As filed with the Securities and Exchange Commission on November 22, 2004
Registration No. 333-119781
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-effective Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST NATIONAL LINCOLN CORPORATION
(Exact name of Registrant as specified in its charter)
Maine 6021 01-0404322
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Identification
or organization) Classification Code No.) No.)
223 Main Street, P.O. Box 940
Damariscotta, Maine 04543-0940
(207) 563-3195
(Address, including zip code and telephone number, including area code,
of Registrant's principal executive offices)
Daniel R. Daigneault
President and Chief Executive Officer
First National Lincoln Corporation
223 Main Street, P.O. Box 940
Damariscotta, Maine 04543-0940
(207) 563-3195
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
with a copy to:
Keith C. Jones, Esq. James B. Zimpritch, Esq.
Verrill Dana, LLP Pierce Atwood LLP
One Portland Square, P.O. Box 586 One Monument Square
Portland, Maine 04112-0586 Portland, Maine 04101
(207) 774-4400 (207) 791-1100
Approximate date of commencement of proposed sale to the public:
Upon consummation of the merger described herein.
If the securities being registered on this Form are being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. __
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. __
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. __
Calculation of Registration Fee
-------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Class Amount Offering Price Aggregate Amount of
Of Securities to be to be Per Share Offering Registration
Registered Registered Or Unit Price(1) Fee(2)
-------------------------------------------------------------------------------
Common Stock, par
value $.01 per share N/A $42.00 $47,598,600 $6,031
-------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculation of the registration
fee. In accordance with Rule 457(o) under the Securities Act of 1933, the
number of shares is not set forth herein. Pursuant to Rule 457(o), the
registration fee has been computed on the basis of the maximum aggregate
offering price of the shares of the Registrant's common stock expected to be
issued upon consummation of the merger of FNB Bankshares ("FNB") with and into
the Registrant, taking into account the maximum number of shares of FNB
(1,133,300) that may be exchanged, including shares issuable upon the exercise
of outstanding options to acquire FNB common stock.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
[FNLC LOGO] [FNB LOGO]
To the shareholders of First National Lincoln Corporation and FNB Bankshares:
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of First National Lincoln Corporation ("FNLC') and
FNB Bankshares ("FNB") have approved an agreement to merge our two companies.
Also, it is expected that FNB's bank subsidiary, The First National Bank of Bar
Harbor, will be merged with The First National Bank of Damariscotta, the bank
subsidiary of FNLC, to create a single bank subsidiary of the combined company.
The resulting bank subsidiary will have 14 banking offices and three investment
management offices serving coastal Maine communities from Brunswick to Calais.
As a result of the merger, the combined company will have assets of
approximately $870 million, with combined loans of approximately $645 million
and combined deposits of approximately $609 million, based upon September 30,
2004 balances. In addition, the combined bank will have nearly $275 million of
investments under management. We believe the combined company will enhance our
ability to serve the financial needs of our communities, which will enable us
to enhance long-term shareholder value for both companies.
In the proposed merger, FNB will merge into FNLC and FNLC will issue
shares of its common stock to the shareholders of FNB in exchange for their
shares in FNB. Each outstanding share of FNB is expected to be converted into
FNLC stock valued at $42.00. The actual exchange ratio, and hence the number of
FNLC shares into which FNB stock will be converted, will vary depending on the
per share market price of FNLC common stock prior to closing, but FNB
shareholders will receive not less than 1.91, nor more than 2.47, shares of
FNLC for each share of FNB they hold. The common stock of FNLC (ticker symbol
FNLC) trades on the Nasdaq Stock Market, Inc.'s National Market. We urge you to
obtain current market quotations for FNLC common stock.
We expect the merger will qualify as a reorganization for federal income
tax purposes. Accordingly, FNB shareholders generally will not recognize any
gain or loss for federal income tax purposes on the exchange of shares of FNB
common stock for FNLC common stock in the merger, except with respect to any
cash received instead of fractional shares of common stock of the combined
company. Upon completion of the merger, we estimate that FNB's former
shareholders will own between approximately 21% and 26% of the common stock of
FNLC.
At our respective special meetings, which will be held on Monday, January
10, 2005, in the case of FNB, and Tuesday, January 11, 2005, in the case of
FNLC, in addition to other business, we will each ask our common shareholders
to approve the merger. Information about these meetings and the merger is
contained in this document. In particular, see "Risk Factors" beginning on page
__. We urge you to read this document carefully and in its entirety.
Whether or not you plan to attend your special meeting, please return your
completed proxy card as soon as possible to make sure that your shares are
represented at the meeting. If you do not vote, it will have the same effect as
voting against the merger.
Each of our Boards of Directors unanimously recommends that shareholders
vote "FOR" the merger. We strongly support this combination of our companies
and join our Boards in their recommendations.
/s/ Daniel R. Daigneault /s/ Tony C. McKim
President and Chief Executive Officer President and Chief Executive Officer
First National Lincoln Corporation FNB Bankshares
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN
CONNECTION WITH THE MERGER OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGER ARE NOT SAVINGS OR
DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF THE FIRST NATIONAL BANK OF
DAMARISCOTTA OR THE FIRST NATIONAL BANK OF BAR HARBOR, AND THEY ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THE INFORMATION IN THIS DOCUMENT IS NOT COMPLETE AND MAY BE CHANGED. FNLC MAY
NOT SELL THE SECURITIES BEING OFFERED BY USE OF THIS DOCUMENT UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, OF
WHICH THIS DOCUMENT IS A PART, IS DECLARED EFFECTIVE. THIS DOCUMENT IS NOT AN
OFFER TO SELL THESE SECURITIES, AND FNLC IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
This document is dated November 22, 2004, and is first being mailed to
shareholders of First National Lincoln Corporation and FNB Bankshares on or
about November 30, 2004.
REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information about
FNLC from documents that may not be included in or delivered with this
document. You can obtain copies of documents incorporated by reference in this
document but not otherwise accompanying this document through the Securities
and Exchange Commission website at http:/www.sec.gov or by requesting them in
writing or by telephone from FNLC at the following address and telephone
number:
FIRST NATIONAL LINCOLN CORPORATION
223 Main Street
P.O. Box 940
Damariscotta, Maine 04543-0940
Attention: Carrie A. Warren
(207) 563-3195
You will not be charged for any of these documents that you request. If you
would like to request documents, please do so by January 3, 2005, if you are an
FNB shareholder, and by January 4, 2005, if you are an FNLC shareholder, in
order to receive them before your special meeting.
See "Where You Can Find More Information" on page __.
FIRST NATIONAL LINCOLN CORPORATION
223 Main Street
Damariscotta, Maine 04543-0940
(207) 563-3195
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on January 11, 2005
To the shareholders of First National Lincoln Corporation:
We will hold a special meeting of shareholders of First National Lincoln
Corporation ("FNLC") at 10:00 a.m., local time, on January 11, 2005, at St.
Patrick's Parish Hall, Newcastle, Maine, for the following purposes:
1. to consider and vote upon a proposal to approve an agreement and plan of
merger, dated as of August 25, 2004, between First National Lincoln Corporation
and FNB Bankshares, as described in the attached document;
2. to consider and vote upon a proposal to adjourn the special meeting to a
later date or dates, if necessary, to permit further solicitation of proxies in
the event there are not sufficient votes at the time of the special meeting to
approve the merger agreement; and
3. to transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
We have fixed the close of business on November 19, 2004 as the record date for
the determination of shareholders entitled to notice of and to vote at the
special meeting. Only holders of FNLC common stock of record at the close of
business on that date will be entitled to notice of and to vote at the special
meeting or any adjournment or postponement of the special meeting.
Our Board of Directors has determined that the merger agreement is in the best
interests of FNLC and its shareholders and unanimously recommends that
shareholders vote "FOR" approval of the merger agreement.
Your vote is very important. Even if you plan to be present at the special
meeting, please promptly complete, sign, date and return your proxy card in the
enclosed envelope. Failure to vote your shares will have the same effect as a
vote against the merger agreement.
By Order of the Board of Directors
Charles A. Wootton
Clerk
Damariscotta, Maine
November 22, 2004
FNB BANKSHARES
102 Main Street
Bar Harbor, Maine 04609
(207) 288-3341
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on Monday, January 10, 2005
To the shareholders of FNB Bankshares:
We will hold a special meeting of shareholders of FNB Bankshares at 3:00 p.m.,
local time, on Monday, January 10, 2005, at Atlantic Oaks Hotel & Conference
Center, Bar Harbor, Maine, for the following purposes:
1. to consider and vote upon a proposal to approve an agreement and plan of
merger, dated as of August 25, 2004, between First National Lincoln Corporation
and FNB Bankshares, as described in the attached document;
2. to consider and vote upon a proposal to adjourn the special meeting to a
later date or dates, if necessary, to permit further solicitation of proxies in
the event there are not sufficient votes at the time of the special meeting to
approve the merger agreement; and
3. to transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
We have fixed the close of business on November 19, 2004 as the record date for
the determination of shareholders entitled to notice of and to vote at the
special meeting. Only holders of FNB common stock of record at the close of
business on that date will be entitled to notice of and to vote at the special
meeting or any adjournment or postponement of the special meeting.
If the merger agreement is approved by shareholders at the special meeting and
the merger is consummated, any shareholder as of the record date for the
special meeting (i) who delivers to FNB, before the shareholder vote on the
merger agreement, a written notice of the shareholder's intent to demand
payment for his, her or its shares if the merger takes place; (ii) whose shares
are not voted in favor of approving the merger agreement; and (iii) who
satisfies the requirements set forth in the notice delivered by FNB or its
successor within the time period set forth therein, shall be entitled to
receive payment for his, her or its shares. FNB, its successor and any such
shareholder shall in such case have the rights and duties and shall follow the
procedures set forth in 13-C M.R.S.A. ch. 13, which are described under "The
Merger -- Appraisal Rights" in the accompanying document and a copy of which is
attached as Annex III to such document.
Our Board of Directors has determined that the merger agreement is in the best
interests of FNB and its shareholders and unanimously recommends that
shareholders vote "FOR" approval of the merger agreement.
Your vote is very important. Even if you plan to be present at the special
meeting, please promptly complete, sign, date and return your proxy card in the
enclosed envelope. Failure to vote your shares will have the same effect as a
vote against the merger agreement.
By Order of the Board of Directors
Ronald J. Wrobel, Clerk
Bar Harbor, Maine
November 22, 2004
TABLE OF CONTENTS
Page
REFERENCES TO ADDITIONAL INFORMATION
QUESTIONS AND ANSWERS ABOUT VOTING PROCEDURES FOR THE SPECIAL MEETINGS
SUMMARY
RISK FACTORS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
GENERAL INFORMATION
THE FNLC SPECIAL MEETING
Time, Date and Place
Matters to be Considered
FNLC Shares Outstanding and Entitled to Vote; Record Date
How to Vote Your FNLC Shares
FNLC Votes Required
Solicitation of FNLC Proxies
Recommendations of the FNLC Board of Directors
THE FNB SPECIAL MEETING
Time, Date and Place
Matters to be Considered
FNB Shares Outstanding and Entitled to Vote; Record Date
How to Vote Your FNB Shares
FNB Votes Required
Solicitation of FNB Proxies
Recommendations of the FNB Board of Directors
THE MERGER (FNLC and FNB Proposal 1)
General
Background of the Merger
FNB's Reasons for the Merger
FNLC's Reasons for the Merger
Opinion of FNB's Financial Advisor
Analyses of RBC Capital Markets
Merger Consideration
Procedures for Exchanging FNB Common Stock Certificates
Treatment of FNB Stock Options
Conditions to the Merger
Regulatory Approvals
FNB Business Pending the Merger
FNB Board of Directors' Covenant to Recommend the Merger Agreement
No Solicitation by FNB
Representations and Warranties of the Parties
Effective Time of the Merger
Amendment of the Merger Agreement
Termination of the Merger Agreement
Interests of Certain Persons in the Merger
Certain Employee Matters
Bank Merger
Resale of FNLC Common Stock
Federal Income Tax Consequences
Accounting Treatment of the Merger
Page
Expenses of the Merger
Listing of the FNLC Common Stock
Termination Fee
Shareholder Agreements
Appraisal Rights
Operations of FNLC After the Merger
ADJOURNMENT OF THE SPECIAL MEETING (FNB and FNLC Proposal 2)
MARKET FOR FNLC COMMON STOCK AND DIVIDENDS
MARKET FOR FNB COMMON STOCK AND DIVIDENDS
INFORMATION ABOUT FNLC
General
FNLC Management and Additional Information
INFORMATION ABOUT FNB
General
FNB's Management's Discussion and Analysis
FNB Management and Additional Information
SUPERVISION AND REGULATION OF FNLC AND FNB
General
Activities and Other Limitations
Capital and Operational Requirements
Distributions
"Source of Strength" Policy
Sarbanes-Oxley Act of 2002
DESCRIPTION OF FNLC CAPITAL STOCK
FNLC Common Stock
Other Provisions
Transfer Agent
COMPARISON OF THE RIGHTS OF SHAREHOLDERS
CERTAIN BENEFICIAL OWNERS OF FNB COMMON STOCK
LEGAL OPINION
EXPERTS
PROPOSALS FOR THE 2005 FNLC ANNUAL MEETING
WHERE YOU CAN FIND MORE INFORMATION
ANNEXES:
Annex I Agreement and Plan of Merger, dated as of August 25, 2004,
between FNLC and FNB
Annex II Opinion of RBC Capital Markets Corporation
Annex III Chapter 13 of the Maine Business Corporation Act
Annex IV FNB Financial Statements
QUESTIONS AND ANSWERS
ABOUT VOTING PROCEDURES FOR THE SPECIAL MEETINGS
Q: What do I need to do now?
A: After you have carefully read this document, indicate on your proxy card
how you want your shares to be voted. Then sign, date and mail your proxy card
in the enclosed prepaid return envelope as soon as possible. This will enable
your shares to be represented and voted at your special meeting.
Q: Why is my vote important?
A: The merger agreement must be approved by holders of at least 67% of the
outstanding shares of FNB common stock and by the holders of at least a
majority of the outstanding shares of FNLC common stock. If you do not vote it
will have the same effect as a vote against the merger agreement.
Q: If my shares are held in "street name" by my broker or bank, will my
broker or bank automatically vote my shares for me?
A: No. Your broker, bank or other nominee will not be able to vote shares
held by it in street name on your behalf without instructions from you. You
should instruct your broker, bank or other nominee to vote your shares,
following the directions your broker, bank or other nominee provides.
Q: What if I fail to instruct my broker or bank?
A: If you fail to instruct your broker, bank or other nominee to vote your
shares, it will have the same effect as a vote against the merger agreement.
Q: Can I attend the meeting and vote my shares in person?
A: Yes. All FNB shareholders are invited to attend the FNB special meeting.
FNB shareholders of record on November 19, 2004 can vote in person at that
special meeting. All FNLC shareholders are invited to attend the FNLC special
meeting. FNLC shareholders of record on November 19, 2004 can vote in person at
that special meeting. If your shares are held in street name, then you are not
the shareholder of record and you must ask your broker, bank or other nominee
how you can vote at your special meeting.
Q: Can I change my vote?
A: Yes. If you have not voted through your broker, bank or other nominee,
there are three ways you can change your vote after you have sent in your proxy
card.
* First, you may send a written notice to the clerk of FNB or FNLC, as
appropriate, stating that you would like to revoke your proxy before the
special meeting.
* Second, you may complete and submit a new proxy card before your special
meeting. Any earlier proxies will be revoked automatically.
* Third, if you are a record holder, you may attend your special meeting and
vote in person. Any earlier proxy will be revoked. However, simply attending
the special meeting without voting will not revoke your proxy.
If you have instructed a broker, bank or other nominee to vote your shares, you
must follow directions you receive from your broker, bank or other nominee to
change your vote.
Page 1
Q: Should I send in my stock certificates now?
A: No. You should not send in your stock certificates at this time. If you
are an FNB shareholder, you will be sent instructions for surrendering your FNB
common stock certificates in exchange for FNLC shares after we complete the
merger. If you are an FNLC shareholder, you will keep your existing shares,
which will remain outstanding and unchanged following the merger.
Q. Why am I receiving this document?
A. We are delivering this document to you because it is serving as both a
joint proxy statement of FNB and FNLC and a prospectus of FNLC. It is a joint
proxy statement because it is being used by our Boards of Directors to solicit
the proxies of our respective common shareholders for the votes on the merger.
It is a prospectus because FNLC is offering shares of its common stock in
exchange for shares of FNB common stock if the merger is completed.
Q: Whom should I call with questions?
A: If you have questions about the merger or how to submit your proxy or
voting instruction card, or if you need additional copies of this document or
the enclosed proxy card or voting instruction card, you should contact:
If you are an FNLC shareholder: If you are an FNB shareholder:
First National Lincoln Corporation FNB Bankshares
223 Main Street 102 Main Street
P.O. Box 940 P.O. Box 258
Damariscotta, Maine 04543-0940 Bar Harbor, Maine 04609
Attention: Carrie A. Warren Attention: Robin Sue McLeod
(207) 563-3195 (207) 288-3341
Page 2
SUMMARY
This summary highlights selected information from this document and may
not contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document, including the merger
agreement and the other documents to which we have referred you. See "Where You
Can Find More Information" on page __. Page references are included in this
summary to direct you to a more complete description of the topics.
Throughout this document, "FNB" refers to FNB Bankshares, "FNBBH" refers
to FNB's banking subsidiary, The First National Bank of Bar Harbor, "FNLC"
refers to First National Lincoln Corporation and "FNBD" refers to The First
National Bank of Damariscotta, FNLC's banking subsidiary. Also, the proposed
merger between FNB and FNLC is referred to as the "merger," the merger between
FNBBH and FNBD as the "bank merger" and the Agreement and Plan of Merger, dated
as of August 25, 2004, between FNB and FNLC as the "merger agreement." The
terms "we" and "our" refer to both FNLC and FNB.
Parties to the Proposed Merger (Pages __ and __)
FNLC. FNLC was incorporated under the Maine Business Corporation Act
on January 15, 1985, for the purpose of becoming the parent holding company of
FNBD. The common stock of FNBD is the principal asset of FNLC, which has no
other subsidiaries. FNBD was chartered as a national bank under the laws of the
United States on May 30, 1864. FNBD has seven offices in Mid-Coast Maine,
including its principal office located on Main Street, Damariscotta, 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. FNBD offers
investment management and personal trust services through Pemaquid Advisors, a
division of FNBD, which has three offices on Bristol Road, Damariscotta, Maine,
Pleasant Street, Brunswick, Maine, and Townsend Avenue, Boothbay Harbor, Maine.
FNBD also maintains an Operations Center at the corner of Bristol Road and
Cross Street in Damariscotta. The mailing address of FNLC's principal executive
office is 223 Main Street, P.O. Box 940, Damariscotta, Maine 04543-0940, and
the telephone number for FNLC's executive offices is (207) 563-3195. FNBD
offers a full range of banking services and products to individuals, businesses
and governments throughout its market areas, including commercial, consumer and
trust investment services. As of November 19, 2004, FNLC's outstanding shares
consisted of one class of common stock, $.01 par value per share, of which
there were 7,355,471 shares outstanding and held of record by approximately
1,000 shareholders.
FNB. FNB was incorporated under the Maine Business Corporation Act on
December 3, 1984, for the purpose of becoming the parent holding company of
FNBBH. The common stock of FNBBH is the principal asset of FNB, which has no
other subsidiaries. FNBBH was chartered as a national bank under the laws of
the United States on November 17, 1888. FNBBH has seven full-service banking
offices in the "Down East" region of Maine's Hancock and Washington counties.
The mailing address of FNB's principal executive office is 102 Main Street,
P.O. Box 258, Bar Harbor, Maine 04609, and the telephone number for FNB's
executive offices is (207) 288-3341. FNBBH offers a full range of banking
services and products to individuals, businesses and governments throughout its
market areas, including commercial, consumer and trust investment services. As
of November 19, 2004, FNB's outstanding shares consisted of one class of common
stock, $.80 par value per share, of which there were 1,048,814 shares
outstanding and held of record by approximately 315 shareholders.
Page 3
FNB Shareholders will Receive Whole Shares of FNLC Common Stock in
Exchange for Each Share of FNB Common Stock Pursuant to the Merger; FNLC
Shareholders Will Keep Their Shares (Page __)
We propose a merger in which FNB will merge with and into FNLC. If the
merger is completed, each outstanding share of FNB common stock (subject to
certain exceptions) will be converted into the right to receive a number of
whole shares of FNLC common stock determined by dividing $42.00 by the average
sales price of FNLC common stock prior to the merger, provided that FNB
shareholders will not receive more than 2.47, nor less than 1.91, FNLC shares
for each FNB share they hold and will receive cash in lieu of any fractional
share interest. The average sales price shall be the sum of the average of the
high and low sales price reported for each trading day during the 30-day period
ending with the fifth business day prior to the merger, divided by the number
of trading days during such period.
FNLC will not issue fractional shares. Instead, FNB shareholders will
receive the value of any fractional share interest in cash based on the average
sales price of FNLC common stock prior to the merger computed in the same
manner as used to determine the exchange ratio in the merger.
If you are an FNB shareholder, you will need to surrender your FNB common
stock certificates to receive the appropriate merger consideration, but you
should not send in any certificates now. Shortly after the merger is completed,
you will receive detailed instructions on how to exchange your FNB shares.
FNLC shareholders will keep their shares, which will remain outstanding
and unchanged as shares of FNLC, following the merger.
Comparative Per Share Market Price Information (Page __)
Shares of FNLC currently trade on the Nasdaq Stock Market Inc.'s National
Market under the symbol "FNLC". Shares of FNB are not traded on any exchange,
but are traded in the over-the-counter market. On August 24, 2004, the last
trading day preceding public announcement of the proposed merger for which a
trade in FNLC common stock was reported, the last sales price reported for FNLC
common stock was $17.50 per share. On August 25, 2004, the last trading day
preceding public announcement of the proposed merger for which a trade in FNB
common stock was reported, the last sales price reported for FNB common stock
was $24.75 per share. On November 19, 2004, the last sales price reported for
FNLC common stock was $ 17.60 per share and the last sales price reported for
FNB common stock was $ 40.70 per share.
The exact number of shares of FNLC common stock which FNB shareholders
will be entitled to receive as a result of the merger will be based on the high
and low sales prices reported for each trading day during the 30-day period
ending with the fifth business day prior to the merger. Based on the average
high and low prices of FNLC common stock during the 30-day period ended on
November 15, 2004, the exchange ratio would be 2.34 of shares of FNLC common
stock for each share of FNB common stock.
FNLC cannot assure you that its stock price will continue to trade at the
prices shown above. You should obtain current stock price quotations for FNLC
common stock from a newspaper, via the internet or by calling your broker.
Page 4
Dividend Policy (Page __)
We currently pay regular cash dividends to our respective shareholders.
During the third quarter of 2004, FNLC declared a regular quarterly cash
dividend of 11.5 cents per share of FNLC common stock. FNLC currently intends
to continue to pay a quarterly cash dividend to its shareholders. On September
28, 2004, FNB declared a quarterly cash dividend of 16.0 cents per share of FNB
common stock. Pursuant to the merger agreement, FNB may continue to declare and
pay regular semi-annual dividends at a rate not in excess of $0.33 per share on
FNB common stock during the period prior to consummation of the merger, and to
the extent necessary so that FNB shareholders do not fail to receive a dividend
for any semi-annual period with respect to their FNB shares, or following the
merger, for any quarterly period with respect to the FNLC shares received in
the merger, a quarterly dividend at the same annualized rate as regular
dividends paid by FNB, on the same record date provided by FNLC for its
quarterly dividend.
The Exchange of FNLC Common Stock for FNB Common Stock in the Merger has been
structured as a Tax-Free Transaction (Page __)
FNLC has received an opinion of counsel to the effect that, based on
certain facts, representations and assumptions, the merger will be treated as a
"reorganization" for federal income tax purposes. Accordingly, FNB
shareholders generally will not recognize any gain or loss on the conversion of
shares of FNB common stock solely into shares of FNLC common stock. However,
FNB shareholders generally will be taxed if they receive cash instead of any
fractional share of FNLC common stock that the FNB shareholder would otherwise
be entitled to receive. Our obligation to complete the merger is conditioned on
our receipt of the same opinion, dated as of the effective date of the merger,
regarding the federal income tax treatment of the merger.
Tax matters are complicated, and the tax consequences of the merger to an
FNB shareholder will depend upon the facts of that shareholder's particular
situation. In addition, FNB shareholders may be subject to state, local or
foreign tax laws that are not discussed herein. Accordingly, we strongly urge
FNB shareholders to consult their own tax advisors for a full understanding of
the tax consequences to them of the merger.
FNLC's Board of Directors Recommends Approval of the Merger (Page __)
Based on FNLC's reasons for the merger described herein, the FNLC Board of
Directors believes that the merger is fair to its shareholders and in their
best interests and unanimously recommends that FNLC shareholders vote "FOR"
approval of the merger agreement.
Date, Time and Location of FNLC Special Meeting (Page __)
The FNLC special meeting will be held at 10:00 a.m., local time, on
Tuesday, January 11, 2005, at St. Patrick's Parish Center, Newcastle, Maine. At
the special meeting, FNLC shareholders will be asked (i) to approve the merger
agreement, (ii) to approve a proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies in the event there are not
sufficient votes at the time of the special meeting to approve the merger
agreement, and (iii) to act on any other matters that may properly come before
the special meeting.
Page 5
Record Date and Voting Rights for the FNLC Special Meeting (Page __)
FNLC shareholders are entitled to vote at the FNLC special meeting if they
owned shares of FNLC common stock as of the close of business on November 19,
2004. FNLC shareholders will have one vote at the special meeting for each
share of FNLC common stock they owned on that date.
Shareholders of record may vote by proxy or by attending the special
meeting and voting in person. Each proxy returned to FNLC (and not revoked) by
a holder of FNLC common stock will be voted in accordance with the instructions
indicated thereon. If no instructions are indicated, the proxy will be voted
"FOR" approval of the merger agreement and "FOR" the proposal to adjourn the
special meeting if necessary to permit further solicitation of proxies on the
proposal to approve the merger agreement.
Approval of the Merger Agreement Requires a Majority Vote by FNLC Shareholders
(Page __)
The affirmative vote of the holders of a majority of the outstanding
shares of FNLC common stock is necessary to approve the merger agreement on
behalf of FNLC. Not voting, or failure by a beneficial owner to instruct a
broker, bank or other nominee how to vote shares held for the beneficial owner,
will have the same effect as voting against the merger agreement. Any
adjournment of the special meeting will require the affirmative vote of the
holders of a majority of the outstanding shares of FNLC present at the special
meeting, regardless of whether a quorum is present.
Management of FNLC Owns Shares Which May Be Voted at the FNLC Special Meeting
(Pages __)
The directors and executive officers of FNLC and their respective
affiliates collectively owned approximately 14.6% of the outstanding shares of
FNLC common stock as of the record date for the FNLC special meeting.
FNB's Board of Directors Recommends Approval of the Merger (Page __)
Based on FNB's reasons for the merger described herein, including the
fairness opinion of RBC Capital Markets, the FNB Board of Directors believes
that the merger is fair to FNB shareholders and in their best interests and
unanimously recommends that FNB shareholders vote "FOR" approval of the merger
agreement.
FNB's Financial Advisor Believes that the Merger Consideration is Fair to FNB
Shareholders (Page __)
Among other factors considered in deciding to approve the merger, the FNB
Board of Directors received the opinion of its financial advisor, RBC Capital
Markets Corporation, a member company of RBC Financial Group, that, as of
August 25, 2004 (the date on which the FNB Board of Directors approved the
merger agreement), the merger consideration was fair to the holders of FNB
common stock from a financial point of view. The opinion was reaffirmed by RBC
Capital Markets Corporation on November 17, 2004, and is included as Annex II.
FNB shareholders should read this opinion completely to understand the
assumptions made, matters considered and limitations of the review undertaken
by RBC Capital Markets in providing its opinion. The opinion of RBC Capital
Markets is directed to the FNB Board of Directors and does not constitute a
recommendation to any shareholder as to any matters relating to the merger. To
date, FNB has paid RBC Capital Markets a $25,000 retainer fee and $75,000
Page 6
for the fairness opinion rendered by it. In addition, FNB has agreed to pay RBC
Capital Markets, upon consummation of the merger, a contingency fee which is
estimated to amount to approximately $240,000, based on the $42.00 per share
merger consideration.
Date, Time and Location of FNB Special Meeting (Page __)
The FNB special meeting will be held at 3:00 p.m., local time, on January
10, 2005, at Atlantic Oaks Hotel & Conference Center, Bar Harbor, Maine. At the
special meeting, FNB shareholders will be asked (i) to approve the merger
agreement, (ii) to approve a proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies in the event there are not
sufficient votes at the time of the special meeting to approve the merger
agreement, and (iii) to act on any other matters that may properly come before
the special meeting.
Record Date and Voting Rights for the FNB Special Meeting (Page __)
FNB shareholders are entitled to vote at the FNB special meeting if they
owned shares of FNB common stock as of the close of business on November 19,
2004. FNB shareholders will have one vote at the special meeting for each share
of FNB common stock they owned on that date.
Shareholders of record may vote by proxy or by attending the special
meeting and voting in person. Each proxy returned to FNB (and not revoked) by a
holder of FNB common stock will be voted in accordance with the instructions
indicated thereon. If no instructions are indicated, the proxy will be voted
"FOR" approval of the merger agreement, and "FOR" the proposal to adjourn the
special meeting if necessary to permit further solicitation of proxies on the
proposal to approve the merger agreement.
Approval of the Merger Agreement Requires a 67% Vote by FNB Shareholders (Page
__)
The affirmative vote of the holders of a 67% of the outstanding shares of
FNB common stock is necessary to approve the merger agreement on behalf of FNB.
Not voting, or failure by a beneficial owner to instruct a broker, bank or
other nominee how to vote shares held for the beneficial owner, will have the
same effect as a vote against the merger agreement. Any adjournment of the
special meeting will require the affirmative vote of the holders of a majority
of the outstanding shares of FNB present at the special meeting, regardless of
whether a quorum is present.
Management of FNB Owns Shares Which May Be Voted at the FNB Special Meeting
(Pages __)
The directors and executive officers of FNB and their respective
affiliates collectively owned approximately 22.7% of the outstanding shares of
FNB common stock as of the record date for the FNB special meeting. The
directors of FNB who are also officers of FNB, have entered into shareholder
agreements with FNLC pursuant to which they have agreed to vote approximately
9.9% of the votes entitled to be cast at the special meeting in favor of the
merger agreement.
Page 7
We Must Meet Several Conditions to Complete the Merger (Page __)
Completion of the merger depends on meeting a number of conditions,
including the following:
* our respective shareholders must approve the merger agreement;
* we must receive all required regulatory approvals for the merger and for the
bank merger, and any waiting periods required by law must have passed;
* there must be no law, injunction or order enacted or issued preventing
completion of the merger or the bank merger;
* we must receive a legal opinion confirming the tax-free nature of the merger;
* the FNLC common stock to be issued in the merger must have been listed for
trading on the Nasdaq Stock Market's National Market;
* the representations and warranties of each of FNLC and FNB in the merger
agreement must be accurate, subject to exceptions that would not have a
material adverse effect on FNLC and FNB, respectively;
* we must each have complied in all material respects with our respective
covenants in the merger agreement; and
* shares as to which appraisal rights have been exercised shall not represent
10% or more of the outstanding FNB common stock.
Unless prohibited by law, either of us could elect to waive a condition
that has not been satisfied and complete the merger anyway. We cannot be
certain whether or when any of the conditions to the merger will be satisfied,
or waived where permissible, or that the merger will be completed.
We Must Obtain Regulatory Approvals to Complete the Merger (Page __)
To complete the merger and the bank merger, we need the prior approval of
or waiver from the Federal Reserve Board, the Office of the Comptroller of the
Currency of the United States and the Maine Bureau of Financial Institutions.
The U.S. Department of Justice is able to provide input into the approval
process of federal banking agencies and will have between 15 and 30 days
following any approval of a federal banking agency to challenge the approval on
antitrust grounds. We have filed all necessary applications and notices with
the applicable regulatory agencies. On November 9, 2004, we received approval
for the merger from the Office of the Comptroller of the Currency of the United
States and the Maine Bureau of Financial Institutions, although the approval of
the Bureau of Financial Institutions is not effective until December 10, 2004.
The Federal Reserve Board previously indicated that it did not object to the
merger.
We may Terminate the Merger Agreement (Page __)
We can mutually agree at any time to terminate the merger agreement before
completing the merger, even if our shareholders have already voted to approve
it.
Either of us also can terminate the merger agreement:
* if any required regulatory approval for consummation of the merger or the
bank merger is not obtained;
* if the merger is not completed by May 31, 2005;
* if the shareholders of either company do not approve the merger agreement; or
* if the other company breaches any of its representations, warranties or
obligations under the merger agreement in a manner which would reasonably be
expected to have a material adverse effect on it and the breach cannot be or
has not been cured within 30 days of notice of the breach.
Page 8
In addition, FNLC may terminate the merger agreement at any time prior to
the FNB special meeting if the FNB Board of Directors withdraws or modifies its
recommendation to the FNB shareholders that the merger agreement be approved in
any way which is adverse to FNLC, or breaches its covenants requiring the
calling and holding of a meeting of shareholders to consider the merger
agreement and prohibiting the solicitation of other offers. FNB also may
terminate the merger agreement at any time prior to the special meeting in
order to concurrently enter into an acquisition agreement or similar agreement
with respect to an unsolicited "superior proposal," as defined in the merger
agreement, which has been received and considered by FNB in compliance with the
applicable terms of the merger agreement, provided that FNB has notified FNLC
at least five business days in advance of any such action and given FNLC the
opportunity during such period, if FNLC elects in its sole discretion, to
negotiate amendments to the merger agreement which would permit FNB to proceed
with the proposed merger with FNLC. Termination of the merger agreement as a
result of the circumstances discussed in this paragraph may require FNB to pay
FNLC a termination fee of $1.5 million. See "Termination Fee," on page __.
We may Amend and Extend the Merger Agreement (Page __)
We may amend the merger agreement at any time before the merger actually
takes place, and may agree to extend the time within which any action required
by the merger agreement is to take place. No amendment may be made after the
special meeting which by law requires further approval by our shareholders,
without obtaining such approval.
FNB's Directors and Executive Officers Have Some Interests in the Merger that
Differ From the Interests of FNB Shareholders (Page __)
Some of FNB's directors and executive officers have agreements and stock
options that provide them with interests in the merger that are different from,
or in addition to, the interests of other FNB shareholders. FNBBH has entered
into employment continuity agreements with its executive officers Tony C.
McKim, Daniel Lay, Jeffrey Dalrymple and Ronald Wrobel which generally provide
that if the officer's employment is terminated or he elects to resign within 30
days of a change in control of FNBBH or FNB the officer will have the right to
receive a lump sum severance payment. If the merger is consummated, the 30-day
period will be extended to 24 months and certain other changes will be made in
these agreements. In addition, pursuant to the merger agreement, Tony C. McKim
and Mark N. Rosborough will be appointed to the Board of Directors of FNLC upon
consummation of the merger. FNLC also has agreed to honor the indemnification
obligations of FNB to FNB's directors, officers and employees, as well as to
permit FNB to purchase liability insurance for FNB's directors and officers for
a six-year period following the merger, subject to the terms of the merger
agreement.
The Board of Directors of FNB was aware of the foregoing interests (other
than the identity of the second director to be appointed to FNLC's Board) and
other interests of executive officers of FNB in the merger and considered them,
among other matters, in approving the merger agreement and the merger.
FNB is Prohibited from Soliciting Other Offers (Page __)
FNB has agreed that, while the merger is pending, it will not initiate or,
subject to some limited exceptions, engage in discussions with any third party
other than FNLC regarding extraordinary transactions such as a merger, business
combination or sale of substantially all of its assets or sale of 10% or more
of its outstanding capital stock.
Page 9
The Merger Will be Accounted for Under the Purchase Method (Page __)
FNLC will use the purchase method of accounting to account for the merger.
The total purchase price will be allocated to the assets acquired and
liabilities assumed, based on their fair values. To the extent that this
purchase price exceeds the fair value of the net tangible assets acquired at
the effective time of the merger, FNLC will allocate the excess purchase price
to intangible assets, including goodwill. In accordance with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
issued in July 2001, the goodwill resulting from the merger will not be
amortized to expense; however, core deposit and other intangibles with definite
useful lives recorded by FNLC in connection with the merger will be amortized
to expense in accordance with the these rules.
Shareholders of FNLC and FNB Have Different Rights (Page __)
Shareholders of FNB who receive shares of FNLC common stock in exchange
for their shares of FNB common stock will become shareholders of FNLC and their
rights as shareholders of FNLC will be governed by FNLC's articles of
incorporation and bylaws. Although both FNLC and FNB are Maine corporations
subject to the Maine Business Corporation Act, the rights of shareholders of
FNLC differ in certain respects from the rights of shareholders of FNB.
Termination Fee (Page __)
FNB must pay FNLC a termination fee of $1.5 million if the merger
agreement is terminated under specified circumstances.
FNB's Shareholders Have Appraisal Rights (Page __)
Under Maine law, holders of FNB common stock have the right, if the merger
is consummated and all requirements of Maine law are satisfied, to receive
payment equal to the fair value of their shares of FNB common stock, determined
in the manner set forth in Maine law. The procedures which must be followed in
connection with the exercise of appraisal rights by shareholders are described
herein under "The Merger - Appraisal Rights" and in 13-C M.R.S.A. ch. 13, a
copy of which is attached as Annex III to this document. A shareholder seeking
to exercise appraisal rights must deliver to FNB, before the shareholder vote
on the merger agreement at the special meeting, written notice of the
shareholder's intent to demand payment for his, her or its shares, if the
merger takes place and may not vote his, her or its shares in favor of approval
of the merger agreement. Failure to take any required step in connection with
the exercise of such rights may result in termination or waiver thereof.
The Shares of FNLC Common Stock to be Issued in the Merger will be listed on
Nasdaq (Page __)
Pursuant to the merger agreement, the shares of FNLC common stock issued
in connection with the merger will be listed on the Nasdaq Stock Market's
National Market.
Page 10
Unaudited Comparative Per Share and Selected Financial Data
The following tables show per share financial information reflecting the
merger of FNLC and FNB (which is referred to as "pro forma" information) and
summary historical data for each of FNLC and FNB. The pro forma information
assumes that the acquisition of FNB had been completed on the dates and at the
beginning of the earliest periods indicated.
FNLC expects that the merger will result in certain one-time
reorganization and restructuring expenses. The pro forma income and dividends
data do not reflect any anticipated reorganization and restructuring expenses
resulting from the merger. It is also anticipated that the merger will provide
the combined company with certain financial benefits that include reduced
operating expenses and opportunities to earn more revenue. The pro forma
information does not reflect any of these anticipated cost savings or benefits.
Therefore, the pro forma information, while helpful in illustrating the
financial characteristics of the merger under one set of assumptions, does not
attempt to predict or suggest future results. The pro forma information also
does not attempt to show how the combined company actually would have performed
had FNLC and FNB been combined throughout the indicated periods.
The summary historical financial data of FNLC has been derived from
financial information that FNLC has included in prior filings with the SEC.
Certain amounts in the historical financial data of FNB have been reclassified
to conform with the historical financial statement presentation of FNLC. When
you read the summary financial information provided in the following tables,
you should also read the more detailed financial information included elsewhere
in this document and in documents regarding FNLC incorporated herein. See Annex
IV, and "Where You Can Find More Information," on page __.
Unaudited Comparative Per Share Data
-------------------------------------------------------------------------------
FNLC FNB
Common Stock Common Stock
------------ ------------
Pro Forma Pro Forma
Historical Combined(1) Historical Equivalent(2)
-------------------------------------------------------------------------------
Net income per basic share:
Nine Months Ended Sept. 30, 2004 0.85 0.80 1.69 1.87
Year ended December 31, 2003 1.02 0.94 1.92 2.20
Net income per diluted share:
Nine Months Ended Sept. 30, 2004 0.83 0.78 1.62 1.83
Year ended December 31, 2003 1.00 0.93 1.86 2.18
Dividends declared per share (3):
Nine Months Ended Sept. 30, 2004 0.33 0.33 0.46 0.77
Year ended December 31, 2003 0.38 0.38 0.47 0.89
Book value per share:
September 30, 2004 7.01 9.63 15.91 22.53
December 31, 2003 6.57 9.18 14.66 21.48
Tangible book value per share:
September 30, 2004 6.99 6.94 15.91 16.24
December 31, 2003 6.55 6.47 14.66 15.14
-------------------------------------------------------------------------------
Page 11
(1) Pro forma combined amounts are calculated by adding together the historical
amounts reported by FNLC and FNB, as adjusted for: (i) the estimated purchase
accounting adjustments to be recorded (consisting of mark-to-market valuation
adjustments for assets acquired and liabilities assumed and adjustments for
intangible assets established, and the resultant amortization/accretion of
certain of such adjustments over appropriate future periods), (ii) lower net
interest income related to funding the cash portion of the purchase price and
(iii) the estimated number of additional shares of FNLC common stock to be
issued in connection with the merger. The number of shares used in the
calculations assumes an exchange ratio of 2.34 shares of FNLC for each FNB
share, based upon an average sales price of $17.95 per share for FNLC common
stock during the 30-day period ended November 15, 2004. The average sales price
to be used in determining the actual exchange ratio in the merger shall be the
sum of the average of the high and low sales price reported for each trading
day during the 30-day period ending with the fifth business day prior to the
merger, divided by the number of trading days during such period.
(2) Pro forma equivalent amounts are calculated by multiplying the pro forma
combined amounts by an assumed exchange ratio of 2.34, as explained above.
(3) It is anticipated that the initial dividend rate will be equal to the
current dividend rate of FNLC. Accordingly, pro forma combined dividends per
share of FNLC common stock represent the historical dividends per common share
paid by FNLC.
Page 12
Selected Consolidated Financial Data of FNLC
(Dollars in Thousands, Except Per Share Data)
-------------------------------------------------------------------------------
September 30, December 31,
------- -----------------------------------------------
2004 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Balance Sheet Data:
Total assets 630,202 568,812 494,068 434,466 393,216 341,287
Securities 137,210 136,689 122,073 108,186 105,220 87,999
Total loans and
leases, net (1) 456,777 394,695 328,374 298,304 262,628 230,491
Goodwill and
other intangibles 125 125 63 - - -
Deposits 401,479 359,077 334,224 262,689 254,566 205,458
Borrowings 172,442 157,822 113,365 131,357 102,919 105,048
Shareholders' equity 51,532 47,718 42,695 37,334 33,160 28,662
Nonperforming assets 1,729 1,537 1,070 667 2,366 681
Book value per share 7.01 6.57 5.89 5.20 4.65 4.03
Tangible book value
per share 6.99 6.55 5.89 5.20 4.65 4.03
-------------------------------------------------------------------------------
Page 13
-------------------------------------------------------------------------------
Nine Months Ended For the Years Ended
September 30 December 31,
---------------- -------------------------------------------
2004 2003 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Operations Data:
Interest and
dividend income $22,414 $20,487 $27,540 $29,307 $30,062 $27,923 $23,540
Interest expense 6,616 7,637 9,796 12,204 15,031 15,153 11,591
------- ------- ------- ------- ------- ------- -------
Net interest
income 15,798 12,850 17,744 17,103 15,031 12,770 11,949
Provision for
loan losses 720 675 907 1,323 1,230 700 645
------- ------- ------- ------- ------- ------- -------
Net interest income
after provision 15,078 12,175 16,837 15,780 13,801 12,070 11,304
------- ------- ------- ------- ------- ------- -------
Net securities
gains (losses) - - - - 73 - -
Other non-interest
income 3,523 3,976 5,148 4,951 3,825 2,967 2,808
Non-interest
expense 9,934 8,591 11,600 11,545 9,978 8,537 7,789
------- ------- ------- ------- ------- ------- -------
Income before income
tax expense 8,667 7,560 10,385 9,186 7,721 6,500 6,323
Income tax expense 2,470 2,140 2,958 2,679 2,228 1,893 1,872
------- ------- ------- ------- ------- ------- -------
Net income $6,197 $5,420 $7,427 $6,507 $5,493 $4,607 $4,451
======= ======= ======= ======= ======= ======= =======
-------------------------------------------------------------------------------
Net income per share:
Basic $0.85 $0.75 $1.02 $0.90 $0.77 $0.64 $0.61
Diluted 0.83 0.73 1.00 0.88 0.75 0.63 0.59
Dividends per share 0.33 0.28 0.38 0.33 0.27 0.22 0.17
-------------------------------------------------------------------------------
Other Data:
Return on
average assets 1.40 1.40 1.41 1.39 1.33 1.27 1.39
Return on
average equity 16.85 16.23 16.39 16.34 15.51 15.15 15.67
Average equity to
average assets 8.29 8.63 8.58 8.49 8.55 8.36 8.88
Net interest
margin(2) 3.95 3.69 3.73 4.00 3.99 3.88 4.12
Tier 1 leverage
capital at
end of period 8.25 8.22 8.06 8.19 8.56 8.58 9.00
Dividend payout
ratio 38.59 37.50 37.13 36.16 35.65 34.20 27.17
Efficiency ratio(3) 49.07 48.66 48.32 50.49 50.60 52.06 50.93
Nonperforming assets
to total assets 0.28 0.23 0.29 0.27 0.20 0.69 0.30
-------------------------------------------------------------------------------
(1) Does not include loans held for sale.
(2) Ratios are on a fully-tax equivalent basis.
(3) The efficiency ratio represents operating expenses as a percentage of net
interest income and noninterest income, excluding securities transactions.
Selected Consolidated Financial Data of FNB
(Dollars in Thousands, Except for Per Share Data)
-------------------------------------------------------------------------------
September 30, December 31,
------- -----------------------------------------------
2004 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Balance Sheet Data:
Total assets 239,777 219,634 195,414 184,629 175,271 150,423
Securities 27,615 35,356 32,635 30,911 40,928 34,382
Total loans and
leases, net (1) 181,069 159,138 147,306 138,787 113,056 101,462
Goodwill and other
intangibles - - - - - -
Deposits 207,100 185,712 162,088 137,923 125,413 115,953
Borrowings 14,011 16,607 17,622 32,504 36,324 22,540
Shareholders' equity 16,664 15,323 13,975 12,486 12,054 10,365
Nonperforming assets 1,064 1,029 1,085 4,542 2,363 1,704
Book value per share 15.91 14.66 13.24 11.86 11.06 9.42
Tangible book value
per share 15.91 14.66 13.24 11.86 11.06 9.42
-------------------------------------------------------------------------------
Page 15
-------------------------------------------------------------------------------
Nine Months Ended For the Years Ended
September 30 December 31,
---------------- -------------------------------------------
2004 2003 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Operations Data:
Interest and
dividend income $8,134 $7,939 $10,524 $11,501 $12,997 $12,512 $10,283
Interest expense 1,844 2,036 2,693 3,652 5,408 5,550 4,472
------- ------- ------- ------- ------- ------- -------
Net interest
income 6,290 5,903 7,831 7,849 7,589 6,962 5,811
Provision for
loan losses 180 270 410 822 600 410 565
------- ------- ------- ------- ------- ------- -------
Net interest income
after provision 6,110 5,633 7,421 7,027 6,989 6,552 5,246
------- ------- ------- ------- ------- ------- -------
Net securities
gains (losses) - (1) - 40 307 18 9
Other non-interest
income 3,028 2,662 3,647 2,987 2,603 2,508 2,008
Non-interest
expense 6,767 6,198 8,321 8,082 8,093 7,153 6,510
------- ------- ------- ------- ------- ------- -------
Income before income
tax expense 2,371 2,096 2,747 1,972 1,806 1,925 753
Income tax expense 602 575 728 495 516 580 239
------- ------- ------- ------- ------- ------- -------
Net income $1,769 $1,521 $2,019 $1,477 $1,290 $1,345 $514
======= ======= ======= ======= ======= ======= =======
-------------------------------------------------------------------------------
Net income per share:
Basic $1.69 $1.44 $1.92 $1.40 $1.21 $1.23 $0.47
Diluted 1.62 1.41 1.88 1.38 1.20 1.23 0.47
Dividends per share 0.46 0.18 0.47 0.37 0.30 0.27 0.23
-------------------------------------------------------------------------------
Other Data:
Return on
average assets 1.05 1.01 0.99 0.78 0.72 0.83 0.36
Return on
average equity 14.95 14.02 13.90 11.20 10.50 12.00 4.90
Average equity to
average assets 7.03 7.23 7.11 6.71 6.89 6.77 7.34
Net interest
margin(2) 4.23 4.36 4.30 4.49 4.63 4.79 4.53
Tier 1 leverage
capital at end
of period 7.05 7.13 6.80 6.80 6.80 7.30 7.40
Dividend payout
ratio 17.75 12.41 24.14 26.19 24.46 21.62 50.00
Efficiency ratio(3) 72.34 72.77 73.22 73.11 75.21 74.15 81.59
Nonperforming assets
to total assets 0.50 0.29 0.39 0.58 2.56 1.36 1.73
-------------------------------------------------------------------------------
(1) Does not include loans held for sale.
(2) Ratios are on a fully-tax equivalent basis.
(3) The efficiency ratio represents operating expenses as a percentage of net
interest income and noninterest income, excluding securities transactions.
RISK FACTORS
Upon completion of the merger, FNB shareholders will receive shares of
FNLC common stock. Prior to deciding whether or not to approve the transaction,
FNB shareholders should be aware of and consider the following risks and
uncertainties that are applicable to the merger, in addition to the other
information contained in or incorporated by reference into this document,
including the matters addressed under the caption "Cautionary Statement
Concerning Forward-Looking Statements" on page __.
The value of the stock consideration and number of FNLC shares to be received
by FNB shareholders may vary with fluctuations in FNLC's stock price.
If the merger is completed, each outstanding share of FNB common stock
(subject to certain exceptions) will be converted into the right to receive a
number of whole shares of FNLC common stock determined by dividing $42.00 by
the average sales price of FNLC common stock prior to the merger, provided that
FNB shareholders will not receive more than 2.47, nor less than 1.91, FNLC
shares for each FNB share they hold and will receive cash in lieu of any
fractional share interest. The average sales price shall be the sum of the
average of the high and low sales price reported for each trading day during
the 30-day period ending with the fifth business day prior to the merger,
divided by the number of trading days during such period. The market price of
the FNLC common stock at the time former shareholders of FNB receive
certificates evidencing shares of FNLC common stock following the merger may be
higher or lower than the market price at the date of this document, on the date
of the FNB special meeting or on the date of the merger. Changes in the price
of the FNLC common stock may result from a variety of factors, including
general market and economic conditions, changes in the business, operations or
prospects of FNLC and regulatory considerations. Accordingly, at the time of
the special meetings, you will not know the exact value of the stock
consideration to be received by FNB shareholders or the exchange ratio used to
determine the number of shares of FNLC common stock to be received when the
merger is completed. As a consequence of the maximum and minimum established
for the exchange ratio, it is possible that FNB shareholders will receive
shares of FNLC having an aggregate value of less than (or more than) $42.00 in
exchange for each share of FNB stock. In addition, there will be a time period
between the completion of the merger and the time at which former FNB
shareholders actually receive certificates evidencing FNLC common stock. Until
stock certificates are received, FNB shareholders will not be able to sell
their FNLC shares in the open market and, thus, will not be able to avoid
losses resulting from any decline in the trading price of the FNLC common stock
during this period.
Directors and officers of FNB have interests in the merger that differ from the
interests of shareholders.
When considering the recommendation of FNB's Board of Directors, FNB
shareholders should be aware that some executive officers and directors of FNB
have interests in the merger that differ from their interests. For example,
certain executive officers have entered into agreements with FNBBH which
provide benefits in the event of a termination of the executive officer's
employment following the merger. These agreements may create potential
conflicts of interest. These and certain other additional interests of FNB's
directors and executive officers may cause some of these persons to view the
proposed transaction differently than other FNB shareholders view it. See
"Interests of Certain Persons in the Merger" beginning on page __.
Page 17
Failure to successfully integrate operations and personnel following merger
could reduce future earnings.
The failure to integrate successfully the operational systems, data
processing, operating procedures and technologies of FNBD and FNBBH following
the merger, particularly the transition of FNBBH's data systems to the platform
currently used by FNLC, could have a material adverse effect on the results of
operations of the combined company. In addition, the success of the merger is
dependent in part upon the integration of key personnel from FNB into the
management structure of FNLC, including Messrs. Tony McKim, Daniel Lay, Ronald
Wrobel and Jeffrey Dalrymple. Following the merger, departments and business
processes will be re-assigned among the existing work forces and locations of
both FNBD and FNBBH. The failure to retain the services of any key FNB employee
or to redeploy personnel and reassign business processes successfully could
have a material adverse effect on the integration of the two companies and the
results of operations of the surviving bank
Costs may exceed the anticipated benefits of the merger.
The merger and integration of our systems and procedures will also involve
significant cost and substantial management time and effort, which FNLC
anticipates may disrupt its operating activities and may adversely affect
FNLC's ability to realize the anticipated benefits of the merger. Achieving the
anticipated benefits of the merger will depend on, among other things, FNLC's
ability to realize anticipated cost savings and to combine our businesses in a
manner that does not materially disrupt the existing customer relationships of
FNB or result in decreased revenues from the loss of customers and that permits
growth opportunities to occur. If FNLC is not able to successfully achieve
these objectives, the anticipated benefits of the merger may not be realized
fully or at all or may take longer to realize than expected.
The market price of shares of FNLC common stock may be affected by factors
which are different from those affecting shares of FNB common stock; limited
market for FNLC Stock.
Some of FNLC's current products, services and markets differ from those of
FNB and, accordingly, the results of operations of FNLC after the merger may be
affected by factors different from those currently affecting the results of
operations of FNB. For a discussion of our businesses and of certain factors to
consider in connection with those businesses, see the documents incorporated by
reference into this document and referred to under "Where You Can Find More
Information" on page __, and information included in this document under
"Information about FNB," beginning on page __. In addition, while FNLC's common
stock is currently listed for trading on the Nasdaq Stock Market's National
Market, the average daily trading volume of such stock is low, which may affect
the ability of an FNB shareholder to sell a large amount of FNLC stock received
as a result of the merger in a short period of time or at a favorable price.
Page 18
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This document and the documents incorporated herein by reference contain
forward-looking statements by us within the meaning of the federal securities
laws. These forward-looking statements include information about the financial
condition, results of operations and business of FNLC upon completion of the
merger, including statements relating to cost savings that might be realized
from the merger, and the transaction fees and expenses expected to be incurred
in connection with the merger. This document also includes forward-looking
statements about the consummation and anticipated timing of the merger, the
exchange ratio and the tax-free nature of the merger. In addition, any of the
words "believes," "expects," "anticipates," "estimates," "predicts" and similar
expressions indicate forward-looking statements. These forward-looking
statements involve certain risks and uncertainties. Actual results may differ
materially from those contemplated by the forward-looking statements due to,
among others, the following factors:
* we may not realize cost savings from the merger or the bank merger;
* we may suffer deposit attrition, customer loss or revenue loss following the
bank merger;
* competitive pressure among depository and other financial institutions may
increase significantly;
* we may encounter costs or difficulties related to the integration of our
businesses;
* changes in the interest rate environment may reduce interest margins;
* general economic or business conditions, either nationally or in the markets
in which we do business, may be less favorable than expected, resulting in,
among other things, a deterioration in credit quality or a reduced demand for
credit;
* legislation or changes in regulatory requirements, including changes in
accounting standards, may adversely affect the businesses in which we are
engaged;
* adverse changes may occur in the securities markets; and
* our competitors may have greater financial resources and develop products and
technology that enable those competitors to compete more successfully than we
do.
Management of FNLC and FNB each believes that the forward-looking
statements about their respective companies are reasonable; however, you should
not place undue reliance on them. Forward-looking statements are not guarantees
of performance. They involve risks, uncertainties and assumptions. The future
results and shareholder values of FNLC following completion of the merger may
differ materially from those expressed in these forward-looking statements.
Many of the factors that will determine these results and values are beyond our
ability to control or predict.
We expressly qualify in their entirety all forward-looking statements
attributable to either of us or any person acting on our behalf by the
cautionary statements contained or referred to in this section.
Page 19
GENERAL INFORMATION
This document constitutes an FNB proxy statement and is being furnished to
all record holders of FNB common stock in connection with the solicitation of
proxies by the Board of Directors of FNB to be used at a special meeting of
shareholders of FNB to be held on January 10, 2005 and any adjournment or
postponement of the FNB special meeting. It also constitutes an FNLC proxy
statement and is being furnished to all record holders of FNLC common stock in
connection with the solicitation of proxies by the Board of Directors of FNLC
to be used at a special meeting of shareholders of FNLC to be held on January
11, 2005 and any adjournment or postponement of the FNLC special meeting. The
purposes of both special meetings are to consider and vote upon the merger
agreement between FNLC and FNB, which provides, among other things, for the
merger of FNB with and into FNLC, and a proposal to adjourn the special meeting
if necessary to solicit additional votes on the merger agreement.
This document also constitutes a prospectus of FNLC relating to the FNLC
common stock to be issued to holders of FNB common stock upon completion of the
merger. Based on (i) the number of shares of FNB common stock outstanding on
the record date for the special meeting, (ii) the number of shares of FNB
common stock issuable upon the exercise of employee and director stock options
outstanding on such date, and (iii) an assumed exchange ratio of 2.34 based
upon the price of FNLC stock during the 30-day period ended November 15, 2004,
approximately 2,451,000 shares of FNLC common stock will be issuable upon
completion of the merger. The actual total number of shares of FNLC common
stock to be issued in the merger will depend on the number of shares of FNB
common stock outstanding at the time of the merger and the actual exchange
ratio.
FNLC has supplied all information contained or incorporated by reference
herein relating to FNLC, and FNB has supplied all information contained herein
relating to FNB.
Page 20
THE FNLC SPECIAL MEETING
Time, Date and Place
A special meeting of shareholders of FNLC will be held at 10:00 a.m.,
local time, on January 11, 2005 at St. Patrick's Parish Hall, Newcastle, Maine.
Matters to be Considered
The purposes of the FNLC special meeting are to consider and approve the
merger agreement, to consider and approve a proposal to adjourn the special
meeting if necessary to permit further solicitation of proxies in the event
there are not sufficient votes at the time of the special meeting to approve
the merger agreement, and to consider any other matters that may be properly
submitted to a vote at the special meeting. At this time, the FNLC Board of
Directors is unaware of any matters, other than specifically set forth in the
preceding sentence, that may be presented for action at the special meeting.
FNLC Shares Outstanding and Entitled to Vote; Record Date
The close of business on November 19, 2004 has been fixed by FNLC as the
record date for the determination of holders of FNLC common stock entitled to
notice of and to vote at the special meeting and any adjournment or
postponement of the FNLC special meeting. At the close of business on the
record date, there were 7,355,471 shares of FNLC common stock outstanding and
entitled to vote. Each share of FNLC common stock entitles the holder to one
vote at the FNLC special meeting on all matters properly presented at the
meeting.
How to Vote Your FNLC Shares
FNLC shareholders of record may vote by proxy or by attending the special
meeting and voting in person. If you choose to vote by proxy, simply mark the
enclosed proxy card, date and sign it, and return it in the postage-paid
envelope provided.
If your FNLC shares are held in the name of a bank, broker or other holder
of record, you will receive instructions from the holder of record that you
must follow in order for your FNLC shares to be voted. Also, please note that
if the holder of record of your FNLC shares is a broker, bank or other nominee
and you wish to vote at the FNLC special meeting, you must bring a letter from
the broker, bank or other nominee confirming that you are the beneficial owner
of the shares and authorizing you to vote those shares.
Any FNLC shareholder executing a proxy may revoke it at any time before
it is voted by:
* delivering to the clerk of FNLC prior to the special meeting a written notice
of revocation addressed to First National Lincoln Corporation, P.O. Box 940,
Damariscotta, Maine 04543-0940 (Attention: Charles A. Wootton, Clerk);
* delivering to FNLC prior to the FNLC special meeting a properly executed
proxy with a later date; or
* attending the special meeting and giving notice of such revocation in person.
Attendance at the FNLC special meeting will not, in and of itself,
constitute revocation of a proxy.
Page 21
Each proxy returned to FNLC (and not revoked) by a holder of FNLC common
stock will be voted in accordance with the instructions indicated thereon. If
no instructions are indicated, the proxy will be voted "FOR" approval of the
merger agreement and "FOR" the proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies on the proposal to approve
the merger agreement.
At this time, the FNLC Board of Directors is unaware of any matters, other
than set forth above, that may be presented for action at the special meeting.
If other matters are properly presented, however, the persons named as proxies
will vote in accordance with their judgment with respect to such matters.
FNLC Vote Required
A quorum, consisting of the holders of a majority of the issued and
outstanding shares of FNLC common stock, must be present in person or by proxy
before any action may be taken at the special meeting. Abstentions will be
treated as shares that are present for purposes of determining the presence of
a quorum but will not be counted in the voting on a proposal.
The affirmative vote of the holders of a majority of the outstanding
shares of FNLC common stock, voting in person or by proxy, is necessary to
approve the merger agreement on behalf of FNLC. The affirmative vote of a
majority of the votes cast on the matter at the special meeting is required to
approve the proposal to adjourn the special meeting if necessary to permit
further solicitation of proxies on the proposal to approve the merger agreement
and any other matter properly submitted to shareholders for their consideration
at the special meeting.
Any "broker non-votes" submitted by brokers or nominees in connection with
the special meeting will not be counted for purposes of determining the number
of votes cast on a proposal but will be treated as present for quorum purposes.
"Broker non-votes" are shares held by brokers or nominees as to which voting
instructions have not been received from the beneficial owners or the persons
entitled to vote those shares and the broker or nominee does not have
discretionary voting power under the applicable New York Stock Exchange rules.
Under these rules, the proposals to approve the merger agreement and to adjourn
the special meeting are not items on which brokerage firms may vote in their
discretion on behalf of their clients if such clients have not furnished voting
instructions within ten days of the special meeting. Because the proposal to
approve the merger agreement is required to be approved by the holders of a
majority of the outstanding shares of FNLC common stock, abstentions and broker
"non-votes" will have the same effect as a vote against the proposal to approve
the merger agreement. For the same reason, the failure of an FNLC shareholder
to vote by proxy or in person at the special meeting will have the effect of a
vote against this proposal. Because of the vote required to adjourn the special
meeting, abstentions and broker "non-votes" will have no effect on this
proposal.
The directors and executive officers of FNLC and their respective
affiliates collectively owned approximately 14.6% of the outstanding shares of
FNLC common stock as of the record date for the FNLC special meeting.
As of the close of business on the record date for the FNLC special
meeting, neither FNB nor, to the knowledge of FNB, any of its directors and
executive officers, beneficially owned any shares of FNLC common stock.
Page 22
Solicitation of FNLC Proxies
FNLC will bear its costs of mailing this document to its shareholders, as
well as all other costs incurred by it in connection with the solicitation of
proxies from its shareholders on behalf of its Board of Directors, except that
we will share equally the cost of printing this document. In addition to
solicitation by mail, the directors, officers and employees of FNLC may solicit
proxies from shareholders of FNLC in person or by telephone, telegram,
facsimile or other electronic methods without compensation other than
reimbursement for their actual expenses.
Arrangements also will be made with brokerage firms and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and FNLC will
reimburse such custodians, nominees and fiduciaries for their reasonable out-
of-pocket expenses in connection therewith.
Recommendations of the FNLC Board of Directors
The FNLC Board of Directors has approved the merger agreement and the
transactions contemplated by the merger agreement. Based on FNLC's reasons for
the merger described in this document, the Board of Directors of FNLC believes
that the merger is in the best interests of FNLC's shareholders and unanimously
recommends that FNLC shareholders vote "FOR" approval of the merger agreement.
See "FNLC's Reasons for the Merger" beginning on page __. The FNLC Board of
Directors also unanimously recommends that FNLC shareholders vote "FOR" the
proposal to adjourn the special meeting if necessary to solicit additional
proxies to vote in favor of the merger agreement.
Page 23
THE FNB SPECIAL MEETING
Time, Date and Place
A special meeting of shareholders of FNB will be held at 3:00 p.m., local
time, on January 10, 2005 at the Atlantic Oaks Hotel & Conference Center, Bar
Harbor, Maine.
Matters to be Considered
The purposes of the FNB special meeting are to consider and approve the
merger agreement, to consider and approve a proposal to adjourn the FNB special
meeting if necessary to permit further solicitation of proxies in the event
there are not sufficient votes at the time of the FNB special meeting to
approve the merger agreement and to consider any other matters that may be
properly submitted to a vote at the FNB special meeting. At this time, the FNB
Board of Directors is unaware of any matters, other than specifically set forth
in the preceding sentence, that may be presented for action at the special
meeting.
FNB Shares Outstanding and Entitled to Vote; Record Date
The close of business on November 19, 2004 has been fixed by FNB as the
record date for the determination of holders of FNB common stock entitled to
notice of and to vote at the FNB special meeting and any adjournment or
postponement of the special meeting. At the close of business on the record
date, there were 1,048,814 shares of FNB common stock outstanding and entitled
to vote. Each share of FNB common stock entitles the holder to one vote at the
special meeting on all matters properly presented at the meeting.
How to Vote Your FNB Shares
FNB shareholders of record may vote by proxy or by attending the FNB
special meeting and voting in person. If you choose to vote by proxy, simply
mark the enclosed proxy card, date and sign it, and return it in the postage-
paid envelope provided.
If your FNB shares are held in the name of a bank, broker or other holder
of record, you will receive instructions from the holder of record that you
must follow in order for your FNB shares to be voted. Also, please note that if
the holder of record of your FNB shares is a broker, bank or other nominee and
you wish to vote at the FNB special meeting, you must bring a letter from the
broker, bank or other nominee confirming that you are the beneficial owner of
the shares and authorizing you to vote those shares.
Any FNB shareholder executing a proxy may revoke it at any time before it
is voted by:
* delivering to the clerk of FNB prior to the special meeting a written notice
of revocation addressed to FNB Bankshares, P.O. Box 258, Bar Harbor, Maine
04609 (Attention: Ronald J. Wrobel, Clerk);
* delivering to FNB prior to the special meeting a properly executed proxy with
a later date; or
* attending the FNB special meeting and giving notice of such revocation in
person.
Attendance at the FNB special meeting will not, in and of itself,
constitute revocation of a proxy.
Page 24
Each proxy returned to FNB (and not revoked) by a holder of FNB common
stock will be voted in accordance with the instructions indicated thereon. If
no instructions are indicated, the proxy will be voted "FOR" approval of the
merger agreement and "FOR" the proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies on the proposal to approve
the merger agreement.
At this time, the FNB Board of Directors is unaware of any matters, other
than set forth above, that may be presented for action at the special meeting.
If other matters are properly presented, however, the persons named as proxies
will vote in accordance with their judgment with respect to such matters.
FNB Vote Required
A quorum, consisting of the holders of a majority of the issued and
outstanding shares of FNB common stock, must be present in person or by proxy
before any action may be taken at the special meeting. Abstentions will be
treated as shares that are present for purposes of determining the presence of
a quorum but will not be counted in the voting on a proposal.
Article VI of FNB's bylaws requires a specific vote to approve "business
combinations" such as the merger. As a result, the affirmative vote of the
holders of 67% of the outstanding shares of FNB common stock, voting in person
or by proxy, is necessary to approve the merger agreement on behalf of FNB. The
affirmative vote of a majority of the votes cast on the matter at the FNB
special meeting is required to approve the proposal to adjourn the special
meeting if necessary to permit further solicitation of proxies on the proposal
to approve the merger agreement and any other matter properly submitted to
shareholders for their consideration at the special meeting.
Any "broker non-votes" submitted by brokers or nominees in connection with
the FNB special meeting will not be counted for purposes of determining the
number of votes cast on a proposal but will be treated as present for quorum
purposes. "Broker non-votes" are shares held by brokers or nominees as to which
voting instructions have not been received from the beneficial owners or the
persons entitled to vote those shares and the broker or nominee does not have
discretionary voting power under the applicable New York Stock Exchange rules.
Under these rules, the proposals to approve the merger agreement and to adjourn
the special meeting are not items on which brokerage firms may vote in their
discretion on behalf of their clients if such clients have not furnished voting
instructions within ten days of the special meeting. Because the proposal to
approve the merger agreement is required to be approved by the holders of 67%
of the outstanding shares of FNB common stock, abstentions and broker "non-
votes" will have the same effect as a vote against the proposal to approve the
merger agreement at the special meeting. For the same reason, the failure of an
FNB shareholder to vote by proxy or in person at the special meeting will have
the effect of a vote against this proposal. Because of the vote required for
the proposal to adjourn the special meeting, abstentions and broker "non-votes"
will have no effect on this proposal.
Page 25
The directors and executive officers of FNB and their respective
affiliates collectively owned approximately 22.7% of the outstanding shares of
FNB common stock as of the record date for the special meeting. Directors of
FNB who are also executive officers hold of record common shares entitling them
to cast approximately 9.9% of the votes entitled to be cast at the FNB special
meeting and have entered into shareholder agreements with FNLC pursuant to
which they have agreed to vote such shares in favor of the merger agreement.
See "Certain Beneficial Owners of FNB Common Stock" on page __ and "Shareholder
Agreements" on page __.
As of the close of business on the record date for the FNB special
meeting, neither FNLC nor, to the knowledge of FNLC, any of its directors and
executive officers, beneficially owned any shares of FNB common stock.
Solicitation of FNB Proxies
FNB will bear its costs of mailing this document to its shareholders, as
well as all other costs incurred by it in connection with the solicitation of
proxies from its shareholders on behalf of its Board of Directors, except that
we will share equally the cost of printing this document. In addition to
solicitation by mail, the directors, officers and employees of FNB may solicit
proxies from shareholders of FNB in person or by telephone, telegram, facsimile
or other electronic methods without compensation other than reimbursement for
their actual expenses.
Arrangements also will be made with brokerage firms and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and FNB will
reimburse such custodians, nominees and fiduciaries for their reasonable out-
of-pocket expenses in connection therewith.
Recommendations of the FNB Board of Directors
The FNB Board of Directors has approved the merger agreement and the
transactions contemplated by the merger agreement. Based on FNB's reasons for
the merger described in this document, including the fairness opinion of RBC
Capital Markets, the Board of Directors of FNB believes that the merger is in
the best interests of FNB's shareholders and unanimously recommends that FNB
shareholders vote "FOR" approval of the merger agreement. See "FNB's Reasons
for the Merger" beginning on page __. The FNB Board of Directors also
unanimously recommends that FNB shareholders vote "FOR" approval of the
proposal to adjourn the special meeting if necessary to solicit additional
proxies to vote in favor of the merger agreement.
Page 26
THE MERGER
(FNLC and FNB Proposal 1)
The following information describes the material aspects of the merger
agreement and the merger. This description does not purport to be complete and
is qualified in its entirety by reference to the annexes to this document,
including the merger agreement. You are urged to carefully read the annexes in
their entirety.
General
Under the terms and conditions set forth in the merger agreement, FNB will
be merged with and into FNLC. At the effective time of the merger, each share
of common stock of FNB outstanding immediately before the effective time of the
merger (except as provided below) will, by virtue of the merger and without any
action on the part of the shareholder, be converted into the right to receive
the number of whole shares of FNLC common stock determined by dividing $42.00
by the average sales price of FNLC common stock prior to the merger, provided
that FNB shareholders will not receive more than 2.47, nor less than 1.91, FNLC
shares for each FNB share they hold, and cash in lieu of any fractional share
interest. The average sales price shall be the sum of the average of the high
and low sales price reported for each trading day during the 30-day period
ending with the fifth business day prior to the merger, divided by the number
of trading days during such period.
Shares of FNB common stock held by FNLC or FNB, other than in a fiduciary
capacity or in satisfaction of a debt previously contracted, or by FNB
shareholders who have elected appraisal rights, will not be converted into the
right to receive the merger consideration upon consummation of the merger.
Background of the Merger
As part of their on-going efforts to improve FNB's community banking
franchise and enhance shareholder value, FNB's management and Board of
Directors have periodically considered various strategic alternatives,
including continuing as an independent institution, growing internally, or
entering into a strategic combination with, or being acquired by, another
institution. At least annually over the last few years, management and the
Board have specifically focused on the strategic alternatives available to FNB.
Consistent with these efforts, and in the ordinary course of business
dealings, Tony C. McKim, President, Chief Executive Officer and a director of
FNB, has from time to time had informal conversations with directors and
management of other Maine banking institutions. During one such conversation
initiated by another Maine financial institution's chief executive officer in
December 2003, the topic of a potential strategic transaction between FNB and
the other party was discussed. This conversation was general in nature and was
followed with another discussion in January 2004, after which Mr. McKim
informed the FNB Board of the other institution's informal solicitation, and
suggested that the Board consider a more formal process regarding a potential
business combination.
On January 27, 2004, FNB's Board of Directors created a special committee
to consider potential business combinations and the processes to be followed in
the pursuit of a potential sale of FNB. The committee consisted of Mr. McKim,
Mark N. Rosborough (a non-employee director and the Chairman of the Board),
William K. McFarland (a non-employee director), and Steven K. Parady (an
employee director). Daniel Lay, a senior vice president of FNBBH and head of
its Trust Department, was asked to assist the committee. The committee was
Page 27
charged specifically with responsibility to manage the process for a potential
sale of FNB and to report to the Board of Directors. The committee was not
given any authority to bind or commit FNB without a further vote of the Board
of Directors.
Later in January 2004, Mr. McKim initiated informal discussions with the
chief executive officer of another Maine financial institution about a
potential transaction between FNB and that party. These discussions were also
general in nature.
In February, 2004, Messrs. McKim and Lay discussed with FNB's legal
counsel, Pierce Atwood LLP, various issues and considerations that might be
expected in a merger or acquisition transaction, as well as the possible
engagement of a financial advisor to assist FNB in connection with the pursuit
of a possible business combination, including rendering a fairness opinion on
any resulting transaction. Together they identified potential financial
advisors to be interviewed.
On February 23, 2004, the FNB committee met at the offices of Pierce
Atwood in Portland, Maine. Legal counsel reviewed with committee members their
fiduciary obligations to FNB's shareholders and their obligations in connection
with a proposed combination with another company. At that meeting, the
committee also interviewed selected financial advisors. The committee
subsequently reported to the FNB Board its recommendation to engage RBC Capital
Markets Corporation as its exclusive financial advisor to assist FNB in
pursuing a business combination.
Near the end of February 2004, Mr. McKim made a preliminary contact with
the chief executive officer of another Maine financial institution regarding a
possible business combination. The conversation was again general in nature,
with the other party indicating that it would like to review a package from
FNB's financial advisor, but otherwise would not participate in further
discussions.
On March 23, 2004, FNB engaged RBC Capital Markets as its exclusive
financial advisor in connection with pursuing a business combination.
Throughout April and May, 2004, Mr. McKim and Mr. Lay participated in a
number of conversations and exchanges of information with RBC Capital Markets
about FNB. Included in the information provided to RBC Capital Markets were
customary materials requested by RBC Capital Markets to facilitate its drafting
of a confidential information memorandum for FNB to make available to
prospective acquirors.
On May 3, 2004, Mr. McKim, Mr. Lay and Pierce Atwood met with RBC Capital
Markets at its offices in Boston, Massachusetts to address preliminary due
diligence items and identify financial institutions to which the confidential
information memorandum might be sent. RBC Capital Markets also articulated its
views with respect to a possible timetable for a business combination.
On June 11, 2004, members of the FNB committee met with RBC Capital
Markets in Bar Harbor, Maine to review a draft of the confidential information
memorandum and to finalize the list of financial institutions that RBC Capital
Markets would contact on FNB's behalf. The list was finalized at seven
institutions, including FNLC.
Page 28
On June 14, 2004, the FNB committee approved the confidential information
memorandum and provided RBC Capital Markets with the authority to contact the
institutions from the list of seven institutions identified.
From June 14, 2004 through June 18, 2004, RBC Capital Markets contacted
these seven financial institutions to determine whether such institutions would
have an interest in pursuing exploratory discussions with regard to a strategic
transaction with a Maine bank. During this period, a representative of RBC
Capital Markets contacted Robert B. Gregory, the non-employee chairman of
FNLC's Board of Directors. During this same week and the following week, six
institutions, including FNLC, elected to execute confidentiality agreements
providing for, among other things, the confidentially of information to be
exchanged in connection with their consideration of a potential transaction
with FNB, the nondisclosure of any negotiations regarding such transaction and
prohibition on FNB and such other party contacting or soliciting the other's
employees.
After each of the six institutions had signed a confidentiality agreement,
RBC Capital Markets spoke by telephone with each institution's executive
management to discuss in general terms FNB and each institution's possible
interest in pursuing a strategic transaction with FNB and to explain the
process FNB had elected to follow with respect to such a transaction.
Five institutions, including FNLC, requested copies of the confidential
information memorandum, which RBC Capital Markets provided to each institution
subsequent to receipt of that institution's executed confidentiality agreement.
During the last half of June and the first week of July 2004, Mr. McKim,
Mr. Lay and representatives of RBC Capital Markets engaged in discussions,
answered questions, and provided information to each of these five
institutions. These discussions involved a wide range of topics, including the
perceived advantages of a possible business combination between FNB and the
various interested parties and, where relevant, their corresponding financial
advisors, questions regarding the process with respect to such a transaction
and additional information necessary to enable each institution to submit a
written initial non-binding indication of interest, including financial terms.
On June 22, 2004, after consulting with senior management and other FNLC
Board members, Mr. Gregory wrote to RBC Capital Markets confirming FNLC's
interest in pursuing a transaction with FNB and laying out his view of the
advantages of such a transaction.
On June 30, 2004, FNLC submitted its initial indication of interest to RBC
Capital Markets.
By July 7, 2004, the deadline for the submission of the written initial
non-binding indication of interest, RBC Capital Markets had received three
indications, including one from FNLC, all of which RBC Capital Markets
immediately forwarded to Mr. McKim, Mr. Lay and Pierce Atwood. Two of the five
institutions that originally requested copies of the confidential information
memoranda elected to withdraw from the process.
From July 8, 2004 through July 11, 2004, Mr. McKim and Mr. Lay discussed
with RBC Capital Markets certain aspects of each of the written initial non-
binding indications of interest.
Page 29
On July 12, 2004, a telephonic meeting was held among the FNB committee,
RBC Capital Markets and Pierce Atwood to update the members of the committee on
the status of the transaction process and to discuss the merits of the three
written initial non-binding indications of interest. The committee elected to
eliminate one of the three bidders as that institution's written initial
indication of interest was not competitive with the others on a financial
basis. The committee then agreed to allow RBC Capital Markets to contact the
two remaining parties, including FNLC, to inform them of the committee's
decision and request that the remaining two institutions continue with the
transaction process.
On July 13, 2004, RBC Capital Markets contacted all three prospective
purchasers to inform them of the committee's decision. RBC Capital Markets
informed two institutions, one of which was FNLC, of the plans for the coming
weeks with respect to scheduled due diligence, document requests and meeting
times with Mr. McKim and Mr. Lay. Later that day, Messrs. McKim, Lay and
Rosborough met with management and two outside directors of FNLC. The
discussion included FNLC's interest in FNB, business culture issues, the
transaction process, and potential treatments of outstanding FNB stock options.
From July 14, 2004 to July 29, 2004, Mr. McKim and Mr. Lay met or spoke
telephonically on numerous occasions with officers and representatives of both
remaining parties and their financial advisors, where applicable, to discuss a
range of issues that each party considered important to that institution's
evaluation of a strategic transaction with FNB. In addition, during this time
period, the two remaining parties conducted financial, business, regulatory and
legal due diligence, including reviews of documents at FNBBH and at off-site
locations to which Mr. McKim had delivered relevant due diligence
documentation.
On July 15, 2004, Mr. Gregory and Daniel R. Daigneault, the President and
CEO of FNLC, made a presentation to the full FNLC Board on the current state of
discussions regarding a possible business combination with FNB and received
instructions to proceed with the discussions and attempt to reach an agreement
on both monetary and non-monetary terms, as requested by the RBC Capital
Markets solicitation for offers.
On July 16, 2004, Mr. Gregory met Mr. McKim in Thomaston, Maine to discuss
FNLC's interest in a business combination, the reasons for FNB's desire to
pursue the transaction process, and issues surrounding the potential
combination of the two management teams.
On July 17, 2004, Mr. Gregory had a conference call with Mr. McKim and Mr.
Lay to further discuss issues surrounding the potential merger of management
teams in a business combination between FNLC and FNB. Mr. Gregory subsequently
requested RBC Capital Markets to assemble documents for review before final
offers were to be presented.
On July 22, 2004, Messrs. Gregory and Daigneault, together with Charles A.
Wootton, a Senior Vice President of FNBD, F. Stephen Ward, the Treasurer and
Chief Financial Officer of FNLC, and Carrie Warren, the Executive Secretary of
FNBD, met with RBC Capital Markets and Mr. McKim in Bar Harbor to review
documents and ask questions about FNB and FNBBH as part of FNLC's due diligence
review.
On July 27, 2004, FNLC finalized a revised offer and sent it to RBC
Capital Markets for consideration.
Page 30
By July 30, 2004, the announced deadline for the submission of written
final indications of interest, RBC Capital Markets had received the two
remaining parties' final indications, which RBC Capital Markets immediately
forwarded to Mr. McKim, Mr. Lay and Pierce Atwood.
On August 2, 2004, Mr. McKim, Mr. Lay, RBC Capital Markets and Pierce
Atwood convened via conference call to assess the remaining parties' final
indications of interest, at which time a number of issues were identified that
required clarification from each remaining party in order to permit FNB and its
advisors to compare the final bids, arrive at a final decision and select a
winning party. It was concluded from the conference call that RBC Capital
Markets would, with FNB's assistance, draft and distribute to each of the two
final parties separate letter requests for clarification of that party's final
offer. These letters were sent on August 3, 2004.
On August 5, 2004, RBC Capital Markets received responses from the two
remaining parties. RBC Capital Markets immediately forwarded these to Mr.
McKim, Mr. Lay and Pierce Atwood. Mr. McKim, Mr. Lay, RBC Capital Markets and
Pierce Atwood subsequently participated in a conference call to discuss the
clarification points from the two letters and concluded that the information
provided was sufficient to warrant the selection of a winning party.
On August 6, 2004, a telephonic meeting was held by the FNB committee,
with RBC Capital Markets and Pierce Atwood also participating, to update the
members on the status of the transaction process and discuss the merits of the
two final indications of interest. RBC Capital Markets advised the committee
that, based on a number of factors, it believed that the FNLC proposal was
superior and thus the committee should recommend to the Board of Directors that
FNB pursue the negotiation of a definitive merger agreement with FNLC.
Following the presentations by management, RBC Capital Markets and Pierce
Atwood, and discussion among its members, the committee unanimously agreed to
make such recommendation to the Board of Directors of FNB.
On August 10, 2004, a special meeting of the FNB Board was held to address
the recommendation of the committee. Senior management of FNB, Pierce Atwood
and RBC Capital Markets (telephonically) participated in the meeting. Prior to
the meeting, RBC Capital Markets furnished to the members of the Board its
financial analysis of the bids and of the two bidders. Mr. McKim updated the
Board of Directors on the transaction process and described the events leading
up to the committee's recommendation. Pierce Atwood reviewed with the Board its
fiduciary obligations to shareholders. RBC Capital Markets reviewed with the
directors the information that had been provided in advance of the meeting,
describing its analysis, the process that had been followed, a comparison of
the final bids, the attributes of FNLC and its stock as a currency, FNLC's
performance, metrics and fundamentals, its liquidity, and related matters. RBC
Capital Markets indicated its overall positive view of the FNLC bid.
Management, RBC Capital Markets and Pierce Atwood addressed questions from
Board members. The FNB Board then unanimously voted to authorize FNB's officers
to pursue negotiation of a definitive merger agreement with FNLC, substantially
in accordance with FNLC's final written proposal. That evening, Mr. McKim and
RBC Capital Markets called Mr. Gregory and informed him that the FNB Board had
unanimously authorized management to proceed with negotiations for a binding
merger agreement with FNLC. The next morning RBC Capital Markets informed the
other party of the Board of Directors' decision.
Page 31
On August 10, the Board of Directors of FNLC met to discuss the status of
the transaction process and to authorize Mr. Gregory and management to
negotiate a definitive agreement with FNB.
On August 12, 2004, FNB's counsel provided FNLC and its counsel, Verrill
Dana, LLP, with a draft of the merger agreement. Representatives of FNB and
FNLC negotiated the merger agreement and the other ancillary documents over the
next two weeks. Among the items discussed during the course of negotiations
were the treatment of certain outstanding options to acquire FNB stock, the
application of a general "material adverse effect" condition to the parties'
obligations under the agreement, the number of FNB directors that would be
appointed to the FNLC Board of Directors after the merger, the suspension of
FNLC's stock repurchase program and the treatment of employee benefit and
compensation matters. During this time, FNLC continued its due diligence
investigation of financial and business matters affecting FNB.
On August 19, 2004, at a regularly scheduled meeting of FNLC's Board,
Messrs. Gregory and Daigneault updated directors on the status of negotiations
with FNB and on FNLC's continuing due diligence review of FNB.
On August 25, 2004, the FNLC Board met to review the terms of the draft
merger agreement and the results of FNLC's continued due diligence
investigation. At that meeting, the FNLC Board determined that the merger was
in the best interests of FNLC shareholders, approved the merger agreement and
recommended that shareholders approve the merger agreement and the transactions
contemplated therein. The FNLC Board also authorized Mr. Daigneault to execute
and deliver the merger agreement on behalf of FNLC.
Later on August 25, 2004, the Board of Directors of FNB reviewed the
proposed definitive merger agreement at a special meeting called for that
purpose. Prior to the meeting the directors had received a copy of the proposed
agreement, a memorandum from Pierce Atwood summarizing the material provisions
of the proposed agreement, and copies of FNLC's most recent filings with the
SEC on Forms 10-K and 10-Q, as well as FNLC's most recent annual report to
shareholders. Management reviewed with the Board developments since the August
10, 2004 Board meeting. Pierce Atwood reviewed with the Board the negotiations
that had taken place and the terms of the proposed definitive merger agreement.
RBC Capital Markets again reviewed with the Board FNB's and FNLC's respective
financial, operational and stock performance on a historical and pro forma
basis under various assumptions, the current mergers and acquisitions market
for financial institutions and FNB's and FNLC's respective historical and
current market values and projected market values under various scenarios. RBC
Capital Markets then reviewed the financial aspects of the proposed transaction
that had been negotiated and delivered its opinion that the merger
consideration was fair to FNB's shareholders from a financial point of view.
After extensive review and discussion, FNB's Board of Directors unanimously
approved the transaction and instructed management to execute and deliver the
merger agreement.
Following the FNB Board meeting, Pierce Atwood contacted counsel for FNLC
to inform them of the FNB Board's approval of the merger agreement and to
arrange for its execution. Late in the evening of August 25, 2004, the merger
agreement was executed and delivered by FNB and FNLC. The next morning, before
the opening of the equity markets, FNB and FNLC issued a joint press release
announcing the execution of the definitive merger agreement.
Page 32
FNB's Reasons for the Merger
After careful consideration, FNB's Board of Directors determined that the
merger agreement is advisable, in the best interests of FNB's shareholders and
on terms that are fair to the shareholders of FNB. Accordingly, the FNB Board
of Directors approved the merger agreement and the merger, and unanimously
recommends that FNB shareholders vote "FOR" approval of the merger agreement.
FNB's Board of Directors consulted with senior management and FNB's
financial and legal advisors and considered a number of factors, including
those set forth below, in reaching its decision to approve the merger agreement
and the transactions contemplated by the merger agreement and to unanimously
recommend that FNB's shareholders vote "FOR" adoption and approval of the
merger agreement.
The following discussion of FNB's reasons for the merger contains a number
of forward-looking statements that reflect the current views of FNB with
respect to future events that may have an effect on its future financial
performance. Forward-looking statements are subject to risks and uncertainties.
Actual results and outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Cautionary statements that
identify important factors that could cause or contribute to differences in
results and outcomes include those discussed under "Cautionary Statements
Regarding Forward-Looking Statements" on page___.
Status of the Banking Industry. The FNB Board of Directors considered the
current and prospective economic, regulatory and competitive climate facing FNB
and independent community banking organizations generally, including but not
limited to margin pressure, limited prospects for deposit growth, rising
expenses, slowing revenue growth, the impact of prolonged maintenance of a
historically low federal funds interest rate, the importance of capitalizing on
developing opportunities in the banking and finance industries, the pace and
scope of consolidation in the banking industry and competition from larger
institutions with greater resources than FNB. The FNB Board also considered the
challenges facing FNB in remaining an independent community banking
institution, the lack of opportunities for growth through acquisitions and the
impacts of these factors on increasing shareholder value.
Review of Prospects of Remaining Independent. FNB's Board of Directors
considered FNB's financial condition, results of operations and business and
earnings prospects in various interest rate environments if it were to remain
an independent entity, and the likely benefits to shareholders, compared with
the value of the merger consideration being offered by FNLC.
Review of Historical Performances. Together with management and its
financial advisors, the FNB Board of Directors reviewed and considered the
respective businesses, operations, asset quality, financial condition,
earnings, competitive positions and stock price performance of FNB and FNLC.
The FNB Board also noted the relative illiquidity of the FNB common stock as
compared to the FNLC common stock.
Compatibility of Cultures. The FNB Board of Directors considered the
similar community banking cultures and business philosophies of the two
companies, particularly with respect to customer service, efficiency, credit
quality, product diversification and meeting local banking needs and the
companies' compatible management teams. The FNB Board of Directors was
particularly cognizant of FNLC's focus on providing community banking services.
Page 33
Projected Strength of Combined Entity. The FNB Board of Directors
considered the projected market capitalization and market position of the
combined entity (and in particular the increasing importance of economies of
scale and access to greater financial resources to capitalize on opportunities
in the banking and financial services markets), the diversification of the
companies' asset and deposit bases, the introduction of several new products
and services not presently offered by FNB, and the ability of the combined
company to compete more effectively in Mid-Coast Maine.
Geographic Fit of Branch Networks. The FNB Board considered the
geographic span of FNLC's branch network, its extension by FNB's branch
network, and the effect that such complementary geographic coverage would have
on the combined enterprise's ability to prosper in its banking markets.
Projected Cost Savings. The FNB Board of Directors considered the
financial effects of the proposed transaction, including the potential cost
savings (resulting from back office efficiencies, consolidations and other cost
savings) and enhanced revenue anticipated from the merger, and the effects of
the merger on the risk-based and leverage capital ratios of the combined
company and its subsidiary banks.
Effects on Employees and Customers. The FNB Board of Directors considered
the likely impact of the proposed merger on the employees and customers of FNB
and its subsidiaries, and on the communities in which FNB presently conducts
its business. Considered especially were the expanded range of financial
services the combined company would be well situated to offer. In particular,
the FNB Board of Directors considered the potential that a merger with FNLC
might be expected to provide FNB employees with continued employment, career
advancement and other benefits that might not be available to the employees if
FNB were to remain independent.
Continued Board Representation. The FNB Board also considered the benefit,
to FNB and the communities it serves, of the appointment of two members of
FNB's Board to the Board of FNLC, as well as FNLC's agreement to consider
appointment of a third individual from FNB's market area to the Board of FNLC.
Merger Consideration. FNB's Board considered the amount and form of the
consideration offered by FNLC in relation to the estimated value of FNB's
common stock. In particular the FNB Board of Directors considered the premium
represented by the consideration to be offered to the holders of FNB common
stock in the merger. The consideration valuation of $42.00 represented a
premium of 69.4% to the last trading price of FNB common stock of $24.80 on
August 23, 2004. The FNB Board also considered that the merger consideration,
in the form of FNLC stock, would provide FNB shareholders with the ability to
continue to participate in the growth of the combined company on a tax-deferred
basis but also with the benefit of the increased liquidity of the FNLC common
stock. In addition, the FNB Board noted that the value of the merger
consideration, $42.00 per share, was subject to limits, or "collars," thereby
ensuring that fluctuations in the FNLC stock price would not affect the value
of the overall consideration to be received by the FNB shareholders beyond the
agreed limits.
Dividend Enhancement. FNB's Board also considered that (i) based on a
hypothetical two-for-one exchange ratio, (ii) assuming continuation of FNLC's
current annual dividend rate of $0.44 per share, (iii) assuming continuation of
FNB's current and budgeted annual dividend rate of $0.63, and (iv) continuation
of FNLC's dividend practices, FNB shareholders would realize an annual cash
dividend increase of approximately 40% (an increase of $0.25, from $0.63 to
$0.88, per share of FNB common stock).
Page 34
Advice from FNB's Financial Advisor. Among other factors considered, FNB's
Board of Directors also considered the presentations made by RBC Capital
Markets with respect to the proposed consideration to be offered to the holders
of FNB common stock in the merger. The FNB Board of Directors considered RBC
Capital Markets' oral opinion, confirmed in writing, that as of the date of its
opinion, the consideration to be received by FNB's shareholders in connection
with the merger was fair from a financial point of view. The full text of this
opinion is attached to this document as Annex II.
Certain Terms of the Merger Agreement. In evaluating the adequacy of the
consideration to be received, the FNB Board of Directors considered the terms
of the merger agreement, including the following:
* The provisions providing for a fixed value of the stock consideration payable
to the FNB shareholders, with limits on the exchange ratio due to changes in
the FNLC stock price prior to the closing of the merger;
* The provisions pertaining to FNB's ability in certain circumstances to
withdraw its recommendation of the merger to the FNB shareholders and FNB's
ability to recommend another transaction to the FNB shareholders and pursue
such transaction in certain circumstances;
* The provisions providing salary and benefits continuation for FNB employees;
and
* The provisions providing protection of executive termination benefits and the
benefits to be made available to former FNB employees, if any, terminated after
the merger.
The FNB Board noted that the termination fee provision of the merger
agreement could have the effect of discouraging alternative proposals for a
business combination between FNB and a third party. However, the Board of
Directors concluded that the amount of the fee that FNB would be obligated to
pay and the circumstances under which it may be payable are typical for
transactions of this size and type, are not likely to discourage any such
proposals and were necessary to induce FNLC to enter into the merger agreement.
Limited Closing Conditions and Likelihood of Obtaining Approval. The FNB
Board of Directors considered the limited nature of the closing conditions
included in the merger agreement and the likelihood of obtaining the regulatory
and shareholder approvals that would be required in order to consummate the
merger within a reasonable time frame.
Tax Treatment of Merger. The FNB Board of Directors considered the
treatment of the merger as a tax-free reorganization for federal income tax
purposes. The FNB Board also noted that generally FNB common shareholders who
receive FNLC common stock in exchange for shares of FNB common stock are not
expected to recognize gain or loss for United States federal income tax
purposes in connection with the receipt of such FNLC common stock, except for
taxes payable in respect of cash received instead of fractional shares.
In considering the opinion of RBC Capital Markets that the consideration
to be received by FNB's shareholders in connection with the merger is fair from
a financial point of view, the FNB Board took into account that the various
types of financial analyses ordinarily used to support this type of opinion
inevitably have limitations. These limitations were explained to the FNB Board
by RBC Capital Markets at the time the FNB Board considered and approved the
merger and the merger agreement.
Page 35
The foregoing discussion of the information and factors considered by
FNB's Board of Directors, while not exhaustive, includes the material factors
considered by the Board of Directors. In view of the variety of factors
considered in connection with its evaluation of the merger, FNB's Board of
Directors did not find it practicable to, and did not, quantify or otherwise
assign relative or specific weight or values to any of these factors, and
individual directors may have given different weights to different factors.
Opinion of FNB's Financial Advisor
Pursuant to an engagement letter dated as of March 23, 2004, FNB retained
RBC Capital Markets Corporation, a member company of RBC Financial Group, to
act as its financial advisor in connection with the merger. On August 25, 2004,
the Board of Directors of FNB held a meeting to evaluate the proposed merger.
At this meeting, RBC Capital Markets rendered its oral and written opinion
that, as of that date and based upon and subject to the factors and assumptions
set forth in its opinion, the merger consideration was fair, from a financial
point of view, to the FNB shareholders.
RBC Capital Markets is a nationally-recognized investment banking and
advisory firm. RBC Capital Markets as part of its investment banking business
is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, private
placements and valuations for corporate and other purposes.
In the ordinary course of its business, RBC Capital Markets may actively
trade shares of FNB's common stock and shares of FNLC's common stock for its
own account and the accounts of its customers, may continue to do so, and,
accordingly, may at any time hold long or short positions in such securities.
FNB did not provide specific instructions to, or place any limitation on,
RBC Capital Markets with respect to the procedures to be followed or factors to
be considered by RBC Capital Markets in performing its analyses or providing
its opinion.
The full text of the RBC Capital Markets opinion rendered on August 25,
2004 and confirmed on November 17, 2004, which describes, among other things,
the assumptions made, matters considered, and qualifications and limitations on
the review undertaken by RBC Capital Markets is attached as Annex II to this
Proxy Statement/Prospectus and is incorporated in this document by reference.
FNB shareholders are urged to read RBC Capital Markets' opinion carefully and
in its entirety. This opinion was reaffirmed by RBC Capital Markets, in
accordance with the terms of its engagement with FNB, as of the date on which
this proxy statement is first mailed to FNB shareholders.
RBC Capital Markets' opinion is directed to, and may only be relied upon
by, the Board of Directors of FNB and addresses only the fairness, from a
financial point of view, of the merger consideration to be paid to FNB
shareholders. The opinion does not address any other aspect of the merger or
any related transaction, constitute a recommendation to any shareholder as to
how to vote at the FNB special meeting or comment on the form of consideration
received. The summary of the fairness opinion set forth in this document is
qualified in its entirety by reference to the full text of the opinion.
Page 36
In arriving at its opinion, RBC Capital Markets, among other things:
* reviewed and analyzed the financial terms in the draft merger agreement dated
August 25, 2004;
* reviewed and analyzed certain publicly available financial and other data
with respect to FNB and FNLC and certain other historical operating data
relating to FNB and FNLC made available to RBC Capital Markets from published
sources and from the internal records of FNB and FNLC;
* conducted discussions with members of the senior management of FNB with
respect to the business prospects and financial outlook of FNB independently
and as combined with FNLC;
* conducted discussions with members of the senior management of FNLC with
respect to the business prospects and financial outlook of FNLC independently
and as combined with FNB;
* received and reviewed financial forecasts prepared by FNB's management on the
potential future performance of FNB as a stand-alone entity;
* reviewed publicly available materials and reports with respect to the
business and financial outlook of FNLC;
* reviewed the publicly reported prices and trading activity for FNLC common
stock and FNB common stock;
* compared the financial performance of FNLC and FNB and the prices of FNLC
common stock and FNB common stock with that of certain other publicly traded
companies and their securities that RBC Capital Markets deemed comparable;
* reviewed the financial terms, to the extent publicly available, of certain
merger transactions that RBC Capital Markets deemed comparable to the proposed
merger; and
* compared the relative contribution to certain balance sheet and income
statement items of each company with their pro-forma ownership in the combined
company.
In RBC Capital Markets' review, it also took into account an assessment of
general economic, market and financial conditions and certain industry trends
and related matters.
In rendering its opinion, RBC Capital Markets assumed and relied upon
without independent verification the accuracy and completeness of the
information reviewed by it for the purposes of its opinion. FNB provided RBC
Capital Markets with forecasted financial information through December 31,
2007. With respect to these financial projections and projected cost savings
and synergies provided by FNB resulting from the merger, RBC Capital Markets
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the future financial performance
of FNB. RBC Capital Markets is not an expert in the evaluation of allowances
for loan losses, and neither made an independent evaluation of the adequacy of
the allowances for loan losses of FNB or FNLC, nor reviewed any individual
credit files of FNB or FNLC or was requested to conduct such a review. As a
result, RBC Capital Markets has assumed that the respective allowances for loan
losses for FNB and FNLC are adequate to cover such losses and will be adequate
on a pro forma basis for the combined entity.
For purposes of rendering its opinion, RBC Capital Markets assumed that,
in all respects material to its analyses:
* the executed version of the merger agreement was in all material respects
identical to the last draft reviewed by RBC Capital Markets;
* the merger will be consummated pursuant to the terms of such agreement,
without amendments thereto and without waiver by any party of any conditions or
obligations thereunder;
Page 37
* the representations and warranties of each party contained in such agreement
are true and correct, and each party will perform all of the covenants and
agreements required to be performed by it under such agreement; and
* the transaction will qualify as a tax-free reorganization for United States
federal income tax purposes and all governmental, regulatory and other consents
and approvals contemplated by such agreement will be obtained and, in the
course of obtaining any of those consents, no restrictions will be imposed or
waivers made that would have an adverse effect on the contemplated benefits of
the merger.
In performing its analysis for its opinion, RBC Capital Markets relied
upon the closing prices of FNB's common stock and FNLC's common stock as of
August 23, 2004. Accordingly, RBC Capital Markets assumed that the respective
closing prices of FNB's common stock and FNLC's common stock did not materially
change as of August 25, 2004.
RBC Capital Markets did not make any independent valuation or appraisal of
the assets or liabilities (contingent or otherwise) of FNB, nor did FNB furnish
it with any such appraisals. RBC Capital Markets did not assume any obligation
to conduct, and did not conduct, any physical inspection of the property or
facilities of FNB or FNLC. Its opinion is necessarily based on financial,
economic, market and other conditions as in effect on, and the information made
available to RBC Capital Markets as of, the date thereof. RBC Capital Markets
did not undertake to reaffirm or revise the opinion or otherwise comment upon
any events occurring after the date it was rendered and, except as set forth in
its engagement with FNB, does not have any obligation to update, revise or
reaffirm this opinion.
Analyses of RBC Capital Markets
In performing its analyses, RBC Capital Markets made numerous assumptions
with respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
RBC Capital Markets, FNB and FNLC. Any estimates contained in the analyses
performed by RBC Capital Markets are not necessarily indicative of actual
values or future results which may be significantly more or less favorable than
suggested by these analyses. Additionally, estimates of the value of businesses
or securities do not purport to be appraisals or to reflect the prices at which
such businesses or securities might actually be sold. Accordingly, these
analyses and estimates are inherently subject to substantial uncertainty. The
RBC Capital Markets opinion was among several factors taken into consideration
by FNB's Board of Directors in making its determination to approve the merger
agreement and the merger. In addition, FNB's Board did not rely on a single
analysis in making its determination. Consequently, the analyses described
below should not be viewed as determinative of the decision of FNB's Board of
Directors or management with respect to the fairness of the merger
consideration.
The following is a summary of the material financial analyses presented by
RBC Capital Markets to the Board of Directors of FNB on August 25, 2004 in
connection with the rendering of its opinion on that date. The summary is not a
complete description of the analyses underlying the RBC Capital Markets opinion
or the presentation made by RBC Capital Markets to FNB's Board of Directors,
but summarizes the material analyses performed and presented in connection with
its opinion. The preparation of a fairness opinion is a complex analytic
process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances. Therefore, a fairness opinion is not readily
susceptible to partial analysis or summary description.
Page 38
In arriving at its opinion, RBC Capital Markets did not attribute any
particular weight to any analysis or factor that it considered, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. The financial analyses summarized below include information presented
in tabular format. Accordingly, RBC Capital Markets believes that its analyses
and the summary of its analyses must be considered as a whole and that
selecting portions of its analyses and factors or focusing on the information
presented below in tabular format, without considering all analyses and factors
covered by it or the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of the process underlying its analyses
and opinion. The tables alone do not constitute a complete description of the
financial analyses performed by RBC Capital Markets.
Calculation of Transaction Value.
RBC Capital Markets reviewed the terms of the merger and noted that
pursuant to the merger agreement, each issued and outstanding share of FNB
common stock will be converted into, and shall be canceled in exchange for, the
right to receive the number of shares of FNLC common stock which is equal to
the quotient determined by dividing (x) $42.00 by (y) the average share price
of the FNLC common stock; provided, however, that the exchange ratio shall be
not more than 2.47 and not less than 1.91 shares of FNLC common stock per share
of FNB common stock. The average share price of FNLC's common stock shall mean
the sum of the average of the high and low sales price of a share of FNLC's
common stock, for each trading day for which a high and low sales price is
reported on Nasdaq (as reported by an authoritative source), during the 30-day
period ending with the fifth business day immediately preceding the closing
date, divided by the number of trading days for which a high and low price is
so reported during such period. In addition, FNLC will pay up to approximately
$2.7 million in cash to retire certain outstanding FNB stock options, with the
remaining options to be converted into options to acquire FNLC stock.
RBC Capital Markets noted that, for purposes of the analysis accompanying
its fairness opinion, the most recently available closing price of FNB common
stock preceding the FNB Board meeting on August 25, 2004 was $24.80 and that
the most recent closing price of FNLC common stock was $18.80. RBC Capital
Markets also noted that, based on the per share merger consideration, cash out
of FNB stock options and roll-over of FNB stock options, the transaction had an
implied aggregate value of approximately $47.9 million as of August 25, 2004.
Transaction Pricing Multiple Analysis. Based on the closing prices
referenced above the merger consideration to be paid to FNB shareholders was
approximately $47.9 million as of August 25, 2004. RBC Capital Markets then
calculated the merger consideration value as a multiple of FNB's last twelve
months' earnings of approximately $2.1 million, FNB's estimated earnings for
the year 2004 (based on FNB management's estimate as of August 25, 2004 of
approximately $2.2 million), FNB's estimated earnings for the year 2005 (based
on FNB management's estimate as of August 25, 2004 of approximately $2.3
million) and FNB's stated book value and its stated tangible book value (based
on financial data for the period ended June 30, 2004). RBC Capital Markets also
calculated the premium to the per share closing price of FNB's common stock on
August 23, 2004. The results of RBC Capital Markets' analysis are set forth in
the following table.
Page 39
Merger consideration as a multiple or percentage of, or premium to, FNB's:
Multiple of last twelve months' earnings .................. 22.4x
Multiple to estimated year 2004 earnings .................. 22.1x
Multiple to estimated year 2005 earnings .................. 21.1x
Price to book value ....................................... 304%
Price to tangible book value .............................. 314%
Premium to FNB's closing stock price on August 23, 2004 ... 69.4%
Peer Group Stock Trading Analysis - FNB. RBC Capital Markets compared
selected operating and stock market results of FNB to the publicly available
corresponding data for the following companies, which, excluding Camden
National Corporation with assets of approximately $1.4 billion, are
northeastern banks with assets between $100 million and $700 million and return
on average equity greater than 4.0%, that RBC Capital Markets determined were
comparable to FNB:
Camden National Corporation Merrill Merchants Bancshares, Inc.
Community Bancorp Salisbury Bancorp, Inc.
Cornerstone Bancorp, Inc. Union Bankshares, Inc.
Factory Point Bancorp, Inc. Wilton Bank
First National Lincoln Corporation
The following table compares selected financial data of FNB with
corresponding median data for the companies selected by RBC Capital Markets,
which data is based on financial data at or for the year-to-date ended June 30,
2004 and market prices as of August 23, 2004.
-------------------------------------------------------------------------------
FNB Peer Group Median
-------------------------------------------------------------------------------
Return on average assets 0.95% 1.35%
Return on average equity 13.36% 14.58%
Loans / Deposits 95.50% 88.1%
Tangible equity / Tangible assets 6.93% 8.17%
Market value / Assets 11.41% 19.83%
Market value / Book value 164.9% 222.5%
Market value / Tangible book value 170.2% 240.0%
Market value / Last twelve months' earnings per share 12.9x 15.8x
Market value / Core deposits 14.79% 28.64%
-------------------------------------------------------------------------------
Peer Group Analysis - FNLC. RBC Capital Markets also compared selected
operating and stock market results of FNLC to the publicly available
corresponding data for the following companies which, excluding Camden National
Corporation with assets of approximately $1.4 billion, are northeastern banks
with assets between $200 million and $800 million, that RBC Capital Markets
determined were comparable to FNLC:
Bar Harbor Bankshares FNB Bankshares
Beverly National Corporation Merrill Merchants Bancshares, Inc.
Cambridge Bancorp Northway Financial, Inc.
Camden National Corporation Patriot National Bancorp, Inc.
Community Bancorp Salisbury Bancorp, Inc.
Community Bank & Trust Company Slade's Ferry Bancorp
Connecticut River Bancorp, Inc. Union Bankshares Company
Cornerstone Bancorp, Inc. Union Bankshares, Inc.
Factory Point Bancorp, Inc. Wainwright Bank & Trust Company
First Litchfield Financial Corporation Westbank Corporation
Page 40
The following table compares selected financial data of FNLC with
corresponding median data for the companies selected by RBC Capital Markets,
which data is based on financial data at or for the year-to-date ended June 30,
2004 and market prices as of August 23, 2004.
-------------------------------------------------------------------------------
FNLC Peer Group Median
-------------------------------------------------------------------------------
Return on average assets 1.39% 0.98%
Return on average equity 16.37% 11.77%
Loans / Deposits 114.7% 84.9%
Tangible equity / Tangible assets 8.05% 7.81%
Market value / Assets 22.50% 13.81%
Market value / Book value 278.9% 185.2%
Market value / Tangible book value 279.8% 195.6%
Market value / Last twelve months' earnings 17.4x 15.8x
Market value / Core deposits 42.82% 20.19%
-------------------------------------------------------------------------------
Comparative Merger Analysis. RBC Capital Markets also compared the
foregoing analyses to comparable data from selected northeastern merger
transactions in the banking and thrift industries that have occurred since
January 1, 2003. The following transactions were reviewed by RBC Capital
Markets in this process:
-------------------------------------------------------------------------------
Acquiror Acquiree
-------------------------------------------------------------------------------
Webster Financial Corporation First City Bank
Fulton Financial Corporation First Washington Financial Corp.
Leesport Financial Corp. Madison Bancshares Group, Ltd.
Sun Bancorp, Inc. Community Bancorp of New Jersey
Fairfield County Bank Corp. Bank of Westport
Community Bank Systems, Inc. First Heritage Bank
National Penn Bancshares, Inc. Peoples First, Inc.
Salisbury Bancorp, Inc. Canaan National Bancorp, Inc.
Shore Bancshares, Inc. Midstate Bancorp, Inc.
Lakeland Bancorp, Inc. Newton Financial Corporation
Harleysville National Corporation Millennium Bank
Banknorth Group, Inc. First & Ocean Bancorp
Royal Bank of Scotland, Plc Community Bancorp, Inc.
South Shore Savings Bank Horizon Bank & Trust Company
Provident Bancorp, Inc. E.N.B. Holding Company, Inc.
Community Bank Systems, Inc. Grange National Banc Corp.
Webster Financial Corp. North American Bank & Trust Company
Univest Corporation of Pennsylvania Suburban Community Bank
National Penn Bancshares, Inc. HomeTowne Heritage Bank
Lakeland Bancorp, Inc. CSB Financial Corp.
Woori Financial Group PanAsia Bank NA
Univest Corporation of Pennsylvania First County Bank
-------------------------------------------------------------------------------
The following table compares selected pro forma financial data of the FNB
/ FNLC merger with corresponding median data from northeastern merger
transactions selected by RBC Capital Markets. For the transactions selected by
RBC Capital Markets, the comparable data used was taken as of the announcement
date of those transactions.
Page 41
-------------------------------------------------------------------------------
FNLC /FNB Comparable Merger Median
-------------------------------------------------------------------------------
Price / Book value 303.8% 250.6%
Price / Tangible book value 314.1% 260.5%
Price / Assets 21.0% 22.6%
Premium to core deposits 18.6% 20.9%
Price to last twelve months' earnings 22.4x 22.3x
Premium to market value 69.4% 39.2%
-------------------------------------------------------------------------------
RBC Capital Markets further selected comparable bank and thrift industry
merger transactions within the state of Maine that have occurred since January
1, 2000. The following transactions were reviewed by RBC Capital Markets in
this process:
-------------------------------------------------------------------------------
Acquiror Acquiree
-------------------------------------------------------------------------------
Chittenden Corporation Ocean National Corporation
Norway Bancorp First Coastal Corporation
Chittenden Corporation Maine Bank Corp.
Union Bankshares Company Mid-Coast Bancorp, Inc.
-------------------------------------------------------------------------------
The following table compares selected financial data of the FNB / FNLC
merger with corresponding median data from the Maine merger transactions
selected by RBC Capital Markets. For the transactions selected by RBC Capital
Markets, the comparable data used was taken as of the announcement date of
those transactions.
-------------------------------------------------------------------------------
FNLC /FNB Maine Merger Median
-------------------------------------------------------------------------------
Price / Book value 303.8% 199.8%
Price / Tangible book value 314.1% 200.4%
Price / Assets 21.0% 18.4%
Premium to core deposits 18.6% 14.5%
Price to last twelve months' earnings 22.4x 20.2x
Premium to market value 69.4% 125.6%
-------------------------------------------------------------------------------
No transaction used in the analysis described above is identical to the
FNB / FNLC transaction. Accordingly, an analysis of the results of the
foregoing involves complex considerations and judgments concerning financial
and operating characteristics and other factors that could affect the merger,
public trading or other values of the companies to which FNB and FNLC are being
compared. In addition, mathematical analyses, such as determining median, are
not of themselves meaningful methods of using comparable transaction data or
comparable company data.
Discounted Cash Flow Analysis. RBC Capital Markets performed a discounted
cash flow analysis to estimate a range of present values per share of FNB
common stock assuming FNB operated as a stand-alone entity. This range was
determined by adding (i) the present value of future cash flows derived from
applying an optimal leverage ratio to the projected financial performance of
FNB through December 31, 2009, and (ii) the present value of the terminal value
of FNB common stock, which is a representation of the value of the entity over
the long term.
Page 42
In calculating a terminal value of FNB common stock, RBC Capital Markets
applied terminal earnings multiples of 12.0x, 14.0x and 16.0x to year 2009
projected earnings. The cash flows and terminal values were then discounted
back using discount rates of 14.0%, 15.0% and 16.0%. RBC Capital Markets viewed
these rates as the appropriate range of discount rates for a company with FNB's
operating history and risk characteristics.
In performing this analysis, RBC Capital Markets projected FNB's earnings
estimates through 2009 based on FNB's management forecasts and FNB's historical
performance. RBC Capital Markets determined that the present value range of the
FNB common stock is from $28.95 to $39.79 per share. This compares favorably to
the $42.00 value per share of FNB common stock to be received by FNB
shareholders in the merger.
The analysis set forth in the discounted cash flow analysis discussion
does not necessarily indicate actual values or actual future results and does
not purport to reflect the prices at which any securities may trade at the
present or at any time in the future. The discount rates applied to FNB
referred to in the paragraphs above were based on several factors, including
RBC Capital Markets' knowledge of FNB and the industry in which it operates,
the business risk of FNB and the overall interest rate environment. The
discounted free cash flow analysis is a widely used valuation methodology, but
the results of this methodology are highly dependent upon the numerous
assumptions that must be made, including earnings growth rates, dividend payout
rates, terminal values and discount rates.
Affordability Valuation Analysis. RBC Capital Markets analyzed and
calculated a range of values which a sophisticated buyer would assign to FNB
assuming such buyer had a required internal rate of return of 14.0%, 16.0% and
18.0%. This valuation methodology is similar to the discounted cash flow
analysis set forth above, and uses the same financial projections, the same
terminal value price-to-earnings multiples of 12.0x, 14.0x and 16.0x to FNB's
year 2009 projected earnings, and the same optimal leverage ratio to the
projected financial performance of FNB through December 31, 2009. The analysis
also uses anticipated cost savings equal to approximately 15% of FNB's non-
interest expense.
In performing this analysis, RBC Capital Markets determined that the
present value range of the FNB common stock is from $26.27 to $42.05 per share.
This compares favorably to the $42.00 value per share of FNB common stock to be
received by FNB shareholders in the merger.
Page 43
Pro Forma Financial Impact. Based on the per share merger consideration of
$42.00, RBC Capital Markets also analyzed the pro forma per share financial
impact of the merger on FNLC's earnings per share ("EPS") and cash earnings per
share for 2005 and 2006 calculated under generally accepted accounting
principles ("GAAP"). RBC Capital Markets also analyzed the pro forma financial
impact of the merger on FNLC's book value per share, tangible book value per
share and leverage ratio. This analysis was based on managements' earnings
estimates and estimated pre-tax cost-savings synergies of approximately 15% of
FNB's non-interest related expenses. The analysis indicated that the impact of
the merger would be marginally dilutive to FNLC EPS on a GAAP basis for 2005
and would be marginally accretive, or additive, to FNLC on a GAAP basis for
2006. The analysis indicated that the impact of the merger would be accretive,
or additive, to FNLC on a cash earnings per share basis for both 2005 and 2006.
The analysis further indicated that the merger would be accretive to FNLC's
book value per share, dilutive to, or decrease, FNLC's tangible book value per
share, and dilutive to FNLC's leverage ratio. The following table sets forth
the results of RBC Capital Markets' analysis. All projected results are for
2005 unless otherwise specified.
---------------------------------------------------
Accretion / (Dilution)
---------------------------------------------------
FNLC GAAP EPS Impact
- 2005 (1.31%)
- 2006 0.82%
FNLC Cash EPS Impact
- 2005 1.39%
- 2006 3.28%
FNLC Book Value per share 44.23%
FNLC Tangible Book Value per share (8.91%)
FNLC Leverage Ratio (8.68%)
---------------------------------------------------
The results referenced above are projections. Actual operating and
financial results achieved by the pro forma combined company will vary from
projected results and variations may be material as a result of business and
operational risks, the timing, amount and costs associated with achieving cost
savings and revenue enhancements, as well as other factors.
Pursuant to a letter agreement between FNB and RBC Capital Markets, dated
as of March 23, 2004, FNB agreed to pay RBC Capital Markets for financial
advisory services rendered through the closing of the merger. Based on the
aggregate merger consideration, the aggregate fee payable to RBC Capital
Markets is approximately $340,000, of which $25,000 was paid as a retainer,
$75,000 became due when the fairness opinion was rendered by RBC Capital
Markets, and the balance of which is contingent upon closing of the merger. FNB
also agreed, among other things, to reimburse RBC Capital Markets for certain
expenses incurred in connection with services provided by RBC Capital Markets,
and to indemnify RBC Capital Markets and its affiliates from and against
certain liabilities and expenses, which may include certain liabilities under
federal securities laws, in connection with its engagement.
Page 44
FNLC's Reasons for Merger
In evaluating the proposed merger, the FNLC Board of Directors consulted
with FNLC's management, as well as its legal counsel and accountants, and
considered a number of factors. The material factors considered by the Board in
reaching its decision to approve the merger and recommend unanimously that FNLC
shareholders vote "FOR" approval of the merger are described below.
This discussion of FNLC's reasons for the merger contains a number of
forward-looking statements that reflect the current views of FNLC with respect
to future events that may have an effect on its future financial performance.
Forward-looking statements are subject to risks and uncertainties. Actual
results and outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Cautionary statements that
identify important factors that could cause or contribute to differences in
results and outcomes include those discussed under "Cautionary Statement
Concerning Forward-Looking Statements" on page __.
Review of Historic Performance. Together with management, the FNLC Board
reviewed and considered historical information concerning the business,
operations, competitive position, financial performance and condition, earnings
and prospects of FNB, taking into account FNLC's due diligence review of FNB's
business.
Geographic Fit and Growth Opportunities. The merger of the bank
subsidiaries of FNLC and FNB will extend the reach of FNLC's franchise from its
current seven Mid-Coast Maine branches in Lincoln and Knox counties by the
addition of seven branches in semi-contiguous markets in the "Down East"
coastal Maine counties of Hancock and Washington not currently served by FNLC.
The FNLC Board believes that the combined entity will be a stronger, larger
community bank offering services to both existing and new customers in its
markets more effectively than either bank could offer if the merger were not to
occur, primarily in FNB's market area, where the combined company's legal
lending limit will be significantly higher than FNB's limit prior to the
merger.
Projected Strength of Combined Entity. The FNLC Board considered the
projected regulatory capital and market position of the combined entity, and
believes the larger size would provide the opportunity to compete more
effectively, especially in the Down East coastal Maine markets now served by
FNB. In addition, the FNLC Board expects the combined companies to benefit from
economies of scale and access to greater financial resources in order to
capitalize on opportunities in the banking and investment management markets.
The merger will also allow greater customer and geographic diversification of
the two companies' asset and deposit bases.
Greater Total Market Capitalization and Liquidity. The total market
capitalization of the combined companies will represent a substantial increase
over FNLC's total market capitalization prior to the merger. The FNLC Board
believes that the increased total market capitalization of the combined company
should provide enhanced liquidity for shareholders and enhance the appeal of
FNLC stock as an investment choice. The FNLC Board also believes that size of
the combined company will increase the recognition and credibility it has
within the banking and financial services industries.
Page 45
Compatibility of Cultures and Tradition. The FNLC Board considered the
similar community banking cultures and business philosophies of the two
companies, particularly with respect to customer service, efficiency, credit
quality, product diversification and meeting local banking needs and the
companies' compatible management teams. The FNLC Board was particularly
cognizant of FNB's focus on providing community banking services and the
history of two nationally chartered institutions bearing the name "The First
National Bank" with century-plus traditions in their markets.
Earnings. The FNLC Board believes that the merger will result in improved
long-term earnings growth and value-enhanced opportunities through operating
efficiencies and increased capitalization for the combined entity that the bank
subsidiaries would not have if the merger were not to occur. Savings are
expected to accrue in the form of operational efficiencies, primarily from the
elimination of outsourced services by FNB which will be provided directly by
FNLC after the merger.
Terms and Conditions of the Merger Agreement. The FNLC Board considered
the terms and conditions of the merger agreement in consultation with legal
counsel and viewed the terms and conditions as favorable to FNLC and its
shareholders.
The FNLC Board also considered certain potentially negative factors which
could arise from the merger. These factors included, among others, the
significant transaction costs involved in connection with the merger, the
substantial management time and effort required to effectuate the merger and
integrate the businesses of FNB and FNLC and the related disruption to FNLC's
operating activities. The FNLC Board also considered the risk that the combined
companies may be unable to successfully integrate the operating practices of
FNLC and FNB and the possibility that the anticipated benefits of the merger
might not be fully realized. In addition, the FNLC Board considered the
regulatory and shareholder approvals required for the completion of the merger.
For a more detailed discussion of the risk factors considered by the FNLC
Board, see "Risk Factors" beginning on page __. The FNLC Board also evaluated
the benefits of the transaction to be received by certain officers and
directors of FNB. See "Interests of Certain Persons in the Merger" on page __.
The FNLC Board did not believe that the negative factors were sufficient,
either individually or collectively, to outweigh the advantages of the merger.
The foregoing discussion of the information and factors considered by the
FNLC Board is not intended to be exhaustive, but includes the material factors
considered by the FNLC Board. The FNLC Board did not assign relative weights to
the above factors or determine that any factor was of greater importance than
another. A determination of various weights would, in the view of the FNLC
Board, be impractical. Rather, the FNLC Board viewed its position and
recommendations as being based on the totality of the information presented to
and considered by it. In addition, individual members of the FNLC Board may
have given different weights to different factors.
The FNLC Board has unanimously approved and adopted the merger agreement
and the matters and transactions contemplated thereby, including the merger,
and recommends that FNLC shareholders vote "FOR" approval of the merger.
Page 46
Merger Consideration
Upon consummation of the merger, each outstanding share of FNB common
stock (except for shares held by FNB or FNLC other than in a fiduciary capacity
and any shares as to which appraisal rights have been exercised) will be
converted into the number of whole shares of FNLC common stock determined by
dividing $42.00 by the average sales price of FNLC common stock prior to the
merger, provided that FNB shareholders will not receive more than 2.47, nor
less than 1.91, FNLC shares for each FNB share they hold.
For purposes of the merger agreement, the "average sales price" means the
sum of the average of the high and low sales prices reported on Nasdaq for each
trading day during the 30-day period ending with the fifth business day prior
to the effective date of the merger, divided by the number of trading days
during such period. The following table illustrates the number of shares of
FNLC stock that would be issuable to FNB shareholders in exchange for each FNB
share in the merger depending on the average sales price of FNLC common stock
determined in accordance with the merger agreement. The average sales price to
be used in the calculation will be rounded to the nearest one-tenth cent.
------------------------------------------------------------------
Average sales price of FNLC stock Number of FNLC shares
as of effective date of merger issuable for each FNB share
------------------------------------------------------------------
$22.00 and above 1.91
$21.00 2.00
$20.00 2.10
$19.00 2.21
$18.00 2.33
$17.00 and below 2.47
------------------------------------------------------------------
The value of the FNLC common stock to be received by FNB shareholders will
depend on the market price of the FNLC common stock prior to the effective time
of the merger. The market price of FNLC common stock is subject to change at
all times based on the future financial condition and operating results of
FNLC, future market conditions and other factors. The market price of the FNLC
common stock at the effective time of the merger or at the time that FNB
shareholders actually receive stock certificates evidencing those shares may be
higher or lower than recent prices. For further information concerning the
historical prices of the FNLC common stock, see "Market for Common Stock and
Dividends" on page __. FNB shareholders are urged to obtain current market
prices for FNLC common stock in connection with voting their shares on the
merger agreement at the FNB special meeting.
No fractional shares of FNLC common stock will be issued in connection
with the merger. Instead, FNLC will make a cash payment to each FNB shareholder
who would otherwise receive a fractional share based on the average sales price
of FNLC common shares computed as of the effective time of the merger.
Page 47
Procedures for Exchanging of FNB Common Stock Certificates
Within five business days after the completion of the merger, the exchange
agent (which will be a bank or trust company selected by FNLC), will mail to
each holder of record of FNB common stock a letter of transmittal and
instructions for use in effecting the surrender of the certificates in exchange
for the merger consideration allocated to them. Upon surrender of a stock
certificate for FNB common stock for exchange and cancellation to the exchange
agent, together with a duly executed letter of transmittal, the holder of such
certificate will be entitled to receive such merger consideration allocated to
him or her and the certificate for FNB common stock so surrendered will be
canceled.
No stock certificates representing fractional shares of FNLC common stock
will be issued upon the surrender for exchange of FNB stock certificates. In
lieu of the issuance of any such fractional share, FNLC will pay to each former
shareholder of FNB who otherwise would be entitled to receive a fractional
share of FNLC common stock an amount in cash determined by multiplying the
fraction of a share of FNLC common stock which such holder would otherwise be
entitled to receive pursuant to the merger agreement by the average sales price
of FNLC common stock as of the effective date of the merger calculated as
provided for the merger consideration. No interest will be paid or accrued on
any cash in lieu of fractional shares.
FNB shareholders who receive shares of FNLC common stock in the merger
will receive dividends on FNLC common stock or other distributions declared
after the completion of the merger only if they have surrendered their FNB
stock certificates. Only then will they be entitled to receive all previously
withheld dividends and distributions, without interest.
After completion of the merger, no transfers of FNB common stock issued
and outstanding immediately prior to the completion of the merger will be
allowed. FNB stock certificates that are presented for transfer after the
completion of the merger will be canceled and exchanged for the appropriate
merger consideration.
FNLC will only issue an FNLC stock certificate in a name other than the
name in which a surrendered FNB stock certificate is registered if the person
submitting the FNB stock certificate presents the exchange agent with all
documents required to show and effect the unrecorded transfer of ownership of
the shares of FNB common stock formerly represented by such FNB stock
certificate, and shows that such person paid any applicable stock transfer
taxes.
If an FNB stock certificate has been lost, stolen or destroyed, the FNB
shareholder may be required to deliver an affidavit and a lost certificate bond
as a condition to receiving any FNLC stock certificate to which he or she may
be entitled.
FNB shareholders should not return their FNB stock certificates with the
enclosed proxy, and stock certificates should not be forwarded to FNLC, FNB or
any other party until they have received the transmittal forms.
Page 48
Treatment of FNB Stock Options
At the effective time of the merger, each option to purchase shares of FNB
common stock granted under FNB's stock option plan, which is outstanding and
unexercised immediately prior thereto, whether or not then vested and
exercisable, will cease to represent a right to acquire shares of FNB common
stock and, except for certain options held by officers of FNB, will be
converted automatically into the right to receive cash in the amount of $42.00
for each share subject to the option less the exercise price per share of the
option, subject to downward adjustment should the average sales price of FNLC
common stock as calculated under the merger agreement fall below $17.00. If the
average sales price is below $17.00, the cash price to be paid to the holders
of options to purchase FNB shares shall be the average sales price multiplied
by 1.91, less the exercise price per share of the option.
Certain options held by officers and directors of FNB will instead be
converted into options to purchase shares of FNLC common stock. The options
which will be converted are as follows:
--------------------------------------------------------------------------
Number of
FNB Shares
Subject to
Holder Exercise Price Expiration Date Option
--------------------------------------------------------------------------
Steven K. Parady $8.93 7/30/2011 3,675
Mark N. Rosborough $8.93 7/30/2011 2,250
Tony C. McKim $8.93 7/30/2011 14,205
Ronald J. Wrobel $8.93 7/30/2011 6,500
Jeffrey C. Dalrymple $8.93 7/30/2011 5,000
Daniel M. Lay $8.93 7/30/2011 9,000
--------------------------------------------------------------------------
TOTAL 40,630
--------------------------------------------------------------------------
FNLC will assume these FNB stock options in accordance with the terms of
the FNB stock option plan and stock option agreement by which they are
evidenced, including without limitation all terms pertaining to the
acceleration and vesting of the holder's option exercise rights, except that
from and after the effective time of the merger:
* FNLC and the options committee of the Board of Directors of FNLC shall be
substituted for FNB and the FNB Board of Directors as the administrators of the
FNB stock option plan;
* each FNB stock option assumed by FNLC will be exercisable solely for shares
of FNLC common stock;
* the number of shares of FNLC common stock subject to such FNB stock option
will be equal to the number of shares of FNB common stock subject to such FNB
stock option immediately before the effective time of the merger multiplied by
the exchange ratio, rounded down to the nearest share; and
* the per share exercise price under each such FNB stock option will be
adjusted by dividing the per share exercise price under each such FNB stock
option by the exchange ratio, rounded up to the nearest cent.
Pursuant to the merger agreement, FNLC agreed to register under the
Securities Act of 1933 the shares of FNLC common stock issuable upon exercise
of the substitute stock options to be issued pursuant to the merger agreement
within five business days after consummation of the merger.
Page 49
Conditions to the Merger
Completion of the merger is subject to the satisfaction of certain
conditions set forth in the merger agreement, or the waiver of such conditions
by the party entitled to do so, at or before the closing date of the merger.
Each party's obligation to consummate the merger under the merger agreement is
subject to the following conditions:
* the holders of 67% of the outstanding FNB common stock and a majority of the
outstanding FNLC common stock must vote affirmatively to approve the merger
agreement;
* all regulatory approvals required to consummate the merger and the bank
merger by any governmental authority must have been obtained and shall remain
in full force and effect, all statutory waiting periods in respect thereof must
have expired, and no required approval can contain any condition, restriction
or requirement which FNLC's Board of Directors reasonably determines in good
faith would, individually or in the aggregate, materially reduce the benefits
of the merger and the bank merger to such a degree that FNLC would not have
entered into the merger agreement had such conditions, restrictions or
requirements been known as of the date of the merger agreement;
* no statute, rule, regulation, judgment, decree, injunction or other order may
have been enacted, issued, promulgated, enforced or entered which prohibits,
restricts or makes illegal the consummation of the merger or the bank merger;
* the registration statement of FNLC of which this document is a part must have
become effective under the Securities Act of 1933, and no stop order suspending
the effectiveness of such registration statement shall have been issued and no
proceedings for that purpose shall have been initiated by the SEC and not
withdrawn;
* the shares of FNLC common stock to be issued in connection with the merger
must have been listed for trading on the Nasdaq Stock Market's National Market;
and
* each of us must have received an opinion of Verrill Dana, LLP (or in the
absence of such firm's opinion, an opinion of Pierce Atwood LLP) to the effect
that the merger will constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code.
In addition to the foregoing conditions, the obligation of FNLC to
consummate the merger under the merger agreement is subject to the following
conditions, which may be waived by FNLC:
* the representations and warranties of FNB in the merger agreement must be
true and correct as of the date of the merger agreement and as of the effective
time of the merger, except as to any representation or warranty which
specifically relates to an earlier date and except that the representations and
warranties of FNB will be deemed true and correct unless the failure or
failures of those representations and warranties to be true and correct has had
or is reasonably likely to have a material adverse effect on FNB;
* FNB must have performed in all material respects all obligations required to
be performed by it at or prior to consummation of the merger;
* FNLC must have received a certificate from specified officers of FNB
attesting to compliance with the foregoing conditions;
* shares as to which FNB shareholders have exercised appraisal rights must
represent less than10% of the outstanding FNB common stock;
* FNLC shall have received an opinion from Pierce Atwood LLP, in substantially
the form provided in the merger agreement;
* each director of FNB who is also an officer shall have entered into a
shareholder agreement with FNLC, which condition was satisfied at the time the
merger agreement was signed (see "Shareholder Agreements" on page __); and
* FNLC shall have received such certificates of FNB's officers or others and
such other documents to evidence fulfillment of the conditions to its
obligations as FNLC may reasonably request.
Page 50
In addition to the other conditions set forth above, the obligation of FNB
to consummate the merger under the merger agreement is subject to the following
conditions, which may be waived by FNB:
* the representations and warranties of FNLC in the merger agreement must be
true and correct as of the date of the merger agreement and as of the effective
time of the merger, except as to any representation or warranty which
specifically relates to an earlier date and except that the representations and
warranties of FNLC will be deemed true and correct unless the failure or
failures of those representations and warranties to be true and correct has had
or is reasonably likely to have a material adverse effect on FNLC;
* FNLC must have performed in all material respects all obligations required to
be performed by it at or prior to consummation of the merger;
* FNB must have received a certificate from specified officers of FNLC
attesting to compliance with the foregoing conditions;
* FNB shall have received an opinion from Verrill Dana, LLP, counsel to FNLC,
in substantially the form provided in the merger agreement; and
* FNB shall have received such certificates of FNLC's officers or others and
such other documents to evidence fulfillment of the conditions to its
obligations as FNB may reasonably request.
Under the terms of the merger agreement, a material adverse effect on
either FNLC or FNB is defined to mean any effect that (1) is material and
adverse to the financial position, results of operations or business of such
entity and its subsidiaries taken as a whole or (2) would materially impair the
ability of such entity and its subsidiaries to perform their respective
obligations under the merger agreement or the bank merger agreement or
otherwise materially impede the consummation of the transactions contemplated
by the merger agreement. However, under the terms of the merger agreement, none
of the following would be deemed to constitute a material adverse effect on any
entity:
* changes in banking, corporate or tax laws or regulations of general
applicability or interpretations of them by governmental authorities;
* changes in United States generally accepted accounting principles or
regulatory accounting requirements applicable to banks or their holding
companies generally;
* changes in interest rates or general economic conditions affecting banks and
their holding companies generally;
* modifications or changes to valuation policies and practices, or expenses
incurred, in connection with the transactions contemplated by the merger
agreement or restructuring charges taken in connection with them; and
* with respect to FNB only, the effects of any action or omission taken with
the prior consent of FNLC or as otherwise contemplated by the merger agreement.
Page 51
Regulatory Approvals
Consummation of the merger is subject to prior receipt of all required
approvals of, and consents to, the merger and the bank merger by all applicable
federal and state regulatory authorities.
Federal Reserve Board. The merger is subject to the prior approval of or
waiver from the Federal Reserve Board under Section 3 of the Bank Holding
Company Act of 1956, as amended. Pursuant to the Bank Holding Company Act, the
Federal Reserve Board may not approve the merger if:
* such transaction would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business
of banking in any part of the United States; or
* the effect of such transaction, in any section of the country, may be
substantially to lessen competition, or tend to create a monopoly, or in any
manner restrain trade, unless in each case the Federal Reserve Board finds that
the anticompetitive effects of the proposed transaction are clearly outweighed
in the public interest by the probable effect of the transaction in meeting the
convenience and needs of the communities to be served. In every case, the
Federal Reserve Board is required to consider the financial and managerial
resources and future prospects of the bank holding company or companies and the
banks concerned and the convenience and needs of the communities to be served.
Under the Community Reinvestment Act of 1977, the Federal Reserve Board also
must take into account the record of performance of each participating bank
holding company in meeting the credit needs of the entire community, including
low and moderate-income neighborhoods, served by each bank holding company and
its subsidiaries. In addition, the Bank Holding Company Act requires that the
Federal Reserve Board take into account the record of compliance of each bank
holding company with applicable state community reinvestment laws. Applicable
regulations require publication of notice of an application for approval of the
merger and an opportunity for the public to comment on the application in
writing and to request a hearing.
Any transaction approved by the Federal Reserve Board may not be completed
until 30 days after such approval, during which time the U.S. Department of
Justice may challenge such transaction on antitrust grounds and seek divesture
of certain assets and liabilities. With the approval of the Federal Reserve
Board and the U.S. Department of Justice, the waiting period may be reduced to
15 days.
Section 225.12(d)(2) of the Federal Reserve Board's Regulation Y provides
that the approval of the Federal Reserve Board is not required for certain
acquisitions by bank holding companies if the acquisition has a component that
will be approved by a federal supervisory agency under the Bank Merger Act and
certain other requirements are met. Under this regulation, the acquiring bank
holding company must submit a notice to the Federal Reserve Board at least ten
days prior to the transaction and no application for approval of the proposed
acquisition under the Bank Holding Company Act will be required unless the
Federal Reserve Board informs the proposed acquirer to the contrary prior to
expiration of this period. FNLC believes that the proposed merger and bank
merger satisfy these requirements and, accordingly, has submitted a notice to
the Federal Reserve Board under this regulation.
Page 52
OCC. The parties currently intend to merge FNB's banking subsidiary,
FNBBH, into FNBD immediately after the merger of FNB into FNLC. The bank merger
is subject to the prior approval of the Office of the Comptroller of the
Currency of the United States under the Bank Merger Act. The bank merger is
expected to qualify for expedited review and a streamlined application, which
means it would be approved 45 days after receipt by the OCC of the appropriate
application, or the 15th day following the close of the comment period, and
FNLC has submitted a streamlined application to the OCC. The OCC will review
the bank merger under statutory criteria which are substantially the same as
those required to be considered by the Federal Reserve Board in evaluating
transactions for approval under Section 3 of the Bank Holding Company Act, as
discussed above, except that the OCC will not conduct an independent antitrust
analysis of the bank merger if the Federal Reserve Board does so. Applicable
regulations require publication of notice of the application for approval of
the bank merger and an opportunity for the public to comment on the application
in writing and to request a hearing.
Any transaction approved by the OCC may not be completed until 30 days
after such approval, during which time the U.S. Department of Justice may
challenge such transaction on antitrust grounds and seek divestiture of certain
assets and liabilities. With the approval of the OCC and the U.S. Department of
Justice, the waiting period may be reduced to 15 days.
State Approvals and Notices. The prior approval of the Superintendent of
the Bureau of Financial Institutions of the State of Maine is required under
Sections 1013(1)(A) and 1015 of Title 9-B of the Maine Revised Statutes for the
acquisition by a Maine financial institution holding company such as FNLC of
more than 5% of the voting shares of a Maine financial institution holding
company such as FNB. Under Maine law, the Maine Superintendent shall not
approve an application for such a transaction unless he determines, after a
consideration of all relevant evidence, that it would contribute to the
financial strength and success of the applicant and promote the convenience and
advantage of the public.
Status of Applications and Notices. We have filed all required
applications and notices with applicable regulatory authorities in connection
with the merger and the bank merger. On November 9, 2004, we received approval
for the merger from the Office of the Comptroller of the Currency of the United
States and the Maine Bureau of Financial Institutions, although the approval of
the Bureau of Financial Institutions is not effective until December 10, 2004.
The Federal Reserve Board previously indicated that it did not object to the
comsummation of the merger without the filing of a formal application, pursuant
to Section 3 of the Bank Holding Company Act.
Page 53
FNB Business Pending the Merger
The merger agreement contains certain covenants of the parties regarding
the conduct of their respective businesses pending consummation of the merger.
These covenants, which are contained in Article IV of the merger agreement
included as Annex I hereto, are briefly described below.
Pending consummation of the merger, FNB may not, and will cause each FNB
subsidiary not to, among other things, take the following actions without the
prior written consent of FNLC:
* conduct its business other than in the ordinary and usual course consistent
with past practice or fail to use reasonable best efforts to preserve its
business organization, keep available the present services of its employees and
preserve for itself and FNLC the goodwill of the customers of FNB and its
subsidiaries and others with whom business relations exist;
* issue, sell or otherwise permit to become outstanding, or authorize the
creation of, any additional shares of stock or permit any additional shares of
stock to become subject to grants of stock options, other than upon the
exercise of stock options outstanding on the date of the merger agreement under
FNB's stock option plan;
* declare any dividend on its capital stock, other than regular semi-annual
cash dividends on the FNB common stock at a rate not in excess of $0.33 per
share and to the extent necessary so that FNB shareholders do not fail to
receive a dividend for any semi-annual period with respect to their FNB shares,
or following the merger, for any quarterly period with respect to the FNLC
shares received in the merger, a quarterly dividend at the same annualized rate
as regular dividends paid by FNB, on the same record date provided by FNLC for
its quarterly dividend;
* amend its articles of incorporation and bylaws or the articles and bylaws (or
equivalent documents) of any subsidiary;
* take specified actions with respect to its business, including without
limitation enter into or amend an employment, consulting or severance agreement
with, or increase the rate of compensation of, its directors, officers or
employees; enter into, establish, adopt or amend any employee benefit plan;
purchase or sell assets or deposits; make capital expenditures; change its
methods of accounting; enter into, amend or modify material contracts; settle
litigation claims; enter into new businesses; change its principal policies;
enter into derivatives contracts; incur indebtedness; make certain real estate
investments; make or modify loans outside of the ordinary course; or acquire
any debt security or equity investment of a type or in an amount that is not
permissible for a national bank; except in the case of each of the foregoing as
permitted by the merger agreement;
* take any action that would prevent or impede the merger from qualifying as a
reorganization under the Internal Revenue Code;
* take any action that would result in (1) any of the representations and
warranties of FNB not being true and correct in any material respect at or
prior to the effective time of the merger, (2) any of the conditions to
consummation of the merger set forth in the merger agreement not being
satisfied or (3) a material violation of the merger agreement or the bank
merger agreement, except in each case as may be required by applicable law and
regulation; or
* agree to do any of the foregoing.
Page 54
The merger agreement also provides that pending consummation of the merger
FNLC may not, and will cause each subsidiary of FNLC not to, take the following
actions without the prior written consent of FNB:
* take any action that would result in (1) any of the representations and
warranties of FNLC not being true and correct in any material respect at or
prior to the effective time of the merger, (2) any of the conditions to the
merger set forth in the merger agreement not being satisfied or (3) a material
violation of the merger agreement or the bank merger agreement, except in each
case as may be required by applicable law and regulation; or
* agree to do any of the foregoing.
FNB Board of Directors' Covenant to Recommend the Merger Agreement
Pursuant to the merger agreement, the FNB Board of Directors is required
to recommend that FNB shareholders approve the merger agreement at all times
prior to and during the meeting of FNB shareholders at which the merger
agreement is to be considered by them. However, nothing in the merger agreement
prevents the FNB Board of Directors from withholding, withdrawing, amending or
modifying its recommendation if it determines, after consultation with its
outside counsel, that such action is legally required in order for the
directors of FNB to comply with their fiduciary duties to the FNB shareholders
under applicable law, provided that any such action in connection with an
"acquisition proposal" must comply with the requirements described under "No
Solicitation by FNB" below.
No Solicitation by FNB
The merger agreement provides that neither FNB nor any of its subsidiaries
shall, and that FNB shall direct and use its reasonable best efforts to cause
its and each such subsidiary's directors, officers, employees, agents and
representatives not to, directly or indirectly, initiate, solicit, encourage or
otherwise facilitate any inquiries or the making of any proposal or offer with
respect to a merger, reorganization, share exchange, consolidation or similar
transaction involving, or any purchase of all or substantially all of the
assets of, FNB or more than 10% of the outstanding equity securities of FNB or
any of its subsidiaries (any such proposal or offer is hereinafter referred to
as an "acquisition proposal"). In the merger agreement, FNB also agreed that
neither it nor any of its subsidiaries shall, and that FNB shall direct and use
its reasonable best efforts to cause its and each such subsidiary's directors,
officers, employees, agents and representatives not to, directly or indirectly,
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an acquisition
proposal, or otherwise facilitate any effort or attempt to make or implement an
acquisition proposal. However, nothing in the merger agreement prevents FNB or
its Board of Directors from:
* complying with its disclosure obligations under federal or state law;
* providing information in response to a request therefor by a person who has
made an unsolicited bona fide written acquisition proposal if the FNB Board of
Directors receives from the person so requesting such information an executed
confidentiality agreement;
* engaging in any negotiations or discussions with any person who has made an
unsolicited bona fide written acquisition proposal; or
Page 55
* recommending such an acquisition proposal to the shareholders of FNB, if and
only to the extent that in each of the last three cases referred to above, (1)
the FNB Board of Directors determines in good faith after consultation with
outside legal counsel that such action would be required in order for its
directors to comply with their respective fiduciary duties under applicable law
and (2) the FNB Board of Directors determines in good faith after consultation
with its financial advisor that such acquisition proposal, if accepted, is
reasonably likely to be consummated, taking into account all legal, financial
and regulatory aspects of the proposal and the person making the proposal and
would, if consummated, result in a transaction more favorable to FNB's
shareholders from a financial point of view than the merger with FNLC. An
acquisition proposal which is received and considered by FNB in compliance with
the requirements set forth in the merger agreement and which meets the
requirements set forth in the preceding sentence is referred to as a "superior
proposal." FNB is required to notify FNLC if any such inquiries, proposals or
offers are received by, any such information is requested from, or any such
discussions or negotiations are sought to be initiated or continued with, FNB
or any of its representatives as soon as FNB becomes aware of the same.
Representations and Warranties of the Parties
Pursuant to the merger agreement, each of us made certain customary
representations and warranties relating to our respective companies,
subsidiaries, businesses and matters related to the merger. For detailed
information concerning these representations and warranties, reference is made
to Article V of the merger agreement included as Annex I hereto. Such
representations and warranties generally must remain accurate through the
completion of the merger unless the fact or facts that caused a breach of a
representation and warranty has not had or is not reasonably likely to have a
material adverse effect on the party making the representation and warranty.
See "Conditions to the Merger" beginning on page __.
Effective Time of the Merger
The merger will become effective upon the filing of articles of merger
with the Secretary of State of the State of Maine pursuant to the Maine
Business Corporation Act, unless a different date and time is specified as the
effective time in such documents. Articles of merger will be filed only after
the satisfaction or waiver of all conditions to the merger set forth in the
merger agreement on a date selected by FNLC after such satisfaction or waiver
which is not later than the later of (A) five business days after such
satisfaction or waiver or (B) the first month end following such satisfaction
or waiver, or on such other date as we may mutually agree upon.
A closing will take place immediately prior to the effective time of the
merger or on such other date as we may mutually agree upon.
Amendment of the Merger Agreement
We may amend the merger agreement at any time before the merger actually
takes place, and may agree to extend the time within which any action required
by the merger agreement is to take place. No amendment may be made after the
special meeting which by law requires further approval by the shareholders of
FNB and FNLC without obtaining such approval.
Page 56
Termination of the Merger Agreement
The merger agreement may be terminated:
* by mutual consent of the parties;
* by a non-breaching party if the other party (1) breaches any covenants or
undertakings contained in the merger agreement or (2) breaches any
representations or warranties contained in the merger agreement, in each case
if such breach has not been cured within thirty days after notice from the
terminating party and which breach would be reasonably expected, individually
or in the aggregate with other breaches, to result in a material adverse effect
with respect to the breaching party;
* by either party if the merger is not consummated by May 31, 2005, unless the
failure to consummate the merger is due to a breach by the party seeking such
termination of its obligations under the merger agreement or, if FNB is seeking
to terminate, by any director and executive officer of FNB through such
director and executive officer's breach of his respective shareholder
agreement;
* by either party if any required regulatory approval for consummation of the
merger or the bank merger is not obtained;
* by either party if the shareholders of FNB or FNLC do not approve by the
requisite vote the merger agreement at the meetings of the shareholders of FNB
and FNLC duly called for such purpose;
* by FNLC, prior to the special meeting, if FNB shall have breached the
covenants described under "No Solicitation by FNB" on page __, the FNB Board of
Directors shall have failed to recommend that the shareholders of FNB approve
the merger agreement or has withdrawn, modified or changed such recommendation
in a manner which is adverse to FNLC, or FNB breaches its covenants requiring
the calling and holding of a meeting of shareholders to consider the merger
agreement; and
* by FNB, at any time prior to the special meeting, in order to concurrently
enter into an acquisition agreement or similar agreement with respect to an
unsolicited "superior proposal," as defined in the merger agreement and under
"No Solicitation by FNB" on page __, which has been received and considered by
FNB in compliance with the applicable terms of the merger agreement, provided
that FNB has notified FNLC at least five business days in advance of any such
action and given FNLC the opportunity during such period, if FNLC elects in its
sole discretion, to negotiate amendments to the merger agreement which would
permit FNB to proceed with the proposed merger with FNLC.
Interests of Certain Persons in the Merger
When FNB shareholders are considering the recommendation of FNB's Board of
Directors with respect to approving the merger agreement, they should be aware
that some directors and executive officers of FNB may be deemed to have
interests in the merger in addition to their interests as shareholders
generally. The FNB Board of Directors was aware of these factors and considered
them, among other matters, in approving the merger agreement and the merger.
These interests are described below.
Stock Options. The merger agreement provides that at the effective time
of the merger each outstanding and unexercised option to purchase shares of FNB
common stock granted pursuant to the FNB stock option plans will cease to
represent the right to acquire shares of FNB common stock. All outstanding
options to purchase FNB common stock that are presently unvested shall become
fully vested and exercisable in the event of a change of control, as defined in
the relevant plan, which would include the merger.
Page 57
Except for certain options held by executive officers and directors of
FNB, outstanding options of FNB will be converted automatically into the right
to receive cash in the amount of $42.00 for each share subject to the option
less the exercise price per share of the option, subject to downward adjustment
should the average sales price of FNLC common stock as calculated under the
merger agreement fall below $17.00. Certain options held by executive officers
of FNB will be converted into options to purchase shares of FNLC common stock.
See "Treatment of FNB Stock Options" on page __.
At the record date for the special meeting, the directors, executive
officers, and certain other employees of FNB held options to purchase an
aggregate of 126,208 shares of FNB common stock. Of these, options to purchase
40,630 shares of FNB common stock held by Messrs. Parady, Rosborough, McKim,
Wrobel, Dalrymple and Lay, will be converted into options to acquire shares of
FNLC common stock in accordance with the merger agreement, and the remainder of
the outstanding options to acquire FNB shares along with the remaining options
held by directors, executive officers, and all other optionees of FNB, will be
converted into the right to receive cash as provided in the merger agreement.
Directors, executive officers, and all other optionees of FNB will each receive
cash equal to $42.00 less the applicable exercise price for remaining options
in accordance with the merger agreement. The total amount to retire options to
acquire FNB shares not converted as part of the merger will be $2,567,127. The
following table lists the unexercised options to purchase FNB common stock held
by FNB's directors, executive officers, and all other optionees as a group, as
of the record date of the special meeting, as well as the options which will be
converted into options to purchase FNLC stock in accordance with the merger
agreement and those which will be converted into the right to receive cash.
-------------------------------------------------------------------------------
Total Options to Options to Total
unexercised be converted be converted cash
options to FNLC options to cash proceeds
-------------------------------------------------------------------------------
Loren H. Clarke 2,850 - 2,850 $90,605
Jeffrey C. Dalrymple 11,250 5,000 6,250 193,006
Wiliam C. Fernald 2,286 - 2,286 66,642
David J. Fletcher 1,725 - 1,725 53,398
Gregory R. Grant 5,100 - 5,100 164,030
Milton Albert Harmon Jr 4,900 - 4,900 158,405
Carroll E. Harper 3,600 - 3,600 109,853
Daniel M. Lay 18,000 9,000 9,000 261,120
William K. McFarland 4,350 - 4,350 134,658
Tony C. McKim 30,750 14,205 16,545 492,388
Steven K. Parady 6,225 3,675 2,550 70,558
Mark N. Rosborough 3,222 2,250 972 28,493
Ronald J. Wrobel 14,400 6,500 7,900 224,739
All Other Optionees 17,550 - 17,550 519,233
-------------------------------------------------------------------------------
126,208 40,630 85,578 $2,567,127
===============================================================================
Page 58
Agreements with Executive Officers of FNB. Pursuant to the merger
agreement, FNLC agreed to honor employment continuity agreements and certain
other arrangements already in effect between FNBBH and each of Messrs. McKim,
Lay, Dalrymple and Wrobel, subject to certain amendments.
The employment continuity agreements provide that if the employment of an
executive officer is terminated, or he elects to resign, within 30 days
following a "change of control" of FNBBH, the executive will receive a lump sum
severance payment equal to 299% of his "base amount' within 10 days after such
termination or resignation. The term "change in control" is defined to include
the direct or indirect acquisition of 25% or more of the combined voting power
of the outstanding securities of FNBBH by a person other than FNB. If effected,
the merger would constitute a change of control. The employment continuity
agreements define "base amount" by reference to applicable provisions of the
Internal Revenue Code. Under those provisions, the term "base amount" means, in
general, the average annual compensation paid to the executive by FNBBH that
was includible in his gross income for the most recent five taxable years
ending before the date on which the change in control occurs. The employment
continuity agreements provide that if the payments due thereunder, alone or
together with other payments the executive is entitled to receive from FNBBH on
account of the change in control, would constitute a "parachute payment" under
federal income tax law, the payment under the employment continuity agreement
would be reduced to the largest amount that would not be subject to the excise
tax applied to parachute payments. Under the current terms of each employment
continuity agreement, each executive agrees that if he receives payments
thereunder he will not accept employment with any financial institution which
has an office or branch in Hancock County for a period of one year from the
date of his termination or resignation.
The merger agreement calls for each employment continuity agreement to be
amended as of the effective time to (i) establish that each executive's base
salary as of December 31, 2004 will be considered the "base amount" for
purposes of determining the maximum payment to be made under his agreement,
(ii) extend from 30 days to 24 months the period during which a termination or
resignation will trigger the severance payments, and (iii) expand the
geographic scope of the restrictive covenant so as to prohibit an executive
from accepting employment with a financial institution having an office or
branch in any of Knox, Lincoln, Hancock or Washington counties, Maine. It is
anticipated that Messrs. McKim, Lay, Dalrymple and Wrobel will sign amendments
to their employment continuity agreements to effect the proposed amendment,
effective on the date of the merger.
Assuming that the merger is consummated, the employment continuity
agreements are amended (as described above) and there are no changes in their
base salaries before January 1, 2005, Messrs. McKim, Lay, Dalrymple and Wrobel
would be entitled to receive approximately $464,000, $296,000, $283,000 and
$256,000, respectively, subject to reduction to the extent that such amounts
exceed the amount that would be deductible for federal income tax purposes
pursuant to Section 280G of the Internal Revenue Code or be subject to the
imposition of excise tax under Section 4999 of the Code, under his respective
employment continuity agreements if his employment were terminated or he were
to resign during the twenty-four month period following the merger. Each
severance payment would be made in a single lump sum.
Page 59
In addition to the employment continuity agreements, each of the four
executives is a party to a split dollar agreement with FNBBH. The split dollar
agreements require FNBBH to pay all premiums due on each of the insurance
policies issued on the lives of the executives, which are subject to the terms
of the split dollar agreements. Under the split dollar agreements, FNBBH is the
owner of each policy, but certain rights with respect to each policy may have
been "endorsed" over to the executive and each executive has the right to
designate a beneficiary to receive a death benefit from one or more of the
policies insuring his life. For Mr. McKim, the amount of the death benefit is
$250,000; for Messrs. Lay, Dalrymple and Wrobel the death benefit is $150,000.
As currently in effect, the split dollar agreements provide that any proceeds
in excess of the death benefit will be paid to FNBBH. If an executive ceases to
be employed by FNBBH before attaining age 65, his benefits under the split
dollar agreement are forfeited. Finally, under certain circumstances (including
a termination of the split dollar agreement), FNBBH must offer to sell the
underlying insurance policies to the executives for a payment equal to the cash
surrender value of the policies. If the split dollar agreements are not
terminated by FNBBH prior to the date of the merger, FNLC will assume FNBBH's
obligation under the split dollar agreements.
Board of Directors and Executive Officers of FNLC following merger.
Pursuant to the merger agreement, Mr. McKim and one other director of FNB will
be added to the FNLC Board of Directors as of the date of the merger to serve
on the same basis as other directors of FNLC. We have determined that the
second director will be Mark N. Rosborough. Subject to compliance with their
fiduciary duties, the FNLC Board will nominate Mr. McKim for election at FNLC's
next annual meeting to serve until the 2007 annual meeting and Mr. Rosborough
to serve until the 2006 annual meeting. FNLC's Board of Directors has also
agreed to consider nominating another person who is a resident of the area
served by FNBBH to serve as a director following the first FNLC annual meeting
after the merger on the same basis as other directors of FNLC. See "FNB
Management and Additional Information", starting on page __, for further
information regarding Messrs. McKim and Rosborough.
FNLC directors do not receive compensation for serving as such. Each
current director of FNLC also serves on the Board of Directors of FNBD.
Currently, directors of FNBD receive $550 for each directors meeting attended
and $300 for each meeting attended of a committee of which the director is a
member. In addition, non-employee directors of FNBD are reimbursed for 85% of
the cost of the director's health insurance premiums. FNB nominees who are
elected to the Board of Directors of FNLC will also be elected to the Board of
FNBD.
In accordance with the terms of the merger agreement, all employees of FNB
or FNBBH as of the effective time will become employees of FNLC or FNBD. We
expect Mr. McKim to become the Executive Vice President of FNLC and Executive
Vice President of FNBD and Messrs. Lay, Dalrymple and Wrobel to assume
management positions with FNBD at salaries equivalent to their current
salaries, or $155,300, $98,999, $94,500, and $85,690 for Messrs. McKim, Lay,
Dalrymple and Wrobel, respectively. See "FNB Management and Additional
Information", starting on page __, for further information regarding Messrs.
McKim, Lay, Dalrymple and Wrobel.
Page 60
Indemnification and Insurance. FNB's directors and officers are entitled
to continuing indemnification against certain liabilities by virtue of
provisions contained in FNB's bylaws and the merger agreement. Pursuant to the
merger agreement, FNLC agreed to indemnify and hold harmless each present and
former director, officer and employee of FNB or an FNB subsidiary determined as
of the effective time of the merger against any costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages or
liabilities incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of matters existing or occurring at or prior to the effective time
of the merger, whether asserted or claimed prior to, at or after the effective
time of the merger, arising in whole or in part out of or pertaining to the
fact that he or she was a director, officer, employee, fiduciary or agent of
FNB or a subsidiary of FNB or is or was serving at the request of FNB or a
subsidiary of FNB as a director, officer, employee, fiduciary or agent of
another corporation, partnership, joint venture, trust or other enterprise,
including without limitation matters related to the negotiation, execution and
performance of the merger agreement or the consummation of any of the
transactions contemplated by the merger agreement, to the fullest extent to
which such indemnified parties would be entitled under the bylaws of FNB or the
constituent documents of any FNB subsidiary, as applicable, or any agreement,
arrangement or understanding disclosed by FNB to FNLC pursuant to the merger
agreement, in each case as in effect on the date of the merger agreement.
Pursuant to the merger agreement, FNLC also generally agreed to honor all
limitations on liability existing in favor of these indemnified parties as
provided in the articles of incorporation, bylaws or similar governing
instruments of FNB and its subsidiaries as in effect as of the date of the
merger agreement with respect to matters occurring prior to the effective time
of the merger.
Pursuant to the merger agreement, FNB shall purchase an extended reporting
period endorsement under FNB's existing directors' and officers' liability
insurance which covers persons who are currently covered by FNB's directors'
and officers' liability insurance that shall provide such directors and
officers with coverage for a period of six years after the effective time of
the merger on terms no less favorable than those in effect on the date of the
merger agreement; provided, however, that FNB may substitute for its existing
coverage a policy or policies providing substantially comparable coverage and
containing terms and conditions no less favorable than those in effect on the
date of the merger agreement if necessary or advisable to obtain such extension
of coverage.
Other than as set forth above, no director or executive officer of FNB has
any direct or indirect material interest in the merger, except insofar as
ownership of FNB common stock might be deemed such an interest. See "Certain
Beneficial Owners of FNB Common Stock" on page __.
Certain Employee Matters
The merger agreement contains certain agreements of the parties with
respect to various employee matters, which are briefly described below.
Page 61
Pre-Merger Covenants. Pursuant to the merger agreement, FNB will not, and
will cause FNBBH not to, enter into or amend or renew any employment
arrangement except normal compensation increases and hiring in the ordinary
course of business subject to certain limits, changes required by law, changes
required contractually, grants or awards to newly-hired employees consistent
with past practice and increases in the premium costs of insured employee
benefits. FNB or FNBBH may pay discretionary bonuses in the ordinary course of
business and consistent with past practice to employees for services rendered
during the period January 1, 2004 to the effective time of the merger of up to
$200,000 in the aggregate for all employees. These bonuses will be reduced in
the case of any individual recipient to the extent necessary to ensure that the
bonus, either alone or in combination with the payment of other amounts, would
not be nondeductible by FNB or FNBBH for federal income tax purposes pursuant
to Section 280G of the Internal Revenue Code or subject to the excise tax
imposed under Section 4999 of the Code.
Pursuant to the merger agreement, FNB and/or FNBBH may make cash
contributions to FNBBH's 401(k) Plan for the 2004 calendar year as long as the
total amount of such cash contributions do not exceed the amount derived by
application of the calendar 2003 formula based on calendar 2004 compensation
levels.
Post-Merger Covenants. Following the merger, FNLC will honor all benefit
obligations and contract rights of current or former employees of FNB and its
subsidiaries provided that FNLC may at any time amend or terminate any FNB
benefit plan in accordance with its terms. As soon as administratively
practicable after the effective time of the merger, FNLC will take all
reasonable action so that employees of FNB and its subsidiaries will be
entitled to participate in the FNLC employee benefit plans of general
applicability to the same extent as similarly-situated employees of FNLC and
its subsidiaries. For purposes of determining eligibility to participate in,
the vesting of benefits and for all other purposes, other than for accrual of
pension benefits, under the FNLC employee benefit plans, FNLC will recognize
years of service with FNB and its subsidiaries to the same extent as such
service was credited for such purpose by FNB, provided that the recognition of
such service shall not result in the duplication of benefits or violate the
law.
If employees of FNB or any of its subsidiaries become eligible to
participate in a medical, dental or health plan of FNLC, FNLC will cause each
such plan to:
* waive any preexisting condition limitations to the extent such conditions are
covered under the applicable medical, health or dental plans of FNLC,
* provide full credit under such plans for any deductibles, co-payment and out-
of-pocket expenses incurred by the employees and their beneficiaries during the
portion of the calendar year prior to such participation, and
* waive any waiting period limitation or evidence of insurability requirement
which would otherwise be applicable to such employee on or after the effective
time of the merger to the extent such employee had satisfied any similar
limitation or requirement under an analogous plan prior to the effective time
of the merger.
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All employees of FNB or an FNB subsidiary as of the effective time of the
merger will become employees of FNLC or an FNLC subsidiary as of such time, and
FNLC or an FNLC subsidiary will use its best efforts to give such persons
(other than any person who is party to an employment agreement, a severance
agreement or a special termination agreement) at least 60 days' prior written
notice of any job elimination during the 90-day period after the effective time
of the merger. Subject to such 60-day notice requirement, FNLC or an FNLC
subsidiary will have no obligation to continue the employment of any employee
of FNB or an FNB subsidiary and nothing contained in the merger agreement will
be deemed to give any employee of FNB or any FNB subsidiary a right to
continuing employment with FNLC or an FNLC subsidiary after the effective time
of the merger. An employee of FNB or an FNB subsidiary (other than an employee
who is party to an employment agreement, a severance agreement or a special
termination agreement) who is involuntarily terminated other than for cause
within two years following the effective time of the merger will be entitled to
receive severance payments equal to one week's compensation for each year of
service with FNB or an FNB subsidiary.
For a period of two years following the effective time of the merger, FNLC
will provide job counseling and outplacement services to all employees of FNB
and its subsidiaries whose employment was terminated other than for cause,
disability or retirement at or following the effective time of the merger.
During that period, FNLC also will notify those former employees who wish to
continue to be so notified of opportunities for positions with FNLC or an FNLC
subsidiary for which FNLC reasonably believes such persons are qualified and
will consider any application for such positions submitted by such persons.
However, any decision to offer employment to any such person will be made in
the sole discretion of FNLC.
In the merger agreement, FNB agreed to take the steps to terminate FNB's
employee stock ownership plan and provide that the account of each participant
in the plan become fully vested and nonforfeitable as of the effective time of
the merger.
Bank Merger
Pursuant to the merger agreement, FNBBH will be merged with and into FNBD,
as soon as practicable following consummation of the merger.
Resale of FNLC Common Stock
The FNLC common stock issued pursuant to the merger will be freely
transferable under the Securities Act of 1933, except for shares issued to any
FNB shareholder who may be deemed to be an affiliate of FNLC for purposes of
Rule 144 promulgated under the Securities Act of 1933 or an affiliate of FNB
for purposes of Rule 145 promulgated under the Securities Act of 1933.
Affiliates will include persons (generally executive officers, directors and
10% shareholders) who control, are controlled by or are under common control
with (1) FNLC or FNB at the time of the special meeting or (2) FNLC at or after
the effective time of the merger.
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Rule 145 will restrict the sale of FNLC common stock received in the
merger by affiliates and certain of their family members and related interests.
Generally speaking, during the year following the effective time of the merger,
a person who is an affiliate of FNB at the time of the special meeting,
provided he or she is not an affiliate of FNLC at or following the effective
time of the merger, may publicly resell any FNLC common stock received by him
or her in the merger, subject to certain limitations as to, among other things,
the amount of FNLC common stock sold by him or her in any three-month period
and as to the manner of sale. After the one-year period, such affiliates may
resell their shares without such restrictions so long as there is adequate
current public information with respect to FNLC as required by Rule 144.
Persons who are affiliates of FNLC after the effective time of the merger may
publicly resell the FNLC common stock received by him or her in the merger
subject to similar limitations and subject to certain filing requirements
specified in Rule 144. At the present time, it is not anticipated that any
affiliates of FNB will become affiliates of FNLC after the merger, other than
Messrs. McKim, Lay, Dalrymple, Wrobel and Rosborough.
The ability of affiliates to resell shares of FNLC common stock received
in the merger under Rules 144 or 145 as summarized herein generally will be
subject to FNLC's having satisfied its reporting requirements under the
Securities Exchange Act of 1934 for specified periods prior to the time of
sale. Affiliates also would be permitted to resell FNLC common stock received
in the merger pursuant to an effective registration statement under the
Securities Act of 1933 or another available exemption from the Securities Act
of 1933 registration requirements. Neither the registration statement of which
this prospectus/proxy statement is a part nor this prospectus/proxy statement
cover any resales of FNLC common stock received by persons who may be deemed to
be affiliates of FNLC or FNB in the merger.
FNB has agreed in the merger agreement to use its reasonable best efforts
to cause each person who may be deemed to be an affiliate of it for purposes of
Rule 145 to deliver to FNLC a letter agreement intended to ensure compliance
with the Securities Act of 1933.
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Federal Income Tax Consequences
General. The following is a description of the material federal income
tax consequences of the merger to shareholders of FNB, which is based in part
upon the opinion of Verrill Dana, LLP, counsel to FNLC. The federal income tax
laws are complex and the tax consequences of the merger may vary depending upon
each FNB shareholder's individual circumstances or tax status. Accordingly,
this description is not a complete description of all of the consequences of
the merger and, in particular, may not address federal income tax
considerations that may affect the treatment of FNB shareholders subject to
special treatment under United States federal income tax law (including, for
example, foreign persons, financial institutions, dealers in securities,
traders in securities who elect to apply a mark-to-market method of accounting,
insurance companies, tax-exempt entities, holders who acquired their shares of
FNB common stock pursuant to the exercise of an employee stock option or right
or otherwise as compensation and holders who hold FNB common stock as part of a
"hedge," "straddle" or "conversion transaction"). In addition, no opinion is
expressed with respect to the tax consequences of the merger under applicable
foreign, state or local laws or under any federal tax laws other than those
pertaining to the income tax. This description is based on laws, regulations,
rulings and judicial decisions as in effect on the date of this
prospectus/proxy statement, without consideration of the particular facts or
circumstances of any holder of FNB common stock. These authorities are all
subject to change and any such change may be made with retroactive effect. No
assurance can be given that, after any such change, this description would not
be different.
Tax matters are very complicated, and the tax consequences of the merger
to an FNB shareholder will depend upon the facts of his or her particular
situation. Accordingly, we strongly urge each FNB shareholder to consult his or
her own tax advisor to determine the particular federal, state, local or
foreign income or other tax consequences to him or her of the merger.
The Merger. Based on facts and representations and assumptions regarding
factual matters that were provided by us and that are consistent with the state
of facts that we believe will be existing as of the effective time of the
merger, the opinion of Verrill Dana, LLP with respect to the material federal
income tax consequences of the merger is as follows.
* The merger, when consummated in accordance with the terms of the merger
agreement, will constitute a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code and, accordingly, neither FNLC nor FNB will
recognize any taxable gain or loss as a result of the merger.
An FNB shareholder will not recognize gain or loss on the exchange for
such shareholder's shares of FNB common stock pursuant to the merger except to
the extent the FNB shareholder receives cash in lieu of a fractional share
interest in FNLC common stock. The shareholder's tax basis in the FNLC common
stock received pursuant to the merger will equal such shareholder's tax basis
in the shares of FNB common stock being exchanged, reduced by any amount
allocable to a fractional share interest of FNLC common stock for which cash is
received. The holding period of FNLC common stock received will include the
holding period of the shares of FNB common stock being exchanged.
Page 65
Cash in Lieu of Fractional Shares. No fractional shares of FNLC common
stock will be issued in the merger. An FNB shareholder who receives cash in
lieu of such a fractional share will be treated as having received such
fractional share pursuant to the merger and then as having exchanged such
fractional share for cash in a redemption by FNLC. An FNB shareholder will
generally recognize capital gain or loss on such a deemed redemption of the
fractional share in an amount determined by the excess of the amount of cash
received and the shareholder's tax basis in the fractional share. Any capital
gain or loss will be long-term capital gain or loss if the FNB common stock
exchanged was held for more than one year.
Shareholders Who Exercise Appraisal Rights. Holders of FNB common stock
who exercise appraisal rights with respect to the merger, as discussed under
"Appraisal Rights" beginning on page __, and who receive cash in respect of
their shares of FNB common stock will recognize capital gain or loss in an
amount equal to the difference between the amount of cash received and the
shareholder's aggregate tax basis for such shares of FNB common stock, which
gain or loss will be long-term capital gain or loss if such shares of FNB
common stock were held for more than one year. If, however, any such FNB
shareholder constructively owns shares of FNB common stock that are exchanged
for shares of FNLC common stock in the merger or owns shares of FNLC common
stock actually or constructively after the merger, the attribution to the
shareholder of stock owned by a related party may prevent the payment of cash
for shares pursuant to the exercise of appraisal rights from qualifying for
capital gain rates and instead result in any gain being treated as the
distribution of a dividend. Under the constructive ownership rules under the
Internal Revenue Code, a shareholder may be treated as owning stock that is
actually owned by another person or entity. FNB shareholders should consult
their tax advisors as to the possibility that all or a portion of any cash
received in exchange for their shares of FNB common stock will be treated as a
dividend.
An FNB shareholder who exercises appraisal rights in part and receives
both FNLC common stock and cash consideration in exchange for all of his or her
shares of FNB common stock generally will recognize gain, but not loss, to the
extent of the lesser of:
* the excess, if any, of (a) the sum of the aggregate fair market value of the
FNLC common stock received (including any fractional share of FNLC common stock
deemed to be received and exchanged for cash) and the amount of cash received
(excluding any cash received in lieu of a fractional share of FNLC common
stock) over (b) the shareholder's aggregate tax basis in the shares of FNB
common stock exchanged in the merger; and
* the amount of cash received by such shareholder.
For this purpose, gain or loss must be calculated separately for each
identifiable block of shares surrendered in the exchange, and a loss realized
on one block of shares may not be used to offset gain realized on another block
of shares. Any such gain will be long-term capital gain if the shares of FNB
common stock exchanged were held for more than one year, unless the receipt of
cash has the effect of a distribution of a dividend under the provisions of the
Internal Revenue Code, in which case such gain will be treated as a dividend to
the extent of such shareholder's ratable share of the undistributed accumulated
earnings and profits of FNB. FNB shareholders who are considering exercising
appraisal rights should consult their tax advisors as to the possibility that
all or a portion of any cash received in exchange for their FNB common stock
will be treated as a dividend.
Page 66
An FNB shareholder's aggregate tax basis in the FNLC common stock received
pursuant to the merger will equal such shareholder's aggregate tax basis in the
shares of FNB common stock being exchanged, reduced by any amount allocable to
a fractional share interest of FNLC common stock for which cash is received and
by the amount of any cash consideration received, and increased by the amount
of taxable gain, if any, recognized by such shareholder in the merger
(including any portion of such gain that is treated as a dividend).
Stock Options. As described in the section entitled, "Treatment of FNB
Stock Options" beginning on page __, at the effective time of the merger, each
outstanding option to purchase shares of FNB common stock granted under FNB's
stock option plan, except for certain options held by officers and directors of
FNB, will be purchased for a single cash payment ("Cashout Options"). Certain
options held by officers and directors of FNB will instead be converted into
options to purchase shares of FNLC common stock ("Rollover Options").
All outstanding options granted pursuant to FNB's stock option plan are
compensatory in nature. Under current law, Section 83 of the Internal Revenue
Code governs the income taxation of compensatory stock options. Although not
entirely free from doubt, holders of Cashout Options who receive cash for their
options will recognize taxable income in an amount equal to the cash received
in the merger for such options. The income will be treated as compensation for
services subject to withholding for income and employment taxes. FNB will be
entitled to deduct such amounts as compensation expense for the taxable period
ending at the time of the merger.
In addition, holders of the Cashout Options may be treated, solely for tax
purposes, as having exchanged FNB common stock for the cash actually received
for the Cashout Options. If so, any gain or loss resulting from the deemed
exchange would be recognized in an amount equal to the cash received less the
holder's basis in the FNB common stock deemed received. The basis of the FNB
common stock deemed received and exchanged by holders of the Cashout Options
will be equal to the amount of income recognized on the deemed exercise of the
Cashout Options. Any gain or loss on the deemed exchange of FNB common stock
for cash would be short-term capital gain or loss.
Under Section 83, and current federal income tax principles governing tax-
free reorganizations, the conversion of the Rollover Options into options to
purchase shares of FNLC common stock should be a non-taxable event. Only upon
exercise of such options does the holder of the options recognize taxable
income in the amount of the difference between the fair market value of the
stock received and the exercise price of such options. Further, FNB (or FNLC,
as its successor in the merger) is not entitled to a tax deduction for
compensation expense related to the options until the options are exercised.
The tax treatment of the options discussed in the preceding paragraphs may
be affected by a new law that will become effective on January 1, 2005. The
American Jobs Creation Act of 2004 added Section 409A to the Internal Revenue
Code which contains provisions applicable to stock options with exercise prices
less than the fair market value of the underlying stock on the date of the
option grants. The IRS is expected to issue transitional and relief guidance
as well as regulations intended to clarify the application of the Code Section
409A to nonqualified stock options.
Page 67
Subject to additional guidance from the IRS, if Section 409A applies to
the Cashout Options (and the options are found not to comply with requirements
of that section), the holders of such options may be subject to a 20% penalty
tax on the amount of income recognized as a result of the merger. Subject to
additional guidance from the IRS, if Section 409A applies to the Rollover
Options, the holders of such options may be required to recognize taxable
income in an amount equal to the fair market value of the FNLC stock underlying
the Rollover Options (as of the effective date of the merger or, with respect
to Rollover Options unvested as of the effective date, at such later date when
they become vested) less the exercise price of such options). The holders of
the Rollover Options may also be subject to a 20% penalty tax on the amount of
income recognized as well as interest on any taxes deemed deferred in prior
taxable years. Any income recognized by holders of Rollover Options because of
the application of Section 409A would also be subject to income and employment
tax withholding. Although uncertain as this time, it is possible that no tax
deduction for compensation would be permitted to FNB (or FNLC, as its successor
in the merger) until the Rollover Options are actually exercised. We strongly
urge holders of options to consult their tax advisors as to the potential
income tax consequences relating to the options, the merger and the new tax
law.
Closing Opinion. It is a condition precedent to the obligations of FNLC
and FNB to effect the merger that they receive an opinion from Verrill Dana,
LLP (or in the absence of such firm's opinion, an opinion of Pierce Atwood
LLP), dated as of the effective time of the merger, with respect to the federal
income tax consequences of the merger described under the subheading "The
Merger" on page __. Such opinion will be based upon facts existing at the
effective time of the merger, and in rendering such opinion, counsel will
require and rely upon facts, representations and assumptions that will be
provided by FNLC, FNB and others.
We have not sought and will not seek any ruling from the Internal Revenue
Service regarding any matters relating to the merger, and as a result there can
be no assurance that the Internal Revenue Service will not disagree with or
challenge any of the conclusions described herein.
Backup Withholding. Non-corporate holders of FNB common stock may be
subject to information reporting and backup withholding on any cash payments
they receive. FNB shareholders will not be subject to backup withholding,
however, if they:
* furnish a correct taxpayer identification number and certify that they are
not subject to backup withholding on the substitute Form W-9 or successor form
included in the letter of transmittal they will receive; or
* demonstrate that they are otherwise exempt from backup withholding.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or credit against an FNB shareholder's United States federal income
tax liability, provided the shareholder furnishes the required information to
the Internal Revenue Service.
Reporting Requirements. FNB shareholders who receive FNLC common stock as
a result of the merger will be required to retain records pertaining to the
merger and will be required to file with their United States federal income tax
return for the year in which the merger takes place a statement setting forth
certain facts relating to the merger.
Page 68
Accounting Treatment of the Merger
The merger will be accounted for under the purchase method of accounting
under accounting principles generally accepted in the United States of America.
Under this method, FNB's assets and liabilities as of the date of the merger
will be recorded at their respective fair values and added to those of FNLC.
Any difference between the purchase price for FNB and the fair value of the
identifiable net assets acquired (including core deposit intangibles) will be
recorded as goodwill. In accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," issued in July 2001,
the goodwill resulting from the merger will not be amortized to expense, but
instead will be reviewed for impairment at least annually and to the extent
goodwill is impaired, its carrying value will be written down to its implied
fair value and a charge will be made to earnings. Core deposit and other
intangibles with definite useful lives recorded by FNLC in connection with the
merger will be amortized to expense in accordance with the new rules. The
financial statements of FNLC issued after the merger will reflect the results
attributable to the acquired operations of FNB beginning on the date of
completion of the merger. The unaudited per share pro forma financial
information contained herein has been prepared using the purchase method of
accounting. See "Summary -- Unaudited Comparative Per Share and Selected
Financial Data" beginning on page __.
Expenses of the Merger
The merger agreement provides that each of FNB and FNLC will bear and pay
all costs and expenses incurred by it in connection with the transactions
contemplated by the merger agreement, including fees and expenses of its own
financial consultants, accountants and counsel, except that expenses of
printing this document will be shared equally between us.
Listing of the FNLC Common Stock
FNLC has agreed to use its reasonable best efforts to cause the shares of
FNLC common stock to be issued in the merger to be listed for trading on the
Nasdaq Stock Market's National Market before the completion of the merger,
subject to official notice of issuance.
Termination Fee
The merger agreement provides that FNB must pay FNLC a $1.5 million
termination fee under the circumstances described below:
* if the merger agreement is terminated by FNLC for any of the reasons
described in the penultimate bullet point under "Termination of the Merger
Agreement" on page __ or by FNB for the reasons described in the last bullet
point in such section, FNB must pay the termination fee to FNLC concurrently
with the termination of the merger agreement; or
* if (x) the merger agreement is terminated by FNLC pursuant to the second
bullet point under "Termination of the Merger Agreement" on page __ or by
either FNLC or FNB because the shareholders of FNB have not approved the merger
agreement as required, and in the case of any termination referenced in this
bullet point an acquisition proposal (as defined under "No Solicitation by FNB"
on page __) shall have been publicly announced or otherwise communicated or
made known to the Board of Directors of FNB (or any person shall have publicly
announced, communicated or made known an intention, whether or not conditional,
to make an acquisition proposal) at any time after the date of the merger
agreement and prior to the time that shareholders of FNB vote on the merger
agreement or the date of termination of the merger agreement, as applicable,
Page 69
and (y) within 18 months after such termination FNB or a subsidiary of FNB
enters into an agreement with respect to an acquisition proposal or consummates
a transaction which is the subject of an acquisition proposal, then FNB shall
pay to FNLC the termination fee on the date of execution of such agreement or
consummation of a transaction which is the subject of an acquisition proposal,
as applicable, provided that if the date of execution of such agreement is
after 12 months but within 18 months after such termination of the merger
agreement, the termination fee shall be payable by FNB to FNLC only upon
consummation of a transaction which is the subject of an acquisition proposal,
regardless whether such consummation occurs within 18 months after termination
of the merger agreement.
Any termination fee that becomes payable pursuant to the merger agreement
shall be paid by wire transfer of immediately available funds to an account
designated by FNLC.
If FNB fails to timely pay the termination fee to FNLC, FNB will be
obligated to pay the costs and expenses incurred by FNLC to collect such
payment, together with interest.
Shareholder Agreements
In connection with the execution of the merger agreement, each director of
FNB who was also an officer of FNB (that is, Messrs. Rosborough, McKim and
Parady) entered into a shareholder agreement with FNLC pursuant to which each
director agreed that at any meeting of the shareholders of FNB, or in
connection with any written consent of the shareholders of FNB, the director
shall:
* appear at such meeting or otherwise cause all shares of FNB common stock held
of record by him to be counted as present thereat for purposes of calculating a
quorum; and
* vote (or cause to be voted), in person or by proxy, or deliver a written
consent (or cause a consent to be delivered) covering, all shares of FNB common
stock held of record by him:
* in favor of adoption and approval of the merger agreement,
* against any action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or agreement of
FNB contained in the merger agreement or of the director contained in the
shareholder agreement and
* against any acquisition proposal (as defined in the merger agreement) or any
other action, agreement or transaction that is intended, or could reasonably be
expected, to materially impede, interfere or be inconsistent with, delay,
postpone, discourage or materially and adversely affect consummation of the
merger or the shareholder agreement.
Pursuant to the shareholder agreement, such directors also agreed not to,
directly or indirectly, sell, transfer, pledge, assign or otherwise dispose of,
or enter into any contract, option, commitment or other arrangement or
understanding with respect to the sale, transfer, pledge, assignment or other
disposition of, any of the shares of FNB common stock held of record by him
prior to the meeting at which shareholders of FNB will consider the merger
agreement.
The shareholder agreements will remain in effect until the earlier of the
effective time of the merger or the termination of the merger agreement in
accordance with its terms.
FNB also agreed to use its reasonable best efforts to cause those persons
who may be deemed to be affiliates of FNB pursuant to Rule 145 under the
Page 70
Securities Act of 1933 to deliver to FNLC prior to the date of the special
meeting a written agreement containing certain restrictions on the transfer of
shares of FNLC common stock acquired in the merger which are intended to ensure
compliance with applicable federal securities laws in connection with the
transfer of such shares. See "Resale of FNLC Common Stock" on page __.
Appraisal Rights
The following is a brief summary of the procedures set forth in Chapter 13
of the Maine Business Corporation Act which must be followed by FNB
shareholders who wish to assert their appraisal rights in connection with the
merger and demand that FNLC purchase their FNB shares at fair value. The
complete text of Chapter 13 is attached to this document as Annex III. Failure
to follow the procedures required by Chapter 13 could result in the loss of an
FNB shareholder's appraisal rights. See "Federal Income Tax Consequences"
beginning on page __ for a discussion of the tax consequences of exercising
appraisal rights.
To assert appraisal rights, FNB shareholders must satisfy all of the
conditions of Chapter 13, as follows:
* Before the vote on the merger agreement is taken at the FNB shareholder
meeting, each FNB shareholder who wishes to assert appraisal rights must give
written notice to FNB Bankshares, P.O. Box 258, Bar Harbor, Maine 04609,
Attention: Ronald J. Wrobel, Clerk, of the shareholder's intent to demand
payment for his, her or its FNB shares if the merger takes place and not vote
or cause or permit to be voted any of his, her or its shares in favor of the
proposed merger. This notice is in addition to and separate from any abstention
or any vote, in person or by proxy, cast against approval of the merger
agreement. Voting against, abstaining from voting, or failing to vote on the
merger agreement will not constitute notice of intent to demand payment of fair
value within the meaning of Chapter 13.
* An FNB shareholder who wishes to assert his, her or its appraisal rights may
not vote and of his, her or its FNB shares for approval of the merger
agreement. If an FNB shareholder returns a signed proxy but does not specify in
the proxy a vote against the merger agreement or an instruction to abstain, the
proxy will be voted for approval of the merger agreement, which will have the
effect of waiving the rights of that FNB shareholder to have his, her or its
FNB shares purchased at fair value. Abstaining from voting or voting against
the merger agreement will not constitute a waiver of an FNB shareholder's
appraisal rights.
If the merger agreement is approved, FNLC will send a written appraisal
notice and payment demand form not later than 10 days after the merger takes
place to each FNB shareholder who has given the written notice described above
and did not vote to approve the merger agreement. The appraisal notice will
state FNLC's estimate of the fair value of the FNB shares, where the payment
demand form must be sent, and where and when FNB share certificates must be
deposited. It will set a date, not fewer than 40 nor more than 60 days after
the date the appraisal notice is sent, by which the payment demand form must be
received from the dissenting shareholder. The payment demand form will require
an FNB shareholder asserting appraisal rights to certify whether or not the
shareholder acquired beneficial ownership of the shares before August 26, 2004,
the date the principal terms of the proposed merger were first included in a
filing with the SEC, and that the shareholder did not vote to approve the
merger agreement. FNB shares acquired after August 26, 2004, referred to as
after-acquired shares, may be subject to different treatment in accordance with
Section 1326 of the Maine Business Corporation Act than shares acquired before
that date.
The appraisal notice provided by FNLC will also (i) provide that, if
requested in writing, FNLC will provide, within 10 days after the date by which
receipt of the payment demand is required, the number of FNB shareholders who
returned payment demand forms by the required date and the total number of FNB
shares owned by those shareholders and (ii) provide the date by which an FNB
shareholder who makes a demand may nevertheless decline to exercise appraisal
rights by notifying FNLC in writing. An FNB shareholder who fails to withdraw
from the appraisal process by complying with this requirement may not
thereafter withdraw without FNLC's written consent.
An FNB shareholder who receives an appraisal notice from FNLC must comply
with the terms of the notice. A shareholder who receives an appraisal notice
and does not comply with the terms of the notice is not entitled to payment for
his, her or its shares under Chapter 13.
Appraisal rights under Chapter 13 may be asserted either by a beneficial
shareholder or a record shareholder. A record shareholder may assert appraisal
rights as to fewer than every share registered in his, her or its name only if
the record shareholder objects for all FNB shares beneficially owned by any one
person and notifies FNLC in writing of the name and address of each person on
whose behalf the record shareholder asserts appraisal rights. An FNB beneficial
shareholder may assert appraisal rights as to shares held on his, her or its
behalf only if the beneficial shareholder submits to FNLC the FNB shareholder
of record's written consent before or at the time the beneficial shareholder
asserts appraisal rights and does so for all shares that he, she or it
beneficially owns.
Within 30 days after the date completed payment demand forms are due, FNLC
will pay in cash to each FNB shareholder who complied with the terms of the
appraisal notice the amount FNLC estimates to be the fair value of his, her or
its FNB shares, plus interest. The payment will be accompanied by FNB's balance
sheet for the previous fiscal year, an income statement for that year, a
statement of changes in shareholder's equity and the latest available interim
financial statements; a statement of FNLC's estimate of the fair value of the
FNB shares; and a statement of the right to demand additional payment under
Section 1327 of the Maine Business Corporation Act, if the FNB shareholder is
dissatisfied with the amount of the payment, by notifying FNLC in writing
within 30 days of the shareholder's own estimate of the fair value of his, her
or its FNB shares and interest due, and if the shareholder fails to timely make
such demand, he, she or it will be deemed to have accepted the payment in full
satisfaction of FNLC's obligations under Chapter 13.
FNB shareholders who hold after-acquired shares are not entitled to
payment within 30 days after the date completed payment demand forms are due.
Instead, such shareholders may receive only an offer of payment conditional on
their agreement to accept it in full satisfaction of their claim. Holders of
after-acquired shares who wish to accept the offer must notify FNLC within 30
days after receipt of the offer. FNLC will pay the amount offered to such
holder within 10 days after receipt by it of notice of acceptance.
A holder of FNB shares (including after-acquired shares) may reject FNLC's
offer and seek judicial appraisal of his, her or its FNB shares under Section
1327 of the Maine Business Corporation Act by notifying FNLC in writing of the
rejection of the offer and demand payment of the holder's stated estimate of
fair value of his, her or its shares plus interest within 30 days after receipt
of the offer or payment, as the case may be. A holder who fails to provide
this notice will be deemed to have accepted FNLC's offer or payment, as the
case may be.
If an FNB shareholder makes a demand under Section 1327, and it cannot be
settled within 60 days after FNLC receives the demand, FNLC will petition a
court to determine the fair value of FNB shares and accrued interest and make
all FNB shareholders whose demands remain unsettled parties to the court
proceeding. The costs and expenses of a court proceeding will be determined by
the court and generally will be assessed against FNLC, but these costs and
expenses may be assessed as the court deems equitable against all or some of
the FNB shareholders demanding appraisal who are parties to the proceeding if
the court finds the action of the shareholders in failing to accept FNLC's
offer was arbitrary, vexatious or not in good faith. These expenses may include
the fees and expenses of counsel and experts employed by the parties.
Holders of FNB shares considering demanding the purchase of their shares
at fair value should keep in mind that the fair value of their FNB shares under
Chapter 13 could be more than, the same as, or less than the value of the FNLC
shares they are entitled to receive under the merger agreement if they do not
demand the purchase of their FNB shares at fair value.
This summary is not a complete statement of the provisions of Chapter 13
and is qualified in its entirety by reference to the text of Chapter 13, which
is attached as Annex III.
Operations of FNLC After the Merger
FNLC expects to achieve some cost savings subsequent to the merger from
the elimination of services now outsourced by FNB and integration of back-
office operations. In addition, because FNBBH will be merged with and into
FNBD, the costs associated with FNBBH operating as a separate regulated bank
will be eliminated.
Because of the uncertainties inherent in merging two financial
institutions, changes in the regulatory environment and changes in economic
conditions, no assurances can be given that any particular level of cost
savings will be realized, that any such cost savings will be realized over the
time period currently anticipated or that such cost savings will not be offset
to some degree by increases in other expenses, including expenses related to
integrating the two companies or by declines in revenues due to deposit loss or
other causes. Although management of FNLC has performed substantial financial
analysis of the proposed merger, identification of all cost savings associated
with the merger has not been completed. Moreover, no assurances can be given
that cost savings will be realized at any given time in the future.
It is anticipated that transaction costs will be incurred in connection
with the merger for investment banking, legal and accounting services. These
costs will be assigned to FNLC's goodwill and none will be charged to earnings
as a special charge related to the merger transaction.
Page 73
ADJOURNMENT OF THE SPECIAL MEETING
(FNB and FNLC Proposal 2)
In the event that there are not sufficient votes to constitute a quorum or
approve the adoption of the merger agreement at the time of the special
meetings, the merger agreement could not be approved unless the meeting was
adjourned to a later date or dates in order to permit further solicitation of
proxies. In order to allow proxies that have been received by us at the time of
the special meeting to be voted for an adjournment, if necessary, We have
submitted the question of adjournment to shareholders as a separate matter for
their consideration. Our Boards of Directors unanimously recommend that their
respective shareholders vote "FOR" the adjournment proposal. If it is necessary
to adjourn the special meetings, no notice of the adjourned meeting is required
to be given to shareholders, other than an announcement at the applicable
special meeting of the hour, date and place to which the special meeting is
adjourned.
Page 74
MARKET FOR FNLC COMMON STOCK AND DIVIDENDS
The common stock of FNLC (ticker symbol FNLC) trades on the Nasdaq Stock
Market's National Market. As of November 19, 2004, there were 7,355,471 shares
of FNLC common stock outstanding, which were held by approximately 1,000
shareholders of record. The closing price of FNLC's on the record date of
November 19, 2004, was $ 17.60 per share. There are no warrants outstanding
with respect to FNLC's common stock, and, other than options issued under
FNLC's 1995 Stock Option Plan, FNLC has no securities outstanding which are
convertible into common equity.
The following table reflects the high and low prices of actual sales of
FNLC common stock in each quarter of 2004, 2003 and 2002. Such quotations do
not reflect retail mark-ups, mark-downs or brokers' commissions.
-------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------
High Low High Low High Low
1st Quarter $ 16.833 $ 14.800 $ 12.500 $ 10.000 $ 9.400 $ 7.250
2nd Quarter 24.520 15.083 13.767 11.173 10.667 9.117
3rd Quarter 19.700 17.000 14.333 13.060 10.333 8.533
4th Quarter* 19.250 17.120 17.017 14.167 11.500 9.000
-------------------------------------------------------------------------------
* Through November 19, 2004
The table below sets forth the cash dividends declared by FNLC in the last
two fiscal years:
-------------------------------------------------------------------------------
Date Declared Amount Per Share Date Payable
-------------------------------------------------------------------------------
March 27, 2002 $0.077 April 30, 2002
June 20, 2002 $0.080 July 31, 2002
September 19, 2002 $0.083 October 31, 2002
December 19, 2002 $0.087 January 31, 2003
-------------------------------------------------------------------------------
March 20, 2003 $0.090 April 30, 2003
June 19, 2003 $0.093 July 31, 2003
September 25, 2003 $0.097 October 31, 2003
December 18, 2003 $0.100 January 30, 2004
-------------------------------------------------------------------------------
March 11, 2004 $0.103 April 30, 2004
June 17, 2004 $0.110 July 30, 2004
September 16, 2004 $0.115 October 29, 2004
-------------------------------------------------------------------------------
All per share data presented above has been adjusted to reflect the three-
for-one stock split, effected through a 200% stock dividend, paid June 1, 2004,
to FNLC shareholders of record on May 12, 2004.
The ability of FNLC to pay cash dividends depends on receipt of dividends
from FNBD. Dividends may be declared by FNBD out of its net profits as the
directors deem appropriate, subject to the limitation that the total of all
dividends declared by FNBD in any calendar year may not exceed the total of its
net profits for that year plus retained net profits of the preceding two years.
FNBD is also required to maintain minimum amounts of capital-to-total-risk-
weighted-assets, as defined by banking regulators. At September 30, 2004, FNBD
was required to have minimum Tier 1 and Tier 2 risk-based capital ratios of
4.00% and 8.00%, respectively. FNBD's actual ratios were 11.03% and 12.15%,
respectively, as of September 30, 2004.
MARKET FOR FNB COMMON STOCK AND DIVIDENDS
The common stock of FNB (ticker symbol FBSH) trades on the NASD Over-the-
Counter Market. The following table reflects the high and low prices of actual
sales in each quarter of 2004, 2003 and 2002. On April 2, 2004, FNB effected a
3-for-1 stock split. The split was accomplished by issuing a 200% stock
dividend. The information below is all on a post-split basis. Such quotations
do not reflect retail mark-ups, mark-downs or brokers' commissions.
-------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------
High Low High Low High Low
1st Quarter $ 22.05 $ 18.43 $ 13.17 $ 12.47 $ 11.42 $ 11.17
2nd Quarter 24.68 22.05 14.83 12.52 12.00 11.17
3rd Quarter 41.90 23.50 17.50 14.50 12.33 11.55
4th Quarter* 41.50 40.70 19.00 17.25 13.83 12.02
-------------------------------------------------------------------------------
* Through November 19, 2004
The last known transaction of FNB's stock as of the close of business on
the record date of November 19, 2004, was $ 40.70 per share. There are no
warrants outstanding with respect to FNB's common stock, and FNB has no
securities outstanding which are convertible into common equity other than
options issued under FNB's Stock Option Plan.
The table below sets forth the cash dividends declared by FNB in the last
two fiscal years and in 2004 through November 19, 2004:
-------------------------------------------------------------------
Date Declared Amount Per Share* Date Payable
-------------------------------------------------------------------
May 28, 2002 $0.1500 June 30, 2002
November 26, 2002 0.2166 December 30, 2002
-------------------------------------------------------------------
May 27, 2003 0.1833 June 30, 2003
November 25, 2003 0.2833 December 30, 2003
-------------------------------------------------------------------
May 25, 2004 0.3000 June 30, 2004
September 28, 2004 0.1600 October 29, 2004
-------------------------------------------------------------------
* adjusted to reflect 2004 stock dividend.
The ability of FNB to pay cash dividends depends on receipt of dividends
from FNBBH. Dividends may be declared by FNBBH out of its net profits as the
directors deem appropriate, subject to the limitation that the total of all
dividends declared by FNBBH in any calendar year may not exceed the total of
its net profits for that year plus retained net profits of the preceding two
years. FNBBH is also required to maintain minimum amounts of capital-to-total-
risk-weighted-assets, as defined by banking regulators. At September 30, 2004,
FNBBH was required to have minimum Tier 1 and Tier 2 risk-based capital ratios
of 4.00% and 8.00%, respectively. FNBBH's actual ratios were 9.3% and 10.6%,
respectively, as of September 30, 2004.
FNB contributes shares to FNBBH's employee stock ownership plan. During
2003, 1,350 shares were contributed to this Plan. There were no contributions
to the plan during the first nine months of 2004.
Page 76
INFORMATION ABOUT FNLC
General
FNLC was incorporated under the Maine Business Corporation Act on January
15, 1985, for the purpose of becoming the parent holding company of FNBD. The
common stock of FNBD is the principal asset of FNLC, which has no other
subsidiaries. As of November 19, 2004, FNLC's outstanding shares consisted of
one class of common stock, $.01 par value per share, of which there were
7,355,471 shares outstanding and held of record by approximately 1,000
shareholders.
FNBD was chartered as a national bank under the laws of the United States
on May 30, 1864. FNBD'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 FNBD's common stock is owned by the FNLC.
FNBD 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 U.S. Route 1, Rockland, Maine. FNBD also maintains
an Operations Center at the corner of Bristol Road and Cross Street in
Damariscotta. The mailing address of FNLC's principal executive office is 223
Main Street, P.O. Box 940, Damariscotta, Maine 04543-0940, and the telephone
number for FNLC's executive offices is (207) 563-3195
FNBD emphasizes personal service to the community, concentrating on retail
banking. FNBD's customers are primarily small businesses and individuals for
whom FNBD offers a wide variety of services, including checking, savings and
investment accounts, consumer and commercial and mortgage loans. The banking
business in FNBD'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
FNBD.
In addition to providing traditional banking services, FNBD provides
investment management and private banking services through Pemaquid Advisors,
which is an operating division of FNBD. In 2000, FNBD 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 larger banks have altered their
personal service commitment to clients not meeting established account
criteria. Pemaquid Advisors is able to offer a comprehensive array of private
banking, financial planning, investment management and trust services to
individuals, businesses, non-profit organizations and municipalities of varying
asset size, and to provide the highest level of personal service. The staff
includes investment and trust professionals with extensive experience.
In June, 2001, FNBD acquired White Pine Asset Management of Portland,
Maine, which then became part of Pemaquid Advisors. Pemaquid Advisors operates
from offices on Bristol Road in Damariscotta, Maine, Pleasant Street, in
Brunswick, Maine, and Townsend Avenue, in Boothbay Harbor, Maine.
Page 77
FNBD has concentrated on extending business loans to customers in the
Bank's primary market area and to extending investment and trust services to
clients with accounts of all sizes. FNBD's management also makes decisions
based upon, among other things, the knowledge of FNBD's employees regarding the
communities and customers in the Bank's primary market area. The individuals
employed by FNBD, 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.
FNLC Management and Additional Information
Certain information relating to executive compensation, benefit plans,
voting securities and the principal holders thereof, certain relationships and
related transactions and other related matters as to FNLC is incorporated by
reference or set forth in FNLC's annual report on Form 10-K for the year ended
December 31, 2003 and its quarterly reports on Form 10-Q for the three months
ended March 31, 2004, June 30, 2004, and September 30, 2004, which are
incorporated herein by reference. FNLC or FNB shareholders desiring copies of
such documents may contact FNLC at its address or telephone number indicated
under "Where You Can Find More Information" on page __.
Page 78
INFORMATION ABOUT FNB
General
FNB was incorporated under the general business laws of the State of Maine
on May 7, 1985, for the purpose of becoming the parent holding company of
FNBBH. The common stock of FNBBH is the principal asset of FNB, which has no
other subsidiaries. As of November 19, 2004, FNB's shares consisted of one
class of common stock, $.80 par value per share, of which there were
approximately 315 shareholders of record and 1,048,814 shares outstanding. All
figures in this document related to FNB common stock and values per share have
been adjusted for a 3-for-1 stock split on April 2, 2004 accomplished by
issuing a 200% stock dividend.
FNBBH was chartered as a national bank under the laws of the United States
on November 17, 1888. FNBBH's capital stock consists of one class of common
stock of which 7,500 shares, par value $90.00 per share, are authorized,
issued, and outstanding. All of FNBBH's common stock is owned by FNB.
FNBBH has seven offices in Down East Maine, including its principal office
located on Main Street, Bar Harbor, Hancock County, Maine and seven branch
offices located at 350 Main St, Southwest Harbor, Maine; Seal Cove Road,
Southwest Harbor, Maine; 235 High St., Ellsworth, Maine; 102 Washington St.,
Eastport, Maine; 1 South St., Blue Hill, Maine; 161 North Street, Calais,
Maine; and 102B Main St., Northeast Harbor, Maine.
FNBBH emphasizes personal service to the community, concentrating on
retail banking. Customers are primarily small businesses and individuals for
whom FNBBH offers a wide variety of services, including checking, savings and
investment accounts, consumer and commercial and mortgage loans. The banking
business in FNBBH'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
FNBBH.
In addition to providing traditional banking services, FNB provides trust
and investment management services through its Trust and Investment Services
Department. The Trust and Investment Services Department offers investment
management and trust services to individuals, businesses, non-profit
organizations and municipalities of varying asset size. The staff includes
investment and trust professionals with extensive experience.
As of September 30, 2004 FNB had total assets amounting to $239.8 million,
loans amounting to $183.2 million, and deposits amounting to $207.1 million.
FNBBH has concentrated on extending business loans to customers in FNBBH's
primary market area and to extending investment and trust services to clients
with accounts of all sizes. FNBBH's management also makes decisions based upon,
among other things, the knowledge of FNBBH's employees regarding the
communities and customers in FNBBH's primary market area. The individuals
employed by FNBBH, 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 FNBBH to respond to customer questions and
concerns on a timely basis and fosters quality customer service.
FNBBH'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 FNBBH's employees are all
factors affecting FNBBH's ability to be competitive.
Page 79
Employees
At November 15, 2004, FNB had 85 employees and full-time equivalency of 83
employees. FNB enjoys good relations with its employees. A variety of employee
benefits, including health, group life and disability insurance, a defined
contribution retirement plan, and an incentive bonus plan, are available to
qualifying officers and employees.
Properties
The principal office of FNBBH is located in Bar Harbor, Maine, and serves
the people of Bar Harbor, Mount Desert, Southwest Harbor, Tremont, and Trenton.
A branch office opened in Southwest Harbor in 1952, which is located
approximately fifteen miles from Bar Harbor, serving the population of
Southwest Harbor, Tremont, Swans Island and the Cranberry Islands.
In 1967, FNBBH opened a branch office in Calais, which is situated
approximately 115 miles from Bar Harbor. Calais is located in Washington County
which is contiguous to Hancock County. This office serves the communities of
Calais, Princeton, Baileyville, Robbinston, Charlotte, Alexander, Baring, and
Red Beach, Maine; St. Stephen, New Brunswick, Canada; and neighboring areas.
In 1971, a branch office was opened in Ellsworth, which is approximately
twenty-two miles from Bar Harbor. This office serves the towns of Ellsworth,
Lamoine, Trenton, Surry, Franklin, Sullivan, Hancock, Waltham, Mariaville, Otis
and neighboring areas.
In 1988 a drive up facility was opened in Southwest Harbor which is
located approximately one mile from the Southwest Harbor branch.
In 1990, a branch was opened in Eastport, Maine. This office serves the
communities of Eastport, Perry, Pembroke, Dennysville, Robbinston and
neighboring areas.
In June of 1998, FNBBH opened its branch in Northeast Harbor. The office
serves the towns of Mount Desert, Islesford, and neighboring areas.
In December of 1999 a branch was opened in Blue Hill located inside the
Tradewinds supermarket. This was FNBBH's first supermarket branch. In August of
2004 a free standing branch was opened in Blue Hill adjacent to the supermarket
and the supermarket branch was closed. The Blue Hill branch serves the
communities of Blue Hill, Surry, Brooklin, Deer Isle, Stonington, Penobscot,
Sedgwick and neighboring areas.
FNB owns all of its facilities except for the land on which the Ellsworth
branch is located, the Calais branch, the Southwest Harbor drive-up facility
and the Northeast Harbor branch, for which FNBBH has entered into long-term
leases. Management believes that FNBBH's current facilities are suitable and
adequate in light of its current needs and its anticipated needs over the near
term.
Page 80
FNB SELECTED FINANCIAL DATA
-------------------------------------------------------------------------------
Dollars in thousands, except for per share amounts
Years ended December 31, 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Summary of Operations
Operating Income $ 14,171 14,528 15,907 15,038 12,300
Operating Expense 11,014 11,734 13,501 12,702 10,981
Net Interest Income 7,830 7,849 7,589 6,962 5,810
Provision for Loan Losses 360 722 600 410 565
Net Income 2,019 1,477 1,290 1,344 514
Per Common Share Data (b)
Net Income
Basic 1.92 1.40 1.21 1.23 0.47
Diluted 1.86 1.37 1.19 1.23 0.47
Cash Dividends (Declared) 0.47 0.37 0.30 0.27 0.23
Book Value 14.66 13.24 11.86 11.06 9.42
Market Value 18.33 13.83 12.08 9.00 8.83
Financial Ratios
Return on Average Equity(a) 13.9% 11.2% 10.5% 12.0% 4.9%
Return on Average Assets(a) 0.99 0.78 0.72 0.83 0.36
Average Equity to Average Assets 7.11 6.71 6.89 6.77 7.34
Net Interest Margin (Tax-Equivalent) 4.30 4.49 4.63 4.79 4.53
Dividend Payout Ratio (Declared) 24.14 26.19 24.46 21.62 50.00
Allowance for Loan Losses/Total Loans 1.23 1.14 1.18 1.28 1.11
Non-Performing Loans to Total Loans 0.53 0.76 3.37 2.09 2.54
Non-Performing Assets to Total Assets 0.39 0.58 2.56 1.36 1.73
Efficiency Ratio (Tax-Equivalent)(c) 73.22 73.11 75.21 74.15 81.59
At Year End
Total Assets $ 219,634 195,414 184,629 175,271 150,423
Total Loans 161,127 149,006 140,442 114,517 102,597
Total Investment Securities 35,356 32,635 30,911 40,928 34,382
Total Deposits 185,712 162,088 137,923 125,412 115,953
Total Shareholders' Equity 15,323 13,975 12,486 12,054 10,365
-------------------------------------------------------------------------------
High Low
Market price per common share of stock during 2003 $ 19.00 12.47
-------------------------------------------------------------------------------
(a) Annualized using a 365-day basis
(b) Adjusted for a three-for-one stock split, in the form of a 200% stock
dividend, payable April 2, 2004, to shareholders of record on March 22,
2004.
(c) FNB uses the following formula in calculating its efficiency ratio:
Non-Interest Expense - Loss on Securities Sales - Loss on Mortgage Sales
------------------------------------------------------------------------------
Tax-Equivalent Net Interest Income + Non-Interest Income - Gains on Securities
- Gains on Mortgage Sales
------------------------------------------------------------------------------
Page 81
-----------------------------------------------------------------------------
For the nine months For the quarters
Dollars in thousands, ended September 30, ended September 30,
except for per share amounts 2004 2003 2004 2003
-----------------------------------------------------------------------------
Summary of Operations
Operating Income $11,162 $10,601 $4,093 $3,849
Operating Expense 8,791 8,505 3,210 3,097
Net Interest Income 6,290 5,903 2,246 1,980
Provision for Loan Losses 180 270 60 90
Net Income 1,769 1,521 658 532
-----------------------------------------------------------------------------
Per Common Share Data(b)
Basic Earnings per Share $1.69 $1.44 $0.63 $0.50
Diluted Earnings per Share 1.62 1.41 0.60 0.49
Cash Dividends Declared 0.46 0.18 0.16 0.00
Book Value 15.91 14.36 15.91 14.36
Market Value 41.25 17.42 41.25 17.42
-----------------------------------------------------------------------------
Financial Ratios
Return on Average Equity (a) 14.95% 14.02% 16.10% 14.36%
Return on Average Assets (a) 1.05% 1.01% 1.13% 1.00%
Average Equity to Average Assets 7.03% 7.23% 7.02% 6.98%
Net Interest Margin Tax-Equivalent (a) 4.23% 4.36% 4.39% 4.16%
Dividend Payout Ratio 17.75% 12.41% 0% 0%
Allowance for Loan
Losses to Total Loans 1.16% 1.20% 1.16% 1.20%
Non-Performing Loans
to Total Loans 0.65% 0.40% 0.65% .40%
Non-Performing Assets
to Total Assets 0.50% 0.29% 0.50% 0.29%
Efficiency Ratio (Tax-Equivalent)(c) 72.34% 72.77% 72.33% 73.84%
-----------------------------------------------------------------------------
At Period End
Total Assets 239,777 219,059 239,777 219,059
Total Loans 183,212 156,228 183,212 156,228
Total Investment Securities 27,615 27,771 27,615 27,771
Total Deposits 207,100 189,677 207,100 189,677
Total Shareholders' Equity 16,664 15,171 16,664 15,171
-----------------------------------------------------------------------------
(a) Annualized using a 365-day basis
(b) Adjusted for a three-for-one stock split, in the form of a 200% stock
dividend, payable April 2, 2004, to shareholders of record on March 22,
2004.
(c) FNB uses the following formula in calculating its efficiency ratio:
Non-Interest Expense - Loss on Securities Sales - Loss on Mortgage Sales
------------------------------------------------------------------------------
Tax-Equivalent Net Interest Income + Non-Interest Income - Gains on Securities
- Gains on Mortgage Sales
------------------------------------------------------------------------------
Page 82
FNB MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section discusses FNB's financial condition and results of
operations for the years ended December 31, 2003, 2002 and 2001, and for the
nine months ended September 30, 2004. It should be read in conjunction with
FNB's financial statements for the corresponding periods contained in Annex IV.
Overview
FNB was incorporated in the State of Maine on January 15, 1985, to become
the parent holding company of FNBBH. FNB generates almost all of its revenues
from FNBBH, which was chartered as a national bank under the laws of the United
States on November 17, 1888. FNBBH has seven offices in Down East Maine,
including its principal office in Bar Harbor, as well as branch offices in
Ellsworth, Southwest Harbor, Northeast Harbor, Blue Hill, Calais and Eastport.
FNBBH emphasizes personal service to the communities it serves, concentrating
primarily on small businesses and individuals.
FNB does not have operations separate from its bank subsidiary. FNBBH
offers a wide variety of traditional banking services and derives the majority
of its revenues from net interest income - the spread between what it earns on
loans and investments and what it pays for deposits and borrowed funds. While
net interest income typically increases as earning assets grow, the spread can
vary up or down depending on the level and direction of movements in interest
rates. Management believes FNBBH has limited exposure to changes in interest
rates, as discussed in "Interest Rate Risk Management" on page ___. In
addition, the banking business in FNBBH's market area historically has been
seasonal with lower deposits in the winter and spring and higher deposits in
the summer and fall. This seasonal swing is fairly predictable and has not had
a materially adverse effect on FNBBH.
Non-interest income is FNBBH's secondary source of revenue and includes
fees and service charges on deposit accounts, fees for processing merchant
credit card receipts, income from the sale and servicing of mortgage loans, and
income from trust and investment management services. Gains on the sale of
mortgages have been substantial in 2002 and 2003 as low interest rates have
caused more purchases and refinances. This trend has continued into 2004 as
rates have remained low. The activity is expected to subside as a large portion
of the mortgage portfolio has refinanced.
FNB posted record earnings in 2003, 2002, and 2000, with 2001 earnings
four percent lower than in 2000. During this four-year period, FNB focused on
market share, asset growth, asset quality, and increased efficiency to increase
its profitability. In 2000, FNB's management set five year goals of becoming a
high-performing bank, establishing goals of return on equity of 15.0% and
return on assets of 1.0%. In 2003 these goals were nearly reached with a return
on average equity of 13.9% and return on average assets of 0.99%. Through
September 30, 2004, FNB earned a return on average equity of 14.9% and return
on average assets of 1.1%. The Holden branch, which was an under performing
location, was sold in February 2000. Impaired loans were reduced by
approximately $1.5 million in 2000 and decreased from $3,762,000 at December
31, 1999 to $847,000 as of December 31, 2003.
FNB's efficiency ratio in 2003 amounted to 73.22%, versus 73.11% in 2002.
The efficiency ratio was up slightly in 2003 but has improved over the past
five years from a high of 81.59% in 1999 as a result of higher net income and a
focus on controlling operating expenses. Year to date through September 30,
2004 the efficiency ratio amounted to 72.34%.
Page 83
FNB Critical Accounting Policies
Management's discussion and analysis of FNB's financial condition is based
on the consolidated financial statements which are prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of such financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, management evaluates its estimates, including those related to
the allowance for loan losses and the valuation of mortgage servicing rights.
FNB management bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets that are not readily apparent from other sources. Actual
results are likely to differ from the amount derived from management's
estimates and assumptions, and such differences could be substantial.
FNB's management believes the allowance for loan losses is a critical
accounting policy that requires the most significant estimates and assumptions
used in the preparation of the consolidated financial statements. The allowance
for loan losses is based on FNB management's evaluation of the level of the
allowance required in relation to the estimated loss exposure in the loan
portfolio. Management believes the allowance for loan losses is a significant
estimate and therefore regularly evaluates it for adequacy by taking into
consideration factors such as prior loan loss experience, the character and
size of the loan portfolio, business and economic conditions and management's
estimation of potential losses. The use of different estimates or assumptions
could produce different provisions for loan losses. The allowance for loan
losses is discussed in more detail under "Assets and Asset Quality" on page 96.
The valuation of mortgage servicing rights is also a critical accounting
policy which requires significant estimates and assumptions. FNBBH often sells
mortgage loans it originates and retains the ongoing servicing of such loans,
receiving a fee for these services, generally 0.25% of the outstanding balance
of the loan per annum. Mortgage servicing rights are recognized when they are
acquired through sale of loans and are reported in other assets. They 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.
FNB's management uses an independent firm which specializes in the valuation of
mortgage servicing rights to determine the fair value recorded on the balance
sheet. This includes an evaluation for impairment based upon the fair value of
the rights, which can vary depending upon current interest rates and prepayment
expectations, as compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such as interest rates and
terms. The use of different assumptions could produce a different valuation for
both mortgage servicing rights and impairment.
Page 84
FNB Results of Operations
-------------------------------------------------------------------------------
Net income for the year ended December 31, 2003 was $2.019 million -- the
highest ever recorded by FNB. This represents a 36.7%, or $542,000, increase
from net income of $1.477 million posted in 2002 and is $729,000, or 56.5%,
above 2001 net income of $1.290 million. The results are attributable to strong
asset growth, improved asset quality, increased non-interest income and
controlled operating expenses.
FNB's net income for the nine months ended September 30, 2004 equaled
$1.769 million versus net income of $1.521 million for the corresponding period
ended September 30, 2003. This represents a $248,000, or 16.3%, increase.
FNB Net Interest Income
Net interest income in 2003 was $7.831 million, a decrease of $18,000, or
0.2%, from the $7.849 million posted by FNB in 2002. While significant growth
in earning assets was posted in 2003, at the same time FNB experienced margin
compression as a result of Federal Reserve policy on interest rates.
FNB's net interest income for the nine months ended September 30, 2004 was
$6.290 million, an increase of $387,000, or 6.6%, over the $5.903 million
realized for the nine months ended September 30, 2003.
Asset growth was responsible for FNB's net interest income, on a tax-
equivalent basis, increasing by $466,000 in 2003, while margin compression
reduced the increase by $420,000, resulting in a net decrease of $10,000 after
adjusting for other decreasing factors of $56,000.
The following tables present changes in interest income and expense
attributable to changes in interest rates, volume, and rate/volume for
interest-earning assets and interest-bearing liabilities of FNB. Tax-exempt
income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2003,
2002 and 2001.
-------------------------------------------------------------------------------
Year ended December 31, 2003 compared to 2002
Dollars in thousands Volume Rate Rate/volume1 Total
-------------------------------------------------------------------------------
Interest on earning assets
Interest-bearing deposits $ 1 - (1) -
Investment securities 26 (470) (7) (451)
Loans held for sale 123 (8) (25) 90
Loans 413 (981) (40) (608)
-------------------------------------------------------------------------------
Total interest income 563 (1,459) (73) (969)
-------------------------------------------------------------------------------
Interest expense
Deposits 357 (813) (99) (555)
Other borrowings2 (260) (226) 82 (404)
-------------------------------------------------------------------------------
Total interest expense 97 (1,039) (17) (959)
-------------------------------------------------------------------------------
Change in net interest income $ 466 (420) (56) (10)
===============================================================================
Page 85
-------------------------------------------------------------------------------
Year ended December 31, 2002 compared to 2001
Dollars in thousands Volume Rate Rate/volume1 Total
-------------------------------------------------------------------------------
Interest on earning assets
Interest-bearing deposits $ 1 (2) - (1)
Investment securities (184) (593) 44 (733)
Loans held for sale (7) (4) 1 (10)
Loans 1,431 (1,779) (239) (587)
-------------------------------------------------------------------------------
Total interest income 1,241 (2,378) (194) (1,331)
-------------------------------------------------------------------------------
Interest expense
Deposits (100) (983) 25 (1,058)
Other borrowings2 (309) (497) 108 (698)
-------------------------------------------------------------------------------
Total interest expense (409) (1,480) 133 (1,756)
-------------------------------------------------------------------------------
Change in net interest income $1,650 (898) (327) 425
===============================================================================
1 Represents the change attributable to a combination of change in rate
and change in volume.
2 Includes federal funds purchased.
The following table presents, for the years ended December 31, 2003, 2002
and 2001, 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.
Page 86
-------------------------------------------------------------------------------
Years ended December 31, 2003 2002 2001
--------------- -------------- ---------------
Amount Avg Amount Avg Amount Avg
of Yield/ of Yield/ of Yield/
Dollars in thousands interest Rate interest Rate interest Rate
-------------------------------------------------------------------------------
Interest-earning assets
Interest-bearing deposits $ 1 0.61% 1 1.49% 2 6.46%
Investments 1,311 3.59% 1,762 4.90% 2,495 6.43%
Loans held for sale 132 6.27% 42 7.83% 52 8.51%
Loans 9,469 6.21% 10,077 6.88% 10,664 8.25%
-------------------------------------------------------------------------------
Total interest-earning
assets 10,913 5.71% 11,881 6.49% 13,213 7.83%
-------------------------------------------------------------------------------
Interest-bearing liabilities
Deposits 2,380 1.64% 2,935 2.27% 3,993 3.01%
Other borrowings 313 1.93% 717 2.82% 1,415 4.34%
-------------------------------------------------------------------------------
Total interest-bearing
liabilities 2,693 1.67% 3,652 2.36% 5,407 3.27%
-------------------------------------------------------------------------------
Net interest income $ 8,220 8,229 7,806
===============================================================================
Interest rate spread 4.04% 4.13% 4.56%
Net interest margin 4.30% 4.49% 4.63%
-------------------------------------------------------------------------------
FNB Non-Interest Income
Non-interest income increased by 20.5% from $3.027 million in 2002 to
$3.647 million in 2003. The increase was attributable to increased income on
mortgage origination and servicing due to higher volumes of loan sales in a
favorable interest rate climate, increased merchant credit card volume and
increased document preparation fees on loans. Non-interest income increased
4.0% in 2002 to $3.027 million from 2001's level of $2.91 million. The increase
was attributable to increased income on mortgage origination and servicing due
to higher volumes of loan sales, document preparation fees on loans, and
increased merchant credit card volume offset by a decrease in gains on sales of
securities.
FNB's non-interest income amounted to $3.028 million in the first nine
months of 2004 which was an increase of $0.366 million, or 13.7%, over the
$2.662 million during the first nine months of 2003. FNB introduced an
overdraft protection product in January of 2004 which was the primary factor
causing a 60.0%, or $252,000, increase in service charges on deposit accounts
in the nine months ended September 30, 2004 over the same period in 2003.
FNB Non-Interest Expense
Non-interest expense increased 2.97% to $8.32 million in 2003 from $8.08
million in 2002. The increase was the result of increased expenses related to
the merchant credit card program. In 2002, non-interest expense stayed
substantially the same as in 2001, decreasing to $8.08 million from $8.09
million. There were increases in salaries and benefits, occupancy and
equipment, and merchant credit card program expenses. There was a drop of $.268
million in realized losses on securities available to $0.038 million in 2002
from $.306 million in 2001.
Page 87
Non-interest expense of $6.8 million for the nine months ended September
30, 2004 is an increase of 9.2% over non-interest expense of $6.2 million for
the first nine months of 2003. Normal increases in the costs of personnel,
products and services as well as increases in merchant credit card processing
fees, due to increased volume, and publicity and advertising, due to marketing
efforts, were primary causes of the increase.
FNB Net Income
Net income for 2003 was $2.019 million - a 36.7%, or $0.542 million,
increase from net income of $1.477 million that was posted in 2002. While net
interest income decreased 0.2%, the significant increase in non-interest income
and decrease in provision for loan losses played a major role in FNB's overall
performance. Diluted earnings per share for the year ended December 31, 2003
increased 36% to $1.88, compared to $1.38 in 2002, and $1.20 in 2001. Both
earnings per share and net income reported by FNB set new records in 2003. Book
value per share was $14.66 on December 31, 2003, up from $13.24 on December 31,
2002 and $11.86 on December 31, 2001. Net income for the year ended December
31, 2002 was $1.477 million - a 14.5% or $.187 million increase from net income
of $1.29 million that was posted in 2001. Increased net interest income, higher
levels of non-interest income and controlled operating expenses were the major
factors in these results.
Net income of $1.77 million through the first nine months of 2004
increased 16% over net income of $1.52 million for the same period in 2003.
Provisions for loan losses in the nine months ended September 30, 2004 amounted
to $180,000 versus $270,000 for the same period in 2003.
FNB Key Ratios
Return on average assets in 2003 was .99%, up from .78% in 2002 and .72%
in 2001. Return on average equity was 13.9% in 2003, compared to 11.2% in 2002
and 10.5% in 2001. The increase in 2003 was primarily due to the record
earnings caused by the factors noted above.
Annualized return on average assets for the first nine months of 2004 was
1.05%, up slightly from 1.01% during the same period in 2003. Annualized return
on average equity was 14.95% for the first nine months of 2004, up from 14.02%
for the first nine months of 2003. FNB's efficiency ratio for the first nine
months of 2004 was 72.34%, compared to 72.77% for the same period in 2003.
FNB Investment Management and Fiduciary Activities
As of December 31, 2003, FNBBH's trust and investment services department
had assets under management with a market value of $113 million, consisting of
590 trust accounts, estate accounts, agency accounts, custody accounts, and
self-directed individual retirement accounts. This compares to December 31,
2002 when 603 accounts with market value of $90.8 million were under
management. The growth in assets under management during 2003 was the result of
a combination of new assets as well as an increase in the market value of
existing assets. Increased business development efforts resulted in the
increase in new accounts opened in 2003 and the first six months of 2004.
As of September 30, 2004 assets under management consisted of 555 accounts
with a market value of $123 million. Fiduciary income amounted to $.487 million
during the first nine months of 2004, an increase of $.122 million, or 34%,
over the $.365 million generated during the first nine months of 2003.
Page 88
FNB Average Daily Balance Sheets
The following table shows FNB's average daily balance sheets for the
years ended December 31, 2003, 2002 and 2001.
-------------------------------------------------------------------------------
Dollars in thousands
Years ended December 31, 2003 2002 2001
-------------------------------------------------------------------------------
Cash and due from banks $ 7,186 6,537 6,070
Interest-bearing deposits 108 47 32
Federal funds sold 6,227 4,565 2,949
Investments
U.S. Treasury securities
& government agencies 8,430 6,895 11,450
Obligations of states
& political subdivisions 7,430 7,681 3,262
Other securities 14,399 16,808 21,153
-------------------------------------------------------------------------------
Total investments 30,259 31,384 35,865
-------------------------------------------------------------------------------
Loans held for sale 2,103 533 613
-------------------------------------------------------------------------------
Loans
Commercial 89,126 83,427 75,428
Consumer 7,637 6,782 5,995
State and municipal 9,202 7,024 4,290
Real estate 48,742 49,897 43,549
-------------------------------------------------------------------------------
Total loans 154,707 147,130 129,262
Allowance for loan losses 1,873 1,561 1,606
-------------------------------------------------------------------------------
Net loans 152,834 145,569 127,656
Fixed assets 3,148 3,072 3,518
OREO -- 34 --
Other assets 2,901 2,548 2,503
-------------------------------------------------------------------------------
Total assets $ 204,766 194,289 179,206
===============================================================================
Page 89
FNB Average Daily Balance Sheets, Continued
-------------------------------------------------------------------------------
Dollars in thousands
Years ended December 31, 2003 2002 2001
-------------------------------------------------------------------------------
Deposits
Demand $ 26,964 24,499 22,340
NOW 38,375 30,216 20,495
Money market 14,239 9,272 5,722
Savings 42,847 41,500 38,977
Certificates of deposit 40,045 36,511 34,102
Certificates of deposit
over $100,000 9,546 11,833 10,954
-------------------------------------------------------------------------------
Total deposits 172,016 153,831 132,590
Federal funds purchased 916 574 1,479
Securities sold under agreements
to repurchase 9,398 12,351 15,458
FHLB short term advances 3,043 8,505 10,797
FHLB long term advances 2,500 2,800 3,000
Treasury, tax & loan deposits 354 1,208 1,827
Other liabilities 1,871 1,901 1,657
-------------------------------------------------------------------------------
Total liabilities 190,098 181,170 166,808
-------------------------------------------------------------------------------
Common stock 298 300 300
Additional paid in capital 784 755 755
Retained earnings 14,431 12,754 12,050
Treasury stock (845) (690) (707)
------------------------------------------------------------------------------
Total capital 14,668 13,119 12,398
-------------------------------------------------------------------------------
Total liabilities and capital $ 204,766 194,289 179,206
===============================================================================
Page 90
FNB Average Daily Balance Sheets
The following table shows FNB's average daily balance sheets for the nine-month
periods ended September 30, 2004 and 2003.
--------------------------------------------------------------------------
Nine-Month Periods ended September 30,
Dollars in thousands 2004 2003
--------------------------------------------------------------------------
Cash and due from banks $ 7,882 $ 6,916
Interest bearing deposits 116 119
Federal funds sold 774 3,872
Investments
U.S. Treasury securities & government agencies 9,692 7,349
Obligations of states & political subdivisions 7,703 7,365
Other securities 14,517 14,754
--------- ---------
Total investments 31,912 29,468
--------- ---------
Loans held for sale 799 1,666
--------- ---------
Loans
Commercial 98,959 88,760
Consumer 8,475 7,650
State and municipal 12,837 8,720
Real estate 54,628 49,149
--------- ---------
Total loans 174,899 154,279
Allowance for loan losses (2,056) (1,843)
--------- ---------
Net loans 172,843 152,436
--------- ---------
Bank premises and equipment, net 4,089 3,105
Other assets 6,081 2,380
--------- ---------
Total assets $224,496 $ 199,962
========= =========
Page 91
FNB Average Daily Balance Sheets, Continued
--------------------------------------------------------------------------
Nine-Month Periods ended September 30,
Dollars in thousands 2004 2003
--------------------------------------------------------------------------
Deposits
Demand $ 30,816 $ 25,907
NOW 40,552 36,375
Money market 20,437 12,794
Savings 46,044 42,039
Certificates of deposit 39,879 40,079
Certificates of deposit over $100,000 10,529 9,568
--------- ---------
Total deposits 188,257 166,762
--------- ---------
Federal funds purchased 2,534 1,224
Securities sold under agreements
to repurchase 9,946 8,621
FHLB short term advances 3,792 4,065
FHLB long term advances 2,000 2,500
Treasury, tax & loan deposits 352 449
Other liabilities 1,832 1,874
--------- ---------
Total liabilities 208,713 185,495
--------- ---------
Common stock 682 300
Additional paid-in capital/surplus 118 755
Retained earnings 15,580 13,835
Net unrealized gain on
securities available for sale 167 261
Treasury stock (764) (684)
--------- ---------
Total shareholders' equity 15,783 14,467
--------- ---------
Total liabilities and shareholders' equity $224,496 $ 199,962
========= =========
---------------------------------------------------------------------------
Page 92
FNB Assets and Asset Quality
-------------------------------------------------------------------------------
FNB experienced 12.4% asset growth in 2003, with the loan portfolio
increasing by $12.091 million, or 8.12%, and the investment portfolio
increasing $2.721 million, or 8.86%. Total assets increased by $24.2 million
from $195.4 million to $219.6 million. Asset growth was funded with deposits,
which increased $23.6 million, or 14.6%. Net interest margin decreased from
4.49% in 2002 to 4.30% in 2003 resulting in a decrease in tax-equivalent net
interest income of $0.01 million, or 0.12%, to $8.219 million. In FNB
management's opinion, significant improvements have been made to loan quality
over the past three years. FNBBH's loan delinquency ratio decreased in 2003 to
0.50% at year end, versus 0.85% on December 31, 2002 and 1.50% on December 31,
2001. The percentage of classified loans to Tier 1 capital decreased in 2003 to
8.75%, versus 18.70% on December 31, 2002 and 41.43% on December 31, 2001. In
FNB management's opinion, there has been no pattern or trend in loan
delinquencies which is of concern. The levels seen in 2003 and 2002 are
reflective of FNBBH's ability to control loan quality and resolve delinquency
issues quickly.
FNB's total assets increased from $219.1 million at September 30, 2003 to
$239.8 million at September 30, 2004, an increase of 9.5%. Total net loans
increased by $23.3 million, or 14.7%, while the investment portfolio decreased
by $.2 million, or .6%, over the same period.
FNB Investment Activities
During 2003, FNB's investment portfolio increased 8.3% to end the year at
$35.36 million, compared to $32.6 million on December 31, 2002. Much of FNB's
investment portfolio consists of callable securities, and the declining
interest rate environment in 2003 resulted in a number of these securities
being called by issuers. FNB was able to replace these securities at favorable
levels and post a $2.7 million net growth in the portfolio in 2003. Due to
calls on U.S. Government Agency securities and pay downs on mortgage-backed
securities, FNB's total investments decreased to $27.6 million on September 30,
2004, a decrease of 21.9% from December 31, 2003.
FNB's investment securities are classified into two categories: securities
available for sale and securities to be held to maturity, with substantially
all of FNB's investment securities held in the available for sale category.
Securities available for sale consist primarily of debt securities which FNB
management intends to hold for indefinite periods of time. They may be used as
part of FNB's funds management strategy, and may be sold in response to changes
in interest rates, changes in prepayment risk, changes in liquidity needs, a
need to increase capital ratios, or for other similar reasons. Securities to be
held to maturity consist primarily of debt securities that FNB has acquired
solely for long-term investment purposes, rather than for trading or future
sale. For securities to be categorized as held to maturity, FNB management must
have the intent and FNB must have the ability to hold such investments until
their respective maturity dates. FNB does not hold trading account securities.
All investment securities are managed in accordance with a written
investment policy adopted by FNB's Board of Directors. It is FNB's general
policy that investments 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 93
In 2003, the growth in FNB's investment portfolio was primarily in U.S.
Government Agency securities. These were selected to provide earnings on
seasonal deposits above the fed funds rate and to enhance the portfolio's
overall yield while not materially adding to FNB's level of interest rate risk.
The following table sets forth FNB's investment securities at their carrying
amounts as of December 31, 2003, 2002, and 2001.
-------------------------------------------------------------------------------
Dollars in thousands 2003 2002 2001
-------------------------------------------------------------------------------
Securities available for sale
U.S. Treasury and agency $ 12,520 8,726 5,024
Mortgage-backed securities 13,174 14,901 16,358
State and political subdivisions 7,246 6,527 6,988
Corporate securities -- -- --
Federal Home Loan Bank stock 1,896 1,896 1,896
Federal Reserve Bank stock 40 40 40
Other equity securities -- -- --
-------------------------------------------------------------------------------
$ 34,876 32,090 30,306
-------------------------------------------------------------------------------
Securities to be held to maturity
State and political subdivisions 480 545 605
-------------------------------------------------------------------------------
480 545 605
-------------------------------------------------------------------------------
Total securities $ 35,356 32,635 30,911
===============================================================================
Page 94
The following table sets forth certain information regarding the yields
and expected maturities of FNB's investment securities as of December 31, 2003.
Yields on tax-exempt securities have been computed on a tax-equivalent basis
using a tax-rate of 35%. Mortgage-backed securities are presented according to
their final contractual maturity date, while the calculated yield takes into
effect the intermediate cashflows from repayment of principal which results in
a much shorter average life.
-------------------------------------------------------------------------------
Available for sale Held to maturity
------------------ ----------------
Dollars in thousands 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 1,501 2.50% - -
Due in 5 to 10 years 9,415 2.14% - -
Due after 10 years 1,604 4.23% - -
-------------------------------------------------------------------------------
12,520 2.45% - -
-------------------------------------------------------------------------------
Mortgage-backed securities
Due in 1 year or less 12 5.59% - -
Due in 1 to 5 years 446 2.70% - -
Due in 5 to 10 years 7,131 4.00% - -
Due after 10 years 5,585 5.03% - -
-------------------------------------------------------------------------------
13,174 4.37% - -
-------------------------------------------------------------------------------
State and political subdivisions
Due in 1 year or less - - - -
Due in 1 to 5 years - - 90 3.80%
Due in 5 to 10 years 124 3.20% 390 3.80%
Due after 10 years 7,122 4.79% - -
-------------------------------------------------------------------------------
7,246 4.76% 480 3.80%
-------------------------------------------------------------------------------
Corporate debt securities
Due in 1 year or less - - - -
Due in 1 to 5 years - - - -
Due in 5 to 10 years - - - -
Due after 10 years - - - -
-------------------------------------------------------------------------------
- - - -
-------------------------------------------------------------------------------
Equity securities 1,936 3.11% - -
-------------------------------------------------------------------------------
$ 34,876 3.69% $480 3.80%
===============================================================================
Page 95
FNB Lending Activities
FNB's loan portfolio experienced growth during 2003, with the most
significant increases seen in commercial real estate loans and municipal loans
offset by a decrease in residential loans. The decrease in residential loans
was in large part due to refinances of portfolio loans that were subsequently
sold on the secondary market. Total loans were $161.1 million at December 31,
2003, an 8.1% increase from total loans of $149 million at December 31, 2002.
This continues the loan growth trend experienced by FNB over the past five
years.
Total loans grew by 13.2% from December 31, 2003 to September 30, 2004,
increasing $21.3 million to $184 million. Year-over-year, total loans at the
end of September 2004 increased by $24 million, or 14.7%, from September 30,
2003. Residential real estate loans grew by 11% and commercial real estate
loans by 20.9%, with other categories remaining relatively unchanged.
The following tables summarize FNBBH's loan portfolio as of December 31,
2003, 2002, 2001, 2000 and 1999.
-----------------------------------------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------
Commercial loans
Real estate $ 75,531 46.9% $ 66,557 44.7% $ 65,187 46.4% $ 55,693 48.6% $ 50,415 49.1%
Other 17,616 10.9% 16,469 11.0% 15,204 10.8% 12,763 11.2% 9,302 9.1%
Residential real estate loans
Construction 9,272 5.7% 5,655 3.8% 5,308 3.8% 2,421 2.1% 1,730 1.7%
Term 39,640 24.6% 46,469 31.2% 43,816 31.2% 35,014 30.6% 33,932 33.0%
Consumer loans 7,865 4.9% 7,610 5.1% 6,103 4.4% 5,510 4.8% 4,952 4.8%
Municipal 11,203 7.0% 6,246 4.2% 4,824 3.4% 3,118 2.7% 2,367 2.3%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $161,127 100.0% $149,006 100.0% $140,442 100.0% $114,519 100.0% $102,698 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
-----------------------------------------------------------------------------------------------------------------
The following table sets forth certain information regarding the
contractual maturities of FNBBH's loan portfolio as of December 31, 2003.
-----------------------------------------------------------------------
Dollars in thousands < 1 Year 1-5 Years > 5 years Total
-----------------------------------------------------------------------
Commercial real estate $ 7,447 26,317 39,471 73,235
Commercial other 6,014 10,601 993 17,608
Residential real estate 5,115 8,481 28,783 42,379
Residential construction 8,824 -- 4 8,828
Consumer 2,059 1,947 3,868 7,874
Municipal 5,003 1,904 4,296 11,203
-----------------------------------------------------------------------
Totals $ 34,462 49,250 77,415 161,127
=======================================================================
Page 96
The following table provides a listing of loans by category, excluding
loans held for sale, between variable and fixed rates as of December 31, 2003.
-------------------------------------------------------------------------------
Dollars in thousands Amount % of total
-------------------------------------------------------------------------------
Variable-rate loans
Commercial loans $83,652 51.9%
Consumer loans 2,888 1.8%
Equity loans 6,473 4.0%
Residential adjustable-rate mortgages 18,717 11.6%
-------------------------------------------------------------------------------
Total variable-rate loans 111,730 69.3%
Fixed-rate loans 49,397 30.7%
-------------------------------------------------------------------------------
Total loans $161,127 100.0%
===============================================================================
FNB Loan Concentrations
FNBBH has a significant amount of loans related to the tourist industry.
As of December 31, 2003 FNBBH had $12.3 million in lodging loans and $6.9
million in restaurant loans, representing 7.6% and 4.3%, respectively, of its
total loan portfolio.
Loan concentrations as of September 30, 2004, remained very similar to the
concentrations at December 31, 2003.
FNB Loans Held for Sale
In 2003, FNBBH sold a large volume of residential mortgages into the
secondary market in order to take advantage of increased mortgage underwriting
opportunities resulting from lower interest rates. The sale of these loans in
2003 resulted in a higher level of non-interest income. Loans held for sale are
carried at the lower of cost or market value, which was $1.06 million at
December 31, 2003 compared to $1.23 million at December 31, 2002.
Loans held for sale decreased to $.316 million at September 30, 2004, from
$1.06 million at December 31, 2003 as mortgage rates began to rise.
FNB Allowance for Loan Losses and Loan Loss Experience
The allowance for loan losses represents the amount available for credit
losses inherent in FNB'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, FNB determines the appropriate overall reserve for loan losses
based upon periodic, systematic reviews of its portfolio to identify inherent
losses based on management's judgment about various qualitative factors. These
reviews result in the identification and quantification of loss factors, which
are used in determining the amount of the allowance for loan losses. FNB
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.
Page 97
Commercial loans are individually reviewed and assigned a credit risk
rating from "1" (low risk of loss) to "7" (high risk of loss). For non-impaired
loans with a credit risk rating of "1" to "6", 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 FNB 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, or loans no
longer accruing interest as a result of the deemed uncollectibility of interest
due, 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 provides the basis for the determination of the commercial loan
portion of the allowance for loan losses.
Consumer loans, which include 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 three-year average of annual historical
losses, adjusted for the qualitative factors noted above.
The results of all analyses are reviewed and discussed by the Risk
Management Committee of FNB's Board of Directors. An integral component of
FNB'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. The reserve
methodology is reviewed on a periodic basis and modified as appropriate. Based
on this analysis, including the aforementioned assumptions, FNB believes that
the allowance for loan losses is adequate as of December 31, 2003. Although
management utilizes its best judgment in providing for possible losses, there
can be no assurance FNBBH 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.
The following table reflects FNBBH's allowance for loan losses by category
of loan as of December 31, 2003, 2002, 2001, 2000 and 1999.
-------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Real estate $ 485 30% 420 35% 313 35% 380 33% 306 35%
Commercial 1,169 65% 1,035 60% 1,201 61% 879 62% 694 60%
Consumer 335 5% 245 5% 141 4% 204 5% 135 5%
-------------------------------------------------------------------------------
Total $1,989 100% 1,700 100% 1,655 100% 1,463 100% 1,135 100%
===============================================================================
The percentage is the amount of loans in each category as a percent of
total loans for the stated year.
FNB's reserve for loan losses as a percent of loans as of September 30,
2004 was 1.16%. The commercial category includes commercial real estate loans.
As of September 30, 2004 the allocation remained relatively unchanged from
December 31, 2003.
Page 98
Net loans charged off by FNB in 2003 were $0.071 million, or 0.05%, of
average loans outstanding for the year, which is significantly lower than the
level of net charge-offs in the past five years. This compares to net loan
charge-offs of $0.677 million, or 0.46%, in 2002 and $0.408 million, or 0.32%,
in 2001. The following table summarizes the activity with respect to loan
losses for the years ended December 31, 2003, 2002, 2001, 2000 and 1999.
-------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Balance at beginning of period $1,700 1,655 1,463 1,135 847
Loans charged off:
Commercial 1 45 858 383 131 242
Real estate mortgage 2 19 2 30 72
Consumer 60 68 67 29 43
-------------------------------------------------------------------------------
Total 107 945 452 190 357
-------------------------------------------------------------------------------
Recoveries on loans previously
charged off:
Commercial 1 19 220 34 92 57
Real estate mortgage -- 10 -- 11 3
Consumer 17 38 10 5 20
-------------------------------------------------------------------------------
Total 36 268 44 108 80
-------------------------------------------------------------------------------
Net loans charged off 71 677 408 82 277
Provision for loan losses 360 722 600 410 565
-------------------------------------------------------------------------------
Balance at end of period $1,989 1,700 1,655 1,463 1,135
===============================================================================
Ratio of net loans charged off to
average loans outstanding 0.05% 0.46% 0.32% 0.08% 0.28%
===============================================================================
1 Includes commercial real estate loans
During 2003, a provision for loan losses of $0.360 million was made to the
allowance for loan losses, compared to a provision of $0.722 million in 2002,
and $0.600 million in 2001. In FNB management's opinion, this decreased level
of provision for loan losses in 2003 was appropriate given the amount of growth
in the loan portfolio and the overall credit quality of the portfolio. At
December 31, 2003, the allowance for loan losses stood at $1.989 million, or
1.23%, of total loans outstanding. This compares to $1.7 million, or 1.14%, of
total loans outstanding at December 31, 2002, and $1.655 million, or 1.18%, of
total loans outstanding at December 31, 2001. In FNB management's opinion, past
levels of provision to the allowance for loan losses have been adequate, as
demonstrated by net loans charged off shown in the table above.
During the first nine months of 2004, charge-offs amounted to $105,000,
recoveries amounted to $67,000, and the provision for loan losses amounted to
$180,000; resulting in an allowance for loan losses of $2.143 million, or
1.16% of total loans, as of September 30, 2004.
Page 99
FNB Non-Performing Assets
FNBBH's loan delinquency ratio decreased in 2003 and was 0.65% on December
31, 2003, versus 0.73% on December 31, 2002. The aggregate dollar amount of
loans more than 90 days past-due or on non-accrual status decreased during 2003
by $.056 million. In FNB management's opinion, there has been significant
improvement in the levels of non-performing assets over the past two years in
part due to the increased efforts of management. These efforts include more
timely follow up on delinquent loans and creation of a troubled debt committee
which is active in establishing action plans to address delinquent and non-
performing loans. The following table sets forth a summary of delinquent loans
(more than ninety days past due) by category and total loans carried on a non-
accrual basis as of December 31, 2003, 2002, 2001, 2000 and 1999.
-------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Commercial real estate & business $ 519 804 3,748 1,922 616
Residential real estate 253 173 649 325 981
Consumer 257 108 145 116 107
-------------------------------------------------------------------------------
Total 1,029 1,085 4,542 2,363 1,704
===============================================================================
Non-accrual loans included
in above total $ 705 704 4,211 2,095 1,388
===============================================================================
FNBBH places 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. For the year ended December 31, 2003, gross
interest income that would have been reported for non-accrual loans if the
loans had been current in accordance with their original terms amounted to
$31,070 and the amount of interest income on those loans that was included in
net income amounted to $5,236.
FNBBH's other real estate owned remained at zero, as it has been at
December 31, each of the last five years. Other real estate owned and
repossessed assets are comprised of properties or other assets acquired through
a foreclosure proceeding, or acceptance of a deed or title in lieu of
foreclosure. These categories may also include properties which secure loans
where FNBBH obtains possession of the underlying collateral from the borrower
or other assets repossessed in connection with non-real estate loans.
As of September 30, 2004 delinquent loans amounted to $.21 million and
non-accrual loans amounted to $1.064 million.
Page 100
FNB Funding, Liquidity and Capital Resources
-------------------------------------------------------------------------------
FNBBH's principal sources of funding are deposits and borrowed funds from
the Federal Home Loan Bank. FNBBH has a comprehensive liquidity management
program in place. It maintains adequate funding for its assets by monitoring
anticipated sources and uses of funding. In addition to acquiring deposits in
its local market, FNBBH also has the ability to quickly obtain funding through
wholesale brokers. FNB had funding through wholesale brokers of $7 million at
September 30, 2004 and $5 million at December 31, 2003. FNBBH's liquidity
position is further supplemented with a $5.0 million credit line with a
correspondent bank.
FNBBH maintains an available for sale portfolio of securities to enhance
its overall liquidity position, although it has not found it necessary to
liquidate securities to meet short-term liquidity needs. Instead, FNBBH uses
less costly Federal Home Loan Bank advances for this purpose. FHLB borrowings
amounted to $2.5 million at September 30, 2004; $2.5 million at December 31,
2003; and $2.56 million at September 30, 2003. At December 31, 2003, FNB had a
net unrealized gain of $.254 million (net of $.131 million in deferred income
taxes) on available for sale securities. This unrealized gain is in line with
FNB management's expectations given the drop in interest rates experienced in
2003.
FNB's deposit balances generally increase during the summer and autumn
months of each year due to increased seasonal business activity. In 2003, the
maximum amount of deposits at any month end was $191.1 million on October 31.
Because of uncertainty about future interest rates, in recent years investors
have shown a preference for short-term deposits which could reprice quickly
should rates rise.
As of December 31, 2003, FNB had primary sources of liquidity of $32.5
million, or 14.8% of its assets. It is FNB management's opinion that this is
adequate. FNBBH has established guidelines for liquidity management, with
policies and procedures prescribed in its funds management policy. FNB
management has not seen any recent significant deposit trends which would have
a material effect on FNBBH's liquidity position.
As of September 30, 2004, FNB had primary sources of liquidity of $39.8
million, or 16.6% of its assets. The increase in sources of liquidity from
December 31, 2003 is a typical seasonal fluctuation caused by the seasonal
increase in deposits.
FNB Deposits
FNBBH realized an increase in deposits of 14.6% in 2003, compared to a
17.5% increase in 2002 and a 10.0% increase in 2001. Much of the growth in 2003
was seen in core deposits, which are typically added at favorable cost relative
to borrowed funds. FNBBH added many new relationships with municipalities in
2003 which helped increase deposits.
Page 101
FNBBH's average cost of deposits (including non-interest-bearing accounts)
was 1.38% for the year ended December 31, 2003, compared to 1.91% for the year
ended December 31, 2002 and 3.01% for the year ended December 31, 2001. This
reduction in average cost of deposits over the past two years is consistent
with the policy for lower interest rates set by the Open Market Committee of
the Federal Reserve Board. The following table sets forth the average daily
balance for FNBBH's principal deposit categories for each period.
-------------------------------------------------------------------------------
Dollars in thousands %growth
Years ended December 31, 2003 2002 2001 2003 vs.2002
-------------------------------------------------------------------------------
Demand deposits $ 27,378 24,507 22,280 11.7%
NOW accounts 38,573 30,503 20,052 26.5%
Money market accounts 14,560 9,363 5,764 55.5%
Savings 42,824 41,346 39,094 3.6%
Certificates of deposit 49,656 48,258 45,379 2.9%
-------------------------------------------------------------------------------
Total deposits $172,991 153,977 132,569 12.3%
===============================================================================
The following table sets forth the average cost of each category of
interest-bearing deposits for the periods indicated.
-------------------------------------------------------------------------------
Years ended December 31, 2003 2002 2001
-------------------------------------------------------------------------------
NOW accounts 0.84% 1.12% 1.74%
Money market accounts 1.20% 2.21% 3.28%
Savings accounts 0.98% 1.60% 3.02%
Certificates of deposit 2.98% 3.54% 5.10%
-------------------------------------------------------------------------------
Total interest-bearing deposits 1.40% 1.92% 3.04%
===============================================================================
Of all certificates of deposit, $31.4 million, or 63.7%, will mature by
December 31, 2004. As of December 31, 2003, FNBBH held a total of $13.7 million
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 $ 718
3 months through 6 months 3,793
6 months through 12 months 1,735
Over 12 months 7,491
-------------------------------------------------------------------------------
Total $13,737
===============================================================================
Total deposits amounted to $207.1 million at September 30, 2004, an
increase of 11.5% from December 31, 2003 and an increase of 9.2% from September
30, 2003. The average cost of deposits was 1.3% for the first nine months of
2004 and the allocation by category remains similar.
Page 102
FNB Borrowed Funds
FNB' borrowed funds consists mainly of repurchase agreements and advances
from the Federal Home Loan Bank (FHLB) which are secured by FHLB stock,
selected commercial real estate loans, and qualifying first mortgage loans. At
FHLB, FNBBH has a credit line of $5.0 million for overnight borrowings, plus
short-term and long-term advance capacity of $19.0 million.
FNBBH participates in the Note Option Depository which is offered by the
U.S. Treasury Department. Under this program, FNBBH accumulates tax deposits
made by its customers and is eligible to receive additional Treasury Direct
investments up to an established maximum balance of $30 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, 2003, 2002 and 2001 were $.05 million, $2.5 million and $1.0
million, respectively.
The following table sets forth certain information regarding FNB's short-
term borrowings.
-------------------------------------------------------------------------------
Dollars in thousands 2003 2002 2001
-------------------------------------------------------------------------------
Securities sold under agreements to
repurchase
Amount outstanding at year-end $14,057 12,267 19,282
Weighted average interest rate
at year-end 1.08% 1.41% 1.90%
Maximum amount outstanding at
any month-end during the year $14,057 16,304 19,407
Average amounts outstanding during
the year 9,392 12,362 15,402
Weighted average interest rate
for the year 1.20% 1.76% 2.12%
-------------------------------------------------------------------------------
FHLB short-term advances
Amount outstanding at year-end -- 355 9,722
Weighted average interest rate
at year-end -- 5.75% 4.68%
Maximum amount outstanding at
any month-end during the year 8,292 16,192 16,926
Average amounts outstanding during
the year 3,199 8,663 9,086
Weighted average interest rate
for the year 1.48% 3.80% 4.83%
-------------------------------------------------------------------------------
As of September 30, 2004 borrowed funds totaled $14.0 million, consisting
of FHLB advances amounting to $2.5 million, repurchase agreements amounting to
$11.0 million, and Treasury Tax & Loan advances of $.5 million. Borrowings for
the first nine months of 2004 averaged $18.6 million with an average cost of
1.76%.
Page 103
FNB Capital Resources
FNB's Capital at December 31, 2003 was sufficient to meet the requirements
of regulatory authorities. For the year, average equity to average assets was
7.11% in 2003, versus 6.72% in 2002. Leverage capital of FNB, or total
shareholders' equity divided by average total assets for the current quarter
less goodwill and any net unrealized gain or loss on securities available for
sale, stood at 6.80% on December 31, 2003, versus 6.77% in 2002.
At December 31, 2003, FNB had tier-one risk-based capital of 9.25% and
tier-two risk-based capital of 10.50%, versus 9.57% and 10.82%, respectively,
in 2002. The declines are due to asset growth exceeding capital growth. 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. FNB's
actual levels of capitalization were above the standards to be rated "well-
capitalized" by regulatory authorities. During 2003, FNB declared semi-annual
cash dividends of $0.183 and $0.283 per share, adjusted to reflect the 2004
stock dividend. FNB's dividend payout ratio was 24.14% of earnings in 2003,
26.19% in 2002, and 24.46% in 2001.
In determining future dividend payout levels, FNB's Board of Directors
carefully analyzes capital requirements and earnings retention, as set forth in
FNB's Dividend Policy. The ability of FNB to pay cash dividends to its
shareholders depends on receipt of dividends from its subsidiary, FNBBH. FNBBH
may pay dividends to the extent FNBBH's directors deem appropriate, subject to
the limitation that the total of all dividends declared by FNBBH 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 2004 will be that year's net income plus $2.6 million. A total
of $.49 million in dividends was declared in 2003.
FBB 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 ratios for both FNB and FNBBH remained above levels required in
order to be "well capitalized" as of September 30, 2004.
Page 104
FNB Contractual Obligations and Off-Balance Sheet Activities
The following table sets forth the contractual obligations and commitments to
extend credit of FNB as of December 31, 2003:
-------------------------------------------------------------------------------
Less than 1-3 4-5 More than
Dollars in thousands Total 1 Year Years Years 5 Years
-------------------------------------------------------------------------------
Borrowed funds $ 16,607 14,107 500 -- 2,000
Operating leases 781 133 233 237 178
Certificates of deposit 49,308 31,405 11,958 5,945 --
-------------------------------------------------------------------------------
Total contractual obligations $ 66,696 45,645 12,691 6,182 2,178
===============================================================================
Unused lines, collateralized
by residential real estate $ 17,075 17,075 -- -- --
Other unused commitments 5,259 5,259 -- -- --
Standby letters of credit 1,230 1,230 -- -- --
Commitments to extend credit 17,486 17,486 -- -- --
-------------------------------------------------------------------------------
Total loan commitments and
unused lines of credit $ 41,050 41,050 -- -- --
===============================================================================
FNB 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
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. Commitments for unused lines are agreements to lend to a
customer provided there is no violation of any condition established in the
contract and generally have fixed expiration dates. Standby letters of credit
are conditional commitments issued by FNBBH to guarantee a customer's
performance to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to
customers. As of December 31, 2003, FNB's off-balance-sheet activities
consisted entirely of commitments to extend credit.
FNB Capital Purchases
In 2003, FNB made capital purchases totaling $318,000. This cost will be
amortized over an average of twelve years, adding approximately $27,000 to pre-
tax operating costs per year. The capital purchases include equipment related
to technology.
During the first nine months of 2004, $1.9 million was capitalized by FNB
as part of the construction of the new branch in Blue Hill which opened in
early August. There were no other significant capital purchases during the
first nine months of 2004.
Effect of Future Interest Rates on Post-retirement Benefit Liabilities
In evaluating FNB's post-retirement benefit liabilities, FNB management
believes changes in discount rates will not have a significant impact on future
operating results or financial condition.
Page 105
FNB 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, and FNBBH's
market risk is composed primarily of interest rate risk. FNBBH's
Asset/Liability Committee ("ALCO") is responsible for reviewing the interest
rate sensitivity position of FNB and establishing policies to monitor and limit
exposure to interest rate risk. All guidelines and policies established by ALCO
have been approved by FNB's Board of Directors.
FNB 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 present a reasonably comprehensive view of the magnitude of
interest rate risk in FNB, 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 2003, was -10.8% of total assets. Core deposits with non-contractual
maturities are presented as repricing in the first months time frame of the
analysis.
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 106
FNB's summarized static gap, as of December 31, 2003, 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 $ 13,499 6,521 13,485 7,167
Loans held for sale 1,061 - - -
Loans 72,066 45,997 30,709 10,392
Other interest-earning assets 386 - - -
Non-rate-sensitive assets - - - 18,351
------------------------------------------------------------------------------
Total assets $ 87,012 52,518 44,194 35,910
==============================================================================
Interest-bearing deposits $114,226 22,589 17,791 31,233
Borrowed funds 14,107 - 500 2,000
Non-rate-sensitive liabilities
and equity - - - 17,188
------------------------------------------------------------------------------
Total liabilities and equity $128,333 22,589 18,291 50,421
==============================================================================
Period gap $(41,321) 29,929 25,903 (14,511)
Percent of total assets (18.81%) 13.63% 11.79% (6.61%)
==============================================================================
Cumulative gap (current) $(41,321) (11,392) 14,511 -
Percent of total assets (18.81%) (5.19%) 6.61% 0.00%
==============================================================================
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. FNB
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 September 30, 2004 simulation model projects 2004 net interest income
would decrease by approximately 0.01% of stable-rate net interest income if
rates fall gradually by one percentage point over the next four months, and
increase by approximately 0.01% if rates rise gradually by one percentage
point. Both scenarios are well within ALCO's policy limits. FNB management
believes this reflects a reasonable interest rate risk position. Within a
fifteen month 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 2.10% in a falling rate scenario and increase by 1.89% in a
rising rate scenario.
Page 107
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 quarterly and reviewed by ALCO.
A summary of FNB's interest rate risk simulation modeling as of December
31, 2003 and 2002 is presented in the following table:
------------------------------------------------------------------------------
Changes in Net Interest Income 2003 2002
------------------------------------------------------------------------------
Year 1
Projected change if rates decrease by 1.0% +0.73% -0.58%
Projected change if rates increase by 2.0% -3.44% -1.12%
------------------------------------------------------------------------------
Year 2
Projected change if rates decrease by 1.0% -5.57% -7.04%
Projected change if rates increase by 2.0% +9.02% -12.11%
------------------------------------------------------------------------------
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, 2003,
FNB was not using any derivative instruments for interest rate risk management.
Page 108
FNB Other Information
-------------------------------------------------------------------------------
Impact of Recently Issued Accounting Standards on FNB
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not
yet exist, should be applied to existing contracts as well as new contracts
entered into after June 30, 2003. SFAS No. 149 does not affect FNB's
consolidated financial condition and results of operations.
In May 2003, FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. This Statement does not impact FNB's
consolidated financial statements as FNB does not have financial instruments
with characteristics of both liabilities and equity.
FASB's Emerging Issues Task Force, in its Issue No. 03-1, has issued new
disclosure requirements with respect to investment securities with unrealized
losses that have not been classified as other-than-temporary. Companies are
required to disclose separately investments that have had continual unrealized
losses for twelve months or more, and those that have had continual unrealized
losses for less than twelve months. For investments in the former category, a
narrative disclosure is required that would allow financial statement users to
understand the positive and negative information management considered in
reaching the conclusion that the impairments are not other-than-temporary. The
new disclosure requirements, which are effective for years ending after
December 15, 2003, did not have a material impact on FNB's consolidated
financial statements.
Page 109
In December 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 into law. The Act includes two new
features to Part D of Medicare that could affect the measurement of the
accumulated postretirement benefit obligation ("APBO") and net periodic
postretirement benefit cost for the Plan: a subsidy to plan sponsors that is
based on 28% of an individual beneficiary's annual prescription drug costs
between $250 and $5,000 and the opportunity for a retiree to obtain a
prescription drug benefit under Medicare. The effects of the Act on the APBO or
net periodic postretirement benefit cost are not reflected in the financial
statements or accompanying notes. Pending specific authoritative guidance on
the accounting for the federal subsidy could require FNB to change previously
reported information when the guidance is issued.
In December 2003, FASB issued a revised version of SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The Statement
retains all of the previous requirements and introduces additional disclosure
requirements and interim reporting requirements. SFAS 132 (revised 2003) is
effective for years ending after December 15, 2003.
In May 2004, FASB issued FASB Staff Position (FSP) No. 106-2. The FSP
supersedes FSP No. 106-1, which was issued to address the accounting impact of
the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The
Act includes a prescription drug benefit under Medicare Part D and a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D.
FSP No. 106-2 applies only to sponsors of single-employer plans for which
(1) the employer concludes that prescription drug benefits under the plan are
actuarially equivalent to Medicare Part D and thus qualify for the subsidy, and
(2) the expected amount of the subsidy will offset or reduce the employer-
sponsor's share of the plan's prescription drug coverage. The FSP provides
accounting guidance and required disclosures. For public companies, the FSP is
effective for the first interim or annual period beginning after June 15, 2004.
Management has not determined the effect of FSP 106-2 on FNB's Consolidated
Financial Statements as it has not been able to determine if the FNB's plan is
actuarially equivalent.
Page 110
FNB Quarterly Financial Information
-------------------------------------------------------------------------------
Dollars in thousands 2003 Q1 2003 Q2 2003 Q3 2003 Q4
-------------------------------------------------------------------------------
Balance Sheets
Cash $ 7,615 16,162 27,198 15,211
Investments 29,697 24,744 27,771 35,356
Net loans 154,474 153,638 158,073 160,199
Other assets 5,308 5,612 6,017 8,868
-------------------------------------------------------------------------------
Total assets $197,094 200,156 219,059 219,634
===============================================================================
Deposits $161,215 169,254 189,677 185,712
Borrowed funds 19,392 14,305 12,372 16,607
Other liabilities 2,034 1,638 1,839 1,992
Shareholders' equity 14,453 14,959 15,171 15,323
-------------------------------------------------------------------------------
Total liabilities & equity $197,094 200,156 219,059 219,634
===============================================================================
Income Statements
Interest income $ 2,635 2,685 2,619 2,585
Interest expense 718 679 639 657
-------------------------------------------------------------------------------
Net interest income 1,917 2,006 1,980 1,928
Provision for loan losses 90 90 90 140
-------------------------------------------------------------------------------
Net interest income after provision 1,827 1,916 1,890 1,788
Non-interest income 663 770 1,229 985
Non-interest expense 1,837 1,995 2,367 2,122
-------------------------------------------------------------------------------
Income before taxes 653 691 752 651
Income taxes 170 185 220 153
-------------------------------------------------------------------------------
Net income $ 483 506 532 498
===============================================================================
Basic earnings per share $ .46 .48 .50 .48
Diluted earnings per share $ .45 .47 .49 .47
-------------------------------------------------------------------------------
Page 111
FNB Directors, Management and Additional Information
Pursuant to the Merger Agreement, Messrs. Rosborough and McKim will become
directors of FNLC following the merger, and Messrs. McKim, Wrobel, Dalrymple
and Lay will become executive officers of FNLC. See "Interests of Certain
Persons in the Merger" on page __.
Mark N. Rosborough (56) has served as a Director of FNB and FNBBH since
1989. Mr. Rosborough is currently the Chairman of the Board of Directors of
FNB. He is the owner of J.T. Rosborough Insurance Agency in Ellsworth, Maine.
Tony C. McKim (37), President and Chief Executive Officer of FNB, has over
16 years of experience in the banking industry. He joined FNB in 1992 as an
internal auditor and prior to becoming President and Chief Executive Officer in
2000, spent 8 years in numerous positions within FNBBH including Controller,
Vice President and Controller, Senior Vice President, Chief Financial Officer
and Chief Operating Officer. Prior to joining FNBBH, Mr. McKim spent four years
in Public Accounting with Albin Randall & Bennett in Portland, Maine. Mr. McKim
is an active member of the Hancock and Washington County communities, serving
as a member of the Board of Directors of many local, regional and state
organizations including MDI Hospital, Maine Health Alliance, Coastal Acadia
Development Corporation, Maine Bankers Association, Acadian Youth Football
League and Trenton Little League. Mr. McKim received his Bachelor of Science
degree with distinction from the University of Maine.
Ronald J. Wrobel (47), Senior Vice President and Chief Financial Officer
of FNB, received his undergraduate degree from the University of Maine at
Presque Isle and his Masters in Accounting from the Graduate School at Bowling
Green University. His professional career began at Agway, Inc., a farmers'
cooperative. Subsequently, Mr. Wrobel joined KPMG Peat Marwick in Portland,
Maine and spent seven years as a CPA specializing in banking and other
industries. In 1992, Mr. Wrobel joined FNBBH, initially as loan review officer,
then Vice President of Risk Management, and for the last four years, as Senior
Vice President, Chief Financial Officer and Chief Operations Officer. He is an
active member of the community and currently serves as Past President and Board
Member of the Rotary Club, Treasurer and member of the Board of the YMCA,
member of Kebo Valley Country Club, and Town of Bar Harbor Warrant Committee.
Jeffrey C. Dalrymple (48), Senior Vice President, Customer Relations of
FNBBH, has almost 25 years of banking experience. He joined FNBBH as Senior
Vice President, Customer Relations in 1998 and currently leads FNBBH's
relationship management efforts and initiatives. Prior to joining FNBBH, Mr.
Dalrymple spent three years at Key Bank in Bangor, serving as Vice President -
Commercial Lending. Previously, Mr. Dalrymple spent 11 years with Maine
National Bank fulfilling various roles including Teller, Branch Manager,
Manager and Vice President - Commercial Lending. Mr. Dalrymple is a graduate
of Colby College with a B.A. degree in Economics and Business.
Daniel M. Lay, Esq. (43), Senior Vice President and Senior Trust Officer
of FNBBH, performed his undergraduate studies at Norwich University and earned
his law degree from the New England School of Law in Boston, Massachusetts in
1990. His career in banking began with State Street Bank and Trust in Boston
where he worked in both the Legal and Mutual Funds Divisions from 1985-1990.
Prior to joining FNBBH in 1993, Mr. Lay was an associate counsel with the firm
of Eaton, Peabody, Bradford & Veague, P.A. in Bangor, Maine. In 1999, Mr. Lay
was promoted to Senior Vice President and Senior Trust Officer. He is a member
of the Maine State Bar Association, serves as President of the Board of
Trustees for the S.P.C.A. of Hancock County and is a member of the Trust
Committee of the Maine Banker's Association.
Page 112
FNB Executive Compensation
The table below sets forth the cash compensation and certain other
compensation paid to the President & Chief Executive Officer of FNB during
2003, 2002 and 2001. No other Executive Officers of FNB received compensation
in excess of $100,000 for the years ended December 31, 2003, 2002 and 2001.
-------------------------------------------------------------------------------
Annual Long-Term
Compensation Compensation
Name ----------------------------- ------------
And Other Securities
Principal Annual Underlying
Position Year Salary Bonus(1) Compensation(2) Options
-------------------------------------------------------------------------------
Tony C. McKim 2003 $ 137,800 $ 25,000 $ 9,771 9,000
President and CEO 2002 $ 130,000 $ 20,200 $10,006 -0-
2001 $ 120,000 $ 10,312 $ 9,002 21,750
-------------------------------------------------------------------------------
(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 FNB to the account of the
President and Chief Executive Officer in the 401(k) Plan. In 2003 FNB and FNBBH
contributed to FNBBH's 401(k)Plan a matching amount for the salary deferred by
Mr. McKim equal to 25.0% of the first 10% of contributions of his earnings and
a discretionary profit-sharing component of $4,343 for 2003, $5,032 in 2002 and
$5,211 for 2001, of his earnings. These percentages were equivalent to the
401(k) Plan match and profit sharing contributions made for all eligible
employees. (b) Also included is the economic value of split dollar life
insurance benefits provided to Mr. McKim under the Life Insurance Endorsement
Split Dollar Plan agreement for Bank Owned Life Insurance. This value was $493
for 2003 and 2002 and $328 for 2001. The value for contributions made on Mr.
McKim's behalf to the FNBBH Employee Stock Ownership Plan was $1,085 in 2003
and $1,016 in 2002.
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 FNB'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
2003:
Page 113
-------------------------------------------------------------------------------
Options/SARs Granted in Last Fiscal Year
-------------------------------------------------------------------------------
Individual Grants Potential realized
----------------- value at assumed
Percent annual rates of
of total stock appreciation
Number of options/ for option term(1)
securities SARs Exercise -------------------
underlying granted to or base
options/ employees price
SARs in fiscal per Expiration
granted year share date 5% 10%
-------------------------------------------------------------------------------
Tony C. McKim 9,000 21.2% $15.02 11/11/2013 $ 220,000 $ 351,000
All other
employees/
directors 33,450 78.8% $15.02 11/11/2013 $ 819,000 $1,303,000
-------------------------------------------------------------------------------
All 42,450 100.0% $15.02 11/11/2013 $1,039,000 $1,654,000
-------------------------------------------------------------------------------
1) The dollar gains under these columns result from calculations assuming 5%
and 10% growth rates compounded over a 10-year period as set by the Securities
and Exchange Commission and are not intended to forecast future price
appreciation of FNB'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.
The following table sets forth information with respect to exercisable
and unexercisable options held as of August 31, 2004:
-------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in 2003 and 2004 through November 19, 2004
and August 25, 2004 Option/SAR Values
-------------------------------------------------------------------------------
Number of
securities underlying Value of unexercised
unexercised options in-the-money
Shares at period end options at period end
acquired ------------------ ---------------------
on Value Exer- Unexer- Exer- Unexer-
exercise realized cisable cisable cisable cisable
-------------------------------------------------------------------------------
Tony C. McKim -0- $ -0- 16,313 14,437 $ 506,845 $ 393,779
All other employees
& directors 7,706 $ 77,470 40,642 54,818 $ 1,302,335 $1,455,255
-------------------------------------------------------------------------------
All optionees 7,706 $ 77,470 56,955 69,255 $ 1,809,180 $1,849,034
-------------------------------------------------------------------------------
Page 114
SUPERVISION AND REGULATION OF FNLC AND FNB
General
FNLC and FNB, as registered bank holding companies under the Bank Holding
Company Act of 1956, as amended, are subject to the supervision of, and
examination by, the Federal Reserve Board. We are also subject to Maine law
governing Maine financial institution holding companies. FNBD, FNLC's wholly-
owned banking subsidiary, and FNBBH, FNB's wholly-owned banking subsidiary, are
each national banks subject to regulation, supervision and examination by the
Office of the Comptroller of the Currency ("OCC"). The following discussion
summarizes certain aspects of those federal banking laws and regulations that
affect FNLC, FNB and their subsidiaries.
Activities and Other Limitations
Bank holding companies are required to obtain the prior approval of the
Federal Reserve Board before acquiring more than 5% of any class of voting
stock of any bank that is not already majority owned by the bank holding
company. Pursuant to the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, a bank holding company generally may acquire banks in
states other than its home state beginning September 29, 1995, without regard
to the permissibility of such acquisitions under state law, but subject to any
state requirement that the bank has been organized and operating for a minimum
period of time, not to exceed five years, and the requirement that the bank
holding company, prior to or following the proposed acquisition, controls no
more than 10% of the total amount of deposits of insured depository
institutions in the United States and less than 30% of such deposits in that
state (or such lesser or greater amount set by state law). Generally, bank
holding companies are required to obtain prior approval of the Federal Reserve
Board to engage in any new activity or to acquire more than 5% of any class of
voting stock of any company.
Unless a bank holding company elects to become a financial holding company
under amendments to the Bank Holding Company Act effected by the Gramm-Leach-
Bliley Act, the activities of a bank holding company and those of companies
that it controls or in which it holds more than 5% of the voting stock are
limited to banking, managing or controlling banks, furnishing services to or
performing services for their subsidiaries or any other activity that the
Federal Reserve Board had determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto as of November
11, 1999, the day before the date of enactment of the Gramm-Leach-Bliley Act.
Effective March 11, 2000, the Gramm-Leach-Bliley Act permits bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that
are financial in nature. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized under the prompt
corrective action provisions in federal laws and regulations, is well managed
and has at least a satisfactory rating under the Community Reinvestment Act by
filing a declaration with the Federal Reserve Board that the bank holding
company seeks to become a financial holding company. FNLC became a financial
holding company under the Bank Holding Company Act effective August 31, 2000,
while FNB became a financial holding company under the Bank Holding Company Act
effective October 3, 2001.
Page 115
No regulatory approval is required for a financial holding company to
acquire a company, other than a bank or savings association, engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve Board. The Gramm-
Leach-Bliley Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and
activities that the Federal Reserve Board has determined to be closely related
to banking. A national bank also may engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development
and real estate investment, through a financial subsidiary of the bank, if the
bank is well capitalized, well managed and has at least a satisfactory
Community Reinvestment Act rating. Subsidiary banks of a financial holding
company or national banks with financial subsidiaries which own financial
subsidiaries engaged in insurance brokerage activities, must continue to be
well capitalized and well managed in order for the financial holding company or
the national bank to continue to engage in activities that are financial in
nature without regulatory actions or restrictions, which could include
divestiture of the financial in nature subsidiary or subsidiaries. In addition,
a financial holding company or a bank may not acquire a company that is engaged
in activities that are financial in nature unless each of the subsidiary banks
of the financial holding company or the bank has a Community Reinvestment Act
rating of satisfactory or better.
Capital and Operational Requirements
The Federal Reserve Board, the OCC and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to U.S. banking
organizations. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum levels,
whether because of its financial condition or actual or anticipated growth. The
Federal Reserve Board risk-based guidelines define a three-tier capital
framework. "Tier 1 capital" generally consists of common and qualifying
preferred shareholders' equity, less certain intangibles and other adjustments.
"Tier 2 capital" and "Tier 3 capital" generally consist of subordinated and
other qualifying debt, preferred stock that does not qualify as Tier 1 capital
and the allowance for credit losses up to 1.25% of risk-weighted assets.
The sum of Tier 1, Tier 2 and Tier 3 capital, less investments in
unconsolidated subsidiaries, represents qualifying "total capital," at least
50% of which must consist of Tier 1 capital. Risk-based capital ratios are
calculated by dividing Tier 1 capital and total capital by risk-weighted
assets. Assets and off-balance sheet exposures are assigned to one of four
categories of risk weights, based primarily on relative credit risk. The
minimum Tier 1 capital ratio is 4% and the minimum total capital ratio is 8%.
At September 30, 2004, FNLC's Tier 1 and total risk-based capital ratios under
these guidelines were 11.59% and 12.70%, respectively, and FNB's were 9.41% and
10.66%, respectively.
The "leverage ratio" requirement is determined by dividing Tier 1 capital
by adjusted average total assets. Although the stated minimum ratio is 3.00%,
most banking organizations are required to maintain ratios of at least 100 to
200 basis points above 3.00%. At September 30, 2004, FNLC's and FNB's leverage
ratios were 8.25% and 7.11%, respectively.
Page 116
Federal bank regulatory agencies require banking organizations that engage
in significant trading activity to calculate a capital charge for market risk.
Significant trading activity means trading activity of at least 10% of total
assets or $ 1.0 billion, whichever is smaller, calculated on a consolidated
basis for bank holding companies. Federal bank regulators may apply the market
risk measure to other banks and bank holding companies as the agency deems
necessary or appropriate for safe and sound banking practices. Each agency may
exclude organizations that it supervises that otherwise meet the criteria under
certain circumstances. The market risk charge will be included in the
calculation of an organization's risk-based capital ratios. Neither FNLC nor
FNB is currently subject to this annual capital charge.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective U.S. federal regulatory agencies
to implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines
could also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan. The
liability of the parent holding company under any such guarantee is limited to
the lesser of 5.00% of the bank's assets at the time it became undercapitalized
or the amount needed to comply with the plan. Furthermore, in the event of the
bankruptcy of the parent holding company, such guarantee would take priority
over the parent's general unsecured creditors. In addition, FDICIA requires the
various regulatory agencies to prescribe certain non-capital standards for
safety and soundness related generally to operations and management, asset
quality and executive compensation and permits regulatory action against a
financial institution that does not meet such standards.
The various federal bank regulatory agencies have adopted substantially
similar regulations that define the five capital categories identified by
FDICIA, using the total risk-based capital, Tier 1 risk-based capital and
leverage capital ratios as the relevant capital measures. Such regulations
establish various degrees of corrective action to be taken when an institution
is considered undercapitalized. Under the regulations, a "well capitalized"
institution must have a Tier 1 capital ratio of at least 6.00%, a total risk-
based capital ratio of at least 10.00% and a leverage ratio of at least 5.00%
and not be subject to a capital directive order. An "adequately capitalized"
institution must have a Tier 1 capital ratio of at least 4.00%, a total risk-
based capital ratio of at least 8.00% and a leverage ratio of at least 4.00%,
or 3.00% in some cases. Under these guidelines, each of our banking
subsidiaries is considered "well capitalized."
Page 117
The federal bank regulatory agencies also have adopted regulations which
mandate that regulators take into consideration concentrations of credit risk
and risks from non-traditional activities, as well as an institution's ability
to manage those risks, when determining the adequacy of an institution's
capital. That evaluation will be made as part of the institution's regular
safety and soundness examination. Banking agencies also have adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance sheet position) in the
determination of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. The banking agencies
do not intend to establish an explicit risk-based capital charge for interest
rate risk but will continue to assess capital adequacy for interest rate risk
under a risk assessment approach based on a combination of quantitative and
qualitative factors and have provided guidance on prudent interest rate risk
management practices.
Distributions
We both derive funds for cash distributions to our respective shareholders
primarily from dividends received from our respective banking subsidiaries.
Each of our banking subsidiaries is subject to various general regulatory
policies and requirements relating to the payment of dividends, including
requirements to maintain capital above regulatory minimums. The appropriate
federal and state regulatory authorities are authorized to determine under
certain circumstances relating to the financial condition of the bank or bank
holding company that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment thereof.
In addition to the foregoing, our ability (and that of our respective
banking subsidiaries) to pay dividends may be affected by the various minimum
capital requirements and the capital and non-capital standards established
under FDICIA, as described above. The right of FNLC and FNB and their
respective shareholders and creditors to participate in any distribution of the
assets or earnings of our respective subsidiaries is further subject to the
prior claims of creditors of such subsidiaries.
"Source of Strength" Policy
According to Federal Reserve Board policy, bank holding companies are
expected to act as a source of financial strength to each subsidiary bank and
to commit resources to support each such subsidiary. This support may be
required at times when a bank holding company may not be able to provide such
support. Similarly, under the cross-guarantee provisions of the Federal Deposit
Insurance Act, in the event of a loss suffered or anticipated by the FDIC --
either as a result of default of a banking or savings institution subsidiary of
a bank holding company or related to FDIC assistance provided to a subsidiary
in danger of default -- the other banking subsidiaries of such bank holding
company, if any, may be assessed for the FDIC's loss, subject to certain
exceptions.
Page 118
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002, which generally establishes a
comprehensive framework to modernize and reform the oversight of public company
auditing, improve the quality and transparency of financial reporting by those
companies and strengthen the independence of auditors. Certain of the
legislation's more significant reforms are noted below.
* The legislation creates a public company accounting oversight Board which is
empowered to set auditing, quality control and ethics standards, to inspect
registered public accounting firms, to conduct investigations and to take
disciplinary actions, subject to SEC oversight and review. The new Board will
be funded by mandatory fees paid by all public companies. The legislation also
improves the Financial Accounting Standards Board, giving it full financial
independence from the accounting industry.
* The legislation strengthens auditor independence from corporate management
by, among other things, limiting the scope of consulting services that auditors
can offer their public company audit clients.
* The legislation heightens the responsibility of public company directors and
senior managers for the quality of the financial reporting and disclosure made
by their companies. Among other things, the legislation provides for a strong
public company audit committee that will be directly responsible for the
appointment, compensation and oversight of the work of the public company
auditors.
* The legislation contains a number of provisions to deter wrongdoing. CEOs and
CFOs will have to certify that company financial statements fairly present the
company's financial condition. If a misleading financial statement later
resulted in a restatement, the CEO and CFO must forfeit and return to the
company any bonus, stock or stock option compensation received in the twelve
months following the misleading financial report. The legislation also
prohibits any company officer or director from attempting to mislead or coerce
an auditor. Among other reforms, the legislation empowers the SEC to bar
certain persons from serving as officers or directors of a public company;
prohibits insider trades during pension fund "blackout periods"; directs the
SEC to adopt rules requiring attorneys to report securities law violations; and
requires that civil penalties imposed by the SEC go into a disgorgement fund to
benefit harmed investors.
* The legislation imposes a range of new corporate disclosure requirements.
Among other things, the legislation requires public companies to report all
off-balance-sheet transactions and conflicts, as well as to present any pro
forma disclosures in a way that is not misleading and in accordance with
requirements to be established by the SEC. The legislation also accelerated the
required reporting of insider transactions, which now generally must be
reported by the end of the second business day following a covered transaction;
requires that annual reports filed with the SEC include a statement by
management asserting that it is responsible for creating and maintaining
adequate internal controls and assessing the effectiveness of those controls;
and requires companies to disclose whether or not they have adopted an ethics
code for senior financial officers, and, if not, why not, and whether the audit
committee includes at least one "financial expert," a term which is to be
defined by the SEC in accordance with specified requirements. The legislation
(and regulations promulgated thereunder) requires the NASD and national
securities exchanges to adopt corporate governance measures aimed at, among
other things, enhancing Board oversight at listed companies over the audit
process and scrutiny of potential conflict of interest transactions. The
legislation also requires the SEC, based on certain enumerated factors, to
regularly and systematically review corporate filings.
Page 119
* The legislation contains provisions which generally seek to limit and expose
to public view possible conflicts of interest affecting securities analysts.
* Finally, the legislation imposes a range of new criminal penalties for fraud
and other wrongful acts, as well as extends the period during which certain
types of lawsuits can be brought against a company or its insiders.
Page 120
DESCRIPTION OF FNLC CAPITAL STOCK
FNLC is currently authorized to issue up to 18,000,000 shares of FNLC
common stock. This is the only class of stock which FNLC is authorized to
issue. The capital stock of FNLC does not represent or constitute a deposit
account and is not insured by the FDIC.
The following description of FNLC capital stock does not purport to be
complete and is qualified in all respects by reference to FNLC's articles of
incorporation, as amended, and bylaws and the Maine Business Corporation Act.
FNLC Common Stock
General. Each share of FNLC common stock has the same relative rights and
is identical in all respects with each other share of FNLC common stock. The
FNLC common stock is not subject to call for redemption and, upon receipt by
FNLC of the shares of FNB common stock surrendered in exchange for FNLC common
stock, each share of FNLC common stock offered hereby will be fully paid and
non-assessable.
Voting Rights. Each holder of FNLC common stock is entitled to one vote
for each share held on all matters voted upon by shareholders, and shareholders
are not permitted to cumulate votes in elections of directors.
Dividends. The holders of the FNLC common stock are entitled to such
dividends as may be declared from time to time by the FNLC Board of Directors
out of funds legally available therefor.
Preemptive Rights. Holders of FNLC common stock do not have any
preemptive rights with respect to any shares which may be issued by FNLC in the
future; thus, FNLC may sell shares of FNLC common stock without first offering
them to the then holders of the FNLC common stock.
Liquidation. In the event of any liquidation, dissolution or winding up
of FNLC, the holders of the FNLC common stock would be entitled to receive,
after payment of all debts and liabilities of FNLC, all assets of FNLC
available for distribution.
Other Provisions
The articles of incorporation and bylaws of FNLC contain a number of
provisions that may have the effect of discouraging or delaying attempts to
gain control of FNLC, including provisions:
* classifying the FNLC Board of Directors into three classes to serve for three
years with one class being elected annually;
* authorizing the FNLC Board of Directors to fix the size of the FNLC Board of
Directors between five and 25 directors;
* authorizing directors to fill vacancies in the FNLC Board of Directors; and
* requiring an increased vote of shareholders to approve specified business
combinations with persons beneficially owning 10% or more of the FNLC's common
stock (or any person who is, or within the previous two years was, an affiliate
or associate of such persons) unless the business combination has been approved
by a majority of FNLC's directors who are not affiliated or associated with the
interested shareholder and who were FNLC directors prior to the time the
interested shareholder acquired such an interest in FNLC shares.
Page 121
In addition to the foregoing, in certain instances the issuance of
authorized but unissued shares of FNLC common stock may have an anti-takeover
effect by making it more difficult and/or expensive to acquire FNLC.
Sections 1109 and 1110 of the Maine Business Corporation Act also may have
some anti-takeover effect. Section 1109 of the Maine Business Corporation Act
generally provides that a Maine corporation which has a class of voting stock
registered or traded on a national securities exchange or under the Securities
Exchange Act of 1934, such as FNLC, may not engage in any business combination
for five years following an "interested stockholder's" "stock acquisition date"
unless the business combination is (1) approved by the corporation's Board of
Directors prior to that "interested stockholder's" "stock acquisition date" or
(2) approved, subsequent to that "interested stockholder's" "stock acquisition
date," by the Board of Directors of the Maine corporation and authorized by the
holders of a majority of the outstanding voting stock of the corporation not
beneficially owned by that "interested stockholder" or any affiliate or
associate thereof or by persons who are either directors or officers and also
employees of the corporation. An "interested stockholder" is defined to include
any person, firm or entity that is directly or indirectly the beneficial owner
of 25% or more of the outstanding voting stock of the corporation, other than
by reason of a revocable proxy given in response to a proxy solicitation
conducted in accordance with the Securities Exchange Act 1934 which is not then
reportable on a Schedule 13D under the Securities Exchange Act of 1934, and
"stock acquisition date" is defined to mean the date that any person, firm or
entity first becomes an "interested stockholder" of that corporation.
Section 1110 of the Maine Business Corporation Act generally provides
shareholders of a Maine corporation which has a class of voting shares
registered or traded on a national securities exchange or registered under the
Securities Exchange Act of 1934, with the right to demand payment of an amount
equal to the fair value of each voting share in the corporation held by the
shareholder from a person or group of persons which become a "controlling
person," which generally is defined to mean an individual, firm or entity (or
group thereof) which has voting power over at least 25% of the outstanding
voting shares of the corporation. Such a demand must be submitted to the
"controlling person" within 30 days after the "controlling person" provides
required notice to the shareholders of the acquisition or transactions which
resulted in such person or group becoming a "controlling person." Section 1110
could be interpreted to provide that a person or group of persons could become
a "controlling person" for purposes of such section by soliciting and acquiring
revocable proxies to vote at least 25% of the voting shares of a corporation.
Transfer Agent
The transfer agent and registrar for the FNLC common stock is FNBD.
Page 122
COMPARISON OF THE RIGHTS OF SHAREHOLDERS
Both FNLC and FNB are Maine corporations subject to the provisions of the
Maine Business Corporation Act. When the merger is completed, shareholders of
FNB who receive shares of FNLC common stock in exchange for their shares of FNB
common stock will become shareholders of FNLC and their rights as shareholders
of FNLC will be governed by the articles of incorporation and bylaws of FNLC.
Under the new Maine Business Corporation Act, the validity of any
provision of the articles of incorporation or the bylaws of a Maine corporation
existing on July 1, 2003 can be determined by reference to the law that was in
effect at the time when the provision was adopted or with reference to the new
law, whichever supports the validity of such provision. A provision of a
corporation's articles of incorporation or bylaws that was valid under the law
in existence at the time the provision was adopted remains in effect,
notwithstanding a contrary provision of the new law, until repealed or amended
by voluntary act of the corporation. As a result, provisions in the articles of
incorporation or bylaws of FNB or FNLC which were adopted pursuant to the
previous Maine Business Corporation Act continue to be valid even if they could
not be adopted pursuant to the current Maine Business Corporation Act.
The following summary is not intended to be a complete statement of the
differences affecting the rights of FNB shareholders who become FNLC
shareholders, but rather summarizes the more significant differences affecting
the rights of such shareholders; the summary is qualified in its entirety by
reference to the articles of incorporation and bylaws of FNB and FNLC and
applicable laws and regulations.
Mergers, Consolidations and Sales of Assets
FNB. The articles of incorporation of FNB contain provisions which
prohibit the Corporation from entering into a "business combination," as
defined in the articles, without the approval and recommendation to the
shareholders by an affirmative vote of not fewer than 80% of FNB's entire Board
of Directors, and the affirmative vote of the holders of not less than 67% of
FNB's outstanding capital stock entitled to vote thereon (excluding, for
purposes of both the number of shares voted in favor and the total number of
shares outstanding, shares beneficially owned by a "related party," as defined
the articles, proposing such business combination). These special requirements
shall not apply if the proposed business combination shall have been approved
by a majority of the "continuing directors," also as defined in the articles,
and only the affirmative vote, if any, required by law, the articles or the
bylaws shall be required. In determining whether to approve a business
combination, FNB's directors are required to consider (i) the long-term social
and economic impact of the proposed business combination, (ii) the experience
and integrity of the acquiring person or entity, and (iii) the financial
condition, earnings prospects, and management philosophy of the acquiring
person or entity.
Page 123
FNB's bylaws contain similar provisions that, to the extent they conflict
with the above-described articles provisions, are superseded by them. Certain
requirements that are not inconsistent with the articles continue to apply. For
example, the FNB bylaws contain a provision that, under certain circumstances
(such as the merger), requires a greater vote to approve business combinations
than the articles. Specifically, while the articles permit shareholder approval
-- in the case of a business combination that has been approved by a majority
of continuing directors -- by the affirmative vote of the holders of a majority
of the outstanding shares of FNB's common stock, the bylaws (whose provisions,
drafted under the former Maine corporate law, are grandfathered) retain
special, greater voting requirements even in non-related party transactions.
FNLC. The articles of FNLC contain a provision which prohibits FNLC from
engaging in a "business combination" with an "interested stockholder," each as
defined in the articles, without the affirmative vote of not less than 80% of
the votes entitled to be cast by all the holders of all outstanding shares of
stock entitled to vote (notwithstanding that no vote may be necessary, or that
a lesser percentage vote may be specified by law or otherwise). Notwithstanding
the foregoing, the above requirements shall not apply if the proposed business
combination shall have been approved by a majority of the "continuing
directors," also as defined in the articles. In addition to the above
requirements, FNLC is prohibited from engaging in a "control transaction," as
defined in the articles, without the approval of a majority of the directors of
the corporation and the affirmative vote of not less than 66 2/3% of the votes
entitled to be cast by the holders of all outstanding shares of stock entitled
to vote (again, notwithstanding that no vote may be necessary, or that a lesser
percentage vote may be specified by law or otherwise).
Authorized Capital Stock
FNB. FNB's articles authorize the issuance of up to 2,000,000 shares of
FNB common stock, $0.80 par value per share, of which 1,048,814 shares were
outstanding as of the record date for the FNB special meeting, and up to
100,000 shares of preferred stock, no par value per share, of which no shares
are issued and outstanding.
FNLC. FNLC's articles authorize the issuance of up to 18,000,000 shares of
FNLC common stock, $0.01 par value per share, of which 7,355,471 shares were
outstanding as of the record date for the FNLC special meeting.
Classification and Size of Board of Directors
FNB. FNB's articles provide that the FNB Board of Directors may increase
or decrease the number of directors of FNB by resolution, provided that the
Board may not increase the number of directors by more than 2 persons between
successive annual meetings of the shareholders, and that no decrease in the
number of directors shall have the effect of shortening the term of an
incumbent director, and provided further in each case that the minimum number
of directors shall be 5 and the maximum number of directors shall be 25.
Currently, the number of directors of FNB is 10, and such directors are divided
into three classes.
Page 124
FNLC. The bylaws of FNLC provide that the number of directors of FNLC
shall be fixed within the minimum and maximum provided in FNLC's articles of
incorporation by resolution duly adopted from time to time by the Board of
Directors of FNLC, provided that the Board may not increase the number of
directors by more than 2 persons between annual meetings. The articles provide
that the minimum number of directors shall be 5 and the maximum number of
directors shall be 25. Currently, the number of directors of FNLC is 10, and
such directors are divided into three classes. Pursuant to the merger
agreement, at least two additional directors are intended to be added to the
Board by FNLC. See "Board of Directors of FNLC Following Merger" on page __.
Director Qualifications
FNB. FNB's bylaws provide that no person shall be eligible to serve as a
director unless he or she is the actual and beneficial owner of shares of FNB
common stock with an aggregate fair market value of not less than $7,500.
FNLC. FNLC's bylaws provide that no person shall be eligible to serve as a
director unless he or she is the actual and beneficial owner of shares of FNLC
common stock with an aggregate fair market value of at least $15,000.
Director Nominations and Shareholder Proposals
FNB. FNB's bylaws generally provide that nominations by shareholders of
candidates for election as directors (and other shareholder proposals) must be
made in writing and delivered to or received by the clerk of FNB 90 days or
more before the date of an annual shareholders' meeting, and no later than 10
days following the date on which notice of a special meeting of shareholders is
given, if the nomination or proposal is to be submitted at a special meeting.
Each such notice shall set forth information concerning the nominee, the
nominating shareholder and other information specified in FNB's bylaws.
FNLC. FNLC's bylaws provide that a shareholder wishing to nominate a
director or bring other business before the annual meeting must be a record
shareholder and have given timely notice in writing to the Clerk of FNLC
containing specific information required by FNLC's bylaws. Any such nominations
or proposals should be mailed to: Clerk, First National Lincoln Corporation,
223 Main Street, P.O. Box 940, Damariscotta, Maine 04543-0940 and must be
received by FNLC between 90 and 135 days before the anniversary date of the
prior year's annual meeting, unless the annual meeting is to be held on a date
more than thirty days before or after such anniversary date, in which case the
notice must be received not later than 10 days after FNLC announces publicly
the intended date of the annual meeting.
Special Meetings of Shareholders
FNB. Pursuant to the bylaws of FNB, special meetings of the shareholders
of FNB may be called by FNB's President, by its Chairman of the Board of
Directors, by a majority of the Board of Directors or of the executive
committee, or by the holders of not less than 25% of the shares entitled to
vote at the meeting.
FNLC. Pursuant to the bylaws of FNLC, special meetings of the shareholders
of FNLC may be called by FNLC's President, by its Chairman of the Board of
Directors, by a majority of the Board of Directors or of the executive
committee, or by the holders of not less than 10% of the shares entitled to
vote at the meeting
Page 125
Notice of Meetings; Record Dates
FNB. FNB's bylaws require that written notice of the annual and any
special meeting be delivered to each shareholder of record not less than 10 and
no more than 60 days prior to the meeting date. Similarly, upon proper request
by a person entitled to call a special meeting of shareholders, the President
is required deliver notice of such meeting to the shareholders not less than 10
and no more than 60 days after receipt of such request. For purposes of
determining shareholders entitled to notice of or to vote at any shareholders'
meeting, the Board shall fix a record date not more than 60 days or less than
10 days prior to the date designated for the particular action.
FNLC. FNLC's bylaws purport to require that written notice of the annual
and any special meeting be delivered to each shareholder of record not less
than 10 and no more than 60 days prior to the meeting date. Similarly, the FNLC
bylaws state that, upon proper request by a person entitled to call a special
meeting of shareholders, the President is required deliver notice of such
meeting to the shareholders not less than 10 and no more than 60 days after
receipt of such request. For purposes of determining shareholders entitled to
notice of or to vote at any shareholders' meeting, the bylaws also provide that
the Board fix a record date not more than 70 days or less than 10 days prior to
the date designated for the particular action.
Certain Amendments to Articles of Incorporation
FNB. With certain exceptions, amendments to the provisions of FNB's
articles concerning business combinations, require the affirmative vote of not
less than 80% of the entire Board of Directors and not less than 67% of FNB's
outstanding capital stock.
FNLC. With certain exceptions, amendments to the provisions of FNLC's
articles concerning business combinations, require the affirmative vote of not
less than 80% of the entire Board of Directors and not less than 66 2/3% of
FNLC's outstanding capital stock.
Indemnification of Directors and Officers
FNB. FNB's bylaws provide generally that FNB shall indemnify directors and
certain executive officers of FNB, and may indemnify other officers, employees
and agents of FNB, against all liabilities incurred by such persons in
connection with any brought or threatened proceeding in which such person is
involved by reason of the fact that he or she is or was a director, officer,
employee or agent of the corporation or serving at the request of the
corporation in a comparable capacity on behalf of another legal entity,
provided that no indemnification shall be provided to any indemnified person to
the extent that such person shall have been adjudicated in any proceeding not
to have acted in good faith in the reasonable belief that the action of such
person was in the best interest of FNB, or, with respect to a criminal
proceeding, to have had reasonable cause to believe that his or her conduct was
unlawful.
Page 126
FNLC. FNLC's bylaws provide that FNLC shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or proceeding by reason of the fact that he or she is or was a
director, officer, employee or agent of FNLC, or serving at the request of the
corporation in a comparable capacity on behalf of another legal entity, against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, provided that no indemnification shall be provided to any
indemnified person to the extent that such person shall have been adjudicated
in any proceeding not to have acted in good faith in the reasonable belief that
the action of such person was in the best interest of FNLC, or, with respect to
a criminal proceeding, to have had reasonable cause to believe that his or her
conduct was unlawful.
Regular Meetings of Directors
FNB. FNB's bylaws require its Board to hold regular meetings at least
monthly.
FNLC. FNLC's bylaws require its Board to hold regular meetings at least
quarterly.
Inspection of Corporate Records
FNB. FNB's bylaws do not contain a provision governing the inspection of
corporate records by shareholders.
FNLC. As expressly permitted by the Maine Business Corporation Act, FNLC's
bylaws require a shareholder who wishes to inspect corporate records to first
notify FNLC in writing, specifying the records he or she wishes to inspect and
his or her purpose in seeking the inspection. FNLC may condition inspection on
receipt of undertakings intended to preserve the confidentiality of any
nonpublic financial information or other competitively sensitive information
about FNLC or its business, to pay FNLC's reasonable costs in making any of the
requested records available and, in the event of a breach by the shareholder,
to indemnify FNLC against its reasonable costs of enforcing any restrictions on
use of the requested records. FNLC may also, as a condition to the disclosure
of any nonpublic information or other competitively sensitive information, and
as a condition to the disclosure of personal information about shareholders,
directors, officers or employees of FNLC, require the shareholder to execute a
confidentiality agreement.
Page 127
CERTAIN BENEFICIAL OWNERS OF FNB COMMON STOCK
The following table sets forth the number of shares of common stock of
FNB beneficially owned as of November 19, 2004 by (i) each person known by FNB
to own beneficially more than five percent of FNB's common stock, (ii) each
current director of FNB (iii) the named executive officer, and (iv) all
executive officers and directors of FNB as a group.
Directors & Executive Officers
-------------------------------------------------------------------------------
Shares Percent
Name Position Owned(2) Owned
-------------------------------------------------------------------------------
Loren H. Clarke Director of FNBBH and FNB 12,225 1.17%
William C. Fernald Director of FNBBH and FNB 20,444 1.95%
David J. Fletcher Director of FNBBH and FNB 7,875 *
Milton Albert Harmon Jr Director of FNBBH and FNB 8,373 *
Carroll E. Harper Director of FNBBH and FNB 2,558 *
Steven K. Parady Director of FNBBH and FNB 31,943 3.05%
Gregory R. Grant Director of FNBBH and FNB 6,496 *
William K. McFarland Director of FNBBH and FNB 9,079 *
Tony C. McKim President, Chief Executive Officer 41,678 3.98%
and Director of FNBBH and FNB
Mark N. Rosborough Director of FNBBH and FNB 46,931 4.49%
-------------------------------------------------------------------------------
Total Ownership of all Directors and
Executive Officers as a group 237,570 22.70%
-------------------------------------------------------------------------------
Owners of 5% or More None
-------------------------------------------------------------------------------
* 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 has or shares the power to vote or to
direct the voting of the security or the power to dispose or direct the
disposition of the security, or if he has the right to acquire beneficial
ownership of the security within 60 days. The figure set forth includes
director's qualifying shares owned by each person.
(2) Includes exercisable stock options.
Page 128
LEGAL OPINION
The validity of the FNLC common stock to be issued in the merger will be passed
upon for FNLC by Verrill Dana, LLP of Portland, Maine.
EXPERTS
The consolidated financial statements of FNLC as of December 31, 2003 and 2002,
and for each of the years in the three-year period ended December 31, 2003 have
been incorporated by reference herein from FNLC's annual report on Form 10-K
for the year ended December 31, 2003 in reliance on the report of Berry, Dunn,
McNeil and Parker LLC, independent certified public accountants, incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of FNB as of December 31, 2003 and 2002,
and for each of the years in the three-year period ended December 31, 2003 have
been included in this document and the annexes hereto in reliance on the report
of Berry, Dunn, McNeil and Parker LLC, independent certified public
accountants, included in Annex IV hereto, and upon the authority of said firm
as experts in accounting and auditing.
PROPOSALS FOR THE 2005 FNLC ANNUAL MEETING
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, the deadline
for the submission of proposals by shareholders for inclusion in the proxy
statement and form of proxy to be used by FNLC in connection with the next
annual meeting of shareholders of FNLC, was November 20, 2004. In addition,
FNLC's bylaws provide that anyone wishing to nominate a director or bring other
business before the annual meeting must be a record shareholder and must give
notice in writing to the Clerk of FNLC containing specific information required
by FNLC's bylaws that is received between December 13, 2004 and January 27,
2005, provided that if the annual meeting is held on a date more than 30 days
before or after April 27, 2005, the shareholder notice shall be timely if
received not later than 10 days after FNLC announces publicly the intended date
of the annual meeting, through a press release, SEC filing or otherwise. Any
such nominations or proposals should be mailed to: Clerk, First National
Lincoln Corporation, 223 Main Street, P.O. Box 940, Damariscotta, Maine 04543-
0940.
Page 129
WHERE YOU CAN FIND MORE INFORMATION
FNLC files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, proxy statements or other information filed by FNLC at the
Commission's public reference room in Washington, D.C., which is located at the
following address: Public Reference Room, Judiciary Plaza, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549.
You can request copies of these documents, upon payment of a duplicating
fee, by writing to the Commission. Please call the Commission at 1-800-SEC-0330
for further information on the operation of the Commission's public reference
rooms. FNLC's Commission filings are also available to the public from document
retrieval services and at the Commission's internet website
(http://www.sec.gov).
FNLC has filed with the Commission a registration statement on Form S-4
under the Securities Act and the rules and regulations thereunder. This
document is a part of that registration statement. As permitted by the
Commission's rules, this document does not contain all of the information you
can find in the registration statement. The registration statement is available
for inspection and copying as set forth above.
The Commission allows FNLC to "incorporate by reference" into this
document, which means that FNLC can disclose important information to you by
referring you to another document filed separately with the Commission. The
information incorporated by reference is considered to be part of this
document, except for any information superseded by information contained in
later filed documents incorporated by reference in this document. FNLC
incorporates by reference the documents filed by it with the Commission listed
below and any future filings made by it with the Commission under Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the
later of the date of the FNB Special Meeting, or the date on which the offering
of FNLC common shares under this document terminated.
FNLC SEC Filings (File No. 0-26589) Period/Date
Annual Report on Form 10-K Year ended December 31, 2003
Quarterly Report on Form 10-Q Three Months Ended March 31, 2004,
June 30, 2004 and September 30, 2004
Current Reports on Form 8-K Filed on January 22, 2004, March 15, 2004,
April 22, 2004, April 27, 2004, June 17, 2004,
July 22, 2004, July 29, 2004, August 26, 2004,
August 27, 2004, September 16, 2004,
October 7, 2004, October 21, 2004
and October 28, 2004.
(in each case other than those portions
furnished under items 2.02 or 7.01 of
Form 8-K, or their predecessors)
You may request a copy of documents incorporated by reference in this
document but not otherwise accompanying this document, at no cost, by writing
or telephoning FNLC at the following address:
FIRST NATIONAL LINCOLN CORPORATION
223 Main Street
P.O. Box 940
Damariscotta, Maine 04543-0940
Attention: Carrie A. Warren
(207) 563-3195
Page 130
To obtain timely delivery, you should request desired information no later
than five business days prior to the date of your special meeting, or by
January 4, 2005 in the case of the FNB special meeting and by January 5, 2005
in the case of the FNLC special meeting.
You should rely only on the information contained or incorporated by
reference in this document. Neither FNLC nor FNB has authorized anyone else to
provide you with information that is different from that which is contained in
this document. Neither FNLC nor FNB is making an offer to sell or soliciting an
offer to buy any securities other than the FNLC common stock to be issued by
FNLC in the merger, and neither FNLC nor FNB is making an offer of such
securities in any state where the offer is not permitted. The information
contained in this document speaks only as of its date unless the information
specifically indicates that another date applies.
Page 131
ANNEX I
-------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 25, 2004
BETWEEN
FIRST NATIONAL LINCOLN CORPORATION
AND
FNB BANKSHARES
------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER, dated as of August 25, 2004 (this "Agreement"),
between FIRST NATIONAL LINCOLN CORPORATION ("Parent") and FNB BANKSHARES (the
"Company").
RECITALS
A. The Company. The Company is a Maine corporation, having its
principal place of business in Bar Harbor, Maine
B. Parent. Parent is a Maine corporation, having its principal place
of business in Damariscotta, Maine.
C. Intention of the Parties. It is the intention of the parties to
this Agreement that the Merger provided for herein be treated as a
"reorganization" under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
D. Board Action. The respective Boards of Directors of each of
Parent and the Company have determined that it is in the best interests of
their respective companies and their shareholders to consummate the Merger
provided for herein.
E. Shareholder Agreements. As a material inducement to Parent to enter
into this Agreement, and simultaneously with, the execution of this Agreement,
each director who is also an officer of the Company, namely Messrs. McKim,
Rosborough and Parady, is entering into an agreement, in the form of Annex A
hereto (collectively, the "Shareholder Agreements") pursuant to which he has
agreed, among other things, to vote his shares of Company Stock (as defined
herein) in favor of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein the
parties agree as follows:
Page I - 1
ARTICLE I
CERTAIN DEFINITIONS
1.01. Certain Definitions. The following terms are used in this
Agreement with the meanings set forth below:
"Acquisition Proposal" has the meaning set forth in Section 6.08.
"Acquisition Agreement" has the meaning set forth in Section 8.01(g).
"Additional Director" has the meaning set forth in Section 6.15.
"Agreement" means this Agreement, as amended or modified from time to time
in accordance with Section 9.02.
"Articles of Merger" has the meaning set forth in Section 2.02(a).
"Average Share Price" has the meaning set forth in Section 3.01(b)(2).
"Bank Insurance Fund" means the Bank Insurance Fund maintained by the
FDIC.
"Bank Merger Agreement" has the meaning set forth in Section 6.13.
"Bank Merger" has the meaning set forth in Section 6.13.
"Bank Secrecy Act" means the Bank Secrecy Act of 1970, as amended.
"Benefit Plans" has the meaning set forth in Section 5.03(m)(i).
"Business Day" means Monday through Friday of each week, except a legal
holiday recognized as such by the U.S. Government or any day on which banking
institutions in the State of Maine are authorized or obligated to close.
"Certificate" means any certificate which immediately prior to the
Effective Time represented shares of Company Common Stock.
"Closing" and "Closing Date" have the meanings set forth in Section
2.02(b).
"Code" has the meaning set forth in the recitals to this Agreement.
"Community Reinvestment Act" means the Community Reinvestment Act of 1977,
as amended.
"Company" has the meaning set forth in the preamble to this Agreement.
"Company Affiliates" has the meaning set forth in Section 6.07.
"Company Articles" means the Articles of Incorporation of the Company, as
amended.
"Company Bank" means First National Bank of Bar Harbor, a national banking
association.
"Company Board" means the Board of Directors of the Company.
"Company Bylaws" means the Bylaws of the Company, as amended.
"Company Common Stock" means the common stock of the Company.
"Company ESOP" means the Company's Employee Stock Ownership Plan, as
amended.
"Company 401(k) Plan" means the First National Bank of Bar Harbor 401(k)
Savings Plan.
"Company Group" means any "affiliated group" (as defined in Section
1504(a) of the Code without regard to the limitations contained in Section
1504(b) of the Code) that includes the Company and its Subsidiaries or any
predecessor of or any successor to the Company (or to another such predecessor
or successor).
"Company Intellectual Property" has the meaning set forth in Section
5.03(u).
"Company Loan Property" has the meaning set forth in Section 5.03(o)(i).
"Company Meeting" has the meaning set forth in Section 6.02.
"Company Preferred Stock means the Serial Preferred Stock of the
Company.
"Company Stock" means, collectively, the Company Common Stock and the
Company Preferred Stock.
"Company Options" means the options to acquire Company Common Stock.
"Company Regulatory Authorities" has the meaning set forth in Section
5.03(i).
Page I - 2
"Company Stock Option Plan" means the Company's Stock Option Plan dated
July 31, 2001.
"Derivatives Contract" has the meaning set forth in Section 5.03(r).
"Disclosure Schedule" has the meaning set forth in Section 5.01.
"Dissenting Shares" has the meaning set forth in Section 3.05.
"D&O Insurance" has the meaning set forth in Section 6.11 (c).
"D&O Tail Coverage" has the meaning set forth in Section 6.11(c).
"ECA Agreements" has the meaning set forth in Section 6.12(b).
"Effective Date" has the meaning set forth in Section 2.02(a).
"Effective Time" has the meaning set forth in Section 2.02(a).
"Employees" has the meaning set forth in Section 5.03(m).
"Environmental Laws" has the meaning set forth in Section 5.03(o).
"Equal Credit Opportunity Act" means the Equal Credit Opportunity Act, as
amended.
"Equity Investment" means (i) an Equity Security; and (ii) an ownership
interest in any company or other entity, any membership interest that includes
a voting right in any company or other entity, any interest in real estate; and
any investment or transaction which in substance falls into any of these
categories even though it may be structured as some other form of investment or
transaction.
"Equity Security" means any stock (other than adjustable-rate preferred
stock, money market (auction rate) preferred stock or other instrument
determined by the OCC to have the character of debt securities), certificate of
interest or participation in any profit-sharing agreement, collateral-trust
certificate, preorganization certificate or subscription, transferable share,
investment contract, or voting-trust certificate; any security convertible into
such a security; any security carrying any warrant or right to subscribe to or
purchase any such security; and any certificate of interest or participation
in, temporary or interim certificate for, or receipt for any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 5.03(m)(iii).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exchange Agent" has the meaning set forth in Section 3.02(a).
"Exchange Ratio" has the meaning set forth in Section 3.01(b)(1), subject
to adjustment pursuant to Section 3.06.
"Fair Housing Act" means the Fair Housing Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"Federal Reserve Act" means the Federal Reserve Act, as amended.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"GAAP" means accounting principles generally accepted in the United States
of America.
"Governmental Authority" means any federal, state or local court,
administrative agency or commission or other governmental authority or
instrumentality.
"Hazardous Substance" has the meaning set forth in Section 5.03(o).
"Indemnified Parties" and "Indemnifying Party" have the meanings set forth
in Section 6.11(a).
"Insurance Policies" has the meaning set forth in Section 5.03(x).
"IRS" means the Internal Revenue Service.
"Leases" has the meaning set forth in Section 5.03(t)
"Liens" means any charge, mortgage, pledge, security interest,
restriction, claim, lien or encumbrance.
"Loans" has the meaning set forth in Section 4.01(r).
Page I - 3
"Maine Superintendent" means the Superintendent of the Bureau of Banking
of the State of Maine.
"Material Adverse Effect" means, with respect to Parent or the Company any
effect that (i) is material and adverse to the financial position, results of
operations or business of Parent and its Subsidiaries taken as a whole or the
Company and its Subsidiaries taken as a whole, as the case may be, or (ii)
would materially impair the ability of any of Parent and its Subsidiaries or
the Company and its Subsidiaries to perform their respective obligations under
this Agreement or the Bank Merger Agreement or otherwise materially impede the
consummation of the Transactions; provided, however, that Material Adverse
Effect shall not be deemed to include the impact of (a) changes in banking,
corporate or tax laws or regulations of general applicability or
interpretations thereof by Governmental Authorities, (b) changes in GAAP or
regulatory accounting requirements applicable to banks or bank holding
companies generally, (c) changes in interest rates or general economic
conditions affecting banks and their holding companies generally, (d) any
modifications or changes to valuation policies and practices, or expenses
incurred, in connection with the Transactions or restructuring charges taken in
connection with the Transactions, in each case in accordance with GAAP, and (e)
with respect to the Company, the effects of any action or omission taken with
the prior consent of Parent or as otherwise contemplated by the Agreement.
"Material Contracts" has the meaning set forth in Section 5.03(k)(i).
"MBCA" means the Maine Business Corporation Act, as amended.
"Merger" has the meaning set forth in Section 2.01(a).
"Merger Consideration" means the number of whole shares of Parent Common
Stock, plus cash in lieu of any fractional share interest, into which shares of
Company Common Stock shall be converted pursuant to the provisions of Article
III.
"Nasdaq" means The Nasdaq Stock Market, Inc.'s NASDAQ National Market or
such national securities exchange on which the Parent Common Stock may be
listed.
"National Labor Relations Act" means the National Labor Relations Act, as
amended.
"OCC" means the Office of the Comptroller of the Currency.
"Option Cash-Out Amount" means, for each Company Option a cash amount
equal to the difference between (x) the exercise price applicable to such
Company Option and (y) $42.00; provided, however, that if the Average Share
Price is less than $17.00, "(y)" shall equal the product of the Exchange Ratio
and the Average Share Price.
"OREO" means other real estate owned.
"Parent" has the meaning set forth in the preamble to this Agreement.
"Parent Articles" means the Articles of Incorporation of Parent, as
amended.
"Parent Bank" means The First National Bank of Damariscotta and any successor
thereto.
"Parent Benefits Plans" has the meaning set forth in Section 6.12(a).
"Parent Board" means the Board of Directors of Parent.
"Parent Bylaws" means the Bylaws of Parent, as amended.
"Parent Common Stock" means the common stock of Parent.
"Parent Regulatory Authorities" has the meaning set forth in Section
5.04(k).
"Pension Plan" has the meaning set forth in Section 5.03(m)(ii).
"Person" means any individual, bank, corporation, partnership,
association, joint-stock company, business trust, limited liability company or
unincorporated organization.
Page I - 4
"Previously Disclosed" by a party shall mean information set forth in a
section of its Disclosure Schedule corresponding to the section of this
Agreement where such term is used.
"Proxy Statement" has the meaning set forth in Section 6.03(a).
"Registration Statement" has the meaning set forth in Section 6.03(a).
"Rights" means, with respect to any Person, warrants, options, rights,
convertible securities and other arrangements or commitments which obligate the
Person to issue or dispose of any of its capital stock or other ownership
interests.
"Rollover Option" means the Company Options described in Exhibit 3.08 that
are to be converted into options for Parent Common Stock pursuant to Section
3.08.
"SEC" means the Securities and Exchange Commission.
"SEC Documents" has the meaning set forth in Section 5.04(g).
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Shareholder Agreements" has the meaning set forth in the recitals to this
Agreement.
"Subsidiary" and "Significant Subsidiary" have the meanings ascribed to
those terms in Rule 1-02 of Regulation S-X of the SEC.
"Superior Proposal" has the meaning set forth in Section 6.08.
"Surviving Corporation" has the meaning set forth in Section 2.01(a).
"Tax" and "Taxes" mean all federal, state, local or foreign income, gross
income, gains, gross receipts, sales, use, ad valorem, goods and services,
capital, production, transfer, franchise, windfall profits, license,
withholding, payroll, employment, disability, employer health, excise,
estimated, severance, stamp, occupation, property, environmental, custom
duties, unemployment or other taxes of any kind whatsoever, together with any
interest, additions or penalties thereto and any interest in respect of such
interest and penalties.
"Tax Returns" means any return, declaration or other report (including
elections, declarations, schedules, estimates and information returns) with
respect to any Taxes.
"Termination Fee" has the meaning set forth in Section 8.02(b).
"Transactions" means the Merger and the Bank Merger and any other
transaction contemplated by this Agreement.
Page I - 5
ARTICLE II
THE MERGER
2.01. The Merger.
(a) The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time, the Company shall merge with and into Parent
in accordance with the applicable provisions of the MBCA (the "Merger"), and
the separate corporate existence of the Company shall cease and Parent shall
survive and continue to exist as a corporation incorporated under the MBCA
(Parent, as the surviving corporation in the Merger, sometimes being referred
to herein as the "Surviving Corporation").
(b) Name. The name of the Surviving Corporation shall be "First
National Lincoln Corporation."
(c) Articles and Bylaws. The Articles of Incorporation and Bylaws of
Parent immediately after the Merger shall be the Parent Articles and the Parent
Bylaws as in effect immediately prior to the Merger.
(d) Directors and Officers of the Surviving Corporation. The
directors and officers of Parent immediately after the Merger shall be the
directors and officers of Parent immediately prior to the Merger, and the
individuals appointed as directors as provided in Section 6.15, until such time
as their successors shall be duly elected and qualified.
(e) Authorized Capital Stock. The authorized capital stock of the
Surviving Corporation upon consummation of the Merger shall be as set forth in
the Parent Articles immediately prior to the Merger.
(f) Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in Section 1106 of the MBCA. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all
the property, rights, privileges, powers and franchises of the Company shall
vest in the Surviving Corporation, and all debts, liabilities, obligations,
restrictions, disabilities and duties of the Company shall become the debts,
liabilities, obligations, restrictions, disabilities and duties of the
Surviving Corporation.
(g) Additional Actions. If, at any time after the Effective Time,
the Surviving Corporation shall consider that any further assignments or
assurances in law or any other acts are necessary or desirable to (i) vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation its
right, title or interest in, to or under any of the rights, properties or
assets of the Company acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Merger, or (ii) otherwise carry out
the purposes of this Agreement, the Company, and its proper officers and
directors, shall be deemed to have granted to the Surviving Corporation an
irrevocable power of attorney to execute and deliver all such proper deeds,
assignments and assurances in law and to do all acts necessary or proper to
vest, perfect or confirm title to and possession of such rights, properties or
assets in the Surviving Corporation and otherwise to carry out the purposes of
this Agreement, and the proper officers and directors of the Surviving
Corporation are fully authorized in the name of the Surviving Corporation or
otherwise to take any and all such action.
2.02 Effective Date and Effective Time; Closing.
(a) Subject to the satisfaction or waiver of the conditions set forth in
Article VII (other than those conditions that by their nature are to be
satisfied at the consummation of the Merger, but subject to the fulfillment or
waiver of those conditions), the parties shall cause Articles of Merger
relating to the Merger (the "Articles of Merger") to be filed with the
Secretary of State of the State of Maine pursuant to the MBCA on (i) a date
selected by Parent after such satisfaction or waiver which is no later than the
later of (A) five Business Days after such satisfaction or waiver or (B) the
Page I - 6
first month end following such satisfaction or waiver, or (ii) such other date
to which the parties may mutually agree in writing. The Merger provided for
herein shall become effective upon such filings or on such date as may be
specified therein. The date of such filings or such later effective date is
herein called the "Effective Date." The "Effective Time" of the Merger shall be
the time of such filings or as set forth in such filings.
(b) A closing (the "Closing") shall take place immediately prior to the
Effective Time at 10:00 a.m., local time, at the offices of Pierce Atwood LLP
in Portland, Maine, or at such other place, at such other time, or on such
other date as the parties may mutually agree upon (such date, the "Closing
Date"). At the Closing, there shall be delivered to Parent and the Company the
opinions, certificates and other documents required to be delivered under
Article VII hereof.
Page I - 7
ARTICLE III
CONSIDERATION; ELECTION AND EXCHANGE PROCEDURES
3.01. Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of a holder of shares of Company
Common Stock:
(a) Each share of Parent Common Stock that is issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding and
shall be unchanged by the Merger.
(b) (1) Subject to Sections 3.04, 3.05 and 3.06, each share of Company
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted into, and shall be canceled in exchange for, the right to
receive, the number of shares of Parent Common Stock which is equal to the
quotient (the "Exchange Ratio") determined by dividing (x) $42.00 by (y) the
Average Share Price of the Parent Common Stock ; provided, however, that the
Exchange Ratio shall be not more than 2.47 and not less than 1.91.
(2) For purposes of this Agreement, the "Average Share Price" of the
Parent Common Stock shall mean the sum of the average of the high and low sales
price of a share of Parent Common Stock, for each trading day for which a high
and low sales price is reported on Nasdaq (as reported by an authoritative
source), during the 30 day period ending with the fifth Business Day
immediately preceding the Effective Date, divided by the number of trading days
for which a high and low price is so reported during such period.
3.02. Exchange Procedures.
(a) Parent shall designate an exchange agent to act as agent (the
"Exchange Agent") for purposes of conducting the exchange procedure described
in Section 3.01. At the Effective Time, for the benefit of the holders of
Certificates, Parent shall deliver to the Exchange Agent one or more
certificates evidencing the aggregate number of shares of Parent Common Stock
issuable. The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to the shares of Parent Common Stock held by
it from time to time hereunder, except that it shall receive and hold all
dividends or other distributions paid or distributed with respect to such
shares for the account of the persons entitled thereto.
(b) Each holder of an outstanding Certificate or Certificates who has
surrendered such Certificate or Certificates to the Exchange Agent will, upon
acceptance thereof by the Exchange Agent, be entitled to a certificate or
certificates representing the number of whole shares of Parent Common Stock and
cash in respect of any fractional shares as provided in Section 3.04, into
which the aggregate number of shares of Company Common Stock previously
represented by such Certificate or Certificates surrendered shall have been
converted pursuant to this Agreement and any other distribution theretofore
paid with respect to Parent Common Stock issuable in the Merger, in each case
without interest. The Exchange Agent shall accept such Certificates upon
compliance with such reasonable terms and conditions as the Exchange Agent may
impose to effect an orderly exchange thereof in accordance with normal exchange
practices. Each outstanding Certificate which prior to the Effective Time
represented Company Common Stock and which is not surrendered to the Exchange
Agent in accordance with the procedures provided for herein shall, except as
otherwise herein provided, until duly surrendered to the Exchange Agent be
deemed to evidence ownership of the number of shares of Parent Common Stock
into which such Company Common Stock shall have been converted or the right to
receive cash in respect of any fractional shares as provided in Section 3.04.
After the Effective Time, there shall be no further transfer on the records of
the Company of Certificates representing shares of Company Common Stock and if
such Certificates are presented to the Company for transfer, they shall be
cancelled against delivery of certificates for Parent Common Stock or cash as
Page I - 8
herein above provided. No dividends which have been declared will be remitted
to any person entitled to receive shares of Parent Common Stock under Section
3.01 until such person surrenders the Certificate or Certificates representing
Company Common Stock, at which time such dividends shall be remitted to such
person, without interest.
(c) The Exchange Agent and Parent, as the case may be, shall not be
obligated to deliver a certificate or certificates representing shares of
Parent Common Stock to which a holder of Company Common Stock would otherwise
be entitled as a result of the Merger or cash in respect of any fractional
shares as provided in Section 3.04 until such holder surrenders the Certificate
or Certificates representing the shares of Company Common Stock for exchange as
provided in this Section 3.02, or, in default thereof, an appropriate affidavit
of loss and indemnity agreement and/or a bond in an amount as may be reasonably
required in each case by Parent. If any certificates evidencing shares of
Parent Common Stock are to be issued in a name other than that in which the
Certificate evidencing Company Common Stock surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the
Certificate so surrendered shall be properly endorsed or accompanied by an
executed form of assignment separate from the Certificate and otherwise in
proper form for transfer and that the person requesting such exchange pay to
the Exchange Agent any transfer or other tax required by reason of the issuance
of a certificate for shares of Parent Common Stock in any name other than that
of the registered holder of the Certificate surrendered or otherwise establish
to the satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(d) Any portion of the shares of Parent Common Stock and cash delivered
to the Exchange Agent by Parent pursuant to Section 3.02(a) that remains
unclaimed by the shareholders of the Company for six months after the Effective
Time (as well as any proceeds from any investment thereof) shall be delivered
by the Exchange Agent to Parent. Any shareholders of Company who have not
theretofore complied with Section 3.02(b) shall thereafter look only to Parent
for the consideration deliverable in respect of each share of Company Common
Stock such shareholder holds as determined pursuant to this Agreement without
any interest thereon. Neither the Exchange Agent nor any party to this
Agreement shall be liable to any holder of stock represented by any Certificate
for any consideration paid to a public official pursuant to applicable
abandoned property, escheat or similar laws. Parent and the Exchange Agent
shall be entitled to rely upon the stock transfer books of the Company to
establish the identity of those persons entitled to receive the consideration
specified in this Agreement, which books shall be conclusive with respect
thereto. In the event of a dispute with respect to ownership of stock
represented by any Certificate, Parent and the Exchange Agent shall be entitled
to deposit any consideration represented thereby in escrow with an independent
third party and thereafter be relieved with respect to any claims thereto.
(e) Notwithstanding anything in this Agreement to the contrary,
Certificates surrendered for exchange by any Company Affiliate shall not be
exchanged for certificates representing shares of Parent Common Stock to which
such Company Affiliate may be entitled pursuant to the terms of this Agreement
until Parent has received a written agreement from such person as specified in
Section 6.07.
3.03. Rights as Shareholders; Stock Transfers. At the Effective
Time, holders of Company Stock shall cease to be, and shall have no rights as,
shareholders of the Company other than to receive the consideration provided
under this Article III. After the Effective Time, there shall be no transfers
on the stock transfer books of the Company or the Surviving Corporation of
shares of Company Stock.
Page I - 9
3.04. No Fractional Shares. Notwithstanding any other provision of
this Agreement, neither certificates nor scrip for fractional shares of Parent
Common Stock shall be issued in the Merger. Each holder of Company Common Stock
who otherwise would have been entitled to a fraction of a share of Parent
Common Stock (after taking into account all Certificates delivered by such
holder) shall receive in lieu thereof cash (without interest) in an amount
determined by multiplying the fractional share interest to which such holder
would otherwise be entitled by the Average Share Price, rounded to the nearest
whole cent. No such holder shall be entitled to dividends, voting rights or any
other rights in respect of any fractional share.
3.05. Dissenting Shares. Notwithstanding Section 3.02 above, each
outstanding share of Company Common Stock the holder of which has perfected
his, her or its right to dissent under the MBCA and has not effectively
withdrawn or lost such right as of the Effective Time (the "Dissenting Shares")
shall not be converted into or represent a right to receive shares of Parent
Common Stock hereunder, and the holder thereof shall be entitled only to such
rights as are granted by the MBCA. The Company shall give Parent prompt notice
upon receipt by the Company of any such written demands for payment of the fair
value of such shares of Company Common Stock and of withdrawals of such demands
and any other instruments provided pursuant to the MBCA. If any holder of
Dissenting Shares shall fail to perfect or shall have effectively withdrawn or
lost the right to dissent at or prior to the Effective Time, the Dissenting
Shares held by such holder shall be converted into a right to receive Parent
Common Stock and cash in respect of any fractional shares as provided in
Section 3.04 in accordance with the applicable provisions of this Agreement.
If any holder of Dissenting Shares shall have effectively withdrawn or lost the
right to dissent (through failure to perfect or otherwise) after the Effective
Time, the Dissenting Shares held by such holder shall be converted into the
right to receive Parent Common Stock and cash in respect of any fractional
shares in accordance with the applicable provisions of this Agreement as Parent
or the Exchange Agent shall determine. Any payments made in respect of
Dissenting Shares shall be made by the Surviving Corporation.
3.06. Anti-Dilution Provisions. If, between the date hereof and the
Effective Time, the shares of Parent Common Stock shall be changed into a
different number or class of shares by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, or
a stock dividend thereon shall be declared with a record date within said
period, the Exchange Ratio shall be adjusted accordingly.
3.07. Withholding Rights. Parent (through the Exchange Agent, if
applicable) shall be entitled to deduct and withhold from any amounts otherwise
payable pursuant to this Agreement to any holder of shares of Company Common
Stock or Company Options such amounts as Parent is required under the Code or
any state, local or foreign tax law or regulation thereunder to deduct and
withhold with respect to the making of such payment. Any amounts so withheld
shall be treated for all purposes of this Agreement as having been paid to the
holder of Company Common Stock or Company Options in respect of which such
deduction and withholding was made by Parent.
3.08. Company Options.
(a) At the Effective Time, each Company Option (other than a Rollover
Option) which is then outstanding, whether or not exercisable, shall become
fully vested and exercisable, and shall cease to represent a right to acquire
shares of Company Common Stock. All such Company Options (other than Rollover
Options) shall, at the Effective Time, be converted automatically into the
right to receive the Option Cash-Out Amount. Each Rollover Option shall be
converted automatically into an option to purchase shares of Parent Common
Stock, and Parent shall assume each such Rollover Option, in accordance with
Page I - 10
the terms of the Company Stock Option Plan and stock option or other agreement
by which it is evidenced, except that from and after the Effective Time, (i)
Parent and the Options Committee of its Board of Directors shall be substituted
for the Company and its Board of Directors (which administers the Company Stock
Option Plan), (ii) each Rollover Option assumed by Parent may be exercised
solely for shares of Parent Common Stock, (iii) the number of shares of Parent
Common Stock subject to such Rollover Option shall be equal to the number of
shares of Company Common Stock subject to such Rollover Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, provided that any
fractional shares of Parent Common Stock resulting from such multiplication
shall be rounded down to the nearest share, and (iv) the per share exercise
price under each such Rollover Option shall be adjusted by dividing the per
share exercise price under each such Rollover Option by the Exchange Ratio,
provided that such exercise price shall be rounded up to the nearest cent.
Parent and the Company agree to take all necessary steps to effect the
foregoing provisions of this Section 3.08(a) and Section 3.07.
(b) Within five Business Days after the Effective Time, Parent shall file
a registration statement on Form S-8 (or any successor or other appropriate
forms), with respect to the shares of Parent Common Stock subject to the
options referred to in paragraph (a) of this Section 3.08 and shall use its
reasonable efforts to maintain the current status of the prospectus or
prospectuses contained therein for so long as such options remain outstanding.
Page I - 11
ARTICLE IV
ACTIONS PENDING ACQUISITION
4.01. Forbearances of the Company. From the date hereof until the
Effective Time, except as expressly contemplated or permitted by this Agreement
or as Previously Disclosed, without the prior written consent of Parent, the
Company will not, and will cause each of its Subsidiaries not to:
(a) Ordinary Course. Conduct its business other than in the ordinary
and usual course consistent with past practice or fail to use reasonable best
efforts to preserve its business organization, keep available the present
services of its employees and preserve for itself and Parent the goodwill of
the customers of the Company and its Subsidiaries and others with whom business
relations exist.
(b) Capital Stock. Issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares of stock or
permit any additional shares of stock to become subject to grants of stock
options, other than upon the exercise of Company Options outstanding on the
date hereof under the Company Stock Option Plan.
(c) Dividends; Etc. (a) Make, declare, pay or set aside for payment
any dividend on or in respect of, or declare or make any distribution on any
shares of Company Stock, other than (A) subject to Section 6.14 hereof, regular
semi-annual cash dividends at a rate not in excess of $.33 per share on the
Company Common Stock, after taking into account any dividend under clause (B),
(B) to the extent necessary to effect the purposes of Section 6.14 and subject
to the provision of prior written notice to, and consultation with, the Parent,
quarterly cash dividends, at the same annualized rate as the regular dividends
paid by the Company, on the same record date provided by Parent with respect to
dividends payable to Parent shareholders, and (C) dividends from wholly-owned
Subsidiaries to the Company, or another wholly-owned Subsidiary of the Company,
or (b) directly or indirectly adjust, split, combine, redeem, reclassify,
purchase or otherwise acquire, any shares of its capital stock. Parent shall
give the Company advance notice of the determination of any record date with
respect to the payment of any dividend on Parent Common Stock.
(d) Compensation; Employment Agreements; Etc. Enter into or amend or
renew any employment, consulting, severance or similar agreements or
arrangements with any director, officer or employee of the Company or its
Subsidiaries or grant any salary or wage increase or increase any employee
benefit (including incentive or bonus payments), except (i) normal individual
increases in compensation to employees in the ordinary course of business
consistent with past practice, provided that no such increase with respect to
any individual employee shall result in an annualized adjustment of more than
4% of such employee's compensation and provided that any such increases to all
employees since June 30, 2004 shall not exceed 3.5% in the aggregate, (ii)
other changes that are required by applicable law, (iii) to satisfy contractual
obligations existing as of the date hereof and set forth in Schedule 4.01(d) of
the Company's Disclosure Schedule, (iv) grants or awards to newly-hired
employees consistent with past practice, (v) discretionary bonuses in the
ordinary course of business and consistent with past practice to employees of
the Company or the Company Bank for services rendered during the period from
January 1, 2004 to the Effective Time of up to $200,000 in the aggregate for
all employees, provided that in the case of any individual recipient any such
bonus, either alone or in combination with the payment of other amounts payable
to the recipient in the event his or her employment is terminated following the
Merger, would not be nondeductible by the Company or the Company Bank (or their
successors) under Section 280G of the Code and subject to the excise tax
imposed under Section 4999 of the Code, and (vi) any increase in the premium
costs of an existing insured employee benefit. Notwithstanding anything to the
Page I - 12
contrary set forth in this Agreement, prior to the Closing Date, the Company
and its Subsidiaries shall be permitted to make cash contributions to the
Company 401(k) Plan for the 2004 calendar year as long as the total amount of
such cash contributions do not exceed the amount derived by application of the
calendar 2003 formula based on calendar 2004 compensation levels.
(e) Hiring. Hire any person as an employee of the Company or any of
its Subsidiaries or promote any employee, except (i) to satisfy contractual
obligations existing as of the date hereof and set forth on Schedule 4.01(e) of
the Company's Disclosure Schedule and (ii) persons hired or promoted to fill
any vacancies arising after the date hereof and whose employment is terminable
at the will of the Company or a Subsidiary of the Company, as applicable, and
(iii) any person to be hired or promoted who would have a base salary,
including any guaranteed bonus or any similar bonus, considered on an annual
basis of less than $50,000.
(f) Benefit Plans. Enter into, establish, adopt or amend (except (i)
as may be required by applicable law, subject to the provision of prior written
notice to, and consultation with, the Parent, (ii) to satisfy contractual
obligations existing as of the date hereof and set forth on Schedule 4.01(f) of
the Company's Disclosure Schedule, or (iii) with respect to the Company's
401(k) Plan, as, and to the extent necessary, to allow the Company to make the
contribution to the Company's 401(k) Plan that is contemplated by the last
sentence of Section 4.01(d)) any pension, retirement, stock option, stock
purchase, savings, profit sharing, deferred compensation, consulting, bonus,
group insurance or other employee benefit, incentive or welfare contract, plan
or arrangement, or any trust agreement (or similar arrangement) related
thereto, in respect of any current or former director, officer or employee of
the Company or its Subsidiaries or take any action to accelerate the vesting or
exercisability of stock options, restricted stock or other compensation or
benefits payable thereunder, except that the Company shall accelerate the
vesting of Company Options in a manner consistent with Section 3.08(a). The
Company shall take such action as may be reasonably requested by Parent to
terminate one or more of the Benefits Plans effective as of the Effective Time.
(g) Dispositions. Sell, transfer, mortgage, encumber or otherwise
dispose of or discontinue any of its assets, deposits, business or properties
except in the ordinary course of business consistent with past practice and in
a transaction that, together with all other such transactions, is not material
to the Company and its Subsidiaries taken as a whole.
(h) Acquisitions. Acquire (other than by way of foreclosures or
acquisitions of control in a bona fide fiduciary capacity or in satisfaction of
debts previously contracted in good faith, in each case in the ordinary and
usual course of business consistent with past practice) all or any portion of
the assets, business, deposits or properties of any other entity.
(i) Capital Expenditures. Make any capital expenditures other than
capital expenditures in the ordinary course of business consistent with past
practice in amounts not exceeding $50,000 individually or $250,000 in the
aggregate.
(j) Governing Documents. Amend the Company Articles or Company
Bylaws or the articles of incorporation or bylaws (or equivalent documents) of
any Subsidiary of the Company.
(k) Accounting Methods. Implement or adopt any change in its
accounting principles, practices or methods, other than as may be required by
changes in laws or regulations or GAAP.
(l) Contracts. Except in the ordinary course of business consistent
with past practice or as otherwise permitted under this Section 4.01, enter
into or terminate any Material Contract or amend or modify in any material
respect any of its existing Material Contracts.
Page I - 13
(m) Claims. Enter into any settlement or similar agreement with
respect to any action, suit, proceeding, order or investigation to which the
Company or any of its Subsidiaries is or becomes a party after the date of this
Agreement, which settlement, agreement or action involves payment by the
Company and its Subsidiaries of an amount which exceeds $50,000 and/or would
impose any material restriction on the business of the Company or create
precedent for claims that are reasonably likely to be material to the Company
and its Subsidiaries taken as a whole.
(n) Banking Operations. Enter into any new material line of
business; change its material lending, investment, underwriting, risk and asset
liability management and other material banking and operating policies, except
as required by applicable law, regulation or policies imposed by any
Governmental Authority; or file any application or make any contract with
respect to branching or site location or branching or site relocation.
(o) Derivatives Contracts. Enter into any Derivatives Contract,
except in the ordinary course of business consistent with past practice.
(p) Indebtedness. Incur any indebtedness for borrowed money (other
than deposits, federal funds purchased, cash management accounts, borrowings
from the Federal Reserve Bank of Boston and securities sold under agreements to
repurchase, in each case in the ordinary course of business consistent with
past practice) or assume, guarantee, endorse or otherwise as an accommodation
become responsible for the obligations of any other Person, other than in the
ordinary course of business consistent with past practice.
(q) Investment Securities. Acquire (other than by way of
foreclosures or acquisitions in a bona fide fiduciary capacity or in
satisfaction of debts previously contracted in good faith, in each case in the
ordinary course of business consistent with past practice) (i) any debt
security or Equity Investment of a type or in an amount that is not permissible
for a national bank or (ii) any other debt security other than in the ordinary
course of business consistent with past practice; or restructure or materially
change its investment securities portfolio, through purchases, sales or
otherwise, or the manner in which such portfolio or any securities therein are
classified under GAAP or reported for regulatory purposes.
(r) Loans. Make, renew or otherwise modify any loan, loan
commitment, letter of credit or other extension of credit (collectively,
"Loans") other than in the ordinary course of business consistent with past
practice.
(s) Investments in Real Estate. Make any investment or commitment to
invest in real estate or in any real estate development project (other than by
way of foreclosure or acquisitions in a bona fide fiduciary capacity or in
satisfaction of a debt previously contracted in good faith, in each case in the
ordinary course of business consistent with past practice).
(t) Transactions with Affiliates. Except pursuant to agreements or
arrangements in effect on the date hereof, pay, loan or advance any amount to,
or sell, transfer or lease any properties or assets (real, personal or mixed,
tangible or intangible) to, or enter into any agreement or arrangement with,
any of its officers or directors or any of their immediate family members or
any affiliates or associates (as such terms are defined under the Exchange Act)
of any of its officers or directors other than compensation in the ordinary
course of business consistent with past practice.
(u) Taxes. Except as may be required by applicable laws or
regulations, make or change any material Tax election, file any material
amended Tax Return, enter into any material closing agreement, settle or
compromise any material liability with respect to Taxes, or consent to any
extension or waiver of the limitation period applicable to any material Tax
claim or assessment. For purposes of this subparagraph (u), "material" shall
mean affecting or relating to $50,000 or more of Taxes.
Page I - 14
(u) Compliance with Agreements. Knowingly commit any act or omission
which constitutes a material breach or default by the Company or any of its
Subsidiaries under any agreement with any Governmental Authority or under any
Material Contract, lease or other agreement or material license to which any of
them is a party or by which any of them or their respective properties is
bound.
(v) Environmental Assessments. Foreclose on or take a deed or title
to any commercial real estate without first conducting a Phase I environmental
assessment of the property or foreclose on any commercial real estate if such
environmental assessment indicates the presence of a Hazardous Substance in
amounts which, if such foreclosure were to occur, would be material.
(w) Adverse Actions. (i) Take any action that would, or is reasonably
likely to, prevent or impede the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code, or (ii) take any action that
is intended or is reasonably likely to result in (x) any of its representations
and warranties set forth in this Agreement being or becoming untrue in any
material respect at any time at or prior to the Effective Time, (y) any of the
conditions to the Merger set forth in Article VII not being satisfied or (z) a
material violation of any provision of this Agreement or the Bank Merger
Agreement, except, in each case, as may be required by applicable law or
regulation.
(x) Commitments. Enter into any contract with respect to, or
otherwise agree or commit to do, any of the foregoing.
4.02. Forbearances of Parent. From the date hereof until the
Effective Time, except as expressly contemplated or permitted by this
Agreement, without the prior written consent of the Company, Parent will not,
and will cause each of its Subsidiaries not to:
(a) Adverse Actions. (i) Take any action that would, or is
reasonably likely to, prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code or (ii) take
any action that is intended or is reasonably likely to result in (x) any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect at any time at or prior to the Effective Time,
(y) any of the conditions to the Merger set forth in Article VII not being
satisfied or (z) a material violation of any provision of this Agreement or the
Bank Merger Agreement, except, in each case, as may be required by applicable
law or regulation.
(b) Commitments. Enter into any contract with respect to, or
otherwise agree or commit to do, any of the foregoing.
(c) Suspension of Stock Buy-back Program. Purchase or acquire, for its
own account, any shares of Parent Common Stock, except for non-market
repurchases of Parent Common Stock from employees of Parent.
Page I - 15
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01. Disclosure Schedules. On or prior to the date hereof, Parent
has delivered to the Company a schedule and the Company has delivered to Parent
a schedule (respectively, its "Disclosure Schedule") setting forth, among other
things, items the disclosure of which is necessary or appropriate either in
response to an express disclosure requirement contained in a provision hereof
or as an exception to one or more representations or warranties contained in
Section 5.03 or 5.04 or to one or more of its covenants contained in Article
IV; provided, however, that (a) no such item is required to be set forth in a
Disclosure Schedule as an exception to a representation or warranty if its
absence would not be reasonably likely to result in the related representation
or warranty being deemed untrue or incorrect under the standard established by
Section 5.02, and (b) the mere inclusion of an item in a Disclosure Schedule as
an exception to a representation or warranty shall not be deemed an admission
by a party that such item represents a material exception or fact, event or
circumstance or that, absent such inclusion in the Disclosure Schedule, such
item is or would be reasonably likely to result in a Material Adverse Effect.
5.02. Standard. No representation or warranty of the Company or
Parent contained in Sections 5.03 or 5.04, respectively, shall be deemed untrue
or incorrect, and no party hereto shall be deemed to have breached a
representation or warranty, as a consequence of the existence of any fact,
event or circumstance unless such fact, circumstance or event, individually or
taken together with all other facts, events or circumstances inconsistent with
any representation or warranty contained in Section 5.03 or 5.04, has had or is
reasonably likely to have a Material Adverse Effect on the party making such
representation or warranty.
5.03. Representations and Warranties of the Company. Subject to
Sections 5.01 and 5.02 and except as Previously Disclosed, the Company hereby
represents and warrants to Parent:
(a) Organization, Standing and Authority. The Company is duly
organized, validly existing and in good standing under the laws of the State of
Maine. The Company is duly qualified to do business and is in good standing in
each jurisdiction where its ownership or leasing of property or assets or the
conduct of its business requires it to be so qualified. The Company has in
effect all federal, state, local and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on its
business as now conducted. The Company Articles and Company Bylaws, copies of
which have been delivered to Parent, are true, complete and correct copies of
such documents as in effect on the date of this Agreement.
(b) Company Capital Stock. The authorized capital stock of the
Company consists solely of 2,000,000 shares of Company Common Stock, of which
1,047,722 shares are outstanding as of the date hereof, and 100,000 shares of
Serial Preferred Stock, of which none are outstanding as of the date hereof.
The outstanding shares of Company Common Stock have been duly authorized and
validly issued and are fully paid and non-assessable, and none of the
outstanding shares of Company Common Stock have been issued in violation of the
preemptive rights of any Person. Section 5.03(b) of the Company's Disclosure
Schedule sets forth for each Company Stock Option, the name of the grantee, the
date of the grant, the type of grant, the status of the option grant as
qualified or non-qualified under Section 422 of the Code, the number of shares
of Company Common Stock subject to each option, the number of shares of Company
Common Stock subject to options that are currently exercisable and the exercise
price per share. Except as set forth in the preceding sentence, there are no
shares of Company Stock reserved for issuance, the Company does not have any
Page I - 16
Rights issued or outstanding with respect to Company Stock, and the Company
does not have any commitment to authorize, issue or sell any Company Stock.
(c) Subsidiaries.
(i) (A) The Company has Previously Disclosed a list of all of its
Subsidiaries together with the jurisdiction of organization of each such
Subsidiary, (B) the Company owns, directly or indirectly, all the issued and
outstanding equity securities of each of its Subsidiaries, (C) no equity
securities of any of its Subsidiaries are or may become required to be issued
(other than to the Company) by reason of any Right or otherwise, (D) there are
no contracts, commitments, understandings or arrangements by which any of its
Subsidiaries is or may be bound to sell or otherwise transfer any of its equity
securities (other than to the Company or any of its wholly-owned Subsidiaries),
(E) there are no contracts, commitments, understandings, or arrangements
relating to the Company's rights to vote or to dispose of such securities and
(F) all the equity securities of the Company's Subsidiaries held by the Company
or its Subsidiaries are fully paid and nonassessable and are owned by the
Company or its Subsidiaries free and clear of any Liens.
(ii) Except for securities and other interests held in a fiduciary
capacity and beneficially owned by third parties or taken in consideration of
debts previously contracted, the Company does not own beneficially, directly or
indirectly, any equity securities or similar interests of any Person or any
interest in a partnership or joint venture of any kind other than its
Subsidiaries and stock in the Federal Reserve Bank of Boston and the Federal
Home Loan Bank of Boston.
(iii) Each of the Company's Subsidiaries has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization and is duly qualified to do business and in good standing in the
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified. The articles of incorporation, bylaws
and similar governing documents of each Subsidiary of the Company, copies of
which have been delivered to Parent, are true, complete and correct copies of
such documents as in effect as of the date of this Agreement.
(iv) The Company Bank is the only Subsidiary of the Company that is an
insured depository institution. The deposit accounts of the Company Bank are
insured by the Bank Insurance Fund in the manner and to the maximum extent
provided by applicable law, and the Company Bank has paid all deposit insurance
premiums and assessments required by applicable laws and regulations.
(d) Corporate Power; Minute Books. Each of the Company and its
Subsidiaries has the corporate power and authority to carry on its business as
it is now being conducted and to own all its properties and assets; and the
Company has the corporate power and authority to execute, deliver and perform
its obligations under this Agreement and to consummate the Transactions,
subject to receipt of all necessary approvals of Governmental Authorities and
the approval of the Company's shareholders of this Agreement. The minute books
of the Company and each of its Subsidiaries contain true, complete and accurate
records of all meetings and other corporate actions held or taken since
December 31, 1999 of their respective shareholders and Boards of Directors
(including committees of their respective Boards of Directors).
(e) Corporate Authority. Subject to the approval of this Agreement
by the holders of 67% of the outstanding Company Common Stock, this Agreement
and the Transactions have been authorized and adopted by all necessary
corporate action of the Company and the Company Board on or prior to the date
hereof. The Company Board has directed that this Agreement be submitted to the
Company's shareholders for approval at a meeting of such shareholders and,
except for the approval and adoption of this Agreement by the affirmative vote
of the holders of a 67% of the outstanding shares of Company Common Stock, no
other vote of the shareholders of the Company is required by law, the Company
Page I - 17
Articles, the Company Bylaws or otherwise to approve this Agreement and the
Transactions. The Company has duly executed and delivered this Agreement and,
assuming due authorization, execution and delivery by Parent, this Agreement is
a valid and legally binding obligation of the Company, enforceable in
accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles).
(f) Regulatory Approvals; No Defaults.
(i) No consents or approvals of, or waivers by, or filings or
registrations with, any Governmental Authority or with any third party are
required to be made or obtained by the Company or any of its Subsidiaries in
connection with the execution, delivery or performance by the Company or the
Company Bank of this Agreement and the Bank Merger Agreement, as applicable, or
to consummate the Transactions, except for (A) filings of applications or
notices with, and approvals or waivers by, the Federal Reserve Board, the OCC,
and the Maine Superintendent, as required, (B) filings with the SEC and state
securities authorities, as applicable, in connection with the submission of
this Agreement for the approval of the holders of Company Common Stock and the
issuance of Parent Common Stock in the Merger, (C) the filing of Articles of
Merger with the Secretary of State of the State of Maine pursuant to the MBCA,
(D) the approval of this Agreement by the holders of 67% of the outstanding
shares of Company Common Stock and (E) such corporate approvals and such
consents or approvals of, or waivers by, or filings or registrations with,
certain of the foregoing federal and state banking agencies in connection with
the Bank Merger. As of the date hereof, the Company is not aware of any reason
why the approvals set forth above and referred to in Section 7.01(b) will not
be received in a timely manner and without the imposition of a condition,
restriction or requirement of the type described in Section 7.01(b).
(ii) Subject to receipt, or the making, of the consents, approvals,
waivers and filings referred to in the preceding paragraph and the expiration
of related waiting periods, the execution, delivery and performance of this
Agreement and the Bank Merger Agreement by the Company and the Company Bank, as
applicable, and the consummation of the Transactions do not and will not (A)
constitute a breach or violation of, or a default under, or give rise to any
Lien, any acceleration of remedies or any right of termination under, any law,
rule or regulation or any judgment, decree, order, governmental permit or
license, or agreement, indenture or instrument of the Company or any of its
Subsidiaries or to which the Company or any of its Subsidiaries or any of their
respective properties is subject or bound, (B) constitute a breach or violation
of, or a default under, the articles of incorporation or bylaws (or similar
governing documents) of the Company or any of its Subsidiaries or (C) require
any consent or approval under any such law, rule, regulation, judgment, decree,
order, governmental permit or license, agreement, indenture or instrument.
(g) Financial Reports; Undisclosed Liabilities. (i) The Company
has previously made available to Parent copies of (i) the consolidated balance
sheet of the Company and its Subsidiary as of December 31, 2003, December 31,
2002 and December 31, 2001, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the fiscal years ended
December 31, 2003, 2002 and 2001, in each case accompanied by the audit report
of Berry, Dunn, McNeil and Parker LLC, independent accountants with respect to
the Company, and (ii) the unaudited consolidated balance sheet of the Company
and its Subsidiary as of June 30, 2004 and the related unaudited consolidated
statements of income, cash flows and changes in shareholders' equity for the
three month and six month periods then ended. The December 31, 2003
consolidated balance sheet of the Company (including the related notes and
schedules thereto) fairly presents the consolidated financial position of the
Page I - 18
Company and its Subsidiary as of its date, and the other financial statements
referred to in this Section 5.03(g) (including any related notes and schedules
thereto, where applicable) fairly present (subject, in the case of unaudited
statements, to recurring audit adjustments normal in nature and amount and the
absence of notes), the results of consolidated operations and consolidated
financial position of the Company and its Subsidiary for the respective fiscal
periods or as of the respective dates therein set forth; each of such
statements (including any related notes and schedules thereto, where
applicable) has been prepared in accordance with GAAP consistently applied
during the periods involved, except in each case as may be noted therein. The
books and records of the Company and its Subsidiaries have been, and are being,
maintained in accordance with GAAP and any other applicable legal and
accounting requirements and reflect only actual transactions.
(ii) Since December 31, 2003, neither the Company nor any of its
Subsidiaries has incurred any liability other than in the ordinary course of
business consistent with past practice (excluding the incurrence of expenses
related to this Agreement and the transactions contemplated hereby).
(iii) Since December 31, 2003, (A) the Company and its Subsidiaries have
conducted their respective businesses in the ordinary and usual course
consistent with past practice (excluding the incurrence of expenses related to
this Agreement and the transactions contemplated hereby) and (B) no event has
occurred or circumstance arisen that, individually or taken together with all
other facts, circumstances and events (described in any paragraph of this
Section 5.03 or otherwise), is reasonably likely to have a Material Adverse
Effect with respect to the Company.
(iv) No agreement pursuant to which any loans or other assets have been
or shall be sold by the Company or its Subsidiaries entitled the buyer of such
loans or other assets, unless there is material breach of a representation or
covenant by the Company or its Subsidiaries, to cause the Company or its
Subsidiaries to repurchase such loan or other asset or the buyer to pursue any
other form of recourse against the Company or its Subsidiaries. Except for
regular semi-annual cash dividends on the Company Common Stock and a stock
dividend of two shares of Company Common Stock per share of Company Common
Stock paid April 2, 2004, since December 31, 2003, no cash, stock or other
dividend or any other distribution with respect to the stock of the Company or
any of its Subsidiaries have been declared, set aside or paid. No shares of the
stock of the Company have been purchased, redeemed or otherwise acquired,
directly or indirectly, by the Company since December 31, 2003, and no
agreements have been made to do the foregoing.
(h) Litigation. No litigation, claim or other proceeding before any
court or governmental agency is pending against the Company or any of its
Subsidiaries and, to the Company's knowledge, no such litigation, claim or
other proceeding has been threatened and there are no facts which could
reasonably give rise to such litigation, claim or other proceeding.
(i) Regulatory Matters.
(i) The Company and each of its Subsidiaries have timely filed all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that they were required to file since December
31, 1999 with any Governmental Authority, and have paid all fees and
assessments due and payable in connection therewith. Except for normal
examinations conducted by any Governmental Authority in the regular course of
the business of the Company and its Subsidiaries, no Governmental Authority has
initiated any proceeding, or to the knowledge of the Company, investigation
into the business or operations of the Company or any of its Subsidiaries since
December 31, 1999. Each of the Company and the Company Bank is "well
capitalized" and "well managed" as those terms are defined in applicable laws
and regulations, and the Company Bank has a Community Reinvestment Act rating
of "satisfactory" or better.
Page I - 19
(ii) Neither the Company nor any of its Subsidiaries nor any of their
respective properties is a party to or is subject to any order, decree,
agreement, memorandum of understanding or similar arrangement with, or a
commitment letter or similar submission to, or extraordinary supervisory letter
from, any federal or state governmental agency or authority charged with the
supervision or regulation of financial institutions or issuers of securities or
engaged in the insurance of deposits or the supervision or regulation of it
(collectively, the "Company Regulatory Authorities"). The Company and its
Subsidiaries have paid all assessments made or imposed by any Company
Regulatory Authority.
(iii) Neither the Company nor any of its Subsidiaries has been advised
by, or has any knowledge of facts which could give rise to an advisory notice
by, any Company Regulatory Authority that such Company Regulatory Authority is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, decree, agreement, memorandum of
understanding, commitment letter, supervisory letter or similar submission.
(j) Compliance With Laws. Each of the Company and its Subsidiaries:
(i) is in compliance with all applicable federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders or
decrees applicable thereto or to the employees conducting such businesses,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act,
the Bank Secrecy Act, Truth in Lending and Bank Privacy laws, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 and all other applicable fair lending laws and
other laws relating to discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all Governmental
Authorities that are required in order to permit them to own or lease their
properties and to conduct their businesses as presently conducted; all such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect and, to the Company's knowledge, no suspension or cancellation
of any of them is threatened; and
(iii) has received, since December 31, 2001, no notification or
communication from any Governmental Authority (A) asserting that the Company or
any of its Subsidiaries is not in compliance with any of the statutes,
regulations or ordinances which such Governmental Authority enforces or (B)
threatening to revoke any license, franchise, permit or governmental
authorization (nor, to the Company's knowledge, do any grounds for any of the
foregoing exist).
(k) Material Contracts; Defaults.
(i) Neither the Company nor any of its Subsidiaries is a party to,
bound by or subject to any agreement, contract, arrangement, commitment or
understanding (whether written or oral) (i) with respect to the employment of
any directors, officers, employees or consultants, (ii) which would entitle any
present or former director, officer, employee or agent of the Company or its
Subsidiaries to indemnification from the Company or its Subsidiaries (other
than indemnity provisions of their respective bylaws), (iii) which would be a
material contract (as defined in Item 601(b)(10) of Regulation S-K of the SEC
if the Company or its Subsidiary, as the case may be, were subject to the
Exchange Act) to be performed after the date of this Agreement, (iv) which is a
consulting agreement (including data processing, software programming and
licensing contracts) not terminable on 60 days or less notice and involving the
payment of more than $50,000 per annum, or (v) which restricts the conduct of
any business by the Company or any of its Subsidiaries (collectively, "Material
Contracts"). The Company has Previously Disclosed and made available to Parent
true and correct copies of each such document.
Page I - 20
(ii) Neither the Company nor any of its Subsidiaries is in default under
any contract, agreement, commitment, arrangement, lease, insurance policy or
other instrument to which it is a party, by which its respective assets,
business, or operations may be bound or affected, or under which it or its
respective assets, business, or operations receives benefits, and there has not
occurred any event that, with the lapse of time or the giving of notice or
both, would constitute such a default. No power of attorney or similar
authorization given directly or indirectly by the Company or any of its
Subsidiaries is currently outstanding.
(l) No Brokers. No action has been taken by the Company or any of
its Subsidiaries that would give rise to any valid claim against any party
hereto for a brokerage commission, finder's fee or other like payment with
respect to the Transactions, excluding a Previously Disclosed fee to be paid to
RBC Capital Markets Corporation, a member company of RBC Financial Group.
(m) Employee Benefit Plans.
(i) All benefit and compensation plans, contracts, policies or
arrangements covering current or former employees of the Company and its
Subsidiaries (the "Employees") and current or former directors of the Company
including, but not limited to, "employee benefit plans" within the meaning of
Section 3(3) of ERISA, and deferred compensation, stock option, stock purchase,
stock appreciation rights, stock based, incentive and bonus plans (the
"Benefits Plans"), are Previously Disclosed in the Disclosure Schedule. True
and complete copies of all Benefit Plans including, but not limited to, any
trust instruments and insurance contracts forming a part of any Benefit Plans
and all amendments thereto have been provided or made available to Parent, and
where no such documents exist with respect to a Benefit Plan, a written summary
of such Benefit Plan has been provided to or made available to Parent.
(ii) All Benefits Plans other than "multiemployer plans" within the
meaning of Section 3(37) of ERISA, covering Employees, to the extent subject to
ERISA, are, and have been administered, in substantial compliance with ERISA,
and, if applicable, the Code, including the filing requirements thereof. Each
Benefit Plan which is an "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA (a "Pension Plan") and which is intended to be qualified
under Section 401(a) of the Code, has received a favorable determination letter
from the IRS (or with respect to a master or prototype plan, has an opinion
letter from the IRS to the effect that such plan so qualifies). The Pension
Plans have been administered in accordance with the written terms of the plan
documents and the Company is not aware of any circumstances likely to result
in revocation of any such favorable determination letter (or withdrawal of such
opinion letter) or the loss of the qualification of such Pension Plan under
Section 401(a) of the Code. There is no pending or, to the Company's
knowledge, threatened litigation relating to the Benefits Plans. Neither the
Company nor any of its Subsidiaries has engaged in a transaction with respect
to any Benefit Plan or Pension Plan that, assuming the taxable period of such
transaction expired as of the date hereof, could subject the Company or any of
its Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code
or Section 502(i) of ERISA .
(iii) No liability under Subtitle C or D of Title IV of ERISA has been or
is expected to be incurred by the Company or any of its Subsidiaries with
respect to any ongoing, frozen or terminated "single-employer plan," within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by
any of them, or the single-employer plan of any entity which is considered one
employer with the Company under Section 4001 of ERISA or Section 414 of the
Code (an "ERISA Affiliate"). Neither the Company nor any of its Subsidiaries is
obligated to contribute to any multiemployer plan, and neither has incurred, or
expects to incur, any withdrawal liability with respect to a multiemployer plan
under Subtitle E of Title IV of ERISA (regardless of whether based on
Page I - 21
contributions of an ERISA Affiliate). No notice of a "reportable event," within
the meaning of Section 4043 of ERISA for which the 30-day reporting requirement
has not been waived, has been required to be filed for any Pension Plan or by
any ERISA Affiliate within the 12-month period ending on the date hereof or
will be required to be filed in connection with the transactions contemplated
by this Agreement.
(iv) All contributions required to be made under the terms of any Benefit
Plan have been timely made or have been reflected on the financial statements
of the Company provided to Parent to the extent required by the terms of any
such Benefit Plan and to the extent required by GAAP. Neither any Pension Plan
nor any single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of the
Code or Section 302 of ERISA and no ERISA Affiliate has an outstanding funding
waiver. Neither the Company nor any of its Subsidiaries has provided, or is
required to provide, security to any Pension Plan or to any single-employer
plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(v) Neither the Company nor any of its Subsidiaries has any obligations
for retiree health or retiree life benefits under any Benefit Plan, other than
coverage as may be required under Section 4980B of the Code or Part 6 of Title
I of ERISA, or under the continuation of coverage provisions of the laws of any
state or locality. Except as Previously Disclosed, the Company or any of its
Subsidiaries may amend or terminate any such Benefit Plan under which such
obligations for retiree health or retiree life exist at any time without
incurring any liability thereunder.
(vi) Except as provided in Section 3.08(a) with respect to the
acceleration of Company Options and except as provided in Section 6.12(f) with
respect to the Company ESOP, none of the execution of this Agreement,
shareholder approval of this Agreement or consummation of the transactions
contemplated by this Agreement will (A) entitle any employees of the Company or
any of its Subsidiaries to severance pay or any increase in severance pay upon
any termination of employment after the date hereof, (B) accelerate the time of
payment or vesting or trigger any payment or funding (through a grantor trust
or otherwise) of compensation or benefits under, increase the amount payable or
trigger any other material obligation pursuant to, any of the Benefit Plans,
(C) result in any breach or violation of, or a default under, any of the
Benefit Plans or (D) result in any payment that would be a "parachute payment"
to a "disqualified individual" as those terms are defined in Section 280G of
the Code, without regard to whether such payment is reasonable compensation for
personal services performed or to be performed in the future.
(vii) Each of the "group health plans" (as defined in 45 C.F.R.
s. 160.103) sponsored by the Company or any Subsidiary has been timely amended
as required to comply with the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA") and the rules and regulations promulgated thereunder and
all such plans have been administered in conformity with HIPAA and applicable
rules and regulations promulgated thereunder. All policies, forms, notices,
plan amendments, and agreements adopted or entered into by the Company or such
Subsidiary with respect to its group health plans have been Previously
Disclosed. Neither the Company nor any Subsidiary is aware of, or has receive
notice of, an impermissible use or disclosure of "protected health information"
(as defined in 45 C.F.R. s. 164.501) that would require an accounting of such
use or disclosure (as required under 45 C.F.R. s. 164.528).
(n) Labor Matters. Neither the Company nor any of its Subsidiaries
is a party to or is bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization, nor
is the Company or any of its Subsidiaries the subject of a proceeding asserting
that it has committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel the Company or any of its
Page I - 22
Subsidiaries to bargain with any labor organization as to wages or conditions
of employment, nor is there any strike or other labor dispute involving it or
any of its Subsidiaries pending or, to the Company's knowledge, threatened, nor
is the Company or any of its Subsidiaries aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in other
organizational activity.
(o) Environmental Matters.
(i) The Company and its Subsidiaries are in compliance with applicable
Environmental Laws; (ii) to the Company's knowledge, no real property
(including buildings or other structures) currently or formerly owned or
operated by the Company or any of its Subsidiaries, or any property in which
the Company or any of its Subsidiaries has held a security interest, Lien or a
fiduciary or management role ("Company Loan Property"), has been contaminated
with, or has had any release of, any Hazardous Substance except in compliance
with Environmental Laws; (iii) neither the Company nor any of its Subsidiaries
could be deemed the owner or operator of, or has participated in the management
regarding Hazardous Substances of, any Company Loan Property which has been
contaminated with, or has had any release of, any Hazardous Substance except in
compliance with Environmental Laws; (iv) neither the Company nor any of its
Subsidiaries has any liability for any Hazardous Substance disposal or
contamination on any third party property; (v) neither the Company nor any of
its Subsidiaries has received any notice, demand letter, claim or request for
information alleging any violation of, or liability under, any Environmental
Law; (vi) neither the Company nor any of its Subsidiaries is subject to any
order, decree, injunction or other agreement with any Governmental Authority or
any third party relating to any Environmental Law; (vii) to the Company's
knowledge, there are no circumstances or conditions (including the presence of
asbestos, underground storage tanks, lead products, polychlorinated biphenyls,
prior manufacturing operations, dry-cleaning, or automotive services) involving
the Company or any of its Subsidiaries, any currently or formerly owned or
operated property, or any Company Loan Property, that could reasonably be
expected to result in any claims, liability or investigations against the
Company or any of its Subsidiaries, result in any restrictions on the
ownership, use, or transfer of any property pursuant to any Environmental Law,
or adversely affect the value of any Company Loan Property; and (viii) the
Company has Previously Disclosed and made available to Parent copies of all
environmental reports or studies, sampling data, correspondence and filings in
its possession or reasonably available to it relating to the Company, its
Subsidiaries and any currently or formerly owned or operated property or any
Company Loan Property.
As used herein, the term "Environmental Laws" means any federal, state or
local law, regulation, order, decree, permit, authorization, opinion or agency
requirement relating to: (A) the protection or restoration of the environment,
health, safety, or natural resources, (B) the handling, use, presence,
disposal, release or threatened release of any Hazardous Substance or (C)
wetlands, indoor air, pollution, contamination or any injury or threat of
injury to persons or property in connection with any Hazardous Substance; and
the term "Hazardous Substance" means any substance that is: (A) listed,
classified or regulated pursuant to any Environmental Law, (B) any petroleum
product or by-product, asbestos-containing material, lead-containing paint or
plumbing, polychlorinated biphenyls, radioactive materials or radon or (C) any
other substance which is the subject of regulatory action by any Governmental
Authority in connection with any Environmental Law.
(p) Tax Matters.
(i)(A) All Tax Returns that are required to be filed on or before the
Effective Date (taking into account any extensions of time within which to file
which have not expired) by or with respect to the Company Group have been or
Page I - 23
will be timely filed on or before the Effective Date, (B) all such Tax Returns
are or will be true and complete , (C) all Taxes shown to be due on the Tax
Returns referred to in clause (A) have been or will be timely paid in full, (D)
the Tax Returns referred to in clause (A) have been examined by the IRS or the
appropriate Tax authority or the period for assessment of the Taxes in respect
of which such Tax Returns were required to be filed has expired, (E) all
deficiencies asserted or assessments made as a result of examinations conducted
by any taxing authority have been paid in full, (F) no issues that have been
raised by the relevant taxing authority in connection with the examination of
any of the Tax Returns referred to in clause (A) are currently pending and (G)
no member of the Company Group has waived any statutes of limitation with
respect to any Taxes of the Company or any of its Subsidiaries.
(ii) The Company has made available to Parent true and correct copies of
the United States federal income Tax Returns filed by the Company and its
Subsidiaries for each of the three most recent fiscal years for which such
returns have been filed.
(iii) Neither the Company nor any of its Subsidiaries has any liability
with respect to income, franchise or similar Taxes that accrued on or before
June 30, 2004 in excess of the amounts accrued or subject to a reserve with
respect thereto that are reflected in the Company's unaudited financial
statements dated as of June 30, 2004 and provided to Parent.
(iv) Neither the Company nor any of its Subsidiaries is a party to any
Tax allocation or sharing agreement, is or has been a member of an affiliated
group filing consolidated or combined Tax Returns (other than a group the
common parent of which is or was the Company) or otherwise has any liability
for the Taxes of any Person (other than the Company and its Subsidiaries).
(v) No closing agreements, private letter rulings, technical advice
memoranda or similar agreement or rulings have been entered into or issued by
any taxing authority with respect to the Company and its Subsidiaries. Neither
the Company nor any of its Subsidiaries has entered into any "tax shelter" or
"listed transaction" within the meaning provided in the Code and the
regulations, rules and procedures promulgated pursuant thereto or any similar
transaction.
(vi) Neither the Company nor any of its Subsidiaries maintains any
compensation plans, programs or arrangements the payments under which would not
reasonably be expected to be deductible as a result of the limitations under
Section 162(m) of the Code and the regulations issued thereunder.
(vii) As of the date hereof, the Company has no reason to believe that any
conditions exist that might prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
(viii)(A) No Tax is required to be withheld pursuant to Section 1445 of
the Code as a result of the Transactions and (B) all Taxes that the Company or
any of its Subsidiaries is or was required by law to withhold or collect have
been duly withheld or collected and, to the extent required by applicable law,
have been paid to the proper Governmental Authority or other Person.
(q) Investment Securities. The Company has previously disclosed the
book and market value as of June 30, 2004 of the investment securities,
mortgage backed securities and securities held for sale of the Company and its
Subsidiaries, as well as, with respect to such securities, descriptions
thereof, CUSIP numbers, book values, fair values and coupon rates.
(r) Risk Management Instruments. Neither the Company nor any of its
Subsidiaries is a party or has agreed to enter into an exchange traded or over-
the-counter equity, interest rate, foreign exchange or other swap, forward,
future, option, cap, floor or collar or any other contract that is not included
on the balance sheet and is a derivatives contract (including various
combinations thereof) (each, a "Derivatives Contract") or owns securities that
(i) are referred to generically as "structured notes," "high risk mortgage
Page I - 24
derivatives," "capped floating rate notes" or "capped floating rate mortgage
derivatives" or (ii) are likely to have changes in value as a result of
interest or exchange rate changes that significantly exceed normal changes in
value attributable to interest or exchange rate changes, except for those
Derivatives Contracts and other instruments legally purchased or entered into
in the ordinary course of business, consistent with safe and sound banking
practices and regulatory guidance. All of such Derivatives Contracts or other
instruments, are legal, valid and binding obligations of the Company or any of
its Subsidiaries enforceable in accordance with their terms (except as
enforcement may be limited by general principles of equity whether applied in a
court of law or a court of equity and by bankruptcy, insolvency and similar
laws affecting creditors' rights and remedies generally), and are in full force
and effect. The Company and its Subsidiaries have duly performed in all
respects all of their obligations thereunder to the extent that such
obligations to perform have accrued; and, to the Company's knowledge, there are
no breaches, violations or defaults or allegations or assertions of such by any
party thereunder which would have or would reasonably be expected to have a
Material Adverse Effect on the Company.
(s) Loans; Nonperforming and Classified Assets.
(i) Each Loan on the books and records of the Company and its
Subsidiaries, was made and has been serviced in all respects in accordance
with customary lending standards in the ordinary course of business, is
evidenced in all respects by appropriate and sufficient documentation and, to
the knowledge of the Company, constitutes the legal, valid and binding
obligation of the obligor named therein in accordance with such documentation,
subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditor's rights or by general equity principles.
(ii) The Company has Previously Disclosed as to the Company and each
Company Subsidiary as of the latest practicable date: (A) any written or, to
the Company's knowledge, oral Loan under the terms of which the obligor is 90
or more days delinquent in payment of principal or interest, or to the
Company's knowledge, in default of any other provision thereof; (B) each Loan
which has been classified as "substandard," "doubtful," "loss," "pass watch, "
"non-accrual" or "special mention" (or words of similar import) by the Company,
a Company Subsidiary or an applicable regulatory authority (it being understood
that no representation is being made that the FDIC, the OCC or the Maine
Superintendent would agree with the loan classifications established by the
Company); (C) a listing of the OREO acquired by foreclosure or by deed-in-lieu
thereof, including the book value thereof; and (D) each Loan with any director,
executive officer or five percent or greater shareholder of the Company or a
Company Subsidiary, or to the best knowledge of the Company, any Person
controlling, controlled by or under common control with any of the foregoing.
(iii) The loan documents with respect to each Loan were in compliance
with applicable laws and regulations and the Company's lending policies at the
time of origination of such Loans and are complete and correct.
(iv) Except as Previously Disclosed, neither the Company nor any of its
Subsidiaries is a party to any agreement or arrangement with (or otherwise
obligated to) any Person which obligates the Company or any of its Subsidiaries
to repurchase from any such Person any Loan or other asset of the Company or
its Subsidiary.
(t) Properties. All real and personal property owned by the Company
or a Subsidiary of the Company or presently used by any of them in its
respective business is in an adequate condition (ordinary wear and tear
excepted) and is sufficient to carry on its business in the ordinary course of
business consistent with its past practices. The Company has good and
marketable title free and clear of all Liens to all of the properties and
Page I - 25
assets, real and personal, reflected on the consolidated statement of financial
condition of the Company as of December 31, 2003 or acquired after such date,
other than properties sold by the Company in the ordinary course of business,
except (i) Liens for current taxes and assessments not yet due or payable (ii)
pledges to secure deposits and other Liens incurred in the ordinary course of
its banking business, (iii) such imperfections of title, easements and
encumbrances, if any, as are not material in character, amount or extent and
(iv) as reflected on the consolidated statement of financial condition of the
Company as of December 31, 2003. All real and personal property leased or
licensed by the Company or a Subsidiary of the Company is held pursuant to
leases or licenses ("Leases") which are valid and enforceable in accordance
with their respective terms and such leases will not terminate or lapse prior
to the Effective Time. There has not occurred any event, and no condition
exists that would constitute a termination event or a breach by the Company or
any Company Subsidiary of, or default by the Company or any Company Subsidiary
in, the performance of any covenant, agreement or condition contained in any
Lease, and to the Company's knowledge, no lessor under any such Lease is in
breach or default in the performance of any covenant, agreement or condition
contained in such Lease. The Company and the Company Subsidiaries have paid all
rents and other charges to the extent due under such Leases.
(u) Intellectual Property. The Company and each Subsidiary of the
Company owns or possesses valid and binding licenses and other rights to use
without payment of any amount all patents, copyrights, computer programs,
whether in source code or object code form (including all software, data bases
and compilations, and the documentation thereto), trade secrets, trade names,
service marks and trademarks used in its businesses ("Company Intellectual
Property"), all of which have been Previously Disclosed by the Company, and
none of the Company or any of its Subsidiaries has received any notice of
conflict with respect thereto that asserts the right of others. The Company and
each of its Subsidiaries have performed in all respects all the obligations
required to be performed by them and are not in default under any contract,
agreement, arrangement or commitment relating to any of the foregoing. To the
knowledge of the Company, the conduct of the business of the Company and its
Subsidiaries does not violate, misappropriate or infringe on the intellectual
property rights of others. The consummation of the Merger and the Bank Merger
will not result in the loss or impairment of the right of the Company or any of
its Subsidiaries to own or use any of the Company Intellectual Property, and
Parent will have substantially the same rights to own or use the Company
Intellectual Property following the consummation of the Merger and the Bank
Merger as the Company and its Subsidiaries had prior to the consummation of the
Merger and the Bank Merger, subject to the receipt of consents of the
applicable counterparties to any licenses to use Company Intellectual Property.
(v) Fiduciary Accounts. The Company and each of its Subsidiaries has
properly administered all accounts for which it acts as a fiduciary, including
but not limited to accounts for which it serves as a trustee, agent, custodian,
personal representative, guardian, conservator or investment advisor, in
accordance with the terms of the governing documents and applicable laws and
regulations. Neither the Company nor any of its Subsidiaries, nor any of their
respective directors, officers or employees, has committed any breach of trust
with respect to any fiduciary account and the records for each such fiduciary
account are true and correct and accurately reflect the assets of such
fiduciary account.
(w) Books and Records. The books and records of the Company and its
Subsidiaries have been fully, properly and accurately maintained in all
respects, and there are no inaccuracies or discrepancies of any kind contained
or reflected therein, and they fairly present the financial position of the
Company and its Subsidiaries.
Page I - 26
(x) Insurance. The Company has Previously Disclosed all of the
insurance policies, binders, or bonds currently maintained or owned by the
Company or any of its Subsidiaries ("Insurance Policies"). The Company and its
Subsidiaries are insured with reputable insurers against such risks and in such
amounts as the management of the Company reasonably has determined to be
prudent in accordance with industry practices. All the Insurance Policies are
in full force and effect; the Company and its Subsidiaries are not in default
thereunder; and all claims thereunder have been filed in due and timely
fashion.
(y) Allowance For Loan Losses. The Company's allowance for loan
losses is, and shall be as of the Effective Date, in compliance with the
Company's existing methodology for determining the adequacy of its allowance
for loan losses as well as the standards established by applicable Governmental
Authorities and the Financial Accounting Standards Board and is and shall be
adequate under all such standards.
(z) Transactions With Affiliates. All "covered transactions" between
a Company Bank and an "affiliate" within the meaning of Sections 23A and 23B of
the Federal Reserve Act have been in compliance with such provisions and the
regulations of the Federal Reserve Bank thereunder.
(aa) Required Vote; Antitakeover Provisions.
(i) The affirmative vote of the holders of 67% of the issued and
outstanding shares of Company Common Stock is necessary to approve this
Agreement and the Transactions on behalf of the Company. No other vote of the
shareholders of the Company is required by law, the Company Articles, the
Company Bylaws or otherwise to approve this Agreement and the Transactions.
(ii) Based on the representation and warranty of Parent contained in
Section 5.04(m), no "control share acquisition," "business combination
moratorium," "fair price" or other form of antitakeover statute or regulation
is applicable to this Agreement or the Transactions.
(bb) Fairness Opinion. The Company Board has received the written
opinion of RBC Capital Markets Corporation, a member company of RBC Financial
Group, to the effect that as of the date hereof the Merger Consideration is
fair to the holders of Company Common Stock from a financial point of view.
(cc) Transactions in Securities. Neither the Company nor any
Subsidiary of the Company has purchased or sold, or caused to be purchased or
sold, any shares of Company Common Stock or other securities issued by the
Company during any period when the Company was in possession of material
nonpublic information.
(dd) Disclosure. The representations and warranties contained in
this Section 5.03, when considered as a whole, do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements and information contained in this Section 5.03 not
misleading.
(ee) Ownership of Parent Common Stock. None of Company or any of its
Subsidiaries, or to Company's knowledge, any of its other affiliates or
associates (as such terms are defined under the Exchange Act), owns
beneficially or of record, directly or indirectly, or is a party to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of, shares of Parent Common Stock (other than shares held
in a fiduciary capacity that are beneficially owned by third parties or as a
result of debts previously contracted) which in the aggregate represent 5% or
more of the outstanding Parent Common Stock.
5.04. Representations and Warranties of Parent. Subject to Sections
5.01 and 5.02 and except as Previously Disclosed, Parent hereby represents and
warrants to the Company as follows:
(a) Organization, Standing and Authority. Parent is duly organized,
validly existing and in good standing under the laws of the State of Maine.
Page I - 27
Parent is duly qualified to do business and is in good standing in each
jurisdiction where its ownership or leasing of property or assets or the
conduct of its business requires it to be so qualified. Parent has in effect
all federal, state, local and foreign governmental authorizations necessary for
it to own or lease its properties and assets and to carry on its business as it
is now conducted.
(b) Parent Stock.
(i) As of the date hereof, the authorized capital stock of Parent
consists solely of 18,000,000 shares of Parent Common Stock, of which 7,348,971
shares were outstanding as of the date hereof. The outstanding shares of Parent
Common Stock have been duly authorized and validly issued and are fully paid
and non-assessable, and none of the shares of Parent Common Stock have been
issued in violation of the preemptive rights of any Person. As of the date
hereof, there are no Rights authorized, issued or outstanding with respect to
the capital stock of Parent, except for (i) shares of Parent Common Stock
issuable pursuant to the Parent Benefits Plans and (ii) by virtue of this
Agreement.
(ii) The shares of Parent Common Stock to be issued in exchange for
shares of Company Common Stock in the Merger, when issued in accordance with
the terms of this Agreement, will be duly authorized, validly issued, fully
paid and nonassessable and the issuance thereof is not subject to any
preemptive right.
(c) Subsidiaries.
(i) As of the date hereof, the only subsidiary of Parent which
constitutes a Significant Subsidiary is the Parent Bank. The Parent Bank has
been duly organized and is validly existing in good standing under the laws of
the United States and is duly qualified to do business and in good standing in
the jurisdictions where its ownership or leasing of property or the conduct of
its business requires it to be so qualified. The Parent Bank is duly licensed
by the OCC, and its deposits are insured by the Bank Insurance Fund
administered by the FDIC in the manner and to the maximum extent provided by
law.
(ii) As of the date hereof, (A) Parent owns, directly or indirectly, all
the issued and outstanding equity securities of the Parent Bank, (B) no equity
securities of the Parent Bank are or may become required to be issued (other
than to Parent) by reason of any Right or otherwise, (C) there are no
contracts, commitments, understandings or arrangements by which the Parent Bank
is or may be bound to sell or otherwise transfer any of its equity securities
(other than to Parent or any of its wholly-owned Subsidiaries) and (D) there
are no contracts, commitments, understandings, or arrangements relating to
Parent's rights to vote or to dispose of such securities.
(d) Corporate Power. Each of Parent and the Parent Bank has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets. Parent has the corporate
power and authority to execute, deliver and perform its obligations under this
Agreement and to consummate the Transactions, subject to the receipt of all
necessary approvals of Governmental Authorities and the approval of the holders
of a majority of the Parent Common Stock of this Agreement.
(e) Corporate Authority. This Agreement and the Transactions have
been authorized by all necessary corporate action of Parent and the Parent
Board. This Agreement has been duly executed and delivered by Parent and,
assuming due authorization, execution and delivery by the Company, this
Agreement is a valid and legally binding agreement of Parent enforceable in
accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles).
Page I - 28
(f) Regulatory Approvals; No Defaults.
(i) No consents or approvals of, or waivers by, or filings or
registrations with, any Governmental Authority or with any third party are
required to be made or obtained by Parent or any of its Subsidiaries in
connection with the execution, delivery or performance by Parent and the Parent
Bank of this Agreement and the Bank Merger Agreement, as applicable, or to
consummate the Transactions, except for (A) filings of applications or notices
with and approvals or waivers by the Federal Reserve Board, the OCC, the Maine
Superintendent, as required, with copies to the Department of Justice and
Federal Trade Commission pursuant to the exemption from filing under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 provided by 15 U.S.C.A. s.
18a(c)(7), (B) filings with the SEC and state securities authorities, as
applicable, in connection with the submission of this Agreement for the
approval of the holders of Company Common Stock and the issuance of Parent
Common Stock in the Merger, (C) application for, and the approval of, the
listing on Nasdaq of the Parent Common Stock to be issued in the Merger, (D)
the approval of this Agreement by the holders of a majority of the outstanding
shares of Parent Common Stock, (E) the filing of Articles of Merger with the
Secretary of State of the State of Maine pursuant to the MBCA, and (F) such
corporate approvals and such consents or approvals of, or waivers by, or
filings or registrations with, certain of the foregoing federal and state
banking agencies in connection with the Bank Merger. As of the date hereof,
Parent is not aware of any reason why the approvals set forth above and
referred to in Section 7.01(b) will not be received in a timely manner and
without the imposition of a condition, restriction or requirement of the type
described in Section 7.01(b).
(ii) Subject to receipt, or the making, of the consents, approvals,
waivers and filings referred to in the preceding paragraph and expiration of
the related waiting periods, the execution, delivery and performance of this
Agreement and the Bank Merger Agreement by Parent and the Parent Bank, as
applicable, and the consummation of the Transactions do not and will not (A)
constitute a breach or violation of, or a default under, or give rise to any
Lien, any acceleration of remedies or any right of termination under, any law,
rule or regulation or any judgment, decree, order, governmental permit or
license, or agreement, indenture or instrument of Parent or of any of its
Subsidiaries or to which Parent or any of its Subsidiaries or properties is
subject or bound, (B) constitute a breach or violation of, or a default under,
the articles of incorporation or bylaws (or similar governing documents) of
Parent or any of its Subsidiaries or (C) require any consent or approval under
any such law, rule, regulation, judgment, decree, order, governmental permit or
license, agreement, indenture or instrument.
(g) Financial Reports and SEC Documents; Material Adverse Effect.
(i) Parent's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 and all other reports, registration statements, definitive
proxy statements or information statements filed or to be filed by it
subsequent to December 31, 2001 under the Securities Act, or under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act in the form filed or to be filed
(collectively, "SEC Documents") with the SEC, as of the date filed or to be
filed, (A) complied or will comply in all respects as to form with the
applicable requirements under the Securities Act or the Exchange Act, as the
case may be and (B) did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that information as of a
later date shall be deemed to modify information as of an earlier date; and
each of the balance sheets contained in or incorporated by reference into any
such SEC Document (including the related notes and schedules thereto) fairly
Page I - 29
presents, or will fairly present, the financial position of Parent and its
Subsidiaries as of its date, and each of the statements of income and changes
in shareholders' equity and cash flows or equivalent statements in such SEC
Documents (including any related notes and schedules thereto) fairly presents,
or will fairly present, the results of operations, changes in shareholders'
equity and changes in cash flows, as the case may be, of Parent and its
Subsidiaries for the periods to which they relate, in each case in accordance
with GAAP consistently applied during the periods involved, except in each case
as may be noted therein.
(ii) Since June 30, 2004, no event has occurred or circumstance arisen
that, individually or taken together with all other facts, circumstances and
events (described in any paragraph of this Section 5.04 or otherwise), is
reasonably likely to have a Material Adverse Effect with respect to Parent.
(h) Litigation. No litigation, claim or other proceeding before any
court or governmental agency is pending against Parent or its Subsidiaries and,
to Parent's knowledge, no such litigation, claim or other proceeding has been
threatened and there are no facts which could reasonably give rise to such
litigation, claim or other proceeding.
(i) No Brokers. No action has been taken by Parent or its
Subsidiaries that would give rise to any valid claim against any party hereto
for a brokerage commission, finder's fee or other like payment with respect to
the Transactions.
(j) Tax Matters. As of the date hereof, Parent does not have any
reason to believe that any conditions exist that might prevent or impede the
Merger from qualifying as a reorganization within the meaning of Section 368(a)
of the Code.
(k) Regulatory Matters.
(i) Neither Parent nor any of its Subsidiaries nor any of their
respective properties is a party to or is subject to any order, decree,
agreement, memorandum of understanding or similar arrangement with, or a
commitment letter or similar submission to, or extraordinary supervisory letter
from, any federal or state governmental agency or authority charged with the
supervision or regulation of financial institutions or issuers of securities or
engaged in the insurance of deposits or the supervision or regulation of it
(collectively, the "Parent Regulatory Authorities"). Parent and its
Subsidiaries have paid all assessments made or imposed by any Parent Regulatory
Authority.
(ii) Neither Parent nor any its Subsidiaries has been advised by, or has
any knowledge of facts which could give rise to an advisory notice by, any
Parent Regulatory Authority that such Parent Regulatory Authority is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, decree, agreement, memorandum of
understanding, commitment letter, supervisory letter or similar submission.
(l) Compliance With Laws. Each of Parent and its Subsidiaries:
(i) is in compliance with all applicable federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders or
decrees applicable thereto or to the employees conducting such businesses,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act,
the Bank Secrecy Act, Truth in Lending and Bank Privacy laws, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 and all other applicable fair lending laws and
other laws relating to discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all Governmental
Authorities that are required in order to permit them to own or lease their
properties and to conduct their businesses as presently conducted; all such
Page I - 30
permits, licenses, certificates of authority, orders and approvals are in full
force and effect and, to Parent's knowledge, no suspension or cancellation of
any of them is threatened; and
(iii) has received, since December 31, 1999, no notification or
communication from any Governmental Authority (A) asserting that Parent or any
of its Subsidiaries is not in compliance with any of the statutes, regulations
or ordinances which such Governmental Authority enforces or (B) threatening to
revoke any license, franchise, permit or governmental authorization (nor, to
Parent's knowledge, do any grounds for any of the foregoing exist).
(m) Ownership of Company Common Stock. None of Parent or any of its
Subsidiaries, or to Parent's knowledge, any of its other affiliates or
associates (as such terms are defined under the Exchange Act), owns
beneficially or of record, directly or indirectly, or is a party to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of, shares of Company Common Stock (other than shares held
in a fiduciary capacity that are beneficially owned by third parties or as a
result of debts previously contracted) which in the aggregate represent 5% or
more of the outstanding Company Common Stock.
(n) Financial Ability. Each of Parent and Parent Bank is, and
immediately following completion of the Transactions will be, in compliance
with all capital requirements applicable to it.
(o) Disclosure. The representations and warranties contained in this
Section 5.04, when considered as a whole, do not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements and information contained in this Section 5.04 not
misleading.
Page I - 31
ARTICLE VI
COVENANTS
6.01. Reasonable Best Efforts. Subject to the terms and conditions
of this Agreement, each of the Company and Parent agrees to use its reasonable
best efforts in good faith to take, or cause to be taken, all actions, and to
do, or cause to be done, all things necessary, proper or desirable, or
advisable under applicable laws, so as to permit consummation of the
Transactions as promptly as practicable and otherwise to enable consummation of
the Transactions, including the satisfaction of the conditions set forth in
Article VII hereof, and shall cooperate fully with the other party hereto to
that end.
6.02. Shareholder Approval. The Company agrees to take, in
accordance with applicable law and the Company Articles and Company Bylaws, all
action necessary to convene as soon as reasonably practicable a special meeting
of its shareholders to consider and vote upon the approval of this Agreement
and any other matters required to be approved by the Company's shareholders for
consummation of the Transactions (including any adjournment or postponement,
the "Company Meeting"). Except with the prior approval of Parent, no other
matters shall be submitted for the approval of the Company shareholders at the
Company Meeting. The Company Board shall at all times prior to and during such
meeting recommend such approval and shall take all reasonable lawful action to
solicit such approval by its shareholders; provided that nothing in this
Agreement shall prevent the Company Board from withholding, withdrawing,
amending or modifying its recommendation if the Company Board determines, after
consultation with its outside counsel, that such action is legally required in
order for the directors to comply with their fiduciary duties to the Company
shareholders under applicable law; provided, further, that Section 6.08 shall
govern the withholding, withdrawing, amending or modifying of such
recommendation in the circumstances described therein.
6.03. Registration Statement.
(a) Parent agrees to prepare a registration statement on Form S-4 or
other applicable form (the "Registration Statement") to be filed by Parent with
the SEC in connection with the issuance of Parent Common Stock in the Merger
(including the proxy statement and prospectus and other proxy solicitation
materials of the Company constituting a part thereof (the "Proxy Statement")
and all related documents). The Company shall prepare and furnish such
information relating to it and its directors, officers and shareholders as may
be reasonably required in connection with the above referenced documents based
on its knowledge of and access to the information required for said documents,
and the Company, and its legal, financial and accounting advisors, shall have
the right to review in advance such Registration Statement prior to its filing.
The Company agrees to cooperate with Parent and Parent's counsel and
accountants in requesting and obtaining appropriate opinions, consents and
letters from its financial advisor and independent auditor in connection with
the Registration Statement and the Proxy Statement. Provided that the Company
has cooperated as described above, Parent agrees to file, or cause to be filed,
the Registration Statement and the Proxy Statement with the SEC as promptly as
reasonably practicable. Each of the Company and Parent agrees to use its
reasonable best efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as reasonably practicable after
the filing thereof. Parent also agrees to use its reasonable best efforts to
obtain all necessary state securities law or "Blue Sky" permits and approvals
required to carry out the transactions contemplated by this Agreement. After
the Registration Statement is declared effective under the Securities Act, the
Company shall promptly mail at its expense the Proxy Statement to its
shareholders.
Page I - 32
(b) Each of the Company and Parent agrees that none of the information
supplied or to be supplied by it for inclusion or incorporation by reference in
(i) the Registration Statement shall, at the time the Registration Statement
and each amendment or supplement thereto, if any, becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading and (ii) the Proxy Statement and any
amendment or supplement thereto shall, at the date(s) of mailing to
shareholders and at the time of the Company Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading. Each
of the Company and Parent further agrees that if such party shall become aware
prior to the Effective Date of any information furnished by such party that
would cause any of the statements in the Registration Statement or the Proxy
Statement to be false or misleading with respect to any material fact, or to
omit to state any material fact necessary to make the statements therein not
false or misleading, to promptly inform the other parties thereof and to take
the necessary steps to correct the Registration Statement or the Proxy
Statement.
(c) Parent agrees to advise the Company, promptly after Parent receives
notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of Parent Common Stock for
offering or sale in any jurisdiction, of the initiation or, to the extent
Parent is aware thereof, threat of any proceeding for any such purpose, or of
any request by the SEC for the amendment or supplement of the Registration
Statement or for additional information.
6.04. Regulatory Filings.
(a) Each of Parent and the Company and their respective Subsidiaries
shall cooperate and use their respective reasonable best efforts to prepare all
documentation, to effect all filings and to obtain all permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary to consummate the Transactions and any other transactions
contemplated by this Agreement; and any initial filings with Governmental
Authorities shall be made by Parent as soon as reasonably practicable after the
execution hereof. Each of Parent and the Company shall have the right to review
in advance, and to the extent practicable each shall consult with the other, in
each case subject to applicable laws relating to the exchange of information,
with respect to all written information submitted to any third party or any
Governmental Authority in connection with the Transactions. In exercising the
foregoing right, each of such parties agrees to act reasonably and as promptly
as practicable. Each party hereto agrees that it shall consult with the other
parties hereto with respect to the obtaining of all permits, consents,
approvals, waivers and authorizations of all third parties and Governmental
Authorities necessary or advisable to consummate the Transactions, and each
party shall keep the other parties apprised of the status of material matters
relating to completion of the Transactions.
(b) Each party agrees, upon request, to furnish the other parties with
all information concerning itself, its Subsidiaries, directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other parties or any of their respective Subsidiaries to any third party
or Governmental Authority.
6.05. Press Releases. The Company and Parent shall consult with each
other before issuing any press release with respect to the Transactions or this
Agreement and shall not issue any such press release or make any such public
statements without the prior consent of the other party, which shall not be
Page I - 33
unreasonably withheld; provided, however, that a party may, without the prior
consent of the other party (but after such consultation, to the extent
practicable in the circumstances), issue such press release or make such public
statements as may upon the advice of outside counsel be required by law or the
rules or regulations of Nasdaq. The Company and Parent shall cooperate to
develop all public announcement materials and make appropriate management
available at presentations related to the Transactions as reasonably requested
by the other party.
6.06. Access; Information.
(a) The Company agrees that upon reasonable notice and subject to
applicable laws relating to the exchange of information, it shall afford Parent
and Parent's officers, employees, counsel, accountants and other authorized
representatives such access during normal business hours throughout the period
prior to the Effective Time to the books, records (including, without
limitation, Tax Returns and work papers of independent auditors), properties
and personnel of the Company and the Company Bank and to such other information
relating to the Company or the Company Bank as Parent may reasonably request
and, during such period, it shall furnish promptly to Parent all information
concerning the business, properties and personnel of the Company and the
Company Bank as Parent may reasonably request. Parent has, prior to the
execution and delivery of this Agreement, been given access to and the
opportunity to examine certain materials provided by the Company, including the
year-end financials, credit files, ALCO packages and minutes, loan loss reserve
adequacy reports and loan risk analyses, and an opportunity to ask questions of
and to receive answers from officers and representatives of the Company and the
Subsidiaries. As of the date of this Agreement, the Parent has, in all
material respects, completed its review of the materials so provided by the
Company and the Subsidiaries.
(b) Parent agrees that upon reasonable notice and subject to applicable
laws relating to the exchange of information, it shall afford the Company and
its authorized representatives such access to Parent's personnel as the Company
may reasonably request.
(c) Each party agrees that it will not, and will cause its
representatives not to, use any information obtained pursuant to this Section
6.06 (as well as any other information obtained prior to the date hereof in
connection with the entering into of this Agreement) for any purpose unrelated
to the consummation of the Transactions. Subject to the requirements of law,
each party shall keep confidential, and shall cause its representatives to keep
confidential, all information and documents obtained pursuant to this Section
6.06 (as well as any other information obtained prior to the date hereof in
connection with the entering into of this Agreement) unless such information
(i) was already known to such party, (ii) becomes available to such party from
other sources not known by such party to be bound by a confidentiality
obligation, (iii) is disclosed with the prior written approval of the party to
which such information pertains or (iv) is or becomes readily ascertainable
from publicly available sources. In the event that this Agreement is terminated
or the Transactions shall otherwise fail to be consummated, each party shall
promptly cause all copies of documents or extracts thereof containing
information and data as to another party hereto to be returned to the party
which furnished the same. No investigation by any party of the business and
affairs of any other party shall affect or be deemed to modify or waive any
representation, warranty, covenant or agreement in this Agreement, or the
conditions to any party's obligation to consummate the Transactions.
(d) No investigation by Parent of the business and affairs of the
Company shall affect or be deemed to modify or waive any representation,
warranty, covenant or agreement in this Agreement, or the conditions to the
obligations of Parent to consummate the Merger.
Page I - 34
6.07. Affiliates. The Company shall use its reasonable best efforts
to identify those persons who may be deemed to be "affiliates" of the Company
within the meaning of Rule 145 promulgated by the SEC under the Securities Act
(the "Company Affiliates") and to cause each person so identified to deliver to
Parent as soon as practicable, and in any event prior to the date of the
Company Meeting, a written agreement to comply with the requirements of Rule
145 under the Securities Act in connection with the sale or other transfer of
Parent Common Stock received in the Merger, which agreement shall be in a form
reasonably satisfactory to Parent.
6.08. Acquisition Proposals. The Company agrees that neither it nor
any of its Subsidiaries shall, and that it shall direct and use its reasonable
best efforts to cause its and each such Subsidiary's directors, officers,
employees, agents and representatives not to, directly or indirectly, initiate,
solicit, encourage or otherwise facilitate any inquiries or the making of any
proposal or offer with respect to a merger, reorganization, share exchange,
consolidation or similar transaction involving, or any purchase of all or
substantially all of the assets of the Company or more than 10% of the
outstanding equity securities of the Company or any of its Subsidiaries (any
such proposal or offer being hereinafter referred to as an "Acquisition
Proposal"). The Company further agrees that neither the Company nor any of its
Subsidiaries shall, and that it shall direct and use its reasonable best
efforts to cause its and each such Subsidiary's directors, officers, employees,
agents and representatives not to, directly or indirectly, engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any Person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; provided, however, that nothing contained in this Agreement shall
prevent the Company or the Company Board from (A) complying with its disclosure
obligations under federal or state law; (B) providing information in response
to a request therefor by a Person who has made an unsolicited bona fide written
Acquisition Proposal if the Company Board receives from the Person so
requesting such information an executed confidentiality agreement; (C) engaging
in any negotiations or discussions with any Person who has made an unsolicited
bona fide written Acquisition Proposal or (D) recommending such an Acquisition
Proposal to the shareholders of the Company, if and only to the extent that, in
each such case referred to in clause (B), (C) or (D) above, (i) the Company
Board determines in good faith (after consultation with outside legal counsel)
that such action would be required in order for its directors to comply with
their respective fiduciary duties under applicable law and (ii) the Company
Board determines in good faith (after consultation with its financial advisor)
that such Acquisition Proposal, if accepted, is reasonably likely to be
consummated, taking into account all legal, financial and regulatory aspects of
the proposal and the Person making the proposal and would, if consummated,
result in a transaction more favorable to the Company's shareholders from a
financial point of view than the Merger. An Acquisition Proposal which is
received and considered by the Company in compliance with this Section 6.08 and
which meets the requirements set forth in clause (D) of the preceding sentence
is herein referred to as a "Superior Proposal." The Company agrees that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Acquisition Proposals. The Company agrees that it will notify Parent if
any such inquiries, proposals or offers are received by, any such information
is requested from, or any such discussions or negotiations are sought to be
initiated or continued with, the Company or any of its representatives as soon
as the Company becomes aware of the same.
Page I - 35
6.09. Certain Policies. Prior to the Effective Date, each of the
Company and its Subsidiaries shall, consistent with GAAP, the rules and
regulations of the SEC and applicable banking laws and regulations, modify or
change its loan, OREO, accrual, reserve, tax, litigation and real estate
valuation policies and practices (including loan classifications and levels of
reserves) so as to be applied on a basis that is consistent with that of
Parent; provided, however, that no such modifications or changes need be made
prior to the satisfaction of the conditions set forth in Section 7.01(b); and
further provided that in any event, no accrual or reserve made by the Company
or any of its Subsidiaries pursuant to this Section 6.09 shall constitute or be
deemed to be a breach, violation of or failure to satisfy any representation,
warranty, covenant, agreement, condition or other provision of this Agreement
or otherwise be considered in determining whether any such breach, violation or
failure to satisfy shall have occurred. The recording of any such adjustments
shall not be deemed to imply any misstatement of previously furnished financial
statements or information and shall not be construed as concurrence of the
Company or its management with any such adjustments.
6.10. Nasdaq Listing. Parent agrees to use its reasonable best
efforts to list, prior to the Effective Date, on the Nasdaq the shares of
Parent Common Stock to be issued in connection with the Merger.
6.11. Indemnification.
(a) From and after the Effective Time, Parent (the "Indemnifying Party")
shall indemnify and hold harmless each present and former director, officer and
employee of the Company or a Company Subsidiary, as applicable, determined as
of the Effective Time (the "Indemnified Parties") against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of matters existing or occurring at or prior to the
Effective Time, whether asserted or claimed prior to, at or after the Effective
Time, arising in whole or in part out of or pertaining to the fact that he or
she was a director, officer, employee, fiduciary or agent of the Company or any
Company Subsidiary or is or was serving at the request of the Company or any of
the Company Subsidiaries as a director, officer, employee, fiduciary or agent
of another corporation, partnership, joint venture, trust or other enterprise,
including without limitation matters related to the negotiation, execution and
performance of this Agreement or consummation of the Transactions, to the
fullest extent which such Indemnified Parties would be entitled under the
Company Articles and Company Bylaws or equivalent documents of any Company
Subsidiary, as applicable, or any agreement, arrangement or understanding which
has been Previously Disclosed by the Company pursuant to this Section, in each
case as in effect on the date hereof. Without limiting the foregoing, Parent
also agrees that limitations on liability existing in favor of the Indemnified
Parties as provided in the Company Articles and Company Bylaws or similar
governing documents of the Company Subsidiaries as in effect on the date hereof
with respect to matters occurring prior to the Effective Time shall survive the
Merger and the Bank Merger and shall continue in full force and effect from and
after the Effective Time.
(b) Any Indemnified Party wishing to claim indemnification under this
Section 6.11, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Indemnifying Party, but the failure to
so notify shall not relieve the Indemnifying Party of any liability it may have
to such Indemnified Party if such failure does not actually prejudice the
Indemnifying Party. In the event of any such claim, action, suit, proceeding or
investigation (whether asserted before or after the Effective Time), (i) the
Indemnifying Party shall have the right to assume the defense thereof and the
Indemnifying Party shall not be liable to such Indemnified Parties for any
Page I - 36
legal expenses of other counsel or any other expenses subsequently incurred by
such Indemnified Parties in connection with the defense thereof, except that if
the Indemnifying Party elects not to assume such defense or counsel for the
Indemnified Parties advises that there are issues which raise conflicts of
interest between the Indemnifying Party and the Indemnified Parties, the
Indemnified Parties may retain counsel which is reasonably satisfactory to the
Indemnifying Party, and the Indemnifying Party shall pay, promptly as
statements therefor are received, the reasonable fees and expenses of such
counsel for the Indemnified Parties (which may not exceed one firm in any
jurisdiction), (ii) the Indemnified Parties will cooperate in the defense of
any such matter, (iii) the Indemnifying Party shall not be liable for any
settlement effected without its prior written consent and (iv) the Indemnifying
Party shall have no obligation hereunder in the event that a federal or state
banking agency or a court of competent jurisdiction shall determine that
indemnification of an Indemnified Party in the manner contemplated hereby is
prohibited by applicable laws and regulations.
(c) The Company shall purchase an extended reporting period endorsement
(the "D & O Tail Coverage") under the Company's existing directors' and
officers' liability insurance (the "D&O Insurance") which covers persons who
are currently covered by the Company's D&O Insurance that shall provide such
directors and officers with coverage for a period of six years after the
Effective Time on terms no less favorable than those in effect on the date
hereof and at the Effective Time shall provide evidence of such D & O Tail
Coverage to Parent; provided, however, that the Company may substitute for its
existing coverage a policy or policies providing substantially comparable
coverage and containing terms and conditions no less favorable than those in
effect on the date hereof if necessary or advisable to obtain such extension of
coverage.
(d) If Parent or any of its successors or assigns shall consolidate with
or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any other entity, then and in each case, proper provision
shall be made so that the successors and assigns of Parent shall assume the
obligations set forth in this Section 6.11.
6.12 Benefit Plans.
(a) As soon as administratively practicable after the Effective Time,
Parent shall take all reasonable action so that employees of the Company and
its Subsidiaries shall be entitled to participate in each employee benefit
plan, program or arrangement of Parent of general applicability (the "Parent
Benefits Plans") to the same extent as similarly-situated employees of Parent
and its Subsidiaries (it being understood that inclusion of the employees of
the Company and its Subsidiaries in the Parent Benefits Plans may occur at
different times with respect to different plans), provided, however, that
nothing contained herein shall require Parent or any of its Subsidiaries to
make any grants to any former employee of the Company or its Subsidiaries under
any discretionary equity compensation plan of Parent. Parent shall cause each
Parent Benefits Plan in which employees of the Company and its Subsidiaries are
eligible to participate to recognize, for purposes of determining eligibility
to participate in, the vesting of benefits and for all other purposes (but not
for accrual of pension benefits other than 401(k) benefits) under the Parent
Benefit Plans, the service of such employees with the Company and its
Subsidiaries to the same extent as such service was credited for such purpose
by the Company; provided, however, that such service shall not be recognized to
the extent that such recognition would result in a duplication of benefits or
in a violation of any applicable non-discrimination rules.
Page I - 37
(b) At and following the Effective Time, Parent shall honor, and the
Surviving Corporation shall continue to be obligated to perform, in accordance
with their terms, all benefit obligations to, and contractual rights of,
current and former employees of the Company and its Subsidiaries existing as of
the Effective Date, as well as all employment, severance, deferred
compensation, split dollar, supplemental retirement or "change-in-control"
agreements, plans or policies of the Company which are Previously Disclosed;
provided that nothing herein shall limit the ability of Parent, after the
Effective Time, to amend or terminate any of the Company's Benefits Plans in
accordance with their terms at any time; and provided further, that Section II
(a) of the Employment Continuity Agreements of Messrs. McKim, Lay, Wrobel and
Dalrymple (collectively, the "ECA Agreements") shall be amended as of the
Effective Time (i) to establish the "base amount" as their respective base
salaries as of December 31, 2004, (ii) to extend the 30 day period referred to
therein to 24 months. Parent acknowledges that the consummation of the Merger
will constitute a "change-in-control" of the Company for purposes of any
employee benefit plans, agreements and arrangements of the Company and (iii) to
change the reference in Section IX thereof to "Hancock County, Maine" to "any
of Knox, Lincoln, Hancock or Washington counties, Maine."
(c) If employees of the Company or any of its Subsidiaries become
eligible to participate in a medical, dental or health plan of Parent, Parent
shall cause each such plan to (i) waive any preexisting condition limitations
to the extent such conditions covered under the applicable medical, health or
dental plans of Parent, (ii) provide full credit under such plans for any
deductibles, co-payment and out-of-pocket expenses incurred by the employees
and their beneficiaries during the portion of the calendar year prior to such
participation, and (iii) waive any waiting period limitation or evidence of
insurability requirement which would otherwise be applicable to such employee
on or after the Effective Time to the extent such employee had satisfied any
similar limitation or requirement under an analogous Plan prior to the
Effective Time.
(d) For the two year period following the Effective Time, Parent shall
provide all employees of the Company and its Subsidiaries whose employment is
terminated by Parent or a Parent Subsidiary other than for cause, disability or
retirement at or following the Effective Time, and who so desires, job
counseling and outplacement assistance services to a reasonable extent and for
a reasonable period of time following such employees' termination of
employment, and, shall, to a reasonable extent, assist any such employees in
locating new employment and shall notify all such employees who request to be
so notified of opportunities for positions with Parent or any of its
Subsidiaries for which Parent reasonably believes such persons are qualified
and shall consider any application for such positions submitted by such
persons, provided, however, that any decision to offer employment to any such
person shall be made in the sole discretion of Parent. For purposes of this
Section 6.12(d) and Section 6.12(e) below, a termination other than for cause
shall include, but not be limited to, resignation following a reduction in pay
or assignment to a work site located more than 20 miles from the employee's
work site as of the Effective Time.
(e) All employees of the Company or a Company Subsidiary as of the
Effective Time shall become employees of Parent or a Parent Subsidiary as of
the Effective Time, and Parent or a Parent Subsidiary will use its reasonable
best efforts to give such persons (other than any such person who is party to
an employment agreement, a severance agreement or a special termination
agreement, including an ECA Agreement) at least 60 days prior written notice
of any job elimination after the Effective Time for a period of 90 days
following the Effective Time. Subject to such 60 day notice requirement,
Parent or a Parent Subsidiary shall have no obligation to continue the
Page I - 38
employment of any such person and nothing contained herein shall give any
employee of the Company or a Company Subsidiary the right to continue
employment with Parent or a Parent Subsidiary after the Effective Time. An
employee of the Company or a Company Subsidiary (other than an employee who is
party to an employment agreement, a severance agreement or a special
termination agreement, including an ECA Agreement) whose employment is
involuntarily terminated other than for cause (as defined in Section 6.12(d)
above) during the two year period following the Effective Time shall be
entitled to receive severance payments equal to one (1) week's compensation for
each year of service of such employee with the Company and/or a Company
Subsidiary, or such payments to which they may be entitled under any employee
severance plan now in effect or hereafter adopted by the Parent or a Parent
Subsidiary, whichever is greater.
(f) As soon as practicable after the date hereof, the Company's Board of
Directors shall take such corporate action as is necessary to terminate the
First National Bank of Bar Harbor Employee Stock Ownership Plan (the "Company
ESOP") and provide that the account of each participant in the Company ESOP
shall become fully vested and nonforfeitable, in each case effective as of the
Effective Time and subject to the consummation of the Merger. Following the
Effective Time, the Parent shall be the sponsor of the Company ESOP and shall
take any and all such further actions as may be necessary to terminate the
Company ESOP and distribute the assets of the Company ESOP to participants in
the Company ESOP as soon as reasonably practicable after the receipt of a
favorable determination letter on termination of the Company ESOP from the IRS
confirming the qualified status of the Company ESOP upon termination, and
Parent shall take the action necessary (including any amendment of Parent's
401(k) plan) to permit the participants who are employees of Parent or its
Subsidiaries as of the date of such distribution to roll any eligible rollover
distributions over into Parent's 401(k) plan. As soon as practicable after the
date hereof, if permitted by the applicable procedures of the Internal Revenue
Service, the Company shall apply to the IRS for a favorable determination
letter on the tax-qualified status of the Company ESOP on termination of the
Company ESOP.
6.13. Bank Merger. If requested by Parent, Company shall take all
action necessary and appropriate, including causing the entering into of an
appropriate merger agreement (the "Bank Merger Agreement"), to cause the
Company Bank to merge with and into the Parent Bank (the "Bank Merger") in
accordance with applicable laws and regulations and the terms of the Bank
Merger Agreement as soon as practicable after consummation of the Merger.
6.14. Coordination of Dividends. After the date of this Agreement, the
Company shall coordinate the declaration of any dividends in respect of the
Company Common Stock and the record dates and payment dates relating thereto
with that of the Parent Common Stock, it being the intention of the parties
that the holders of Parent Common Stock or Company Common Stock shall not
receive more than one dividend, or fail to receive one dividend, for any single
semi-annual period with respect to their shares of Company Common Stock, or
for any single calendar quarter with respect to any shares of Parent Common
Stock any holder of Company Common Stock receives in exchange therefor in the
Merger.
6.15. Board Representation. Upon consummation of the Transactions,
the Board of Directors of Parent shall increase the number of authorized
directors who serve on its Board of Directors and appoint Mr. McKim and one
other director of the Company, as mutually determined by the Company and Parent
(the "Additional Director") to fill the vacancies created thereby and to serve
on the same basis as other Parent directors until the first Annual Meeting of
Parent's Shareholders following the Effective Time. With respect to that
Annual Meeting, the Board of Directors of Parent shall, subject to compliance
Page I - 39
with the fiduciary duties of the Parent Board and any director qualification
provisions of the Parent's bylaws, include Mr. McKim as a nominee (to serve as
a director until the 2007 Annual Meeting), and the Additional Director as a
nominee (to serve as a director until the 2006 Annual Meeting). The Board of
Directors shall consider including an additional resident of the area served by
the Company Bank as a nominee to serve as a director following the first Annual
Meeting of Parent's Shareholders following the Effective Time.
6.16. Notification of Certain Matters. Each of the Company and
Parent shall give prompt notice to the other of any fact, event or circumstance
known to it that (i) is reasonably likely, individually or taken together with
all other facts, events and circumstances known to it, to result in any
Material Adverse Effect with respect to it or (ii) would cause or constitute a
material breach of any of its representations, warranties, covenants or
agreements contained herein. From time to time prior to the Effective Time (and
on the date prior to the Closing Date), each party will supplement or amend its
Disclosure Schedules delivered in connection with the execution of this
Agreement to reflect any matter which, if existing, occurring or known at the
date of this Agreement, would have been required to be set forth or described
in such Disclosure Schedules or which is necessary to correct any information
in such Disclosure Schedules which has been rendered materially inaccurate
thereby. No supplement or amendment to such Disclosure Schedules shall have any
effect for the purpose of determining the accuracy of the representations and
warranties of the parties contained in Article V in order to determine the
fulfillment of the conditions set forth in Sections 7.02(a) or 7.03(a) hereof,
as the case may be, or the compliance by the Company or Parent, as the case may
be, with the respective covenants and agreements of such parties contained
herein.
Page I - 40
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01. Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each of the parties hereto to consummate the
Merger is subject to the fulfillment or, to the extent permitted by applicable
law, written waiver by the parties hereto prior to the Closing Date of each of
the following conditions:
(a) Shareholder Approval. This Agreement shall have been duly
approved by the requisite vote of the holders of outstanding shares of Company
Common Stock and Parent Common Stock.
(b) Regulatory Approvals. All regulatory approvals required to
consummate the Transactions shall have been obtained and shall remain in full
force and effect and all statutory waiting periods in respect thereof shall
have expired and no such approvals shall contain any conditions, restrictions
or requirements which the Parent Board reasonably determines in good faith
would, individually or in the aggregate, materially reduce the benefits of the
Transactions to such a degree that Parent would not have entered into this
Agreement had such conditions, restrictions or requirements been known at the
date hereof.
(c) No Injunction. No Governmental Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and prohibits,
restricts or makes illegal the consummation of the Transactions.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated by the SEC and not
withdrawn.
(e) Listing. The shares of Parent Common Stock to be issued in the
Merger shall have been approved for listing on the Nasdaq.
(f) Tax Opinion. Each of Parent and the Company shall have received
the written opinion of Verrill & Dana, LLP, in form and substance reasonably
satisfactory to both the Company and Parent, dated as of the Effective Date,
substantially to the effect that, on the basis of the facts, representations
and assumptions set forth in such opinion which are consistent with the state
of facts existing at the Effective Time, the Merger will be treated for Federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code. In rendering such opinion, such counsel may require and rely upon
representations and covenants, including those contained in certificates of
officers of Parent, the Company and others, reasonably satisfactory in form and
substance to such counsel. In the event that each of Parent and the Company
shall not have received such written opinion from Verrill & Dana, LLP, as
provided above, then in such case this condition to closing will be deemed
satisfied if each of Parent and the Company shall have received the foregoing
written opinion from Pierce Atwood LLP subject to the foregoing requirements as
to form and substance.
7.02. Conditions to Obligation of the Company. The obligation of the
Company to consummate the Merger is also subject to the fulfillment or written
waiver by the Company prior to the Closing Date of each of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of Parent set forth in this Agreement, subject in all cases to the
standard set forth in Section 5.02, shall be true and correct as of the date of
this Agreement and as of the Effective Date as though made on and as of the
Effective Date (except that representations and warranties that by their terms
Page I - 41
speak as of the date of this Agreement or some other date shall be true and
correct as of such date), and the Company shall have received a certificate,
dated the Effective Date, signed on behalf of Parent by the Chief Executive
Officer and the Chief Financial Officer of Parent to such effect.
(b) Performance of Obligations of Parent. Parent shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and the Company
shall have received a certificate, dated the Effective Date, signed on behalf
of Parent by the Chief Executive Officer and the Chief Financial Officer of
Parent to such effect.
(c) Opinion of Counsel. The Company shall have received an opinion
dated the Effective Date of Verrill & Dana, LLP, counsel to Parent, in
substantially the form attached as Exhibit 7.02(c), which is attached hereto
and made a part hereof.
(d) Other Actions. Parent shall have furnished the Company with such
certificates of its respective officers or others and such other documents to
evidence fulfillment of the conditions set forth in Sections 7.01 and 7.02 as
the Company may reasonably request.
7.03. Conditions to Obligation of Parent. The obligation of Parent
to consummate the Merger is also subject to the fulfillment or written waiver
by Parent prior to the Closing Date of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement, subject in all cases to
the standard set forth in Section 5.02, shall be true and correct as of the
date of this Agreement and as of the Effective Date as though made on and as of
the Effective Date (except that representations and warranties that by their
terms speak as of the date of this Agreement or some other date shall be true
and correct as of such date), and Parent shall have received a certificate,
dated the Effective Date, signed on behalf of the Company by the Chief
Executive Officer and the Chief Financial Officer of the Company to such
effect.
(b) Performance of Obligations of Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and Parent shall
have received a certificate, dated the Effective Date, signed on behalf of the
Company by the Chief Executive Officer and the Chief Financial Officer of the
Company to such effect.
(c) Shareholder Agreements. Shareholder Agreements, substantially in
the form attached as Annex A hereto, shall have been executed and delivered by
each director who is also an officer of the Company in connection with the
Company's execution and delivery of this Agreement.
(d) Dissenting Shares. Dissenting Shares shall not represent 10% or
more of the outstanding Company Common Stock.
(e) Opinion of Counsel. Parent shall have received an opinion dated
the Effective Date of Pierce Atwood, counsel to the Company, in substantially
the form attached as Exhibit 7.03(e), which is attached hereto and made a part
hereof.
(f) Other Actions. The Company shall have furnished Parent with such
certificates of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in Sections 7.01 and 7.03 as Parent may
reasonably request, and as may be reasonably required to assist Parent and its
executives in meeting its obligations under the Sarbanes-Oxley Act of 2002 with
respect to reporting the Transactions.
Page I - 42
ARTICLE VIII
TERMINATION
8.01. Termination. This Agreement may be terminated, and the
Transactions may be abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the
mutual consent of Parent and the Company if the Board of Directors of each so
determines by vote of a majority of the members of its entire Board.
(b) Breach. At any time prior to the Effective Time, by Parent or
the Company if its Board of Directors so determines by vote of a majority of
the members of its entire Board, in the event of: (i) a breach by Parent or the
Company, as the case may be, of any representation or warranty contained herein
(subject to the standard set forth in Section 5.02), which breach cannot be or
has not been cured within 30 days after the giving of written notice to the
breaching party or parties of such breach; or (ii) a breach by Parent or the
Company, as the case may be, of any of the covenants or agreements contained
herein, which breach cannot be or has not been cured within 30 days after the
giving of written notice to the breaching party or parties of such breach,
which breach (whether under (i) or (ii)) would be reasonably expected,
individually or in the aggregate with other breaches, to result in a Material
Adverse Effect with respect to Parent or the Company, as the case may be.
(c) Delay. At any time prior to the Effective Time, by Parent or the
Company if its Board of Directors so determines by vote of a majority of the
members of its entire Board, in the event that the Transactions are not
consummated by May 31, 2005, except to the extent that the failure of the
Merger then to be consummated arises out of or results from the knowing action
or inaction of (i) the party seeking to terminate pursuant to this Section
8.01(c) or (ii) any of the Shareholders (if the Company is the party seeking to
terminate), which action or inaction is in violation of its obligations under
this Agreement or, in the case of the Shareholders, his, her or its obligations
under the relevant Shareholder Agreement.
(d) No Regulatory Approval. By the Company or Parent, if its Board
of Directors so determines by a vote of a majority of the members of its entire
Board, in the event the approval of any Governmental Authority required for
consummation of the Merger and the other transactions contemplated by this
Agreement shall have been denied by final nonappealable action of such
Governmental Authority or an application therefor shall have been permanently
withdrawn at the request of a Governmental Authority.
(e) No Shareholder Approval. By either Parent or the Company if any
approval of the shareholders of the Company or Parent contemplated by Section
7.01(a) this Agreement shall not have been obtained by reason of the failure to
obtain the required vote at the Company Meeting or Parent Meeting, as the case
may be.
(f) Failure to Recommend. At any time prior to the Company Meeting,
by Parent if (i) the Company shall have breached Section 6.08, (ii) the Company
Board shall have failed to make its recommendation referred to in Section 6.02,
withdrawn such recommendation or modified or changed such recommendation in a
manner adverse in any respect to the interests of Parent, or (iii) the Company
shall have materially breached its obligations under Section 6.02 by failing to
call, give notice of, convene and hold the Company Meeting in accordance with
Section 6.02.
(g) Superior Proposal. At any time prior to the Company Meeting, by
the Company in order to concurrently enter into an acquisition agreement or
similar agreement (each, an "Acquisition Agreement") with respect to a Superior
Proposal which has been received and considered by the Company and the Company
Board in compliance with Section 6.08 hereof, provided, however, that this
Agreement may be terminated by the Company pursuant to this Section 8.01(g)
Page I - 43
only after the fifth Business Day following the Company's provision of written
notice to Parent advising Parent that the Company Board is prepared to accept a
Superior Proposal, and only if, during such five-Business Day period, if Parent
so elects in its sole discretion, the Company and its advisors shall have
negotiated in good faith with Parent to make such adjustments in the terms and
conditions of this Agreement as would enable Parent and the Company to proceed
with the Transactions on such adjusted terms.
8.02. Effect of Termination and Abandonment.
(a) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article VIII, no party to this Agreement shall have
any liability or further obligation to any other party hereunder except (i) as
set forth in this Section 8.02 and Section 9.01 and (ii) that termination will
not relieve a breaching party from liability for any willful breach of any
covenant, agreement, representation or warranty of this Agreement giving rise
to such termination.
(b) The Company shall pay Parent the sum of $1,500,000 (the "Termination
Fee") if this Agreement is terminated as follows:
(i) if this Agreement is terminated by Parent pursuant to Section
8.01(f) or by the Company pursuant to Section 8.01(g), in either of which case
payment shall be made to Parent concurrently with the termination of this
Agreement; or
(ii) if (x) this Agreement is terminated by (A) Parent pursuant to
Section 8.01(b) or (B) by either Parent or the Company pursuant to Section
8.01(e) as a result of the failure to obtain the required vote at the Company
Meeting contemplated by Section 7.01(a) this Agreement and in the case of any
termination pursuant to clause (A) or (B) an Acquisition Proposal shall have
been publicly announced or otherwise communicated or made known to the Company
Board (or any Person shall have publicly announced, communicated or made known
an intention, whether or not conditional, to make an Acquisition Proposal) at
any time after the date of this Agreement and prior to the taking of the vote
of the shareholders of the Company contemplated by this Agreement at the
Company Meeting, in the case of clause (B), or the date of termination, in the
case of clause (A), and
(y) within 18 months after such termination the Company or a Subsidiary of the
Company enters into an agreement with respect to an Acquisition Proposal or
consummates a transaction which is the subject of an Acquisition Proposal, then
the Company shall pay to Parent the Termination Fee on the date of execution of
such agreement or consummation of a transaction which is the subject of an
Acquisition Proposal, provided that if the date of execution of such agreement
is after 12 months but within 18 months after such termination of this
Agreement, the Termination Fee shall be payable by the Company to Parent only
upon consummation of a transaction which is the subject of an Acquisition
Proposal, regardless whether such consummation occurs within 18 months after
termination of this Agreement.
Any amount that becomes payable pursuant to this Section 8.02(b) shall be paid
by wire transfer of immediately available funds to an account designated by
Parent.
(c) The Company and Parent agree that the agreement contained in
paragraph (b) of this Section 8.02 is an integral part of the transactions
contemplated by this Agreement, that without such agreement Parent would not
have entered into this Agreement and that such amounts do not constitute a
penalty or liquidated damages in the event of a breach of this Agreement by the
Company. If the Company fails to pay Parent the amounts due under paragraph (b)
above within the time periods specified therein, the Company shall pay the
costs and expenses (including reasonable legal fees and expenses) incurred by
Parent in connection with any action in which Parent prevails, including the
filing of any lawsuit, taken to collect payment of such amounts, together with
Page I - 44
interest on the amount of any such unpaid amounts at the prime lending rate
prevailing during such period as published in The Wall Street Journal, as it
may vary, calculated on a daily basis from the date such amounts were required
to be paid until the date of actual payment.
Page I - 45
ARTICLE IX
MISCELLANEOUS
9.01. Survival. No representations, warranties, agreements and
covenants contained in this Agreement shall survive the Effective Time (other
than agreements or covenants contained herein that by their express terms are
to be performed after the Effective Time) or the termination of this Agreement
if this Agreement is terminated prior to the Effective Time (other than
Sections 6.06(c), 8.02 and, excepting Section 9.12 hereof, this Article IX,
which shall survive any such termination). Notwithstanding anything in the
foregoing to the contrary, no representations, warranties, agreements and
covenants contained in this Agreement shall be deemed to be terminated or
extinguished so as to deprive a party hereto or any of its affiliates of any
defense at law or in equity which otherwise would be available against the
claims of any Person, including without limitation any shareholder or former
shareholder.
9.02. Waiver; Amendment. Prior to the Effective Time, any provision
of this Agreement may be (i) waived by the party benefited by the provision or
(ii) amended or modified at any time, by an agreement in writing among the
parties hereto executed in the same manner as this Agreement, except that after
the Company Meeting no amendment shall be made which by law requires further
approval by the shareholders of the Company without obtaining such approval.
9.03. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.04. Governing Law. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of Maine applicable to
contracts made and to be performed entirely within such State.
9.05 Expenses. Each party hereto will bear all expenses incurred by
it in connection with this Agreement and the transactions contemplated hereby,
including fees and expenses of its own financial consultants, accountants and
counsel and, in the case of Parent, the registration fee to be paid to the SEC
in connection with the Registration Statement, except that expenses of printing
the Proxy Statement shall be shared equally between the Company and Parent, and
provided further that nothing contained herein shall limit either party's
rights to recover any liabilities or damages arising out of the other party's
willful breach of any provision of this Agreement.
9.06. Notices. All notices, requests and other communications
hereunder to a party shall be in writing and shall be deemed given if
personally delivered, telecopied (with confirmation) or mailed by registered or
certified mail (return receipt requested) to such party at its address set
forth below or such other address as such party may specify by notice to the
parties hereto.
If to the Company to: If to Parent to:
FNB Bankshares First National Lincoln Corporation
102 Main Street 223 Main Street, PO Box 940
Bar Harbor, Maine 04609 Damariscotta, ME 04543-0760
Attention: Tony C. McKim Attention: Daniel R. Daigneault,
President and CEO
Fax: (207) 288-2469 Fax: (207) 563-5085
With a copy to: With a copy to:
Pierce Atwood LLP Verrill & Dana, LLP
One Monument Square One Portland Square, PO Box 586
Portland, Maine 04101 Portland, ME 04112-0586
Attention: James B. Zimpritch, Esq. Attention: Keith C. Jones
Fax: (207) 791-1350 Fax: (207) 774-7499
Page I - 46
9.07. Entire Understanding; No Third Party Beneficiaries. This
Agreement and the Shareholder Agreements represent the entire understanding of
the parties hereto and thereto with reference to the Transactions, and this
Agreement and the Shareholder Agreements supersede any and all other oral or
written agreements heretofore made. Except for the Indemnified Parties' right
to enforce Parent's obligation under Section 6.11, which are expressly intended
to be for the irrevocable benefit of, and shall be enforceable by, each
Indemnified Party and his or her heirs and representatives, nothing in this
Agreement, expressed or implied, is intended to confer upon any Person, other
than the parties hereto or their respective successors, any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
9.08. Severability. Except to the extent that application of this
Section 9.08 would have a Material Adverse Effect on the Company or Parent, any
term or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable. In all such cases, the parties shall use their reasonable best
efforts to substitute a valid, legal and enforceable provision which, insofar
as practicable, implements the original purposes and intents of this Agreement.
9.09. Enforcement of the Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
9.10. Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of, or
Exhibit or Schedule to, this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and are not part of
this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." Whenever the words "as of the date hereof" are used in
this Agreement, they shall be deemed to mean the day and year first above
written (August 25 , 2004).
9.11. Assignment. No party may assign either this Agreement or any
of its rights, interests or obligations hereunder without the prior written
approval of the other party. Subject to the preceding sentence, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
9.12. Alternative Structure. Notwithstanding any provision of this
Agreement to the contrary, Parent may at any time modify the structure of the
acquisition of the Company set forth herein, subject to the prior written
consent of the Company, which consent shall not be unreasonably withheld or
delayed, provided that (i) the Merger Consideration to be paid to the holders
of Company Common Stock is not thereby changed in kind or reduced in amount as
a result of such modification, (ii) such modification will not adversely affect
the tax treatment of the Company's shareholders as a result of receiving the
Merger Consideration and (iii) such modification will not materially delay or
jeopardize receipt of any required approvals of Governmental Authorities.
Page I - 47
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
FIRST NATIONAL LINCOLN CORPORATION
By:
/s/ Daniel R. Daigneault
___________________________________________
Name: Daniel R. Daigneault
Title: President & CEO
FNB BANKSHARES
By:
/s/ Tony C. McKim
________________________________________
Name: Tony C. McKim
Title: President & CEO
Page I - 48
ANNEX A
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT (the "Agreement"), dated as of______________, 2004
by and between _________________, a shareholder ("Shareholder") of FNB
BANKSHARES, a Maine corporation (the "Company"), and FIRST NATIONAL LINCOLN
CORPORATION , a Maine corporation ("Parent"). All terms used herein and not
defined herein shall have the meanings assigned thereto in the Merger Agreement
(defined below).
WHEREAS, Parent and the Company have entered into an Agreement and Plan of
Merger, dated as of the date hereof (the "Merger Agreement"), pursuant to which
the Company will merge with and into Parent on the terms and conditions set
forth therein (the "Merger") and, in connection therewith, outstanding shares
of Company Common Stock will be converted into shares of Parent Common Stock
and/or cash in the manner set forth therein; and
WHEREAS, Shareholder holds of record the shares of Company Common Stock
identified on Annex I hereto (such shares being referred to as the "Shares");
and
WHEREAS, in order to induce Parent to enter into the Merger Agreement,
Shareholder, solely in such Shareholder's capacity as a shareholder of the
Company and not in any other capacity, has agreed to enter into and perform
this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
1. Agreement to Vote Shares. Shareholder agrees that at any meeting
of the shareholders of the Company, or in connection with any written consent
of the shareholders of the Company, Shareholder shall:
(i) appear at each such meeting or otherwise cause the Shares to be
counted as present thereat for purposes of calculating a quorum; and
(ii) vote (or cause to be voted), in person or by proxy, or deliver a
written consent (or cause a consent to be delivered) covering, all _______
Shares, (x) in favor of adoption and approval of the Merger Agreement and the
Merger; (y) against any action or agreement that would result in a breach of
any covenant, representation or warranty or any other obligation or agreement
of the Company contained in the Merger Agreement or of Shareholder contained in
this Agreement; and (z) against any Acquisition Proposal or any other action,
agreement or transaction that is intended, or could reasonably be expected, to
materially impede, interfere or be inconsistent with, delay, postpone,
discourage or materially and adversely affect consummation of the Merger or
this Agreement.
2. No Transfers Prior to the Company Meeting (as defined in the
Merger Agreement), Shareholder agrees not to, directly or indirectly, sell
transfer, pledge, assign or otherwise dispose of, or enter into any contract
option, commitment or other arrangement or understanding with respect to the
sale, transfer, pledge, assignment or other disposition of, any of the Shares
if such sale, transfer, pledge, assignment or disposition could occur prior to
the Company Meeting. In the case of any transfer by operation of law, this
Agreement shall be binding upon and inure to the transferee(s). Any transfer or
other disposition in violation of the terms of this Section 2 shall be null and
void.
3. Representations and Warranties of Shareholder. Shareholder
represents and warrants to and agrees with Parent as follows:
A. Capacity. Shareholder has all requisite capacity and authority to
enter into and perform his, her or its obligations under this Agreement.
Page I - 49
B. Binding Agreement. This Agreement constitutes the valid and
legally binding obligation of Shareholder, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
C. Non-Contravention. The execution and delivery of this Agreement
by Shareholder does not, and the performance by Shareholder of his, her or its
obligations hereunder and the consummation by Shareholder of the transactions
contemplated hereby will not, violate or conflict with, or constitute a default
under, any agreement, instrument, contract or other obligation or any order,
arbitration award, judgment or decree to which Shareholder is a party or by
which Shareholder is bound, or any statute, rule or regulation to which
Shareholder is subject or, in the event that Shareholder is a corporation,
partnership, trust or other entity, any charter, bylaw or other organizational
document of Shareholder.
D. Ownership of Shares. Shareholder has good title to all of the
Shares as of the date hereof, and, except as set forth on Annex I hereto, the
Shares are so owned free and clear of any liens, security interests, charges or
other encumbrances.
4. Specific Performance and Remedies. Shareholder acknowledges that
it will be impossible to measure in money the damage to Parent if Shareholder
fails to comply with the obligations imposed by this Agreement and that, in the
event of any such failure, Parent will not have an adequate remedy at law or in
equity. Accordingly, Shareholder agrees that injunctive relief or other
equitable remedy, in addition to remedies at law or in damages, is the
appropriate remedy for any such failure and will not oppose the granting of
such relief on the basis that Parent has an adequate remedy at law. Shareholder
agrees that Shareholder will not seek, and agrees to waive any requirement for,
the securing or posting of a bond in connection with Parent's seeking or
obtaining such equitable relief. In addition, after discussing the matter with
Shareholder, Parent shall have the right to inform any third party that Parent
reasonably believes to be, or to be contemplating, participating with
Shareholder or receiving from Shareholder assistance in violation of this
Agreement, of the terms of this Agreement and of the rights of Parent
hereunder, and that participation by any such persons with Shareholder in
activities in violation of Shareholder's agreement with Parent set forth in
this Agreement may give rise to claims by Parent against such third party.
5. Term of Agreement; Termination.
A. The term of this Agreement shall commence on the date hereof.
B. This Agreement shall terminate upon the date, if any, of termination
of the Merger Agreement in accordance with its terms. Upon such termination, no
party shall have any further obligations or liabilities hereunder; provided,
however, such termination shall not relieve any party from liability for any
willful breach of this Agreement prior to such termination.
C. If the Merger Agreement is not terminated in accordance with its
terms, this Agreement (except for the provisions of Sections 3 and 8, which
shall survive the Effective Time) shall terminate upon the Effective Time. Upon
such termination, no party shall have any further obligations or liabilities
under this Agreement; provided, however, such termination shall not relieve any
party from liability for any willful breach of such Section prior to such
termination.
6. Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject matter
hereof and contains the entire agreement among the parties with respect to the
subject matter hereof. This Agreement may not be amended, supplemented or
modified, and no provisions hereof may be modified or waived, except by an
Page I - 50
instrument in writing signed by each party hereto. No waiver of any provisions
hereof by either party shall be deemed a waiver of any other provisions hereof
by any such party, nor shall any such waiver be deemed a continuing waiver of
any provision hereof by such party.
7. Notices. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be deemed given when
delivered personally, upon receipt of a transmission confirmation if sent by
telecopy or like transmission and on the next business day when sent by a
reputable overnight courier service to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
If to Parent:
First National Lincoln Corporation
223 Main Street
PO Box 940
Damariscotta, ME 04543-0760
Attention: Daniel R. Daigneault, President and CEO
Fax: (207) 563-5085
With a copy to:
Verrill & Dana, LLP
One Portland Square
PO Box 586
Portland, ME 04112-0586
Attention: Keith C. Jones
Fax: (207) 774-7499
If to Shareholder:
________________________________________
________________________________________
________________________________________
8. Miscellaneous.
A. Severability. If any provision of this Agreement or the
application of such provision to any person or circumstances shall be held
invalid or unenforceable by a court of competent jurisdiction, such provision
or application shall be unenforceable only to the extent of such invalidity or
unenforceability, and the remainder of the provision held invalid or
unenforceable and the application of such provision to persons or
circumstances, other than the party as to which it is held invalid, and the
remainder of this Agreement, shall not be affected.
B. Capacity. The covenants contained herein shall apply to
Shareholder solely in his or her capacity as a shareholder of the Company, and
no covenant contained herein shall apply to Shareholder in his or her capacity
as a director, officer or employee of the Company or in any other capacity.
Nothing contained in this Agreement shall be deemed to apply to, or limit in
any manner, the obligations of the Shareholder to comply with his or her
fiduciary duties as a director of the Company.
C. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
Page I - 51
D. Headings. All Section headings herein are for convenience of
reference only and are not part of this Agreement, and no construction or
reference shall be derived therefrom.
E. Choice of Law. This Agreement shall be deemed a contract made
under, and for all purposes shall be construed in accordance with, the laws of
the State of Maine, without reference to its conflicts of law principles.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
FIRST NATIONAL LINCOLN CORP.
By:________________________________________
Name:
Title:
[SHAREHOLDER]
________________________________________(Signature)
ANNEX I
Shareholder Agreement
Shares of Company
Common Stock
Owned
of Record
________________________________________
Page I - 52
Exhibit 3.08
Rollover Options
-----------------------------------------------------------------------------
Number of
Shares
Subject to
Name Exercise Price Expiration Date Option
-----------------------------------------------------------------------------
Steven K. Parady $8.93 7/30/2011 3,675
Mark N. Rosborough $8.93 7/30/2011 2,250
Tony C. McKim $8.93 7/30/2011 14,205
Ronald J. Wrobel $8.93 7/30/2011 6,500
Jeffrey C. Dalrymple $8.93 7/30/2011 5,000
Daniel M. Lay $8.93 7/30/2011 9,000
-----------------------------------------------------------------------------
TOTAL 40,630
=============================================================================
Page I - 53
Exhibit 7.02(c)
[Form of Verrill & Dana, LLP Opinion]
______________, 200__
FNB Bankshares
102 Main Street
Bar Harbor, Maine 04609
Attention Tony C. McKim
Re: Agreement and Plan of Merger dated as of August __, 2004
Ladies and Gentlemen:
We have represented First National Lincoln Corporation, a Maine corporation
("FNLC"), in connection with the execution and delivery of an Agreement and
Plan of Merger by and between FNB Bankshares, a Maine corporation ("FNB"), and
FNLC dated as of August ___, 2004 with respect to the merger of FNB with and
into FNLC (the "Agreement"). This opinion is provided to you at the request of
FNLC pursuant to Section 7.02(c) of the Agreement.
We have reviewed the Agreement and examined originals or copies of such records
of FNLC, certificates of officers of FNLC and public officials, and other
documents that we have deemed relevant and necessary as a basis for this
opinion. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to originals of documents submitted to us as copies, and the
authenticity of the originals of such documents.
As to questions of fact material to this opinion, we have relied without
independent verification upon representations contained in certificates of
officers of FNLC and public officials. For purposes of this opinion, we have
also assumed the accuracy and completeness of all representations of FNB set
forth in the Agreement or in certificates or other instruments delivered to
FNLC at the closing of the transactions contemplated in the Agreement.
Based on the foregoing, and subject to the qualifications set forth below, we
are of the opinion that:
1. FNLC is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Maine.
2. The authorized capital stock of FNLC consists of 18,000,000 shares of
Common Stock, $0.01 par value per share. We are advised by FNLC's transfer
agent that _____ shares of the Common Stock of FNLC were issued and outstanding
at the close of business on ___________, 200__.
3. The Agreement has been duly authorized, executed, and delivered on
behalf of FNLC.
4. The Agreement constitutes the legal, valid, and binding obligation of
FNLC, enforceable against FNLC in accordance with its terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, or other laws affecting the rights and remedies of creditors
generally, and general principles of equity, whether applied by a court of law
or equity
Page I - 54
6. The merger of FNB with and into FNLC will become effective, in
accordance with the terms of the Articles of Merger executed by FNLC and FNB,
as of ______ p.m. on the date upon which the Articles of Merger are filed with
the Maine Secretary of State.
7. Neither the execution and delivery by FNLC of, nor the performance by
FNLC of its obligations under, the Agreement will constitute a violation by
FNLC of, or any breach or default by FNLC under, its Articles of Incorporation
or bylaws, the Articles of Organization and bylaws of FNLC's subsidiary, The
First National Bank of Damariscotta (the "Bank") or any judgment, writ, order
or decree, specific to FNLC or the Bank, of any court or other governmental
authority of which we have knowledge.
We express no opinion herein concerning any matter involving choices or
conflicts of law; or concerning the enforceability of any waiver of rights;
exculpatory clause, indemnification against misconduct by an indemnitee or
related person, or any provision purporting to supersede equitable principles
of contract construction; or any matters involving tax or securities laws.
We are members of the Bar of the State of Maine and we are not expressing an
opinion as to any matter relating to the laws of any jurisdiction other than
the laws of the State of Maine.
As used herein, the term "knowledge" means the actual knowledge of those
attorneys of this firm who have been principally involved in representing FNLC
in connection with the transactions contemplated in the Agreement.
This opinion is intended for use by you in connection with the transactions
contemplated in the Agreement and, except as set forth below, is not to be
relied upon by any other person or in any other context. The contents of this
opinion are not to be quoted or otherwise disclosed to third parties, in whole
or in part, without our prior written consent. Subject to such limitations,
you may furnish a copy of this opinion to your counsel, Pierce Atwood.
Very truly yours,
VERRILL & DANA, LLP
Page I - 55
Exhibit 7.03(e)
[Form of Pierce Atwood LLP Opinion]
______________, 200__
First National Lincoln Corporation
[Address]
Re: Agreement and Plan of Merger dated as of August __, 2004
Ladies and Gentlemen:
We have represented FNB Bankshares, a Maine corporation ("FNB"), in connection
with the execution and delivery of an Agreement and Plan of Merger by and
between First National Lincoln Corporation, a Maine corporation ("FNLC"), and
FNB dated as of August ___, 2004with respect to the merger of FNB with and into
FNLC (the "Agreement"). This opinion is provided to you at the request of FNB
pursuant to Section 7.03(E) of the Agreement.
We have reviewed the Agreement and examined originals or copies of such records
of FNB, certificates of officers of FNB and public officials, and other
documents that we have deemed relevant and necessary as a basis for this
opinion. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to originals of documents submitted to us as copies, and the
authenticity of the originals of such documents.
As to questions of fact material to this opinion, we have relied without
independent verification upon representations contained in certificates of
officers of FNB and public officials. For purposes of this opinion, we have
also assumed the accuracy and completeness of all representations of FNB set
forth in the Agreement or in certificates or other instruments delivered to FNB
at the closing of the transactions contemplated in the Agreement.
Based on the foregoing, and subject to the qualifications set forth below, we
are of the opinion that:
1. FNB is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Maine.
2. The authorized capital stock of FNB consists of 2,000,000 shares of
Common Stock. We are advised by FNB's transfer agent that _____ shares of the
Common Stock of FNB were issued and outstanding at the close of business on
___________, 200__.
3. The Agreement has been duly authorized, executed, and delivered on
behalf of FNB.
4. The Agreement constitutes the legal, valid, and binding obligation of
FNB, enforceable against FNB in accordance with its terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, or other laws affecting the rights and remedies of creditors
generally, and general principles of equity, whether applied by a court of law
or equity
Page I - 56
6. The merger of FNB with and into FNLC will become effective, in
accordance with the terms of the Articles of Merger executed by FNB and FNLC,
as of ______ p.m. on the date upon which the Articles of Merger are filed with
the Maine Secretary of State.
7. Neither the execution and delivery by FNB of, nor the performance by FNB
of its obligations under, the Agreement will constitute a violation by FNB of,
or any breach or default by FNB under, its Articles of Incorporation or bylaws,
the Articles of Organization and bylaws of FNB's subsidiary, The First National
Bank of Bar Harbor (the "Bank") or any judgment, writ, order or decree,
specific to FNB or the Bank, of any court or other governmental authority of
which we have knowledge.
We express no opinion herein concerning any matter involving choices or
conflicts of law; or concerning the enforceability of any waiver of rights;
exculpatory clause, indemnification against misconduct by an indemnitee or
related person, or any provision purporting to supersede equitable principles
of contract construction; or any matters involving tax or securities laws.
We are members of the Bar of the State of Maine and we are not expressing an
opinion as to any matter relating to the laws of any jurisdiction other than
the laws of the State of Maine.
As used herein, the term "knowledge" means the actual knowledge of those
attorneys of this firm who have been principally involved in representing FNB
in connection with the transactions contemplated in the Agreement.
This opinion is intended for use by you in connection with the transactions
contemplated in the Agreement and, except as set forth below, is not to be
relied upon by any other person or in any other context. The contents of this
opinion are not to be quoted or otherwise disclosed to third parties, in whole
or in part, without our prior written consent. Subject to such limitations,
you may furnish a copy of this opinion to your counsel, Pierce Atwood.
Very truly yours,
PIERCE ATWOOD LLP
Page I - 57
Annex II
Opinion of RBC Capital Markets Corporation
November 17, 2004
CONFIDENTIAL
The Board of Directors
FNB Bankshares
102 Main Street
Bar Harbor, ME 04609
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of FNB Bankshares (the "Company"), of the Per
Share Merger Consideration (as defined below) to be paid pursuant to the terms
of the Agreement and Plan of Merger dated as of August 25, 2004 (the
"Agreement"), by and between the Company and First National Lincoln Corporation
(the "Buyer"). Capitalized terms used herein shall have the meanings used in
the Agreement, unless otherwise defined herein.
Pursuant to the Agreement, the Company will merge (the "Merger") with and
into the Buyer. The Buyer will pay the Merger Consideration of $42.00 per
share to the Company's shareholders consisting of 100% Buyer common stock, plus
approximately $2.7 million in cash to retire the Company's options other than
the agreed upon 40,630 options to be converted into options of the Buyer. The
Merger Consideration shall be paid to the holders of Company common stock and
holders of Company common stock options pursuant to the terms specified in the
Agreement. The transaction is intended, and we have assumed it will qualify,
as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended. The terms and conditions of the Merger are
set forth more fully in the Agreement.
RBC Capital Markets Corporation ("RBC"), a member company of RBC Financial
Group, as part of its investment banking services, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, corporate restructurings, underwritings, secondary distributions
of listed and unlisted securities, private placements and valuations for
corporate and other purposes. We are acting as financial advisor to the
Company in connection with the Merger, and we will receive a fee for our
services. This fee (the "Transaction Fee") is contingent upon the consummation
of the Merger or a similar transaction involving the Company. We received a
fee for providing our opinion. The opinion fee was not contingent upon the
consummation of the Merger. In addition, the Company has agreed to indemnify
us for certain liabilities that may arise out of our engagement. In the
ordinary course of business, RBC and/or its affiliates act as a market maker
and broker in the publicly traded securities of the Company and receives
customary compensation in connection therewith, and also actively trades
securities of the Company for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. In its capacity as a broker of publicly traded securities, RBC
and/or its affiliates may, for its own account or for the accounts of its
customers, hold a long or short position in the securities of the Buyer.
In connection with our review of the Merger, and in arriving at our
opinion, we have undertaken such review and inquiries as we deemed necessary or
appropriate under the circumstances, including the following: (i) reviewed and
analyzed the financial terms in the Agreement dated August 25, 2004; (ii)
Page II - 1
reviewed and analyzed certain publicly available financial and other data with
respect to the Company and the Buyer and certain other historical operating
data relating to the Company and the Buyer made available to us from published
sources and from the internal records of the Company and the Buyer; (iii)
conducted discussions with members of the senior management of the Company with
respect to the business prospects and financial outlook of the Company
independently and as combined; (iv) conducted discussions with members of the
senior management of the Buyer with respect to the business prospects and
financial outlook of the Buyer independently and as combined; (v) received and
reviewed financial forecasts prepared by the Company's management on the
potential future performance of the Company as a stand-alone entity; (vi)
reviewed publicly available materials and reports with respect to the business
and financial outlook of the Buyer; (vii) reviewed the publicly reported prices
and trading activity for the Buyer common stock and the Company common stock;
(viii) compared the financial performance of the Buyer and the Company and the
prices of the Buyer common stock and the Company common stock with that of
certain other publicly traded companies and their securities that we have
deemed comparable; (ix) reviewed the financial terms, to the extent publicly
available, of certain merger transactions that we have deemed comparable; and
(x) compared the relative contribution to certain balance sheet and income
statement items of each company with their pro-forma ownership in the combined
company. In addition, we have conducted such other analyses and examinations
and considered such other financial, economic and market criteria as we have
deemed necessary in arriving at our opinion.
With respect to the data and discussions relating to the business
prospects and financial outlook of the Buyer and the Company, upon advice of
the Company, we have assumed that such data have been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of the Buyer and the Company as to the future financial performance
of the Buyer and the Company, and that the Buyer and the Company will perform
substantially in accordance with such financial data and estimates. We express
no opinion as to such financial data and estimates or the assumptions on which
they were based.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial, legal, tax, operating and other information
provided to us by the Company and the Buyer (including, without limitation, the
financial statements and related notes thereto of the Company and the Buyer, as
well as other publicly available information with respect to the Company and
the Buyer), and have not assumed responsibility for independently verifying and
have not independently verified such information. We have not assumed any
responsibility to perform, and have not performed, an independent evaluation or
appraisal of any of the respective assets or liabilities, contingent or other,
of the Company or the Buyer, and we have not been furnished with any such
valuations or appraisals. We express no opinion regarding the liquidation
value of any entity. In addition, we have (i) not assumed any obligation to
conduct, and have not conducted, any physical inspection of the property or
facilities of the Company or the Buyer, (ii) not made an independent evaluation
of the adequacy of the allowance for loan losses of the Company or the Buyer,
and (iii) not reviewed the individual credit files relating to the Company or
the Buyer. We have assumed with your consent, that the respective allowances
for loan losses will be adequate on a pro forma basis for the combined entity.
Additionally, we have not been asked to consider and did not consider the
possible effects of any litigation or other legal claims. With respect to all
legal matters relating to the Company and the Buyer, we have relied on the
advice of legal counsel to the Company.
Page II - 2
We have assumed that the executed Agreement is in all material respects
identical to the last draft reviewed by us. We have also assumed the Merger
will be consummated pursuant to the terms of the Agreement, without amendments
thereto and without waiver by any party of any conditions or obligations
thereunder. We have assumed in all respects material to our analysis, that the
representations and warranties of each party contained in the Agreement are
true and correct, and that each party will perform all of the covenants and
agreements required to be performed by it under the Agreement. We have also
assumed that all governmental, regulatory and other consents and approvals
contemplated by the Agreement will be obtained and that in the course of
obtaining any of those consents no restrictions will be imposed or waivers made
that would have an adverse effect on the contemplated benefits of the Merger.
Our opinion speaks only as of the date hereof, is based on the conditions
as they exist and information which we have been supplied as of the date
hereof, and is without regard to any market, economic, financial, legal or
other circumstances or event of any kind or nature which may exist or occur
after such date. It should be understood that although subsequent developments
may affect our opinion, we do not have any obligation to update, revise or
reaffirm our opinion and we expressly disclaim any responsibility to do so. We
are not expressing any opinion herein as to the prices at which the Buyer's
common stock has traded or will trade following the announcement or
consummation of the Merger.
This opinion is provided for the information of the Board of Directors of
the Company in connection with its consideration of the Merger. This opinion
shall not be otherwise relied upon, published or otherwise used, nor shall any
public references to us be made without our prior written approval, except as
set forth in our engagement letter with you dated March 23, 2004.
Our opinion addresses solely the fairness of the Merger Consideration to
be paid in the Merger, from a financial point of view, to the shareholders of
the Company. We have not reviewed, nor does our opinion in any way address,
other Merger terms or arrangements, including without limitation the financial
or other terms of any employment or non-competition agreement with Company
management or any break-up or termination fee. Further, our opinion does not
address, nor should it be construed to address, the relative merits of the
underlying decision by the Board of Directors of the Company to authorize the
Company to engage in the Merger compared to any alternative business strategies
or transaction in which the Company might engage. Further, our opinion does
not constitute a recommendation to any shareholder of the Company to take any
action in connection with the Merger or otherwise.
Based on our experience as investment bankers and subject to the
foregoing, including the various assumptions and limitations set forth herein,
it is our opinion that, as of the date hereof, the Merger Consideration to be
paid in the Merger is fair, from a financial point of view, to the shareholders
of the Company.
Very truly yours,
/s/ RBC Capital Markets Corporation
RBC CAPITAL MARKETS CORPORATION
Page II - 3
Annex III
APPRAISAL RIGHTS
SUBCHAPTER I
APPRAISAL RIGHTS AND PAYMENT FOR SHARES
s.1301. Definitions
As used in this chapter, unless the context otherwise indicates, the
following terms have the following meanings.
1. Affiliate. "Affiliate" means:
A. A person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with another person; or
B. A senior executive of a person described in paragraph A.
For purposes of section 1303, subsection 3, paragraphs B and C, a person is
deemed to be an affiliate of its senior executives.
2. Beneficial shareholder. "Beneficial shareholder" means a person who is
the beneficial owner of shares held in a voting trust or by a nominee on the
beneficial owner's behalf.
3. Corporation. "Corporation" means the issuer of the shares held by a
shareholder demanding appraisal and, for matters covered in sections 1323 to
1332, includes the surviving entity in a merger.
4. Fair value. "Fair value" means the value of a corporation's shares
determined:
A. Immediately before the effectuation of the corporate action to which a
shareholder objects;
B. Using customary and current valuation concepts and techniques generally
employed for similar businesses in the context of the transaction requiring
appraisal; and
C. Without discounting for lack of marketability or minority status except, if
appropriate, for amendments to the corporation's articles of incorporation
pursuant to section 1302, subsection 5.
5. Interest. "Interest" means interest from the effective date of a
corporate action until the date of payment, at the rate of interest on
judgments in this State on the effective date of the corporate action.
6. Preferred shares. "Preferred shares" means a class or series of shares
whose holders have preference over any other class or series of shares with
respect to distributions.
7. Record shareholder. "Record shareholder" means a person in whose name
shares are registered in the records of a corporation or the beneficial owner
of shares to the extent of the rights granted by a nominee certificate on file
with the corporation.
8. Senior executive. "Senior executive" means a chief executive officer,
chief operating officer, chief financial officer and anyone in charge of a
principal business unit or function.
9. Shareholder. "Shareholder" means both a record shareholder and a
beneficial shareholder.
Page III - 1
s.1302. Appraisal rights
A shareholder is entitled to appraisal rights and to obtain payment of the
fair value of that shareholder's shares in the event of any of the following
corporate actions:
1. Merger to which corporation is party. Consummation of a merger to which
a corporation is a party if:
A. Shareholder approval is required for the merger by section 1104 and the
shareholder is entitled to vote on the merger, except that appraisal rights are
not available to any shareholder of the corporation with respect to shares of
any class or series that remain outstanding after consummation of the merger;
or
B. The corporation is a subsidiary and the merger is governed by section 1105;
2. Share exchange to which corporation is party. Consummation of a share
exchange to which the corporation is a party as the corporation whose shares
will be acquired if the shareholder is entitled to vote on the exchange, except
that appraisal rights are not available to any shareholder of the corporation
with respect to any class or series of shares of the corporation that are not
exchanged;
3. Disposition of assets. Consummation of a disposition of assets pursuant
to section 1202 if a shareholder is entitled to vote on the disposition;
4. Fractional shares. An amendment of the corporation's articles of
incorporation with respect to a class or series of shares that reduces the
number of shares of a class or series owned by the shareholder to a fraction of
a share if the corporation has the obligation or right to repurchase the
fractional share so created;
5. Other amendment. Any other amendment to the corporation's articles of
incorporation, merger, share exchange or disposition of assets to the extent
provided by the articles of incorporation, bylaws or a resolution of the
corporation's board of directors;
6. Domestication. Consummation of a domestication if the shareholder does
not receive shares in the foreign corporation resulting from the domestication
that have terms as favorable to the shareholder in all material respects and
represent at least the same percentage interest of the total voting rights of
the outstanding shares of the corporation as the shares held by the shareholder
before the domestication;
7. Conversion to nonprofit status. Consummation of a conversion of the
corporation to nonprofit status pursuant to chapter 9, subchapter 2; or
8. Conversion to unincorporated entity. Consummation of a conversion of
the corporation to an unincorporated entity pursuant to chapter 9, subchapter
4.
s.1303. Limitations on appraisal rights
Notwithstanding section 1302, the availability of appraisal rights under
section 1302, subsections 1 to 4, 6 and 8 is limited in accordance with this
section.
1. National listing; specific market value. Appraisal rights are not
available for the holders of shares of any class or series of shares that:
Page III - 2
A. Is listed on the New York Stock Exchange or the American Stock Exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers; or
B. Has at least 2,000 shareholders and the outstanding shares of such class or
series have a market value of at least $20,000,000 exclusive of the value of
such shares held by a corporation's subsidiaries, senior executives, directors
and beneficial shareholders owning more than 10% of such shares.
2. Date of determination. The applicability of subsection 1 is determined
as of:
A. The record date fixed to determine the shareholders entitled to receive
notice of and to vote at the meeting of shareholders to act upon a corporate
action requiring appraisal rights pursuant to section 1302 to 1305; or
B. The day before the effective date of a corporate action that requires
appraisal rights if there is no meeting of shareholders.
3. Exception. Notwithstanding subsection 1, appraisal rights are available
pursuant to section 1302 to 1305 for the holders of any class or series of
shares:
A. Who are required by the terms of a corporate action requiring appraisal
rights pursuant to sections 1302 to 1305 to accept for such shares anything
other than cash or shares of any class or any series of shares of any
corporation, or any other proprietary interest of any other entity, that
satisfies the standards set forth in subsection 1 at the time the corporate
action becomes effective;
B. When any of the shares or assets of a corporation are being acquired or
converted, whether by merger, share exchange or otherwise, pursuant to a
corporate action pursuant to sections 1302 to 1305 by a person, or by an
affiliate of a person, who:
(1) Is, or at any time in the one-year period immediately preceding approval by
the corporation's board of directors of the corporate action requiring
appraisal rights was, the beneficial owner of 20% or more of the voting power
of the corporation, excluding any shares acquired pursuant to an offer for all
shares having voting power if such offer was made within one year prior to the
corporate action requiring appraisal rights for consideration of the same kind
and of a value equal to or less than that paid in connection with the corporate
action; or
(2) Directly or indirectly has, or at any time in the one-year period
immediately preceding approval by the corporation's board of directors of the
corporate action requiring appraisal rights had, the power, contractually or
otherwise, to cause the appointment or election of 25% or more of the directors
to the corporation's board of directors; or
C. When any of the shares or assets of a corporation are being acquired or
converted, whether by merger, share exchange or otherwise, pursuant to a
corporate action by a person, or by an affiliate of a person, who is, or at any
time in the one-year period immediately preceding approval by the corporation's
board of directors of the corporate action requiring appraisal rights pursuant
to section 1302 was, a senior executive or director of the corporation or a
senior executive of any affiliate of the corporation, and that senior executive
or director, as a result of the corporate action, receives a financial benefit
not generally available to other shareholders as such, other than:
Page III - 3
(1) Employment, consulting, retirement or similar benefits established
separately and not as part of or in contemplation of the corporate action;
(2) Employment, consulting, retirement or similar benefits established in
contemplation of, or as part of, the corporate action that are not more
favorable than those existing before the corporate action or, if more
favorable, that have been approved on behalf of the corporation in the same
manner as is provided in section 873; or
(3) In the case of a director of the corporation who will, in the corporate
action, become a director of the acquiring entity in the corporate action or
one of its affiliates, rights and benefits as a director that are provided on
the same basis as those afforded by the acquiring entity generally to other
directors of such entity or such affiliate.
For the purposes of this subsection, the term "beneficial owner" means any
person who, directly or indirectly, through any contract, arrangement or
understanding, other than a revocable proxy, has or shares the power to vote or
to direct the voting of shares, except that a member of a national securities
exchange may not be considered to be a beneficial owner of securities held
directly or indirectly by the member on behalf of another person solely because
that member is the record holder of such securities if the member is precluded
by the rules of such exchange from voting without instruction on contested
matters or matters that may affect substantially the rights or privileges of
the holders of the securities to be voted. When 2 or more persons agree to act
together for the purpose of voting their shares of the corporation, each member
of the group formed by that agreement is considered to have acquired beneficial
ownership, as of the date of such agreement, of all voting shares of the
corporation beneficially owned by any member of the group.
s.1304. Limitation or elimination of appraisal rights in articles of
incorporation
Notwithstanding section 1302 or 1303, the articles of incorporation of a
corporation as originally filed or any amendment thereto may limit or eliminate
appraisal rights for any class or series of preferred shares, but any
limitation or elimination contained in an amendment to the articles of
incorporation that limits or eliminates appraisal rights for any of those
shares that are outstanding immediately prior to the effective date of that
amendment or that the corporation is or may be required to issue or sell after
the effective date of the amendment pursuant to any conversion, exchange or
other right existing immediately before the effective date of that amendment
does not apply to any corporate action that becomes effective within one year
of that date if that action would otherwise afford appraisal rights.
s.1305. Challenge by shareholder
A shareholder entitled to appraisal rights under this subchapter may not
challenge a completed corporate action described in section 1302, other than
those described in section 1303, subsection 3, unless the corporate action:
1. Not authorized. Was not effectuated in accordance with the applicable
provisions of chapter 9, 10, 11 or 12 or the corporation's articles of
incorporation, bylaws or board of directors' resolution authorizing the
corporate action; or
2. Fraud; misrepresentation. Was procured as a result of fraud or material
misrepresentation.
Page III - 4
s.1306. Assertion of appraisal rights
1. Record shareholder assert appraisal rights. A record shareholder may
assert appraisal rights as to fewer than all the shares registered in the
record shareholder's name but owned by a beneficial shareholder only if the
record shareholder objects with respect to all shares of the class or series
owned by the beneficial shareholder and notifies the corporation in writing of
the name and address of each beneficial shareholder on whose behalf appraisal
rights are being asserted. The rights of a record shareholder who asserts
appraisal rights for only part of the shares held of record in the record
shareholder's name under this subsection must be determined as if the shares as
to which the record shareholder objects and the record shareholder's other
shares were registered in the names of different record shareholders.
2. Beneficial shareholder; appraisal rights. A beneficial shareholder may
assert appraisal rights as to shares of any class or series held on behalf of
the shareholder only if the shareholder:
A. Submits to the corporation the record shareholder's written consent to the
assertion of the rights no later than the date referred to in section 1322,
subsection 2, paragraph B, subparagraph (2); and
B. Does so with respect to all shares of the class or series that are
beneficially owned by the beneficial shareholder.
SUBCHAPTER II
PROCEDURE FOR EXERCISE OF APPRAISAL RIGHTS
s.1321. Notice of appraisal rights
1. Meeting notice. If a proposed corporate action described in section
1302 is to be submitted to a vote at a shareholders' meeting, the meeting
notice must state that the corporation has concluded that shareholders are, are
not or may be entitled to assert appraisal rights under this chapter. If the
corporation concludes that appraisal rights are or may be available, a copy of
this chapter must accompany the meeting notice sent to those record
shareholders entitled to exercise appraisal rights.
2. Notice of corporate action. In a merger pursuant to section 1105, the
parent corporation shall notify in writing all record shareholders of the
subsidiary who are entitled to assert appraisal rights that a corporate action
became effective. The notice must be sent within 10 days after the corporate
action became effective and include the materials described in section 1323.
s.1322. Notice of intent to demand payment
If a proposed corporate action requiring appraisal rights under sections
1302 to 1305 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert appraisal rights with respect to any class or series of
shares:
1. Written notice. Shall deliver to the corporation before the vote is
taken written notice of the shareholder's intent to demand payment if the
proposed action is effectuated; and
2. Not vote shares. May not vote, or cause or permit to be voted, any
shares of the class or series in favor of the proposed action.
A shareholder who does not satisfy the requirements of subsection 1 is not
entitled to payment under this chapter.
Page III - 5
s.1323. Appraisal notice and form
1. Written appraisal notice; form. If a proposed corporate action
requiring appraisal rights under section 1302 becomes effective, a corporation
must deliver a written appraisal notice and form required by subsection 2,
paragraph A to all shareholders who satisfied the requirements of section 1322.
In the case of a merger under section 1105, the parent shall deliver a written
appraisal notice and form to all record shareholders who may be entitled to
assert appraisal rights.
2. Appraisal notice. The appraisal notice required by subsection 1 must be
sent no earlier than the date a corporate action became effective and no later
than 10 days after that date and must:
A. Supply a form that specifies the date of the first announcement to
shareholders of the principal terms of the proposed corporate action and
requires the shareholder asserting appraisal rights to certify:
(1) Whether or not beneficial ownership of those shares for which appraisal
rights are asserted was acquired before that date; and
(2) That the shareholder did not vote for the transaction;
B. Include the following information:
(1) Where the form must be sent and where certificates for certificated shares
must be deposited and the date by which those certificates must be deposited,
which date may not be earlier than the date for receiving the required form
under subparagraph (2);
(2) A date by which the corporation must receive the form, which date may not
be fewer than 40 nor more than 60 days after the date the appraisal notice and
form are sent, and a statement that the shareholder has waived the right to
demand appraisal with respect to the shares unless the form is received by the
corporation by the specified date;
(3) A corporation's estimate of the fair value of the shares;
(4) That, if requested in writing, a corporation will provide, to the
shareholder so requesting, within 10 days after the date specified in
subparagraph (2) the number of shareholders who return the forms by the
specified date and the total number of shares owned by those shareholders; and
(5) The date by which the notice to withdraw under section 1324 must be
received, which date must be within 20 days after the date specified in
subparagraph (2); and
C. Be accompanied by a copy of this chapter.
s.1324. Perfection of rights; right to withdraw
1. Perfection of rights. A shareholder who receives notice pursuant to
section 1323 and who wishes to exercise appraisal rights shall certify on the
form sent by the corporation whether the beneficial owner of the shares
acquired beneficial ownership of the shares before the date required to be set
forth in the notice pursuant to section 1323, subsection 2, paragraph A. If a
shareholder fails to make this certification, the corporation may elect to
treat the shareholder's shares as after-acquired shares under section 1326. A
shareholder who wishes to exercise appraisal rights shall execute and return
the form and, in the case of certificated shares, deposit the shareholder's
certificates in accordance with the terms of the notice by the date referred to
in the notice pursuant to section 1323, subsection 2, paragraph B, subparagraph
(2). Once a shareholder deposits that shareholder's certificates or, in the
Page III - 6
case of uncertificated shares, returns the executed forms, that shareholder
loses all rights as a shareholder, unless the shareholder withdraws pursuant to
subsection 2.
2. Withdraw from appraisal process. A shareholder who has complied with
subsection 1 may nevertheless decline to exercise appraisal rights and withdraw
from the appraisal process by notifying the corporation in writing by the date
set forth in the appraisal notice pursuant to section 1323, subsection 2,
paragraph B, subparagraph (5). A shareholder who fails to withdraw from the
appraisal process may not thereafter withdraw without the corporation's written
consent.
3. Failure to execute and return form; nonpayment. A shareholder who does
not execute and return the form and, in the case of certificated shares,
deposit that shareholder's share certificates where required, each by the date
set forth in the notice described in section 1323, subsection 2, is not
entitled to payment under this chapter.
s.1325. Payment
1. Fair value. Except as provided in section 1326, within 30 days after
the form required by section 1323, subsection 2, paragraph B, subparagraph (2)
is due, a corporation shall pay in cash to those shareholders who complied with
section 1324, subsection 1 the amount the corporation estimates to be the fair
value of their shares, plus interest.
2. Additional information. The payment to each shareholder pursuant to
subsection 1 must be accompanied by:
A. Financial statements of the corporation that issued the shares to be
appraised, consisting of a balance sheet as of the end of a fiscal year ending
not more than 16 months before the date of payment, an income statement for
that year, a statement of changes in shareholders' equity for that year, and
the latest available interim financial statements, if any;
B. A statement of the corporation's estimate of the fair value of the shares,
which estimate must equal or exceed the corporation's estimate given pursuant
to section 1323, subsection 2, paragraph B, subparagraph (3); and
C. A statement that shareholders described in subsection 1 have the right to
demand further payment under section 1327 and that if any such shareholder does
not do so within the time period specified in section 1327, that shareholder is
deemed to have accepted the payment in full satisfaction of the corporation's
obligations under this chapter.
s.1326. After-acquired shares
1. Withhold payment. A corporation may elect to withhold payment required
by section 1325 from any shareholder who did not certify that beneficial
ownership of all of the shareholder's shares for which appraisal rights are
asserted was acquired before the date set forth in the appraisal notice sent
pursuant to section 1323, subsection 2, paragraph A.
2. Notify shareholders. If a corporation elected to withhold payment under
subsection 1, the corporation shall, within 30 days after the date by which the
corporation must receive the form is given as required by section 1323,
subsection 2, paragraph B, subparagraph (2) is due, notify all shareholders who
are described in subsection 1:
Page III - 7
A. Of the information required by section 1325, subsection 2, paragraph A;
B. Of the corporation's estimate of fair value pursuant to section 1325,
subsection 2, paragraph B;
C. That the shareholders may accept the corporation's estimate of fair value,
plus interest, in full satisfaction of their demands or demand appraisal under
section 1327;
D. That those shareholders who wish to accept the offer pursuant to paragraph B
must notify the corporation of their acceptance of the corporation's offer
within 30 days after receiving the offer pursuant to paragraph B; and
E. That those shareholders who do not satisfy the requirements for demanding
appraisal under section 1327 are deemed to have accepted the corporation's
offer pursuant to paragraph B.
3. Shareholders who accept offer. Within 10 days after receiving the
shareholder's acceptance pursuant to subsection 2, a corporation must pay in
cash the amount it offered under subsection 2, paragraph B to each shareholder
who agreed to accept the corporation's offer in full satisfaction of the
shareholder's demand.
4. Shareholders deemed to accept offer; payment. Within 40 days after
sending the notice described in subsection 2, a corporation shall pay in cash
the amount the corporation offered to pay under subsection 2, paragraph B to
each shareholder described in subsection 2, paragraph E.
s.1327. Procedure if shareholder dissatisfied with payment or offer
1. Notification; demand. A shareholder paid pursuant to section 1325 who
is dissatisfied with the amount of the payment shall notify the corporation in
writing of that shareholder's estimate of the fair value of the shares and
demand payment of that estimate plus interest less any payment under section
1325. A shareholder offered payment under section 1326 who is dissatisfied with
that offer must reject the offer and demand payment of the shareholder's stated
estimate of the fair value of the shares plus interest.
2. Failure to notify corporation in writing. A shareholder who fails to
notify a corporation in writing of that shareholder's demand to be paid the
shareholder's stated estimate of the fair value plus interest under subsection
1 within 30 days after receiving the corporation's payment or offer of payment
under section 1325 or 1326 waives the right to demand payment under this
section and is entitled only to the payment made or offered pursuant to those
sections.
SUBCHAPTER III
JUDICIAL APPRAISAL OF SHARES
s.1331. Court action
1. Commence proceeding. If a shareholder makes demand for payment under
section 1327 that remains unsettled, a corporation shall commence a proceeding
within 60 days after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the 60-day period, the corporation
shall pay in cash to each shareholder the amount the shareholder demanded
pursuant to section 1327 plus interest.
Page III - 8
2. Appropriate court. A corporation shall commence the proceeding under
subsection 1 in the appropriate court of the county where the corporation's
principal office or, if there is no principal office, its registered office in
this State is located. If the corporation is a foreign corporation without a
registered office in this State, the corporation shall commence the proceeding
in the county in this State where the principal office or registered office of
the domestic corporation merged with the foreign corporation was located at the
time of the transaction.
3. Shareholders party to proceeding. A corporation shall make all
shareholders whether or not residents of this State whose demands remain
unsettled parties to the proceeding as in an action against their shares, and
all parties must be served with a copy of the petition. Nonresidents may be
served by registered or certified mail or by publication as provided by law.
4. Jurisdiction; appraisers. The jurisdiction of the court in which the
proceeding is commenced under subsection 2 is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
a decision on the question of fair value. The appraisers have the powers
described in the order appointing them or in any amendment to the order. The
shareholders demanding appraisal rights under this chapter are entitled to the
same discovery rights as parties in other civil proceedings. Shareholders
demanding appraisal rights under this chapter do not have a right to a jury
trial.
5. Shareholder entitled to judgment. Each shareholder made a party to the
proceeding under subsection 1 is entitled to judgment for the:
A. Amount, if any, by which the court finds the fair value of the shareholder's
shares, plus interest, exceeds the amount paid by a corporation to the
shareholder for the shares; or
B. Fair value, plus interest, of the shareholder's shares for which a
corporation elected to withhold payment under section 1326.
s.1332. Court costs and counsel fees
1. Court costs. The court in an appraisal proceeding commenced under
section 1331 shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against a corporation, except that the court may
assess costs against all or some of the shareholders demanding appraisal, in
amounts the court finds equitable, to the extent the court finds the
shareholders acted arbitrarily, vexatiously or not in good faith with respect
to the rights provided by this chapter.
2. Counsel; expect fees. The court in an appraisal proceeding under
section 1331 may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
A. Against a corporation and in favor of any or all shareholders demanding
appraisal if the court finds the corporation did not substantially comply with
the requirements of section 1321, 1323, 1325 or 1326; or
B. Against either a corporation or a shareholder demanding appraisal, in favor
of any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith with
respect to the rights provided by this chapter.
Page III - 9
3. Fees awarded from settlement. If the court in an appraisal proceeding
under section 1331 finds that the services of counsel for any shareholder were
of substantial benefit to other shareholders similarly situated and that the
fees for those services should not be assessed against a corporation, the court
may award to the counsel reasonable fees to be paid out of the amounts awarded
the shareholders who were benefited.
4. Corporation fails to make payment. To the extent a corporation fails to
make a required payment pursuant to section 1325, 1326 or 1327, a shareholder
may sue directly for the amount owed and, to the extent successful, is entitled
to recover from the corporation all costs and expenses of the suit, including
counsel fees.
Page III - 10
Annex IV
FNB Financial Statements
Report of Management
The Management of FNB Bankshares is responsible for the preparation,
content, and integrity of the financial statements and other statistical data
presented in this report. The financial statements have been prepared in
conformity with U.S. generally accepted accounting principles and necessarily
include amounts based on Management's best estimates and judgment. Management
also prepared the other information in this report and is responsible
for its accuracy and consistency with the financial statements.
FNB Bankshares 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 Risk Management Committee. The Risk
Management Committee regularly meets with the independent auditors, the
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 the internal auditor have direct access
to the Risk Management Committee to discuss the scope and results of their
work, the adequacy of internal controls, and the quality of financial
reporting.
/s/ TONY C. MCKIM /s/ RONALD J. WROBEL
Tony C. McKim Ronald J. Wrobel
President & Chief Executive Officer Treasurer & Chief Financial
Officer
Page IV - 1
Report of Independent Auditors
Berry, Dunn, McNeil & Parker
The Board of Directors
FNB Bankshares and Subsidiary
We have audited the consolidated balance sheets of FNB Bankshares and
Subsidiary as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the three years in the three-year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 FNB Bankshares
and Subsidiary as of December 31, 2003 and 2002, 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, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ BERRY, DUNN, McNEIL & PARKER
Berry, Dunn, McNeil & Parker
Bangor, Maine
February 6, 2004
(except for Note 18, as to which date is August 25, 2004)
Page IV - 2
Consolidated Balance Sheets
FNB Bankshares and Subsidiary
-------------------------------------------------------------------------------
As of December 31, 2003 2002
-------------------------------------------------------------------------------
Assets
Cash and due from banks $ 9,511,000 $ 7,339,000
Federal funds sold 5,700,000 2,225,000
-------------------------------------------------------------------------------
Cash and cash equivalents 15,211,000 9,564,000
Securities available for sale 32,940,000 30,154,000
Securities to be held to maturity (1) 480,000 545,000
Other investment securities 1,936,000 1,936,000
Loans held for sale 1,061,000 1,227,000
Loans receivable, 161,127,000 149,006,000
Less allowance for loan losses 1,989,000 1,700,000
-------------------------------------------------------------------------------
Net loans 159,138,000 147,306,000
Accrued interest receivable 1,252,000 1,196,000
Premises and equipment 3,396,000 2,975,000
Other assets 4,220,000 511,000
-------------------------------------------------------------------------------
Total assets $ 219,634,000 $ 195,414,000
===============================================================================
(1) Market value of $483,000 at December 31, 2003 and $548,000 at December 31,
2002.
Page IV - 3
Consolidated Balance Sheets, Concluded
FNB Bankshares and Subsidiary
-------------------------------------------------------------------------------
As of December 31, 2003 2002
-------------------------------------------------------------------------------
Liabilities
Demand deposits $ 30,243,000 $ 25,139,000
Savings and NOW deposits 106,161,000 87,506,000
Other time deposits 49,308,000 49,443,000
-------------------------------------------------------------------------------
Total deposits 185,712,000 162,088,000
Securities sold under agreement to repurchase 14,057,000 12,267,000
Other borrowed funds 2,550,000 5,355,000
Accrued expenses and other liabilities 1,992,000 1,729,000
-------------------------------------------------------------------------------
Total liabilities 204,311,000 181,439,000
Commitments (notes 2, 6, 13, 14 and 16)
-------------------------------------------------------------------------------
Shareholders' equity
Common stock, par value $0.80; authorized
2,000,000 shares, issued 1,125,000 shares 900,000 900,000
Additional paid-in capital 357,000 55,000
Surplus 456,227 456,227
Retained earnings 14,513,773 12,984,773
Accumulated other comprehensive income
Net unrealized gain on securities
available for sale, net of deferred income
taxes of $131,000 in 2003 and $139,000 in 2002 254,000 270,000
16,481,000 14,666,000
Less cost of treasury stock (79,728 and 69,834
shares in 2003 and 2002, respectively 1,158,000 691,000
-------------------------------------------------------------------------------
Total shareholders' equity 15,323,000 13,975,000
-------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 219,634,000 $ 195,414,000
===============================================================================
Common stock
Number of shares authorized 2,000,000 2,000,000
Number of shares issued 1,125,000 1,125,000
Number of shares outstanding 1,045,272 1,055,166
-------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these
consolidated financial statements
Page IV - 4
Consolidated Statements of Income
FNB Bankshares and Subsidiary
-------------------------------------------------------------------------------
Years ended December 31, 2003 2002 2001
-------------------------------------------------------------------------------
Interest and dividend income
Loans receivable $ 9,393,000 $ 9,938,000 $10,594,000
Securities available for sale 999,000 1,401,000 2,144,000
Securities to be held to maturity 18,000 23,000 39,000
Federal funds sold 53,000 73,000 95,000
Other investment securities 61,000 66,000 125,000
-------------------------------------------------------------------------------
Total interest and dividend income 10,524,000 11,501,000 12,997,000
-------------------------------------------------------------------------------
Interest expense
Deposits 2,380,000 2,935,000 3,993,000
Securities sold under agreements to
repurchase 113,000 226,000 562,000
Other borrowed funds 200,000 491,000 853,000
-------------------------------------------------------------------------------
Total interest expense 2,693,000 3,652,000 5,408,000
-------------------------------------------------------------------------------
Net interest income 7,831,000 7,849,000 7,589,000
Provision for loan losses 360,000 722,000 600,000
Provision for losses on loan commitments 50,000 100,000 --
-------------------------------------------------------------------------------
Net interest income after provision
for loan losses 7,421,000 7,027,000 6,989,000
-------------------------------------------------------------------------------
Noninterest income
Income from fiduciary activities 556,000 484,000 473,000
Service charges on deposit accounts 561,000 539,000 487,000
Other service charges and fees 1,853,000 1,596,000 1,392,000
Realized gains on securities
available for sale -- 40,000 307,000
Net gain on sale of bank assets -- 13,000 4,000
Other 677,000 355,000 247,000
-------------------------------------------------------------------------------
Total noninterest income 3,647,000 3,027,000 2,910,000
-------------------------------------------------------------------------------
Noninterest expenses
Salaries and employee benefits 4,180,000 4,207,000 4,143,000
Occupancy and equipment expense 1,151,000 1,124,000 1,072,000
Deposit insurance premium 23,000 24,000 61,000
Realized losses on securities available
for sale 1,000 38,000 306,000
Other 2,966,000 2,689,000 2,511,000
-------------------------------------------------------------------------------
Total noninterest expenses 8,321,000 8,082,000 8,093,000
-------------------------------------------------------------------------------
Income before income taxes 2,747,000 1,972,000 1,806,000
Income tax expense 728,000 495,000 516,000
-------------------------------------------------------------------------------
Net income $ 2,019,000 $ 1,477,000 $ 1,290,000
===============================================================================
Page IV - 5
Consolidated Statements of Income, Concluded
FNB Bankshares and Subsidiary
-------------------------------------------------------------------------------
Years ended December 31, 2003 2002 2001
-------------------------------------------------------------------------------
Basic earnings per share $ 1.92 $ 1.40 $ 1.21
Diluted earnings per share $ 1.86 $ 1.37 $ 1.19
Cash dividends declared per share $ 0.47 $ 0.37 $ 0.30
Weighted average number of shares
outstanding 1,050,145 1,052,618 1,067,127
-------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these
consolidated financial statements
Page IV - 6
Consolidated Statements of Changes in Shareholders' Equity
FNB Bankshares and Subsidiary
------------------------------------------------------------------------------------------------------
Years ended December 31, 2003, 2002, and 2001
------------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss) Total
Additional on securities share-
Common paid-in Retained available Treasury holders'
Stock capital Surplus earnings for sale Stock Equity
------------------------------------------------------------------------------------------------------
Balance at
December 31,
2000 900,000 55,000 456,227 10,921,773 44,000 (323,000) 12,054,000
======================================================================================================
Net income - - - 1,290,000 - - 1,290,000
Change in net
unrealized
gain on
securities
available for
sale, net of
deferred taxes
and
reclassification
adjustments - - - - (156,000) - (156,000)
------------------------------------------------------------------------------------------------------
Total Comprehensive
income - - - 1,290,000 (156,000) - 1,134,000
Cash dividends
declared - - - (318,000) - - (318,000)
Repurchase of
37,572 shares
of treasury
stock - - - - - (388,000) (388,000)
Sale of 353
shares of
treasury stock - - - - - 4,000 4,000
------------------------------------------------------------------------------------------------------
Balance at
December 31,
2001 900,000 55,000 456,227 11,893,773 (112,000) (707,000) 12,486,000
======================================================================================================
Page IV - 7
------------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss) Total
Additional on securities share-
Common paid-in Retained available Treasury holders'
Stock capital Surplus earnings for sale Stock Equity
------------------------------------------------------------------------------------------------------
Net income - - - 1,477,000 - - 1,477,000
Change in net
unrealized
gain on
securities
available for
sale, net of
deferred taxes
and
reclassification
adjustments - - - - 382,000 - 382,000
------------------------------------------------------------------------------------------------------
Total Comprehensive
income - - - 1,477,000 382,000 - 1,859,000
Cash dividends
declared - - - (386,000) - - (386,000)
Repurchase of
999 shares
of treasury
stocks - - - - - (12,000) (12,000)
Sale of 3,186
shares of
treasury stock - - - - - 28,000 28,000
------------------------------------------------------------------------------------------------------
Balance at
December 31,
2002 900,000 55,000 456,227 12,984,773 270,000 (691,000) 13,975,000
======================================================================================================
Page IV - 8
------------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss) Total
Additional on securities share-
Common paid-in Retained available Treasury holders'
Stock capital Surplus earnings for sale Stock Equity
------------------------------------------------------------------------------------------------------
Net income - - - 2,019,000 - - 2,019,000
Change in net
unrealized
gain on
securities
available for
sale, net of
deferred taxes
and
reclassification
adjustments - - - - (16,000) - (16,000)
------------------------------------------------------------------------------------------------------
Total
comprehensive
income - - - 2,019,000 (16,000) - 2,003,000
Cash dividends
declared - - - (490,000) - - (490,000)
Repurchase of
54,000 shares
of treasury
stock - - - - - (881,000) (881,000)
Sale of 44,106
shares of
treasury stock - 302,000 - - - 414,000 716,000
------------------------------------------------------------------------------------------------------
Balance at
December 31,
2003 900,000 357,000 456,227 14,513,773 254,000 (1,158,000) 15,323,000
======================================================================================================
The accompanying footnotes are an integral part of these consolidated financial
statements
Page IV - 9
Consolidated Statements of Cash Flows
FNB Bankshares and Subsidiary
-------------------------------------------------------------------------------
Years ended December 31, 2003 2002 2001
-------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,019,000 $ 1,477,000 $ 1,290,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 378,000 428,000 436,000
Deferred income taxes -- 104,000 (143,000)
Provision for loan losses 360,000 722,000 600,000
Net change in loans held for sale 166,000 (326,000) 835,000
Net realized (gains) losses
on securities available for sale 1,000 (2,000) (1,000)
Net loss on sale of other real
estate owned -- 2,000 --
Net gain on sale of assets -- (13,000) (4,000)
Amortization of premiums and
accretion of discounts on investments 201,000 353,000 (11,000)
Decrease (increase) in accrued
interest receivable (56,000) 230,000 66,000
Decrease (increase) in other assets (703,000) 230,000 71,000
Increase in accrued expenses and
other liabilities 263,000 13,000 236,000
-------------------------------------------------------------------------------
Net cash provided by operating
activities 2,629,000 3,218,000 3,375,000
-------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of securities available for
sale (55,162,000) (24,459,000) (28,085,000)
Proceeds from sales and maturities
available for sale 52,151,000 22,902,000 37,817,000
Proceeds from maturities of
securities to be held to maturity 65,000 60,000 60,000
Net increase in loans (12,191,000) (9,401,000) (26,331,000)
Proceeds from sale of other real
estate owned -- 158,000 --
Purchase of life insurance policies (3,000,000) -- --
Purchase of premises and equipment (799,000) (113,000) (99,000)
-------------------------------------------------------------------------------
Net cash used in investing activities (18,936,000) (10,853,000) (16,638,000)
-------------------------------------------------------------------------------
Page IV - 10
Consolidated Statements of Cash Flows, Concluded
FNB Bankshares and Subsidiary
-------------------------------------------------------------------------------
Years ended December 31, 2003 2002 2001
-------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand savings,
and NOW deposit accounts 23,759,000 21,469,000 4,464,000
Net increase (decrease) in
other time deposits (135,000) 2,696,000 8,046,000
Net decrease in short-term
borrowings and securities sold
under agreement to repurchase (660,000) (5,515,000) (8,974,000)
Proceeds from long-term borrowings 8,000,000 5,000,000 7,000,000
Repayment of long-term debt (8,355,000) (14,367,000) (1,846,000)
Purchase of treasury stock (881,000) (12,000) (388,000)
Proceeds from sale of treasury stock 716,000 28,000 4,000
Dividends paid (490,000) (386,000) (318,000)
-------------------------------------------------------------------------------
Net cash provided by
financing activities 21,954,000 8,913,000 7,988,000
-------------------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents 5,647,000 1,278,000 (5,275,000)
Cash and cash equivalents at
beginning of year 9,564,000 8,286,000 13,561,000
-------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 15,211,000 $ 9,564,000 $ 8,286,000
===============================================================================
Interest paid $ 2,734,000 $ 3,707,000 $ 5,503,000
Income taxes paid 858,000 463,000 632,000
Loans transferred to
other real estate owned -- 160,000 --
-------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these
consolidated financial statements
Page IV - 11
Nature of Business
The Company provides a full range of banking services to individual and
business customers in Down East Maine. The Company is subject to the
regulations of certain federal agencies and undergoes periodic examinations by
those regulatory authorities.
NOTE 1. Summary of Significant Accounting Policies
The accounting and reporting policies of FNB Bankshares and Subsidiary
conform to generally accepted accounting principles and to general practice
within the banking industry. The following is a description of the significant
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of FNB
Bankshares (Company) and its wholly-owned subsidiary, First National Bank of
Bar Harbor (Bank). All significant intercompany balances have been eliminated
in consolidation.
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," requires a company to
disclose certain income statement and balance sheet information by operating
segment. Since the Company's operations include only its banking and financing
activities, no additional disclosures are required by the Statement.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance
for loan losses and the carrying value of real estate owned, management obtains
independent appraisals for significant properties.
Investment Securities
The Company's accounting policies for investment securities are as
follows:
Securities Available for Sale
Securities available for sale consist of debt securities that the Company
anticipates could be available for sale in response to changes in market
interest rates, liquidity needs, changes in funding sources and other similar
factors. These assets are specifically identified and are carried at fair
value. Unrealized holding gains and losses for these assets are reported as a
net amount in a separate component of stockholders' equity, net of deferred
income taxes. When a decline in fair value is considered other than temporary,
the loss is recognized in the consolidated statements of operations, resulting
in the establishment of a new cost basis for the security.
Page IV - 12
The components of unrealized holding gains and losses and related tax
effects are as follows:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Unrealized holding gains(losses) on
available for sale securities $ (24,000) 580,000 (237,000)
Reclassification adjustment for (gains)
losses realized in income $ 1,000 (2,000) --
-------------------------------------------------------------------------------
Net unrealized gains (losses) $ (23,000) 578,000 (237,000)
Tax effect 7,000 (196,000) 81,000
-------------------------------------------------------------------------------
Net-of-tax amount $ (16,000) 382,000 (156,000)
===============================================================================
Gains and losses on the sale of securities available for sale are
determined using the specific identification method.
Securities to be Held to Maturity
Securities to be held to maturity consist of debt securities that the
Company has the positive intent and ability to hold until maturity. These
securities are carried at amortized cost. When a decline in fair value is
considered other than temporary, the loss is recognized in the consolidated
statements of income, resulting in the establishment of a new cost basis for
the security.
Other Investment Securities
Other investment securities consist of Federal Home Loan Bank (FHLB) stock
and Federal Reserve Bank stock. These securities are carried at cost.
Premiums and Discounts
Premiums are amortized and discounts are accreted using methods
approximating the interest method.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried
at the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
Loans Receivable
Loans receivable that management has the intent and ability to hold for
the foreseeable future, or until maturity or pay-off, are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
Page IV - 13
Interest on loans is accrued and credited to income based on the principal
amount outstanding. Loans 30 days or more past due are considered delinquent.
The accrual of interest on loans is discontinued at the time the loan is 90
days delinquent unless the credit is well-secured and in process of collection.
Loans are placed on nonaccrual or charged off at an earlier date if collection
of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income, unless
management is satisfied the loan is well secured and the accrued interest is
collectible. The interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Loans deemed uncollectible are
charged to the allowance. Management's periodic evaluation of the adequacy of
the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Loan Servicing
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on loan type, investor type and interest rate. The amount of impairment
recognized is the amount by which the capitalized mortgage servicing rights for
a stratum exceed their fair value. Mortgage servicing rights are not material
to the financial statements.
Page IV - 14
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of carrying amount or fair value less cost to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in loss on
foreclosed real estate. The historical average holding period for such
properties is six months.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Premises and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and
leasehold improvements are carried at cost, less accumulated depreciation and
amortization computed principally by the straight-line method over the
estimated useful lives of the assets.
Stock Options
The Company established a stock option plan in 2001. Under the plan, the
Company may grant options to its employees, directors and others for up to
162,924 shares of common stock on a post-split basis. Both incentive stock
options and non-qualified stock options may be granted under the plan. The
exercise price of each option is determined by the Board of Directors, but
shall in no instance be less than the fair market value on the date of grant.
An option's maximum term is ten years.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the stock option plan. Accordingly, no
compensation cost has been recognized. The following table illustrates the
effect on net income if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.
-------------------------------------------------------------------------------
Year ended December 31
2003 2002 2001
-------------------------------------------------------------------------------
Net income, as reported $2,019,000 1,477,000 1,290,000
Deduct, Total stock-based employee
compensation expense determined
under fair value based method of all
awards, net of related tax effects (15,000) (13,000)
(5,000)
-------------------------------------------------------------------------------
Pro forma net income $2,004,000 1,464,000 1,285,000
===============================================================================
Page IV - 15
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 3%, risk-free interest rates of 5% in 2003 and
2002 and 6% in 2001, and expected lives of 2.5 years.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business the Company has entered into off-
balance-sheet financial instruments consisting of commitments to extend credit.
Such financial instruments are recorded in the consolidated financial
statements when they are funded.
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. The Company declared a 3-for-1 split of outstanding common stock in
March 2004, effected in the form of a dividend. Earnings and cash dividends per
share and information regarding shares outstanding have been retroactively
restated to reflect the stock split.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and cash equivalents
approximate their fair value.
Investment securities. Fair values for securities, excluding restricted equity
securities, are based on quoted market prices. The carrying values of other
investment securities approximate fair values.
Mortgage loans held for sale. Fair values of mortgage loans held for sale are
based on commitments on hand from investors or prevailing market prices.
Loans receivable. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for other loans receivable are estimated by discounting future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings.
Accrued interest. The carrying amounts of accrued interest approximate their
fair values.
Life insurance contracts. The fair value of life insurance contracts is equal
to their contractual cash surrender values.
Mortgage servicing rights. The fair value of mortgage servicing rights is based
on market quotes for comparable instruments.
Page IV - 16
Deposit liabilities. The fair values disclosed for demand, savings and NOW
deposits are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The carrying amounts of
variable-rate, fixed-term money-market accounts and certificates of deposit
(CDs) approximate their fair values at the reporting date. Fair values for
fixed-rate CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short-term borrowings. The carrying amounts of borrowings under repurchase
agreements maturing within 90 days approximate their fair values.
Other borrowed funds. The fair values of other borrowed funds are estimated
using discounted cash flow analyses based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Off-balance-sheet instruments. The Company's off-balance-sheet instruments
consist of loan commitments. Fair values for loan commitments have not been
presented as the future revenue derived from such financial instruments is not
significant.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
NOTE 2. Cash and Due from Banks
The Federal Reserve Board requires the Company to maintain a target
reserve balance. The amount of this reserve balance as of December 31, 2003 was
$100,000. 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.
NOTE 3. Investment in Debt Securities
Debt securities have been classified in the consolidated statements of
financial condition according to management's intent. The carrying amounts of
securities and their approximate fair values at December 31 were as follows:
-------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
December 31, 2003 Cost Gains Losses Value
-------------------------------------------------------------------------------
Securities available for sale
U.S. Treasury and government
agency securities $12,517,000 15,000 12,000 12,520,000
Collateralized mortgage
obligations and other
mortgage-backed securities 13,080,000 141,000 47,000 13,174,000
Obligations of states and
political subdivisions 6,958,000 305,000 17,000 7,246,000
-------------------------------------------------------------------------------
$32,555,000 461,000 76,000 32,940,000
===============================================================================
Page IV - 17
-------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
December 31, 2002 Cost Gains Losses Value
-------------------------------------------------------------------------------
Securities available for sale
U.S. Treasury and government
agency securities $ 8,769,000 47,000 -- 8,726,000
Collateralized mortgage
obligations and other
mortgage-backed securities 14,683,000 265,000 47,000 14,901,000
Obligations of states and
political subdivisions 6,383,000 148,000 4,000 6,527,000
-------------------------------------------------------------------------------
$29,745,000 460,000 51,000 30,154,000
===============================================================================
-------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------
Securities to be held to maturity
December 31, 2003
Obligations of states and
political subdivisions $480,000 3,000 -- 483,000
===============================================================================
December 31, 2002
Obligations of states and
political subdivisions $545,000 3,000 -- 548,000
===============================================================================
The scheduled maturities of debt securities at December 31, 2003 were as
follows:
-------------------------------------------------------------------------------
Securities Securities
available for sale: to be held to maturity:
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------------------------------------------------------
Due in 1 to 5 years $1,501,000 1,501,000 90,000 91,000
Due in 5 to 10 years 9,536,000 9,539,000 390,000 392,000
Due in more than 10 years 8,438,000 8,726,000 -- --
Collateralized mortgage
obligations and other
mortgage-backed
securities 13,080,000 13,174,000 -- --
-------------------------------------------------------------------------------
$32,555,000 32,940,000 480,000 483,000
===============================================================================
Some securities have provisions whereby they may be called prior to their
scheduled maturity dates.
Page IV - 18
Unrealized losses relate to available for sale securities and are all
considered to be temporary. Classification of securities with unrealized losses
based on the length of time they have been in a continual loss position as of
December 31, 2003 is as follows:
-------------------------------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
------------------- ------------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------------------------------------------------------------------------------
U.S. Treasury
and government
agency
securities $ 2,031,000 12,000 -- -- 2,031,000 12,000
Collateralized
mortgage
obligations and
other mortgage-
backed
securities 4,898,000 29,000 882,000 18,000 5,780,000 47,000
Obligations of
states and
political
subdivisions 573,000 17,000 -- -- 573,000 17,000
-------------------------------------------------------------------------------
$ 7,502,000 58,000 882,000 18,000 8,384,000 76,000
===============================================================================
Securities carried at approximately $20,255,000 and $22,773,000 at
December 31, 2003 and 2002, respectively, were pledged to secure public funds,
trust deposits and securities sold under agreements to repurchase, and for
other purposes required or permitted by law.
NOTE 4. Loans Receivable
The components of loans in the consolidated statements of financial
condition were as follows:
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Commercial $ 28,819,000 22,715,000
Real estate construction 9,272,000 5,655,000
Commercial real estate 75,531,000 66,557,000
Residential real estate 39,578,000 46,437,000
Consumer loans 7,865,000 7,610,000
-------------------------------------------------------------------------------
Subtotal 161,065,000 148,974,000
Net deferred loan costs 62,000 32,000
Allowance for loan losses (1,989,000) (1,700,000)
-------------------------------------------------------------------------------
$159,138,000 147,306,000
===============================================================================
Page IV - 19
An analysis of the change in the allowance for loan losses follows:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Balance at beginning of year $ 1,700,000 1,655,000 1,463,000
Loans charged off (107,000) (945,000) (452,000)
Recoveries on loans 36,000 268,000 44,000
-------------------------------------------------------------------------------
Net loans charged off (71,000) (677,000) (408,000)
Provision for loan losses 360,000 722,000 600,000
-------------------------------------------------------------------------------
Balance at end of year $ 1,989,000 1,700,000 1,655,000
===============================================================================
The following is a summary of information pertaining to impaired loans:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Impaired loans without
a valuation allowance $ 705,000 704,000 3,054,000
Impaired loans with
a valuation allowance 142,000 431,000 1,675,000
-------------------------------------------------------------------------------
Total impaired loans $ 847,000 1,135,000 4,729,000
===============================================================================
Valuation allowance related
to impaired loans $ 29,000 60,000 686,000
===============================================================================
Average investment in
impaired loans $ 801,000 2,385,000 3,387,000
===============================================================================
Interest income recognized on
impaired loans $ 7,000 31,000 95,000
===============================================================================
Interest income recognized
on a cash basis on impaired
loans $ 2,000 14,000 61,000
===============================================================================
No additional funds are committed to be advanced in connection with
impaired loans.
Page IV - 20
At December 31, loans 90 days or more past due and still accruing, and
loans on nonaccrual status, were as follows:
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Past due 90 Past due 90
days or more days or more
and still and still
accruing Nonaccrual accruing Nonaccrual
-------------------------------------------------------------------------------
Real estate -
All other loans secured
by 1-4 family residential
properties $ 38,000 215,000 39,000 134,000
Installment -- -- -- 4,000
Student 257,000 -- 104,000 --
Commercial (time and
demand) and all other
loans 29,000 490,000 238,000 566,000
-------------------------------------------------------------------------------
$ 324,000 705,000 381,000 704,000
===============================================================================
The Company's lending activities are conducted primarily in northeastern
coastal Maine. The Company grants single family and multi-family residential
loans, commercial real estate loans, commercial loans, and a variety of
consumer loans. In addition, the Company grants loans for the construction of
residential homes, multi-family properties and commercial real estate
properties. Most loans granted by the Company are either collateralized by real
estate or guaranteed by federal and local governmental authorities. The ability
and willingness of the single family residential and consumer borrowers to
honor their repayment commitments is generally dependent on the level of
overall economic activity within the borrowers' geographical areas and real
estate values. The ability and willingness of commercial real estate,
commercial and construction loan borrowers to honor their repayment commitments
is generally dependent on the health of the real estate economic sector of the
borrowers' geographical areas and general economy.
A substantial portion of the Company's loan portfolio is comprised of
loans made to borrowers in tourist-related industries. Thus, the ultimate
collectibility of these loans could be dependent on the state of the industry.
Loans outstanding to borrowers in tourist-related industries amounted to
approximately $24,437,000 and $23,992,000 at December 31, 2003 and 2002,
respectively.
NOTE 5. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of mortgage loans serviced for others was $58,200,000, $35,250,000, and
$24,724,000 at December 31, 2003, 2002 and 2001, respectively.
Net gains on sales of loans were $413,000 for 2003, $157,000 for 2002, and
$51,000 for 2001.
Page IV - 21
NOTE 6. Premises and Equipment
Components of properties and equipment included in the consolidated
statements of financial condition at December 31, 2003 and 2002 were as
follows:
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Cost
Land $ 250,000 250,000
Bank premises 3,323,000 3,256,000
Construction in progress 568,000 86,000
Furniture and equipment 3,864,000 3,645,000
Leasehold improvements 128,000 127,000
-------------------------------------------------------------------------------
Total cost 8,133,000 7,364,000
Less accumulated depreciation 4,737,000 4,389,000
-------------------------------------------------------------------------------
$ 3,396,000 2,975,000
===============================================================================
At December 31, 2003, the Bank had entered into a contract for
construction of a branch in Blue Hill. Estimated costs to complete the project
are $1,500,000. Certain Bank facilities and equipment are leased under various
operating leases. Rental expense was $140,000 in 2003, $138,000 in 2002 and
$135,000 in 2001.
Future minimum rental commitments under non-cancelable leases are:
-------------------------------------------------------------------------------
2004 $133,000
2005 115,000
2006 118,000
2007 120,000
2008 117,000
Thereafter 178,000
-------------------------------------------------------------------------------
$ 781,000
===============================================================================
NOTE 7. Deposits
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000, was $13,737,000 and $15,066,000 in 2003 and 2002,
respectively. At December 31, 2003, the scheduled maturities of certificates of
deposit (in thousands) are as follows:
-------------------------------------------------------------------------------
2004 $ 31,405,000
2005 8,122,000
2006 3,836,000
2007 4,251,000
2008 1,694,000
-------------------------------------------------------------------------------
Total $ 49,308,000
===============================================================================
Page IV - 22
NOTE 8. Borrowed Funds
Securities sold under agreements to repurchase generally mature within one
to four days from the transaction date. All repurchase agreements are fully
collateralized by government-backed securities. Other borrowed funds consist of
Federal Home Loan Bank (FHLB) advances and treasury, tax and loan deposits.
Treasury, tax and loan deposits, which total $50,000 at December 31, 2003 and
$2,500,000 at December 31, 2002, generally are repaid upon notification by the
U.S. Treasury.
Information concerning securities sold under agreements to repurchase is
summarized as follows.
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Average balance during the year $ 9,392,000 12,362,000
Average interest rate during the year 1.20% 1.76%
Maximum month-end balance during the year 14,057,000 16,304,000
-------------------------------------------------------------------------------
At December 31, 2003 and 2002, the Bank had credit lines available of
$5,000,000 and $2,000,000 from FHLB and Key Bank, respectively.
The Company is required to own stock of the FHLB in order to borrow from
the FHLB. FHLB advances are collateralized by a pledge of certain mortgage and
other loans with a carrying value of $38,614,000 at December 31, 2003 and a
lien on the Company's FHLB stock of $1,896,000 at December 31, 2003, which is
included in other investment securities in the consolidated statement of
financial condition.
A summary of borrowings from the FHLB at December 31, 2003 and 2002 is as
follows:
-------------------------------------------------------------------------------
Interest Rate Amount
-------------------------------------------------------------------------------
December 31, 2003 Fixed advances 4.98% - 6.54% $2,500,000
===============================================================================
December 31, 2002 Fixed advances 4.98% - 6.54% $2,855,000
===============================================================================
Maturities are as follows:
-------------------------------------------------------------------------------
2005 $ 500,000
2009 2,000,000
-------------------------------------------------------------------------------
Page IV - 23
NOTE 9. Noninterest Expense
Amounts included in other noninterest expense that individually exceed 1%
of total interest and noninterest income are as follows:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Credit card interchange and other expenses $1,102,000 949,000 825,000
Item processing fees 266,000 269,000 261,000
Publicity and advertising 216,000 131,000 129,000
-------------------------------------------------------------------------------
NOTE 10. Income Taxes
The provision for income taxes consisted of the following for the years
ended December 31:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Current tax provision
Federal $ 688,000 360,000 630,000
State 40,000 31,000 29,000
-------------------------------------------------------------------------------
728,000 391,000 659,000
Deferred federal -- 104,000 (143,000)
-------------------------------------------------------------------------------
$ 728,000 495,000 516,000
===============================================================================
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:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Expected tax expense $ 934,000 671,000 614,000
Non-taxable income (231,000) (223,000) (136,000)
State income taxes, net 25,000 20,000 18,000
Other -- 27,000 20,000
-------------------------------------------------------------------------------
$ 728,000 495,000 516,000
===============================================================================
Management expects the Company will realize all deferred income tax
benefits to offset the income tax liabilities arising from the reversal of
taxable temporary differences and taxable income generated in future years.
Accordingly, the Company has not established a valuation allowance for deferred
income tax benefits.
Deferred tax assets and liabilities included in other assets at December
31 consist of the following:
Page IV - 24
Items that give rise to the deferred income tax assets and liabilities and
the tax effect of each at December 31, 2003 and 2002 are as follows:
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Allowance for loan losses $ 571,000 456,000
Deferred loan fees (51,000) (51,000)
Post-retirement benefits 387,000 379,000
Accelerated tax depreciation (183,000) (191,000)
Unrealized gain on securities available for sale (131,000) (139,000)
Accrued interest on nonperforming loans 15,000 14,000
Other assets 4,000 13,000
Other liabilities (203,000) (79,000)
-------------------------------------------------------------------------------
Net deferred income tax asset $ 409,000 402,000
===============================================================================
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, 2003 and 2002 are as follows:
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Asset $ 977,000 862,000
===============================================================================
Liability $ 568,000 460,000
===============================================================================
No valuation allowance is deemed necessary for the deferred tax asset.
NOTE 11. Pension and Other Postretirement Benefits
The Company has a defined contribution pension plan for its employees.
Contributions under the Plan totaled $155,000 and $149,000 for 2003 and 2002,
respectively. In addition to providing pension benefits, the Company provides
certain life insurance and health insurance benefits on an unfunded basis for
retired employees.
Components of the net periodic benefit cost of this plan were as follows:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Service cost $ 9,000 8,000 39,000
Interest cost 90,000 85,000 103,000
Net amortization 17,000 (6,000) 24,000
Special termination benefit -- -- 179,000
-------------------------------------------------------------------------------
Net periodic benefit cost $116,000 87,000 345,000
===============================================================================
Other information regarding this plan is as follows:
Employer contribution $106,000 83,000 78,000
Weighted average assumptions
as of December 31:
Discount rate 6.75% 7.25% 7.25%
-------------------------------------------------------------------------------
Page IV - 25
The following tables set forth the accumulated post-retirement benefit
obligation, funded status, and net periodic pension cost:
-------------------------------------------------------------------------------
At December 31, 2003 2002
-------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year: $1,380,000 1,690,000
Service cost 9,000 8,000
Interest cost 90,000 85,000
Benefits paid (106,000) (83,000)
Actuarial loss 13,000 160,000
Curtailment gain -- (480,000)
-------------------------------------------------------------------------------
Accumulated benefit obligation, end of year $1,386,000 1,380,000
Unrecognized net loss $(249,000) (265,000)
-------------------------------------------------------------------------------
Accrued postretirement benefit cost $1,137,000 1,115,000
===============================================================================
The health care cost trend rate for the 2003 valuation decreased gradually
from 7.5% for 2004 to 4.5% by the year 2013.
A one-percentage-point change (increase and decrease) in assumed health
care cost trend rates would have the following effects:
-------------------------------------------------------------------------------
Increase Decrease
-------------------------------------------------------------------------------
Effect on total of service and interest cost
components $ 7,000 $ (6,000)
Effect on postretirement benefit obligation 101,000 (88,000)
-------------------------------------------------------------------------------
In 2002, the Plan was substantially curtailed. Eligibility was limited to
participants who were retired as of July 1, 1996 and active employees age 50
and over in 1996.
During 2002, the Company established an employee stock ownership plan
for the benefit of substantially all employees. Contributions to the plan are
at the discretion of the Board of Directors. The Company accrued $20,000 of
expense in 2003 related to the plan. No expense related to the plan was
recorded in 2002. Expense under the plan is measured based on the quoted market
prices of shares committed to be contributed to the plan. Under the plan, the
Company is obligated to repurchase shares allocated to employees at fair value.
At December 31, 2003, 1,350 shares had been contributed to the Plan, and the
fair value of the Company's shares was $18.33 per share on a post-split basis.
No shares had been contributed to the plan at December 31, 2002.
In December 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act includes
the following two new features to Medicare (Medicare Part D) that could affect
the measurement of the accumulated postretirement benefit obligation (APBO) and
net periodic postretirement benefit cost for the Plan:
A subsidy to plan sponsors that is based on 28% of an individual
beneficiary's annual prescription drug costs between $250 and $5,000
Page IV - 26
The opportunity for a retiree to obtain a prescription drug benefit under
Medicare
The effects of the Act on the APBO or net periodic postretirement benefit
cost are not reflected in the financial statements or accompanying notes.
Pending specific authoritative guidance on the accounting for the federal
subsidy could require the Company to change previously reported information
when the guidance is issued.
NOTE 12. Related Parties
The Company has granted loans to its officers and directors and related
borrowers in the normal course of business. Such loans aggregated $5,557,000
and $4,862,000 at December 31, 2003 and 2002, respectively. Included in the
2003 total are loans amounting to $3,080,000 to two of the Company's officers,
directors, and related entities which exceed 5% of total stockholders' equity.
Included in the 2002 total are loans amounting to $2,059,000 to two of the
Company's officers, directors and related entities which exceed 5% of total
stockholders' equity. Deposits from officers and directors and related entities
were $1,454,000 and $967,000 at December 31, 2003 and 2002, respectively.
A summary of loans to directors and executive officers, which in the
aggregate exceed $60,000, is as follows:
-----------------------------------------------------------------------
Balance at January 1, 2003 $3,895,000
New loans 2,219,000
Repayments (1,947,000)
=======================================================================
Balance at December 31, 2003 4,167,000
=======================================================================
NOTE 13. Financial Instruments
The Bank is a 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 extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contract or notional
amounts of those instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial institution for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk.
Page IV - 27
The estimated fair values of financial instruments were as follows:
-------------------------------------------------------------------------------
December 31, 2003 December 31, 2002
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------------------------------------------------------------------------------
Financial assets
Cash and cash equivalents $ 15,211,000 15,211,000 9,564,000 9,564,000
Securities available
for sale 32,940,000 32,940,000 30,154,000 30,154,000
Securities to be
held to maturity 480,000 483,000 545,000 548,000
Other investment securities 1,936,000 1,936,000 1,936,000 1,936,000
Loans held for sale 1,061,000 1,072,000 1,227,000 1,238,000
Loans receivable, net 159,138,000 158,241,000 147,306,000 146,806,000
Accrued interest receivable 1,252,000 1,252,000 1,196,000 1,196,000
Life insurance contracts 3,014,000 3,014,000 -- --
Mortgage servicing rights 454,000 614,000 238,000 275,000
-------------------------------------------------------------------------------
Financial liabilities
Deposits $(185,712,000)(186,566,000)(162,088,000)(162,980,000)
Securities sold under
agreements to repurchase (14,057,000) (14,057,000) (12,267,000) (12,267,000)
Other borrowed funds (2,550,000) (3,027,000) (5,355,000) (5,878,000)
Accrued interest payable (128,000) (128,000) (169,000) (169,000)
-------------------------------------------------------------------------------
A summary of the notional amounts of the Bank's financial instruments with
off-balance-sheet risk follows:
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Commitments to extend credit $17,486,000 17,558,000
Unadvanced portions of construction loans 10,528,000 4,576,000
Unadvanced commitments on lines of credit 9,764,000 10,933,000
Standby letters of credit 1,230,000 1,154,000
Overdraft protection accounts 2,042,000 1,848,000
-------------------------------------------------------------------------------
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation of the
borrower.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance by a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Page IV - 28
NOTE 14. Stock Compensation Plan
The following table sets forth the status of the plan as of December 31,
2003, 2002 and 2001, and changes during the years then ended:
-------------------------------------------------------------------------------
Weighted Average
Number of Shares Exercise Price
-------------------------------------------------------------------------------
Balance at December 31, 2000 -- $ --
Granted during the year 95,250 8.93
-------------------------------------------------------------------------------
Balance at December 31, 2001 95,250 8.93
Granted during the year 3,750 10.25
Exercised during the year (3,036) 8.93
-------------------------------------------------------------------------------
Balance at December 31, 2002 95,964 8.98
Granted during the year 42,450 15.02
Exercised during the year (5,256) 8.97
Forfeited during the year (4,500) 8.93
-------------------------------------------------------------------------------
Balance at December 31, 2003 128,658 $ 10.97
===============================================================================
The number and weighted average exercise price of exercisable options was
40,272 and $8.95 at December 31, 2003, and 20,778 and $8.93 at December 31,
2002. There were no exercisable options at December 31, 2001.
The following information applies to options outstanding at December 31,
2003:
-------------------------------------------------------------------------------
Weighted Average Number
Number Remaining of shares
Outstanding Contractual Life Exercisable
-------------------------------------------------------------------------------
Options outstanding
$8.93 82,647 7.5 39,522
$10.25 3,561 8.8 750
$15.02 42,450 9.8 --
-------------------------------------------------------------------------------
128,658 40,272
===============================================================================
Page IV - 29
NOTE 15. Earnings Per Share
The following tables provide detail for basic earnings per share and
diluted earnings per share for the years ended December 31, 2003, 2002 and
2001:
-------------------------------------------------------------------------------
Income Shares Per-Share
For the Year Ended December 31, 2003 (Numerator) (Denominator) Amount
-------------------------------------------------------------------------------
Net income as reported $ 2,019,000
-------------------------------------------------------------------------------
Basic EPS: Income available
to common shareholders $ 2,019,000 1,050,145 $ 1.92
Effect of dilutive securities:
incentive stock options 35,965
-------------------------------------------------------------------------------
Diluted EPS: Income available
to common shareholders
plus assumed conversions $ 2,019,000 1,086,110 $ 1.86
===============================================================================
-------------------------------------------------------------------------------
Income Shares Per-Share
For the Year Ended December 31, 2002 (Numerator) (Denominator) Amount
-------------------------------------------------------------------------------
Net income as reported $ 1,477,000
-------------------------------------------------------------------------------
Basic EPS: Income available
to common shareholders $ 1,477,000 1,052,618 $ 1.40
Effect of dilutive securities:
incentive stock options 22,762
-------------------------------------------------------------------------------
Diluted EPS: Income available
to common shareholders
plus assumed conversions $ 1,477,000 1,075,380 $ 1.37
===============================================================================
-------------------------------------------------------------------------------
Income Shares Per-Share
For the Year Ended December 31, 2001 (Numerator) (Denominator) Amount
-------------------------------------------------------------------------------
Net income as reported $ 1,290,000
-------------------------------------------------------------------------------
Basic EPS: Income available
to common shareholders $ 1,290,000 1,067,127 $ 1.21
Effect of dilutive securities:
incentive stock options 12,940
-------------------------------------------------------------------------------
Diluted EPS: Income available
to common shareholders
plus assumed conversions $ 1,290,000 1,080,067 $ 1.19
===============================================================================
All earnings per share calculations have been made using the weighted
average number of shares outstanding for each year. All 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 IV - 30
NOTE 16. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material adverse effect on the consolidated financial statements and the Bank's
business. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes as of December 31, 2003 that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table. No deduction was made from capital for interest-rate risk in 2003 or
2002. The Company's capital amounts and ratios do not differ materially from
those of the Bank.
-------------------------------------------------------------------------------
Minimum to be
Minimum well-capitalized
for capital under prompt
adequacy corrective action
Actual purposes provisions
-------------------------------------------------------------------------------
As of December 31, 2003
Tier 2 capital to $ 16,910,000 12,881,000 16,101,000
risk-weighted assets 10.5% 8.0% 10.0%
Tier 1 capital to 14,896,000 6,440,000 9,661,000
risk-weighted assets 9.3% 4.0% 6.0%
Tier 1 capital to 14,896,000 8,760,000 10,950,000
average assets 6.8% 4.0% 5.0%
-------------------------------------------------------------------------------
As of December 31, 2002
Tier 2 capital to $ 15,376,000 11,370,000 14,213,000
risk-weighted assets 10.8% 8.0% 10.0%
Tier 1 capital to 13,599,000 5,685,000 8,528,000
risk-weighted assets 9.6% 4.0% 6.0%
Tier 1 capital to 13,599,000 8,032,000 10,040,000
average assets 6.8% 4.0% 5.0%
-------------------------------------------------------------------------------
Page IV - 31
NOTE 17. Parent Company Financial Information
The following is summarized statement of financial condition information
for FNB Bankshares as of December 31, 2003 and 2002.
-------------------------------------------------------------------------------
December 31, 2003 2002
-------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 128,000 81,000
Investment in First National Bank of Bar Harbor 15,195,000 13,894,000
-------------------------------------------------------------------------------
$ 15,323,000 13,975,000
===============================================================================
Stockholders' equity
Common stock $ 900,000 900,000
Additional paid-in capital 357,000 55,000
Surplus 456,227 456,227
Retained earnings 14,513,773 12,984,773
Net unrealized gain on securities available
for sale 254,000 270,000
Less treasury stock (1,158,000) (691,000)
-------------------------------------------------------------------------------
$ 15,323,000 13,975,000
===============================================================================
FNB Bankshares had no material income or cash flow activity during 2003,
2002 or 2001 other than the income from investment in First National Bank of
Bar Harbor and the capital transactions described in the consolidated
statements of changes in stockholders' equity.
First National Bank of Bar Harbor paid dividends to FNB Bankshares
amounting to $489,704 in 2003, $386,439 in 2002, and $318,239 in 2001.
NOTE 18. Subsequent Event
On August 25, 2004, the Company entered into an agreement to merge into
First National Lincoln Corporation (FNLC). Each share of the Company is
expected to be converted into FNLC stock valued at $42.00. The merger is
expected to be completed during the first quarter of 2005.
Page IV - 32
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Shareholders and Board of Directors
FNB Bankshares and Subsidiary
We have reviewed the accompanying interim consolidated financial information of
FNB Bankshares and Subsidiary as of September 30, 2004 and 2003 and for the
three- and nine-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is to express an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with accounting principles generally accepted in the United States
of America.
Bangor, Maine
November 1, 2004
Page IV - 33
FNB BANKSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
------------------------------------------------------------------------------
(000 OMITTED except per share data Sept. 30, Sept. 30, Dec. 31,
and number of shares) 2004 2003 2003
------------------------------------------------------------------------------
Assets
Cash and due from banks $ 9,979 $ 8,698 $ 9,511
Overnight funds sold 10,200 18,500 5,700
------- ------- -------
Cash and cash equivalents 20,179 27,198 15,211
------- ------- -------
Investments:
Available for sale at market value 27,135 27,226 34,876
Held to maturity at cost
(market values $480 at 9/30/04,
$544 at 9/30/03 and
$483 at 12/31/03) 480 545 480
Loans held for sale
(fair value approximates cost) 316 3,747 1,061
Loans 183,212 156,228 161,127
Less: allowance for loan losses 2,143 1,902 1,989
------- ------- -------
Net loans 181,069 154,326 159,138
------- ------- -------
Accrued interest receivable 1,199 1,079 1,252
Premises and equipment at cost,
net of accumulated depreciation 4,742 3,229 3,396
Other assets 4,657 1,709 4,220
------- ------- -------
Total Assets $ 239,777 $ 219,059 $ 219,634
======= ======= =======
Page IV - 34
CONSOLIDATED BALANCE SHEETS, CONTINUED
-------------------------------------------------------------------------------
Sept. 30, Sept. 30, Dec. 31,
2004 2003 2003
-------------------------------------------------------------------------------
Liabilities
Demand deposits $ 33,585 $ 30,535 $ 30,243
NOW deposits 51,830 44,560 43,608
Money market deposits 19,746 18,454 18,388
Savings deposits 50,613 46,613 44,165
Certificates of deposit 40,156 40,102 39,171
Certificates $100,000 and over 11,170 9,413 10,137
------- ------- -------
Total deposits 207,100 189,677 185,712
------- ------- -------
Borrowed funds 14,011 12,372 16,607
Other liabilities 2,002 1,839 1,992
------- ------- -------
Total Liabilities 223,113 203,888 204,311
------- ------- -------
Shareholders' Equity
Common stock 848 900 900
Additional paid-in capital - 55 357
Surplus 456 456 456
Retained earnings 15,074 14,312 14,514
Net unrealized gain on
securities available for sale 286 128 254
Treasury stock - (680) (1,158)
------- ------- -------
Total Shareholders' Equity 16,664 15,171 15,323
------- ------- -------
Total Liabilities
& Shareholders' Equity $ 239,777 $ 219,059 $ 219,634
======= ======= =======
-------------------------------------------------------------------------------
Number of shares authorized 6,000,000 6,000,000 6,000,000
Number of shares issued 1,047,722 1,125,000 1,125,000
Number of shares outstanding 1,047,722 1,056,291 1,045,272
Book value per share $15.91 $14.36 $14.66
-------------------------------------------------------------------------------
Share and per share data have been adjusted to reflect the three-for-one stock
split, in the form of a 200% stock dividend, payable April 2, 2004, to
shareholders of record on March 22, 2004.
-------------------------------------------------------------------------------
See Independent Accountants' Review Report. The accompanying notes are an
integral part of these consolidated financial statements.
Page IV - 35
FNB BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
------------------------------------------------------------------------------
(000 OMITTED except per share data For the nine months ended September 30,
and number of shares) 2004 2003
------------------------------------------------------------------------------
Interest and dividend income
Interest and fees on loans $ 7,224 $ 7,114
Interest on Federal Funds Sold 7 25
Interest and dividends on investments 903 800
Total interest and dividend income 8,134 7,939
-------- --------
Interest expense
Interest on deposits 1,642 1,790
Interest on borrowed funds 202 246
-------- --------
Total interest expense 1,844 2,036
-------- --------
Net interest income 6,290 5,903
Provision for loan losses 180 270
-------- --------
Net interest income after provision for loan losses 6,110 5,633
-------- --------
Non-interest income:
Fiduciary income 487 365
Service charges on deposit accounts 672 420
Mortgage origination and servicing income 181 210
Other operating income 1,688 1,667
-------- --------
Total other operating income 3,028 2,662
-------- --------
Non-interest expense:
Salaries and employee benefits 3,112 2,930
Expenses of premises & fixed assets 844 791
Losses on sales of securities available for sale - 1
Other 2,811 2,477
-------- --------
Total other operating expenses 6,767 6,199
-------- --------
Income before income taxes 2,371 2,096
Applicable income taxes 602 575
-------- --------
NET INCOME $ 1,769 $ 1,521
======== ========
-----------------------------------------------------------------------------
Earnings per common share
Basic earnings per share $1.69 $1.44
Diluted earnings per share $1.62 $1.41
Cash dividends declared per share $0.46 $0.18
Weighted average number of shares outstanding 1,046,434 1,055,874
Incremental shares 46,532 21,626
Share and per share data have been adjusted to reflect the three-for-one stock
split, in the form of a 200% stock dividend, payable April 2, 2004, to
shareholders of record on March 22, 2004.
-----------------------------------------------------------------------------
See Independent Accountants' Review Report. The accompanying notes are an
integral part of these consolidated financial statements.
FNB BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
------------------------------------------------------------------------------
(000 OMITTED except per share data For the quarters ended September 30,
and number of shares) 2004 2003
------------------------------------------------------------------------------
Interest and dividend income
Interest and fees on loans $ 2,545 $ 2,338
Interest on Federal Funds Sold 5 22
Interest and dividends on investments 292 260
-------- --------
Total interest and dividend income 2,842 2,620
-------- --------
Interest expense
Interest on deposits 550 580
Interest on borrowed funds 46 60
-------- --------
Total interest expense 596 640
-------- --------
Net interest income 2,246 1,980
Provision for loan losses 60 90
-------- --------
Net interest income after provision for loan losses 2,186 1,890
-------- --------
Non-interest income:
Fiduciary income 163 136
Service charges on deposit accounts 171 151
Mortgage origination and servicing income 48 66
Other operating income 869 876
-------- --------
Total other operating income 1,251 1,229
-------- --------
Non-interest expense:
Salaries and employee benefits 1,053 984
Expenses of premises & fixed assets 305 251
Other 1,196 1,132
-------- --------
Total other operating expenses 2,554 2,367
-------- --------
Income before income taxes 883 752
Applicable income taxes 225 220
-------- --------
NET INCOME $ 658 $ 532
======== ========
-----------------------------------------------------------------------------
Earnings per common share
Basic earnings per share $0.63 $0.50
Diluted earnings per share $0.60 $0.49
Cash dividends declared per share $0.16 $0.14
Weighted average number of shares outstanding 1,047,233 1,056,307
Incremental shares 53,717 25,543
Share and per share data have been adjusted to reflect the three-for-one stock
split, in the form of a 200% stock dividend, payable April 2, 2004, to
shareholders of record on March 22, 2004.
-----------------------------------------------------------------------------
See Independent Accountants' Review Report. The accompanying notes are an
integral part of these consolidated financial statements.
Page IV - 37
FNB BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
----------------------------------------------------------------------------------------------
For the nine months ended September 30, 2004
----------------------------------------------------------------------------------------------
(000 omitted except for share data) Net
unrealized
gain Total
Number of Common Additional on securities share-
common stock & paid-in Retained available Treasury holders'
shares surplus capital earnings for sale stock equity
----------------------------------------------------------------------------------------------
Balance at
December 31,
2003 1,045,272 $1,356 $357 $14,514 $254 $(1,158) $15,323
--------- ------ ---- ------- ----- ------- -------
Net income - - - 1,769 - - 1,769
Net unrealized
gain on
securities
available for
sale - - - - 32 - 32
--------- ------ ---- ------- ----- ------- -------
Comprehensive
income - - - 1,769 32 - 1,801
Cash dividends
declared (482) (482)
Treasury stock
sales 2,450 11 (2) 2 - 11 22
Retirement of
treasury
stock - (63) (355) (729) - 1,147 -
--------- ------ ---- ------- ----- ------- -------
Balance
at September 30,
2004 1,047,722 $1,304 $ - $15,074 $286 $ - $16,664
========= ====== ==== ======= ===== ======= =======
----------------------------------------------------------------------------------------------
Page IV - 38
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, CONTINUED
----------------------------------------------------------------------------------------------
For the nine months ended September 30, 2003
----------------------------------------------------------------------------------------------
(000 omitted except for share data) Net
unrealized
gain Total
Number of Common Additional on securities share-
common stock & paid-in Retained available Treasury holders'
shares surplus capital earnings for sale stock equity
----------------------------------------------------------------------------------------------
Balance at
December 31,
2002 1,055,166 $1,356 $55 $12,985 $270 $(691) $13,975
--------- ------ ---- ------- ----- ------- -------
Net income - - - 1,521 - - 1,521
Net unrealized
loss on
securities
available for
sale - - - - (142) - (142)
--------- ------ ---- ------- ----- ------- -------
Comprehensive
income - - - 1,521 (142) - 1,379
Cash dividends
declared - - - (194) - - (194)
Treasury stock
sales/purchases 1,125 - - - - 11 11
--------- ------ ---- ------- ----- ------- -------
Balance
at September 30,
2003 1,056,291 $1,356 $55 $14,312 $128 $(680) $15,171
========= ====== ==== ======= ===== ======= =======
----------------------------------------------------------------------------------------------
Share and per share data have been adjusted to reflect the three-for-one stock
split, in the form of a 200% stock dividend, payable April 2, 2004, to
shareholders of record on March 22, 2004.
See Independent Accountants' Review Report. The accompanying notes are an
integral part of these consolidated financial statements.
Page IV - 39
FNB BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-------------------------------------------------------------------------------
For the nine months ended September 30,
(000 omitted) 2004 2003
-------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 1,769 $ 1,521
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 318 285
Provision for loan losses 180 270
Net change in loans held for sale 745 (2,520)
Net increase in other assets and accrued interest (384) (1,081)
Net (decrease)/increase in other liabilities (158) 110
Net amortization of
premiums on investments 130 326
Net cash provided (used) by operating activities 2,600 (1,089)
------ ------
Cash flows from investing activities
Proceeds from maturities, payments and calls of
securities available for sale 9,616 47,849
Purchases of securities available for sale (1,973) (43,453)
Net increase in loans (22,111) (7,290)
Capital expenditures (1,664) (539)
------ ------
Net cash used by
investing activities (16,132) (3,433)
------ ------
Cash flows from financing activities
Net increase in demand deposits,
savings, money market and club accounts 19,370 27,517
Net increase in
certificates of deposit 2,018 72
Repayment on long-term borrowings - (289)
Net decrease in short-term borrowings (2,596) (4,961)
Payment to repurchase common stock - (2)
Proceeds from sale of treasury stock 22 13
Dividends paid (314) (194)
------ ------
Net cash provided by financing activities 18,500 22,156
------ ------
Page IV - 40
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
-------------------------------------------------------------------------------
For the nine months ended September 30,
2004 2003
-------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,968 17,634
Cash and cash equivalents at beginning of period 15,211 9,564
------ ------
Cash and cash equivalents at end of period $20,179 $27,198
====== ======
-------------------------------------------------------------------------------
Interest paid $ 1,783 $ 2,005
Income taxes paid 491 636
Dividends declared and payable at end of period 168 0
-------------------------------------------------------------------------------
See Independent Accountants' Review Report. The accompanying notes are an
integral part of these consolidated financial statements.
Page IV - 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
FNB Bankshares (the "Company") is a financial holding company that owns
all of the common stock of The First National Bank of Bar Harbor (the
"Bank"). The accompanying unaudited consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. All significant intercompany
transactions and balances are eliminated in consolidation. The income reported
for the 2004 period is not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report for the year ended December 31, 2003.
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," requires a company to
disclose certain income statement and balance sheet information by operating
segment. Since the Company's operations include only its banking and financing
activities, no additional disclosures are required by the Statement.
NOTE 2 - COMMON STOCK
On March 16, 2004, the Company's Board of Directors declared a three-for-
one split of the Company's common stock payable in the form of a 200% stock
dividend to shareholders of record on March 22, 2004, with a payment date of
April 2, 2004. All share and per share data included in the consolidated
financial statements and elsewhere in this report have been restated to reflect
the stock split.
A summary of the status of the Company's Stock Option Plan as of September
30, 2004, and changes during the nine months then ended, is presented below.
-------------------------------------------------------------------------------
Number of Weighted Average
Shares Exercise Price
-------------------------------------------------------------------------------
Balance at December 31, 2003 128,658 $10.97
Granted during the period 0 0
Exercised during the period (2,450) 8.93
------- ------
Balance at September 30, 2004 126,208 $11.01
======= ======
-------------------------------------------------------------------------------
Page IV - 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the nine months ended September 30, 2004 and 2003:
-----------------------------------------------------------------------------
For the nine months ended September 30, 2004
-----------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------------------------------------
Net income as reported $ 1,769,000
---------
Basic EPS: Income available
to common shareholders $ 1,769,000 1,046,434 $ 1.69
Effect of dilutive securities:
incentive stock options 46,532
--------- --------- ------
Diluted EPS: Income available
to common shareholders plus
assumed conversions $ 1,769,000 1,092,966 $ 1.62
========= ========= ======
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
For the nine months ended September 30, 2003
-----------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------------------------------------
Net income as reported $ 1,521,000
-------
Basic EPS: Income available
to common shareholders $ 1,521,000 1,055,874 $ 1.44
Effect of dilutive securities:
incentive stock options 21,626
------- --------- ------
Diluted EPS: Income available
to common shareholders plus
assumed conversions $ 1,521,000 1,077,500 $ 1.41
========= ========= ======
-----------------------------------------------------------------------------
All earnings per share calculations have been made using the weighted
average number of shares outstanding during the period. 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 the end
of each period.
Page IV - 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended September 30, 2004 and 2003:
-----------------------------------------------------------------------------
For the three months ended September 30, 2004
-----------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------------------------------------
Net income as reported $ 658,000
-------
Basic EPS: Income available
to common shareholders $ 658,000 1,047,233 $ 0.63
Effect of dilutive securities:
incentive stock options 53,717
------- --------- ------
Diluted EPS: Income available
to common shareholders plus
assumed conversions $ 658,000 1,100,950 $ 0.60
======= ========= ======
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
For the three months ended September 30, 2003
-----------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------------------------------------
Net income as reported $ 532,000
-------
Basic EPS: Income available
to common shareholders $ 532,000 1,056,307 $ 0.50
Effect of dilutive securities:
incentive stock options 25,543
------- --------- ------
Diluted EPS: Income available
to common shareholders plus
assumed conversions $ 532,000 1,081,850 $ 0.49
-----------------------------------------------------------------------------
All earnings per share calculations have been made using the weighted
average number of shares outstanding during the period. 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 the end
of each period.
Page IV - 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4 - TREASURY STOCK
A revision to the Maine Business Corporation Act provides that stock
reacquired by a corporation be classified as "authorized but unissued", which
eliminates the concept of treasury stock.
In order to recognize the effect of the revision, the Company retired its
treasury stock as of June 30, 2004 in accordance with the new statute. The
78,403 shares so retired are available for reissuance as authorized, but
unissued, shares.
NOTE 5 - POST RETIREMENT BENEFIT PLANS
The Company provides certain life insurance and health insurance benefits
on an unfunded basis for retired employees. In 2002, the Plan was substantially
curtailed. Eligibility was limited to participants who were retired as of July
1, 1996 and active employees age 50 and over in 1996.
In December 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act includes
the following two new features to Medicare (Medicare Part D) that could affect
the measurement of the accumulated postretirement benefit obligation (APBO) and
net periodic postretirement benefit cost for the Plan: a subsidy to plan
sponsors that is based on 28% of an individual beneficiary's annual
prescription drug costs between $250 and $5,000 and the opportunity for a
retiree to obtain a prescription drug benefit under Medicare. The effects of
the Act on the APBO or net periodic postretirement benefit cost are not
reflected in the financial statements or accompanying notes. Pending specific
authoritative guidance on the accounting for the federal subsidy could require
the Company to change previously reported information when the guidance is
issued. The following tables set forth the net periodic pension cost:
Components of the net periodic benefit cost of this plan were as follows:
------------------------------------------------------------------------------
For the nine months For the three months
ended Sept. 30, ended Sept. 30,
In thousands of dollars 2004 2003 2004 2003
------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 7 $ 7 $ 2 $ 2
Interest cost 63 68 21 23
Net amortization 12 12 4 4
--- --- --- ---
Net periodic benefit cost $82 $87 $27 $29
=== === === ===
------------------------------------------------------------------------------
A weighted average discount rate of 6.25% and 6.75% was used in 2004 and
2003, respectively, in determining both the accumulated benefit obligation and
the net benefit cost. The measurement date for benefit obligations was as of
year-end for both years presented. The estimated amount of related benefit
expense in 2004 is $105,000.
Page IV - 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
During 2002, the Company established an employee stock ownership plan for
the benefit of substantially all employees. Contributions to the plan are at
the discretion of the Board of Directors. The Company accrued $20,000 of
expense in 2003 related to the plan. No expense related to the plan was
recorded in 2002. Expense under the plan is measured based on the quoted market
prices of shares committed to be contributed to the plan. Under the plan, the
Company is obligated to repurchase shares allocated to employees at fair value.
At December 31, 2003, 1,350 shares had been contributed to the Plan, and the
fair value of the Company's shares was $18.33 per share on a post-split basis.
No shares had been contributed to the plan at December 31, 2002 and no shares
had been contributed to the plan during the first nine months of 2004.
On October 12, 2004, the Company's Board of Directors voted to terminate the
plan effective as of the date of consummation of the merger disclosed in Note
7.
NOTE 6 - RECENT ACCOUNTING DEVELOPMENTS
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) No. 106-2. The FSP supersedes FSP No. 106-1, which was
issued to address the accounting impact of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act). The Act includes a
prescription drug benefit under Medicare Part D and a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D.
FSP No. 106-2 applies only to sponsors of single-employer plans for which
(1) the employer concludes that prescription drug benefits under the plan are
actuarially equivalent to Medicare Part D and thus qualify for the subsidy, and
(2) the expected amount of the subsidy will offset or reduce the employer-
sponsor's share of the plan's prescription drug coverage. The FSP provides
accounting guidance and required disclosures. For public companies, the FSP is
effective for the first interim or annual period beginning after June 15, 2004.
Management has not determined the effect of FSP 106-2 on the Company's
Consolidated Financial Statements as it has not been able to determine if the
Company's plan is actuarially equivalent.
NOTE 7 - MERGER
On August 25, 2004, the Company entered into an agreement to merge into
First National Lincoln Corporation (FNLC). Each share of the Company is
expected to be converted into FNLC stock valued at $42.00. The merger is
expected to be completed during the first quarter of 2005.
Page IV - 46
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Under Sections 857 et. seq. of the Maine Business Corporation Act, and
except to the extent broader indemnification is authorized by a corporation's
articles of incorporation, a corporation generally may indemnify an individual
who is a party to a proceeding because that individual is a director of the
corporation against liability incurred in the proceeding if the individual's
conduct was in good faith and the individual reasonably believed (i) in the
case of conduct in the individual's capacity as director, that the individual's
conduct was in the best interests of the corporation (or participants in an
employee benefit plan of the corporation with respect to service thereto); (ii)
in all other cases, that the individual's conduct was at least not opposed to
the best interests of the corporation; and (iii) in the case of any criminal
proceeding, the individual had no reasonable cause to believe the individual's
conduct was unlawful. Unless ordered by a court to do so, however, a
corporation may not indemnify one of its directors (1) in connection with a
proceeding by or in the right of the corporation, except for reasonable
expenses incurred in connection with the proceeding if it is determined that
the director has met the relevant standard of conduct set forth above; or (2)
in connection with any proceeding with respect to conduct for which the
director was adjudged liable on the basis that the director received a
financial benefit to which the director was not entitled, whether or not
involving action in the director's official capacity. Under the Maine Business
Corporation Act, a corporation shall indemnify a director who was wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the director was a party because the director was a director of the
corporation against reasonable expenses incurred by the director in connection
with the proceeding. Under the Maine Business Corporation Act, a corporation
generally may indemnify and advance expenses to an officer of the corporation
who is a party to a proceeding because that officer is an officer of the
corporation to the same extent as a director and, in the case of an officer who
is not a director, to such further extent as may be provided the corporation's
articles of incorporation, bylaws, a resolution of the corporation's Board of
Directors or a contract, except no indemnification may be made to such a person
for (1) liability in connection with a proceeding by or in the right of the
corporation other than for reasonable expenses incurred in connection with the
proceeding or (2) liability arising out of conduct that constitutes (i) receipt
by the officer of a financial benefit to which the officer is not entitled;
(ii) an intentional infliction of harm on the corporation or its shareholders;
or (iii) an intentional violation of criminal law.
Page 132
FNLC's bylaws provide that FNLC shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that he or she is or
was a director, officer, employee or agent of FNLC, or is or was serving at the
request of FNLC as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding; provided that no indemnification shall be
provided for any person with respect to any matter as to which he or she shall
have been finally adjudicated in any action, suit or proceeding not to have
acted in the reasonable belief that his or her action was in the best interests
of FNLC or, with respect to any criminal action or proceeding, had reasonable
cause to believe that his or her conduct was unlawful.
FNLC's bylaws provide that FNLC shall pay the expenses incurred by an
indemnified person in advance of a final disposition of an action or proceeding
upon (1) authorization by the Board of Directors in the manner provided in the
bylaws, and (2) receipt by FNLC of a written undertaking by or on behalf of the
indemnified person to repay such amount if the indemnified person is ultimately
determined not to be entitled to indemnification under the bylaws.
In addition, FNLC carries a liability insurance policy for its directors
and officers.
Page 133
Item 21. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits:
-------------------------------------------------------------------------------
Exhibit Exhibit Location
No.
-------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of August 25, (1)
2004 between FNLC and FNB
2.2 Form of Shareholder Agreement, dated as of August 25, (1)
2004 between FNLC and certain directors of FNB
3.1 Conformed Articles of Incorporation of FNLC (2)
3.2 Conformed Bylaws of FNLC (2)
4.1 Specimen Common Stock certificate (3)
5 Opinion of Verrill Dana, LLP regarding legality of
securities being registered (3)
8 Opinion of Verrill Dana, LLP regarding certain
federal income tax consequences (3)
23.1 Consent of Verrill Dana, LLP (contained in the
opinions included
as Exhibits 5 and 8)
23.2 Consent of Berry, Dunn, McNeil & Parker, LLC,
independent certified public accountants for FNLC (filed herewith)
23.3 Consent of Berry, Dunn, McNeil & Parker, LLC,
independent certified public accountants for FNB (filed herewith)
24 Powers of Attorney (3)
99.1 Form of proxy for the FNLC special meeting (3)
99.2 Form of proxy for the FNB special meeting (3)
99.3 Solicitation materials to be provided to
certain participants in FNB's ESOP (3)
99.4 Consent of Tony C. McKim (3)
99.5 Consent of Mark N. Rosborough (3)
-------------------------------------------------------------------------------
(1) Exhibit is included in Annex I to the Prospectus/Proxy Statement included
herein.
(2) Incorporated by reference to Current Report of Form 8-K filed by FNLC
with the SEC on October 7, 2004.
(3) Previously filed
(b) Financial Statement Schedules.
No financial statement schedules are filed because the required information is
not applicable or is included in the consolidated financial statements or
related notes.
Page 134
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
Page 135
(d) The undersigned registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (c) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
Page 136
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Pre-effective Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Damariscotta, State of Maine, on this 22nd day of November 2004.
FIRST NATIONAL LINCOLN CORPORATION
/s/ Daniel R. Daigneault
________________________________________
By: Daniel R. Daigneault
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Pre-effective
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
/s/ Malcolm E. Blanchard
_________________________________ Date: November 22, 2004
Malcolm E. Blanchard
Director
/s/ Katherine M. Boyd
_________________________________ Date: November 22, 2004
Katherine M. Boyd
Director
/s/ Daniel R. Daigneault
_________________________________ Date: November 22, 2004
Daniel R. Daigneault
Director, President & Chief Executive Officer
(principal executive officer)
/s/ Dana L. Dow
_________________________________ Date: November 22, 2004
Dana L. Dow
Director
/s/ Robert B. Gregory
_________________________________ Date: November 22, 2004
Robert B. Gregory
Director
Page 137
/s/ Randy A. Nelson
_________________________________ Date: November 22, 2004
Randy A. Nelson
Director
/s/ Carl S. Poole, Jr.
_________________________________ Date: November 22, 2004
Carl S. Poole, Jr.
Director
/s/ Stuart G. Smith
_________________________________ Date: November 22, 2004
Stuart G. Smith
Director
/s/ David B. Soule, Jr.
_________________________________ Date: November 22, 2004
David B. Soule, Jr.
Director
/s/ Bruce B. Tindal
_________________________________ Date: November 22, 2004
Bruce B. Tindal
Director
/s/ F. Stephen Ward
_________________________________ Date: November 22, 2004
F. Stephen Ward
Treasurer & Chief Financial Officer
(principal financial and accounting officer)
Page 138
Exhibit Index
-------------------------------------------------------------------------------
Exhibit Exhibit Location
No.
-------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of August 25, 2004 (1)
between FNLC and FNB
2.2 Form of Shareholder Agreement, dated as of August 25, 2004 (1)
between FNLC and certain directors of FNB
3.1 Conformed Articles of Incorporation of FNLC (2)
3.2 Conformed Bylaws of FNLC (2)
4.1 Specimen Common Stock certificate (5)
5 Opinion of Verrill Dana, LLP regarding legality of (5)
securities being registered
8 Opinion of Verrill Dana, LLP regarding certain (5)
federal income tax consequences
23.1 Consent of Verrill Dana, LLP (4)
23.2 Consent of Berry, Dunn, McNeil & Parker, LLC, (3)
independent certified public accountants for FNLC
23.3 Consent of Berry, Dunn, McNeil & Parker, LLC, (3)
independent certified public accountants for FNB
24 Powers of Attorney (5)
99.1 Form of proxy for the FNLC special meeting (5)
99.2 Form of proxy for the FNB special meeting (5)
99.3 Solicitation materials to be provided to certain (5)
participants in FNB's ESOP
99.4 Consent of Tony C. McKim (5)
99.5 Consent of Mark N. Rosborough (5)
-------------------------------------------------------------------------------
(1) Included in Annex I to the Prospectus/Proxy statement and incorporated
herein by reference
(2) Incorporated by reference to Current Report on Form 8-K filed by FNLC with
the SEC on October 7, 2004.
(3) Filed herewith.
(4) Contained in the opinions included as Exhibits 5 and 8.
(5) Previously filed.
Page 139