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. 0-26589 March 31, 2002 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 March 31, 2002 Common Stock, Par One Cent 2,394,679 FIRST NATIONAL LINCOLN CORPORATION INDEX PART 1 Financial Information (Unaudited) Page No. Item 1: Independent Accountants' Review Report ..................... 1 Financial Statements Consolidated Balance Sheets - March 31, 2002, March 31, 2001, and December 31, 2001 .... 2 - 3 Consolidated Statements of Income and Non-Owners' Changes in Equity - for the three months ended March 31, 2002 and March 31, 2001 .................. 4 - 5 Consolidated Statements of Cash Flows - for the three months ended March 31, 2002 and March 31, 2001 .................. 6 - 7 Notes to Financial Statements - Three months ended March 31, 2002 and March 31, 2001...... 8 Item 2: Management's discussion and analysis of financial condition and results of operations .......... 9 - 14 Item 3: Quantitative and qualitative disclosures about market risk....................................... 14 PART II Other Information Item 1: Legal Proceedings ...................................... 15 Item 2: Changes in Securities .................................. 16 Item 3: Defaults Upon Senior Securities ........................ 17 Item 4: Submission of Matters to a Vote of Security Holders .... 18 Item 5: Other Information ...................................... 19 Item 6: Exhibits and reports on Form 8-K ....................... 20 Signatures .......................................................... 21 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, 2002 and 2001, 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 10, 2002 Page 1 FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS 3/31/02 3/31/01 12/31/01 (000 OMITTED) (Unaudited) (Unaudited) (Unaudited) Assets Cash and due from banks $ 7,829 $ 6,897 $ 10,894 Investments: Available for sale 49,364 66,634 50,914 Held to maturity (market values $56,141 at 3/31/02, $47,818 at 3/31/01 and $56,921 at 12/31/01) 57,836 47,857 57,272 Loans held for sale (which approximates market value at 3/31/01) 2,138 164 466 Loans 304,726 272,969 301,304 Less allowance for loan losses 3,227 2,357 3,000 Net loans 301,499 270,612 298,304 Accrued interest receivable 2,821 3,271 2,635 Bank premises and equipment 7,784 5,741 7,563 Other real estate owned 200 509 202 Other assets 7,248 5,990 6,216 Total Assets $436,719 $407,675 $434,466 Page 2 BALANCE SHEETS CONT. 3/31/02 3/31/01 12/31/01 (Unaudited) (Unaudited) (Unaudited) Liabilities & Shareholders' Equity Demand deposits $ 20,601 $ 19,200 $ 22,496 NOW deposits 42,363 36,084 43,644 Money market deposits 24,429 11,860 15,878 Savings deposits 48,996 39,592 46,855 Certificates of deposit 82,366 82,804 79,907 Certificates $100M and over 57,642 51,433 53,909 Total deposits 276,397 240,973 262,689 Borrowed funds 118,763 128,867 131,357 Other liabilities 3,424 3,288 3,086 Total Liabilities 398,584 373,128 397,132 Shareholders' Equity: Common stock 25 25 25 Additional paid-in capital 4,687 4,687 4,687 Retained earnings 34,953 31,248 34,030 Accumulated Other Comprehensive income: Net unrealized gains on available-for-sale securities 658 874 784 Treasury stock (2,188) (2,287) (2,192) Total Shareholders' Equity 38,135 34,547 37,334 Total Liabilities & Shareholders' Equity $436,719 $407,675 $434,466 Number of shares authorized 6,000,000 6,000,000 6,000,000 Number of shares outstanding 2,394,679 2,376,175 2,391,375 Book value per share $15.92 $14.54 $15.61 See Accountants' Review Report. The accompanying notes are an integral part of these consolidated financial statements. Page 3 FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND NON-OWNER CHANGES IN EQUITY For the three months ended March 31, 2002 2001 (000 OMITTED) (Unaudited) (Unaudited) Interest and Dividend Income: Interest and fees on loans $ 5,474 $ 5,738 Interest on deposits with other banks 5 24 Interest and dividends on investments 1,675 1,773 Total interest and dividend income 7,154 7,535 Interest expense: Interest on deposits 1,900 2,762 Interest on borrowed funds 1,092 1,411 Total interest expense 2,992 4,173 Net interest income 4,162 3,362 Provision for loan losses 410 195 Net interest income after provision for loan losses 3,752 3,167 Other operating income: Fiduciary income 185 182 Service charges on deposit accounts 220 210 Other operating income 514 348 Total other operating income 919 740 Other operating expenses: Salaries and employee benefits 1,357 1,137 Occupancy expense 186 143 Furniture and equipment expense 310 235 Other 766 697 Total other operating expenses 2,619 2,212 Income before income taxes 2,052 1,695 Applicable income taxes 579 489 NET INCOME $ 1,473 $ 1,206 Page 4 STATEMENTS OF INCOME CONT. 2002 2001 (Unaudited) (Unaudited) Non-owner changes in equity, net of tax: Unrealized gains(losses) on available for sale securities arising during period (126) 671 Total other comprehensive income(loss), net of taxes of $( 65) in 2002 and $346 in 2001 (126) 671 COMPREHENSIVE INCOME $ 1,347 $ 1,877 Earnings per common share: Basic earnings per share $0.62 $0.51 Diluted earnings per share $0.60 $0.50 Cash dividends declared per share $0.23 $0.19 Weighted average number of shares outstanding 2,393,310 2,377,167 Dilutive effect of stock options in number of shares 81,023 58,966 See 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 CASH FLOWS For the three months ended March 31, (000 omitted) 2002 2001 (Unaudited) (Unaudited) Cash flows from operating activities: Net income $1,473 1,206 Adjustments to reconcile net income to net cash provided(used) by operating activities: Depreciation 229 176 Provision for loan losses 410 195 Loans originated for resale (11,835) (3,150) Proceeds from sales and transfers of loans 10,163 2,986 Net change in other assets and accrued interest (1,218) 75 Net change in other liabilities 403 371 Net accretion of discounts on investments (183) (9) Net cash provided(used) by operating activities (558) 1,850 Cash flows from investing activities: Proceeds from maturities, payments and calls of securities available for sale 1,380 582 Proceeds from maturities, payments and calls of securities to be held to maturity 5,051 2,573 Proceeds from sales of other real estate owned 2 85 Purchases of securities available for sale 0 (3,263) Purchases of securities to be held to maturity (5,453) (8,137) Net increase in loans (3,605) (8,417) Capital expenditures (450) (565) Net cash used in investing activities (3,075) (17,142) Cash flows from financing activities: Net increase(decrease) in demand deposits, savings, money market and club accounts 7,516 (4,404) Net increase (decrease) in certificates of deposit 6,192 (9,189) Advances on long-term borrowings 8,000 12,500 Repayments on long-term borrowings 0 (3,114) Net increase(decrease) in short-term borrowings (20,594) 16,562 Payment to repurchase common stock (115) (87) Proceeds from sale of Treasury stock 119 50 Dividends paid (550) (453) Net cash provided by financing activities 568 11,865 Page 6 STATEMENTS OF CASH FLOWS CONT. 2002 2001 (Unaudited) (Unaudited) Net decrease in cash and cash equivalents (3,065) (3,427) Cash and cash equivalents at beginning of period 10,894 10,324 Cash and cash equivalents at end of period $7,829 $6,897 Interest paid $3,076 $4,173 Income taxes paid 0 62 Non-cash transactions: Loans transferred to other real estate owned (net) 0 238 Change in net unrealized gain on available for sale securities (191) 1,017 See Accountants' Review Report. The accompanying notes are an integral part of these consolidated financial statements. Page 7 NOTES TO FINANCIAL STATEMENTS 1. The accompanying consolidated financial statements of First National Lincoln Corporation and its subsidiary as of and for the three-month periods ended March 31, 2002 and 2001 are unaudited. In the opinion of Management, all adjustments consisting of normal, recurring accruals necessary for a fair representation have been reflected therein. Certain financial information which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2001. RECENT ACCOUNTING DEVELOPMENTS Statement of Position (SOP) 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others" was issued in December 2001. The SOP is effective for financial statements issued for fiscal years beginning after December 15, 2001. The SOP reconciles and conforms the accounting and financial reporting provisions established by various Audit and Accounting Industry Guides. The adoption of the SOP did not have an effect on the Company's consolidated financial condition and results of operations. Page 8 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 are 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, 2002 was $1,473,000, an increase of 22.1% over 2001's net income of $1,206,000. Revenue growth was the primary factor in the Company's increased earnings and was a direct result of asset growth, which produced higher levels of net interest income, as well as increased margins due to lower interest rates. From March 31, 2001 to March 31, 2002, the loan and investment portfolios increased by a combined $24.5 million, which Management views as excellent. Fully diluted earnings per share for the first quarter of 2002 were $0.60, a 20.0% increase over the $0.50 reported in 2001. NET INTEREST INCOME Total interest income for the three months ended March 31, 2002 was $7,154,000, a 5.1% decrease from 2001's total interest income of $7,535,000. Total interest expense of $2,992,000 is a 28.3% decrease from 2001's total interest expense of $4,173,000. The decreases in both interest income and interest expense were a result of lower interest rates. Net interest income was $4,162,000, a 23.8% increase over 2001's net interest income of $3,362,000, which resulted from higher levels of earning assets and lower interest rates. A continued easing or neutral stance on interest rates by the Federal Reserve Board also resulted in wider net interest margins in first quarter of 2002. Page 9 MANAGEMENT'S DISCUSSION CONT. PROVISION FOR LOAN LOSSES A $410,000 provision to the allowance for loan losses was made during the first three months of 2002, a $215,000 increase over the $195,000 provision made for the same period of 2001. In Management's opinion, the increase is not indicative of a decline in overall credit quality within the portfolio. Instead, it is the result of (1)significant growth in the commercial loan portfolio, (2)the deterioration of one large credit as a result of new Government Regulations affecting the commercial fishing industry and (3)economic effects of the September 11, 2001, terrorist attack on the region. Based on Management's analysis of the loan portfolio, the Company believes the allowance for loan losses is adequate as of March 31, 2002. At March 31, 2002, the balance of $3,227,000 in the allowance for loan losses was 1.06% of total loans, compared to 1.00% at December 31, 2001 and 0.86% at March 31, 2001. Loans considered to be impaired according to SFAS 114/118 totalled $1,719,875 at March 31, 2002, compared to $1,103,281 at March 31, 2001. This increase is attributable to the deterioration of a single large credit noted above. The portion of the allowance for loan losses allocated to impaired loans at March 31, 2002, was $545,312 compared to $194,547 at March 31, 2001. NON-INTEREST INCOME Non-interest income was $919,000 for the three months ended March 31, 2002, an increase of 24.2% from 2001's non-interest income of $740,000. The increase was due primarily to increases in merchant credit card income, mort- gage origination and servicing income, and service charge income on deposit accounts. Demand for residential mortgages was strong in the first quarter and the Bank sold $10.2 million of loans in the first three months of 2002 compared to $3.0 million in the first three months of 2001. This resulted in increased gains on sales of loans. NON-INTEREST EXPENSE Non-interest expense of $2,619,000 for the three months ended March 31, 2002 is an increase of 18.4% from non-interest expense of $2,212,000 for the first three months of 2001. This increase was primarily due to higher staffing costs and investments in information technology necessary to achieve the Company's goal of providing more comprehensive and competitive services to its customers. INCOME TAXES Income taxes on operating earnings increased to $579,000 for the first three months of 2002 from $489,000 for the same period a year ago. Due to the Company's increased holdings of tax-exempt securities, the percentage increase in income taxes was smaller than the percentage increase in pre-tax income. LOANS Loans grew by $31.8 million or 11.6% between March 31, 2001 and March 31, 2002. Most of this growth came in commercial loans, which increased $14.6 million, and mortgage loans, which increased $15.4 million. During the first three months of 2002, total loans increased by $3.4 million or 1.1%. Page 10 MANAGEMENT'S DISCUSSION CONT. INVESTMENTS The Company's investment portfolio decreased by $7.3 million or 6.4% between March 31, 2001 and March 31, 2002. A portion of the Bank's investment portfolio consists of callable securities, and a declining interest rate environment in 2001 which remained low in the first quarter of 2002 resulted in a large number of these securities being called by issuers. The Bank has been able to replace a portion of these securities at comparable levels. At March 31, 2002, the Company's available-for-sale portfolio had an unrealized gain, net of taxes, of $0.7 million, which is in line with the interest rate decreases seen in the end of the fourth quarter of 2001 and the first quarter of 2002. DEPOSITS As of March 31, 2002, deposits grew year-over-year by 14.7%, or $35.4 million. Demand deposits grew $1.4 million, NOW accounts $6.3 million, savings $9.4 million, money market accounts $12.6 million and certificates of deposit $5.8 million. Management believes the increase in core deposits (demand, NOW, savings, and money markets) is partially attributable to an inflow from equity and mutual fund investments. In addition, approximately $5 million of the increase is attributable to funds deposited in the Bank's new Rockland, Maine office, which was opened in September, 2001. Core deposits in the first quarter of 2002 grew by $7.5 million, which is attributable to a combination of normal seasonal fluctuation, and factors noted above. Certificates of deposit increased $6.2 million. The increase in certificate of deposit balances in both periods is the result of pricing strategies undertaken by the Company. BORROWED FUNDS The Company's funding includes borrowings from the Federal Home Loan Bank and repurchase agreements. Between March 31, 2001 and March 31, 2002, borrowed funds decreased by $10.1 million or 7.8%. The Company utilizes borrowings as an additional source of funding for both loans and investments, which enables it to grow its balance sheet and revenues. Borrowings are reduced as other sources of funding increase, including core deposits and certificates of deposit. This was the case during the twelve-month period ended March 31, 2002. During the first three months of 2002, borrowed funds decreased by $12.6 million or 9.6%, and were replaced in the first-quarter by certificates of deposit and core deposits. LIQUIDITY MANAGEMENT As of March 31, 2002 the Bank had primary sources of liquidity of $42.7 million and an additional $41.5 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. Page 11 MANAGEMENT'S DISCUSSION CONT. SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES Shareholders' equity as of March 31, 2002 was $38,135,000 compared to $34,547,000 for the same date in 2001. The Company's strong earnings performance in the preceeding twelve months was offset slightly by a decrease in the recognized net unrealized gain on available-for-sale securities, as required under SFAS 115. During 2001, the Company increased its dividend each quarter to end the year at a quarterly dividend rate of 22 cents per share. In 2002, a cash dividend of 23 cents per share was declared in the first quarter compared to 19 cents in the first quarter of 2001. Regulatory leverage capital ratios for the Company were 8.56% and 8.45%, respectively, at March 31, 2002 and March 31, 2001. The Company had a tier one risk-based capital ratio of 12.88% and tier two risk-based capital ratio of 14.00% at March 31, 2002, compared to 12.77% and 13.67%, respectively, at March 31, 2001. These are comfortably above the standards to be rated "well- capitalized" by regulatory authorities -- qualifying the Company for lower deposit-insurance premiums. NON-PERFORMING ASSETS At March 31, 2002 and 2001, loans on a non-accrual status totaled $1,720,000 and $1,880,000, respectively. In Management's opinion, the level at March 31, 2002 is not reflective of the overall quality of the Company's loan portfolio but is, instead, the result of an unexpected and isolated decline in one credit. In addition to loans on a non-accrual status at March 31, 2002 and 2001, loans past due greater than 90 days totaled $670,000 and $413,000 respectively. The Company continues to accrue interest on these loans because it believes collection of the interest is reasonably assured. LOAN POLICIES Real estate values: A. Residential properties. The Bank loans 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 loan's payment history remains satisfactory. If a loan becomes delinquent, a review of the loan might be done. When a loan becomes 90 or more days past due, an in-depth review of the loan is made and a determination made as to whether or not a reappraisal is required. B. Land-only properties. The Bank has few loans secured by land only, but does loan up to 65% of the appraised value of the property. Loans on these properties are handled the same way as above from booking date on. C. Commercial properties. The Bank loans up to 75% of the appraised value of commercial properties. Once the loan is closed, the decision to reappraise 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, changes in local zoning ordinances and changes in the condition of the property, including environmental contamination. A certified or licensed appraiser is used for all appraisals. Page 12 MANAGEMENT'S DISCUSSION CONT. 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. 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 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 classified commercial loans greater than $100,000, and semi-annually on all criticized loans greater than $100,000. C. Delinquent loans are reviewed weekly by the Bank's Collections Officer and Senior Credit Officer. D. A tickler system is utilized to insure timely receipt of current information (such as financial statements, appraisals 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 Credit 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. Page 13 MANAGEMENT'S DISCUSSION CONT. 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. Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the market risks reported in the Company's Annual Report at December 31, 2001. Page 14 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 15 ITEM 2. CHANGES IN SECURITIES None Page 16 ITEM 3. DEFAULT UPON SENIOR SECURITIES None. Page 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 18 ITEM 5: Other Information None. Page 19 ITEM 6: Exhibits, Financial Statement Schedules, and reports on Form 8-K A. EXHIBITS None. B. REPORTS ON FORM 8-K None. Page 20 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 14, 2002 /s/Daniel R. Daigneault Date Daniel R. Daigneault President and CEO May 14, 2002 /s/F. Stephen Ward Date F. Stephen Ward Treasurer Page 21