FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: Commission File No. 2-96573 September 30, 1996 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 XX 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 September 30, 1996 Common Stock, Par One Cent 612,705
FIRST NATIONAL LINCOLN CORPORATION INDEX PART 1 Financial Information Page No. Item 1: Financial Statements Consolidated Balance Sheets - 1 - 2 September 30, 1996, September 30, 1995, and December 31, 1995. Consolidated Statements of Income - 3 - 4 Nine months ended September 30, 1996 and September 30, 1995. Consolidated Statements of Income - 5 - 6 Three months ended September 30, 1996 and September 30, 1995. Consolidated Statements of Cash Flows - 7 - 8 Nine months ended September 30, 1996 and September 30, 1995. Footnotes to Financial Statements - 9 Nine months ended September 30, 1996 and September 30, 1995. Item 2: Management's discussion and analysis of 10 - 13 financial condition and results of operations. PART II Other Information Item 1: Legal Proceedings 14 Item 2: Changes in Securities 15 Item 3: Defaults Upon Senior Securities 16 Item 4: Submission of Matters to a Vote of Security Holders 17 Item 5: Other Information 18 Item 6: Exhibits and reports on Form 8-K. 19 Signatures 20
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (000 OMITTED) 9/30/96 9/30/95 12/31/95 (Unaudited) (Unaudited) (Unaudited) Assets Cash and due from banks $5,974 $5,303 $5,404 Interest bearing deposits in other banks 0 0 2,700 Investments: Available for sale 25,261 13,022 34,236 Held to maturity (market values $36,189 at 9/30/96, $49,761 at 9/30/95 and $27,473 at 12/31/95) 36,750 49,839 27,334 Loans held for sale (market value $4,127 at 12/31/95) 0 0 4,066 Loans 153,891 133,080 133,245 Less allowance for loan losses 1,867 2,163 2,059 Net loans 152,024 130,917 131,186 Accrued interest receivable 1,739 1,677 1,708 Bank premises and equipment 3,842 4,178 4,146 Other real estate owned 870 721 648 Other assets 1,180 1,316 854 Total Assets $227,640 $206,973 $212,282 Page 1
BALANCE SHEETS CONT. 9/30/96 9/30/95 12/31/95 (Unaudited) (Unaudited) (Unaudited) Liabilities & Stockholders' Equity Demand deposits $14,104 $13,037 $12,989 NOW deposits 27,339 26,821 27,064 Money market deposits 6,725 7,155 7,179 Savings deposits 35,518 33,796 32,943 Certificates of deposit 59,088 56,255 57,535 Certificates $100M and over 12,032 13,832 12,758 Total deposits $154,806 $150,896 $150,468 Borrowed funds 49,615 35,650 41,225 Other liabilities 1,599 1,630 1,024 Total Liabilities 206,020 188,176 192,717 Shareholders' Equity: Common stock 6 1,524 1,524 Additional paid-in capital 4,346 2,717 2,719 Retained earnings 17,276 14,544 15,123 Net unrealized gains (losses) on available- for-sale securities (8) 35 202 Treasury stock 0 (23) (3) Total Stockholders' Equity 21,620 18,797 19,565 Total Liabilities & Stockholders' Equity $227,640 $206,973 $212,282 Page 2
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED) For the nine months ended September 30, 1996 1995 (Unaudited) (Unaudited) Interest Income: Interest and fees on loans $9,768 $8,904 Interest on deposits with other banks 15 0 Interest and dividends on investments 3,224 3,312 Total interest income 13,007 12,216 Interest expense: Interest on deposits 4,156 3,833 Interest on borrowed funds 1,953 1,903 Total interest expense 6,109 5,736 Net interest income 6,898 6,480 Provision for loan losses 0 0 Net interest income after provision for loan losses 6,898 6,480 Other operating income: Trust department income 238 173 Service charges on deposit accounts 366 369 Net securities gains (losses) 2 19 Other operating income 410 143 Total other operating income 1,016 704 Other operating expenses: Salaries and employee benefits 2,246 2,240 Occupancy expense 246 231 Furniture and equipment expense 430 446 Other 1,329 1,365 Total other operating expenses 4,251 4,282 Page 5
STATEMENTS OF INCOME CONT. 1996 1995 (Unaudited) (Unaudited) Income before income taxes 3,663 1,845 Applicable income taxes 1,180 919 NET INCOME $2,483 $1,983 Earnings per common share: Net income $4.05 $3.26 Dividends declared $0.54 $0.44 Page 6
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED) For the quarter ended September 30, 1996 1995 (Unaudited) (Unaudited) Interest Income: Interest and fees on loans $3,380 $3,132 Interest on deposits with other banks 9 0 Interest and dividends on investments 1,070 1,092 Total interest income 4,459 4,224 Interest expense: Interest on deposits 1,364 1,438 Interest on borrowed funds 697 598 Total interest expense 2,061 2,036 Net interest income 2,398 2,188 Provision for loan losses 0 0 Net interest income after provision for loan losses 2,398 2,188 Other operating income: Trust department income 81 68 Service charges on deposit accounts 117 135 Net securities gains (losses) 0 58 Other operating income 202 40 Total other operating income 400 301 Other operating expenses: Salaries and employee benefits 765 751 Occupancy expense 79 75 Furniture and equipment expense 141 146 Other 495 460 Total other operating expenses 1,480 1,432 Page 3
STATEMENTS OF INCOME CONT. 1996 1995 (Unaudited) (Unaudited) Income before income taxes 1,318 1,057 Applicable income taxes 425 336 NET INCOME $893 $721 Earnings per common share: Net income $1.46 $1.18 Dividends declared $0.19 $0.15 Page 4
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 1996 1995 (Unaudited) (Unaudited) Cash flows from operating activities: Net income $2,483 $1,983 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 395 383 Provision for loan losses 0 0 Net (gain) loss on sale of investments (2) 39 Provision for losses on other real estate owned 15 15 Losses related to other real estate owned 9 7 Net change in other assets (478) (132) Net change in other liabilities 575 680 Net amortization of premium on investments 105 18 Net cash provided by operating activities 3,102 2,993 Cash flows from investing activities: Proceeds from sales of investments 4,479 2,968 Proceeds from maturities of investments 11,861 6,952 Proceeds from maturities of deposits in other banks 2,700 0 Proceeds from sales of other real estate owned 364 118 Additional investment in other real estate owned (7) (7) Purchase of investments (16,973) (6,764) Net decrease (increase) in loans (17,375) (13,354) Capital expenditures (91) (77) Net cash used in investing activities (15,042) (10,164) Cash flows from financing activities: Net increase (decrease) in demand deposits, savings, money market and club accounts 3,511 (7,887) Net increase (decrease) in certificates of deposit 827 16,338 Net increase (decrease) in other borrowings 8,390 (960) Proceeds from sale of Treasury stock 29 31 Payment to repurchase common stock (26) (54) Net proceeds from stock issuance 109 44 Dividends paid (330) (268) Net cash provided by financing activities 12,510 7,244 Page 7
STATEMENTS OF CASH FLOWS CONT. 1996 1995 (Unaudited) (Unaudited) Net increase (decrease) in cash and cash equivalents 570 73 Cash and cash equivalents at beginning of period 5,404 5,230 Cash and cash equivalents at end of period $5,974 $5,303 Interest paid $6,012 $5,620 Income taxes paid 1,096 594 Non-cash transactions: Loans transferred to other real estate owned (net) 603 303 Loans held for sale transferred to loan portfolio 4,066 - Net change in unrealized gain (loss) on available for sale securities (210) 169 Page 8
FOOTNOTES TO FINANCIAL STATEMENTS 1. At the Company's annual meeting held on April 30, 1996, shareholders approved an amendment to increase the number of shares of common stock authorized for issuance from 1,200,000 to 600,000, and to change the par value of the common stock from no par value to $.01 cent per share. 2. The quarterly financial statements in the opinion of Management fairly represent all adjustments made to reflect the current financial condition of the Company for this interim period just ended. All such adjustments were of a normal recurring nature. Page 9
Item 2 - MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION & RESULTS OF OPERATIONS EARNINGS SUMMARY Net income for the nine months ended September 30, 1996 was $2,483,000, an increase of 25.2% over 1995's net income of $1,983,000. Net income for the quarter ended September 30, 1996 was $893,000. This is a 23.9% increase over the same period a year ago. NET INTEREST INCOME Net interest income for the nine months ended September 30, 1996 was $6,898,000, a 6.5% increase over 1995's net interest income of $6,480,000. Total interest income of $13,007,000 is a 6.5% increase over 1995's total interest income of $12,216,000. Total interest expense of $6,109,000 is a 6.5% increase over 1995's total interest expense of $5,736,000. Net interest income for the quarter ended September 30, 1996 was $2,398,000. This is a 9.6% increase over 1995's net interest income of $2,188,000. Total interest income was $4,459,000, a 5.6% increase over 1995's total interest income of $4,224,000. Total interest expense of $2,061,000 is a 1.2% increase over 1995's total interest expense of $2,036,000. PROVISION FOR LOAN LOSSES No provision to the allowance for loan losses was made during the first nine months of 1996. The allowance for loan losses is deemed adequate as calculated in accordance with Banking Circular #201 and with respect to SFAS 114/118. Loans considered to be impaired according to SFAS 114/118 totalled $162,000 at September 30, 1996. The portion of the allowance for loan losses allocated to impaired loans at September 30, 1996 was $12,000. NON-INTEREST INCOME Non-interest income of $1,016,000 for the nine months ended September 30, 1996 was an increase of 44.3% from 1995's non-interest income of $704,000. This increase can be attributed to an increase in fiduciary income and fees charged for processing merchant credit card deposits. Non-interest income for the quarter ended September 30, 1996 was $400,000, a 32.9% increase over 1995's non-interest income of $301,000. NON-INTEREST EXPENSE Non-interest expense of $4,251,000 for the nine months ended September 30, 1996 is a decrease of 0.7% from 1995's non-interest expense of $4,282,000. Non-interest expense for the quarter ended September 30, 1996 was $1,480,000, a 3.4% increase over the same period a year ago. INCOME TAXES Income taxes on operating earnings increased to $1,180,000 for the first nine months of 1996 from $919,000 for the same period a year ago. Income taxes on operating earnings were $425,000 for the quarter ended September 30, 1996, compared to $336,000 in 1995. The level of income taxes has increased as a result of the Company's increased earnings. Page 10
DEPOSITS AND BORROWED FUNDS Deposits as of September 30, 1996 increased by 2.6% or $3,910,000 from September 30, 1995. Demand deposits increased by 8.2% or $1,067,000, NOW deposits increased by 1.9% or $518,000, savings deposits increased by 5.1% or $1,722,000, money market deposits decreased by 6.0% or $430,000 and certificates of deposit increased by 1.5% or $1,033,000. Deposits were supplemented by borrowings from the Federal Home Loan Bank and repurchase agreements. Total borrowed funds increased by 39.2% or $13,965,000 from the same period a year ago. STOCKHOLDERS' INVESTMENT AND CAPITAL RESOURCES Stockholders' investment as of September 30, 1996 was $21,620,000 compared to $18,797,000 for the same period in 1995. The reason for this increase was the strong earnings performance in the year 1995 and the first nine months of 1996. During 1995, the Company declared cash dividends of 14 cents per share for the first quarter and 15 cents per share for the second and third quarters. Dividends were increased by one cent in the fourth quarter of 1995 to 16 cents per share. In addition, the Company declared a one-time special cash dividend of 10 cents per share in the fourth quarter of 1995. Dividends were increased one cent per quarter in the first, second and third quarters of 1996 to the current level of 19 cents per share. Leverage capital ratios for the Company were 9.50% and 9.08%, respectively, at September 30, 1996 and September 30, 1995. The Bank had a tier one risk-based capital ratio of 14.46% and tier two risk-based capital ratio of 15.71% at September 30, 1996, compared to 13.33% and 14.58%, respectively, at September 30, 1995. These were comfortably above the standards to be rated "well-capitalized" by the regulatory authorities. LIQUIDITY MANAGEMENT As of September 30, 1996 the Bank had primary sources of liquidity of $33,099,000, or 14.6% of its assets. It is Management's opinion that this is adequate. In its Asset/Liability policy, the Bank has adopted guidelines for liquidity. We are not aware of any current 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. LOAN POLICIES Real estate values: A. Residential properties We loan up to 80% of the appraised value of properties without mortgage insurance and up to 95% of the appraised value of properties with mortgage insurance. No further appraisals are done as long as the payment history remains satisfactory. If a loan becomes delinquent, a review might be done of the loan. Page 11
When a loan becomes 90 or more days past due, an in-depth review is made of the loan and a determination made as to whether or not a reappraisal is required. B. Land only properties We do not have many of these but we do loan up to 65% of the appraised value of the property. They are handled the same way as above from booking date on. C. Commercial properties We loan up to 75% of the appraised value and, once the loan is closed, the decision to re-appraise a property is subjective and depends on a variety of factors, such as: the payment status of the loan, the risk rating of the loan, the amount of time that has passed since the last appraisal, changes in the real estate market, availability of financing, inventory of competing properties, and changes in condition of the property i.e. zoning changes, environmental contamination, etc. Note: A certified or licensed appraiser is used for all appraisals. At September 30, 1996 and 1995, loans on a non-accrual status totaled $430,000 and $1,231,000, respectively. In addition to loans on a non-accrual status at September 30, 1996 and 1995, loans past due greater than 90 days totaled $161,000 and $117,000 respectively. The Company continues to accrue interest on these loans because it believes collection of the interest is reasonably assured. INVESTMENTS In the first quarter of 1994, the Company adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 requires that all debt securities be classified into one of three categories: trading securities, securities available for sale and securities held to maturity. As of September 30, 1996 stockholders' equity was reduced by $8,000 due to a net unrealized loss in the available-for-sale portfolio. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS No material off-balance sheet risk exists that requires a separate liability presentation. SALE OF LOANS In the first quarter of 1996, the Company adopted SFAS 122, "Accounting for Mortgage Servicing Rights". This statement requires mortgage servicing rights, whether purchased or originated, to be capitalized and subsequently considerd for impairment. As of September 30, 1996, the Bank had not acquired any servicing rights through loan origination or purchase transactions. No recourse obligations have been incurred in connection with the sale of loans. RISK ELEMENTS Any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed under Item III of Industry Guide 3 do not represent or result from trends or uncertainties which Page 12
Management reasonably expects will materially impact future operating results, liquidity or capital resources. There are no known potential problem loans which are not now disclosed pursuant to Item III. C. 1. of Industry Guide 3. Item III. C. 2. is not applicable. REGULATORY MATTERS Procedures for monitoring Bank Loan Administration: A. Loan reviews are done on a regular basis. B. An action plan is prepared quarterly on all criticized commercial loans greater than $100,000. C. Delinquent loans are reviewed weekly by the Bank's Collections Officer and Senior Loan Officer. D. A tickler system is utilized to insure timely receipt of current information (such as financial statements, appraisals and/or credit memos to the credit file). Note: Most of the above applies only to commercial loans, but retail loans are reviewed periodically, usually around a delinquency. Procedures for monitoring Bank Other Real Estate Owned: The O.R.E.O. portfolio is handled by the Collections Officer, with backup by the Senior Loan Officer. Most properties are listed with real estate brokers for sale. All properties are appraised periodically for market value, and provision is made to the allowance for O.R.E.O. losses if the estimated market value after selling costs is lower than the carrying value of the property. OTHER TERMINATION OF PENSION PLAN As of May 31, 1996, the Company ceased benefit accruals for its pension plan, which covers substantially all employees. All required documents requesting approval for termination of the defined benefit plan were filed with the Internal Revenue Service and the Pension Benefit Guarantee Corporation on June 18, 1996. The Company has received final approvals for termination of the plan and will distribute the assets to fulfill the Company's liabilities under the plan in the fourth quarter of 1996. The Company expects to realize a gain on termination of approximately $63,000. The Company is modifying its defined contribution (401k) plan as a replacement for the pension plan, and has added an annual compensation-based contribution to the plan, in addition to the current employer-matching contribution. This modification is not expected to have a material impact on the Company's financial statements. Page 13
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 14
ITEM 2. CHANGES IN SECURITIES None Page 15
ITEM 3. DEFAULT UPON SENIOR SECURITIES None. Page 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Page 17
ITEM 5: Other Information None. Page 18
ITEM 6: Exhibits, Financial Statement Schedules, and reports on Form 8-K A. EXHIBITS EXHIBIT 27. Financial Data Schedule. B. REPORTS ON FORM 8-K During the registrant's first six months ended September 30, 1996 the registrant was not required to and did not file any reports on Form 8-K. Page 19
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 November 13, 1996 Daniel R. Daigneault Date Daniel R. Daigneault President and CEO November 13, 1996 F. Stephen Ward Date F. Stephen Ward Treasurer Page 20