UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: Commission File No.
March 31, 2004 0-26589
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 [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [X] 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 May 7, 2004
Common Stock, Par One Cent 7,308,676
FIRST NATIONAL LINCOLN CORPORATION
INDEX
PART 1 Financial Information (Unaudited)
Page No.
Item 1:
Selected Financial Data .................................... 1
Independent Accountants' Review Report ..................... 2
Financial Statements
Consolidated Balance Sheets -
March 31, 2004, March 31, 2003 and December 31, 2003 3 - 4
Consolidated Statements of Income - for the three months
ended March 31, 2004 and March 31, 2003 .................. 5
Consolidated Statements of Changes in Shareholders' Equity -
for the three months ended March 31, 2004 and March 31, 2003 6 - 7
Consolidated Statements of Cash Flows - for the three months
ended March 31, 2004 and March 31, 2003 .................. 8 - 9
Notes to Consolidated Financial Statements - for the three
months ended March 31, 2004 and March 31, 2003 10 - 13
Item 2: Management's discussion and analysis of
financial condition and results of operations .......... 14 - 21
Item 3: Quantitative and qualitative disclosures
about market risk ...................................... 22 - 24
Item 4: Controls and Procedures ................................ 25
PART II Other Information
Item 1: Legal Proceedings ...................................... 26
Item 2: Changes in Securities .................................. 27
Item 3: Defaults Upon Senior Securities ........................ 28
Item 4: Submission of Matters to a Vote of Security Holders .... 29
Item 5: Other Information ...................................... 30
Item 6: Exhibits and reports on Form 8-K ....................... 31
Signatures .......................................................... 32
PART I.
ITEM 1. FINANCIAL STATEMENTS
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY
SELECTED FINANCIAL DATA (Unaudited)
- ------------------------------------------------------------------------------
For the three months ended
Dollars in thousands, March 31,
except for per share amounts 2004 2003
- ------------------------------------------------------------------------------
Summary of Operations
Operating Income $ 8,224 $ 8,091
Operating Expense 5,532 5,751
Net Interest Income 4,953 4,100
Provision for Loan Losses 240 225
Net Income 1,924 1,679
- ------------------------------------------------------------------------------
Per Common Share Data (b)
Basic Earnings per Share $ 0.264 $ 0.231
Diluted Earnings per Share 0.258 0.226
Cash Dividends Declared 0.103 0.090
Book Value 6.74 6.05
Market Value 16.00 11.32
- ------------------------------------------------------------------------------
Financial Ratios
Return on Average Equity (a) 16.14% 15.77%
Return on Average Assets (a) 1.36% 1.36%
Average Equity to Average Assets 8.43% 8.59%
Net Interest Margin Tax-Equivalent (a) 3.87% 3.66%
Dividend Payout Ratio 39.24% 39.13%
Allowance for Loan Losses/Total Loans 1.06% 1.10%
Non-Performing Loans to Total Loans 0.40% 0.34%
Non-Performing Assets to Total Assets 0.30% 0.25%
Efficiency Ratio ( c ) 49.26% 49.42%
- ------------------------------------------------------------------------------
At Period End
Total Assets $ 578,219 $ 504,088
Total Loans 415,460 346,095
Total Investment Securities 138,069 128,667
Total Deposits 384,251 340,377
Total Shareholders' Equity 49,352 43,952
- ------------------------------------------------------------------------------
(a) Annualized using a 365-day basis
(b) Adjusted for three-for-one stock split declared on April 27, 2004 to
shareholders of record on May 12, 2004, payable June 1, 2004.
(c) The Company uses the following formula in calculating its efficiency
ratio
Non-Interest Expense - Loss on Securities Sales
- ------------------------------------------------------------------------------
Tax-Equivalent Net Interest Income + Non-Interest Income - Gains on Securities
- ------------------------------------------------------------------------------
Page 1
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
First National Lincoln Corporation
We have reviewed the accompanying interim consolidated financial information of
First National Lincoln Corporation and Subsidiary as of March 31, 2004 and
2003, and for the three-month periods then ended. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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
standards of the Public Company Accounting Oversight Board, the objective of
which is to express an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with United States generally accepted accounting principles.
Berry, Dunn, McNeil & Parker
Portland, Maine
May 7, 2004
Page 2
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
- ------------------------------------------------------------------------------
(000 OMITTED except per share data March 31, March 31, December 31,
and number of shares) 2004 2003 2003
- ------------------------------------------------------------------------------
Assets
Cash and due from banks $ 9,236 $ 10,146 $ 17,087
Overnight funds sold - 3,800 -
------- ------- -------
Cash and cash equivalents 9,236 13,946 17,087
------- ------- -------
Investments:
Available for sale 55,570 63,652 57,445
Held to maturity (market values $84,455
at 3/31/04, $66,771 at 3/31/03 and
$80,820 at 12/31/03) 82,499 65,015 79,244
Loans held for sale (fair value
approximates cost) 295 1,535 982
Loans 415,460 346,095 398,895
Less: allowance for loan losses 4,392 3,809 4,200
------- ------- -------
Net loans 411,068 342,286 394,695
------- ------- -------
Accrued interest receivable 3,147 3,051 2,743
Premises and equipment, net of
accumulated depreciation 8,948 7,657 9,007
Other real estate owned 44 75 51
Other assets 7,412 6,871 7,558
------- ------- -------
Total Assets $ 578,219 $ 504,088 $ 568,812
======= ======= =======
Page 3
CONSOLIDATED BALANCE SHEETS CONTINUED
- ------------------------------------------------------------------------------
March 31, March 31, December 31,
2004 2003 2003
- ------------------------------------------------------------------------------
Liabilities
Demand deposits $ 26,581 $ 23,501 $ 28,874
NOW deposits 51,346 46,736 52,161
Money market deposits 80,837 91,611 80,586
Savings deposits 63,085 60,116 63,356
Certificates of deposit 77,840 69,110 69,880
Certificates $100,000 and over 84,562 49,303 64,220
------- ------- -------
Total deposits 384,251 340,377 359,077
------- ------- -------
Borrowed funds 139,515 115,151 157,822
Other liabilities 5,101 4,608 4,195
------- ------- -------
Total Liabilities 528,867 460,136 521,094
------- ------- -------
Shareholders' Equity:
Common stock 74 74 74
Additional paid-in capital 4,046 4,687 4,699
Retained earnings 44,106 39,299 42,939
Net unrealized gains on securities
Available for sale 2,805 2,339 2,497
Treasury stock (1,679) (2,447) (2,491)
------- ------- -------
Total Shareholders' Equity 49,352 43,952 47,718
------- ------- -------
Total Liabilities
and Shareholders' Equity $ 578,219 $ 504,088 $ 568,812
======= ======= =======
- -----------------------------------------------------------------------------
Share and per Share data have been adjusted to reflect the three-for-one stock
split effective May 12, 2004
- -------------------------------------------------------------------------------
Number of shares authorized 18,000,000 18,000,000 18,000,000
Number of shares issued 7,443,810 7,443,810 7,443,810
Number of shares outstanding 7,323,624 7,259,289 7,264,140
Book value per share $6.74 $6.05 $6.57
- -----------------------------------------------------------------------------
See Independent Accountants' Review Report. The accompanying notes are an
integral part of these consolidated financial statements.
Page 4
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- ------------------------------------------------------------------------------
(000s OMITTED except per share data For the three months ended March 31,
and number of shares) 2004 2003
- ------------------------------------------------------------------------------
Interest and dividend income:
Interest and fees on loans $ 5,553 $ 5,265
Interest on deposits with other banks 3 43
Interest and dividends on investments 1,565 1,560
----- -----
Total interest and dividend income 7,121 6,868
----- -----
Interest expense:
Interest on deposits 1,260 1,704
Interest on borrowed funds 908 1,064
----- -----
Total interest expense 2,168 2,768
----- -----
Net interest income 4,953 4,100
Provision for loan losses 240 225
----- -----
Net interest income after provision for loan losses 4,713 3,875
----- -----
Non-interest income:
Fiduciary income 214 189
Service charges on deposit accounts 271 267
Mortgage origination and servicing income 165 292
Other operating income 453 475
----- -----
Total non-interest income 1,103 1,223
----- -----
Non-interest expense:
Salaries and employee benefits 1,664 1,412
Occupancy expense 213 192
Furniture and equipment expense 366 358
Other 881 796
----- -----
Total non-interest expense 3,124 2,758
----- -----
Income before income taxes 2,692 2,340
Applicable income taxes 768 661
----- -----
NET INCOME $ 1,924 $ 1,679
===== =====
- -----------------------------------------------------------------------------
Share and per share data have been adjusted to reflect the three-for-one stock
split effective May 12, 2004.
- -------------------------------------------------------------------------------
Earnings per common share:
Basic earnings per share $0.264 $0.231
Diluted earnings per share $0.258 $0.226
Cash dividends declared per share $0.103 $0.090
Weighted average number of shares
outstanding 7,298,505 7,256,319
Incremental Shares 163,161 185,295
- -----------------------------------------------------------------------------
See Independent Accountants' Review Report. The accompanying notes are an
integral part of these consolidated financial statements.
Page 5
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<table>
<caption>
- ----------------------------------------------------------------------------------------------
Three months ended March 31, 2004
- ----------------------------------------------------------------------------------------------
(000 omitted except for share data) Net
unrealized
gains Total
Number of Additional on securities share-
common Common paid-in Retained available Treasury holders'
shares stock capital earnings for sale stock equity
<s> <c> <c> <c> <c> <c> <c> <c>
- ----------------------------------------------------------------------------------------------
Balance at
December 31,
2003 7,264,140 $74 $4,699 $42,939 $2,497 $(2,491) $47,718
--------- --- ------ ------- ------ ------- -------
Net income - - - 1,924 - - 1,924
Net change in
unrealized
gain on
securities
available for
sale, net of
tax expense
of $159 - - - - 308 - 308
--------- --- ------ ------- ------ ------- -------
Comprehensive
income - - - 1,924 308 - 2,232
Cash dividends
declared - - - (757) - - (757)
Treasury stock
purchases (7,610) - - - - (122) (122)
Treasury stock
sales 67,094 - (653) - - 934 281
--------- --- ------ ------- ------ ------- -------
Balance
at March 31,
2004 7,323,624 $74 $4,046 $44,106 $2,805 $(1,679) $49,352
========= === ====== ======= ====== ======= =======
- ----------------------------------------------------------------------------------------------
Page 6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CONTINUED
- ----------------------------------------------------------------------------------------------
Three months ended March 31, 2003
- ----------------------------------------------------------------------------------------------
(000 omitted except for share data) Net
unrealized
gains Total
Number of Additional on securities share-
common Common paid-in Retained available Treasury holders'
shares stock capital earnings for sale stock equity
- ----------------------------------------------------------------------------------------------
Balance at
December 31,
2002 7,244,079 $74 $4,687 $38,273 $2,170 $(2,509) $42,695
--------- --- ------ ------- ----- ------- -------
Net income - - - 1,679 - - 1,679
Net change in
unrealized
gain on
securities
available for
sale, net of
tax expense of
$87 - - - - 169 - 169
--------- --- ------ ------ ------ ------- -------
Comprehensive
income - - - 1,679 169 - 1,848
Cash dividends
declared - - - (653) - - (653)
Treasury stock
purchases (6,600) - - - - (73) (73)
Treasury stock
sales 21,810 - - - - 135 135
--------- --- ------ ------- ------ ------- --------
Balance
at March 31,
2003 7,259,289 $74 $4,687 $39,299 $2,339 $(2,447) $43,952
========= === ====== ======= ====== ======= =======
- ----------------------------------------------------------------------------------------------
See Independent Accountants' Review Report. The accompanying notes are an integral part of these
consolidated financial statements.
</table>
Page 7
FIRST NATIONAL LINCOLN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------
For the three months ended March 31,
(000 omitted) 2004 2003
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,924 $ 1,679
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 258 249
Provision for loan losses 240 225
Loans originated for resale (4,543) (15,663)
Proceeds from sales and transfers of loans 5,230 16,741
Net gain on sale of other real estate owned - (24)
Net increase in other assets and accrued interest (201) (508)
Net increase in other liabilities 747 712
Net amortization of premiums on investments 72 11
------ ------
Net cash provided by operating activities 3,727 3,422
------ ------
Cash flows from investing activities:
Proceeds from maturities, payments and calls of
securities available for sale 2,326 1,019
Proceeds from maturities, payments and calls of
securities to be held to maturity 15,282 12,662
Proceeds from sales of other real estate owned 7 204
Purchases of securities available for sale - (8,000)
Purchases of securities to be held to maturity (18,593) (12,030)
Net increase in loans (16,613) (14,137)
Capital expenditures (287) (73)
------ ------
Net cash used in investing activities (17,878) (20,355)
------ ------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
savings, money market and club accounts (3,128) 9,165
Net increase (decrease) in
certificates of deposit 28,302 (3,012)
Advances on long-term borrowings - 5,000
Repayment on long-term borrowings (6,000) -
Net decrease in short-term borrowings (12,307) (3,214)
Payments to repurchase common stock (122) (73)
Proceeds from sale of treasury stock 281 135
Dividends paid (726) (628)
------ ------
Net cash provided by financing activities 6,300 7,373
------ ------
Page 8
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
Net decrease in cash and
cash equivalents (7,851) (9,560)
Cash and cash equivalents at beginning
of period 17,087 23,506
------ ------
Cash and cash equivalents at end of
period $ 9,236 $13,946
====== ======
- -------------------------------------------------------------------------------
Interest paid $ 2,495 $ 2,909
Income taxes paid - -
Non-cash transactions:
Change in net unrealized gain on
available for sale securities 467 256
- ------------------------------------------------------------------------------
See Independent Accountants' Review Report. The accompanying notes are an
integral part of these consolidated financial statements.
Page 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
First National Lincoln Corporation (the Company) is a financial holding company
that owns all of the common stock of The First National Bank of Damariscotta
(the Bank). The accompanying unaudited consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. All significant intercompany
transactions and balances are eliminated in consolidation. The income reported
for the 2004 period is not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2003.
NOTE 2 - COMMON STOCK
On April 27, 2004, the Company's Board of Directors declared a three-for-one
split of the Company's common stock payable in the form of a stock dividend to
shareholders of record on May 12, 2004, with a payment date of June 1, 2004.
All share and per share data included in the consolidated financial statements
and elsewhere in this report have been restated to reflect the stock split.
A summary of the status of the Company's Stock Option Plan as of March 31,
2004, and changes during the three months then ended, is presented below.
- -------------------------------------------------------------------------------
Number of Weighted Average
Shares Exercise Price
- -------------------------------------------------------------------------------
Balance at December 31, 2003 294,600 $4.41
Granted during the period - -
Exercised during the period (57,600) 2.21
------- -----
Balance at March 31, 2004 237,000 $4.95
======= =====
- -------------------------------------------------------------------------------
Page 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended March 31, 2004 and 2003:
- -----------------------------------------------------------------------------
For the three months ended March 31, 2004
- -----------------------------------------------------------------------------
In thousands, except for number of Income Shares Per-Share
shares and per share data (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------
Net income as reported $ 1,924
-----
Basic EPS: Income available
to common shareholders $ 1,924 7,298,505 $ 0.264
Effect of dilutive securities:
incentive stock options 163,161
----- --------- -----
Diluted EPS: Income available
to common shareholders plus
assumed conversions $ 1,924 7,461,666 $ 0.258
===== ========= =====
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
For the three months ended March 31, 2003
- -----------------------------------------------------------------------------
In thousands, except for number of Income Shares Per-Share
shares and per share data (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------
Net income as reported $ 1,679
-----
Basic EPS: Income available
to common shareholders $ 1,679 7,256,319 $ 0.231
Effect of dilutive securities:
incentive stock options 185,295
----- --------- -----
Diluted EPS: Income available
to common shareholders plus
assumed conversions $ 1,679 7,441,614 $ 0.226
===== ========= =====
- -----------------------------------------------------------------------------
All earnings per share calculations have been made using the weighted
average number of shares outstanding during the period. All of the dilutive
securities are incentive stock options granted to certain key members of
Management. The dilutive number of shares has been calculated using the
treasury method, assuming that all granted options were exercisable at the end
of each period.
Page 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income for the three months ended March 31, 2004 and 2003
is as follows:
- -----------------------------------------------------------------------------
For the three months ended March 31,
Dollars in thousands 2004 2003
- -----------------------------------------------------------------------------
Net income $ 1,924 $ 1,679
Net unrealized gain on securities available
for sale, net of deferred taxes of $159
in 2004 and $87 in 2003 308 169
------- ------
Comprehensive income $ 2,232 $ 1,848
======= ======
- -----------------------------------------------------------------------------
NOTE 5 - POST RETIREMENT BENEFIT PLANS
The Bank sponsors two post retirement benefit plans. One plan provides health
insurance benefits to employees hired prior to June 30, 1988 and who retired
before June 30, 1996. The other plan provides life insurance coverage to
employees who retired prior to December 31, 2002. The Bank also provides health
insurance for retired directors. None of these plans are pre-funded. The Bank
elected to recognize the accumulated postretirement benefit obligation as of
January 1, 1993 of $578,000 as a component of net periodic post retirement
benefit cost over a 20-year period.
In December 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act includes
the following two new features to Medicare (Medicare Part D) that could affect
the measurement of the accumulated postretirement benefit obligation (APBO) and
net periodic postretirement benefit cost for the Plan: a subsidy to plan
sponsors that is based on 28% of an individual beneficiary's annual
prescription drug costs between $250 and $5,000 and the opportunity for a
retiree to obtain a prescription drug benefit under Medicare. The effects of
the Act on the APBO or net periodic postretirement benefit cost are not
reflected in the financial statements or accompanying notes. Pending specific
authoritative guidance on the accounting for the federal subsidy could require
the Company to change previously reported information when the guidance is
issued. The following tables set forth the net periodic pension cost:
- -------------------------------------------------------------------------------
For the three months ended March 31, 2004 2003
- -------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 2 $ 1
Interest cost 8 9
Amortization of unrecognized transition obligation 7 7
Amortization of prior service cost 1 (1)
Amortization of accumulated gains 1 1
- -------------------------------------------------------------------------------
Net periodic benefit cost $19 $17
===============================================================================
Weighted average assumptions as of March 31:
Discount rate 7.0% 7.0%
- -------------------------------------------------------------------------------
Page 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The above discount rate assumption was used in determining both the
accumulated benefit obligation and the net benefit cost. The measurement
date for benefit obligations was as of year-end for both years presented. The
estimated amount of benefits to be paid in 2004 is $45,000.
NOTE 6 - RECENT ACCOUNTING DEVELOPMENTS
Statement of Financial Accounting Standards (SFAS) No. 133 Implementation
Issue C13, "When a Loan Commitment Is Included in the Scope of Statement 133,"
requires commitments to originate mortgage loans that will be held for sale
upon origination to be accounted for as derivatives, but does not provide
guidance on how the fair value of those commitments should be measured.
In March 2004, the SEC issued Staff Accounting Bulletin (SAB) No. 105,
"Application of Accounting Principles to Loan Commitments," in which the staff
indicated it believes loan commitments are written options and therefore should
never result in the recognition of an asset under SFAS No. 133. Rather, the
staff indicated lenders should initially recognize a liability for loan
commitments, with the offsetting debit recognized as a derivative loss to the
extent a premium is not received from the potential borrower.
The staff indicated it would not object to a registrant's recognizing loan
commitments as assets provided it discontinues that practice for commitments
entered into in the first reporting period beginning after March 15, 2004 and
provided assets recorded on loan commitments entered into prior to that date
are reversed when the related loan closes or the commitment expires.
SAB No. 105 is not expected to have a material effect on the Company's
consolidated financial statements and results of operations.
Page 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the Company's financial condition is
based on the consolidated financial statements which are prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of such financial statements requires Management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, Management evaluates its estimates, including
those related to the allowance for loan losses. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis in
making judgments about the carrying values of assets that are not readily
apparent from other sources. Actual results could differ from the amount
derived from Management's estimates and assumptions under different assumptions
or conditions.
Management believes the allowance for loan losses is a critical accounting
policy that requires the most significant estimates and assumptions used in the
preparation of the consolidated financial statements. The allowance for loan
losses is based on Management's evaluation of the level of the allowance
required in relation to the estimated loss exposure in the loan portfolio.
Management believes the allowance for loan losses is a significant estimate and
therefore regularly evaluates it for adequacy by taking into consideration
factors such as prior loan loss experience, the character and size of the loan
portfolio, business and economic conditions and Management's estimation of
potential losses. The use of different estimates or assumptions could produce
different provisions for loan losses.
The valuation of mortgage servicing rights is also a critical accounting
policy which requires significant estimates and assumptions. The Bank often
sells mortgage loans it originates and retains the ongoing servicing of such
loans, receiving a fee for these services, generally 0.25% of the outstanding
balance of the loan per annum. Mortgage servicing rights are recognized when
they are acquired through sale of loans and are reported in other assets. They
are amortized into non-interest income in proportion to, and over the period
of, the estimated future net servicing income of the underlying financial
assets. Management uses an independent firm which specializes in the valuation
of mortgage servicing rights to determine the fair value which is recorded on
the balance sheet. This includes an evaluation for impairment based upon the
fair value of the rights, which can vary depending upon current interest rates
and prepayment expectations, as compared to amortized cost. Impairment is
determined by stratifying rights by predominant characteristics, such as
interest rates and terms. The use of different assumptions could produce a
different valuation for both mortgage servicing rights and impairment.
Page 14
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
EARNINGS SUMMARY
Net income for the three months ended March 31, 2004 was $1,924,000, an
increase of 14.6% over net income of $1,679,000 in the comparable period of
2003.
The Company's increase in net income for the first three months of 2004 in
comparison to 2003 was the result of a 20.8% increase in net interest income
due to wider margins and growth in earning assets. While there was a decline in
non-interest income due to decreased mortgage origination activity, at the same
time the Company saw a controlled level of increase in operating expenses
Fully diluted earnings per share for the first three months of 2004 were
$0.258, a 14.2% increase over the $0.226 reported for the first three months of
2003.
NET INTEREST INCOME
Total interest income of $7,121,000 for the three months ended March 31, 2004
is a 3.7% increase from total interest income of $6,868,000 in the comparable
period of 2003. While the low interest rate climate brought on by Federal
Reserve Board actions resulted in lower asset yields, this was more than offset
by increased interest income from strong growth in the level of earning assets.
At the same time, total interest expense of $2,168,000 for the first three
months of 2004 is a 21.7% decrease from total interest expense of $2,768,000
for the first three months of 2003. This was a direct result of the low
interest rate climate brought on by Federal Reserve Board actions.
The combination of lower interest rates and asset growth resulted in net
interest income of $4,953,000 for the three months ended March 31, 2004, a
20.8% increase from the $4,100,000 reported for the same period in 2003.
The Company's net interest margin on a tax-equivalent basis increased from
3.66% in the first three months of 2003 to 3.87% in the first three months of
2004. Tax-exempt interest income amounted to $652,000 and $427,000 for the
three months ended March 31, 2004 and 2003, respectively. Tax equivalency is
calculated using a 35% effective tax rate. These results are consistent with
the widening which occurred in the Company's net interest margin beginning in
the third quarter of 2003 after repricing a significant amount of liabilities
in the second and third quarters of 2003.
The following table presents the effect of tax-exempt income on the
calculation of the net interest margin:
- -------------------------------------------------------------------------------
For the three months ended March 31,
(in thousands) 2004 2003
- ------------------------------------------------------------------------------
Net interest income as presented $ 4,953 $ 4,100
Effect of tax-exempt income 262 230
----- -----
Net interest income, tax equivalent $ 5,215 $ 4,330
===== =====
- ------------------------------------------------------------------------------
Page 15
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
PROVISION FOR LOAN LOSSES
A $240,000 provision to the allowance for loan losses was made during the first
three months of 2004, a $15,000 increase from the $225,000 provision made for
the same period of 2003. The slightly higher level of provision in 2004
compared to 2003 is in line with the Company's asset growth and is not
indicative of a decline in overall asset quality.
NON-INTEREST INCOME
Non-interest income was $1,103,000 for the three months ended March 31, 2004, a
decrease of 9.8% from the $1,223,000 reported for the first three months of
2003. The decrease in non-interest income was due primarily to a decline in
mortgage origination and servicing income. While demand for residential
mortgages remained strong in the first three months of 2004, much of new
mortgage production was in variable-rate loans and the Bank opted to retain a
significant amount in its portfolio given the opportunity to increase earning
assets without taking on substantial interest rate risk.
NON-INTEREST EXPENSE
Non-interest expense of $3,124,000 for the three months ended March 31, 2004,
is an increase of 13.3% over non-interest expense of $2,758,000 for the first
three months of 2003. This increase has been primarily due to higher personnel
and premises costs to provide more comprehensive and competitive services for
customers, as well as increased costs for supplies and professional fees.
INCOME TAXES
Income taxes on operating earnings increased to $768,000 for the first three
months of 2004 from $661,000 for the same period a year ago. The increase is in
line with the increase in pre-tax income.
Page 16
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
AVERAGE DAILY BALANCE SHEET
The following table shows the Company's average daily balance sheets for the
three-month periods ended March 31, 2004 and 2003
- --------------------------------------------------------------------------
Three-Month Periods ended March 31,
Dollars in thousands 2004 2003
- --------------------------------------------------------------------------
Cash and due from banks $ 11,440 $ 9,006
Overnight funds sold 1,393 17,496
Investments
U.S. Treasury securities & government agencies 56,517 48,956
Obligations of states & political subdivisions 32,648 26,448
Other securities 42,981 44,192
--------- ---------
Total investments 132,146 119,596
--------- ---------
Loans held for sale 295 2,416
--------- ---------
Loans
Commercial 140,732 123,909
Consumer 26,323 27,380
State and municipal 8,419 11,353
Real estate 231,837 177,505
--------- ---------
Total loans 407,311 340,147
Allowance for loan losses (4,269) (3,733)
--------- ---------
Net loans 403,042 336,414
--------- ---------
Premises and equipment, net 9,035 7,931
Other assets 10,139 9,645
--------- ---------
Total assets $ 567,490 $ 502,504
========= =========
Deposits
Demand $ 26,848 $ 23,792
NOW 51,879 47,408
Money market 80,608 87,165
Savings 63,426 60,450
Certificates of deposit 74,756 70,559
Certificates of deposit over $100,000 77,538 49,899
--------- ---------
Total deposits 375,055 339,273
--------- ---------
Borrowed funds 140,004 115,806
Other liabilities 4,616 4,247
--------- ---------
Total liabilities 519,675 459,326
--------- ---------
Common stock 74 74
Additional paid in capital 4,687 4,687
Retained earnings 42,958 38,715
Unrealized gain on AFS 2,497 2,170
Treasury stock (2,401) (2,468)
--------- ---------
Total capital 47,815 43,178
--------- ---------
Total liabilities and capital $ 567,490 $ 502,504
========= =========
Page 17
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
INVESTMENTS
The Company's investment portfolio increased by $1.4 million or 1.0% between
December 31, 2003, and March 31, 2004. A portion of the portfolio consists of
callable securities, some of which were called by issuers and replaced at lower
yields. At March 31, 2004, the Company's available-for-sale portfolio had an
unrealized gain, net of taxes, of $2.8 million, which is in line with the
interest rate climate seen in the first three months of 2004.
LOANS
Loans grew by $16.6 million or 4.2% during the first three months of 2004. The
growth in commercial loans was $6.0 million or 4.4% and municipal loans
decreased $0.4 million or 4.9%. The residential mortgage portfolio increased by
$8.0 million or 4.6%, and home equity lines of credit grew $3.1 million or 6.0%
year-to-date.
Between March 31, 2003 and March 31, 2004, the loan portfolio increased
$69.4 million or 20.0%, as a result of strong customer demand and orginiation.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the amount available for credit losses
inherent in the Company's loan portfolio. Loans are charged off when they are
deemed uncollectible, after giving consideration to factors such as the
customer's financial condition, underlying collateral and guarantees, as well
as general and industry economic conditions.
In general, the Company determines the appropriate overall reserve for
loan losses based upon periodic, systematic reviews of its portfolio to
identify inherent losses and Management's judgment about various qualitative
factors. These reviews result in the identification and quantification of loss
factors, which are used in determining the amount of the allowance for loan
losses. The Company periodically evaluates prevailing economic and business
conditions, industry concentrations, changes in the size and characteristics of
the portfolio and other pertinent factors. Portions of the allowance for loan
losses are quantified to cover the estimated losses inherent in each loan
category based on the results of this detailed review process.
Commercial loans are individually reviewed and assigned a credit risk
rating from "1" (low risk of loss) to "8" (high risk of loss). For non-impaired
loans with a credit risk rating of "1" to "7", estimated loss factors based on
historical loss experience (ranging from two to five years) are used to
calculate a loan loss reserve for each credit risk rating classification.
Qualitative adjustments are also made based upon Management's assessment of
prevailing economic conditions, trends in volumes and terms of loans, levels
and trends in delinquencies and non-accruals, and the effect of changes in
lending policies. A specific allocation is made for impaired loans (loans on
non-accrual status, as well as loans with a credit risk rating of "8"), which
are measured at the net present value of future cash flows, discounted at the
loan's effective interest rate, or at fair market value of collateral if the
loan is collateral dependent. The combination of these analyses is the basis
for the determination of the commercial loan portion of the allowance for loan
losses.
Consumer loans, which include residential mortgages, home equity
loans/lines, and direct/indirect loans, are generally evaluated as a group
based on product type. The determination of the consumer loan portion of
the allowance for loan losses is based on a five-year average of annual
historical losses, adjusted for the qualitative factors noted above.
Page 18
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
The results of all analyses are reviewed and discussed by the Directors'
Loan Committee. An integral component of the Company's risk management process
is to ensure the proper quantification of the reserve for loan losses based
upon an analysis of risk characteristics, demonstrated losses, loan
segmentations, and other factors. Reserve methodology is reviewed on a periodic
basis and modified as appropriate. The unallocated component of the allowance
for loan losses represents Management's view that, given the complexities of
the loan portfolio, there are estimable losses that have been incurred within
the portfolio but not yet specifically identified.
Based on this analysis, including the aforementioned assumptions, the
Company believes that the allowance for loan losses is adequate as of March 31,
2004. As of that date, the balance of $4,392,000 was 1.06% of total loans,
compared to 1.05% at December 31, 2003 and 1.10% at March 31, 2003. Loans
considered to be impaired according to SFAS 114/118 totalled $1,653,000 at
March 31, 2004, compared to $1,537,000 at December 31, 2003. The portion of the
allowance for loan losses allocated to impaired loans at March 31, 2004, was
$252,000 compared to $204,000 at December 31, 2003.
DEPOSITS
During the first three months of 2004, deposits increased by $25.2 million or
7.0% over December 31, 2003. Core deposits (demand, NOW, savings and money
market accounts) decreased by $3.1 million or 1.4% in the first three months of
2004, which is in line with the regular seasonal pattern experienced in the
first quarter. During the same period, certificates of deposit increased $28.3
million, primarily due to pricing strategies which resulted in attracting low-
cost short-term time deposits.
Between March 31, 2003, and March 31, 2004, deposits grew by 12.9%, or
$43.9 million. Demand deposits grew $3.1 million, NOW accounts $4.6 million,
savings $3.0 million, and money market accounts decreased $10.8 million, while
certificates of deposit increased $44.0 million. The increase in certificates
of deposit was primarily from wholesale and brokered CD's.
BORROWED FUNDS
The Company's funding includes borrowings from the Federal Home Loan Bank, the
Federal Reserve System, and repurchase agreements, enabling it to grow its
balance sheet and, in turn, grow its revenues. They may also be used to carry
out interest rate risk management strategies, and are increased as other
sources of funding decrease, including core deposits and certificates of
deposit. During the three months ended March 31, 2004, borrowed funds decreased
by $18.3 million or 11.6% from December 31, 2003, as a result of the above-
noted increase in deposits.
Between March 31, 2003 and March 31, 2004, borrowed funds increased $24.4
million or 21.2% to fund the level of asset growth which exceeded the level of
deposit growth.
SHAREHOLDERS' EQUITY
Shareholders' equity as of March 31, 2004 was $49,352,000, compared to
$47,718,000 as of December 31, 2003. The Company's strong earnings performance
in the first three months of 2004 provided a significant addition to retained
earnings. In addition, the net unrealized gain on available-for-sale
securities, presented in accordance with SFAS 115, has increased by $308,000
since December 31, 2003.
Page 19
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
On April 27, 2004, the Company's Board of Directors declared a three-for-
one split of the Company's common stock payable in the form of a stock dividend
to shareholders of record on May 12, 2004, with a payment date of June 1, 2004.
All share and per share data included in the consolidated financial statements
and elsewhere in this report have been restated to reflect the stock split.
During 2003, the Company increased its dividend each quarter to end the
year at a quarterly dividend rate of 10.0 cents per share. In 2004, a cash
dividend of 10.3 cents per share was declared in the first quarter compared to
9.0 cents in the first quarter of 2003.
Regulatory leverage capital ratios for the Company were 8.20% and 8.06% at
March 31, 2003 and December 31, 2003, respectively. The Company had a tier one
risk-based capital ratio of 11.88% and tier two risk-based capital ratio of
13.00% at March 31, 2004, compared to 11.82% and 12.92%, respectively, at
December 31, 2003. These are comfortably above the standards to be rated "well-
capitalized" by regulatory authorities -- qualifying the Company for lower
deposit-insurance premiums.
On September 23, 2002, the Company announced that its Board of Directors
authorized the repurchase of up to 5.0% of the outstanding shares of the
Company's common stock, or slightly more than 360,000 shares. The Company
expects such repurchases to be effected from time to time, in the open market,
in private transactions or otherwise, during a period of up to 24 months. The
amount and timing of shares to be purchased will be subject to market
conditions and will be based on several factors, including the price of the
Company's stock and the level of stock issuances under the Company's employee
stock plans. No assurance can be given as to the specific timing of the share
repurchases or as to whether and to what extent the share repurchase will be
consummated. In Management's opinion, the Company has adequate capital
resources to undertake this repurchase plan. As of March 31, 2004, the Company
had repurchased 115,044 shares under the 2002 repurchase plan - including 7,611
shares in the first quarter of 2004.
CONTRACTUAL OBLIGATIONS
The following table sets forth the contractual obligations of the Company as of
March 31, 2004:
- -------------------------------------------------------------------------------
Less than 1-3 3-5 More than
Dollars in thousands Total 1 Year Years Years 5 Years
- -------------------------------------------------------------------------------
Borrowed funds $ 139,515 67,015 38,000 7,000 27,500
Operating leases 223 79 102 42 -
Certificates of deposit 162,402 115,953 40,885 5,564 -
------- ------- ------ ------ ------
Total $ 302,140 183,047 78,987 12,606 27,500
======= ======= ====== ====== ======
Commitments to extend
credit and
unused lines of credit $ 83,981 83,981 - - -
- -------------------------------------------------------------------------------
Page 20
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
LIQUIDITY MANAGEMENT
As of March 31, 2004 the Bank had primary sources of liquidity of $82.6 million
and an additional $101.5 million of secondary sources. It is Management's
opinion that this is adequate. In its Asset/Liability policy, the Bank has
adopted guidelines for liquidity. The Company is not aware of any
recommendations by the regulatory authorities which, if they were to be
implemented, would have a material effect on the Corporation's liquidity,
capital resources or results of operations.
NON-PERFORMING ASSETS
At March 31, 2004, loans on non-accrual status totaled $1,653,000, which
compares to non-accrual loans of $1,537,011 as of December 31, 2003. In
addition to loans on non-accrual status at March 31, 2004, loans past due 90
days or more and accruing (calculated on a constant 30-day month basis) totaled
$990,000, which compares to $378,000 as of December 31, 2003. 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.
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 21
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates. First National
Lincoln Corporation's market risk is composed primarily of interest rate risk.
The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the
interest rate sensitivity position of the Company and establishing policies to
monitor and limit exposure to interest rate risk. All guidelines and policies
established by ALCO have been approved by the Board of Directors.
ASSET/LIABILITY MANAGEMENT
The primary goal of asset/liability management is to maximize net interest
income within the interest rate risk limits set by ALCO. Interest rate risk is
monitored through the use of two complementary measures: static gap analysis
and earnings simulation modeling. While each measurement has limitations, taken
together they represent a reasonably comprehensive view of the magnitude of
interest rate risk in the Company, the level of risk through time, and the
amount of exposure to changes in certain interest rate relationships.
Static gap analysis measures the amount of repricing risk embedded in the
balance sheet at a point in time. It does so by comparing the differences in
the repricing characteristics of assets and liabilities. A gap is defined as
the difference between the principal amount of assets and liabilities which
reprice within a specified time period. The Bank's cumulative one-year gap, at
March 31, 2004, was +4.3% of total assets. ALCO's policy limit for the one-year
gap is plus or minus 20% of total assets. Core deposits with non-contractual
maturities are presented based upon historical patterns of balance attrition
and pricing behavior which are reviewed at least annually.
The gap repricing distributions include principal cash flows from
residential mortgage loans and mortgage-backed securities in the time frames in
which they are expected to be received. Mortgage prepayments are estimated by
applying industry median projections of prepayment speeds to portfolio segments
based on coupon range and loan age.
Page 22
QUANTITATIVE AND QUALITATIVE MARKET RISK, CONTINUED
A summary of the Bank's static gap, as of March 31, 2004, is presented in
the following table:
- -------------------------------------------------------------------------------
0-90 91-365 1-5 5+
Dollars in thousands days days years years
- -------------------------------------------------------------------------------
Investment securities at
amortized cost $ 24,484 27,645 47,003 34,006
Loans held for sale 1 8 78 208
Loans 165,222 72,052 142,473 35,713
Other interest-earning assets 4,692 - - -
Non-rate-sensitive assets - - - 23,119
-------- -------- -------- --------
Total assets $ 194,399 99,705 189,554 93,046
-------- -------- -------- --------
Interest-bearing deposits 122,057 76,719 46,449 112,445
Borrowed funds 41,779 25,236 45,000 27,499
Non-rate-sensitive
liabilities and equity 800 2,550 16,522 59,648
-------- -------- -------- --------
Total liabilities and equity $ 164,636 104,505 107,971 199,592
-------- -------- -------- --------
Period gap $ 29,763 (4,800) 81,583 (106,546)
========= ======== ======== ========
Percent of total assets 5.16% -0.83% 14.15% -18.47%
Cumulative gap (current) $ 29,763 24,963 106,546 -
Percent of total assets 5.16% 4.33% 18.47% 0.0%
- -------------------------------------------------------------------------------
The earnings simulation model forecasts captures the impact of changing
interest rates on one-year and two-year net interest income. The modeling
process calculates changes in interest income received and interest expense
paid on all interest-earning assets and interest-bearing liabilities reflected
on the Company's balance sheet. None of the assets used in the simulation are
held for trading purposes. The modeling is done for a variety of scenarios that
incorporate changes in the absolute level of interest rates as well as basis
risk, as represented by changes in the shape of the yield curve and changes in
interest rate relationships. Management evaluates the effects on income of
alternative interest rate scenarios against earnings in a stable interest rate
environment. This analysis is also most useful in determining the short-run
earnings exposures to changes in customer behavior involving loan payments and
deposit additions and withdrawals.
The Bank's most recent simulation model projects net interest income would
decrease by approximately 0.02% of stable-rate net interest income if rates
fall gradually by one percentage point over the next year, and decrease by
approximately 4.18% if rates rise gradually by two percentage points. Both
scenarios are well within ALCO's policy limit of a decrease in net interest
income of no more than 10.0% given a 2.0% move in interest rates, up or down.
Management believes this reflects a reasonable interest rate risk position. In
year two, and assuming no additional movement in rates, the model forecasts
that net interest income would be higher than that earned in a stable rate
environment by 2.37% in a falling-rate scenario and decrease by 10.50% in a
rising rate scenario when compared to the year-one base scenario.
Page 23
QUANTITATIVE AND QUALITATIVE MARKET RISK, CONTINUED
A summary of the Bank's interest rate risk simulation modeling, as of
March 31, 2004 is presented in the following table:
- -------------------------------------------------------------
Changes in Net Interest Income March 31, 2004
- -------------------------------------------------------------
Year 1
Projected change if rates decrease by 1.0% -0.02%
Projected change if rates increase by 2.0% -4.18%
- -------------------------------------------------------------
Year 2
Projected change if rates decrease by 1.0% +2.37%
Projected change if rates increase by 2.0% -10.50%
- -------------------------------------------------------------
This dynamic simulation model includes assumptions about how the balance
sheet is likely to evolve through time and in different interest rate
environments. Loans and deposits are projected to maintain stable balances. All
maturities, calls and prepayments in the securities portfolio are assumed to be
reinvested in similar assets. Mortgage loan prepayment assumptions are
developed from industry median estimates of prepayment speeds for portfolios
with similar coupon ranges and seasoning. Non-contractual deposit volatility
and pricing are assumed to follow historical patterns. The sensitivities of key
assumptions are analyzed annually and reviewed by ALCO.
The information for static gap and changes in net interest income
presented in this section pertains to the Bank only and does not include a
small volume of assets and liabilities owned by the Company and included in its
consolidated financial statements as of March 31, 2004. In Management's
opinion, the Bank-only information would not be materially different than that
for the Company's consolidated balances. This sensitivity analysis does not
represent a Company forecast and should not be relied upon as being indicative
of expected operating results. These hypothetical estimates are based upon
numerous assumptions including, among others, the nature and timing of interest
rate levels, yield curve shape, prepayments on loans and securities, deposit
decay rates, pricing decisions on loans and deposits, and reinvestment/
replacement of asset and liability cash flows. While assumptions are developed
based upon current economic and local market conditions, the Company cannot
make any assurances as to the predictive nature of these assumptions, including
how customer preferences or competitor influences might change.
INTEREST RATE RISK MANAGEMENT
A variety of financial instruments can be used to manage interest rate
sensitivity. These may include investment securities, interest rate swaps, and
interest rate caps and floors. Frequently called interest rate derivatives,
interest rate swaps, caps and floors have characteristics similar to securities
but possess the advantages of customization of the risk-reward profile of the
instrument, minimization of balance sheet leverage and improvement of
liquidity. As of March 31, 2004, the Company was not using any derivative
instruments for interest rate risk management.
The Company engages an independent consultant to periodically review its
interest rate risk position, as well as the effectiveness of simulation
modeling and reasonableness of assumptions used. As of March 31, 2004, there
were no significant differences between the views of the independent consultant
and Management regarding the Company's interest rate risk exposure. Management
expects interest rates may rise in the second half of 2004 and believes that
the current level of interest rate risk is acceptable.
Page 24
Item 4: Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company's management conducted an evaluation
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of the company's disclosure
controls and procedures, as of the end of the last fiscal quarter. In designing
and evaluating the Company's disclosure controls and procedures, the Company
and its management recognize that any controls and procedures, no matter how
well designed and operated, can provide only a reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating and implementing possible controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that they believe the Company's disclosure
controls and procedures are reasonably effective to ensure that information
required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms. We intend to continue to review and document our disclosure controls
and procedures, including our internal controls and procedures for financial
reporting, and we may from time to time make changes to the disclosure controls
and procedures to enhance their effectiveness and to ensure that our systems
evolve with our business.
There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Page 25
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 26
ITEM 2. CHANGES IN SECURITIES
The Company issues shares to the Bank's 401k Investment and Savings Plan
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act"), contained in Section 3(a)(11) thereof and Rule
147 promulgated thereunder. During the first three months of 2004, 2,772 shares
were issued pursuant to this Plan, as presented in the following table:
- -------------------------------------------
Month Number of Shares
- -------------------------------------------
January 2004 1,461
February 2004 534
March 2004 777
------
2,772
======
- -------------------------------------------
Page 27
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
Page 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 29
ITEM 5: Other Information
None.
Page 30
ITEM 6: Exhibits, Financial Statement Schedules, and reports on Form 8-K
A. EXHIBITS
14.1 CODE OF BUSINESS CONDUCT AND ETHICS
UNDER SECTION 406 OF THE SARBANES-OXLEY ACT OF 2002
31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PERSUANT TO RULE 13a-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PERSUANT TO RULE 13a-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PERSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PERSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PERSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PERSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
B. REPORTS ON FORM 8-K
The Company's press release announcing the fourth quarter and year end 2003
earnings was filed on Form 8-K under item 5 on January 22, 2004.
The Company's press release announcing the first quarter 2004 dividend
declaration was filed on Form 8-K under item 5 on March 15, 2004.
The Company's press release announcing the appointment of Randy A. Nelson to
the Board of Directors was filed on Form 8-K under item 5 on March 15, 2004.
Page 31
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 10, 2004 /s/ Daniel R. Daigneault
Date Daniel R. Daigneault
President & Chief Executive Officer
May 10, 2004 /s/ F. Stephen Ward
Date F. Stephen Ward
Treasurer & Chief Financial Officer
Page 32