UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year ended December 31, 2001
Commission File Number 0-26589
FIRST NATIONAL LINCOLN CORPORATION
(Exact name of Registrant as specified in its charter)
MAINE 01-0404322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MAIN STREET, DAMARISCOTTA, MAINE 04543
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (207) 563-3195
Securities registered pursuant to Section 12(b) or Section 12(g)
of the Securities Exchange Act of 1934
Common Stock, $.01 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No[ ]
State the aggregate market value of voting stock held by
non-affiliates of the Registrant as of March 1, 2002:
Common Stock, $.01 par value per share: $56,558,000
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of March 1, 2002:
Common Stock: 2,394,642 shares
TABLE OF CONTENTS
PART I
ITEM 1. Discussion of Business ------------------------------------------- 1
ITEM 2. Properties ------------------------------------------------------- 5
ITEM 3. Legal Proceedings ------------------------------------------------ 6
ITEM 4. Submission of Matters to a Vote of Security Holders -------------- 7
PART II
ITEM 5. Market for Registrant's Common Equity ---------------------------- 8
ITEM 6. Selected Financial Data ------------------------------------------ 9
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ---------------------------------------- 10
ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk ------ 28
ITEM 8. Financial Statements and Supplementary Data ---------------------- 33
ITEM 9. Changes in and/or Disagreements with Accountants ----------------- 68
PART III
ITEM 10. Directors and Executive Officers of the Registrant -------------- 69
ITEM 11. Executive Compensation ------------------------------------------ 72
ITEM 12. Security Ownership of Certain Beneficial Owners and Management -- 79
ITEM 13. Certain Relationships and Related Transactions ------------------ 81
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K- 82
Signatures --------------------------------------------------------------- 83
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, 2001, the
Company's securities consisted of one class of common stock, $.01 par value per
share, of which there were 2,391,375 shares outstanding and held of record by
approximately 500 shareholders.
The Bank was chartered as a national bank under the laws of the United
States on May 30, 1864. The Bank's capital stock consists of one class of
common stock of which 120,000 shares, par value $2.50 per share, are authorized
and outstanding. All of the Bank's common stock is owned by the Company.
The Bank has seven offices in Mid-Coast Maine, including its principal
office located on Main Street, Damariscotta, Lincoln County, Maine and six
branch offices located at U.S. Route 1, Waldoboro, Maine; Townsend Avenue,
Boothbay Harbor, Maine; Route 27, Wiscasset, Maine; U.S. Route 1, Rockport,
Maine; Elm Street, Camden, Maine; and Route 1, Rockland, Maine. The Bank also
maintains an Operations Center at the corner of Bristol Road and Cross Street
in Damariscotta. The Bank has not consummated any mergers, consolidations or
other acquisitions of assets with any other person during the past five years,
other than as described elsewhere herein.
The Bank emphasizes personal service to the community, concentrating on
retail banking. Customers are primarily small businesses and individuals for
whom the Bank offers a wide variety of services, including checking, savings
and investment accounts, consumer, commercial and mortgage loans and credit
cards. The Bank has not made any material changes in its mode of conducting
business during the past five years. The banking business in the Bank's market
area historically has been seasonal with lower deposits in the winter and
spring and higher deposits in the summer and fall. This swing is fairly
predictable and has not had a materially adverse effect on the Bank.
In addition to providing traditional banking services, the Company
provides investment management and private banking services through Pemaquid
Advisors, which is an operating division of the Bank. In 2000, The Bank
separated its Trust and Investment Services Department into a separate division
with a different brand identity. Under the name of Pemaquid Advisors, the
division is focused on taking advantage of opportunities created as the larger
banks have altered their personal service commitment to clients not meeting
established account criteria. Pemaquid Advisors is able to offer a comprehen-
sive array of private banking, financial planning, investment management and
trust services to individuals, businesses, non-profit organizations and munici-
palities of varying asset size, and to provide the highest level of personal
service. The staff includes investment and trust professionals with extensive
experience.
In June, 2001, the Bank acquired White Pine Asset Management of Portland,
Maine, which then became part of Pemaquid Advisors. Pemaquid Advisors operates
from its offices on Bristol Road in Damariscotta, Maine and Monument Square,
Portland, Maine.
The financial services landscape has changed considerably over the past
five years in the Bank's primary market area. Two large out-of-state banks have
continued to experience local change as a result of mergers and acquisitions at
the regional and national level. Credit unions have continued to expand their
membership and the scope of banking services offered. Non-banking entities such
as brokerage houses, mortgage companies and insurance companies are offering
very competitive products. Many of these entities and institutions have
resources substantially greater than those available to the Bank and are not
subject to the same regulatory restrictions as the Company and the Bank.
Page 1
Interstate banking also could intensify competition if out-of-state
institutions increasingly take advantage of recent legislation liberalizing
interstate banking and branching opportunities in Maine.
In November of 1999, Congress adopted the Gramm-Leach-Bliley Financial
Modernization Act ("GLBA"). This legislation breaks down the firewalls
separating related business in order to create more competition and a level
playing field. In this case, the Act eliminates depression-era restrictions
which separate the business of banking from the business of insurance and
securities underwriting, and also resulted in modifications to protect
consumers and streamline regulation. While the Company view this legislation as
an opportunity to offer a more comprehensive range of financial products and
services, at the same time it will also provide additional competition in the
marketplace.
Over the past decade, due to more liberal interstate banking laws, Maine
has seen an increase in acquisitions of locally-owned Maine-based banks. It is
Management's view that these acquisitions often result in customer
dissatisfaction as the decision-making on loans, marketing, and other aspects
of the acquired banks' businesses are shifted from local bank management
possessing independent decision-making power to management operating under
policies and guidelines from corporate headquarters in other states. The
Company believes that this shift often results in delayed decision-making by
management which is not familiar with the needs of the acquired bank's
customers or the communities they serve. Individuals and small businesses are
particularly sensitive to these changes since they may not fit the product
parameters established by the larger banks.
Thus, the Company believes that there will continue to be a need for a
bank in the Bank's primary market area with local management having decision-
making power and emphasizing loans to small and medium-sized businesses and to
individuals. The Bank has concentrated on extending business loans to such
customers in the Bank's primary market area and to extending trust services to
clients with accounts of all sizes. The Bank's management also makes decisions
based upon, among other things, the knowledge of the Bank's employees regarding
the communities and customers in the Bank's primary market area. The
individuals employed by the Bank, to a large extent, reside near the branch
offices and thus are generally familiar with their communities and customers.
This is important in local decision-making and allows the Bank to respond to
customer questions and concerns on a timely basis and fosters quality customer
service.
The Bank has worked and will continue to work to position itself to be
competitive in its market area. The Bank's ability to make decisions close to
the marketplace, management's commitment to providing quality banking products,
the caliber of the professional staff, and the community involvement of the
Bank's employees are all factors affecting the Bank's ability to be
competitive. If the Company and the Bank are unable to compete successfully,
however, the business and operations could be adversely affected.
Customer Information Security. The FDIC and other bank regulatory agencies
have published final guidelines establishing standards for safeguarding
nonpublic personal information about customers that implement provisions of the
GLBA (the "Guidelines"). Among other things, the Guidelines require each
financial institution, under the supervision and ongoing oversight of its Board
of Directors or an appropriate committee thereof, to develop, implement and
maintain a comprehensive written information security program designed to
ensure the security and confidentiality of customer information, to protect
against any anticipated threats or hazards to the security or integrity of such
information, and to protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to any
customer.
Page 2
Privacy. The FDIC and other regulatory agencies have published final privacy
rules pursuant to provisions of the GLBA ("Privacy Rules"). The Privacy Rules,
which govern the treatment of nonpublic personal information about consumers by
financial institutions, require a financial institution to provide notice to
customers (and other consumers in some circumstances) about its privacy
policies and practices, describe the conditions under which a financial
institution may disclose nonpublic personal information to nonaffiliated third
parties, and provide a method for consumers to prevent a financial institution
from disclosing that information to most nonaffiliated third parties by
"opting-out" of that disclosure, subject to certain exceptions.
USA Patriot Act. The USA Patriot Act of 2001 (the "Patriot Act"), designed to
deny terrorists and others the ability to obtain access to the United States
financial system, has significant implications for depository institutions,
broker-dealers and other businesses involved in the transfer of money. The
Patriot Act requires financial institutions to implement additional policies
and procedures with respect to money laundering, suspicious activities,
currency transaction reporting and due diligence on customers. Implementation
of the Patriot Act's requirements will occur in stages, as rules regarding its
provisions are finalized by government agencies.
As of December 31, 2001, the Company employed 129 persons, with 126 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
Board") an annual report and other information required pursuant to the Act.
The Company is subject to examination by the Federal Reserve Board.
The Act requires the prior approval of the Federal Reserve Board for a
bank holding company to acquire or hold more than a 5% voting interest in any
bank, and controls interstate banking activities. The Act restricts First
National Lincoln Corporation's non-banking activities to those which are
determined by the Federal Reserve Board to be closely related to banking. The
Act does not place territorial restrictions on the activities of non-bank
subsidiaries of bank holding companies.
The majority of the Company's cash revenues are generally derived from
dividends paid to the Company by the Bank. These dividends are subject to
various legal and regulatory restrictions which are summarized in Note 16 to
the accompanying financial statements.
The Bank is subject to the provisions of the National Bank Act, and as
such, must meet certain liquidity and capital requirements, which are discussed
in Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. The Office of the Comptroller of the Currency -- the
Bank's principal regulatory agency -- conducts periodic examinations of the
Bank. Certain state banking regulations also apply to the Bank, as administered
by the Maine Bureau of Banking.
Page 3
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, 2001, the Bank was classified in the
lowest risk category. FDICIA also directs regulators to establish underwriting
and operations standards, encompassing such areas as real estate lending,
consumer disclosure rules, internal controls and new reporting requirements.
The monetary policies of regulatory authorities, including the Federal
Reserve Board, have a significant effect on the operating results of banks and
bank holding companies. Through open market securities transactions and changes
in its discount rate and reserve requirements, the Board of Governors exerts
considerable influence over the cost and availability of funds for lending and
investment. The nature of future monetary policies and the effect of such
policies on the future business and earnings of the Company and the Bank cannot
be predicted. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations, regarding the Bank's net interest margin
and the effect of interest-rate volatility on future earnings.
Page 4
ITEM 2. Properties
The principal office of the Bank is located in Damariscotta, Maine, and
serves the people of Damariscotta, Newcastle, Edgecomb, Jefferson, Bremen,
Wiscasset, Nobleboro, South Bristol and Bristol. A branch office opened in
Waldoboro in 1975, which is located approximately ten miles from Damariscotta
on U.S. Rt. 1, serves the population of Waldoboro and the surrounding towns of
Friendship, Warren, Washington and Monhegan Island.
In 1979, a branch office was opened in Boothbay Harbor, which is situated
approximately 16 miles from Damariscotta. This office serves the towns of
Boothbay, West Boothbay, Boothbay Harbor, Southport and neighboring areas.
Expansion of the Bank's Boothbay Harbor office began in the Fall of 1995
to better serve customer needs. It included utilization of an adjacent
property that was purchased in 1994. The project was completed in
the summer of 1996.
In 1988, a branch office was opened in Wiscasset, which is approximately
eight miles from Damariscotta. This office serves the towns of Wiscasset,
Edgecomb, Alna, Woolwich and Dresden.
In 1997, the Bank purchased and renovated a property on Route 1 in
Rockport, Maine, in which to open its first branch office outside of Lincoln
County, Maine. Rockport is located in Knox County, Maine, which is contiguous
to Lincoln County, Maine, and with similar demographic characteristics. This
move into Knox County was made to provide additional growth opportunities for
the Bank, which has limited potential for growth in its existing market area.
In May of 1998, the Bank opened a sixth branch in Camden, Maine, which is
geographically contiguous to Rockport, Maine. The addition of this branch in
the Knox County market has allowed the Bank to better serve customers in this
area by providing both in-town and out-of-town locations that meet different
customer needs.
In September of 2001, the Bank opened its Rockland office at the corner of
Route One and Broadway in Rockland Maine. Located in Knox County between the
Waldoboro and Rockport offices, the Rockland office serves the towns of
Rockland, Thomaston, Owl's Head and St. George.
An operations center is located in the block adjacent to the Damariscotta
office, fronting on Bristol Road. It was put in service in July, 1989. The Bank
also owns real estate on Water Street in Damariscotta, Maine, which was put
into use for additional office space during 1995.
In 2001, the Bank purchased property at 9 Bristol Road in Damariscotta,
Maine and moved its Pemaquid Advisors division into the facility. The division
also occupies leased office space at 2 Monument Square in Portland, Maine, from
which it provides its services to the Portland community.
The Bank owns all of its facilities except for the Camden and Portland
locations, for which the Bank entered into long-term leases. Management
believes that the Bank's current facilities are suitable and adequate in light
of its current needs and its anticipated needs over the near term.
Page 5
ITEM 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or
the Bank is a party or to which any of its property is subject, other than
routine litigation incidental to the business of the Bank. None of these
proceedings is expected to have a material effect on the financial condition of
the Company or of the Bank.
Page 6
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no items submitted to a vote of security holders of the Company
during the fourth quarter of 2001.
Page 7
ITEM 5. Market for Registrant's Common Equity
The common stock of First National Lincoln Corporation (ticker symbol FNLC)
trades on the Nasdaq National Market System. The following table reflects the
high and low prices of actual sales in each quarter of 2001 and 2000. Such
quotations do not reflect retail mark-ups, mark-downs or brokers' commissions.
- -----------------------------------------------------------------
2001 2000
-------------- --------------
High Low High Low
1st Quarter 15.75 15.00 16.75 13.25
2nd Quarter 18.50 15.42 15.25 14.13
3rd Quarter 21.75 17.50 16.00 14.50
4th Quarter 22.25 19.50 16.00 15.50
- ------------------------------------------------------------------
The last known transaction of the Company's stock during 2001 was on
December 31 at $22.10 per share. There are no warrants outstanding with respect
to the Company's common stock, and the Company has no securities outstanding
which are convertible into common equity.
The table below sets forth the cash dividends declared in the last two
fiscal years:
- ------------------------------------------------------------------
Date Declared Dividend Per Share Date Payable
---------------- ------------------ -----------------
March 23, 2000 $ 0.1500 April 28, 2000
June 15, 2000 $ 0.1600 July 28, 2000
September 21, 2000 $ 0.1700 October 27, 2000
December 21, 2000 $ 0.1800 January 31, 2001
March 13, 2001 $ 0.1900 April 27, 2001
June 14, 2001 $ 0.2000 July 31, 2001
September 20, 2001 $ 0.2100 October 31, 2001
December 20, 2001 $ 0.2200 January 31, 2002
- ------------------------------------------------------------------
The ability of the Company to pay cash dividends depends on receipt of
dividends from the Bank. Dividends may be declared by the Bank out of its net
profits as the directors deem appropriate, subject to the limitation that the
total of all dividends declared by the Bank in any calendar year may not exceed
the total of its net profits of that year plus retained net profits of the
preceding two years. The Bank is also required to maintain minimum amounts of
capital-to-total-risk-weighted-assets, as defined by banking regulators. At
December 31, 2001, 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 12.28% and 13.35%, respectively, as of December 31, 2001.
Page 8
ITEM 6. Selected Financial Data
- -------------------------------------------------------------------------------
Dollars in thousands, except for per share amounts
Years ended December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------
Summary of Operations
Operating Income $ 33,960 30,890 26,348 23,621 21,439
Operating Expense 26,239 24,390 20,025 17,903 15,757
Net Interest Income 15,031 12,770 11,949 10,844 10,337
Provision for Loan Losses 1,230 700 645 400 103
Net Income 5,493 4,607 4,451 4,011 3,906
Per Common Share Data(1)
Net Income
Basic 2.30 1.93 1.84 1.62 1.58
Diluted 2.24 1.89 1.77 1.56 1.55
Cash Dividends (Declared) 0.82 0.66 0.50 0.39 0.29
Book Value 15.61 13.94 12.09 11.64 10.46
Market Value 22.10 15.50 16.25 22.50 13.75
Financial Ratios
Return on Average Equity 15.51% 15.15% 15.67% 14.86% 16.16%
Return on Average Assets 1.33 1.27 1.39 1.44 1.55
Average Equity to Average Assets 8.55 8.36 8.88 9.70 9.62
Net Interest Margin 3.99 3.88 4.12 4.28 4.45
Dividend Payout Ratio (Declared) 35.65 34.20 27.17 24.06 18.04
Allowance for Loan Losses/Total Loans 1.00 0.87 0.88 0.87 0.99
Non-Performing Loans to Total Loans 0.22 0.89 0.29 0.34 0.28
Non-Performing Assets to Total Assets 0.20 0.69 0.30 0.36 0.26
Efficiency Ratio 0.51 0.52 0.51 0.52 0.50
At Year End
Total Assets $434,466 393,216 341,287 286,806 266,279
Total Loans 301,304 264,929 232,526 209,224 181,510
Total Investment Securities 108,186 105,220 87,999 59,342 68,745
Total Deposits 262,689 254,566 205,458 201,803 169,880
Total Shareholders' Equity 37,334 33,160 28,662 28,776 25,885
- -------------------------------------------------------------------------------
1)Per common share data has been adjusted to reflect the 300% stock dividend
issued in 1997.
- -------------------------------------------------------------------------------
High Low
Market price per common share of stock during 2001 $ 22.25 15.00
- -------------------------------------------------------------------------------
Page 9
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
First National Lincoln Corporation and its subsidiary, The First National Bank
of Damariscotta, posted record earnings in 2001, continuing the positive growth
in both assets and income seen during the past eight years. Prior to 1997, the
Company focused on cost reduction and increased efficiency to increase its
profitability, but in recent years, the overall strategy has changed to
controlled, profitable growth. The value of this strategy can be seen in the
Company's expansion into Knox County. The Rockport and Camden offices were
opened in 1997 and 1998, respectively, and in September, 2001 the Bank opened
its Rockland office. These offices have far exceeded their initial goals and
have provided the opportunity for substantial new market growth.
The Company experienced strong asset growth in 2001, with the loan
portfolio increasing by $36.4 million or 13.7%, and the investment portfolio
increasing $3.0 million or 2.8%. The combined effect saw total assets
increasing by 10.5% or $41.3 million from $393.2 million to $434.5 million.
Asset growth was funded with borrowed funds, which increased $28.4 million, or
27.6%, and with deposits, which increased $8.1 million or 3.2% in 2001. The
Company saw very good growth in low-cost core deposits during the year and,
coupled with favorable pricing of borrowings, allowed approximately $15 million
of wholesale certificates of deposit to mature at year end. As a result of
2001's balance sheet growth and a wider interest margin, the Company increased
net interest income by $2.3 million or 17.7% to $15.0 million.
Management believes the Bank has limited exposure to changes in interest
rates, as discussed in "Interest Rate Risk Management" elsewhere in
Management's Discussion.
Financial Condition and Results of Operations
Net income for the year ended December 31, 2001 was $5,493,000 -- the highest
annual net income recorded by the Company. This represents a 19.2% or $886,000
increase from net income of $4,607,000 that was posted in 2000 and is
$1,042,000, or 23.4%, above 1999 net income of $4,451,000. Return on average
assets in 2001 was 1.33%, up from 1.27% in 2000 and down from 1.39% in 1999.
The increase in 2001 is attributable to the Company's strong asset growth
accompanied by wider interest spreads than in past years due to recent drops in
interest rates and lower funding costs. Return on average equity was 15.51% in
2001, compared to 15.15% in 2000 and 15.67% in 1999. The increase in 2001 was
primarily due to the record earnings resulting from higher net interest income,
caused by the factors noted above.
Non-interest income increased by 31.4% from $2,967,000 in 2000 to
$3,898,000 in 2001. The increase was attributable to increased income on
mortgage origination and servicing due to higher volumes of loan sales in a
favorable interest rate climate, newly instituted document preparation fees on
loans and increased merchant credit card volume. Non-interest income increased
5.7% in 2000 to $2,967,000 from 1999's level of $2,808,000. Loan sales and
their derived income dropped substantially in 2000 from 1999 levels due to an
unfavorable interest rate climate. The resulting drop in origination and
servicing income occurred in contrast to increases in investment management
income, service charges on deposit accounts and merchant credit card income.
Page 10
Non-interest expense increased 16.9% to $10.0 million in 2001 from $8.5
million in 2000, which was attributable to increased employee expenses for
staff expansion and increased equipment and software expense. These were
necessary to maintain the high level of service we are committed to delivering
to our customer base. The Company's efficiency ratio -- a benchmark measure of
the amount spent to generate a dollar of income -- was 0.51 in 2001 compared to
0.62 for its peer group. The efficiency ratio is calculated by dividing the
Company's operating expenses (which excludes the provision for loan losses) by
the total of net interest income on a tax-equivalent basis before provision for
loan losses and other operating income (which excludes securities gains). The
Company's efficiency ratio was 0.52 in 2000 compared to 0.60 for its peer
group. In 2000, non-interest expense increased 9.6% to $8.5 million from $7.8
million in 1999, attributable primarily to increased costs for merchant credit
card services and employee expenses.
Average shareholders' equity to average assets was 8.55% in 2001, compared
to 8.36% in 2000, and 8.88% in 1999. The 2000 ratio declined due to strong
asset growth and the Company repurchasing shares of its own stock. The 2001
increase was the result of strong earnings. Earnings per share for the year
ended December 31, 2001 increased 19.2% to $2.30, compared to $1.93 in 2000,
and $1.84 in 1999. Earnings per share on a fully diluted basis increased 18.5%
for the year ended December 31, 2001, to $2.24, compared to $1.89 in 2000, and
$1.77 in 1999. Book value per share was $15.61 on December 31, 2001, up from
$13.94 on December 31, 2000 and $12.09 on December 31, 1999.
The Bank's loan delinquency ratio decreased in 2001, and was 1.45% on
December 31, 2001, versus 2.26% on December 31, 2000 and 1.29% on December 31,
1999. In Management's opinion, there has been no pattern or trend in loan
delinquencies which is of concern. The levels seen in 2001 and 1999 are related
to the Bank's ability to control loan quality and resolve delinquency issues
quickly. Delinquencies in 2000 were isolated circumstances involving a small
number of borrowers.
Page 11
Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for the
years ended December 31, 2001, 2000 and 1999.
- ------------------------------------------------------------------------------
Dollars in thousands
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------
Cash and due from banks $ 5,997 6,943 6,750
Interest-bearing deposits 1,954 343 466
--------- ------- -------
Investments
U.S. Treasury securities & government agencies 53,094 57,113 56,445
Obligations of states & political subdivisions 18,514 13,282 9,301
Other securities 38,992 23,129 12,506
--------- ------- -------
Total investments 110,600 93,524 78,252
--------- ------- -------
Loans held for sale 466 0 65
--------- ------- -------
Loans
Commercial 95,401 80,167 69,706
Consumer 31,645 30,195 28,774
State and municipal 9,059 9,180 9,405
Real estate 145,783 131,231 114,952
--------- ------- -------
Total loans 281,888 250,773 222,837
Allowance for loan losses 2,583 2,126 1,950
--------- ------- -------
Net loans 279,305 248,647 220,887
--------- ------- -------
Fixed assets 6,119 5,421 5,673
Other assets 9,764 8,724 7,624
--------- ------- -------
Total assets $ 414,205 363,602 319,717
========= ======= =======
Deposits
Demand $ 20,529 20,324 17,230
NOW 40,616 38,067 34,654
Money market 12,297 12,874 10,597
Savings 42,004 40,205 40,121
Certificates of deposit 67,776 43,169 74,983
Certificates of deposit over $100,000 83,075 69,385 26,598
--------- ------- -------
Total deposits 266,297 224,024 204,183
--------- ------- -------
Borrowed funds 109,418 107,044 85,000
Other liabilities 3,072 2,126 2,130
--------- ------- -------
Total liabilities 378,787 333,194 291,313
--------- ------- -------
Common stock 25 25 25
Additional paid in capital 4,687 4,687 4,685
Retained earnings 32,929 27,851 24,849
Treasury stock (2,223) (2,155) (1,155)
-------- ------- -------
Total capital 35,418 30,408 28,404
-------- ------- -------
Total liabilities and capital $ 414,205 363,602 319,717
========= ======= =======
Average Rates and Net Interest Yield
The following table shows, for the years ended December 31, 2001, 2000 and
1999, the interest earned or paid for each major asset and liability category,
the average yield for each major asset and liability category, and the net
yield between assets and liabilities. Tax-exempt income has been calculated on
a tax-equivalent basis using a 35% rate. Unrecognized interest on non-accrual
loans is not included in the amount presented, but the average balance of non-
accrual loans is included in the denominator when calculating yields.
- -------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
-------------- -------------- ---------------
Dollars in thousands Amount Avg Amount Avg Amount Avg
Of yield/ of yield/ of yield/
interest rate interest rate interest Rate
- -------------------------------------------------------------------------------
Interest-earning assets
Interest-bearing deposits $ 77 3.94% 25 7.41% 24 5.15%
Investments 7,537 6.82% 6,660 7.12% 5,244 6.70%
Loans held for sale 33 7.05% 0 0% 5 7.69%
Loans 23,138 8.21% 21,841 8.71% 18,737 8.41%
------- ---- ------ ----- ------ -----
Total interest-earning
assets $30,785 7.79% 28,526 8.28% 24,010 7.96%
------- ----- ------ ----- ------ -----
Interest-bearing liabilities
Deposits $10,006 4.07% 8,626 4.23% 7,205 3.85%
Other borrowings 5,025 4.59% 6,528 6.10% 4,386 5.16%
------- ----- ----- ----- ----- -----
Total interest-bearing
liabilities $15,031 4.23% 15,154 4.88% 11,591 4.26%
------- ----- ------ ----- ------ -----
Net interest income $15,754 13,372 12,419
======= ====== ======
Interest rate spread 3.56% 3.40% 3.70%
Net interest margin 3.99% 3.88% 4.12%
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Page 13
Rate Volume Analysis
The following tables present changes in interest income and expense
attributable to changes in interest rates, volume, and rate/volume1 for
interest-earning assets and interest-bearing liabilities. Tax-exempt income is
calculated on a tax-equivalent basis, using a 35.0% tax rate in 2001 and 2000.
Year ended December 31, 2001 compared to 2000
- -------------------------------------------------------------------------------
Rate/
Dollars in thousands Volume Rate volume(1) Total
- -------------------------------------------------------------------------------
Interest on earning assets
Interest-bearing deposits $ 120 $ (12) $ (56) $ 52
Investment securities 1,215 (286) (52) 877
Loans held for sale - - 33 33
Loans 2,710 (1,257) (156) 1,297
-------- ------- -------- ------
Total interest income $ 4,045 $(1,555) $ (231) $ 2,259
-------- -------- --------- --------
Interest expense
Deposits $ 1,781 $ (332) $ (69) $ 1,380
Other borrowings(2) 146 (1,613) (36) (1,503)
-------- -------- --------- -------
Total interest expense $ 1,927 $(1,945) $ (105) $ (123)
-------- --------- --------- --------
Change in net interest income $ 2,118 $ 390 $ (126) $ 2,382
======== ======== ======== ========
- -------------------------------------------------------------------------------
Year ended December 31, 2000 compared to 1999
- ------------------------------------------------------------------------------
Rate/
Dollars in thousands Rate Volume volume(1) Total
- ------------------------------------------------------------------------------
Interest on earning assets
Interest-bearing deposits $ (6) $ 10 $ (3) $ 1
Investment securities 1,024 328 64 1,416
Loans held for sale (5) - - (5)
Loans 2,348 672 84 3,104
-------- ------- -------- -------
Total interest income $ 3,361 $ 1,010 $ 145 $ 4,516
-------- ------- -------- --------
Interest expense
Deposits $ 645 $ 712 $ 64 $ 1,421
Other borrowings(2) 1,138 797 207 2,142
-------- ------- -------- --------
Total interest expense $ 1,783 $ 1,509 $ 271 $ 3,563
-------- ------- -------- --------
Change in net interest income $ 1,578 $ (499) $ (126) $ 953
======== ======= ======== ========
- -------------------------------------------------------------------------------
(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 14
Capital Resources
Capital at December 31, 2001 was sufficient to meet the requirements of
regulatory authorities. Average equity to average assets was 8.55% in 2001,
versus 8.36% in 2000. Leverage capital, or total shareholders' equity divided
by average total assets less goodwill and any net unrealized gain or loss on
securities available for sale, stood at 8.56% on December 31, 2001, versus
8.58% in 2000.
At December 31, 2001, the Company had tier-one risk-based capital of
12.88% and tier-two risk-based capital of 13.95%, versus 13.09% and 14.01%,
respectively, in 2000. To be rated "well-capitalized", regulatory requirements
call for minimum tier-one and tier-two risk-based capital ratios of 6.00% and
10.00%, respectively. The Company's actual levels of capitalization were
comfortably above the standards to be rated "well-capitalized" by regulatory
authorities.
During 2001, the Company declared cash dividends of $0.19 per share for
the first quarter, $0.20 per share for the second quarter, $0.21 per share for
the third quarter, and $0.22 per share for the fourth quarter. The Company's
dividend payout ratio was 35.65% of earnings in 2001, 34.20% in 2000, and
27.17% in 1999.
In determining future dividend payout levels, the Board of Directors
carefully analyzes capital requirements and earnings retention, as set forth in
the Company's Dividend Policy. The ability of the Company to pay cash dividends
to its shareholders depends on receipt of dividends from its subsidiary, the
Bank. The subsidiary may pay dividends to its parent out of so much of its net
profits as the Bank's directors deem appropriate, subject to the limitation
that the total of all dividends declared by the Bank in any calendar year may
not exceed the total of its net profits of that year combined with its retained
net profits of the preceding two years. The amount available for dividends in
2002 will be that year's net income plus $5,709,000.
In 2001, 17,000 shares of common stock were issued in conjunction with the
exercise of stock options for consideration totaling $133,000. The Company also
purchased 13,953 shares of common stock for total consideration of $254,000, of
which 9,715 shares were re-issued via employee stock programs before year-end.
Management knows of no present trends, events or uncertainties that will have,
or are reasonably likely to have, a material effect on capital resources,
liquidity, or results of operations.
Capital Purchases
In 2001, the Company made capital purchases totaling $2,985,000. This cost will
be amortized over an average of twenty years, adding approximately $150,000 to
pre-tax operating costs per year. The capital purchases included primarily real
estate for Branch premises and equipment related to technology.
Liquidity
As of December 31, 2001, the Bank had primary sources of liquidity of $41.4
million, or 9.5% of its assets. It is Management's opinion that this is
adequate. The Bank has established guidelines for liquidity management, with
policies and procedures prescribed in its funds management policy.
The Bank's principal sources of funds are deposits, cash and due from
banks, federal funds sold, loan and dividend payments, loan and investment
maturities, and borrowed funds from the Federal Home Loan Bank. To compensate
for the seasonal flow in its deposit structure, the Bank maintains adequate
funding for its loan portfolio by monitoring maturities within its investment
portfolio, and utilizing advances from the Federal Home Loan Bank or entering
into securities repurchase agreements.
Page 15
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 $130.3 million. The Bank's liquidity position is further
supplemented with securities repurchase agreements with certain brokers and a
$5.0 million credit line with a correspondent bank.
Deposits grew during 2001, ending the year at $262.7 million. The growth
was primarily in core deposits. Because of the liquidity provided in part by
the increase in core deposits, Management allowed certificates of deposit from
non-local sources to mature without renewal. These funds are typically
available to the Bank to meet future liquidity needs. Management has not seen
any recent significant deposit trends which would have a material effect on the
Bank's liquidity position.
At December 31, 2001, the Company had a net unrealized gain of $784,000
(net of $404,000 in deferred income taxes) on available for sale securities.
This unrealized gain is in line with Management's expectations given the drop
in interest rates experienced in 2001. 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 2001, the Company's investment portfolio increased 2.8% to end the year
at $108,186,000, compared to $105,220,000 on December 31, 2000. Much of the
Bank's investment portfolio consists of callable securities. A declining
interest rate environment in 2001 resulted in a large number of the Bank's
securities being called by issuers. The Bank was able to replace these
securities at comparable levels, resulting in the $3.0 million net growth in
the portfolio in 2001.
The Company's investment securities are classified into two categories:
securities available for sale and securities to be held to maturity. Securities
available for sale consist primarily of debt securities which Management
intends to hold for indefinite periods of time. They may be used as part of the
Company's funds management strategy, and may be sold in response to changes in
interest rates, changes in prepayment risk, changes in liquidity needs, to
increase capital, or for other similar factors. Securities to be held to
maturity consist primarily of debt securities that the Company has acquired
solely for long-term investment purposes, rather than for trading or future
sale. For securities to be held to maturity, Management has the intent and the
Company has the ability to hold such investments until their respective
maturity dates. The Company does not hold trading account securities.
All investment securities are managed in accordance with a written
investment policy adopted by the Board of Directors. It is the Company's
general policy that investments for either portfolio be limited to government
debt obligations, time deposits, banker's acceptances, corporate bonds and
commercial paper with one of the three highest ratings given by a nationally
recognized rating agency.
Page 16
In 2001, the growth in the Company's investment portfolio was primarily in
U.S. Government Agency mortgage-backed securities. This change was made to
enhance the portfolio's overall yield while not materially adding to the
Company's level of interest rate risk. The following table sets forth the
Company's investment securities at their carrying amounts as of December 31,
2001, 2000 and 1999.
- -------------------------------------------------------------------------------
Dollars in thousands 2001 2000 1999
- -------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and agency $ - 13,847 12,155
Mortgage-backed securities 2,425 3,712 4,352
State and political subdivisions 13,770 10,952 6,536
Corporate securities 27,861 27,742 12,403
Federal Home Loan Bank stock 6,005 5,941 5,941
Federal Reserve Bank stock 53 53 53
Other equity securities 800 670 651
--------- ------- ------
50,914 62,917 42,091
--------- ------- ------
Securities to be held to maturity:
U.S. Treasury and agency 35,444 27,025 27,860
Mortgage-backed securities 13,851 10,311 13,485
State and political subdivisions 6,393 4,380 4,560
Corporate securities 1,584 587 3
-------- ------ ------
57,272 42,303 45,908
-------- ------ ------
Total securities $ 108,186 105,220 87,999
========= ======= ======
- -------------------------------------------------------------------------------
Page 17
The following table sets forth certain information regarding the yields
and expected maturities of the Company's investment securities as of December
31, 2001. Yields on tax-exempt securities have been computed on a tax-
equivalent basis using a tax-rate of 35%.
- -------------------------------------------------------------------------------
Dollars in thousands Available for sale Held to maturity
-------------------- -----------------
Fair Yield to Amortized Yield to
value maturity cost maturity
- -------------------------------------------------------------------------------
U.S. Treasury and Agency:
Due in 1 year or less $ - - $ - -
Due in 1 to 5 years - - - -
Due in 5 to 10 years - - - -
Due after 10 years - - 35,444 6.41%
------ ------- -------- -----
- - 35,444 6.41%
------ ------- -------- -----
Mortgage-backed securities:
Due in 1 year or less - - - -
Due in 1 to 5 years 93 5.45% 157 5.56%
Due in 5 to 10 years 1,191 7.95% 1,033 6.96%
Due after 10 years 1,141 6.79% 12,661 6.70%
------ ------- ------- -----
2,425 7.31% 13,851 6.70%
------ ------- ------- -----
State and political
subdivisions:
Due in 1 year or less - - - -
Due in 1 to 5 years - - - -
Due in 5 to 10 years - - 3,146 8.10%
Due after 10 years 13,770 7.63% 3,247 7.58%
------ ----- ----- -----
13,770 7.63% 6,393 7.84%
------ ----- ----- -----
Corporate Debt Securities:
Due in 1 year or less 1,484 4.57% - -
Due in 1 to 5 years 7,000 7.20% 1,119 4.79%
Due in 5 to 10 years 16,102 7.69% 465 8.10%
Due after 10 years 3,275 7.08% - -
------ ----- ----- -----
27,861 7.33% 1,584 5.76%
------ ----- ----- -----
Equity Securities: 6,858 4.92% - -
------ ----- ----- -----
$ 50,914 7.08% $ 57,272 6.62%
======= ===== ======== =====
- -------------------------------------------------------------------------------
Page 18
Lending Activities
The loan portfolio experienced growth in almost all areas during 2001, with the
most significant increase seen in residential real estate loans. Total loans
were $301,304,000 at December 31, 2001, a 13.7% increase from total loans of
$264,929,000 at December 31, 2000. This continues the loan growth trend
experienced by the Company over the past five years.
The following tables summarize the Bank's loan portfolio as of December 31,
2001, 2000, 1999, 1998 and 1997.
- -------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------
Commercial loans
Real estate $ 32,638 30,695 30,305 25,585 20,173
Other 68,378 53,362 41,970 38,718 33,100
Residential real estate loans
Construction 2,522 1,060 1,661 3,397 3,053
Term 159,743 139,300 121,599 105,877 92,937
Consumer loans 30,727 33,028 29,227 27,993 24,041
Municipal 7,296 7,484 7,764 7,654 8,206
-------- ------- ------- ------- ------
Total $301,304 264,929 232,526 209,224 181,510
======== ======= ======= ======= =======
- -------------------------------------------------------------------------------
Credit Card balances
included in consumer loans
$ 2,510 2,676 2,536 2,569 2,457
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Percentage of Total Loans Outstanding by year
As of December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------
Commercial loans
Real estate 10.8% 11.6% 13.0% 12.2% 11.1%
Other 22.7% 20.1% 18.0% 18.5% 18.2%
Residential real estate loans
Construction 0.9% 0.4% 0.7% 1.6% 1.7%
Term 53.0% 52.6% 52.4% 50.6% 51.3%
Consumer loans 10.2% 12.5% 12.6% 13.4% 13.2%
Municipal 2.4% 2.8% 3.3% 3.7% 4.5%
------- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
- -------------------------------------------------------------------------------
The Bank issues both VISA and MasterCard credit cards whose balances are shown
in the table above. The number of credit card accounts decreased by 7.4% in
2001 to end the year at 3,694.
Page 19
The following table sets forth certain information regarding the contractual
maturities of the Bank's loan portfolio as of December 31, 2001.
- -------------------------------------------------------------------------------
Dollars in thousands < 1 Year 1-5 Years 5-10 Years >10 Years Total
- -------------------------------------------------------------------------------
Commercial real estate $ 420 1,618 2,608 27,992 32,638
Commercial other 19,233 10,844 14,604 23,697 68,378
Residential real estate 1,062 674 6,984 151,023 159,743
Residential construction 138 2,384 - - 2,522
Consumer 1,081 9,026 9,294 11,326 30,727
Municipal 1,515 1,399 902 3,480 7,296
-------- ------ ------ ------- ------
Totals $ 23,449 25,945 34,392 217,518 301,304
======== ====== ====== ======= =======
- -------------------------------------------------------------------------------
The following table provides a listing of loans by category, excluding loans
held for sale, between variable and fixed rates as of December 31, 2001.
- -------------------------------------------------------------------------------
Dollars in thousands Amount % of total
- -------------------------------------------------------------------------------
Variable-rate loans
Commercial loans $ 78,403 26.0%
State and municipal loans 3,949 1.3%
Consumer loans 5,319 1.8%
Equity loans 9,471 3.1%
Residential adjustable-rate mortgages 76,657 25.5%
--------- -----
Total 173,799 57.7%
Fixed-rate loans 127,505 42.3%
--------- -----
Total loans $ 301,304 100.0%
========= ======
- -------------------------------------------------------------------------------
The Bank's loan delinquency ratio decreased in 2001, and was 1.45% on December
31, 2001, versus 2.26% on December 31, 2000.
Loan Concentrations
As of December 31, 2001, 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 2001, the Bank placed a higher volume of residential mortgages into the
secondary market compared to 2000. This was the result of increased mortgage
underwriting opportunities resulting from lower interest rates. Loans held for
sale are carried at the lower of cost or market value, which was $466,000 at
December 31, 2001. There were no loans held for sale at December 31, 2000.
Page 20
Non-Performing Assets
The aggregate dollar amount of loans more than 90 days past-due or on non-
accrual status decreased during 2001, and remains low relative to the Bank's
peer group. In Management's opinion, there has been no pattern or trend in non-
performing assets of concern. The increase in 2000 was related to isolated
circumstances involving a small number of borrowers. The level at December 31,
2001 is more in line with the Bank's normal delinquency. The following table
sets forth a summary of the value of delinquent loans (more than ninety days
past due) by category, total loans carried on a non-accrual basis, and income
not recognized from non-accrual loans as of December 31, 2001, 2000, 1999, 1998
and 1997.
- -------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------
Commercial real estate &
business $ 655 2,479 822 414 420
Residential real estate 275 267 260 222 320
Consumer 150 103 90 91 128
------- ----- ----- ---- ----
Total 1,080 2,849 1,172 727 868
======= ===== ===== ==== ====
Non-accrual loans
included in above total 667 2,366 681 716 510
Income not recognized
from non-accrual loans $ 77 185 64 51 50
- -------------------------------------------------------------------------------
It is the policy of the Bank to place a loan on non-accrual status only
after a careful review of the loan circumstances and a determination that
payment in full of principal and/or interest is not expected. Income not
recognized from non-accrual loans represents the interest income, as of the end
of each period, that would have been recorded on loans placed on non-accrual
status if they were current in accordance with their original terms. None of
these amounts were included in interest income for the same periods.
Other real estate owned decreased during 2001. At December 31, 2001 it
included two properties valued at $202,000, compared to nine properties valued
at $356,000 at December 31, 2000.
Other real estate owned and repossessed assets are comprised of (i)
properties or other assets acquired through a foreclosure proceeding, or
acceptance of a deed or title in lieu of foreclosure, (ii) properties which
secure loans where the Bank obtains possession of the underlying collateral
from the borrower, and (iii) other assets repossessed in connection with non-
real estate loans. Other real estate owned and repossessed assets are carried
at the lower of cost or fair value less the estimated selling expenses of the
collateral. An allowance is established for the amount by which cost exceeds
fair value less estimated selling expenses on a property by property basis.
Losses arising from the acquisition of such properties are charged against the
allowance for loan losses. Operating expenses and any subsequent provisions to
reduce the carrying value are charged to operations. Gains and losses upon
disposition are reflected in earnings as realized.
Page 21
Allowance for Loan Losses and Loan Loss Experience
The allowance for loan losses represents the amount available for credit losses
inherent in the Company's loan portfolio. Loans are charged off when they are
deemed uncollectible, after giving consideration to factors such as the
customer's financial condition, underlying collateral and guarantees, as well
as general and industry economic conditions.
In general, the Company determines the appropriate overall reserve for
loan losses based upon periodic, systematic reviews of its portfolio to
identify inherent losses and Management's judgment about various qualitative
factors. These reviews result in the identification and quantification of loss
factors, which are used in determining the amount of the allowance for loan
losses. The Company periodically evaluates prevailing economic and business
conditions, industry concentrations, changes in the size and characteristics of
the portfolio and other pertinent factors. Portions of the allowance for loan
losses are quantified to cover the estimated losses inherent in each loan
category based on the results of this detailed review process.
Commercial loans are individually reviewed and assigned a credit risk
rating from "1" (low risk of loss) to "8" (high risk of loss). For non-impaired
loans with a credit risk rating of "1" to "7", estimated loss factors based on
historical loss experience (ranging from two to five years) are used to
calculate a loan loss reserve for each credit risk rating classification.
Qualitative adjustments are also made based upon Management's assessment of
prevailing economic conditions, trends in volumes and terms of loans, levels
and trends in delinquencies and non-accruals, and the effect of changes in
lending policies. A specific allocation is made for impaired loans (loans on
non-accrual status), which are measured at the net present value of future cash
flows, discounted at the loan's effective interest rate, or at fair market
value of collateral if the loan is collateral dependent. The combination of
these analyses is the basis for the determination of the commercial loan
portion of the allowance for loan losses.
Consumer loans, which include credit cards, residential mortgages, home
equity loans/lines, and direct/indirect loans, are generally evaluated as a
group based on product type. The determination of the consumer loan portion of
the allowance for loan losses is based on a five-year average of annual
historical losses, adjusted for the qualitative factors noted above.
The results of all analyses are reviewed and discussed by the Directors' Loan
Committee. An integral component of the Company's risk management process is to
ensure the proper quantification of the reserve for loan losses based upon an
analysis of risk characteristics, demonstrated losses, loan segmentations, and
other factors. Reserve methodology is reviewed on a periodic basis and modified
as appropriate. Based on this analysis, including the aforementioned
assumptions, the Company believes that the allowance for loan losses is
adequate as of December 31, 2001. The unallocated component of the allowance
for loan losses represents Management's view that, given the complexities of
the loan portfolio, there are estimable losses that have been incurred within
the portfolio but not yet specifically identified.
Page 22
The following table reflects the Bank's allowance for loan losses by category
of loan as of December 31, 2001, 2000, 1999, 1998, and 1997. The unallocated
portion of the allowance for loan losses is a general reserve that is not
allocated to a specific portion of the loan portfolio. The commercial category
includes commercial real estate loans.
- -------------------------------------------------------------------------------
Dollars in thousands
As of
December 31, 2001 2000 1999 1998 1997
------------- ----------- ----------- ----------- -----------
Real estate $ 618 54% 562 53% 488 53% 440 52% 454 53%
Commercial 1,467 36% 907 35% 686 34% 736 35% 683 34%
Consumer 604 10% 631 12% 580 13% 408 13% 254 13%
Unallocated 311 - 201 - 281 - 238 - 409 -
------ ---- ----- ---- ----- ---- ----- ---- ----- ----
Total $3,000 100% 2,301 100% 2,035 100% 1,822 100% 1,800 100%
====== ==== ===== ==== ===== ==== ===== ==== ===== ====
- -------------------------------------------------------------------------------
(Percentage is amount of loans in each category as a percent of total loans
for the stated year)
Page 23
Net loans charged off in 2001 were $531,000, or 0.19% of average loans
outstanding for the year. This compares to net loan chargeoffs of $434,000, or
0.17% in 2000 and $432,000 or 0.19% in 1999. The following table summarizes the
activity with respect to loan losses for the years ended December 31, 2001,
2000, 1999, 1998 and 1997.
- -------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------
Balance at
beginning of period $2,301 2,035 1,822 1,800 1,906
====== ===== ===== ===== =====
Loans charged off:
Commercial (1) 391 164 153 121 60
Real estate mortgage 1 5 31 46 31
Consumer 243 388 359 285 246
------ ----- ----- ------ -----
Total 635 557 543 452 337
------ ----- ----- ------- ----
Recoveries on loans
previously charged off:
Commercial(1) 34 44 12 14 70
Real estate mortgage 1 6 8 - -
Consumer 69 73 91 60 58
------ ----- ----- ------- ----
Total 104 123 111 74 128
------ ----- ----- ------- ----
Net loans charged off 531 434 432 378 209
Provision for loan losses 1,230 700 645 400 103
------ ----- ----- ------- ----
Balance at end of period $3,000 2,301 2,035 1,822 1,800
====== ===== ===== ======= =====
Ratio of net loans charged
off to average loans
outstanding 0.19% 0.17% 0.19% 0.19% 0.12%
- -------------------------------------------------------------------------------
(1)Includes commercial real estate loans
During 2001, a provision of $1,230,000 was made to the allowance for loan
losses, compared to a provision of $700,000 in 2000, and $645,000 in 1999. In
Management's opinion, this increased level of provision is not indicative of a
decline in overall credit quality within the portfolio. Instead, it is the
result of the significant loan growth experienced combined with an additional
provision for commercial loans as a result of the impact on the fishing and
hospitality industries from the September 11, 2001, terrorist attack as well as
possible unanticipated declines in the credit quality of our borrowers due to
the current economic recession. At December 31, 2001, the allowance for loan
losses stood at $3,000,000, or 1.00% of total loans outstanding. This compares
to $2,301,000, or 0.87% of total loans outstanding at December 31, 2000, and
$2,035,000, or 0.88% of total loans outstanding at December 31, 1999.
Deposits
The Bank realized an increase of 3.2% in 2001 compared to a 23.9% increase in
deposits in 2000 and 1.8% increase in deposits in 1999. Most of the growth in
2001 was seen in core deposits which are typically added at favorable costs
versus borrowed funds and certificates of deposit.
Page 24
The Bank's deposit balances generally increase during the summer and autumn
months of each year due to increased seasonal business activity. In 2001, the
maximum amount of deposits at any month end was $288,944,000 on July 31.
Because of uncertainty about future interest rates, in recent years investors
have shown a preference for shorter-term deposits which could reprice quickly
should rates begin to rise.
The Bank's average cost of deposits (including non-interest-bearing
accounts) was 3.76% for the year ended December 31, 2001, compared to 3.85% for
the year ended December 31, 2000 and 3.53% for the year ended December 31,
1999. The following table sets forth the average daily balance for the Bank's
principal deposit categories for each period.
- -------------------------------------------------------------------------------
Dollars in thousands %growth
Years ended December 31, 2001 2000 1999 2001vs.2000
- -------------------------------------------------------------------------------
Demand deposits $ 20,529 20,324 17,230 1.0%
NOW accounts 40,616 38,067 34,654 6.7%
Money market accounts 12,297 12,874 10,597 -4.5%
Savings 42,004 40,205 40,121 4.5%
Certificates of deposit 150,851 112,554 101,581 34.0%
--------- ------- ------- -----
Total deposits $266,297 224,024 204,183 18.9%
======== ======= ======= =====
- -------------------------------------------------------------------------------
The following table sets forth the average cost of each category of interest-
bearing deposits for the periods indicated.
- -------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
NOW accounts 1.05% 1.27% 1.26%
Money market accounts 3.40% 3.70% 3.47%
Savings accounts 2.57% 2.79% 2.77%
Certificates of deposit 5.36% 5.82% 5.21%
------ ----- -----
Total interest-bearing deposits 4.07% 4.23% 3.85%
====== ===== =====
- -------------------------------------------------------------------------------
As of December 31, 2001, the Bank held a total of $53,909,000 in
certificate of deposit accounts with balances in excess of $100,000. The
following table summarizes the time remaining to maturity for these
certificates of deposit:
- -----------------------------------------------
Dollars in thousands
- -----------------------------------------------
Within 3 months $ 10,450
3 months through 6 months 6,122
6 months through 12 months 5,763
Over 12 months 31,574
----------
Total $ 53,909
==========
- -----------------------------------------------
Of all certificates of deposit, $74.2 million or 55.5% of certificates of
deposit will mature by December 31, 2002.
Page 25
Borrowed Funds
Borrowed funds consists mainly of advances from the Federal Home Loan Bank
(FHLB) which are secured by stock in the FHLB, funds on deposit with FHLB, U.S.
Treasury and Agency notes and mortgage-backed securities and qualifying first
mortgage loans. Advances at December 31, 2001 totaled $99,000,000, with a
weighted average interest rate of 3.79% and remaining maturities ranging from
one day to nine years.
The Bank offers securities repurchase agreements to municipal and
corporate customers as an alternative to deposits. The balance of these
agreements as of December 31, 2001 was $22,424,000, compared to $16,512,000 on
December 31, 2000, and $12,489,000 on December 31, 1999. The Bank also had a
repurchase agreement with a brokerage firm at December 31, 2001 in the amount
of $9,767,000.
The Bank participates in the Note Option Depository which is offered by
the U.S. Treasury Department. Under the Treasury Tax & Loan Note program, the
Bank accumulates tax deposits made by its customers and is eligible to receive
additional Treasury Direct investments up to an established maximum balance of
$5.0 million. The balances invested by the Treasury are increased and decreased
at the discretion of the Treasury. The deposits are generally made at interest
rates that are favorable in comparison to other borrowings. The balances on the
Treasury Tax & Loan note at December 31, 2001, 2000 and 1999 were $166,000,
$1,077,000 and $2,850,000, respectively.
The maximum amount of borrowed funds outstanding at any month-end during
each of the last three years was $131,357,000 at the end of December during
2001, $116,966,000 at the end of November for the year 2000 and $105,048,000 at
the end of December for the year 1999. The average amount outstanding during
2001 was $109,418,000, with a weighted average interest rate of 4.59%. This
compares to an average outstanding amount of $107,044,000 in 2000, with a
weighted average interest rate of 6.10%. The average balance outstanding on the
Bank's borrowed funds for the year ended December 31, 1999 was $85,000,000,
with a weighted average interest rate of 5.16%.
Investment Management and Fiduciary Activities
As of December 31, 2001, Pemaquid Advisors, the Bank's private banking and
investment management division, had assets with a market value of $126,486,000
under management. This amount consisted of 597 trust accounts, estate accounts,
agency accounts, and self-directed individual retirement accounts. This
compares to December 31, 2000 when 501 accounts with market value of
$117,032,000 were under management.
Effect of Future Interest Rates on Post-retirement Benefit Liabilities
In evaluating the Company's post-retirement benefit liabilities, Management
believes that changes in assumptions, especially in discount rates, will not
have a significant impact on the Company's future operating results or
financial condition.
Page 26
Accounting Pronouncements
Effective January 1, 2001, the Company adopted Statement of Financial Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS No. 138. Adoption of this standard had no material effect on
the financial condition and results of operations of the Company. During 2001,
the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets", SFAS No.
143 "Accounting for Asset Retirement Obligations" and SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets".
SFAS No. 141 requires that the purchase method be used to account for
business combinations initiated after June 30, 2001. SFAS No. 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The amortization of goodwill ceases upon adoption of the Statement
on January 1, 2002.
SFAS Nos. 143 and 144 provide guidance concerning the recognition and
measurement of an impairment loss for certain types of long-lived assets and
obligations associated with the retirement of tangible long-lived assets.
Management does not expect these statements to have any material effect on the
Company's consolidated financial condition and results of operations.
Forward-Looking Statements
Certain disclosures in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain certain forward-looking statements
(as defined in the Private Securities Litigation Reform Act of 1995). In
preparing these disclosures, Management must make assumptions, including, but
not limited to, the level of future interest rates, general local, regional and
national economic conditions, competitive pressures, prepayments on loans and
investments, required levels of capital, needs for liquidity, and the adequacy
of the allowance for loan losses. These forward-looking statements may be
subject to significant known and unknown risks and uncertainties, and other
factors, including, but not limited to, those matters referred to in the
preceding sentence.
Although First National Lincoln Corporation believes that the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially from the results discussed in these forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company which attempt to
advise interested parties of the factors which affect the Company's business.
Page 27
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates. First National
Lincoln Corporation's market risk is composed primarily of interest rate risk.
The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the
interest rate sensitivity position of the Company and establishing policies to
monitor and limit exposure to interest rate risk. All guidelines and policies
established by ALCO have been approved by the Board of Directors.
Asset/Liability Management
The primary goal of asset/liability management is to maximize net interest
income within the interest rate risk limits set by ALCO. Interest rate risk is
monitored through the use of two complementary measures: static gap analysis
and earnings simulation modeling. While each measurement has limitations, taken
together they represent a reasonably comprehensive view of the magnitude of
interest rate risk in the Company, the level of risk through time, and the
amount of exposure to changes in certain interest rate relationships.
Static gap analysis measures the amount of repricing risk embedded in the
balance sheet at a point in time. It does so by comparing the differences in
the repricing characteristics of assets and liabilities. A gap is defined as
the difference between the principal amount of assets and liabilities which
reprice within a specified time period. The cumulative one-year gap, at year-
end, was minus 7.6% of total assets. ALCO's policy limit for the one-year gap
is plus or minus 20% of total assets. Core deposits with non-contractual
maturities are presented based upon historical patterns of balance attrition
and pricing behavior which are reviewed at least annually.
The gap repricing distributions include principal cash flows from
residential mortgage loans and mortgage-backed securities in the time frames in
which they are expected to be received. Mortgage prepayments are estimated by
applying industry median projections of prepayment speeds to portfolio segments
based on coupon range and loan age.
Page 28
A summary of the Company's static gap, as of December 31, 2001, is presented in
the following table:
- -------------------------------------------------------------------------------
0-90 91-365 1-5 5+
Dollars in thousands days days years years
- -------------------------------------------------------------------------------
Investment securities at
amortized cost $ 3,235 11,911 7,184 85,852
Loans held for sale 3 14 119 329
Loans 80,464 39,591 131,012 47,236
Other interest-earning assets - - - 4,250
Non-rate-sensitive assets - - - 23,266
-------- ------- ------- -------
Total assets $ 83,702 51,516 138,315 160,933
-------- ------- ------- -------
Interest-bearing deposits 35,887 58,121 54,013 92,171
Borrowed funds 59,367 12,331 32,160 27,500
Non-rate-sensitive
liabilities and equity - 2,450 2,650 57,816
-------- ------- ------- -------
Total liabilities and equity $ 95,254 72,902 88,823 177,487
-------- ------- ------- -------
Period gap $ (11,552) (21,386) 49,492 (16,554)
======== ======= ======= =======
Percent of total assets (2.7%) (4.9%) 11.4% (3.8%)
Cumulative gap (current) $ (11,552) (32,938) 16,554 -
Percent of total assets (2.7%) (7.6%) 3.8% 0.0%
- -------------------------------------------------------------------------------
The earnings simulation model forecasts one- and two-year net interest
income under a variety of scenarios that incorporate changes in the absolute
level of interest rates as well as basis risk, as represented by changes in the
shape of the yield curve and changes in interest rate relationships. Management
evaluates the effects on income of alternative interest rate scenarios against
earnings in a stable interest rate environment. This analysis is also most
useful in determining the short-run earnings exposures to changes in customer
behavior involving loan payments and deposit additions and withdrawals.
The most recent simulation model projects net interest income would
decrease by approximately 0.6% of stable-rate net interest income if rates fall
gradually by two percentage points over the next year, and increase by
approximately 0.6% if rates rise gradually by two percentage points. Both
scenarios are well within ALCO's policy limit of a decrease in net interest
income of no more than 10.0% given a 2.0% move in interest rates, up or down.
Management believes this reflects a reasonable interest rate risk position.
Within a two-year horizon and assuming no additional movement in rates, the
model forecasts that net interest income would be lower than that earned in a
stable rate environment by 0.5% in a falling rate scenario and decrease by 5.6%
in a rising rate scenario.
This dynamic simulation model includes assumptions about how the balance
sheet is likely to evolve through time and in different interest rate
environments. Loans and deposits are projected to maintain stable balances. All
maturities, calls and prepayments in the securities portfolio are assumed to be
reinvested in similar assets. Mortgage loan prepayment assumptions are
developed from industry median estimates of prepayment speeds for portfolios
with similar coupon ranges and seasoning. Non-contractual deposit volatility
and pricing are assumed to follow historical patterns. The sensitivities of key
assumptions are analyzed annually and reviewed by ALCO.
Page 29
A summary of the Company's interest rate risk simulation modeling, as of
December 31, 2001 and 2000 is presented in the following table:
- -------------------------------------------------------------------------------
Changes in Net Interest Income 2001 2000
- -------------------------------------------------------------------------------
Year 1
Projected change if rates decrease by 2.0% -0.6% +5.6%
Projected change if rates increase by 2.0% +0.6% -5.5%
- -------------------------------------------------------------------------------
Year 2
Projected change if rates decrease by 2.0% -0.5% +17.0%
Projected change if rates increase by 2.0% -5.6% -13.6%
- -------------------------------------------------------------------------------
Interest Rate Risk Management
A variety of financial instruments can be used to manage interest rate
sensitivity. These may include the securities in the investment portfolio,
interest rate swaps, and interest rate caps and floors. Frequently called
interest rate derivatives, interest rate swaps, caps and floors have
characteristics similar to securities but possess the advantages of
customization of the risk-reward profile of the instrument, minimization of
balance sheet leverage and improvement of liquidity. As of December 31, 2001,
the Company was not using any derivative instruments for interest rate risk
management.
The Company engages an independent consultant to periodically review its
interest rate risk position, as well as the effectiveness of simulation
modeling and reasonableness of assumptions used. As of December 31, 2001, there
were no significant differences between the views of the independent consultant
and Management regarding the Company's interest rate risk exposure. Management
expects interest rates will remain constant for much of 2002 and but believes
that the current level of interest rate risk is acceptable.
Page 30
Quarterly Information
The following tables provides unaudited financial information by quarter for
each of the past two years:
- -------------------------------------------------------------------------------
Dollars in thousands 2001 Q1 2001 Q2 2001 Q3 2001 Q4
- -------------------------------------------------------------------------------
Balance Sheets
Cash $ 6,897 11,121 13,447 10,894
Investments 114,491 111,102 105,791 108,186
Net loans 270,776 279,876 285,515 298,770
Other assets 15,511 16,826 16,951 16,616
--------- ------- ------- -------
Total assets $ 407,675 418,925 421,704 434,466
========= ======= ======= =======
Deposits $ 240,973 281,370 277,733 262,689
Borrowed funds 128,867 99,353 102,696 131,357
Other liabilities 3,288 2,980 4,297 3,086
Shareholders' equity 34,547 35,222 36,978 37,334
--------- ------- ------- -------
Total liabilities
& equity $ 407,675 418,925 421,704 434,466
========= ======= ======= =======
Income Statements
Interest income $ 7,536 7,635 7,541 7,350
Interest expense 4,173 3,975 3,663 3,220
--------- ------- ------- -------
Net interest income 3,363 3,660 3,878 4,130
Provision for loan losses 195 280 215 540
--------- ------- ------- -------
Net interest income
after provision 3,168 3,380 3,663 3,590
Non-interest income 740 942 1,153 1,063
Non-interest expense 2,212 2,296 2,776 2,694
-------- ------- ------- -------
Income before taxes 1,696 2,026 2,040 1,959
Income taxes 489 595 594 550
-------- ------- ------- -------
Net income $ 1,207 1,431 1,446 1,409
========= ======= ======= =======
Basic earnings per share $ 0.51 0.60 0.61 0.58
Diluted earnings per share $ 0.50 0.58 0.59 0.57
- -------------------------------------------------------------------------------
Page 31
- -------------------------------------------------------------------------------
Dollars in thousands 2000 Q1 2000 Q2 2000 Q3 2000 Q4
- -------------------------------------------------------------------------------
Balance Sheets
Cash $ 9,348 10,342 8,620 10,324
Investments 91,100 88,779 96,581 105,220
Net loans 239,760 250,345 256,293 262,628
Other assets 14,137 14,753 14,736 15,044
--------- -------- ------- -------
Total assets $ 354,345 364,219 376,230 393,216
========= ======== ======= =======
Deposits $ 210,857 221,557 247,190 254,566
Borrowed funds 111,274 109,957 95,309 102,919
Other liabilities 2,639 2,342 2,232 2,571
Shareholders' equity 29,575 30,363 31,499 33,160
--------- -------- ------- -------
Total liabilities
& equity $ 354,345 364,219 376,230 393,216
========= ======= ======= =======
Income Statements
Interest income $ 6,494 6,835 7,128 7,466
Interest expense 3,388 3,648 3,919 4,198
--------- ------- ------- -------
Net interest income 3,106 3,187 3,209 3,268
Provision for loan losses 150 150 210 190
--------- ------- ------- -------
Net interest income
after provision 2,956 3,037 2,999 3,078
Non-interest income 628 700 909 730
Non-interest expense 2,017 2,079 2,372 2,069
--------- ------- ------- -------
Income before taxes 1,567 1,658 1,536 1,739
Income taxes 455 486 445 507
--------- ------- ------- -------
Net income $ 1,112 1,172 1,091 1,232
======== ======= ======= =======
Basic earnings per share $ 0.46 0.49 0.46 0.52
Diluted earnings per share $ 0.45 0.48 0.45 0.51
- -------------------------------------------------------------------------------
Page 32
ITEM 8. Financial Statements and Supplementary Data
Report of Management
The Management of First National Lincoln Corporation is responsible for the
preparation, content, and integrity of the financial statements and other
statistical data. The financial statements have been prepared in conformity
with U.S. generally accepted accounting principles and necessarily include
amounts based on Management's best estimates and judgment. Management also
prepared the other information in this report and is responsible for the
accuracy and consistency with the financial statements.
First National Lincoln Corporation maintains internal control systems designed
to produce reliable financial statements. Management recognizes that although
controls established for these systems are applied in a prudent manner, errors
and irregularities may occur. However, Management believes that its internal
accounting and reporting systems provide reasonable assurance that material
errors or irregularities are prevented or would be detected and corrected on a
timely basis.
The Company's internal auditor continually reviews, evaluates, and monitors
internal control systems and recommends programs to Management to further
safeguard assets. The Board of Directors discharges its responsibility for
financial statements through its Audit Committee. The Audit Committee regularly
meets with the independent auditors, internal auditor, and representatives of
Management to assure that each is meeting its responsibility. The Committee
also reviews the independent and internal auditors' reports and findings as
they are submitted throughout the year. Both the independent auditors and
internal auditor have direct access to the Audit Committee to discuss the scope
and results of their work, the adequacy of internal controls, and the quality
of financial reporting.
/s/Daniel R. Daigneault /s/F. Stephen Ward
Daniel R. Daigneault F. Stephen Ward
President & Chief Executive Officer Treasurer
Page 33
Berry, Dunn, McNeil & Parker
Certified Public Accountants
Independent Auditors' Report
The Board of Directors and Shareholders
First National Lincoln Corporation
We have audited the accompanying consolidated balance sheets of First National
Lincoln Corporation and Subsidiary as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2001. These financial statements are the responsibility of the Company's
Management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by Management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First National
Lincoln Corporation and Subsidiary as of December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the three-year period ended December 31, 2001, in
conformity with U.S. generally accepted accounting principles.
/s/Berry, Dunn, McNeil & Parker
Berry, Dunn, McNeil & Parker
Portland, Maine
February 4, 2002
Page 34
Consolidated Balance Sheets
First National Lincoln Corporation and Subsidiary
- -----------------------------------------------------------------------------
As of December 31, 2001 2000
- -----------------------------------------------------------------------------
Assets
Cash and due from banks $ 10,894,000 $ 10,324,000
Securities available for sale 50,914,000 62,917,000
Securities to be held to maturity,
market value of $56,921,000 in 2001
and $41,617,000 in 2000 57,272,000 42,303,000
Loans held for sale at cost,
which approximates market value 466,000 -
Loans 301,304,000 264,929,000
Less allowance for loan losses 3,000,000 2,301,000
-------------- --------------
Net loans 298,304,000 262,628,000
-------------- --------------
Accrued interest receivable 2,635,000 3,105,000
Bank premises and equipment 7,563,000 5,352,000
Other real estate owned 202,000 356,000
Other assets 6,216,000 6,231,000
-------------- --------------
Total assets $ 434,466,000 $ 393,216,000
============== =============
Page 35
Consolidated Balance Sheets, Concluded
First National Lincoln Corporation and Subsidiary
- -----------------------------------------------------------------------------
As of December 31, 2001 2000
- -----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Demand deposits $ 22,496,000 $ 022,488,000
NOW deposits 43,644,000 38,603,000
Money market deposits 15,878,000 9,941,000
Savings deposits 46,855,000 40,108,000
Certificates of deposit (including
certificates of $100,000 or more
of $53,909,000 in 2001
and $68,937,000 in 2000) 133,816,000 143,426,000
------------- -------------
Total deposits 262,689,000 254,566,000
Borrowed funds 131,357,000 102,919,000
Other liabilities 3,086,000 2,571,000
------------- -------------
Total liabilities 397,132,000 360,056,000
------------- -------------
Commitments and contingent liabilities
(notes 12, 13 and 17)
Shareholders' equity:
Common stock, one cent par value 25,000 25,000
Additional paid-in capital 4,687,000 4,687,000
Retained earnings 34,030,000 30,495,000
Accumulated other comprehensive income
Net unrealized gain on
securities available for sale,
net of tax 784,000 203,000
Treasury stock, at cost,
89,895 shares in 2001
and 102,657 shares in 2000 (2,192,000) (2,250,000)
------------ ------------
Total shareholders' equity 37,334,000 33,160,000
------------ ------------
Total liabilities and shareholders' equity $ 434,466,000 $ 393,216,000
============ ============
- ------------------------------------------------------------------------------
Common stock
Number of shares authorized 6,000,000 6,000,000
Number of shares issued 2,481,270 2,481,270
Number of shares outstanding 2,391,375 2,378,613
- -------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 36
Consolidated Statements of Income
First National Lincoln Corporation and Subsidiary
- -------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 22,953,000 $ 21,600,000 $ 18,501,000
Interest on deposits with
other banks 77,000 25,000 24,000
Interest and dividends on
investments (includes tax-exempt
income of $926,000 in 2001,
$659,000 in 2000,
and $447,000 in 1999) 7,032,000 6,298,000 5,015,000
----------- ----------- -----------
Total interest income 30,062,000 27,923,000 23,540,000
----------- ----------- -----------
Interest expense:
Interest on deposits 10,006,000 8,625,000 7,205,000
Interest on borrowed funds 5,025,000 6,528,000 4,386,000
----------- ----------- -----------
Total interest expense 15,031,000 15,153,000 11,591,000
----------- ----------- -----------
Net interest income 15,031,000 12,770,000 11,949,000
Provision for loan losses 1,230,000 700,000 645,000
----------- ----------- -----------
Net interest income after
provision for loan losses 13,801,000 12,070,000 11,304,000
----------- ----------- -----------
Other operating income:
Fiduciary and investment
management income 698,000 673,000 546,000
Service charges on deposit accounts 901,000 832,000 685,000
Net realized gain on
securities available for sale 73,000 - -
Other 2,226,000 1,462,000 1,577,000
----------- ----------- -----------
Total other operating income 3,898,000 2,967,000 2,808,000
----------- ----------- -----------
Other operating expenses:
Salaries and employee benefits 4,903,000 4,334,000 3,981,000
Occupancy expense 573,000 478,000 472,000
Furniture and equipment expense 1,023,000 750,000 705,000
Other 3,479,000 2,975,000 2,631,000
---------- ---------- ----------
Total other operating expenses 9,978,000 8,537,000 7,789,000
---------- ---------- ----------
Income before income taxes 7,721,000 6,500,000 6,323,000
Income tax expense 2,228,000 1,893,000 1,872,000
---------- ---------- ----------
Net income $ 5,493,000 $ 4,607,000 $ 4,451,000
========== ========== ==========
Page 37
Consolidated Statements of Income, Concluded
First National Lincoln Corporation and Subsidiary
- -------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Basic earnings per share $ 2.30 $ 1.93 $ 1.84
Diluted earnings per share $ 2.24 $ 1.89 $ 1.77
Cash dividends declared per share $ 0.82 $ 0.66 $ 0.50
Weighted average number
of shares outstanding 2,384,402 2,384,356 2,424,385
- -------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 38
Consolidated Statement of Changes in Shareholders Equity
First National Lincoln Corporation and Subsidiary
<table>
<caption>
- ------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
- ------------------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss) Total
Number of Additional on securities share-
common Common paid-in Retained available Treasury holders'
shares stock capital earnings for sale stock equity
<s> <c> <c> <c> <c> <c> <c> <c>
- -------------------------------------------------------------------------------------------------------------
Balance at
December 31,
1998 2,471,531 $25,000 $4,687,000 $24,218,000 $ 63,000 $ (217,000) $28,776,000
========= ======= ========== =========== ============ =========== ===========
Net income - - - 4,451,000 - - 4,451,000
Net unrealized
loss on
securities
available for1
sale, net of
tax benefit
of $713,000 - - - - (1,382,000) - (1,382,000)
--------- ------- ---------- ---------- ------------ ----------- -----------
Comprehensive
income - - - 4,451,000 (1,382,000) - 3,069,000
Cash dividends
declared - - - (1,206,000) - - (1,206,000)
Treasury stock
purchases (107,633) - - - - (2,104,000) (2,104,000)
Treasury stock
sales 6,149 - - - - 127,000 127,000
--------- ------- ---------- ---------- ------------ ----------- -----------
Balance
at December 31,
1999 2,370,047 25,000 4,687,000 27,463,000 (1,319,000) (2,194,000) 28,662,000
========= ======= ========== ========== =========== =========== ===========
Page 39
Consolidated Statement of Changes in Shareholders Equity, continued
First National Lincoln Corporation and Subsidiary
- ------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
- ------------------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss) Total
Number of Additional on securities share-
common Common paid-in Retained available Treasury holders'
shares stock capital earnings for sale stock equity
- -------------------------------------------------------------------------------------------------------------
Balance
at December 31,
1999 2,370,047 25,000 4,687,000 27,463,000 (1,319,000) (2,194,000) 28,662,000
========= ======= ========== ========== =========== =========== ==========
Net income - - - 4,607,000 - - 4,607,000
Net unrealized
gain on
securities
available for
sale, net of
tax expense of
$784,000 - - - - 1,522,000 - 1,522,000
--------- ------- ---------- ---------- ------------ ----------- ---------
Comprehensive
income - - - 4,607,000 1,522,000 - 6,129,000
Cash dividends
declared - - - (1,575,000) - - (1,575,000)
Treasury stock
purchases (20,613) - - - - (316,000) (316,000)
Treasury stock
sales 29,179 - - - - 260,000 260,000
--------- ------- ---------- ---------- ------------ ----------- -----------
Balance
at December 31,
2000 2,378,613 25,000 4,687,000 30,495,000 203,000 (2,250,000) 33,160,000
========= ======= ========== ========== ============ =========== ===========
Page 40
Consolidated Statement of Changes in Shareholders Equity, concluded
First National Lincoln Corporation and Subsidiary
- ------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
- ------------------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss) Total
Number of Additional on securities share-
common Common paid-in Retained available Treasury holders'
shares stock capital earnings for sale stock equity
- ------------------------------------------------------------------------------------------------------------
Balance
at December 31,
2000 2,378,613 25,000 4,687,000 30,495,000 203,000 (2,250,000) 33,160,000
========= ======= ========== ========== ========== =========== ===========
Net income - - - 5,493,000 - - 5,493,000
Net unrealized
gain on
securities
available for
sale, net of
tax expense of
$299,000 - - - - 581,000 - 581,000
--------- ------- ---------- ---------- ---------- ----------- -----------
Comprehensive
income - - - 5,493,000 581,000 - 6,074,000
Cash dividends
declared - - - (1,958,000) - - (1,958,000)
Treasury stock
purchases (13,953) - - - - (254,000) (254,000)
Treasury stock
sales 26,715 - - - - 312,000 312,000
--------- ------- ---------- ---------- ---------- ----------- -----------
Balance
at December 31,
2001 2,391,375 $25,000 $4,687,000 $34,030,000 $ 784,000 $(2,192,000) $37,334,000
========= ======= ========== =========== ========== =========== ===========
The accompanying footnotes are an integral part of these consolidated financial statements
</table>
Page 41
Consolidated Statements of Cash Flows
First National Lincoln Corporation and Subsidiary
- ------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 5,493,000 $ 4,607,000 $ 4,451,000
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 774,000 675,000 538,000
Deferred income taxes - 148,000 (235,000)
Provision for loan losses 1,230,000 700,000 645,000
Provision for losses on
other real estate owned - - 20,000
Loans originated for resale (18,451,000) (3,426,000) (9,115,000)
Proceeds from sales of loans 17,985,000 3,553,000 9,197,000
Net gain on sale or call of
securities available for sale (73,000) - -
Losses on other real estate owned 55,000 5,000 6,000
Net change in other assets and
accrued interest receivable 485,000 (1,540,000) (741,000)
Net change in other liabilities 119,000 223,000 830,000
Net accretion of discount on
investments (278,000) (147,000) (20,000)
---------- ---------- ----------
Net cash provided by operating
activities 7,339,000 4,798,000 5,576,000
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales, maturities
and calls of securities
available for sale 17,629,000 1,496,000 2,833,000
Proceeds from maturities and calls of
securities to be held to maturity 31,025,000 4,556,000 12,557,000
Proceeds from sales
of other real estate owned 537,000 35,000 281,000
Purchases of securities
available for sale (4,585,000) (19,952,000) (28,122,000)
Purchases of securities
to be held to maturity (45,804,000) (868,000) (18,000,000)
Net increase in loans (37,344,000) (32,897,000) (24,074,000)
Capital expenditures (2,985,000) (509,000) (190,000)
---------- ---------- ----------
Net cash used in
investing activities (41,527,000) (48,139,000) (54,715,000)
---------- ---------- ----------
Page 42
Consolidated Statements of Cash Flows, concluded
First National Lincoln Corporation and Subsidiary
- ------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in
demand deposits, savings,
and money market accounts 17,733,000 (1,276,000) 12,038,000
Net increase (decrease) in
certificates of deposit (9,610,000) 50,384,000 (8,383,000)
Advances on long-term borrowings 51,500,000 15,000,000 8,000,000
Repayments on long-term borrowings (7,114,000) (5,440,000) (20,416,000)
Net increase (decrease) in
short-term borrowings (15,948,000) (11,689,000) 63,004,000
Purchase of Treasury stock (254,000) (316,000) (2,104,000)
Proceeds from sale of Treasury stock 312,000 260,000 127,000
Dividends paid (1,861,000) (1,479,000) (1,244,000)
---------- ---------- ----------
Net cash provided by
financing activities 34,758,000 45,444,000 51,022,000
---------- ---------- ----------
Net increase in cash
and cash equivalents 570,000 2,103,000 1,883,000
Cash and cash equivalents
at beginning of year 10,324,000 8,221,000 6,338,000
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 10,894,000 $ 10,324,000 $ 8,221,000
=========== =========== ===========
Interest paid $ 15,003,000 $ 14,911,000 $ 11,591,000
Income taxes paid 2,526,000 1,935,000 1,949,000
Non-cash transactions:
Loans transferred to
other real estate owned (438,000) (60,000) (340,000)
Change in unrealized gain (loss) on
available for sale securities 880,000 2,306,000 (2,095,000)
- -------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 43
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of First National Lincoln Corporation
conform to U.S. generally accepted accounting principles and to general
practice within the banking industry. The following is a description of the
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 intercompany 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. Pemaquid Advisors, a division of the Bank, provides investment
management, private banking and financial planning services. Pemaquid Advisors
has offices in Damariscotta and Portland, Maine.
Basis of Financial Statement Presentation
In preparing the financial statements, Management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with
the determination of the allowance for loan losses and the carrying value of
real estate owned, Management obtains independent appraisals for significant
properties.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents
includes cash on hand and amounts due from banks.
Investment Securities
Investment securities are classified as available for sale or held to maturity
when purchased. There are no trading account securities.
Securities available for sale consist primarily of debt securities which
Management intends to hold for indefinite periods of time. They may be used as
part of the Bank's funds management strategy, and may be sold in response to
changes in interest rates or prepayment risk, changes in liquidity needs, to
increase capital, or for other similar reasons. These assets are accounted for
at fair value, with unrealized gains or losses adjusted through shareholders'
equity, net of related income taxes.
Page 44
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Securities to be held to maturity consist primarily of debt securities
which Management has acquired solely for long-term investment purposes, rather
than to acquire such securities for purposes of trading or future sale. For
securities to be held to maturity, Management has the intent and the Company
has the ability to hold such securities until their respective maturity dates,
and such securities are carried at cost adjusted for the amortization of
premiums and accretion of discounts.
Investment securities transactions are accounted for on a settlement date
basis. The reported amounts would not be materially different from those
accounted for on a trade date basis. Gains and losses on the sales of
investment securities are determined using the amortized cost of the specific
security sold.
Loans Held for Sale
Loans held for sale consist of residential real estate mortgage loans and are
carried at the lower of aggregate cost or market value, as determined by
current investor yield requirements.
Loan Fees and Costs
Loan origination fees and certain direct loan origination costs are deferred
and recognized in interest income as an adjustment to the loan yield over the
life of the related loans. The unamortized net deferred fees and costs are
included on the balance sheets with the related loan balances, and the
amortization is included with the related interest income.
Allowance for Loan Losses
Loans considered to be uncollectible are charged against the allowance for loan
losses. The allowance for loan losses is maintained at a level determined by
Management to be adequate to absorb 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: reviews of
individual non-performing loans and performing watch-report loans, loan
portfolio size by category, recent loss experience and current economic
conditions. Although Management utilizes its best judgment in providing for
possible losses, there can be no assurance the Bank will not have to increase
its provision for possible losses in the future due to increases in non-
performing assets or otherwise, which would adversely affect the results of
operations.
Impaired loans, including restructured loans, are measured at the present
value of expected future cash flows discounted at the loan's effective interest
rate, at the loan's observable market price, or at the fair value of the
collateral if the loan is collateral dependent. Management takes into
consideration impaired loans in addition to the above mentioned factors in
determining the appropriate level of allowance for loan losses.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period the
change is enacted.
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Accrual of Interest Income and Expense
Interest on loans and investment securities is taken into income using methods
which relate the income earned to the balances of loans and investment
securities outstanding. Interest expense on liabilities is derived by applying
applicable interest rates to principal amounts outstanding. Recording of
interest income on problem loans, which includes impaired loans, ceases when
collectibility of principal and interest within a reasonable period of time
becomes doubtful. Cash payments received on non-accrual loans, which includes
impaired loans, are applied to reduce the loan's principal balance until the
remaining principal balance is deemed collectible, after which interest is
recognized when collected. As a general rule, a loan may be restored to accrual
status when payments are current and repayment of the remaining contractual
amounts is expected or when it otherwise becomes well secured and in the
process of collection.
Bank Premises and Equipment
Premises, furniture and equipment are stated at cost, less accumulated
depreciation. Depreciation expense is computed by straight-line and accelerated
methods over the asset's estimated useful life.
Other Real Estate Owned (OREO)
Real estate acquired by foreclosure or deed in lieu of foreclosure is
transferred to OREO and recorded at the lower of cost or fair market value less
estimated costs to sell based on appraised value at the date actually or
constructively received. Loan losses arising from the acquisition of such
property are charged against the allowance for loan losses. OREO is stated at
the lower of cost or market. An allowance for losses on OREO is maintained for
subsequent valuation adjustments on a specific property basis.
Earnings Per Share
Basic earnings per share data are based on the weighted average number of
common shares outstanding during each year. Diluted earnings per share gives
effect to the stock options outstanding, determined by the treasury stock
method.
Post-retirement Benefits
The cost of providing post-retirement benefits is accrued during the active
service period of the employee.
Segments
First National Lincoln Corporation, through the branch network of its
subsidiary, The First National Bank of Damariscotta, provides a broad range of
financial services to individuals and companies in Mid-Coast Maine. These
services include demand, time, and savings deposits; lending; credit card
servicing; ATM processing; and investment management and trust services.
Operations are managed and financial performance is evaluated on a corporate-
wide basis. Accordingly, all of the Company's banking operations are considered
by Management to be aggregated in one reportable operating segment.
Page 46
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Comprehensive Income
Comprehensive income includes both net income and other comprehensive income.
Other comprehensive income includes the change in unrealized gains and losses
on securities available for sale and is disclosed in the consolidated
statements of changes in shareholders' equity.
Loan Servicing
Servicing rights are recognized when they are acquired through sale of loans.
Capitalized servicing rights are reported in other assets and are amortized
into non-interest income in proportion to, and over the period of, the
estimated future net servicing income of the underlying financial assets.
Servicing rights are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights by predominant characteristics, such as interest rates and terms.
Impairment is recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the capitalized amount for
the stratum.
Effect of New Financial Accounting Standards
Effective January 1, 2001, the Company adopted Statement of Financial Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS No. 138. Adoption of this standard had no material effect on
the financial condition and results of operations of the Company. During 2001,
the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets", SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS No. 141 requires that the purchase method be used to account for
business combinations initiated after June 30, 2001. SFAS No. 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The amortization of goodwill ceases upon adoption of the Statement
on January 1, 2002.
SFAS Nos. 143 and 144 provide guidance concerning the recognition and
measurement of an impairment loss for certain types of long-lived assets and
obligations associated with the retirement of tangible long-lived assets.
Management does not expect these statements to have any material effect on the
Company's consolidated financial condition and results of operations.
Note 2. Cash and Due from Banks
At December 31, 2001 the Company had a contractual clearing balance of $500,000
at the Federal Reserve Bank. The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts. The Company believes it is not
exposed to any significant risk with respect to these accounts.
Page 47
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 3. Investment Securities
The following tables summarize the amortized cost and estimated fair value of
investment securities at December 31, 2001 and 2000:
- ------------------------------------------------------------------------------
December 31, 2001 Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (Estimated)
- ------------------------------------------------------------------------------
Securities available for sale:
Mortgage-backed securities $ 2,395,000 75,000 ( 45,000) 2,425,000
State and political
subdivisions 13,821,000 198,000 (249,000) 13,770,000
Corporate securities 26,647,000 1,419,000 (205,000) 27,861,000
Federal Home Loan Bank stock 6,005,000 - - 6,005,000
Federal Reserve Bank stock 53,000 - - 53,000
Other equity securities 805,000 12,000 (17,000) 800,000
----------- ---------- ----------- ----------
$49,726,000 1,704,000 (516,000) 50,914,000
=========== ========== ========== ==========
Securities to be held to maturity:
U.S. Treasury and agency $35,444,000 73,000 (422,000) 35,095,000
Mortgage-backed securities 13,851,000 201,000 (263,000) 13,789,000
State and political
subdivisions 6,393,000 147,000 (112,000) 6,428,000
Corporate securities 1,584,000 43,000 (18,000) 1,609,000
----------- ---------- ---------- ----------
$57,272,000 464,000 (815,000) 56,921,000
=========== ========== ========== ==========
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
December 31, 2000 Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (Estimated)
- -------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and agency $14,021,000 68,000 (242,000) 13,847,000
Mortgage-backed securities 3,727,000 56,000 (71,000) 3,712,000
State and political
subdivisions 10,837,000 185,000 (70,000) 10,952,000
Corporate securities 27,274,000 546,000 (78,000) 27,742,000
Federal Home Loan Bank stock 5,941,000 - - 5,941,000
Federal Reserve Bank stock 53,000 - - 53,000
Other equity securities 755,000 - (85,000) 670,000
----------- ---------- ---------- ----------
$62,608,000 855,000 (546,000) 62,917,000
=========== ========== ========== ==========
Securities to be held to maturity:
U.S. Treasury and agency $27,025,000 - (690,000) 26,335,000
Mortgage-backed securities 10,311,000 55,000 (228,000) 10,138,000
State and political
subdivisions 4,380,000 169,000 (5,000) 4,544,000
Corporate securities 587,000 13,000 - 600,000
----------- ---------- ---------- ----------
$42,303,000 237,000 (923,000) 41,617,000
=========== ========== ========== ==========
- -------------------------------------------------------------------------------
Page 48
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
The contractual maturities of investment securities at December 31, 2001 are
shown below. For purposes of this table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the weighted-average contractual maturities of the underlying
collateral.
- -------------------------------------------------------------------------------
Securities Securities to be
available for sale: held to maturity:
----------------------- ------------------------
Amortized Fair Value Amortized Fair Value
Cost (Estimated) Cost (Estimated)
- -------------------------------------------------------------------------------
Due in 1 year or less $ 1,550,000 1,484,000 - -
Due in 1 to 5 years 6,700,000 7,093,000 1,276,000 1,258,000
Due in 5 to 10 years 16,534,000 17,293,000 4,644,000 4,752,000
Due after 10 years 18,079,000 18,186,000 51,352,000 50,911,000
Equity securities 6,863,000 6,858,000 - -
---------- ---------- ---------- ----------
$49,726,000 50,914,000 57,272,000 56,921,000
=========== ========== ========== ==========
- -------------------------------------------------------------------------------
At December 31, 2001 securities carried at $42,442,000, with a market value of
$42,768,000, were pledged to secure borrowings from the Federal Home Loan Bank,
public deposits, and for other purposes as required by law. Gains and losses on
the sale of securities available for sale are computed by subtracting the
amortized cost at the time of sale from the security's selling price, net of
accrued interest to be received. Information regarding the sales and calls of
securities available for sale is summarized below:
- -----------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------
Proceeds from sales and calls $ 1,000,000 - 100,000
========== ========== ==========
Gross gains 73,000 - -
Gross losses - - -
---------- ---------- ----------
Net gain 73,000 - -
========== ========== ==========
Related income taxes $ 25,000 - -
- -----------------------------------------------------------------------------
The realized gain on securities in 2001 was the result of a security which was
called at par value by the issuer.
Note 4. Loan Servicing
In 2001, mortgage servicing rights of $245,000 were capitalized, and
amortization for the year totaled $95,000. After deducting for a valuation
allowance of $127,000, at December 31, 2001, mortgage servicing rights had a
fair value of $234,000, which is included in other assets.
In 2000, mortgage servicing rights of $31,000 were capitalized, and
amortization for the year totaled $95,000. After deducting for a valuation
allowance of $69,000, at December 31, 2000, mortgage servicing rights had a
fair value of $142,000.
At December 31, 2001 and 2000, the Bank serviced loans for others totaling
$46,723,000 and $35,635,000, respectively.
Page 49
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 5. Loans
The following table shows the composition of the Company's loan portfolio as of
December 31, 2001 and 2000:
- ------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------
Real estate loans
Residential $ 159,743,000 139,300,000
Commercial 32,638,000 30,695,000
Commercial and industrial loans 68,378,000 53,362,000
State and municipal loans 7,296,000 7,484,000
Consumer loans 30,727,000 33,028,000
Residential construction lo 2,522,000 1,060,000
------------- -----------
Total loans $ 301,304,000 264,929,000
============= ===========
- -------------------------------------------------------------------------------
Loan balances include net deferred loan costs of $681,000 in 2001 and $431,000
in 2000.
At December 31, 2001 and 2000, loans on non-accrual status totaled
$667,000 and $2,366,000, respectively. Interest income which would have been
recognized on these loans, if interest had been accrued, was $77,000 for 2001,
$185,000 for 2000 and $64,000 for 1999. Loans past due greater than 90 days
which are accruing interest totaled $452,000 at December 31, 2001 and $483,000
at December 31, 2000. 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, 2001, 2000 and 1999 were as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Balance at beginning of year $ 2,301,000 2,035,000 1,822,000
Provision charged to operating
expenses 1,230,000 700,000 645,000
---------- ---------- ----------
3,531,000 2,735,000 2,467,000
---------- ---------- ----------
Loans charged off (635,000) (557,000) (543,000)
Recoveries on loans 104,000 123,000 111,000
---------- ---------- ----------
Net loans charged off (531,000) (434,000) (432,000)
---------- ---------- ----------
Balance at end of year $ 3,000,000 2,301,000 2,035,000
========== ========== ==========
- -------------------------------------------------------------------------------
Page 50
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Information regarding impaired loans is as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Average investment in impaired loans $ 1,055,000 654,000 536,000
Interest income recognized on
impaired loans, including cash basis 38,000 16,000 51,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
Balance of impaired loans $ 667,000 1,590,000
Less portion for which no allowance
for loan losses is allocated (247,000) (412,000)
--------- ---------
Portion of impaired loan balance
for which an allowance
for loan losses is allocated 420,000 1,178,000
========= =========
Portion of allowance for loan losses
allocated to the impaired loan balance $ 202,000 260,000
- -------------------------------------------------------------------------------
Loans to directors, officers and employees totaled $10,431,000 at December 31,
2001 and $10,775,000 at December 31, 2000. A summary of loans to directors and
executive officers, which in the aggregate exceed $60,000, is as follows:
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
Balance at beginning of year $ 7,000,000 3,579,000
New loans 1,892,000 4,345,000
Repayments (2,967,000) (827,000)
---------- ---------
Balance at end of year $ 5,925,000 7,097,000
========== =========
- -------------------------------------------------------------------------------
Note 6. Bank Premises and Equipment
Bank premises and equipment are carried at cost and consist of the following:
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
Land $ 1,309,000 986,000
Land improvements 414,000 333,000
Bank buildings 5,579,000 4,324,000
Equipment 6,730,000 5,403,000
---------- ----------
14,032,000 11,046,000
Less accumulated depreciation 6,469,000 5,694,000
---------- ----------
$ 7,563,000 5,352,000
========== ==========
Page 51
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 7. Other Real Estate Owned
The following summarizes other real estate owned:
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
Real estate acquired in settlement of loans $ 202,000 392,000
Less: allowance for losses - (36,000)
---------- ----------
Other real estate owned, net $ 202,000 356,000
========== ==========
- -------------------------------------------------------------------------------
Changes in the allowance for each of the three years ended December 31 were as
follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Beginning balance $ 36,000 36,000 36,000
Losses charged to allowance (36,000) - (20,000)
Provision charged to income - - 20,000
------- ------- -------
Ending balance $ - 36,000 36,000
======= ======= =======
- -------------------------------------------------------------------------------
Note 8. Income Taxes
The current and deferred components of income tax expense were as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Federal income tax:
Current $ 2,138,000 1,650,000 2,034,000
Deferred - 148,000 (235,000)
---------- --------- ---------
2,138,000 1,798,000 1,799,000
State income tax 90,000 95,000 73,000
---------- --------- ---------
$ 2,228,000 1,893,000 1,872,000
========== ========= =========
- -------------------------------------------------------------------------------
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:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Expected tax expense $ 2,625,000 2,210,000 2,150,000
Non-taxable income (452,000) (431,000) (349,000)
State income taxes 59,000 63,000 48,000
Qualified housing tax credit (8,000) (30,000) (31,000)
Other 4,000 81,000 54,000
---------- ---------- ----------
$ 2,228,000 1,893,000 1,872,000
========== ========== ==========
- ----------------------------------------------------------------------------
Page 52
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Items that give rise to the deferred income tax assets and liabilities and the
tax effect of each at December 31 are as follows:
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
Allowance for loan losses and OREO $ 887,000 634,000
Deferred loan fees (285,000) (146,000)
Accrued pension and post-retirement 240,000 187,000
Depreciation (111,000) (85,000)
Unrealized gain on securities available for sale (404,000) (104,000)
Mortgage servicing rights (80,000) (48,000)
Other assets (102,000) (8,000)
Other liabilities 36,000 51,000
-------- --------
Net deferred income tax asset $ 181,000 481,000
======== ========
- -------------------------------------------------------------------------------
These amounts are included in other assets on the balance sheets, except for
the deferred tax liability on unrealized gains on securities available for sale
which is included in other liabilities. The deferred income tax asset and
liability at December 31, 2001 and 2000 are as follows:
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
Asset $ 1,163,000 872,000
========== =========
Liability $ 982,000 391,000
========== =========
- -------------------------------------------------------------------------------
No valuation allowance is deemed necessary for the deferred tax asset.
Note 9. Certificates of Deposit
At December 31, 2001, the scheduled maturities of certificates of deposit are
as follows:
- ---------------------------------
2002 $ 74,159,000
2003 45,849,000
2004 9,869,000
2005 2,119,000
2006 1,820,000
------------
Total $ 133,816,000
============
- ---------------------------------
Interest on certificates of deposit of $100,000 or more was $3,680,000,
$2,732,000 and $1,411,000 in 2001, 2000 and 1999, respectively.
Page 53
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 10. Borrowed Funds
Borrowed funds consists of advances from the Federal Home Loan Bank (FHLB),
Treasury Tax & Loan Notes, and securities sold under agreements to repurchase
with municipal and commercial customers. Advances from FHLB include overnight
borrowings on an $8,000,000 line of credit.
Pursuant to collateral agreements, FHLB advances are collateralized by all
stock in the Home Loan Bank, with a value of $6,005,000 at December 31, 2001
and $5,941,000 at December 31, 2000; qualifying first mortgage loans, which
were valued at $153,607,000 and $130,895,000 in 2001 and 2000, respectively;
U.S. Government and Agency securities not pledged to others, which were valued
at $25,677,000 in 2001 and $30,369,000 in 2000; and funds on deposit with FHLB.
As of December 31, 2001, the Bank's total FHLB borrowing capacity was
$138,315,000, of which $39,315,000 was unused and available for additional
borrowings. All FHLB advances as of December 31, 2001 had fixed rates of
interest until their respective maturity dates, except for the FHLB overnight
line of credit, which has an interest rate which can fluctuate daily.
Under the Treasury Tax & Loan Note program, the Bank accumulates tax
deposits made by customers and is eligible to receive Treasury Direct
investments up to an established maximum balance. Securities sold under
agreements to repurchase include U.S. Treasury and Agency securities with an
aggregate amortized cost of $32,185,000 and $16,918,000 at December 31, 2001
and 2000, respectively, and an aggregate fair value of $32,514,000 and
$16,796,000 at December 31, 2001 and 2000, respectively. Repurchase agreements
have maturity dates ranging from 1 to 365 days. The Bank also has in place
securities repurchase agreements totaling $9,767,000 with a broker and a $5.0
million credit line with a correspondent bank which is currently not in use.
Borrowed funds at December 31, 2001 and 2000 have the following range of
interest rates and maturity dates:
- -------------------------------------------------------------------------------
December 31, 2001
- -------------------------------------------------------------------------------
Federal Home Loan Bank Advances
Maturities within one year 1.83%-2.53% $ 32,500,000
Maturities within two years 4.19%-4.81% 28,000,000
Maturities within three years 4.75%-4.89% 11,000,000
Maturities over five years 3.93%-5.41% 27,500,000
------------
99,000,000
------------
Treasury Tax & Loan Notes
Rate in effect at 12/31/01 was 1.39% variable 166,000
Repurchase agreements
Municipal and commercial customers 2.25%-3.65% 22,424,000
Brokers 2.05% 9,767,000
------------
$ 131,357,000
============
- -------------------------------------------------------------------------------
Page 54
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- -------------------------------------------------------------------------------
December 31, 2000
- -------------------------------------------------------------------------------
Federal Home Loan Bank Advances
Maturities within one year 5.05%-6.77% $ 70,330,000
Maturities over one year 4.95%-5.41% 15,000,000
------------
85,330,000
------------
Treasury Tax & Loan Notes
Rate in effect at 12/31/00 was 5.25% variable 1,077,000
Repurchase agreements
Municipal and commercial customers 4.25%-6.00% 16,512,000
------------
$ 102,919,000
============
- -------------------------------------------------------------------------------
Note 11. Employee Benefit Plans
401(k) Plan
The Bank has a defined contribution plan available to substantially all
employees who have completed six months of service. Employees may contribute up
to 15.0% of their compensation, and the Bank may provide a match of up to 3.0%
of compensation. Subject to a vote of the Board of Directors, the Bank may also
make a profit-sharing contribution to the Plan. Such contribution equaled 3.0%
of each eligible employee's compensation in 2001, 2.50% in 2000, and 3.0% in
1999.
The expense related to the 401(k) plan was $146,000, $160,000, and
$165,000 in 2001, 2000, and 1999, respectively.
Pension Plans
The Bank also sponsors an unfunded, non-qualified supplemental retirement plan
for certain officers. The agreement provides supplemental retirement benefits
payable in installments over 20 years upon retirement or death. The costs for
this plan are recognized over the service periods of the participating
officers. The expense of this supplemental plan was $141,000 in 2001, $123,000
in 2000, and $115,000 in 1999. As of December 31, 2001 and 2000, the accrued
liability of this plan was $484,000 and $342,000, respectively.
Post-retirement Benefit Plans
The Bank sponsors two post-retirement benefit plans. One plan provides health
insurance benefits to employees hired prior to June 30, 1988 and who retired
before June 30, 1996. The other plan provides life insurance coverage to full-
time employees who work until retirement. The Bank also provides health
insurance for retired directors. None of these plans are pre-funded.
The Bank elected to recognize the accumulated post-retirement benefit
obligation as of January 1, 1993 of $578,000 as a component of net periodic
post-retirement benefit cost over a 20-year period.
Page 55
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
The following tables set forth the accumulated post-retirement benefit
obligation, funded status, and net periodic pension cost:
- -------------------------------------------------------------------------------
At December 31, 2001 2000
- -------------------------------------------------------------------------------
Change in benefit obligations:
Benefit obligation at beginning of year: $ 445,000 463,000
Service cost 5,000 5,000
Interest cost 32,000 32,000
Benefits paid (54,000) (55,000)
-------- --------
Benefit obligation at end of year: $ 428,000 445,000
======== ========
Funded status:
Benefit obligation at end of year $(428,000) (445,000)
Unrecognized prior service cost (60,000) (64,000)
Unamortized net actuarial gain (24,000) (5,000)
Unrecognized transition obligation 319,000 348,000
-------- --------
Accrued benefit cost $(193,000) (166,000)
======== ========
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 5,000 5,000 8,000
Interest cost 32,000 32,000 32,000
Amortization of unrecognized
transition Obligation 29,000 29,000 29,000
Amortization of prior service cost (5,000) (5,000) (5,000)
Amortization of accumulated gains (2,000) (3,000) (4,000)
------- -------- -------
Net periodic benefit cost $ 59,000 58,000 60,000
======= ======== =======
Weighted average assumptions as of December 31:
Discount rate 7.0% 7.0% 7.0%
- -------------------------------------------------------------------------------
Note 12. Shareholders' Equity
The Company has reserved 160,000 shares of its common stock to be made
available to directors and employees who elect to participate in the stock
purchase or savings and investment plans. As of December 31, 2001, 105,366
shares had been issued pursuant to these plans, leaving 54,634 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 7,573 shares in
2001, 29,179 shares in 2000, and 6,149 shares in 1999. Stock sold to directors
and employees in 2001 was all from treasury shares.
Page 56
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
In 1995, the Company's shareholders adopted a Stock Option Plan and
authorized 200,000 shares to be reserved for options to be granted to certain
key officers of the Company and the Bank. The option exercise price is equal to
or exceeds the fair market value of the shares on the date of the grant, and
options are generally not exercisable before two years from the date granted.
All options expire 10 years from the date of grant.
The following table sets forth the status of the plan as of December 31,
2001, 2000 and 1999, and changes during the years then ended:
- ------------------------------------------------------------------------------
Number Weighted Average
of Shares Exercise Price
- ------------------------------------------------------------------------------
Balance at December 31, 1998 158,000 $ 7.97
Granted in 1999 20,000 19.06
---------- --------------
Balance at December 31, 1999 178,000 9.21
Granted in 2000 5,000 16.50
Exercised in 2000 (22,000) 6.98
Forfeited in 2000 (6,000) 12.96
---------- --------------
Balance at December 31, 2000 155,000 9.62
Exercised in 2001 (17,000) 7.84
---------- --------------
Balance at December 31, 2001 138,000 $ 9.84
========== ==============
- -----------------------------------------------------------------------------
The number and weighted average exercise price of exercisable options was
93,500 and $8.28 at December 31, 2001, 81,700 and $7.45 at December 31, 2000,
and 70,000 and $7.34 at December 31, 1999. The range of prices for outstanding
and exercisable stock options at December 31, 2001 was as follows:
- -------------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
----------- ----------- --------
Options Outstanding
$6.38 to $10.00 84,000 3.3 $ 6.88
$10.01 to $15.00 26,000 5.1 10.25
$15.01 to $20.00 24,000 7.9 17.68
$20.01 to $22.50 4,000 7.0 22.50
----------- ----------- --------
138,000 4.5 $ 9.84
=========== =========== ========
Options Exercisable
$6.38 to $10.00 76,000 3.2 $ 6.73
$10.01 to $15.00 7,000 5.1 10.25
$15.01 to $20.00 9,000 8.1 17.43
$20.01 to $22.50 1,500 7.0 22.50
----------- ----------- --------
93,500 3.9 $ 8.28
=========== =========== ========
- -------------------------------------------------------------------------------
Page 57
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
No compensation cost has been recognized for the Plan. The fair market
value of options granted was $16,000 in 2000, and $93,000 in 1999. No options
were granted in 2001. The weighted average fair value of options granted was
$3.24 in 2000, and $4.66 in 1999. The fair market value is estimated using the
Black-Scholes option pricing model and the following assumptions: quarterly
dividends of $0.18 in 2000 and $0.11 in 1999, risk-free interest rate of 6.00%
in 2000 and 5.25% in 1999, volatility of 25.11% in 2000 and 13.85% in 1999, and
an expected life of 10 years.
Had compensation cost been expensed, net of related income taxes, based on
fair market value of the options at the grant dates, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts shown
in the following table:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Net income
As reported $ 5,493,000 4,607,000 4,451,000
Pro forma 5,493,000 4,596,000 4,390,000
Basic earnings per share
As reported 2.30 1.93 1.84
Pro forma 2.30 1.93 1.81
Diluted earnings per share
As reported 2.24 1.89 1.77
Pro forma 2.24 1.88 1.74
- -------------------------------------------------------------------------------
Note 13. Off-Balance Sheet Financial Instruments
and Concentrations of Credit Risk
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to originate loans, commitments
for unused lines of credit, and standby letters of credit. The instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
Commitments for unused lines are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Loan commitments are recorded when funded. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on Management's credit evaluation of the
borrower.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee a customer's performance to a third party, with the customer being
obligated to repay (with interest) any amounts paid out by the Bank under the
letter of credit. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
Page 58
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
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:
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
Unused lines, collateralized
by residential real estate $ 10,445,000 7,603,000
Unused credit card lines 11,718,000 11,846,000
Other unused commitments 22,367,000 23,533,000
Standby letters of credit 60,000 202,000
Commitments to extend credit 15,718,000 10,355,000
Unused portion of foreign
exchange forward contract, US$ equivalent 319,000 -
- -----------------------------------------------------------------------------
The Company grants residential, commercial and consumer loans to customers
principally located in the Mid-Coast region of Maine. Collateral on these loans
typically consists of residential or commercial real estate, or personal
property. Although the loan portfolio is diversified, a substantial portion of
borrowers' ability to honor their contracts is dependent on the economic
conditions in the area, especially in the real estate sector.
Note 14. Earnings Per Share
The following tables provide detail for basic earnings per share and diluted
earnings per share for the years ended December 31, 2001, 2000 and 1999:
- -------------------------------------------------------------------------------
For the Year Ended December 31, 2001 Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------
Net income as reported $ 5,493,000
========== ========== ========
Basic EPS: Income available to
common shareholders $ 5,493,000 2,384,402 $ 2.30
Effect of dilutive securities:
incentive stock options - 70,547
---------- ---------- --------
Diluted EPS: income available to
common shareholders plus
assumed conversions $ 5,493,000 2,454,949 $ 2.24
========== ========== ========
- -------------------------------------------------------------------------------
Page 59
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- -------------------------------------------------------------------------------
For the Year Ended December 31, 2000 Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------
Net income as reported $ 4,607,000
========== ========== ========
Basic EPS: Income available to
common shareholders $ 4,607,000 2,384,356 $ 1.93
Effect of dilutive securities:
incentive stock options - 56,752
---------- ---------- --------
Diluted EPS: income available to
common shareholders plus
assumed conversions $ 4,607,000 2,441,108 $ 1.89
========== ========== ========
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
For the Year Ended December 31, 1999 Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------
Net income as reported $ 4,451,000
========== ========== ========
Basic EPS: Income available to
common shareholders $ 4,451,000 2,424,385 $ 1.84
Effect of dilutive securities:
incentive stock options - 93,001
---------- ---------- --------
Diluted EPS: income available to
common shareholders plus
assumed conversions $ 4,451,000 2,517,386 $ 1.77
========== ========== ========
- -------------------------------------------------------------------------------
All earnings per share calculations have been made using the weighted
average number of shares outstanding for each year. All of the dilutive
securities are incentive stock options granted to certain key members of
Management. The dilutive number of shares has been calculated using the
treasury method, assuming that all granted options were exercisable at each
year end.
Page 60
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 15. Fair Value of Financial Instruments
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments.
Cash and Due from Banks
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 Held for Sale
The fair value of loans held for sale is determined by the current investor
yield requirements.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair values of performing loans are calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest risk inherent in the
loan. The estimates of maturity are based on the Company's historical
experience with repayments for each loan classification, modified, as required,
by an estimate of the effect of current economic and lending conditions, and
the effects of estimated prepayments.
The fair value estimate for credit card loans is based on the carrying
value of existing loans. This estimate does not include the value that relates
to estimated cash flows from new loans generated from existing cardholders over
the remaining life of the portfolio.
Fair values for significant non-performing loans are based on estimated
cash flows and are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
Management has made estimates of fair value using discount rates that it
believes to be reasonable. However, because there is no market for many of
these financial instruments, Management has no basis to determine whether the
fair value presented above would be indicative of the value negotiated in an
actual sale.
Cash Surrender Value of Life Insurance
The fair value is based on the actual cash surrender value of life insurance
policies.
Page 61
Accrued Interest Receivable
The fair value estimate of this financial instrument approximates the carrying
value as this financial instrument has a short maturity. It is the Company's
policy to stop accruing interest on loans for which it is probable that the
interest is not collectible. Therefore, this financial instrument has been
adjusted for estimated credit loss.
Deposits
The fair value of deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The fair value estimates do not
include the benefit that results from the low-cost funding provided by the
deposits compared to the cost of borrowing funds in the market. If that value
were considered, the fair value of the Company's net assets could increase.
Borrowed Funds
The fair value of borrowed funds is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently available for borrowings of similar remaining maturities.
Accrued Interest Payable
The fair value estimate approximates the carrying amount as this financial
instrument has a short maturity.
Off-Balance-Sheet Instruments
Off-balance-sheet instruments include loan commitments. Fair values for loan
commitments have not been presented as the future revenue derived from such
financial instruments is not significant.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These values
do not reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on Management's judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial instruments include the deferred tax asset, bank premises
and equipment, and other real estate owned. In addition, tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of the estimates.
Page 62
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
The estimated fair values for the Company's financial instruments as of
December 31, 2001 and 2000 were as follows:
- -------------------------------------------------------------------------------
December 31, 2001
- -------------------------------------------------------------------------------
Carrying Estimated
amount fair value
------------- -----------
Financial assets
Cash and due from banks $ 10,894,000 10,894,000
Securities available for sale 50,914,000 50,914,000
Securities to be held to maturity 57,272,000 56,921,000
Loans held for sale 466,000 466,000
Loans (net of allowance for loan losses) 298,304,000 303,828,000
Cash surrender value of life insurance 4,250,000 4,250,000
Accrued interest receivable 2,635,000 2,635,000
Financial liabilities
Deposits 262,689,000 258,697,000
Borrowed funds 131,357,000 133,285,000
Accrued interest payable 891,000 891,000
- -------------------------------------------------------------------------------
December 31, 2000
- -------------------------------------------------------------------------------
Carrying Estimated
amount fair value
------------- -----------
Financial assets
Cash and due from banks $ 10,324,000 10,324,000
Securities available for sale 62,917,000 62,917,000
Securities to be held to maturity 42,303,000 41,617,000
Loans (net of allowance for loan losses) 262,628,000 260,594,000
Cash surrender value of life insurance 4,063,000 4,063,000
Accrued interest receivable 3,105,000 3,105,000
Financial liabilities
Deposits 254,566,000 244,870,000
Borrowed funds 102,919,000 102,987,000
Accrued interest payable 864,000 864,000
- -------------------------------------------------------------------------------
Page 63
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 16. Other Operating Income and Expense
Other operating income includes the following items greater than 1% of
revenues.
- ------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------
Merchant discount fees $ 880,000 743,000 553,000
Mortgage origination and servicing 357,000 71,000 412,000
- ------------------------------------------------------------------------------
Other operating expense includes the following items greater than 1% of
revenues.
- -------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------
Stationery and supplies $ 215,000 160,000 162,000
Merchant interchange fees 620,000 551,000 407,000
Postage, freight and express 186,000 169,000 163,000
Exams and audits 231,000 190,000 179,000
- ------------------------------------------------------------------------------
Note 17. Regulatory Capital Requirements
The ability of the Company to pay cash dividends to its shareholders depends
primarily on receipt of dividends from its subsidiary, the Bank. The subsidiary
may pay dividends to its parent out of so much of its net income as the Bank's
directors deem appropriate, subject to the limitation that the total of all
dividends declared by the Bank in any calendar year may not exceed the total of
its net income of that year combined with its retained net income of the
preceding two years and subject to minimum regulatory capital requirements. The
amount available for dividends in 2002 will be 2002 earnings plus retained
earnings of $5,709,000 from 2001 and 2000.
The payment of dividends by the Company is also affected by various
regulatory requirements and policies, such as the requirements to maintain
adequate capital. In addition, if, in the opinion of the applicable regulatory
authority, a bank under its jurisdiction is engaged in or is about to engage in
an unsafe or unsound practice (which, depending on the financial condition of
the bank, could include the payment of dividends), that authority may require,
after notice and hearing, that such bank cease and desist from that practice.
The Federal Reserve Bank and the Comptroller of the Currency have each
indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsafe and unsound banking practice. The Federal
Reserve Bank, the Comptroller and the Federal Deposit Insurance Corporation
have issued policy statements which provide that bank holding companies and
insured banks should generally only pay dividends out of current operating
earnings.
In addition to the effect on the payment of dividends, failure to meet
minimum capital requirements can also result in mandatory and discretionary
actions by regulators that, if undertaken, could have an impact on the
Company's operations. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measurements of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
Page 64
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
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, 2001, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2001, the most recent notification from the Office of
the Comptroller of the Currency classified the Bank as well-capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since this notification that Management believes have
changed the institution's category.
The actual capital amounts and ratios for the Bank are presented in the
following table:
- -------------------------------------------------------------------------------
To be well-
capitalized
For under prompt
capital corrective
adequacy action
Actual purposes provisions
- -------------------------------------------------------------------------------
As of December 31, 2001
Tier 2 capital to $ 37,533,000 22,494,000 28,118,000
risk-weighted assets 13.35% 8.00% 10.00%
Tier 1 capital to 34,533,000 11,247,000 16,871,000
risk-weighted assets 12.28% 4.00% 6.00%
Tier 1 capital to 34,533,000 16,967,000 21,208,000
average assets 8.14% 4.00% 5.00%
- -------------------------------------------------------------------------------
As of December 31, 2000
Tier 2 capital to $ 33,784,000 19,977,000 24,972,000
risk-weighted assets 13.53% 8.00% 10.00%
Tier 1 capital to 31,483,000 9,989,000 14,983,000
risk-weighted assets 12.61% 4.00% 6.00%
Tier 1 capital to 31,483,000 15,303,000 19,129,000
average assets 8.23% 4.00% 5.00%
- -------------------------------------------------------------------------------
Page 65
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
The actual capital amounts and ratios for the Company, on a consolidated basis,
are presented in the following table:
- -------------------------------------------------------------------------------
To be well-
capitalized
For under prompt
capital corrective
adequacy action
Actual purposes provisions
- -------------------------------------------------------------------------------
As of December 31, 2001
Tier 2 capital to $ 39,402,000 22,603,000 28,254,000
risk-weighted assets 13.95% 8.00% 10.00%
Tier 1 capital to 36,402,000 11,302,000 16,952,000
risk-weighted assets 12.88% 4.00% 6.00%
Tier 1 capital to 36,402,000 17,016,000 21,270,000
average assets 8.56% 4.00% 5.00%
- -------------------------------------------------------------------------------
As of December 31, 2000
Tier 2 capital to $ 35,244,000 20,130,000 25,163,000
risk-weighted assets 14.01% 8.00% 10.00%
Tier 1 capital to 32,943,000 10,065,000 15,098,000
risk-weighted assets 13.09% 4.00% 6.00%
Tier 1 capital to 32,943,000 15,351,000 19,188,000
average assets 8.58% 4.00% 5.00%
- -------------------------------------------------------------------------------
Note 18. 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, 2001 2000
- -------------------------------------------------------------------------------
Assets
Cash $ 656 222
Dividends receivable 550 475
Investments 750 672
Investment in subsidiary 35,469 31,756
Other assets 479 484
------- -------
$ 37,904 33,609
======= =======
Liabilities and shareholders' equity
Dividends payable $ 526 428
Other liabilities 44 21
Shareholders' equity 37,334 33,160
------- -------
$ 37,904 33,609
======= =======
- -------------------------------------------------------------------------------
Page 66
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, concluded
- -------------------------------------------------------------------------------
Statements of Income
Years ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Investment income $ 56 57 35
-------- -------- -------
Total income 56 57 35
-------- -------- -------
Other expense 47 50 54
-------- -------- -------
Income (loss) before Bank earnings 9 7 (19)
Equity in earnings of Bank:
Remitted 2,200 1,600 3,395
Unremitted 3,284 3,000 1,075
-------- -------- -------
Net income $ 5,493 4,607 4,451
======== ========= =======
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Statements of Cash Flows
Years ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 5,493 4,607 4,451
Adjustments to reconcile net income
to net cash provided
by operating activities:
(Increase) decrease in other assets 5 23 (41)
Increase (decrease) in other liabilities 23 (1) 20
Unremitted earnings of Bank (3,284) (3,000) (1,075)
-------- ------- -------
Net cash provided by operating activities 2,237 1,629 3,355
-------- ------- -------
Cash flows from investment activities:
Proceeds from sales and maturities of
securities available for sale - - 100
Purchases of investments - - (300)
-------- ------- -------
Net cash used in investing activities - - (200)
-------- ------- -------
Cash flows from financing activities:
Purchase of Treasury stock (254) (316) (2,104)
Sale of Treasury stock 312 260 127
Dividends paid (1,861) (1,479) (1,244)
-------- ------- -------
Net cash used in financing activities (1,803) (1,535) (3,221)
-------- ------- -------
Net increase (decrease) in cash 434 94 (66)
Cash, beginning of year 222 128 194
-------- ------- -------
Cash, end of year $ 656 222 128
======== ======= =======
- -------------------------------------------------------------------------------
Page 67
ITEM 9. Changes in and/or Disagreements with Accountants
None.
Page 68
ITEM 10. Directors and Executive Officer of the Registrant
The Articles of Incorporation of the Company provide that the Board of
Directors shall consist of not fewer than five (5) nor more than twenty-five
(25) persons as determined by the Board prior to each Annual Meeting, with
Directors serving for "staggered terms" of three years. A resolution of the
Board of Directors adopted pursuant to the Company's Articles of Incorporation
has established the number of Directors at ten. Each person listed below has
consented to be named as a nominee, and the Board of Directors knows of no
reason why any of the nominees listed below may not be able to serve as a
Director if elected.
The following Directors' terms expire in 2002, and each will be nominated for a
re-election for a three-year term as Director expiring in 2005:
Katherine M. Boyd has served as a Director of the Company and The First
National Bank of Damariscotta (the "Bank"), the Company's wholly owned
subsidiary, since 1993. A resident of Boothbay Harbor, she owns the Boothbay
Region Greenhouses with her husband. Ms. Boyd serves as trustee of the Boothbay
Region YMCA, and was previously chairperson of the YMCA Annual Fund Drive.
Carl S. Poole, Jr. has served as a Director of the Company since its
organization in 1985 and has served as a Director of the Bank since 1984. Mr.
Poole is President, Secretary, and Treasurer of Poole Brothers Lumber, a lumber
and building supply company with locations in Damariscotta, Pemaquid and
Boothbay Harbor, Maine.
David B. Soule, Jr. has served as a Director of the Company and the Bank
since 1989. Mr. Soule has been practicing law in Wiscasset since 1971. He
served two terms in the Maine House of Representatives, is a past President of
the Lincoln County Bar Association and is a former Public Administrator,
Lincoln County.
Bruce B. Tindal has served as a Director of the Company and the Bank since
1999. Mr. Tindal formed and is owner of Tindal & Callahan Real Estate in
Boothbay Harbor, which has been in operation since 1985. Mr. Tindal is a
Trustee of St. Andrews Hospital and serves on the Board of Directors of the
Boothbay Region Land Trust and the Boothbay Region Economic Development Corp.
Mr. Tindal is also a member of the National Association of Realtors and the
Boothbay Harbor Rotary Club.
The following Directors' terms will expire in 2003:
Daniel R. Daigneault has served as President, Chief Executive Officer and
as a member of the Board of Directors of both the Company and the Bank since
1994. Prior to being employed by the Bank, Mr. Daigneault was Vice President,
Senior Commercial Loan Officer at Camden National Bank, Camden, Maine. Mr.
Daigneault is Chairman of the Maine Bankers Association and past President of
the Boothbay Region YMCA Board of Trustees.
Dana L. Dow has served as a Director of the Company and the Bank since
1999. Mr. Dow is President of Dow Furniture, Inc., located in Waldoboro, Maine,
which he purchased from his father in 1977. Prior to purchasing Dow Furniture,
Mr. Dow taught chemistry and physics at Medomak Valley High School.
Robert B. Gregory has served as a Director of the Company and the Bank
since 1987 and has served as Chairman of both the Company and the Bank since
September 1998. Mr. Gregory has been a practicing attorney since 1980, first in
Lewiston, Maine and since 1983 in Damariscotta, Maine.
Page 69
The following Directors' terms will expire in 2004:
Bruce A. Bartlett has served as a Director of the Company since its
organization in 1985 and as a Director of the Bank, since 1981. Mr. Bartlett
served as President and Chief Executive Officer of the Company and the Bank
until his retirement in 1994.
Malcolm E. Blanchard has served as a Director of the Company since its
organization in 1985 and has served as a Director of the Bank since 1976. Mr.
Blanchard has been actively involved, either as sole proprietor or as a
partner, in real estate development since 1970.
Stuart G. Smith has served as a Director of the Company and the Bank since
1997. A resident of Camden, he and his wife own and operate Maine Sport
Outfitters in Rockport and Lord Camden Inn and Bayview Landing in Camden,
Maine. Mr. Smith is also on the board and part owner of the Mid Coast Skating
and Tennis Center. He also serves on the board of the Five Town CSD School
Board and the SAD 28 Camden/Rockport School Board.
There are no family relationships among any of the Directors of the
Company, and there are no arrangements or understandings between any Director
and any other person pursuant to which that Director has been or is to be
elected. No Director of the Bank or the Company serves as a Director on the
board of any other corporation with a class of securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934 or that is subject to the
reporting requirements of Section 15(d) of the Securities Exchange Act of 1934,
or of any company registered as an investment company under the Investment
Company Act of 1940, as amended.
Executive Officers
Each Executive Officer of the Company and the Bank is identified in the
following table, which also sets forth their respective ages, offices, and
periods served as an Executive Officer of the Company or the Bank:
- -------------------------------------------------------------------------------
Name & Age(1) Office & Position Period Served
- -------------------------------------------------------------------------------
Daniel R. Daigneault President & Chief Executive Officer 1994 to date
49 of the Company and of the Bank
F. Stephen Ward Treasurer of the Company. Senior Vice 1993 to date
48 President and Chief Financial Officer
of the Bank. Managing Principal
of Pemaquid Advisors
Donald C. Means Clerk of the Company, Senior Vice 1973 to date
64 President and Senior Loan Officer of the Bank
Walter F. Vietze Senior Vice President and Senior 1984 to date
60 Operations Officer of the Bank
Michael T. Martin Senior Vice President and Credit 1993 to date
46 Administration Officer of the Bank
Charles A. Wootton Senior Vice President, Banking Services 2000 to date
45 Officer and Senior Loan Officer of the Bank
Susan A. Norton Vice President, Administration 2002 to date
41 and Compliance
Richard M. Elder Vice President, Retail Services 2002 to date
36
- -------------------------------------------------------------------------------
(1) As of December 31, 2001
Page 70
Daniel R. Daigneault has served as President, Chief Executive Officer and
as a member of the Board of Directors of both the Company and the Bank since
1994. Prior to being employed by the Company and the Bank, Mr. Daigneault was
Vice President, Senior Commercial Loan Officer at Camden National Bank, Camden,
Maine.
F. Stephen Ward has served as Treasurer of the Company since 1994 and as
Chief Financial Officer of the Bank since 1993. In 2000, Mr. Ward also became
the Managing Director of Pemaquid Advisors, the Bank's investment management
and private banking division. Mr. Ward has been employed by the Bank since 1990
and served as Assistant Vice President and Marketing Officer from 1990 to 1993.
From 1978 to 1990 Mr. Ward was employed by Down East Enterprises, Inc.
Donald C. Means has been employed by the Bank since 1973. In 1988 Mr.
Means became the Senior Loan Officer for the Bank. From 1962 to 1973 Mr. Means
was employed by The First National Bank of Boston, a major New England
financial institution. While employed there, Mr. Means' primary
responsibilities involved commercial lending.
Walter F. Vietze has been employed by the Bank since 1984. From 1979 to
1984, Mr. Vietze was employed by Casco Bank, Portland, Maine. His primary
responsibilities involved providing online banking services to correspondent
banks. Prior to 1979, Mr. Vietze was affiliated with BayBanks in
Massachusetts.
Michael T. Martin has been employed by the Bank since 1993. In 2001, Mr.
Martin was promoted to Senior Vice President for Credit Administration. He was
employed by Fleet Bank from 1980 to 1992, and by Canal National Bank from 1977
to 1980. His primary responsibilities were in Loan Review and Credit
Administration.
Charles A. Wootton has been employed by the Bank since January 2000. In
2001, Mr. Wootton was promoted to Senior Vice President for Banking Services
and Senior Loan Officer. From 1981 to 2000 Mr. Wootton was employed by Camden
National Bank, serving as branch manager, commercial loan and business
development officer. In 1996, Mr. Wootton became Vice President responsible
for branch administration.
Susan A. Norton became a member of the Executive Leadership Team in 2002
when she was promoted to Vice President Administration and Compliance. In
1995, Ms. Norton was the Assistant Compliance Officer and Education Officer.
She also holds the position of Assistant Director of Strategic Planning and CRA
Officer as well as being the Compliance Officer for the Company. Ms. Norton has
been employed by the Bank since 1992.
Richard M. Elder has served as Vice President Retail Services since 2000
and became a member of the Executive Leadership Team in 2002. Mr. Elder
previously served as Senior Commercial Loan Officer, Manager of the Bank's
Boothbay Harbor branch and Senior Commercial Loan Officer. Mr. Elder has been
employed by the Bank since 1993.
There are no family relationships among any of the Executive Officers, nor
are there any arrangements or understandings between any Executive Officer and
any other person pursuant to which that Executive Officer has been or is to be
elected.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that the Company's directors,
executive officers, and any person holding more than ten percent of the
Company's Common Stock file with the SEC reports of ownership changes, and that
such individuals furnish the Company with copies of the reports.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that all of its executive officers and directors complied with all Section
16(a) filing requirements applicable to them in 2001.
Page 71
ITEM 11. Executive Compensation
Executive Compensation
The table below sets forth cash compensation paid to the President and
Chief Executive Officer as well as the Senior Vice President and Chief
Financial Officer during 2001, 2000, and 1999. No other Executive Officers of
the Company received compensation in excess of $100,000 for the years ended
December 31, 2001, 2000, and 1999.
- -------------------------------------------------------------------------------
Name Annual Long-Term
and Compensation Compensation
Principal ----------------------------- --------------------
Position Year Salary Bonus(1) Other(2) # Options
- -------------------------------------------------------------------------------
Daniel R. Daigneault 2001 $ 195,000 $ 48,750 $ 14,660 -0-
President and CEO 2000 184,000 17,112 14,005 -0-
1999 164,300 17,416 9,600 4,000
- -------------------------------------------------------------------------------
F. Stephen Ward 2001 $ 115,000 $ 10,560 $ 11,972 -0-
SVP and CFO 2000 85,000 8,670 5,387 -0-
1999 71,020 7,102 4,825 3,000
- -------------------------------------------------------------------------------
(1) Bonuses are listed in the year earned and normally accrued. Such bonuses
may be paid in the following year.
(2) Amounts shown include contributions paid by the Company to the respective
accounts of the Named Executive Officers in the 401(k) Plan. In 2001 the
Company and the Bank contributed to the Bank's Savings and Investment Plan a
matching amount for the salary deferred by Mr. Daigneault and Mr. Ward equal to
3.0% of their respective earnings and a profit-sharing component of 3.0% of
their respective earnings, which were subject to IRS regulations limiting the
maximum amount of an officer's earnings eligible for matching or profit-sharing
401(k) contributions to $170,000. These percentages were equivalent to the
401(k) Plan match and profit sharing contributions made for all eligible
employees. This figure also recognizes the value to the officers of a Company-
provided vehicle.
Compensation of the Chief Executive Officer
The Compensation Committee consists of four outside members of the Board
of Directors. This Committee has the responsibility for conducting the annual
evaluation of the Chief Executive Officer and renders recommendations to the
full Board of Directors regarding compensation for the Chief Executive Officer.
The compensation of the Chief Executive Officer consists of a base salary plus
a bonus, under an approved plan adopted for all employees of the Bank, and
other cash bonuses which the Committee may deem appropriate based on the
overall performance of the Chief Executive Officer and the achievement of
prescribed goals. These goals are a combination of financial targets and
corporate objectives such as implementation of the strategic plan,
satisfactorily addressing issues identified as priorities by the banking
regulators and overall performance of the management team. The financial goals
pertain to profitability, growth and loan portfolio quality.
Page 72
The compensation philosophy of the Company for all executive officers is
to pay a competitive base salary commensurate with salaries paid by other
similar financial institutions, plus a short-term incentive which is tied to
the achievement of certain performance levels. In 1994 the Company instituted
a formal performance-based compensation program called "Performance
Compensation for Stakeholders". The overall objective of the program is to
shift a portion of employee compensation from base salary to performance based
payments. In 2001, total cash payout under this Stakeholder Performance
Compensation program was 14.00% of the participating employees' base salaries.
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
loan quality. The guiding principle is to reach a balance of profitability,
growth, productivity and loan quality which should have a positive impact on
maximizing long-term shareholder value. It rewards current performance which
contributes toward the achievement of long-term goals. Each year specific key
performance indicators are chosen along with financial performance levels. In
2001 some of the indicators were: loan volume, deposit volume, non-performing
loan levels, non-interest income, net interest income, salaries and wages as a
percentage of income and operating expenses as a percentage of net income.
The amount of base compensation potentially payable to the Chief Executive
Officer was determined by reviewing independent salary surveys of compensation
of officers and employees for similar financial institutions. The committee
took into consideration the actual salaries paid to Presidents and CEOs of
similar banks in establishing the 2001 base salary for the Chief Executive
Officer.
The Chief Executive Officer is given annual goals relating to both
financial performance and corporate objectives, which are established by the
Committee pursuant to discussions with the Chief Executive Officer. On an
annual basis the Committee conducts a formal evaluation of the Chief Executive
Officer, compares his performance to the established goals, assesses the
overall performance of the Bank and makes recommendations as appropriate.
The Chief Executive Officer's base compensation for 2001 was reflective of
the Company's overall financial performance in 2000, which, in the opinion of
the Compensation Committee, was considered excellent. All 2000 goals set for
the Chief Executive Officer were met or exceeded, which included reaching
certain targets for asset growth, asset quality, and overall profitability.
Taking these various factors into consideration and in recognition of his
performance, the committee increased his base salary by $11,000 or 6.0% to
$195,000 for 2001.
The Chief Executive Officer's 2001 bonus compensation was 25.00% of base
compensation, of which 14% was paid in accordance with the Company's
Stakeholder Performance Compensation program for all employees. The additional
bonus for 2001 is a reflection of the exceptional year the Company had in
exceeding its financial performance goals, most notably the 19.2% increase in
net income and the Return on Equity of 15.51%.
2001 Compensation Committee Members:
Malcolm E. Blanchard, Chair
Robert B. Gregory
Carl S. Poole, Jr.
Stuart G. Smith
Page 73
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
During 2001, Directors Gregory, Blanchard, Poole and Smith served as
members of the Compensation Committee. No member of the Committee was, or ever
has been, an officer or employee of the Company or the Bank. All Committee
members are customers of and engage in banking transactions with the Bank in
the ordinary course of business. As described in the section entitled "Certain
Relationships and Related Transactions", all loans to such individuals were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons
and, in the opinion of Management, did not involve more than the normal risk of
collectibility or present other unfavorable features.
Director Compensation
Each of the outside directors of the Bank, with the exception of the
Chairman of the Board, received a director's fee in the amount of $500 for each
meeting attended and $200 for each meeting attended of a committee of which the
director is a member. The Chairman of the Board received an annual fee of
$17,000. Certain Board members were also paid fees for appraisals, consulting
services and legal services, and such fees are on terms no more favorable to
the recipient than are generally paid by the Bank for such services to other
providers in the area. Fees paid by the Bank to its Directors as a group
totaled $81,308 in 2001, but no fees are paid to Directors of the Company.
President Daigneault, who is the only director who is also an officer of the
Company, receives no additional compensation for serving on the Board of
Directors of the Company or the Bank.
The Company has two standing committees of the Board of Directors: Audit
and Options. The Bank has six standing committees of the Board of Directors:
Executive, Audit, Asset/Liability, Trust, Directors' Loan and Compensation.
Certain members of management also serve on some committees. All directors
attended at least 75% of Board meetings and meetings held by Committees of
which they were members, and the aggregate attendance of Board and Committee
meetings by all members of the Board of Directors in 2001 was in excess of 90%.
Stock Option Plan
In April 1995 the stockholders approved a Stock Option Plan. The purpose
of the Stock Option Plan is to encourage the retention of key employees by
facilitating their purchase of a stock interest in the Company. The 1995 Stock
Option Plan provides for grants of options to purchase Company common stock and
is administered by an Options Committee which consists of four outside
directors. During 2001, no stock options were granted under the 1995 Stock
Option Plan, as set forth in the accompanying table.
2001 Option Committee Members:
Malcolm E. Blanchard, Chair
Robert B. Gregory
Carl S. Poole, Jr.
Stuart G. Smith
Page 74
Long-Term Compensation
Long-term compensation may be distinguished from annual compensation by
the time frame for which performance results are measured to determine awards.
While annual compensation covers a calendar year, long-term compensation is
provided through the Company's stock option plan, which covers a period of two
to ten years. The following table sets forth information with respect to the
named executives and all other employees concerning grants of stock options
during 2001:
- -------------------------------------------------------------------------------
Option Grants During the Year Ended December 31, 2001
- -------------------------------------------------------------------------------
% of Potential realizable
Number of options value at assumed rates
securities granted Exercise of stock appreciation
underlying in price for option term(1)
options fiscal per Expiration ---------------------
granted year Share(2) Date 5% 10%
- -------------------------------------------------------------------------------
Daniel R. Daigneault -0- 0.0% $ -0- - $ -0- $ -0-
F. Stephen Ward -0- 0.0% $ -0- - $ -0- $ -0-
All other employees -0- 0.0% $ -0- - $ -0- $ -0-
- -------------------------------------------------------------------------------
All -0- 100.0% $ -0- - $ -0- $ -0-
- -------------------------------------------------------------------------------
1) The dollar gains under these columns result from calculations assuming 5%
and 10% growth rates compounded over a 10-year period as set by the Securities
and Exchange Commission and are not intended to forecast future price
appreciation of the Company's common stock. The gains reflect a future value
based upon growth at these prescribed rates. The values have not been
discounted to present value. It is important to note that options have value to
the listed executive and to all option recipients only if the stock price
advances beyond the exercise price shown on the table during the effective
option period.
2) Under the Stock Option Plan, the exercise price may not be less than the
fair market value of the common stock on the date the option is granted.
The following table sets forth information with respect to exercisable and
unexercisable options held as of December 31, 2001:
- -------------------------------------------------------------------------------
Aggregated Option Exercises in 2001 and December 31, 2001 Option Values
- -------------------------------------------------------------------------------
Number of
securities underlying Value of unexercised
unexercised options in-the-money
Shares at year end options at year end
acquired ------------------- ---------------------
on Value Exer- Unexer- Exer- Unexer-
exercise realized cisable cisable cisable cisable
- -------------------------------------------------------------------------------
Daniel R. Daigneault -0- $ -0- 56,000 22,000 $ 866,000 $ 244,000
F. Stephen Ward 12,000 111,000 8,500 4,500 87,000 31,000
All other employees 5,000 54,000 29,000 18,000 340,000 125,000
- -------------------------------------------------------------------------------
All optionees 17,000 $165,000 93,500 44,500 $1,293,000 $ 400,000
- -------------------------------------------------------------------------------
Page 75
Description of the Company's Benefit Plans
The Company has reserved 160,000 shares of its common stock to be made
available to directors and employees who elect to participate in the directors'
deferral, employee stock purchase, or 401(k) savings and investment plans. As
of December 31, 2001, 105,366 shares had been issued pursuant to these plans,
leaving 54,634 shares available for future issuance. The issuance price is
based on the market price of the stock at issuance date.
All shares issued under the 401(k) savings and investment plans are issued
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act"), contained in Section 3(a)(11) thereof and Rule
147 promulgated thereunder. During the period ending nine months after the date
of issuance of these shares, these shares may be transferred only to residents
of the State of Maine. Each certificate issued for these plan shares bears a
legend referring to this restriction.
Shares issued under the employee stock purchase plan prior to September
11, 1998, were issued pursuant to exemptions from registration under Section
3(a)(11) and Rule 147 of the Securities Act. Shares issued under the employee
stock purchase plan on or after September 11, 1998, have been issued pursuant
to a registration statement filed under the Securities Act. The members of the
Board of Directors and certain officers of the Company, who may be deemed to be
"affiliates", may resell shares of the Company's common stock purchased or
acquired under this plan only in accordance with certain restrictions imposed
by the Securities Act and Rule 144 promulgated thereunder.
The Bank's 401(k) Plan (The First National Bank of Damariscotta Savings
and Investment Plan) is the Bank's sole retirement plan, and was modified in
1996 after termination of the Bank's traditional defined benefit pension plan.
It is available to any employee who has attained the age of 21 and completed
six months of continuous service. Eligible employees may contribute to their
plan accounts a percentage of their compensation, up to a maximum of 15%
annually. The Bank may, by an annual vote of its Directors, make matching
contributions. In addition, also by vote of its Directors, the Bank may make an
annual profit sharing contribution to the Plan. The 401(k) Plan is administered
by a special committee appointed by the Board of Directors.
Employee contributions are 100% vested at all times, while employer
contributions are vested over a five-year period. Upon termination of
employment for any reason, a plan participant may receive his or her
contribution account and earnings allocated to it, as well as the vested
portion of his or her employer-matching account and earnings allocated to it.
Non-vested amounts are forfeited and are used by the Bank to help defray plan
administration expenses incurred by the Bank. The Bank paid $78,000 in matching
contributions and $68,000 in profit-sharing contributions to this plan in 2001.
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, 2001, 54,684 shares of
the Company's stock had been purchased by the 401(k) Plan at the direction of
plan participants.
The Bank instituted an employee stock purchase plan effective February 1,
1987, and the Board of Directors has allocated 80,000 shares of stock to be
available for purchase under this plan. Employees who have been employed by the
Bank for three consecutive calendar months are eligible to purchase shares on a
quarterly basis through payroll deduction. The price per share for shares sold
pursuant to the plan is defined as the closing price on the day the shares are
purchased. As of December 31, 2001, 50,682 shares of the Company's stock had
been purchased pursuant to the plan.
The Bank provides all full-time employees with group life, health, and
long-term-disability insurance through the Independent Bankers' Employee
Page 76
Benefits Trust of Maine. A Flexible Benefits Plan is available to all full-time
employees after satisfying eligibility requirements and to part-time employees
scheduled to work 20 or more hours a week.
The Bank also sponsors an un-funded, non-qualified supplemental retirement
plan for certain officers. The plan provides supplemental retirement benefits
payable in installments over 20 years upon retirement or death. The costs for
this plan are recognized over the service lives of the participating officers.
The projected retirement benefit for Mr. Daigneault, assuming he remains
employed by the Bank until normal retirement age of 65, is $169,329 per year,
with such payments beginning in the year 2017. The projected retirement benefit
for Mr. Ward, assuming he remains employed by the Bank until normal retirement
age of 65, is $61,127 per year, with such payments beginning in the year 2018.
The expense for all participants in this supplemental plan was $141,000 in
2001, $123,000 in 2000, and $115,000 in 1999. As of December 31, 2001 and 2000,
the accrued liability of this plan was $484,000 and $342,000, respectively.
On December 15, 1994, the Company's board of directors adopted a Stock
Option Plan (the "Option Plan") for the benefit of officers and other full-time
employees of the Company and the Bank. This plan was approved by the Company's
shareholders at the 1995 Annual Meeting. Under the Option Plan, 200,000 shares
(subject to adjustment to reflect stock splits and similar events) are reserved
from the authorized but unissued common stock of the Company for future
issuance by the Company for exercise of stock options granted to certain key
employees of the Company and the Bank from time to time.
The purpose of the Option Plan is to encourage the retention of such key
employees by facilitating their purchase of a stock interest in the Company.
The Option Plan is intended to provide for the granting of incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") to employees of the Company or the Bank.
The Option Plan is administered by the Options Committee of the Company's
board of directors, which is comprised solely of directors who are ineligible
to receive grants of stock options under the Option Plan and who have not
received grants of options within the 12 months preceding their appointment to
the Options Committee. The Options Committee selects the employees of the Bank
and the Company to whom options are to be granted and designates the number of
options to be granted. The Option Plan may be amended only by the vote of the
holders of a majority of the Company's outstanding common stock if such
amendment would increase the number of shares available for issuance under the
Option Plan, change the eligibility criteria for grants of options under the
Option Plan, change the minimum option exercise price or increase the maximum
term of options. Other amendments may be effected by the Options Committee.
Employees selected by the Options Committee receive, at no cost to them,
options under the Option Plan. The option exercise prices are equal to or
exceed the fair market value of the shares on the date of the grant, and no
option is exercisable after the expiration of 10 years from the date it is
granted. The fair market value of the shares is determined by the Options
Committee as specified in the Option Plan. The optionee cannot transfer or
assign any option other than by will or in accordance with the laws of descent
and distribution, and the option may be exercised only by the employee during
the employee's lifetime. After an employee's death, options may be exercised
by the employee's estate or heirs up to one year following the date of death.
Code Section 422 limits option grants by providing that during the term of the
Option Plan, no grant may be made to any employee owning more than 10% of the
Company's outstanding shares unless the exercise price is at least 110% of the
underlying shares' fair market value and such option is not exercisable more
than five years following the option grant. The aggregate fair market value of
the stock for which any employee may be granted incentive stock options which
are first exercisable in any calendar year may generally not exceed $100,000.
Page 77
While generally no options may be exercisable before the second
anniversary of the grant date, in the event of a change in control involving
the Company all options (other than those held by officers or directors of the
Company or the Bank for less than six months) shall become immediately
exercisable. Also, an employee whose employment is terminated in connection
with or within two years after such a change in control event shall be entitled
to exercise all options for up to three months following the date of
termination; provided that options held by officers or directors shall not be
exercisable until six months after the grant date. Employees whose services
are terminated, other than following a change in control as described above,
shall thereupon forfeit any options held; provided, however, that following
termination due to disability an employee shall be entitled to exercise options
for up to one year (provided, further, that officers may exercise only with
respect to options held for at least six months).
The Company receives no monetary consideration for the granting of
incentive stock options. Upon the exercise of options, the Company receives
payment in cash from optionees in exchange for shares issued. No federal income
tax consequences are incurred by the Company at the time incentive stock
options are granted or exercised, unless the optionee incurs liability for
ordinary income tax treatment upon exercise of the option, as discussed below,
in which event the Company would be entitled to a deduction equal to the
optionee's ordinary income attributable to the options. Provided the employee
holds the shares received on exercise of a stock option for the longer of two
years after the option was granted or one year after it was exercised, the
optionee will realize capital gains income (or loss) in the year of sale in an
amount equal to the difference between the sale price and the option exercise
price paid for shares. If the employee sells the shares prior to the
expiration of the period, the employee realizes ordinary income in the year of
disposition equal to the difference between the fair market value of the shares
on the date of exercise and the exercise price and capital gains income (or
loss) equal to the difference (if any) between the sale price of the shares and
the fair market value of the shares on the date of exercise.
In addition to the tax consequences discussed above, the excess of the
option price over the fair market value of the optioned stock at the time of
option exercise is required to be treated by an incentive optionee as an item
of tax preference for purposes of the alternative minimum tax.
Performance Graph
Set forth below is a line graph comparing the five-year cumulative total
return of the Company's common stock ("FNLC"), assuming reinvestment of all
cash dividends and retention of all stock dividends, with that of the Standard
& Poor's 500 Index ("S&P 500") and the NASDAQ Combined Bank Index ("NASD
Bank"). The NASD Bank index is a capitalization-weighted index designed to
measure the performance of all NASDAQ stocks in the banking sector.
The following information is presented in a line graph in the printed Form
10_K:
- -------------------------------------------------------------------------------
Performance graph data 1996 1997 1998 1999 2000 2001
- -------------------------------------------------------------------------------
FNLC 100.00 136.93 227.55 169.40 168.46 252.52
NASD Bank 100.00 163.59 144.33 132.81 152.30 167.64
S&P 500 100.00 133.10 170.82 206.42 187.78 165.52
- -------------------------------------------------------------------------------
Page 78
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Directors, Management and Principal Shareholders(1)
The following table sets forth the number of shares of common stock of the
Company beneficially owned as of March 11, 2002 by (i) each person known by the
Company to own beneficially more than five percent of the Company's common
stock, (ii) each current director of the Company and nominee for a position on
the Board, (iii) the named executive officers, and (iv) all executive officers
and directors of the Company as a group. Except as otherwise indicated below,
each of the directors, executive officers and shareholders owning more than
five percent of the Company's stock has sole voting and investment power with
respect to all shares of stock beneficially owned as set forth opposite his or
her name.
Page 79
- -------------------------------------------------------------------------------
Shares Percent
Owners of 5% or More Owned Owned
- -------------------------------------------------------------------------------
Daniel P. & Edith I. Thompson 157,794 6.59%
20 Pounds Road
New Harbor, ME 04545
- -------------------------------------------------------------------------------
Directors & Executive Officers
- -------------------------------------------------------------------------------
Name Position Term Shares Percent
Age(2) Expires Owned Owned
- -------------------------------------------------------------------------------
Bruce A. Bartlett Director of the Bank and the Company; 2004 8,994 *
68 Chairman, Trust Committee
Malcolm E. Blanchard Director of the Bank and the Company; 2004 28,070 1.17%
67 Chairman, Executive Committee
Katherine M. Boyd Director of the Bank and the Company 2002 10,606 *
50
Daniel R. Daigneault President, Chief Executive Officer 2003 87,786(3) 3.67%
49 and Director of the Bank and the Company
Dana L. Dow Director of the Bank and the Company 2003 1,436 *
50
Robert B. Gregory Chairman of the Boards of Directors 2003 15,145 *
48 of the Bank and the Company
Carl S. Poole, Jr. Director of the Bank and the Company; 2002 90,272 3.77%
56 Chairman, Asset/Liability Committee
Stuart G. Smith Director of the Bank and the Company; 2004 19,776 *
49 Chairman, Directors' Loan Committee
David B. Soule, Jr. Director of the Bank and the Company; 2002 6,031 *
56 Chairman,Audit Committees of the
Bank and the Company
Bruce B. Tindal Director of the Bank and the Company 2002 1,786 *
51
F. Stephen Ward Treasurer of the Company. Senior Vice n/a 28,846(3) 1.21%
48 President and Chief Financial Officer
of the Bank. Managing Principal of
Pemaquid Advisors
- -------------------------------------------------------------------------------
Total Ownership of all Directors and
Executive Officers as a group 344,607 14.39%
- -------------------------------------------------------------------------------
* Less than one percent of total outstanding shares
(1)For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended. In general, a person is deemed to be the
beneficial owner of a security if he/she has or shares the power to vote or to
direct the voting of the security or the power to dispose or direct the
disposition of the security, or if he/she has the right to acquire beneficial
ownership of the security within 60 days. The figure set forth includes
director's qualifying shares owned by each person.
(2)As of December 31, 2001.
(3)Includes exercisable stock options.
Page 80
ITEM 13. Certain Relationships and Related Transactions
The Federal Reserve Act permits the Bank to contract for or purchase property
from any of its Directors only when such purchase is made in the regular course
of business upon terms not less favorable to the Bank than those offered by
others unless the purchase has been authorized by a majority of the Board of
Directors not interested in the transaction. Similarly, the Federal Reserve
Act prohibits loans to Executive Officers of the Bank unless such loans are on
terms not more favorable than those afforded other borrowers and certain other
prescribed conditions have been met.
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of its business with Directors, Officers and principal
shareholders of the Company and their affiliates. All such transactions have
been made upon substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with others. In the opinion of management, such loans have not involved more
than the normal risk of collectibility nor have they presented other
unfavorable features. The total amount of loans outstanding at December 31,
2001 to the Company's Directors, Executive Officers and their associates was
$6,065,717, which constituted 2.01% of the Bank's total loans outstanding at
that date.
Page 81
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
Exhibit 3 Articles of Incorporation and Bylaws, filed as Exhibit 3 to
Company's Registration Statement No. 2-96573.
Exhibit 3.1 Articles of Amendment, filed as part of Exhibit 3 to the
Company's Registration Statement No. 2-96573.
Exhibit 3.2 Amendments to Articles of Incorporation filed as part of
Exhibit 3 to the Company's quarterly filing on Form 10-Q for the second quarter
of 1996.
Exhibit 4.1 Articles of Incorporation and Bylaws, filed as Exhibit 3 to
the Company's Registration Statement No. 2-96573.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 2001.
Page 82
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
------------------------------------------------
FIRST NATIONAL LINCOLN COPORATION
By /s/Daniel R. Daigneault
Daniel R. Daigneault, President
March 28, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title and Date
/s/Daniel R. Daigneault President and Director
Daniel R. Daigneault (Principal Executive Officer)
March 28, 2002
/s/F. Stephen Ward Treasurer
F. Stephen Ward (Principal Financial Officer,
Principal Accounting Officer)
March 28, 2002
/s/Robert B. Gregory Director and
Robert B. Gregory Chairman of the Board
March 28, 2002
/s/Bruce A. Bartlett Director
Bruce A. Bartlett March 28, 2002
/s/Malcolm E. Blanchard Director
Malcolm E. Blanchard March 28, 2002
/s/Katherine M. Boyd Director
Katherine M. Boyd March 28, 2002
/s/Dana L. Dow Director
Dana L. Dow March 28, 2002
/s/Carl S. Poole, Jr. Director
Carl S. Poole, Jr. March 28, 2002
/s/Stuart G. Smith Director
Stuart G. Smith March 28, 2002
/s/David B. Soule, Jr. Director
David B. Soule, Jr. March 28, 2002
/s/Bruce A. Tindal Director
Bruce A. Tindal March 28, 2002
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