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, 1998 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, 1998 Common Stock, Par One Cent 2,476,250
FIRST NATIONAL LINCOLN CORPORATION INDEX PART 1 Financial Information Page No. Item 1: Financial Statements Consolidated Balance Sheets - 1 - 2 September 30, 1998, September 30, 1997, and December 31, 1997. Consolidated Statements of Income - 3 - 4 Nine months ended September 30, 1998 and September 30, 1997. Consolidated Statements of Income - 5 - 6 Quarter ended September 30, 1998 and September 30, 1997. Consolidated Statements of Cash Flows - 7 - 8 Nine months ended September 30, 1998 and September 30, 1997. Footnotes to Financial Statements - 9 Nine months ended September 30, 1998 and September 30, 1997. Item 2: Management's discussion and analysis of 10 - 15 financial condition and results of operations. PART II Other Information Item 1: Legal Proceedings 16 Item 2: Changes in Securities 17 Item 3: Defaults Upon Senior Securities 18 Item 4: Submission of Matters to a Vote of Security Holders 19 Item 5: Other Information 20 Item 6: Exhibits and reports on Form 8-K. 21 Signatures 22
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS 9/30/98 9/30/97 12/31/97 (000 OMITTED) (Unaudited) (Unaudited) (Unaudited) Assets Cash and due from banks $10,091 $5,476 $5,683 Interest bearing deposits in other banks 0 1,300 0 Investments: Available for sale 13,876 16,078 16,463 Held to maturity (market values $47,145 at 9/30/98, $54,835 at 9/30/97 and $52,610 at 12/31/97) 46,722 54,692 52,282 Loans held for sale (market value $100 at 12/31/97) 0 0 100 Loans 207,231 173,130 181,510 Less allowance for loan losses 1,792 1,818 1,800 Net loans 205,439 171,312 179,710 Accrued interest receivable 1,898 1,815 1,961 Bank premises and equipment 4,869 4,062 4,871 Other real estate owned 339 395 184 Other assets 6,071 1,923 5,025 Total Assets $289,305 $257,053 $266,279 Page1
BALANCE SHEETS CONT. 9/30/98 9/30/97 12/31/97 (Unaudited) (Unaudited) (Unaudited) Liabilities & Stockholders' Equity Demand deposits $17,959 13,856 $14,109 NOW deposits 31,635 28,352 29,213 Money market deposits 7,714 4,213 6,238 Savings deposits 38,157 35,221 34,104 Certificates of deposit 70,429 64,453 68,970 Certificates $100M and over 30,480 15,260 17,246 Total deposits $196,374 161,715 $169,880 Borrowed funds 62,996 68,489 69,037 Other liabilities 1,632 1,716 1,477 Total Liabilities 261,002 231,920 240,394 Shareholders' Equity: Common stock 25 25 25 Additional paid-in capital 4,686 4,584 4,595 Retained earnings 23,604 20,485 21,172 Net unrealized gains (losses) on available- for-sale securities 99 58 93 Treasury stock (111) - 0 Total Stockholders' Equity 28,303 25,133 25,885 Total Liabilities & Stockholders' Equity $289,305 257,053 $266,279 Page 2
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND NON-OWNER CHANGES IN EQUITY For the nine months ended September 30, 1998 1997 (000 OMITTED) (Unaudited) (Unaudited) Interest Income: Interest and fees on loans $12,858 11,099 Interest on deposits with other banks 24 34 Interest and dividends on investments 3,097 3,520 Total interest income 15,979 14,653 Interest expense: Interest on deposits 5,012 4,288 Interest on borrowed funds 2,856 2,672 Total interest expense 7,868 6,960 Net interest income 8,111 7,693 Provision for loan losses 275 20 Net interest income after provision for loan losses 7,836 7,673 Other operating income: Fiduciary income 301 248 Service charges on deposit accounts 464 414 Net securities gains (losses) (21) 0 Other operating income 899 478 Total other operating income 1,643 1,140 Other operating expenses: Salaries and employee benefits 2,774 2,434 Occupancy expense 329 253 Furniture and equipment expense 436 467 Other 1,624 1,388 Total other operating expenses 5,163 4,542 Income before income taxes 4,316 4,271 Applicable income taxes 1,293 1,349 NET INCOME $3,023 $2,922 Page 3
STATEMENTS OF INCOME CONT. 1998 1997 (Unaudited) (Unaudited) Non-owner changes in equity, net of tax: Unrealized gains (losses) arising during period 6 44 Less: reclassification adjustment for accumulated gains (losses) included in net-income (14) 0 Total non-owner changes in equity, net of tax (8) 44 INCOME AND NON-OWNER CHANGES IN EQUITY $3,015 $2,966 Earnings per common share: Basic earnings per share $1.22 $1.19 Diluted earnings per share $1.17 $1.16 Cash dividends declared per share $0.24 $0.17 Weighted average number of shares outstanding 2,478,642 2,463,902 Page 4
CONSOLIDATED STATEMENTS OF INCOME AND NON-OWNER CHANGES IN EQUITY For the quarter ended September 30, 1998 1997 (000 OMITTED) (Unaudited) (Unaudited) Interest Income: Interest and fees on loans $4,486 3,872 Interest on deposits with other banks 14 10 Interest and dividends on investments 952 1,229 Total interest income 5,452 5,111 Interest expense: Interest on deposits 1,821 1,470 Interest on borrowed funds 856 961 Total interest expense 2,677 2,431 Net interest income 2,775 2,680 Provision for loan losses 170 20 Net interest income after provision for loan losses 2,605 2,660 Other operating income: Fiduciary income 113 78 Service charges on deposit accounts 163 139 Net securities gains (losses) 4 0 Other operating income 483 232 Total other operating income 763 449 Other operating expenses: Salaries and employee benefits 975 833 Occupancy expense 115 84 Furniture and equipment expense 125 175 Other 685 528 Total other operating expenses 1,900 1,620 Income before income taxes 1,468 1,489 Applicable income taxes 437 473 NET INCOME $1,031 $1,016 Page 5
STATEMENTS OF INCOME CONT. 1998 1997 (Unaudited) (Unaudited) Non-owner changes in equity, net of tax: Unrealized gains (losses) arising during period (12) 37 Less: reclassification adjustment for accumulated gains (losses) included in net-income 3 0 Total non-owner changes in equity, net of tax (9) 37 INCOME AND NON-OWNER CHANGES IN EQUITY $1,022 $1,053 Earnings per common share Basic earnings per share $0.42 $0.41 Diluted earnings per share $0.40 $0.40 Cash dividends declared per share $0.08 $0.06 Weighted average number of shares outstanding 2,477,530 2,467,603 Page 6
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 1998 1997 (000 OMITTED) (Unaudited) (Unaudited) Cash flows from operating activities: Net income $3,023 2,922 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 407 437 Provision for loan losses 275 20 Loans originated for resale (11,719) (1,657) Proceeds from sales and transfers of loans 11,819 1,959 Net (gain) loss on sale of investments 21 0 Provision for losses on other real estate owned 0 0 Losses related to other real estate owned 0 26 Net change in other assets (983) (906) Net change in other liabilities 145 350 Net amortization of premium on investments 235 85 Net cash provided by operating activities 3,223 3,236 Cash flows from investing activities: Proceeds from sales of investments 5,474 0 Proceeds from maturities of investments 25,134 11,975 Maturities of interest-bearing deposits 0 0 Purchase of interest-bearing deposits 0 (325) Proceeds from sales of other real estate 0 444 Additional investment in other real estate owned 0 (1) Purchase of investments (22,701) (22,199) Net decrease (increase) in loans (26,159) (16,523) Capital expenditures (405) (123) Net cash used in investing activities (18,657) (26,752) Cash flows from financing activities: Net increase (decrease) in demand deposits, savings, money market and club accounts 11,801 (495) Net increase (decrease) in certificates of deposit 14,693 6,536 Net increase (decrease) in other borrowings (6,041) 17,341 Payment to repurchase common stock (191) 48 Proceeds from sale of Treasury stock 76 (48) Net proceeds from stock issuance 95 98 Dividends paid (591) (511) Net cash provided by financing activities 19,842 22,969 Page 7
STATEMENTS OF CASH FLOWS CONT. 1998 1997 (Unaudited) (Unaudited) Net increase (decrease) in cash and cash equivalents 4.408 (547) Cash and cash equivalents at beginning of period 5,683 6,023 Cash and cash equivalents at end of period $10,091 $5,476 Interest paid $7,868 $6,852 Income taxes paid 1,341 1,307 Non-cash transactions: Loans transferred to other real estate owned (net) 155 50 Net change in unrealized gain (loss) on available for sale securities 16 44 Page 8
FOOTNOTES TO FINANCIAL STATEMENTS 1. 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, 1998 was $3,023,000, an increase of 3.5% over 1997's net income of $2,922,000. Net income for the quarter ended September 30, 1998 was $1,031,000. This is a 1.5% increase over 1997's net income of $1,016,000. Earnings growth for the first nine months of 1998 has been at a lower rate than in the past three years due to several factors. The Bank's operating expenses have increased as a result of opening two new branches in Rockport, Maine and Camden, Maine. At the same time, the Bank's operating margins have been compressed as a result of increased competition and the current interest rate environment with a yield curve that has been extremely flat or inverted. It is Management's opinion that neither of these factors will have a significant negative impact on the long-term operating results of the Company. NET INTEREST INCOME Net interest income for the nine months ended September 30, 1998 was $8,111,000, a 5.4% increase over 1997's net interest income of $7,693,000. Total interest income of $15,979,000 is a 9.0% increase over 1997's total interest income of $14,653,000. Total interest expense of $7,868,000 is a 13.0% increase over 1997's total interest expense of $6,960,000. Net interest income for the quarter ended September 30, 1998 was $2,775,000. This is a 3.5% increase over 1997's net interest income of $2,680,000. Total interest income was $5,452,000, a 6.7% increase over 1997's total interest income of $5,111,000. Total interest expense of $2,677,000 is a 10.1% increase over 1997's total interest expense of $2,431,000. PROVISION FOR LOAN LOSSES A $275,000 provision to the allowance for loan losses was made during the first nine months of 1998. 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 $308,000 at September 30, 1998. The portion of the allowance for loan losses allocated to impaired loans at September 30, 1998 was $142,000. NON-INTEREST INCOME Non-interest income of $1,643,000 for the nine months ended September 30, 1998. This is an increase of 44.1% from 1997's non-interest income of $1,140,000, due to strong mortgage origination and merchant credit card income, as well as a non-recurring gain of $125,000. Non-interest income for the quarter ended September 30, 1998 was $763,000, a 69.9% increase over the same period a year ago. NON-INTEREST EXPENSE Non-interest expense of $5,163,000 for the nine months ended September 30, 1998 is an increase of 13.7% from 1997's non-interest expense of $4,542,000. Non-interest expense for the quarter ended September 30, 1998 was $1,900,000, an 17.3% increase over the same period a year ago. Page 10
MANAGEMENT'S DISCUSSION CONT. INCOME TAXES Income taxes on operating earnings decreased to $1,293,000 for the first nine months of 1998 from $1,349,000 for the same period a year ago. The level of income taxes declined slightly as a result of the Company's increased holdings of tax-exempt securities. DEPOSITS AND BORROWED FUNDS Deposits as of September 30, 1998 increased by 21.4% or $34,659,000 from September 30, 1997. Demand deposits increased by 29.6% or $4,103,000, NOW deposits increased by 11.6% or $3,283,000, savings deposits increased by 8.3% or $2,936,000, money market deposits increased by 83.1% or $3,501,000 and certificates of deposit increased by 26.0% or $20,836,000. This is the most substantial deposit growth that the Bank has seen in several years and is a direct result of the opening of two new branches as well as the acquisition of approximately $9 million in CDs in the national wholesale market. Deposits were supplemented by borrowings from the Federal Home Loan Bank and repurchase agreements. Due to strong deposit growth, however, total borrowed funds decreased by 8.0% or $5,493,000 from the same period a year ago. STOCKHOLDERS' INVESTMENT AND CAPITAL RESOURCES Stockholders' investment as of September 30, 1998 was $28,303,000 compared to $25,133,000 for the same period in 1997. The reason for this increase was the strong earnings performance in the year 1997 and the first nine months of 1998. During 1997, the Company increased its dividend each quarter to end the year at a quarterly dividend rate of 6 cents per share. In addition, a special cash dividend of 6 cents per share was declared in the fourth quarter of 1997. In 1998, dividends have been increased by one cent per share each quarter, ending with 9 cents per share in the third quarter. (Dividend information for prior periods has been restated to reflect the 300% stock dividend issued on December 1, 1997.) Leverage capital ratios for the Company were 9.78% and 9.78%, respectively, at September 30, 1998 and September 30, 1997. The Bank had a tier one risk-based capital ratio of 14.47% and tier two risk-based capital ratio of 15.44% at September 30, 1998, compared to 15.62% and 16.80%, respectively, at September 30, 1997. These were comfortably above the standards to be rated "well-capitalized" by the regulatory authorities. LIQUIDITY MANAGEMENT As of September 30, 1998 the Bank had primary sources of liquidity of $57,110,000, or 19.8% 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. Page 11
MANAGEMENT'S DISCUSSION CONT. 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. 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. A certified or licensed appraiser is used for all appraisals. At September 30, 1998 and 1997, loans on a non-accrual status totaled $721,000 and $537,000, respectively. In addition to loans on a non-accrual status at September 30, 1998 and 1997, loans past due greater than 90 days totaled $370,000 and $674,000 respectively. The Company continues to accrue interest on these loans because it believes collection of the interest is reasonably assured. INVESTMENTS As of September 30, 1998 stockholders' equity was increased by $99,000 due to a net unrealized gain 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 No recourse obligations have been incurred in connection with the sale of loans. Page 12
MANAGEMENT'S DISCUSSION CONT. 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 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. ACCOUNTING PRONOUNCEMENTS SFAS No. 130, "Reporting Comprehensive Income", was adopted on January 1, 1998. This standard requires that financial statements report comprehensive income in addition to net income. Comprehensive income is all changes in equity except investments by owners and distributions by owners. For the Company, this includes unrealized appreciation or depreciation on securities available for sale. Page 13
MANAGEMENT'S DISCUSSION CONT. YEAR 2000 READINESS With the year 2000 approaching, all businesses and governments are facing the challenge of assessing and preparing their computer systems to handle dates beyond 1999. First National Lincoln Corporation and its subsidiary, The First National Bank of Damariscotta, are taking steps to address the many issues related to the transition to the next century. The Bank's actions with regard to Year 2000 compliance are reviewed by the Board of Directors, its internal audit department, and its Federal Regulators. These include the following: * The Bank has formulated a Year 2000 Plan to direct and coordinate activities related to Year 2000 preparedness. All systems and business relationships have been assessed to determine the scope of the project and target dates have been set for any necessary systems changes. A test plan is also in place to test all critical systems. * A Year 2000 Task Force, overseen by the Board of Directors, has been created and includes top management and staff from each division. It has been working since the Summer of 1997 towards full Year 2000 compliance. * A new core banking system has been purchased and became operational in the third quarter of 1998. The system has been certified by the vendor as Year 2000 compliant and offers many features which will enhance customer service. * The Bank is seeking to verify that all vendors, suppliers and other business partners will be ready for Year 2000, and has created a team to work with bank customers to assess their Year 2000 awareness and readiness. The estimated cost to address Year 2000 issues is approximately $1 million. This includes $400,000 for the purchase of hardware and software for the new core banking system, $250,000 for new PCs and networking hardware, $50,000 for new telephone equipment, and a human-resources allocation of $300,000. Most of these expenditures have already been incurred and will be amortized over a three-to-five year period. The purchase of new hardware and PCs, although required for operation of the new core banking system, is part of the Bank's planned upgrade of computers. The phone system is a more modern system that is being installed irrespective of Year 2000 issues. Of the $300,000 human resource allocation, it is estimated that only $25,000 will be an incremental expense to cover summer college students, overtime for existing personnel, and outside support. The remaining $275,000 is an allocation of existing human resources to effectively implement and bring to a successful conclusion the Year 2000 Plan It is Management's opinion that the Company's major Year 2000 risks are primarily related to problems experienced by key counterparties which are beyond the Company's control. The two most significant counterparties are U.S. Government Agencies: the Federal Reserve Bank and the Federal Home Loan Bank. The Company has begun and will continue to closely monitor the Year 2000 preparation and readiness of both agencies. The Company has developed contingency plans with for all mission critical systems. These plans include identification of alternative resources and/or vendors as well as specific trigger dates for action and implementation. Page 14
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. Page 15
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 16
ITEM 2. CHANGES IN SECURITIES None Page 17
ITEM 3. DEFAULT UPON SENIOR SECURITIES None. Page 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 19
ITEM 5: Other Information In the third quarter of 1998, the company filed a Form S-8 with the Securities Exchange Commission to register shares for the Company's Employee Stock Purchase Plan. Page 20
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 nine months ended September 30, 1998 the registrant was not required to and did not file any reports on Form 8-K. Page 21
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 12, 1998 Daniel R. Daigneault Date Daniel R. Daigneault President and CEO November 12, 1998 F. Stephen Ward Date F. Stephen Ward Treasurer Page 22