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 March 31, 1999 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, 1999 Common Stock, Par One Cent 2,470,157
FIRST NATIONAL LINCOLN CORPORATION INDEX PART 1 Financial Information Page No. Item 1: Financial Statements Consolidated Balance Sheets - 1 - 2 March 31, 1999, March 31, 1998, and December 31, 1998. Consolidated Statements of Income - 3 - 4 Three months ended March 31, 1999 and March 31, 1998. Consolidated Statements of Cash Flows - 5 - 6 Nine months ended March 31, 1999 and March 31, 1998. Footnotes to Financial Statements - 7 Three months ended March 31, 1999 and March 31, 1998. Item 2: Management's discussion and analysis of 8 - 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 3/31/99 3/31/98 12/31/98 (000 OMITTED) (Unaudited) (Unaudited) (Unaudited) Assets Cash and due from banks $ 5,620 $4,652 $6,338 Interest bearing deposits in other banks 0 0 0 Investments: Available for sale 31,145 13,583 18,858 Held to maturity (market values $39,597 at 3/31/99, $50,932 at 3/31/98 and $40,702 at 12/31/98) 39,846 50,832 40,484 Loans held for sale 0 0 209 Loans 216,322 192,186 209,224 Less allowance for loan losses 1,822 1,772 1,822 Net loans 214,500 190,414 207,402 Accrued interest receivable 2,006 2,048 1,770 Bank premises and equipment 5,753 4,797 5,866 Other real estate owned 398 241 303 Other assets 5,421 5,042 5,576 Total Assets $304,689 $271,609 $286,806 Page1
BALANCE SHEETS CONT. 3/31/99 3/31/98 12/31/98 (Unaudited) (Unaudited) (Unaudited) Liabilities & Stockholders' Equity Demand deposits $15,125 13,030 $17,649 NOW deposits 32,169 29,326 33,710 Money market deposits 7,885 6,970 9,793 Savings deposits 38,640 34,111 39,226 Certificates of deposit 76,544 67,899 72,294 Certificates $100M and over 26,516 18,045 29,131 Total deposits $196,879 169,381 $201,803 Borrowed funds 76,342 73,539 54,460 Other liabilities 2,096 1,917 1,767 Total Liabilities 275,317 244,837 258,030 Shareholders' Equity: Common stock 25 25 25 Additional paid-in capital 4,686 4,655 4,687 Retained earnings 24,974 21,990 24,218 Net unrealized gains (losses) on available- for-sale securities (91) 122 63 Treasury stock (221) (20) (217) Total Stockholders' Equity 29,373 26,772 28,776 Total Liabilities & Stockholders' Equity $304,689 271,609 $286,806 Page 2
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND NON-OWNER CHANGES IN EQUITY For the three months ended March 31, 1999 1998 (000 OMITTED) (Unaudited) (Unaudited) Interest Income: Interest and fees on loans $ 4,379 4,099 Interest on deposits with other banks 5 5 Interest and dividends on investments 1,026 1,100 Total interest income 5,410 5,204 Interest expense: Interest on deposits 1,774 1,575 Interest on borrowed funds 849 963 Total interest expense 2,623 2,538 Net interest income 2,787 2,666 Provision for loan losses 90 45 Net interest income after provision for loan losses 2,697 2,621 Other operating income: Fiduciary income 137 91 Service charges on deposit accounts 149 147 Net securities gains (losses) 0 (25) Other operating income 253 202 Total other operating income 539 415 Other operating expenses: Salaries and employee benefits 959 893 Occupancy expense 119 104 Furniture and equipment expense 167 155 Other 524 464 Total other operating expenses 1,769 1,616 Income before income taxes 1,466 1,420 Applicable income taxes 438 428 NET INCOME $1,028 $ 992 Page 3
STATEMENTS OF INCOME CONT. 1999 1998 (Unaudited) (Unaudited) Non-owner changes in equity, net of tax: Unrealized gains (losses) arising during period (233) 29 Less: reclassification adjustment for accumulated gains (losses) included in net-income 154 (16) Total non-owner changes in equity, net of tax (79) 13 INCOME AND NON-OWNER CHANGES IN EQUITY $ 948 $1,005 Earnings per common share: Basic earnings per share $0.42 $0.40 Diluted earnings per share $0.40 $0.39 Cash dividends declared per share $0.11 $0.07 Weighted average number of shares outstanding 2,470,620 2,479,828 Page 4
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 1999 1998 (000 OMITTED) (Unaudited) (Unaudited) Cash flows from operating activities: Net income $1,028 992 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 153 147 Provision for loan losses 90 45 Provision for losses on other real estate owned 0 0 Loans originated for resale (4,909) (3,361) Proceeds from sales and transfers of loans 5,118 3,124 Net (gain) loss on sale or call of securities held for sale 0 25 Net (gain) loss on sale of securities to be held to maturity 0 0 Losses related to other real estate owned 11 0 Net change in other assets and accrued interest (81) (437) Net change in other liabilities 506 563 Net amortization of premium on investments 15 26 Net cash provided by operating activities 1,931 1,124 Cash flows from investing activities: Proceeds from sales, maturities and calls of securities available for sale 596 5,824 Proceeds from sales, maturities and calls of securities to be held to maturity 8,620 9,499 Proceeds from sales of other real estate owned 40 0 Additional investment in other real estate owned 0 0 Purchases of securities available for sale (13,114) (2,658) Purchases of securities to be held to maturity (8,000) (8,070) Purchase of interest-bearing deposits 0 0 Maturities of interest-bearing deposits 0 0 Net decrease (increase) in loans (7,334) (10,424) Capital expenditures (40) (72) Net cash used in investing activities (19,232) (5,901) Cash flows from financing activities: Net increase (decrease) in demand deposits, savings, money market and club accounts (6,559) (227) Net increase (decrease) in certificates of deposit 1,635 (272) Net increase (decrease) in other borrowings 21,882 4,502 Payment to repurchase common stock (57) (20) Proceeds from sale of Treasury stock 53 0 Net proceeds from stock issuance 0 60 Dividends paid (371) (297) Net cash provided by financing activities 16,583 3,746 Page 5
STATEMENTS OF CASH FLOWS CONT. 1999 1998 (Unaudited) (Unaudited) Net increase (decrease) in cash and cash equivalents (718) (1,031) Cash and cash equivalents at beginning of period 6,338 5,683 Cash and cash equivalents at end of period $ 5,620 $4,652 Interest paid $2,623 $2,477 Income taxes paid 0 0 Non-cash transactions: Loans transferred to other real estate owned (net) 146 56 Loans held for sale transferred to loan portfolio 0 100 Net change in unrealized gain (loss) on available for sale securities (234) 29 Page 6
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 7
Item 2 - MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION & RESULTS OF OPERATIONS EARNINGS SUMMARY Net income for the three months ended March 31, 1999 was $1,028,000, an increase of 3.6% over 1998's net income of $992,000. Earnings growth for the first three months of 1999 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 ralatively flat. 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 three months ended March 31, 1999 was $2,786,000, a 4.5% increase over 1998's net interest income of $2,666,000. Total interest income of $5,410,000 is a 3.9% increase over 1998's total interest income of $5,204,000. Total interest expense of $2,623,000 is a 3.3% increase over 1998's total interest expense of $2,538,000. PROVISION FOR LOAN LOSSES A $90,000 provision to the allowance for loan losses was made during the first three months of 1999. 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 $526,000 at March 31, 1999. The portion of the allowance for loan losses allocated to impaired loans at March 31, 1999 was $260,000. NON-INTEREST INCOME Non-interest income was $539,000 for the three months ended March 31, 1999. This is an increase of 29.8% from 1998's non-interest income of $415,000, and was due to strong mortgage origination and merchant credit card income, as well as fiduciary income. NON-INTEREST EXPENSE Non-interest expense of $1,769,000 for the three months ended March 31, 1999 is an increase of 9.5% from 1998's non-interest expense of $1,616,000. This increase has been primarily due to the Bank's increased number of offices noted above. INCOME TAXES Income taxes on operating earnings increased to $438,000 for the first three months of 1998 from $428,000 for the same period a year ago. Due to the Company's increased holdings of tax-exempt securities, the increase in income taxes was very small. Page 8
MANAGEMENT'S DISCUSSION CONT. DEPOSITS AND BORROWED FUNDS Deposits as of March 31, 1999 decreased by 2.4% or $4.9 million from December 31, 1998. Demand deposits decreased by 14.3% or $2.5 million, NOW accounts decreased by 4.6% or $1.5 million, savings deposits decreased by 1.5% or $0.6 million, money market deposits decreased by 19.5% or $1.9 million and certificates of deposit increased by 1.6% or $1.6 million. These decreases are normal for the seasonal deposit flow that Management anticipates in the first quarter of the year. Deposits were supplemented by borrowings from the Federal Home Loan Bank and repurchase agreements. Due to strong asset growth, total borrowed funds increased by 40.2% or $21.9 million from December 31, 1998. STOCKHOLDERS' INVESTMENT AND CAPITAL RESOURCES Stockholders' investment as of March 31, 1999 was $29,373,000 compared to $26,772,000 for the same period in 1998. The reason for this increase was the strong earnings performance in the preceeding 12 months. During 1998, the Company increased its dividend each quarter to end the year at a quarterly dividend rate of 10 cents per share. In addition, a special cash dividend of 5 cents per share was declared in the fourth quarter of 1998. In 1999, a cash dividend of 11 cents per share was declared in the first quarter. Leverage capital ratios for the Company were 9.64% and 9.86%, respectively, at March 31, 1999 and March 31, 1998. The Bank had a tier one risk-based capital ratio of 14.00% and tier two risk-based capital ratio of 15.00% at March 31, 1999, compared to 14.50% and 15.51%, respectively, at March 31, 1998. These were comfortably above the standards to be rated "well- capitalized" by the regulatory authorities. LIQUIDITY MANAGEMENT As of March 31, 1999 the Bank had primary sources of liquidity of $63.0 million, or 20.8% of its assets. It is Management's opinion that this is adequate. In its Asset/Liability policy, the Bank has adopted guidelines for liquidity. The Company is 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. INVESTMENTS As of March 31, 1999 stockholders' equity was decreased by $91,000 due to a net unrealized loss in the available-for-sale portfolio. Page 9
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 March 31, 1999 and 1998, loans on a non-accrual status totaled $939,000 and $448,000, respectively. In addition to loans on a non-accrual status at March 31, 1999 and 1998, loans past due greater than 90 days totaled $286,000 and $271,000 respectively. 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. 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. Page 10
MANAGEMENT'S DISCUSSION CONT. 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 The Financial Accounting Standards Board has issued SFAS No. 133, Accounting For Derivative Instruments and Hedging Activities and is effective for fiscal years beginning after June 15, 1999. Management has not determined the impact of SFAS No. 133 on the financial statements. 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, have taken 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. The awareness phase of the Company's Year 2000 readiness began with the creation of a Year 2000 Task Force, overseen by the Board of Directors, which includes top management and staff from each division. It has been working since the summer of 1997 towards full Year 2000 compliance. From this, the Company began its assessment phase, during which a Year 2000 Plan was formulated to direct and coordinate activities related to Year 2000 preparedness. Development of this plan began with an examination of all internal systems and identification of those which are considered "mission- critical" and requiring the highest priority in evaluation and remediation. This process included not only computer hardware and software, but also non- information-technology systems, such as alarms and heating control systems. Page 11
MANAGEMENT'S DISCUSSION CONT. From this evaluation, the scope of the Year 2000 remediation project was developed and target dates were set for any necessary systems changes. A test plan was also developed for the testing of all mission-critical systems. The assessment phase of the project was complete in the first quarter of 1998. The major project in the remediation phase was the acquisition of a new core banking system which 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 Management believes will enhance customer service. In addition, several stand-alone hardware and software systems have been upgraded or replaced. At March 31, 1999, the Company was, in Management's opinion, on track with its timelines for completion of its Year 2000 plan. At that point virtually all hardware and software changes required in the remediation phase were complete and operational, and the testing required in the validation phase of the plan was substantially complete. Only one third-party interface remained to be tested, which is expected by be complete in the second quarter of 1999. 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 personal computers and networking hardware, and $50,000 for new telephone equipment. The purchase of new hardware and personal computers, 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, but has been certified by the vendor as Year 2000 compliant. Almost all of these expenditures have been incurred and will be amortized over a three-to- five year period. In addition to hardware and software, the above-mentioned estimated total cost includes a human-resources allocation of $300,000 which has been or will be expensed as incurred. Of this, it is estimated that only $25,000 will be an incremental expense, which will include 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. Externally, both business relationships and significant counterparties have been evaluated for their state of Year 2000 preparedness. The Company has verified that all key 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. At this time, it is Management's opinion that the Company's major Year 2000 risks are primarily related to 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 -- upon which the Company is dependent for liquidity and funds transfer needs. 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 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. Since the Company's primary business is providing traditional banking services, the creation of additional liquidity capacity to meet the potential needs of its customers and communities is a key part of contingency planning. A separate liquidity contingency plan will be finalized by the end of the second quarter of 1999. Page 12
MANAGEMENT'S DISCUSSION CONT. With Year 2000 assessment, remediation and validation now nearly complete, in Management's opinion the worst-case scenario the Company envisions involves electric power and telecommunication interruptions. For electric power, the Company is currently installing a back-up generator for its operations facility. While no formal plans are in place to address telecommunication disruptions, in Management's opinion this is not a significant issue due to the general state of preparedness of the telecommunications industry. 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 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 three months ended March 31, 1999 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 May 14, 1999 Daniel R. Daigneault Date Daniel R. Daigneault President and CEO May 14, 1999 F. Stephen Ward Date F. Stephen Ward Treasurer Page 20