UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: Commission File No. March 31, 2003 0-26589 FIRST NATIONAL LINCOLN CORPORATION (Exact name of registrant as specified in its charter) MAINE 01-0404322 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No) MAIN STREET, DAMARISCOTTA, MAINE 04543 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (207) 563 - 3195 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No[ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 7, 2003 Common Stock, Par One Cent 2,420,748 FIRST NATIONAL LINCOLN CORPORATION INDEX PART 1 Financial Information (Unaudited) Page No. Item 1: Selected Financial Data .................................... 1 Independent Accountants' Review Report ..................... 2 Financial Statements Consolidated Balance Sheets - March 31, 2003, March 31, 2002 and December 31, 2002 3 - 4 Consolidated Statements of Income - for the three months ended March 31, 2003 and March 31, 2002 .................. 5 Consolidated Statements of Changes in Shareholders' Equity - for the three months ended March 31, 2003 and March 31, 2002 6 - 7 Consolidated Statements of Cash Flows - for the three months ended March 31, 2003 and March 31, 2002 .................. 8 - 9 Notes to Financial Statements - for the three months ended March 31, 2003 and March 31, 2002 10 - 13 Item 2: Management's discussion and analysis of financial condition and results of operations .......... 14 - 21 Item 3: Quantitative and qualitative disclosures about market risk ...................................... 22 - 24 Item 4: Controls and Procedures ................................ 25 PART II Other Information Item 1: Legal Proceedings ...................................... 26 Item 2: Changes in Securities .................................. 27 Item 3: Defaults Upon Senior Securities ........................ 28 Item 4: Submission of Matters to a Vote of Security Holders .... 29 Item 5: Other Information ...................................... 30 Item 6: Exhibits and reports on Form 8-K ....................... 31 Signatures .......................................................... 32 Certifications ...................................................... 33 - 34 PART I. ITEM 1. FINANCIAL STATEMENTS FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY SELECTED FINANCIAL DATA (Unaudited) - ------------------------------------------------------------------------------ For the three months ended Dollars in thousands, March 31, except for per share amounts 2003 2002 - ------------------------------------------------------------------------------ Summary of Operations Operating Income $ 8,091 $ 8,073 Operating Expense 5,751 6,021 Net Interest Income 4,100 4,162 Provision for Loan Losses 225 410 Net Income 1,679 1,473 - ------------------------------------------------------------------------------ Per Common Share Data Basic Earnings per Share $ 0.69 $ 0.62 Diluted Earnings per Share 0.68 0.60 Cash Dividends Declared 0.27 0.23 Book Value 18.16 15.92 Market Value 33.95 28.15 - ------------------------------------------------------------------------------ Financial Ratios Return on Average Equity (a) 15.77% 15.76% Return on Average Assets (a) 1.36% 1.37% Average Equity to Average Assets 8.59% 8.67% Net Interest Margin Tax-Equivalent (a) 3.66% 4.23% Dividend Payout Ratio 39.13% 37.10% Allowance for Loan Losses/Total Loans 1.10% 1.06% Non-Performing Loans to Total Loans 0.34% 0.56% Non-Performing Assets to Total Assets 0.25% 0.48% Efficiency Ratio 49.42% 49.69% - ------------------------------------------------------------------------------ At Period End Total Assets $ 504,088 $ 436,719 Total Loans 346,095 304,726 Total Investment Securities 128,667 107,200 Total Deposits 340,377 276,397 Total Shareholders' Equity 43,952 38,135 - ------------------------------------------------------------------------------ (a) Quarterly data annualized using a 365-day basis - ------------------------------------------------------------------------------ Page 1 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Shareholders First National Lincoln Corporation We have reviewed the accompanying interim consolidated financial information of First National Lincoln Corporation and Subsidiary as of March 31, 2003 and 2002, and for the three-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. 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 U.S. generally accepted auditing standards, 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 U.S. generally accepted accounting principles. Berry, Dunn, McNeil & Parker Portland, Maine May 7, 2003 Page 2 FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------ March 31, March 31, December 31, (000 OMITTED except number of shares) 2003 2002 2002 (unaudited) (unaudited) (unaudited) - ------------------------------------------------------------------------------ Assets Cash and due from banks $ 10,146 $ 7,829 $ 14,181 Overnight funds sold 3,800 - 9,325 ------- ------- ------- Cash and cash equivalents 13,946 7,829 23,506 ------- ------- ------- Investments: Available for sale 63,652 49,364 56,410 Held to maturity (market values $66,771 at 3/31/03, $56,141 at 3/31/02 and $67,421 at 12/31/02) 65,015 57,836 65,663 Loans held for sale (fair value approximates cost) 1,535 2,138 2,613 Loans 346,095 304,726 332,074 Less: allowance for loan losses 3,809 3,227 3,700 ------- ------- ------- Net loans 342,286 301,499 328,374 ------- ------- ------- Accrued interest receivable 3,051 2,821 2,642 Bank premises and equipment, net 7,657 7,784 7,833 Other real estate owned 75 200 255 Other assets 6,871 7,248 6,772 ------- ------- ------- Total Assets $ 504,088 $ 436,719 $ 494,068 ======= ======= ======= Page 3 BALANCE SHEETS CONT. - ------------------------------------------------------------------------------ March 31, March 31, December 31, 2003 2002 2002 - ------------------------------------------------------------------------------ Liabilities & Shareholders' Equity Demand deposits $ 23,501 $ 20,601 $ 25,484 NOW deposits 46,736 42,363 46,989 Money market deposits 91,611 24,429 80,805 Savings deposits 60,116 48,996 59,521 Certificates of deposit 69,110 82,366 71,169 Certificates $100,000 and over 49,303 57,642 50,256 ------- ------- ------- Total deposits 340,377 276,397 334,224 ------- ------- ------- Borrowed funds 115,151 118,763 113,365 Other liabilities 4,608 3,424 3,784 ------- ------- ------- Total Liabilities 460,136 398,584 451,373 ------- ------- ------- Shareholders' Equity: Common stock 25 25 25 Additional paid-in capital 4,687 4,687 4,687 Retained earnings 39,348 34,953 38,322 Net unrealized gains on available-for-sale securities 2,339 658 2,170 Treasury stock (2,447) (2,188) (2,509) ------- ------- ------- Total Shareholders' Equity 43,952 38,135 42,695 ------- ------- ------- Total Liabilities & Shareholders' Equity $ 504,088 $ 436,719 $ 494,068 ======= ======= ======= - ----------------------------------------------------------------------------- Number of shares authorized 6,000,000 6,000,000 6,000,000 Number of shares issued 2,481,270 2,481,270 2,481,270 Number of shares outstanding 2,419,763 2,394,679 2,414,693 Book value per share $18.16 $15.92 $17.68 - -------------------------------------------------------------------------- See Independent Accountants' Review Report. The accompanying notes are an integral part of these consolidated financial statements. Page 4 FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------ For the three months ended March 31, (000s OMITTED except per share data 2003 2002 and number of shares) (Unaudited) (Unaudited) - ------------------------------------------------------------------------------ Interest and dividend income: Interest and fees on loans $ 5,265 $ 5,474 Interest on deposits with other banks 43 5 Interest and dividends on investments 1,560 1,675 ----- ----- Total interest and dividend income 6,868 7,154 ----- ----- Interest expense: Interest on deposits 1,704 1,900 Interest on borrowed funds 1,064 1,092 ----- ----- Total interest expense 2,768 2,992 ----- ----- Net interest income 4,100 4,162 Provision for loan losses 225 410 ----- ----- Net interest income after provision for loan losses 3,875 3,752 ----- ----- Other operating income: Fiduciary income 189 185 Service charges on deposit accounts 267 220 Other operating income 767 514 ----- ----- Total other operating income 1,223 919 ----- ----- Other operating expenses: Salaries and employee benefits 1,412 1,357 Occupancy expense 192 186 Furniture and equipment expense 358 310 Other 796 766 ----- ----- Total other operating expenses 2,758 2,619 ----- ----- Income before income taxes 2,340 2,052 Applicable income taxes 661 579 ----- ----- NET INCOME $ 1,679 $ 1,473 ===== ===== - ----------------------------------------------------------------------------- Earnings per common share: Basic earnings per share $0.69 $0.62 Diluted earnings per share $0.68 $0.60 Cash dividends declared per share $0.27 $0.23 Weighted average number of shares outstanding 2,418,773 2,393,310 Incremental Shares 61,765 81,023 - ----------------------------------------------------------------------------- See Independent Accountants' Review Report. The accompanying notes are an integral part of these consolidated financial statements. Page 5 FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) <table> <caption> - ---------------------------------------------------------------------------------------------- Three months ended March 31, 2002 - ---------------------------------------------------------------------------------------------- (000 omitted except for share data) Net unrealized gain Total Number of Additional on securities share- common Common paid-in Retained available Treasury holders' shares stock capital earnings for sale stock equity <s> <c> <c> <c> <c> <c> <c> <c> - ---------------------------------------------------------------------------------------------- Balance at December 31, 2001 2,391,375 $25 $4,687 $34,030 $ 784 $(2,192) $37,334 --------- --- ------ ------- ------ ------- ------- Net income - - - 1,473 - - 1,473 Net change in unrealized loss on securities available for sale, net of taxes of ($65) - - - - (126) - (126) --------- --- ------ ------- ------ ------- ------- Comprehensive income - - - 1,473 (126) - 1,347 Cash dividends declared - - - (550) - - (550) Treasury stock purchases (4,086) - - - - (115) (115) Treasury stock sales 7,390 - - - - 119 119 --------- --- ------ ------- ------ ------- ------- Balance at March 31, 2002 2,394,679 $25 $4,687 $34,953 $ 658 $(2,188) $38,135 ========= === ====== ======= ====== ======= ======= - ---------------------------------------------------------------------------------------------- Page 6 CHANGES IN SHAREHOLDERS' EQUITY CONT. - ---------------------------------------------------------------------------------------------- Three months ended March 31, 2003 - ---------------------------------------------------------------------------------------------- (000 omitted except for share data) Net unrealized gain Total Number of Additional on securities share- common Common paid-in Retained available Treasury holders' shares stock capital earnings for sale stock equity - ---------------------------------------------------------------------------------------------- Balance at December 31, 2002 2,414,693 $25 $4,687 $38,322 $2,170 $(2,509) $42,695 --------- --- ------ ------- ----- ------- ------- Net income - - - 1,679 - - 1,679 Net change in unrealized gain on securities available for sale, net of tax expense of $87 - - - - 169 - 169 --------- --- ------ ------ ------ ------- ------- Comprehensive income - - - 1,679 169 - 1,848 Cash dividends declared - - - (653) - - (653) Treasury stock purchases (2,200) - - - - (73) (73) Treasury stock sales 7,270 - - - - 135 135 --------- --- ------ ------- ------ ------- -------- Balance at March 31, 2003 2,419,763 $25 $4,687 $39,348 $2,339 $(2,447) $43,952 ========= === ====== ======= ====== ======= ======= - ---------------------------------------------------------------------------------------------- See Independent Accountants' Review Report. The accompanying notes are an integral part of these consolidated financial statements. </table> Page 7 FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- For the three months ended March 31, (000 omitted) 2003 2002 (Unaudited) (Unaudited) - ------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 1,679 1,473 Adjustments to reconcile net income to net cash provided(used) by operating activities: Depreciation 249 229 Provision for loan losses 225 410 Loans originated for resale (15,663) (11,835) Proceeds from sales and transfers of loans 16,741 10,163 Net gain on sale of other real estate owned (24) 0 Net change in other assets and accrued interest (508) (1,218) Net change in other liabilities 712 403 Net amortization (accretion) of premiums (discounts) on investments 11 (183) ------ ------ Net cash provided(used) by operating activities 3,422 (558) ------ ------ Cash flows from investing activities: Proceeds from maturities, payments and calls of securities available for sale 1,019 1,380 Proceeds from maturities, payments and calls of securities to be held to maturity 12,662 5,051 Proceeds from sales of other real estate owned 204 2 Purchases of securities available for sale (8,000) 0 Purchases of securities to be held to maturity (12,030) (5,453) Net increase in loans (14,137) (3,605) Capital expenditures (73) (450) ------ ------ Net cash used in investing activities (20,355) (3,075) ------ ------ Cash flows from financing activities: Net increase in demand deposits, savings, money market and club accounts 9,165 7,516 Net increase (decrease) in certificates of deposit (3,012) 6,192 Advances on long-term borrowings 5,000 8,000 Net decrease in short-term borrowings (3,214) (20,594) Payment to repurchase common stock (73) (115) Proceeds from sale of treasury stock 135 119 Dividends paid (628) (550) ------ ------ Net cash provided by financing activities 7,373 568 ------ ------ Page 8 STATEMENTS OF CASH FLOWS CONT. - ------------------------------------------------------------------------------- 2003 2002 (Unaudited) (Unaudited) - ------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (9,560) (3,065) Cash and cash equivalents at beginning of period 23,506 10,894 ------ ------ Cash and cash equivalents at end of period $13,946 7,829 ====== ====== - ------------------------------------------------------------------------------- Interest paid $ 2,909 $ 3,076 Non-cash transactions: Change in net unrealized gain on available for sale securities 256 (191) - ------------------------------------------------------------------------------ See Independent Accountants' Review Report. The accompanying notes are an integral part of these consolidated financial statements. Page 9 NOTES TO FINANCIAL STATEMENTS NOTE 1 - STOCK OPTIONS First National Lincoln Corporation (the Company) established a stock option plan in 1995. Under the plan, the Company may grant options to its employees for up to 200,000 shares of common stock. Only incentive stock options may be granted under the plan. The option price of each option grant is determined by the Options Committee of the Board of Directors, and in no instance shall be less than the fair market value on the date of the grant. An option's maximum term is ten years from the date of grant. The Company applies Accounting Principles Board Opinion No.25 and related interpretations in accounting for the stock option plan. Accordingly, no compensation cost has been recognized. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation. - ------------------------------------------------------------------------------- In thousands, except for per share data 2003 2002 - ------------------------------------------------------------------------------- Net income As reported $ 1,679 1,473 Value of option grants, net of tax - 60 ----- ----- Pro forma 1,679 1,413 ===== ===== Basic earnings per share As reported 0.69 0.62 Value of option grants, net of tax - 0.03 ----- ----- Pro forma 0.69 0.59 ===== ===== Diluted earnings per share As reported 0.68 0.60 Value of option grants, net of tax - 0.03 ----- ----- Pro forma 0.68 0.57 ===== ===== - ------------------------------------------------------------------------------- No options were granted in 2003. The fair market value of options granted in 2002, net of tax, was $60,000, with a weighted average fair market value of options granted of $8.32. The fair market value is estimated using the Black- Scholes option pricing model and the following assumptions: quarterly dividends of $0.22, risk-free interest rate of 1.59%, volatility of 37.73%, and an expected life of 10 years. Page 10 NOTES CONT. A summary of the status of the Company's Stock Option Plan as of March 31, 2003, and changes during the three months then ended, is presented below. - ------------------------------------------------------------------------------- Number of Weighted Average Shares Exercise Price - ------------------------------------------------------------------------------- Balance at December 31, 2002 104,800 9.84 Granted during the period 0 0 Exercised during the period (4,100) 6.79 ------- ----- Balance at March 31, 2003 100,700 9.96 ======= ===== - ------------------------------------------------------------------------------- NOTE 2 - BASIS OF PRESENTATION First National Lincoln Corporation is a financial holding company that owns all of the common stock of The First National Bank of Damariscotta (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 2003 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2002. NOTE 3 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2003 and 2002: - ----------------------------------------------------------------------------- For the three months ended March 31, 2003 - ----------------------------------------------------------------------------- In thousands, except for number of Income Shares Per-Share shares and per share data (Numerator) (Denominator) Amount - ----------------------------------------------------------------------------- Net income as reported $ 1,679 ----- Basic EPS: Income available to common shareholders $ 1,679 2,418,773 $ 0.69 Effect of dilutive securities: incentive stock options 61,765 ----- --------- ---- Diluted EPS: Income available to common shareholders plus assumed conversions $ 1,679 2,480,538 $ 0.68 ===== ========= ==== - ----------------------------------------------------------------------------- Page 11 NOTES CONT. - ----------------------------------------------------------------------------- For the three months ended March 31, 2002 - ----------------------------------------------------------------------------- In thousands, except for number of Income Shares Per-Share shares and per share data (Numerator) (Denominator) Amount - ----------------------------------------------------------------------------- Net income as reported $ 1,473 ----- Basic EPS: Income available to common shareholders $ 1,473 2,393,310 $ 0.62 Effect of dilutive securities: incentive stock options 81,023 ----- --------- ---- Diluted EPS: Income available to common shareholders plus assumed conversions $ 1,473 2,474,333 $ 0.60 ===== ========= ==== - ----------------------------------------------------------------------------- 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 each year end. Page 12 NOTES CONT. NOTE 4 - RECENT ACCOUNTING DEVELOPMENTS Financial Accounting Standards Board (FASB) Interpretation Number 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (FIN 45), was issued in November 2002. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year- end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. Financial and standby letters of credit are included in the scope of FIN 45, while commercial letters of credit are not. A guarantor of financial and standby letters of credit is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation contains disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation does not have a material effect on the Company's consolidated financial statements. In 2003, 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. The amendment requires contracts with comparable characteristics be accounted for similarly. This Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in Statement 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows and amends certain other existing pronouncements. 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 the Company's consolidated financial condition and results of operations. Page 13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States. The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions. Management believes the allowance for loan losses is a critical accounting policy that requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and Management's estimation of potential losses. The use of different estimates or assumptions could produce different provisions for loan losses. EARNINGS SUMMARY Net income for the three months ended March 31, 2003 was $1,679,000, an increase of 14.0% over net income of $1,473,000 in the comparable period of 2002. Increased non-interest income coupled with controlled operating expenses were the primary factors in the Company's increased earnings. While assets grew, interest margins decreased, resulting in a slight decrease in net interest income. Between December 31, 2002 and March 31, 2003, the loan and investment portfolios increased by a combined $20.6 million, which Management views as an excellent rate of growth. Fully diluted earnings per share for the first three months of 2003 were $0.68, a 13.3% increase over the $0.60 reported for the first three months of 2002. Page 14 MANAGEMENT'S DISCUSSION CONT. NET INTEREST INCOME Total interest income of $6,868,000 for the three months ended March 31, 2003 is a 4.0% decrease from total interest income of $7,154,000 in the comparable period of 2002. Total interest expense of $2,768,000 for the first three months of 2003 is a 7.5% decrease from total interest expense of $2,992,000 for the first three months of 2002. The decreases in both interest income and interest expense were due to significantly lower interest rates resulting from current economic conditions, despite significantly higher balances for both assets and liabilities. At the same time, the low interest rate climate brought on by recent Federal Reserve Board actions resulted in a high level of residential mortgage refinance activity during the period, during which the Bank sold an increased amount of its secondary-market-qualifying mortgage production. This, along with above-average growth in core deposits, resulted in high levels of liquidity, which were in turn invested in low-rate overnight deposits causing compression of the net interest margin. The combination of lower interest rates and sale of mortgage loans resulted in net interest income of $4,100,000 for the three months ended March 31, 2003, a 1.5% decline from the $4,162,000 reported for the same period in 2002. This was more than compensated for by income recognized from the sale of mortgage loans, which was recorded in non-interest income. The Company's net interest margin on a tax-equivalent basis decreased from 4.23% in the first three months of 2002 to 3.66% in the first three months of 2003. Tax-exempt interest income amounted to $427,000 and $322,000 for the three months ended March 31, 2003 and 2002, respectively. Tax equivalency is calculated using a 35% effective tax rate. The following table presents the effect of tax-exempt income on the calculation of the net interest margin: - ------------------------------------------------------------------------------- For the three months ended March 31, (in thousands) 2003 2002 - ------------------------------------------------------------------------------ Net interest income as presented $ 4,100 $ 4,162 Effect of tax-exempt income 230 173 ----- ----- Net interest income, tax equivalent $ 4,330 $ 4,335 ===== ===== - ------------------------------------------------------------------------------ PROVISION FOR LOAN LOSSES A $225,000 provision to the allowance for loan losses was made during the first three months of 2003, a $185,000 decrease from the $410,000 provision made for the same period of 2002. In 2002, the deterioration of one large credit due to weakness in the commercial fishing industry led to the relatively high level of provision in the 2002 period. While commercial loan growth has been significant in the first quarter of 2003, there have been no extraordinary new instances of weakness in the portfolio, resulting in a lower provision in the first quarter of 2003 than in the first quarter of 2002. Page 15 MANAGEMENT'S DISCUSSION CONT. NON-INTEREST INCOME Non-interest income was $1,223,000 for the three months ended March 31, 2003, an increase of 33.1% over the $919,000 reported for the first three months of 2002. The increase in non-interest income was due primarily to mortgage origination and servicing income. There were also increases in merchant credit card processing income and service charge income on deposit accounts. Demand for residential mortgages was strong in the first three months of 2003, and the Bank sold $16.7 million of residential loans in the first three months of 2003 compared to $10.2 million in the first three months of 2002. This resulted in increased gains on sales of loans. In addition, during the period from December 31, 2002 to March 31, 2003, the balances of loans serviced for others increased $7.3 million. NON-INTEREST EXPENSE Non-interest expense of $2,758,000 for the three months ended March 31, 2003, is an increase of 5.3% over non-interest expense of $2,619,000 for the first three months of 2002. This increase has been primarily due to higher personnel and computer hardware/software costs to provide more comprehensive and competitive services for customers, and an increase of nearly 50% in health care insurance premiums. In addition, there were increases in merchant credit card processing costs which were offset by an increase in merchant credit card processing income. INCOME TAXES Income taxes on operating earnings increased to $661,000 for the first three months of 2003 from $579,000 for the same period a year ago. The increase is in line with the increase in pre-tax income. Page 16 MANAGEMENT'S DISCUSSION CONT. AVERAGE DAILY BALANCE SHEET The following table shows the Company's average daily balance sheets for the three-month periods ended March 31, 2003 and 2002 - -------------------------------------------------------------------------- Three-Month Periods ended March 31, Dollars in thousands 2003 2002 - -------------------------------------------------------------------------- Cash and due from banks $ 9,006 8,236 Interest-bearing deposits 17,496 1,104 Investments U.S. Treasury securities & government agencies 48,956 53,209 Obligations of states & political subdivisions 26,448 20,453 Other securities 44,192 36,156 --------- --------- Total investments 119,596 109,818 --------- --------- Loans held for sale 2,416 1,817 --------- --------- Loans Commercial 123,909 103,318 Consumer 27,380 29,966 State and municipal 11,353 7,300 Real estate 177,505 161,867 --------- --------- Total loans 340,147 302,451 Allowance for loan losses (3,733) (3,051) --------- --------- Net loans 336,414 299,400 --------- --------- Fixed assets 7,931 7,614 Other assets 9,645 9,455 --------- --------- Total assets $ 502,504 437,444 ========= ========= Deposits Demand $ 23,792 20,457 NOW 47,408 42,676 Money market 87,165 19,404 Savings 60,450 47,943 Certificates of deposit 70,559 82,255 Certificates of deposit over $100,000 49,899 57,832 --------- --------- Total deposits 339,273 270,567 --------- --------- Borrowed funds 115,806 125,966 Other liabilities 4,247 3,001 --------- --------- Total liabilities 459,326 399,534 --------- --------- Common stock 25 25 Additional paid in capital 4,687 4,687 Retained earnings 38,764 34,527 Unrealized Gain/Loss on AFS 2,170 784 Treasury stock (2,468) (2,113) --------- --------- Total capital 43,178 37,910 --------- --------- Total liabilities and capital $ 502,504 437,444 ========= ========= Page 17 MANAGEMENT'S DISCUSSION CONT. INVESTMENTS The Company's investment portfolio increased by $6.6 million or 5.4% between December 31, 2002, and March 31, 2003. A portion of the portfolio consists of callable securities, some of which were called by issuers and replaced at lower yields. At March 31, 2003, the Company's available-for-sale portfolio had an unrealized gain, net of taxes, of $2.3 million, which is in line with the interest rate climate seen in the first three months of 2003. LOANS Loans grew by $14.0 million or 4.2% during the first three months of 2003. The growth in commercial loans was $7.9 million or 6.6% and municipal loans increased $2.3 million or 24.7%. Although the residential mortgage portfolio declined by $0.9 million, this decrease was more than offset by home equity lines of credit, which grew $5.0 million or 16.3% -- the result of more competitive product pricing and marketing. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents the amount available for credit losses inherent in the Company's loan portfolio. Loans are charged off when they are deemed uncollectible, after giving consideration to factors such as the customer's financial condition, underlying collateral and guarantees, as well as general and industry economic conditions. In general, the Company determines the appropriate overall reserve for loan losses based upon periodic, systematic reviews of its portfolio to identify inherent losses and Management's judgment about various qualitative factors. These reviews result in the identification and quantification of loss factors, which are used in determining the amount of the allowance for loan losses. The Company periodically evaluates prevailing economic and business conditions, industry concentrations, changes in the size and characteristics of the portfolio and other pertinent factors. Portions of the allowance for loan losses are quantified to cover the estimated losses inherent in each loan category based on the results of this detailed review process. Commercial loans are individually reviewed and assigned a credit risk rating from "1" (low risk of loss) to "8" (high risk of loss). For non-impaired loans with a credit risk rating of "1" to "7", estimated loss factors based on historical loss experience (ranging from two to five years) are used to calculate a loan loss reserve for each credit risk rating classification. Qualitative adjustments are also made based upon Management's assessment of prevailing economic conditions, trends in volumes and terms of loans, levels and trends in delinquencies and non-accruals, and the effect of changes in lending policies. A specific allocation is made for impaired loans (loans on non-accrual status), which are measured at the net present value of future cash flows, discounted at the loan's effective interest rate, or at fair market value of collateral if the loan is collateral dependent. The combination of these analyses is the basis for the determination of the commercial loan portion of the allowance for loan losses. Consumer loans, which include credit cards, residential mortgages, home equity loans/lines, and direct/indirect loans, are generally evaluated as a group based on product type. The determination of the consumer loan portion of the allowance for loan losses is based on a five-year average of annual historical losses, adjusted for the qualitative factors noted above. Page 18 MANAGEMENT'S DISCUSSION CONT. The results of all analyses are reviewed and discussed by the Directors' Loan Committee. An integral component of the Company's risk management process is to ensure the proper quantification of the reserve for loan losses based upon an analysis of risk characteristics, demonstrated losses, loan segmentations, and other factors. Reserve methodology is reviewed on a periodic basis and modified as appropriate. The unallocated component of the allowance for loan losses represents Management's view that, given the complexities of the loan portfolio, there are estimable losses that have been incurred within the portfolio but not yet specifically identified. Based on this analysis, including the aforementioned assumptions, the Company believes that the allowance for loan losses is adequate as of March 31, 2003. As of that date, the balance of $3,809,000 was 1.10% of total loans, compared to 1.11% at December 31, 2002 and 1.06% at March 31, 2003. Loans considered to be impaired according to SFAS 114/118 totalled $1,164,000 at March 31, 2003, compared to $1,070,000 at December 31, 2002. The portion of the allowance for loan losses allocated to impaired loans at March 31, 2003, was $271,000 compared to $297,000 at December 31, 2002. DEPOSITS During the first three months of 2003, deposits increased by $6.2 million or 1.8% over December 31, 2002. Core deposits (demand, NOW, savings and money market accounts) grew by $9.2 million or 4.3% in the first three months of 2003. During the same period, certificates of deposit decreased $3.0 million, primarily due to pricing strategies which resulted in certificates maturing and not renewing at the lower rates offered by the Bank. As of March 31, 2003, deposits grew year-over-year by 23.1%, or $64.0 million. Demand deposits grew $2.9 million, NOW accounts $4.4 million, savings $11.1 million, and money market accounts $67.2 million, while certificates of deposit decreased $21.6 million. The increase in money market accounts is attributable to an inflow from equity and mutual fund investments, as well as a $26.7 million increase in money market accounts from deposits for the Bank's investment management division which were previously placed with a mutual fund company. The decrease of $21.6 million in certificates of deposit was primarily due to pricing strategies which resulted in certificates maturing and not renewing at the lower rates offered by the Bank. BORROWED FUNDS The Company's funding includes borrowings from the Federal Home Loan Bank, the Federal Reserve System, and repurchase agreements. The Company utilizes borrowings as an additional source of funding for both loans and investments, enabling it to grow its balance sheet and, in turn, grow its revenues. They may also be used to carry out interest rate risk management stategies, and are increased as other sources of funding decrease, including core deposits and certificates of deposit. During the three months ended March 31, 2003, borrowed funds increased by $1.8 million or 1.6% from December 31, 2002. Between March 31, 2002 and March 31, 2003, core deposits grew substantially, meeting the Bank's liquidity needs created by the growth in the loan and investment portfolios and the outflow of certificates of deposit. Borrowed funds decreased $3.6 million or 3.0% during this period. Page 19 MANAGEMENT'S DISCUSSION CONT. SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES Shareholders' equity as of March 31, 2003 was $43,952,000, compared to $42,695,000 as of December 31, 2002. The Company's strong earnings performance in the first three months months of 2003 provided a significant addition to retained earnings and was accompanied by an increase in the net unrealized gain on available-for-sale securities, as required under SFAS 115. During 2002, the Company increased its dividend each quarter to end the year at a quarterly dividend rate of 26 cents per share. In 2003, a cash dividend of 27 cents per share was declared compared to 23 cents in the first quarter of 2002. Regulatory leverage capital ratios for the Company were 8.28% and 8.19% at March 31, 2003 and December 31, 2002, respectively. The Company had a tier one risk-based capital ratio of 11.89% and tier two risk-based capital ratio of 12.99% at March 31, 2003, compared to 12.32% and 13.45%, respectively, at December 31, 2002. These are comfortably above the standards to be rated "well- capitalized" by regulatory authorities -- qualifying the Company for lower deposit-insurance premiums. On September 23, 2002, the Company announced that its Board of Directors authorized the repurchase of up to 5.0% of the outstanding shares of the Company's common stock, or slightly more than 120,000 shares. The Company expects such repurchases to be effected from time to time, in the open market, in private transactions or otherwise, during a period of up to 24 months. The amount and timing of shares to be purchased will be subject to market conditions and will be based on several factors, including the price of the Company's stock and the level of stock issuances under the Company's employee stock plans. No assurance can be given as to the specific timing of the share repurchases or as to whether and to what extent the share repurchase will be consummated. In Management's opinion, the Company has adequate capital resources to undertake this repurchase plan. As of March 31, 2003, the Company had repurchased 5,480 shares under the 2002 repurchase plan - including 3,280 shares in the fourth quarter of 2002 and 2,200 shares in the first quarter of 2003. CONTRACTUAL OBLIGATIONS The following table sets forth the contractual obligations of the Company as of March 31, 2003: - ------------------------------------------------------------------------------- Less than 1-3 4-5 More than Dollars in thousands Total 1 Year Years Years 5 Years - ------------------------------------------------------------------------------- Borrowed funds $ 115,151 53,651 22,000 12,000 27,500 Operating leases 301 78 136 87 - Certificates of deposit 118,413 83,113 25,223 10,077 - ------- ------- ------ ------ ------ Total $ 233,865 136,842 47,359 22,164 27,500 ======= ======= ====== ====== ====== Commitments to extend credit and unused lines of credit $ 59,069 59,069 - - - - ------------------------------------------------------------------------------- Page 20 MANAGEMENT'S DISCUSSION CONT. LIQUIDITY MANAGEMENT As of March 31, 2003 the Bank had primary sources of liquidity of $43.7 million and an additional $60.2 million of secondary sources. It is Management's opinion that this is adequate. In its Asset/Liability policy, the Bank has adopted guidelines for liquidity. The Company is not aware of any recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on the Corporation's liquidity, capital resources or results of operations. NON-PERFORMING ASSETS At March 31, 2003, loans on non-accrual status totaled $1,164,000, which compares to non-accrual loans of $1,070,000 as of December 31, 2002. In addition to loans on non-accrual status at March 31, 2003, loans past due 90 days or more and accruing (calculated on a constant 30-day month basis) totaled $166,000, which compares to $406,000 as of December 31, 2002. The Company continues to accrue interest on these loans because it believes collection of the interest is reasonably assured. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS No material off-balance sheet risk exists that requires a separate liability presentation. SALE OF LOANS No recourse obligations have been incurred in connection with the sale of loans. FORWARD-LOOKING STATEMENTS Certain disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations contain certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In preparing these disclosures, Management must make assumptions, including, but not limited to, the level of future interest rates, prepayments on loans and investment securities, required levels of capital, needs for liquidity, and the adequacy of the allowance for loan losses. These forward-looking statements may be subject to significant known and unknown risks uncertainties, and other factors, including, but not limited to, those matters referred to in the preceding sentence. Although First National Lincoln Corporation believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the facts which affect the Company's business. Page 21 Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK MANAGEMENT Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. First National Lincoln Corporation's market risk is composed primarily of interest rate risk. The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. All guidelines and policies established by ALCO have been approved by the Board of Directors. ASSET/LIABILITY MANAGEMENT The primary goal of asset/liability management is to maximize net interest income within the interest rate risk limits set by ALCO. Interest rate risk is monitored through the use of two complementary measures: static gap analysis and earnings simulation modeling. While each measurement has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities which reprice within a specified time period. The Bank's cumulative one-year gap, at March 31, 2003, was 0.2% of total assets. ALCO's policy limit for the one-year gap is plus or minus 20% of total assets. Core deposits with non-contractual maturities are presented based upon historical patterns of balance attrition and pricing behavior which are reviewed at least annually. The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the time frames in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age. Page 22 MARKET RISK CONT. A summary of the Bank's static gap, as of March 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 $ 26,342 16,014 48,563 33,449 Loans held for sale 14 64 519 938 Loans 123,636 64,806 129,438 28,215 Other interest-earning assets 3,800 4,519 - - Non-rate-sensitive assets - - - 22,736 -------- -------- -------- -------- Total assets $ 153,792 85,403 178,520 85,338 -------- -------- -------- -------- Interest-bearing deposits 127,848 55,876 35,290 97,862 Borrowed funds 30,651 23,000 34,000 27,500 Non-rate-sensitive liabilities and equity 675 2,175 14,250 53,926 -------- -------- -------- -------- Total liabilities and equity $ 159,174 81,051 83,540 179,288 -------- -------- -------- -------- Period gap $ (5,382) 4,352 94,980 (93,950) ========= ======== ======== ======== Percent of total assets -1.07% 0.87% 18.88% -18.68% Cumulative gap (current) $ (5,382) (1,030) 93,950 - Percent of total assets -1.07% -0.20% 18.68% 0.0% - ------------------------------------------------------------------------------- The earnings simulation model forecasts captures the impact of changing interest rates on one-year and two-year net interest income. The modeling process calculates changes in interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company's balance sheet. None of the assets used in the simulation are held for trading purposes. The modeling is done for a variety of scenarios that incorporate changes in the absolute level of interest rates as well as basis risk, as represented by changes in the shape of the yield curve and changes in interest rate relationships. Management evaluates the effects on income of alternative interest rate scenarios against earnings in a stable interest rate environment. This analysis is also most useful in determining the short-run earnings exposures to changes in customer behavior involving loan payments and deposit additions and withdrawals. The Bank's most recent simulation model projects net interest income would increase by approximately 1.38% of stable-rate net interest income if rates fall gradually by one percentage point over the next year, and decrease by approximately 2.21% if rates rise gradually by two percentage points. Both scenarios are well within ALCO's policy limit of a decrease in net interest income of no more than 10.0% given a 2.0% move in interest rates, up or down. Management believes this reflects a reasonable interest rate risk position. In year two, and assuming no additional movement in rates, the model forecasts that net interest income would be higher than that earned in a stable rate environment by 3.40% in a falling rate scenario and decrease by 2.37% in a rising rate scenario when compared to the year one base scenario. Page 23 MARKET RISK CONT. This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. Loans and deposits are projected to maintain stable balances. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in similar assets. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Non-contractual deposit volatility and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed annually and reviewed by ALCO. A summary of the Bank's interest rate risk simulation modeling, as of March 31, 2003 is presented in the following table: - ------------------------------------------------------------- Changes in Net Interest Income 2003 - ------------------------------------------------------------- Year 1 Projected change if rates decrease by 1.0% +1.38% Projected change if rates increase by 2.0% -2.21% - ------------------------------------------------------------- Year 2 Projected change if rates decrease by 1.0% +3.40% Projected change if rates increase by 2.0% -2.37% - ------------------------------------------------------------- The information for static gap and changes in net interest income presented in this section pertains to the Bank only and does not include a small volume of assets and liabilities owned by the Company and included in its consolidated financial statements as of March 31, 2003. In Management's opinion, the Bank-only information would not be materially different than that for the Company's consolidated balances. This sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/ replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. INTEREST RATE RISK MANAGEMENT A variety of financial instruments can be used to manage interest rate sensitivity. These may include investment securities, 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 March 31, 2003, the Company was not using any derivative instruments for interest rate risk management. The Company engages an independent consultant to periodically review its interest rate risk position, as well as the effectiveness of simulation modeling and reasonableness of assumptions used. As of March 31, 2003, there were no significant differences between the views of the independent consultant and Management regarding the Company's interest rate risk exposure. Management expects interest rates will remain constant for the remainder of 2003 and believes that the current level of interest rate risk is acceptable. Page 24 Item 4: Controls and Procedures (a) Evaluation of disclosure controls and procedures. As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the new rules, the Company is currently in the process of further reviewing and documenting disclosure controls and procedures, including internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that these systems evolve with the Company's business. (b) Changes in internal controls. None. Page 25 PART II ITEM 1. LEGAL PROCEEDINGS The Company was not involved in any legal proceedings requiring disclosure under Item 103 of Regulation S-K during the reporting period. Page 26 ITEM 2. CHANGES IN SECURITIES None Page 27 ITEM 3. DEFAULT UPON SENIOR SECURITIES None. Page 28 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 29 ITEM 5: Other Information None. Page 30 ITEM 6: Exhibits, Financial Statement Schedules, and reports on Form 8-K A. EXHIBITS 99 Certification of Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 B. REPORTS ON FORM 8-K The Company's press release announcing the fourth quarter 2002 earnings was filed on Form 8-K under item 5 on January 16, 2003. The Company's press release announcing the first quarter 2003 dividend declaration was filed on Form 8-K under item 5 on March 21, 2003. Page 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST NATIONAL LINCOLN CORPORATION May 15, 2003 /s/ Daniel R. Daigneault Date Daniel R. Daigneault President & Chief Executive Officer May 15, 2003 /s/ F. Stephen Ward Date F. Stephen Ward Treasurer & Chief Financial Officer Page 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Daniel R. Daigneault, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First National Lincoln Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Daniel R. Daigneault Daniel R. Daigneault President & Chief Executive Officer First National Lincoln Corporation Page 33 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, F. Stephen Ward, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First National Lincoln Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ F. Stephen Ward F. Stephen Ward Treasurer & Chief Financial Officer First National Lincoln Corporation Page 34