The First Bancorp, Inc. Annual Report 2007

Plain-text annual report

A N N U A L R E P O R T 2 0 0 7 Strength In Numbers Damariscotta Lake is a spawning ground for the alewife, and each year these ﬁ sh make an intrepid journey back from the ocean. Clearly there is strength in numbers, as seen in the photographs on the cover and below, as the alewives travel homeward in large schools. Perhaps they do this to baffl e the osprey, eagles and other predators looming above as they pass through Great Salt Bay, for an alewife’s journey between sea and stream is likely to be a repeat performance, since unlike salmon, they do not die after spawning. In 2007, First National Lincoln Corporation enjoyed an alewife- like journey of its own, with a return to record earnings despite a challenging economic current. Our success was due in large part to a collective strength in numbers – underscored by employee, customer, and community service initiatives, many of which are highlighted in this report. Message from the President Dear First National Lincoln Corporation Shareholder: I am pleased to report that 2007 was a great year for First National Lincoln Corporation and its subsidiary, The First, N.A., with a return to record earnings. This represents the fourteenth year of record earnings out of the last ﬁ fteen years, with 2006 the only down year over this period. Throughout this year’s annual report we will share with you what was behind our 2007 success, our views on the state of the banking industry, as well as the challenges and opportunities that we see on the horizon for 2008. In 2007 we took inventory of our strengths and weaknesses, reviewed our business model and examined our positioning in the markets we serve. After reviewing all of this data, it became very clear to us that First National Lincoln Corporation is well positioned for success by continuing to do what we do best: to focus on serving our three primary constituents – our shareholders, our customers, and our employees. How we serve each of these constituents is the distinguishing factor between The First and all of our competitors. Our strategy is to generate quality loan growth with a reasonable spread above our funding costs in order to provide the Company with a strong, consistent net interest margin. We believe that focusing on the spread business of banking and operating with the best effi ciency ratio possible will enable us to continue to generate above average returns for our shareholders. We must also maintain our discipline in credit underwriting and pricing – venturing outside of these boundaries is one of the reasons why a lot of ﬁ nancial institutions have had so many problems in 2007. While this may sound like a simple formula for success, executing this strategy is what sets First National Lincoln Corporation apart from others. Record Earnings Net income of $13,101,000 was an increase of $806,000 or 6.6% over the $12,295,000 earned in 2006. The driving force behind our improved earnings was net interest income, which at $31,836,000 was 2 up $1.2 million or 4.0% compared to 2006. The Company’s net interest income, non-interest income, operating expenses, and the provision for loan losses are the primary operating components that aff ect proﬁ tability. Our objective is to increase net interest income each year, keep operating cost increases to a minimum, have stable non-interest income and maintain strong loan quality in order to minimize the amount we have to provision to cover loan losses. Each component requires a strong focus and discipline to optimize the beneﬁ t to the bottom line. Interest rates were relatively stable in the ﬁ rst half of 2007: the Federal Reserve stopped increasing rates in mid-2006 and took a “wait and see” attitude until September 2007. Although the yield curve was still inverted for most of the year, with short-term rates higher than long-term rates, it did not present as much of a challenge as it did in 2006 when rates were still on an upward swing. As the year progressed, , concerns of the continued weakening of the housing market – driven primarily by the subprime loan arket – driven primarily by the subprime loan problems – lead to select opportunities to reduce our cost of of funds and to purchase high-quality investments at attractive ive yields. As a result, the Company’s net interest margin gin improved as the year progressed, and although the margin gin of 3.13% for the year in 2007 was below the 3.24% posted ted in 2006, in the fourth quarter of 2007 the margin was 3.17% 7% compared to 3.11% for the fourth quarter of 2006. p g y p g In addition to the reduction in our funding costs, the other her major reason for the increase in net interest income was was the excellent asset growth that was posted in the loan and and investment portfolios. Total loans increased $82.0 million or or 9.8% in 2007 while the level of investments increased $41.3 1.3 million or 22.9%. For a more detailed discussion on the the investment portfolio and funding, see page 16. Loan Growth For most banks, 2007 was a very challenging year to grow a loan portfolio. The weakening economy impacted loan demand for business as well as consumer loans. This was accompanied by continuing issues in the housing market which experienced declines in home purchases and demand for residential construction loans. The subprime loan crisis, which was in the news for a good part of the year, did not have any direct impact on us since the Bank has avoided doing those types of loans. By far the strongest area of loan growth for The First in 2007 was business loans. The total increase of $39.8 million or 12.0% was not only much better than the prior year, but also one of our strongest years historically. The residential loan portfolio experienced modest growth of $23.4 million, which was respectable given the decline in home sales and lack of reﬁ nancing activity that we and most banks saw in 2007. This speaks to the relative stability of the housing market along the coast of Maine, and although demand for second homes and retirees moving to Maine was not exceptional in 2007, it was still good and healthy. Another loan category that provided good growth for the Bank in 2007 was municipal loans to local towns and school districts for a variety of needs: from funding operations until taxes are collected to construction loans for new schools. This market was quite vibrant in the communities we serve, providing excellent business opportunities and resulting in $11.0 million in new dollars advanced in 2007. 3 Credit Quality In addition to growing the loan portfolio, it is essential to maintain good credit quality for the loans that are made. While there is a strong temptation to relax credit standards to generate more loan activity, we have been unrelenting in our quest to not fall into this trap and have not relaxed our underwriting standards to generate volume. We take pride in our approach to working with customers to minimize loan problems and loan losses. The success we have had with this approach is reﬂ ected in the Bank’s asset quality ﬁ gures, one of which is the ratio of non-performing loans to total loans which was 0.31% as of December 31, 2007 compared to 0.42% as of the end of 2006. This ﬁ gure is the lowest it has been since the end of 2001. Another measure of credit quality is the level of net loan losses, which was $996,000 or 0.11% of total loans for 2007. This is a relatively modest level of loan losses given the dollar amount of our loans outstanding and is a reﬂ ection of our strong credit quality culture. and is a reﬂ ection of our strong credit qualit The other ratio reﬂ ecting the quality of both the loan and the investment portfolios is the level of non-performing assets to total assets which was 0.23% at the end of 2007 compared to 0.32% at the end of 2006. This validates that we have minimal credit risk in the investment portfolio, which has been our objective. We have avoided collateralized debt obligations (CDOs) and the like – the type of investments that many ﬁ nancial and other companies invested in and have led to investment quality problems. Higher yields are almost always the result of a higher level of risk, and we stayed true to our strategy and were not tempted to purchase riskier investments such as these, which was the critical factor in our success in managing this portfolio in 2007. FNLC Stock Performance As you have read, all of the ﬁ nancial metrics of the Company were very favorable for 2007. This was not only in relationship to 2006 but also when compared to the last several very favorable for 2007. This was not only in years. By most measures, 2007 was one of the better years in the Company’s history. The only disappointment was the market price of First National Lincoln Corporation’s stock, which ended the year at $14.64 per share, a decline of $2.08 or 12.4% from $16.72 as of December 31, 2006. This decline in market value was seen despite continued increases in the cash dividend, which was $0.69 per share in 2007, a 13.1% increase over the $0.61 declared in 2006. Earnings per share for the year ended December 31, 2007 were $1.34, up $0.09 or 7.2% from the $1.25 reported for the year ended December 31, 2006. Earnings per share, along with net income, were the highest in the history of the Company. So with record earnings, strong increases in the cash dividend, a strong dividend yield, as well as good credit quality and asset growth, the question is, why did the market price of the stock decline? This reduction in value deﬁ es ﬁ nancial logic. We do not have the answer to this question; however, 2007 was a very negative year for bank stocks – nearly all declined in value, regardless of the individual company’s performance. An analysis of individual bank stock performance revealed that 90% of publicly traded banks experienced declines in stock prices during 2007. The SNL Bank Index posted a 25.0% decline in 2007 and showed banks with assets between $1 billion and $5 billion (like FNLC) off by almost 29.0% for the year. So our 12.4% decline was relatively modest in comparison. We will continue to be patient and focus on maintaining our high-performance results, and eventually the market value of the stock will reﬂ ect our eff orts. 4 Observations for 2008 for the Industry and FNLC In late summer 2007, the Federal Open Market Committee (FOMC) began to reduce interest rates in response to the rising crisis in the subprime mortgage market. As delinquencies on those loans increased, the global impact of the problem became apparent. Not only were the lenders that originated the loans having problems, the holders of the investment securities engineered from these subprime loans began to realize the value of their investments were in question. This led to a liquidity crisis, which carried over into the entire credit market. Over the last few months, concerns have continued to increase over the magnitude of the weakened housing and construction markets and the impact these will have on the economy. Is the United States in or heading into a recession? The FOMC aggressively reduced interest rates to help the economy, and the United States Congress has passed a ﬁ scal stimulus package as well. In my opinion, 2008 will be a package as well. In my opinion, 2008 will be a year of uncertainty until a clearer picture of the impact that hat housing, consumer spending, and energy costs will have on on the economy. Despite high gasoline prices in 2007, tourism sm was good in many areas, especially along the coast of Maine, ne, and we are optimistic that a stabilization of gas prices will will occur and help the 2008 tourist season. The real estate ate market should also rebound at some point; the question ion is, when? We have experienced several cyclical housing ing markets in Maine and feel conﬁ dent that improvement in in housing activity along the coast of Maine is not too far far away. Although a few small businesses are seeing some me weaknesses in their particular industries, others in our our markets are doing quite well and are hopeful that 2008 will will be a good year for them. For First National Lincoln Corporation, we plan to continue to focus on generating good quality loans, inue to focus on generating good quality loans, keep expenses in check, and take advantage of declining rates to continue to reduce funding costs. We weathered 2007 with great success, and we look forward to continued prosperous results in 2008. On behalf of the First National Lincoln Corporation leadership team and Board of Directors, I would like to thank you, our shareholders, as well as our employees and our customers, for your support and contributions to the success of the Company. Sincerely, Daniel R. Daigneault lt D i l R D i President & Chief Executive Offi cer 5 Rise and Shine with The First In the summer of 2007, The First launched an eye-opening customer convenience and brand building initiative: be the bank that is First to Open for business in all of our market areas. Since the ﬁ rst day of summer and every weekday since, our tellers raise their drive-up banking window curtains at 7 a.m. To promote First to Open, the Bank created a multimedia advertising campaign entitled “Rise and Shine: The Rewards of Banking at The First” and outﬁ tted each branch with drive-up banners, front lawn signs, and lobby posters. As an incentive during the ﬁ rst month, customers received a small thank you gift for visiting the Bank between 7 a.m. and 8 a.m. Within the ﬁ rst two weeks of operation, First to Open transactions reached a steady pace that has held throughout the summer and into fall and winter. Long-time Bar Harbor customer, Vicki Tibbetts, observes, “Now that The First opens at 7 a.m., I do all of my personal and business banking on the way to work. In the summer months, this means I don’t have to ﬁ ght the downtown traffi c at lunchtime, and in the winter months, this means I don’t have to walk very far in the snow because I arrive early enough to get a prime parking spot at the offi ce. I really love your early morning hours!” Many new customers have cited our early opening hour as a primary reason for choosing The First as their bank. First to Open has created convenience and advantages for employees too. Tellers who staff the early morning shifts appreciate the opportunity to end their work day a little earlier so they can be home when their children get out of school, enjoy an afternoon in the garden, or take a trip to the beach. What started out as a customer convenience initiative has turned into one of the brightest ideas in banking! First to Open is here to stay. The early bird crew in Rockport greets the day with smiles and cups of coff ee. Shown left to right are Kristin Ross, Josie Hanks, Ronda Monroe (at the drive-up), and Mindy Marshall. 6 Brenda Bolan and her beagle pup Jenny experience one of the many rewards of 7a.m. banking with teller David Nadeau at the Damariscotta drive-up window. 7 The members of Tremont’s Girl Scout Troop 330 meet in our brand new Southwest Harbor community conference room to plan their next badge project. Terri Lanpher (third from left) leads Lorelei Wehrfritz, Kylie Tozier, Audrey Beal, Ajha Stanley, and Natalie Butler. 8 Southwest Harbor: A Community Investment Our Southwest Harbor offi ce opened in 1951 and has been a Main Street ﬁ xture for more than half a century. In 2007, the time had come for this branch to receive a complete makeover. After a careful study that included input from our customers, plans were put into action to expand and enhance our banking presence while adding charm to the downtown setting. In August, the new Southwest Harbor offi ce was revealed. The building’s exterior is trimmed with an environmentally friendly ﬁ ber-cement siding, and the look is now consistent with all of our non-brick buildings. Inside, customers are welcomed into a warm and comfortable lobby that features a handcrafted cherry and marble teller line. Handicapped accessibility has been greatly improved with access ramps, an electronic push button entrance, and a sit-down teller station. The former upstairs apartment was masterfully converted to more offi ces, an employee break room, and storage space. Wherever possible, historic ﬁ xtures and built-ins were retained for character. A community access conference room is one of the most unique features of our new Southwest Harbor offi ce. Equipped with its own external entrance, the conference room is available by pre- arrangement to local organizations wishing to conduct their meetings in a comfortable and professional setting, no matter the day or hour. From the inside out, our Southwest Harbor offi ce project has been a true community reinvestment act. Felice Janes, Southwest Harbor Branch Manager, says, “Main Street has never looked better, and my staff and I are so pleased to be working in such lovely surroundings. We truly feel rededicated to this entire community.” Employees Wanda Jewett, Heather Parsons, and Felice Janes stand proudly in the lobby of their spacious new offi ce on Main Street in Southwest Harbor. 9 The Art and Science of Financial Services In our coastal Maine marketplace, we are privileged to partner with many dynamic and growing businesses. At The First, we recognize that many of our business customers require the high- tech banking tools that give them a competitive edge; at the same time, they seek the personalized service and customer care that is our hallmark. One ﬁ ne example of a business customer that appreciates The First’s state-of-the-art banking and savvy investment management with a human touch is The Jackson Laboratory, a world-class scientiﬁ c research and education facility headquartered in Bar Harbor. The Jackson Laboratory is a fully engaged business banking partner, utilizing many of our Business First products and services. In fact, The Laboratory was our ﬁ rst customer to utilize First Remote Deposit, a desktop check depositing service that was introduced in 2007. In addition to the business banking relationship, The Laboratory entrusts our First Advisors team with the stewardship of endowment funds that allow students of science to realize their goals: from investigating diseases to deﬁ ning the very cutting edge of research. Linda Jensen, Chief Financial Offi cer for The Laboratory, affi rms, “The people at The First and First Advisors are very responsive to our business needs, off ering the latest services and personal know- how that allow us to devote our time and resources to accomplishing our mission. It’s very gratifying to work with a local business that shares our passion for excellence.” So while scientists at The Jackson Laboratory lead the search for preventing, treating and curing human disease, the team at The First will continue to advance a long-standing business relationship based on service and trust. From our perspective, a more rewarding partnership would be diffi cult to discover. Members of the First Advisors’ Jackson Laboratory service team include Amanda Horton, Eileen Dorieka, Scott Hammond and Tony McKim. 10 Scott Hammond (right), Senior Investment Offi cer for First Advisors, looks on as Dr. Jon Geiger, Director of Educational Programs at The Jackson Laboratory, assists Master of Science in Teaching intern Hannah Webber in the student laboratory. 11 First employees Dennis Dorr, Heather Lewis, and Mike Martin (shown left to right) walk and talk their way around the indoor track at the Central Lincoln County YMCA. 12 Wellness First The key element to The First’s ongoing success is exceptional customer service, which is provided by our exceptional employees. Keeping our team healthy was a major focus in 2007, and a corporate wellness program kicked into high gear and introduced our employees to the fun of ﬁ tness with meaningful and enjoyable programs for employees to rally around as individuals and as small teams. By far, the most successful program was the 14-week Wellness Walking Tour. Participants engaged in various types of physical activity outside of work in order to earn miles on a virtual walk from Calais to Boothbay Harbor, passing through each of our branch offi ce towns in between. Employees who exercised their way to each weekly milepost received fun rewards purchased from our local merchants along the course. Over half of our employees participated – 110 to be exact – logging more than 45,000 miles of exercise! Caryn Weaver from Damariscotta cites a personal perk that she discovered along the way: “By walking with small groups of people on my lunch break, I have gotten to know several of my coworkers on a more personal level. This would not have happened without the incentive of our walking tour!” As health insurance and medical costs continue to escalate, our investment in employee wellness becomes a valuable business asset. Susan Norton, our Senior Vice President of Human Resources notes, “Healthier employees have less absences and are more productive because they feel better. Morale is raised when employees sense that the company is interested in them as total persons. By assisting our employees in meeting their desired health goals and avoiding disabling problems, we also send a message of self-responsibility – a valuable personal trait and an important employee quality.” April Lawrence and Dennis Dorr enjoy the great outdoors while representing The First at the Camden Snow Bowl’s National Toboggan Championships for the past two years. 13 First Hoop! At The First, we share wholeheartedly in our communities’ passion for youth sports. From little league baseball to high school basketball, we are proud to support programs that promote active lifestyles, teamwork, and good sportsmanship in our young athletes. Since 2005, The First has enjoyed great success on the basketball court with a brand-boosting, community commitment we call First Hoop. Through First Hoop, each participating high school’s general athletic fund is awarded a cash donation at every home court basketball game played during the regular season. Fifty dollars is the base donation, automatically awarded at the start of each game. The rest of the donation rides on the outcome of two events: The First Hoop and The First Fan Free-Throw. Fifty dollars is added to the fund if the ﬁ rst hoop of the game is scored by the home team. Finally, ﬁ fty dollars is added to the fund if a randomly selected spectator, also known as “The First Fan,” successfully makes a free-throw hoop at halftime. Speaking of The First Fan, spectator enthusiasm has grown each year as more fans are stepping up to the challenge and realizing some of the donation power rests in their hands. With ﬁ fty dollars on the line, fans are usually given several attempts at their free- throw. For their eff ort, we award each First Fan with a thank-you gift, regardless of whether they make the shot. Without having to jump through hoops, each participating high school receives a meaningful donation at the end of the basketball season. To date, the First Hoop program has donated over $20,000 to high school athletic programming in our market area. Now that’s what we call a slam dunk! The Calais Blue Devils accept their First Hoop check from our Calais staff . Shown left to right are: Kim Currier, Janis Marchese, Shirley Ray Coburn, Marlene Parks, Sam Bell, Nicole Osborne, Kayla Beaton, and Randy Morrison. 14 Mike Delahanty First Fan and Medomak Valley High School student sets his sights on the rim as First Hoop Mike Delahanty, First Fan and Medomak Valley High School student, sets his sights on the rim as First Hoop volunteers from left, Jennifer Oldham, Cheryl Jones, and Sue Ferrier cheer him on. 15 Message from the Chief Financial Officer An often overlooked proﬁ t center for many bank holding companies is the Treasury function. For FNLC, this produced signiﬁ cant earnings in 2007 by using the excess equity over and above that needed to support loans and other assets and putting it to work in the investment portfolio. Since we are largely wholesale-funded, the Treasury function generates its own funding from several non-local sources. The result is a signiﬁ cant contribution to net interest income, which ﬂ ows almost directly to the bottom line since this is done with little additional non-interest expense. Growth in Earning Assets The Company posted excellent growth in earning assets in 2007, and a large portion of this came in the investment portfolio, which increased $41.3 million or 22.9% over December 31, 2006. After more than a year of a ﬂ at-to-inverted yield curve, the Federal Open Market Committee began lowering short-term interest rates in the third quarter of 2007. This resulted in a steepening of the yield curve and provided interest rates in the third quarter of 2007. This an excellent opportunity for the Company to add to the an investment portfolio as short-term rates dropped while inv long-term rates remained relatively stable. lon Unlike many bank holding companies, the investment Un portfolio is an important component of earning assets for po FNLC, not just a liquidity management tool. This can be FN seen in its average yield, which at 5.98% on a tax-equivalent see basis for 2007 – up from 5.73% in 2006 – places us in the bas top ten percent of all bank holding companies in our peer top group and is nearly 1.0% above our peers. We do this with a gro conservative investment approach that takes very little credit con risk and seeks to enhance yield through careful selection of risk investment-grade securities with a modest level of interest inv rate risk. It is important to note that as in the Company’s rat loan portfolio, our investment portfolio does not hold any securities with sub-prime mortgages as their loan portfolio, our investment portfolio does no underlying collateral. Funding the Balance Sheet In addition to our investment portfolio, another area where FNLC diff ers from peers is how we fund our balance sheet. Recognizing that growing earning assets is the primary way we increase earnings per share, ﬁ nding ways to fund asset growth has been critical to our success for the past ten-plus years. Unlike many other parts of the United States, Maine is a state with a very low rate of deposit growth, which means that if we only had local deposits to fund asset growth, we would have either had to pay much higher rates to attract those deposits or forego growth opportunities. Beginning in 1993, FNLC began using non-local or wholesale sources of funding to supplement that which was available within our market. These include borrowings from the Federal Home Loan Bank as well as non-local certiﬁ cates of deposits obtained through brokers, matching services, and internet direct placement. Although we pay rates comparable to local certiﬁ cates of deposit – our most expensive source of local funding – wholesale sources have virtually no origination costs. The result is that wholesale funding has an all-in cost 16 (interest paid plus origination costs) that is comparable to checking and savings accounts, which have a high cost of origination and maintenance. Another important role wholesale funding plays is in helping the Company manage the regular seasonal ﬂ ows we experience in local deposits. Typically, these deposits peak in the late third or early fourth quarter, and are at their lowest point in the ﬁ rst or second quarters. While this seasonal ﬂ ow is quite predictable, the size of it has increased substantially after our acquisition of FNB Bankshares in 2005, totaling nearly $40.0 million in 2007. Change in Funding Structure All of the growth in earning assets in 2007 was funded through wholesale sources, with local deposits actually declining by $13.4 million or 2.4%. Although we saw growth in checking accounts and local certiﬁ cates of deposit, there were net outﬂ ows in savings and money market accounts, which we attribute primarily to customers needing to utilize some of their cash reserves in a period of a weakening economy. h reserves in a period of a weakening economy. At the same time, we shifted a portion of funding between n wholesale certiﬁ cates of deposit and borrowed funds to o take advantage of signiﬁ cantly better rates at the Federal al Home Loan Bank – another factor in our improved d earnings in 2007. As a result, we saw borrowed funds increase to 24.6% of f total funding from 14.2% at the end of 2006, and wholesale e certiﬁ cates of deposit decline to 21.3% of total funding g compared to 24.6% at the end of 2006. Looking at the entire e funding picture, the Company saw its funding from local al sources decline to 54.2% as of December 31, 2007, compared d to 61.2% at December 31, 2006. This continues the trend we e have seen over the past decade to use more wholesale funding. g. Ten years ago, at the end of 1997, 73.4% of our balance sheet et was funded with local deposits and 26.6% from wholesale sources, and ﬁ ve years ago, at the end of 2002, this our ources, and ﬁ ve years ago, at the end of 2002, this had changed to 68.9% from wholesale sources and 30.1% from wholesale sources. There continues to be a lively discussion in the banking industry about the use of wholesale funding. For FNLC, however, there has not been suffi cient deposit growth in our local market area to fund the balance sheet growth we have generated over the past ten years at a reasonable cost. It is extremely diffi cult to bring in new low-cost accounts if we are relying on growth at the expense of our competitors – moving a checking account from one bank to another is not an easy task and one with a large amount of customer inertia. And with higher-cost source of funding, there soon reaches a point where the only way to obtain these funds is to pay an above-market rate of interest. Our goal in managing our funding sources has been to pay a fair and competitive rate of interest to our local customers, and turn to wholesale sources for the additional funding we need. As noted above, when acquisition costs are factored in, the cost of wholesale funding is roughly the same as local funding, and the net result is the funding of our balance sheet at the lowest total cost. 17 Capital Management In addition to managing the Company’s investment portfolio and providing wholesale funding, the Treasury function has the primary responsibility for capital management. In order to remain viable, a bank holding company must maintain a level of equity capital to meet requirements set forth by banking regulators. The Treasury function’s goal is to maximize the shareholders’ investment in the Company over the long term by balancing three competing uses of capital: paying dividends, repurchasing the Company’s stock, or providing for future growth. During 2007, the Company repurchased 109,861 shares at an average price of $15.35 per share and at a total cost of $1.7 million and declared cash dividends of $6.8 million, leaving $5.3 million added to capital for future growth. dividends of $6.8 million, leaving $5.3 million g p p 2007 Results and Key Performance Ratios 2007 For t For the year ended December 31, 2007, FNLC posted record earnings per share on a fully diluted basis of $1.34, up $0.09 earn or 7.2% from the $1.25 reported for the year ended December or 7. 31, 2006. Net income for 2007 was $13,101,000, an increase 31, 2 of $806,000 or 6.6% from the $12,295,000 posted in 2006. of $8 The Treasury function made a signiﬁ cant contribution to The the Company’s proﬁ tability in 2007. With $14.8 million in the C interest income on a tax-equivalent basis and $10.5 million inter in interest expense, the Treasury function contributed $2.4 in in million to net income after deduction for a small allocation milli of operating expenses and taxes. This represents 18.0% of the of op Company’s net income and equates to $0.24 of our earnings Com per share of $1.34. per s For 2007, our return on average tangible equity was 15.89%, up from the 15.75% posted in 2006, and For 2007 our return on average tangible equit well above the 15.00% threshold deﬁ ning high-performance banks. FNLC’s effi ciency ratio – a key operating statistic which measures how much a company spends to generate revenue – was 50.16% for 2007, a signiﬁ cant improvement from the 52.12% posted for 2006. We are even more pleased with the improvement we have seen in our effi ciency ratio during the past three years after it rose signiﬁ cantly due to our acquisition of FNB Bankshares in 2005. It is now almost back to the pre-acquisition level of 2004, and we feel that the continued improvement of our effi ciency ratio will be a vital factor in FNLC’s ongoing ﬁ nancial performance. In all, 2007 was a very good year for First National Lincoln Corporation, and although this section has focused on the contribution of the Treasury function, it is the individual eff orts that all of our 200+ employees make that enable the Company to produce ﬁ nancial results which are consistently above that of our peers. Once again, thank you for the opportunity to serve as your Chief Financial Offi cer and to be part of a team focused on maximizing long-term value for our shareholders. F. Stephen Ward Executive Vice President & Chief Financial Offi cer 18 Selected Five-Year Financial Data Dollars in thousands, except for per share amounts Years ended December 31, 2007 2006 2005 2004 2003 Summary of Operations Interest Income Interest Expense Net Interest Income Provision for Loan Losses Non-Interest Income Non-Interest Expense Net Income Per Common Share Data Net Income Basic Diluted Cash Dividends (Declared) Book Value Market Value Financial Ratios Return on Average Equity Return on Average Tangible Equity Return on Average Assets Average Equity to Average Assets Average Tangible Equity to Average Assets Net Interest Margin (Tax-Equivalent) Dividend Payout Ratio (Declared) Allowance for Loan Losses/Total Loans Non-Performing Loans to Total Loans Non-Performing Assets to Total Assets Effi ciency Ratio (Tax-equivalent) At Year End Total Assets Total Loans Total Investment Securities Total Deposits Total Borrowings Total Shareholders’ Equity $ 71,721 $ 64,204 $ 50,431 $ 30,528 $ 27,540 39,885 31,836 1,432 10,145 22,183 13,101 33,589 30,615 1,325 10,306 22,439 12,295 18,848 31,583 200 9,034 22,518 12,843 $ 1.34 1.34 0.69 11.58 14.64 $ 1.25 1.25 0.61 10.98 16.72 $ 1.32 1.30 0.53 10.52 17.58 11.89% 15.89 11.63% 15.75 1.13 9.53 7.13 3.13 51.49 0.74 0.31 0.23 50.16 1.14 9.81 7.24 3.24 48.80 0.76 0.42 0.32 52.12 12.98% 17.81 1.36 10.44 7.61 3.84 40.15 0.79 0.40 0.30 52.89 9,024 21,504 880 4,667 13,371 8,509 $ 1.16 1.14 0.45 7.18 17.45 17.10% 17.36 1.41 8.22 8.27 3.94 38.62 0.99 0.34 0.25 48.78 9,796 17,744 907 5,148 11,600 7,427 $ 1.02 1.00 0.38 6.57 16.63 16.39% 16.39 1.41 8.58 8.58 3.73 37.13 1.05 0.39 0.29 48.32 $ 1,223,250 $ 1,104,869 $ 1,042,209 920,164 221,815 781,280 316,719 112,668 838,145 180,549 805,235 179,862 107,327 772,338 183,981 713,964 215,189 103,452 $ 634,238 478,332 126,827 369,844 207,206 52,815 High $ 568,812 398,895 136,689 359,077 157,822 47,718 Low Market price per common share of stock during 2007 $ 17.50 $ 13.60 19 Consolidated Balance Sheets First National Lincoln Corporation and Subsidiary As of December 31, Assets Cash and cash equivalents Securities available for sale Securities to be held to maturity, fair value of $181,132,000 at December 31, 2007, and $134,649,000 at December 31, 2006 Loans held for sale Loans Less allowance for loan losses Net loans Accrued interest receivable Premises and equipment, net Other real estate owned Goodwill Other assets Total assets Liabilities Demand deposits NOW deposits Money market deposits Savings deposits Certiﬁ cates of deposit under $100,000 Certiﬁ cates of deposit $100,000 or more Total deposits Borrowed funds Other liabilities Total liabilities Shareholders’ equity Common stock, one cent par value Additional paid-in capital Retained earnings Accumulated other comprehensive income Net unrealized gain on securities available for sale, net of tax of $370,000 in 2006 and $373,000 in 2005 Net unrealized loss on postretirement beneﬁ t costs, net of tax beneﬁ t of $190,000 Total shareholders’ equity Total liabilities and shareholders’ equity Common stock Number of shares authorized Number of shares issued Number of shares outstanding Book value per share 20 2007 2006 $ 17,254,000 40,461,000 $ 24,188,000 44,815,000 181,354,000 1,817,000 920,164,000 6,800,000 913,364,000 6,585,000 16,481,000 827,000 27,684,000 17,423,000 $ 1,223,250,000 $ 60,637,000 101,680,000 124,033,000 86,611,000 301,364,000 106,955,000 781,280,000 316,719,000 12,583,000 1,110,582,000 97,000 44,762,000 67,647,000 135,734,000 460,000 838,145,000 6,364,000 831,781,000 6,140,000 15,845,000 1,144,000 27,684,000 17,078,000 $ 1,104,869,000 $ 62,157,000 99,612,000 137,163,000 98,131,000 164,770,000 243,402,000 805,235,000 179,862,000 12,445,000 997,542,000 98,000 45,587,000 61,298,000 436,000 696,000 (274,000) 112,668,000 $ 1,223,250,000 (352,000) 107,327,000 $ 1,104,869,000 18,000,000 9,732,493 9,732,493 11.58 $ 18,000,000 9,770,792 9,770,792 10.98 $ Consolidated Statements of Income First National Lincoln Corporation and Subsidiary Years ended December 31, Interest and dividend income Interest and fees on loans (includes tax-exempt income of $1,179,000 in 2007, $975,000 in 2006, and $879,000 in 2005) $ Interest on deposits with other banks Interest and dividends on investments (includes tax-exempt income of $2,685,000 in 2007, $2,703,000 in 2006, and $2,482,000 in 2005) Total interest and dividend income Interest expense Interest on deposits Interest on borrowed funds Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Fiduciary and investment management income Service charges on deposit accounts Net securities gains Mortgage origination and servicing income Other operating income Total non-interest income Non-interest expense Salaries and employee beneﬁ ts Occupancy expense Furniture and equipment expense Amortization of core deposit intangible Other operating expenses Total non-interest expense Income before income taxes Income tax expense Net income Earnings per common share Basic earnings per share Diluted earnings per share Cash dividends declared per share Weighted average number of shares outstanding Incremental shares 2007 2006 2005 60,585,000 - $ 54,585,000 64,000 $ 42,623,000 13,000 11,136,000 71,721,000 29,745,000 10,140,000 39,885,000 31,836,000 1,432,000 30,404,000 1,737,000 2,740,000 2,000 589,000 5,077,000 10,145,000 11,037,000 1,438,000 1,944,000 283,000 7,481,000 22,183,000 18,366,000 5,265,000 13,101,000 9,555,000 64,204,000 25,804,000 7,785,000 33,589,000 30,615,000 1,325,000 29,290,000 1,951,000 2,752,000 18,000 503,000 5,082,000 10,306,000 10,826,000 1,421,000 2,124,000 283,000 7,785,000 22,439,000 17,157,000 4,862,000 12,295,000 $ 7,795,000 50,431,000 13,489,000 5,359,000 18,848,000 31,583,000 200,000 31,383,000 1,686,000 2,438,000 - 616,000 4,294,000 9,034,000 11,099,000 1,395,000 2,136,000 271,000 7,617,000 22,518,000 17,899,000 5,056,000 12,843,000 $ $ $ 1.34 1.34 0.69 9,787,287 25,731 $ 1.25 1.25 0.61 9,816,307 49,476 $ 1.32 1.30 0.53 9,745,456 114,751 21 Directors and Management ADMINISTRATION Jody L. Brown Vice President, Credit Administration John P. Quesnel Vice President, Special Assets Manager Thomas C. Bland Assistant Vice President, Controller Eva-Marie Fleury Assistant Vice President, Collections Manager Terri L. Geroux Assistant Vice President, Human Resources Offi cer Denise C. Griffi n Assistant Vice President, Human Resources Offi cer Cathryn A. Peterman Assistant Vice President, Security, Branch Operations Offi cer Amy M. Rollins Assistant Vice President, Marketing Director Jeanette M. Hayes Mortgage Loan Underwriter Deborah J. Wallace Financial Analyst Glory Ann West Marketing Manager OPERATIONS Tammy L. Plummer Vice President, Chief Technology Offi cer Thomas M. Wilhelm Vice President, Operations Offi cer Janett N. Muise Assistant Vice President, Electronic Banking Offi cer Ann E. Greenleaf Deposit Services Patti J. Gwara Data Processing Manager Lucinda B. Leeman Loan Processing Manager Connie J. Miller Loan Services Manager Miles L. Smith Information Systems Manager BOARD OF DIRECTORS Stuart G. Smith Chairman of the Board Daniel R. Daigneault President & Chief Executive Offi cer Tony C. McKim Executive Vice President & Chief Operating Offi cer Directors: Katherine M. Boyd Robert B. Gregory Randy A. Nelson Carl S. Poole, Jr. Mark N. Rosborough David B. Soule, Jr. Bruce B. Tindal Directors of First National Lincoln Corporation also serve as Directors of The First, N.A. FNLC EXECUTIVE OFFICERS Daniel R. Daigneault President & Chief Executive Offi cer Tony C. McKim Executive Vice President & Chief Operating Offi cer F. Stephen Ward Executive Vice President & Chief Financial Offi cer Charles A. Wootton Executive Vice President & Clerk EXECUTIVE LEADERSHIP TEAM Daniel R. Daigneault President & Chief Executive Offi cer Tony C. McKim Executive Vice President & Chief Operating Offi cer F. Stephen Ward Executive Vice President & Chief Financial Offi cer Charles A. Wootton Executive Vice President & Senior Loan Offi cer Richard M. Elder Senior Vice President, Retail Services Michael T. Martin Senior Vice President, Credit Offi cer Susan A. Norton Senior Vice President, Human Resources & Compliance Ronald J. Wrobel Senior Vice President, Operations Offi cer 22 Directors and Management BAR HARBOR OFFICE Robert S. Wilson Vice President, Senior Business Relationship Offi cer Karri A. Bailey Vice President, Business Relationship Offi cer Marilyn E. Silocka Vice President, Regional Manager, Branch Manager Stephen H. Sprague Vice President, Senior Mortgage Loan Offi cer Robert Cambridge Branch Supervisor BLUE HILL OFFICE Duane R. Crawford Business Relationship Offi cer Bonnie A. Marckoon Branch Manager BOOTHBAY HARBOR OFFICE Brenda L. Blackman Vice President, Business Relationship Offi cer Tana J. Gamage Branch Manager CALAIS OFFICE Louis J. Esposito Vice President, Regional Manager Senior Business Relationship Offi cer Marlene R. Parks Branch Manager CAMDEN OFFICE Eric G. Belléy Vice President, Senior Business Relationship Offi cer Angela M. Sabins Assistant Branch Manager DAMARISCOTTA OFFICE Bonnie L. Lash Vice President, Senior Mortgage Loan Offi cer Sarah S. Matel Vice President, Senior Business Relationship Offi cer Todd L. Savage Vice President, Senior Business Relationship Offi cer Sherry D. Smith Assistant Vice President, Branch Manager Dana J. Orenstein Assistant Branch Manager EASTPORT OFFICE Tari L. Camick Branch Manager Gloria J. Harris Business Relationship Offi cer ELLSWORTH OFFICE Lornie E. Smith Vice President, Senior Business Relationship Offi cer E. Ray Huntley Vice President, Senior Business Relationship Offi cer Gail C. Sargent Branch Manager Kathleen R. Kief Branch Supervisor NORTHEAST HARBOR OFFICE Hannah E. Wilkinson Branch Supervisor ROCKLAND OFFICE Steven H. Poulin Vice President, Regional Manager, Senior Business Relationship Offi cer Gail F. Pinto Branch Manager ROCKPORT OFFICE Petrea Allen Vice President, Senior Mortgage Loan Offi cer Jennifer B. Stewart Branch Manager SOUTHWEST HARBOR OFFICE Felice D. Janes Branch Manager WALDOBORO OFFICE Tina P. O’Donnell Vice President, Regional Manager Business Relationship Offi cer Susan E. Blackler Branch Manager Angela M. Powell Branch Supervisor WISCASSET OFFICE Lorna J. Weber Assistant Vice President, Branch Manager Monique C. McRae Assistant Branch Manager FIRST ADVISORS Principals Scott S. Hammond Edythe A. Jordan Steven K. Parady Martin S. Snider Kent A. Whitaker 23 Information for Shareholders Common Stock Prices and Dividends The common stock of First National Lincoln Corporation (ticker symbol FNLC) trades on the Nasdaq National Market System. The following table reﬂ ects the high and low prices of actual sales in each quarter of 2007 and 2006. Such quotations do not reﬂ ect retail mark-ups, mark-downs or brokers’ commissions. 2007 High $ 16.84 17.00 17.50 15.95 Low $ 15.64 15.50 13.60 14.20 2006 High $17.89 17.72 17.99 17.40 Low $17.10 16.45 16.62 16.39 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter The last known transaction of the Company’s stock during 2007 was on December 31 at $14.64 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 ﬁ scal years: Date Declared March 16, 2006 June 15, 2006 September 21, 2006 December 21, 2006 March 22, 2007 June 21, 2007 September 19, 2007 December 20, 2007 Amount Date Per Share Payable $ 0.145 $ 0.150 $ 0.155 $ 0.160 $ 0.165 $ 0.170 $ 0.175 $ 0.180 April 28, 2006 July 31, 2006 October 31, 2006 January 31, 2007 April 30, 2007 July 31, 2007 October 31, 2007 January 31, 2008 Pending Legal Proceedings There are no material pending legal proceedings to which the Company or the Bank is the party or to which any of its property is subject, other than routine litigation incidental to the business of the Bank. None of these proceedings is expected to have a material eff ect on the ﬁ nancial condition of the Company or of the Bank. Annual Meeting The Annual Meeting of the Shareholders of First National Lincoln Corporation will be held Wednesday, April 30, 2008 at 11:00 a.m. at The Samoset Resort, 220 Warrenton Street, Rockport, Maine 04856. 24 Number of Shareholders The number of shareholders of record as of February 21, 2008 was approximately 2,200. Annual Report on Form 10-K The Company’s Annual Report on Form 10-K to be ﬁ led with the Securities and Exchange Commission is available online at the Commission’s website: www.sec.gov. Shareholders may obtain a written copy, without charge, upon written request to the address listed below. Accessing Reports Online First National Lincoln Corporation’s press releases, SEC ﬁ lings and other reports or information issued by the Company are available at: www.FNLC.com. In addition, all SEC ﬁ lings are accessible at the Commission’s website: www.sec.gov. Corporate Headquarters Contact: F. Stephen Ward, Chief Financial Offi cer First National Lincoln Corporation 223 Main Street, P.O. Box 940 Damariscotta, Maine 04543 207-563-3195; 1-800-564-3195 Transfer Agent Shareholder inquiries regarding change of address or title should be directed to: Shareholder Relations First National Lincoln Corporation 223 Main Street, P.O. Box 940 Damariscotta, Maine 04543 207-563-3195; 1-800-564-3195 Independent Certiﬁ ed Public Accountants Berry, Dunn, McNeil & Parker 100 Middle Street, P.O. Box 1100 Portland, Maine 04104-1100 Corporate Counsel Pierce Atwood, Attorneys One Monument Square Portland, Maine 04101 Annual Report Photography Credits All photographs contained in this Report are copyright of the individual photographers named below. Page 1: Greg Latimer; page 2, 8, 9, 10, 11, 12, and 15: Benjamin Magro; page 6 and 13: Jim Dugan; page 7: Ronn Orenstein; page 14: Ferguson Calder. Our cover photo, Alewife School, by Dan Friedland, earned First Place Color and Best of Show honors at the 2007 Maine Photography Show.

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