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, 2000
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, 2000
Common Stock, Par One Cent 2,387,847
FIRST NATIONAL LINCOLN CORPORATION
INDEX
PART 1 Financial Information
Page No.
Item 1:
Independent Accountants' Report ............................ 1
Financial Statements
Consolidated Balance Sheets -
March 31, 2000, March 31, 1999, and December 31, 1999 .... 2 - 3
Consolidated Statements of Income and
Non-Owners' Changes in Equity - for the three months
ended March 31, 2000 and March 31, 1999 .................. 4 - 5
Consolidated Statements of Cash Flows - for the three months
ended March 31, 2000 and March 31, 1999 .................. 6 - 7
Footnotes to Financial Statements -
Three months ended March 31, 2000 and March 31, 1999...... 8
Item 2: Management's discussion and analysis of
financial condition and results of operations .......... 9 - 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' 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, 2000, and for
the three-month period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review 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 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 review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
Berry, Dunn, McNeil & Parker
Portland, Maine
May 4, 2000
Page 1
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
3/31/00 3/31/99 12/31/99
(000 OMITTED) (Unaudited) (Unaudited) (Unaudited)
Assets
Cash and due from banks $ 9,348 $ 5,620 $ 8,221
Investments:
Available for sale 44,885 31,145 42,091
Held to maturity (market values $43,375
at 3/31/00, $39,597 at 3/31/99 and
$43,581 at 12/31/99) 46,215 39,846 45,908
Loans held for sale (which approximates
market value at 12/31/99) 0 0 127
Loans 241,801 216,322 232,526
Less allowance for loan losses 2,041 1,822 2,035
Net loans 239,760 214,500 230,491
Accrued interest receivable 2,473 2,006 2,335
Bank premises and equipment 5,384 5,753 5,518
Other real estate owned 296 398 336
Other assets 5,984 5,421 6,260
Total Assets $354,345 $304,689 $341,287
Page 2
BALANCE SHEETS CONT.
3/31/00 3/31/99 12/31/99
(Unaudited) (Unaudited) (Unaudited)
Liabilities & Shareholders' Equity
Demand deposits $ 16,362 $ 15,125 $ 17,746
NOW deposits 36,037 32,169 36,714
Money market deposits 14,696 7,885 16,607
Savings deposits 39,302 38,640 41,349
Certificates of deposit 69,101 76,544 70,859
Certificates $100M and over 35,359 26,516 22,183
Total deposits 210,857 196,879 205,458
Borrowed funds 111,274 76,342 105,048
Other liabilities 2,639 2,095 2,119
Total Liabilities 324,770 275,316 312,625
Shareholders' Equity:
Common stock 25 25 25
Additional paid-in capital 4,853 4,686 4,687
Retained earnings 28,215 24,974 27,463
Net unrealized gains (losses) on
available-for-sale securities (1,244) (91) (1,319)
Treasury stock (2,274) (221) (2,194)
Total Shareholders' Equity 29,575 29,373 28,662
Total Liabilities &
Shareholders' Equity $354,345 $304,689 $341,287
Number of shares authorized 6,000,000 6,000,000 6,000,000
Number of shares issued and outstanding 2,387,847 2,470,157 2,370,047
Book value per share $12.39 $11.89 $12.09
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,
2000 1999
(000 OMITTED) (Unaudited) (Unaudited)
Interest Income:
Interest and fees on loans $ 5,015 $ 4,379
Interest on deposits with other banks 1 5
Interest and dividends on investments 1,479 1,026
Total interest income 6,495 5,410
Interest expense:
Interest on deposits 1,821 1,774
Interest on borrowed funds 1,568 849
Total interest expense 3,389 2,623
Net interest income 3,106 2,787
Provision for loan losses 150 90
Net interest income after provision
for loan losses 2,956 2,697
Other operating income:
Fiduciary income 167 137
Service charges on deposit accounts 198 149
Other operating income 263 253
Total other operating income 628 539
Other operating expenses:
Salaries and employee benefits 1,067 959
Occupancy expense 132 119
Furniture and equipment expense 176 167
Other 642 525
Total other operating expenses 2,017 1,770
Income before income taxes 1,567 1,466
Applicable income taxes 456 438
NET INCOME $ 1,111 $ 1,028
Page 4
STATEMENTS OF INCOME CONT.
2000 1999
(Unaudited) (Unaudited)
Non-owner changes in equity, net of tax:
Unrealized gains (losses)on available for
sale securities arising during period 75 (49)
Total other comprehensive income, net of
taxes of $39 in 2000 and $(25) in 1999 75 (49)
COMPREHENSIVE INCOME $ 1,186 $ 979
Earnings per common share:
Basic earnings per share $0.47 $0.42
Diluted earnings per share $0.45 $0.40
Cash dividends declared per share $0.15 $0.11
Weighted average number of shares
outstanding 2,382,284 2,470,620
Dilutive effect of stock options
in number of shares 80,572 88,538
Page 5
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(000 omitted) 2000 1999
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $1,111 1,028
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 139 153
Provision for loan losses 150 90
Loans originated for resale (236) (4,909)
Proceeds from sales and transfers of loans 363 5,118
Losses related to other real estate owned 5 11
Net change in other assets and accrued interest 138 (81)
Net change in other liabilities 483 506
Net amortization of premium (accretion of discounts)
on investments (4) 15
Net cash provided by operating activities 2,149 1,931
Cash flows from investing activities:
Proceeds from maturities, payments and calls of
securities available for sale 172 596
Proceeds from maturities, payments and calls of
securities to be held to maturity 603 8,620
Proceeds from sales of other real estate owned 35 40
Purchases of securities available for sale (2,842) (13,114)
Purchases of securities to be held to maturity (918) (8,000)
Net increase in loans (9,419) (7,334)
Capital expenditures (5) (40)
Net cash used in investing activities (12,374) (19,232)
Cash flows from financing activities:
Net decrease in demand deposits,
savings, money market and club accounts (6,019) (6,559)
Net increase in certificates of deposit 11,418 1,635
Net increase in other borrowings 6,226 21,882
Payment to repurchase common stock (80) (57)
Proceeds from sale of Treasury stock 12 53
Net proceeds from stock issuance 154 0
Dividends paid (359) (371)
Net cash provided by financing activities 11,352 16,583
Page 6
STATEMENTS OF CASH FLOWS CONT.
2000 1999
(Unaudited) (Unaudited)
Net increase (decrease) in cash and
cash equivalents 1,127 (718)
Cash and cash equivalents at beginning
of period 8,221 6,338
Cash and cash equivalents at end of
period $9,348 $5,620
Interest paid $3,389 $2,623
Income taxes paid 0 0
Non-cash transactions:
Loans transferred to other real estate
owned (net) 0 146
Net change in unrealized gain (loss) on
available for sale securities 75 (49)
Page 7
FOOTNOTES TO FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements of First National
Lincoln Corporation and its subsidiary for the three-month periods ended March
31, 2000 and 1999 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,
1999.
Page 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EARNINGS SUMMARY
Net income for the three months ended March 31, 2000 was $1,111,000, an
increase of 8.1% over 1999's net income of $1,028,000. Revenue growth was the
primary factor in the Company's increased earnings for the first three months
of 2000 compared to the same period in 1999. This was a direct result of asset
growth, which produced higher levels of net interest income. During the period,
the loan and investment portfolios increased by a combined $12.4 million, which
Management views as excellent for the first quarter of the year.
Earnings per share for the first quarter of 2000 were $0.47, a 12.1%
increase over the $0.42 reported in 1999.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 2000 was
$3,106,000, an 11.4% increase over 1999's net interest income of $2,787,000.
Total interest income of $6,495,000 is a 20.1% increase over 1999's total
interest income of $5,410,000. Total interest expense of $3,389,000 is a 29.2%
increase over 1999's total interest expense of $2,623,000. The increases in
both interest income and interest expense was due to a combination of
significantly higher balances and higher interest rates.
PROVISION FOR LOAN LOSSES
A $150,000 provision to the allowance for loan losses was made during the
first three months of 2000. This is a $60,000 increase over the $90,000
provision made for the same period of 1999. The increase was due to increases
in the commecial loan portfolio and the added risk these loans carry. The
allowance for loan losses is deemed adequate as calculated in accordance with
Banking Circular #201 and with respect to Statement of Financial Accounting
Standards (SFAS) 114/118. Loans considered to be impaired according to SFAS
114/118 totalled $195,000 at March 31, 2000. The portion of the allowance for
loan losses allocated to impaired loans at March 31, 2000 was $166,000.
NON-INTEREST INCOME
Non-interest income was $628,000 for the three months ended March 31,
2000, an increase of 16.5% from 1999's non-interest income of $539,000. The
increase was due to increased service charge income on deposit accounts
connected with the increase in the Bank's core deposits, as well as increases
in merchant credit card income and fiduciary income. These increases were
offset by decreased mortgage origination and servicing income. While demand for
residential mortgages has been strong, the Bank chose to retain most of the
production in portfolio, resulting in decreased gains on sales of loans -- only
$363,000 were sold in the first three months of 2000 compared to $5,118,000 for
the same period in 1999. In addition, the Company's adoption of SFAS 125
produced a one-time gain in the second quarter of 1999 relating to mortgage
servicing rights which results in a reduction of the future recognition of
servicing income on those loans.
Page 9
MANAGEMENT'S DISCUSSION CONT.
NON-INTEREST EXPENSE
Non-interest expense of $2,017,000 for the three months ended March 31,
2000, is an increase of 14.0% from 1999's non-interest expense of $1,770,000.
This increase has been primarily due to increases in staffing and software
costs connected with the Company's goal to provide more comprehensive and
competitive services to its customers. In addition, increases in merchant
credit card costs which were offset by an increase in merchant credit card
income.
INCOME TAXES
Income taxes on operating earnings increased to $456,000 for the first
three months of 1999 from $438,000 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.
INVESTMENTS
The Company's investment portfolio increased by $20.1 million or 28.3%
between March 31, 1999 and March 31, 2000, a direct result of an attractive
investment climate which resulted from a steepening of the yield curve. During
the first three months of 2000, the investment portfolio increased by $3.1
million or 3.5%. At March 31, 2000, the Company's available-for-sale portfolio
had an unrealized loss, net of taxes, of $1.2 million, which is in line with
the interest rates increases seen in the third and fourth quarters of 1999 and
the first quarter of 2000.
LOANS
Loans grew by $25.4 million or 11.8% between March 31, 1999 and March 31,
2000. The majority of this growth came in commercial loans, the Company's
highest earning assets, along with very strong growth in mortgage loans. During
the first three months of 2000, loans increased by $9.3 million or 4.0%.
DEPOSITS
As of March 31, 2000, deposits grew year-over year by 7.1% or $14.0
million. The majority of this increase came in core deposits (checking, savings
and money market accounts) which are the Company's lower cost sources of
funding. For the same period, certificates of deposit increased by $1.0
million. During the first three months of 2000, deposits increased by $5.4
million or 2.6%. The majority of this growth was in certificates of deposit
from national markets which can be done efficiently and in large quantities,
without a material impact on interest margins.
BORROWED FUNDS
The Company's funding also includes borrowings from the Federal Home Loan
Bank and repurchase agreements. Between March 31, 1999 and March 31, 2000,
borrowed funds increased by $34.9 million or 45.8%. The Company utilizes
borrowings as an additional source of funding for both loans and investments
which allows it to grow its balance sheet and revenues. During the first three
months of 2000, borrowed funds increased by $6.2 million or 5.9%.
Page 10
MANAGEMENT'S DISCUSSION CONT.
SHAREHOLDERS' INVESTMENT AND CAPITAL RESOURCES
Shareholders' investment as of March 31, 2000 was $29,575,000 compared to
$29,373,000 for the same period in 1999. The Company's strong earnings
performance in the preceeding 12 months was offset by the recognition of a net
unrealized after-tax loss on available-for-sale securities, as required under
SFAS 115, and by the buyback of $2,041,000 of treasury stock.
During 1999, the Company increased its dividend each quarter to end the
year at a quarterly dividend rate of 14 cents per share. In 2000, a cash
dividend of 15 cents per share was declared in the first quarter compared to 11
cents in the first quarter of 1999.
Regulatory leverage capital ratios for the Company were 8.94% and 9.64%,
respectively, at March 31, 2000 and March 31, 1999. The decrease was due to the
acquisition of treasury stock, which reduces capital. The Company had a tier
one risk-based capital ratio of 13.95% and tier two risk-based capital ratio of
14.88% at March 31, 2000, compared to 14.00% and 15.00%, respectively, at March
31, 1999. These are comfortably above the standards to be rated "well-
capitalized" by regulatory authorities -- qualifying the Company for lower
deposit-insurance premiums.
LIQUIDITY MANAGEMENT
As of March 31, 2000 the Bank had primary sources of liquidity of $37.6
million, or 10.7% 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.
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.
Page 11
MANAGEMENT'S DISCUSSION CONT.
At March 31, 2000 and 1999, loans on a non-accrual status totaled
$1,618,000 and $939,000, respectively. In Management's opinion, this increase
is not refelctive 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, 2000 and 1999, loans
past due greater than 90 days totaled $277,000 and $286,000 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.
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 12
MANAGEMENT'S DISCUSSION CONT.
ACCOUNTING PRONOUNCEMENTS
During 1999, the Financial Accounting Standards Board (FASB) issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS 133." SFAS 133, which established accounting reporting
standards for derivative instruments and for hedging activity, was amended by
SFAS 137. SFAS 137 defers the effective date of SFAS 133 to fiscal years
beginning after June 15, 2000. The Bank does not hold any derivative
instruments and Management does not expect to enter into derivative
transactions in the near future. Should the Bank enter into derivative
transactions, SFAS 137 will be followed when effective.
YEAR 2000 ISSUE
As a result of extensive preparations for the century date change that began in
1997, the Company experienced no problems with its computer systems or other
affected areas on January 1, 2000.
In prior filings, the Company disclosed its estimated cost to address Year
2000 issues at approximately $1 million. This included $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. These expenditures are being amortized over a three-to-five year
period. In addition to hardware and software, the total includes a human-
resources allocation of $300,000, which was expensed as incurred. Of this, only
$25,000 was an incremental expense, which included summer college students,
overtime for existing personnel, and outside support. The remaining $275,000
was an allocation of existing human resources costs. The Company did not incur
any additional costs for Year 2000 preparations beyond those previously
disclosed.
In Management's opinion, the Company's major Year 2000 risks were
primarily related to key counterparties which are beyond the Company's control,
including the Federal Reserve Bank and the Federal Home Loan Bank - upon which
the Company is dependent for liquidity and funds transfer needs. The Company
experienced no problems or issues related to the century date change with
either counterparty.
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.
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
EXHIBIT 27. Financial Data Schedule.
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 15, 2000 Daniel R. Daigneault
Date Daniel R. Daigneault
President and CEO
May 15, 2000 F. Stephen Ward
Date F. Stephen Ward
Treasurer
Page 21