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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None
Page 15
<PAGE>
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
Page 16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 17
<PAGE>
ITEM 5: Other Information
None.
Page 18
<PAGE>
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
<PAGE>
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
<PAGE>
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<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
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