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 Quarter Period Ended:                           Commission File No.

June 30, 2005                                                                  0-26589

 

**FIRST NATIONAL LINCOLN CORPORATION**

(Exact name of registrant as specified in its charter)

 

MAINE01-0404322

(State or other jurisdiction of incorporation or organization)(I.R.S. Employer 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    Noo

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes x   Noo

 

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 August 5, 2005

Common Stock, Par One Cent

9,785,649

 
 

 

 

 

**Table of Contents**

 

**Part I. Financial Information**

**1**

 
**Selected Financial Data (Unaudited)**

**1**

 
**Item 1 – Financial Statements**

**2**

 
*Report of Independent Registered Public Accounting Firm*

*2*

 
*Consolidated Balance Sheets (Unaudited)*

*3*

 
*Consolidated Statements of Income (Unaudited)*

*4*

 
*Consolidated Statements of Changes in Shareholders' Equity (Unaudited)*

*5*

 
*Consolidated Statements of Cash Flows (Unaudited)*

*6*

 
**Notes to Consolidated Financials Statements**

**7**

 
*Note 1 – Basis of Presentation*

*7*

 
*Note 2 – Common Stock*

*7*

 
*Note 3 – Stock Options*

*7*

 
*Note 4 – Earnings Per Share*

*8*

 
*Note 5 – Postretirement Benefit Plans*

*9*

 
*Note 6 – Pro-Forma Financial Information*

*10*

 
**Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations**

**12**

 
*Critical Accounting Policies*

*12*

 
*GAAP vs. Pro-Forma Results*

*12*

 
*Executive Summary*

*13*

 
*Net Interest Income*

*13*

 
*Provision for Loan Losses*

*15*

 
*Non-Interest Income*

*15*

 
*Non-Interest Expense*

*15*

 
*Income Taxes*

*15*

 
*Average Daily Balance Sheets*

*16*

 
*Value of Assets Acquired*

*17*

 
*Investments*

*18*

 
*Loans*

*18*

 
*Allowance for Loan Losses*

*18*

 
*Deposits*

*19*

 
*Borrowed Funds*

*19*

 
*Shareholders' Equity*

*20*

 
*Non-Performing Assets*

*20*

 
*Off-Balance Sheet Financial Instruments*

*20*

 
*Sale of Loans*

*20*

 
*Contractual Obligations*

*21*

 
*Liquidity Management*

*21*

 
*Forward-Looking Statements*

*21*

 
**Item 3 – Quantitative and Qualitative Disclosures About Market Risk**

**22**

 
*Market-Risk Management*

*22*

 
*Asset/Liability Management*

*22*

 
*Interest Rate Risk Management*

*23*

 
**Item 4: Controls and Procedures**

**24**

**Part II – Other Information**

**25**

 
Item 1 – Legal Proceedings

25

 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

25

 
Item 3 – Default Upon Senior Securities

25

 
Item 4 – Submission of Matters to a Vote of Security Holders

26

 
Item 5 – Other Information

26

 
Item 6 – Exhibits

27

**Signatures**

**28**

 

 

 

 

**Part I. Financial Information**

 

**Selected Financial Data (Unaudited)**

First National Lincoln Corporation and Subsidiary

 

 

**For the six months ended**

**For the quarters ended**

*Dollars in thousands,***

**June 30******

**June 30******

*except for per share amounts***

**2005**

2004

**2005**

2004

 

 

 

 

 

***Summary of Operations*********

 

 

 

 

Operating Income

**$27,082******

$16,760 

**$14,522******

$8,537 

Operating Expense

**18,524******

11,190 

**10,166******

$5,660 

Net Interest Income

**15,280******

10,185 

**7,894******

5,233 

Provision for Loan Losses

**100******

480 

**100******

240 

Net Income

**6,130******

3,981 

**3,133******

2,056 

***Per Common Share Data*********

 ****

 

 ****

 

Basic Earnings per Share

**$0.63******

$0.54 

**$0.32******

$0.28 

Diluted Earnings per Share

**0.62******

0.53 

**0.31******

0.28 

Cash Dividends Declared

**0.255******

0.213 

**0.130******

0.110 

Book Value

**10.24******

6.74 

**10.24******

6.74 

Market Value

**17.00******

19.50 

**17.00******

19.50 

***Financial Ratios*********

 ****

 

 ****

 

Return on Average Equity 1

**12.89%******

16.37%

**12.57%******

16.58%

Return on Average Tangible Equity 1

**17.59%******

16.41%

**17.44%******

16.62%

Return on Average Assets 1

**1.37%******

1.39%

**1.33%******

1.41%

Average Equity to Average Assets

**10.62%******

8.47%

**10.62%******

8.51%

Average Tangible Equity to Average Assets

**7.78%******

8.45%

**7.65%******

8.49%

Net Interest Margin Tax-Equivalent 1

**3.92%******

3.92%

**3.87%******

3.97%

Dividend Payout Ratio

**40.48%******

39.51%

**40.63%******

39.29%

Allowance for Loan Losses/Total Loans

**0.91%******

1.03%

**0.91%******

1.03%

Non-Performing Loans to Total Loans

**0.35%******

0.35%

**0.35%******

0.35%

Non-Performing Assets to Total Assets

**0.26%******

0.27%

**0.26%******

0.27%

Efficiency Ratio –Tax Equivalent 2

**52.26%******

48.91%

**53.33%******

48.60%

***At  Period End*********

 ****

 

 ****

 

Total Assets

**$ 958,572******

$613,972 

**$ 958,572******

$ 613,972 

Total Loans

**718,376******

443,433 

**718,376******

443,433 

Total Investment Securities

**160,041******

141,301 

**160,041******

141,301 

Total Deposits

**672,254******

386,573 

**672,254******

386,573 

Total Shareholders’ Equity

**100,572******

49,515 

**100,572******

49,515 

***Prior periods have been adjusted to reflect the three-for-one stock split in 2004*********

 

1Annualized using a 365-day basis

2The Company uses the following formula in calculating its efficiency ratio:

 

Non-Interest Expense  -  Loss on Securities 

Tax-Equivalent Net Interest Income + Non-Interest Income – Gains on Securities

 

Page 1

 

 

 

**Item 1 – Financial Statements**

 

 

 

 

 

 

 

***Report of Independent Registered Public Accounting Firm***

 

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 June 30, 2005 and 2004, and for the three-month and six-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 (United States), 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  interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Berry, Dunn, McNeil & Parker

 

Portland, Maine

August 5, 2005

 

 

Page 2

 

 

 

***Consolidated Balance Sheets (Unaudited)***

First National Lincoln Corporation and Subsidiary

 

 

**June 30,**

December 31,

June 30,

*In thousands of dollars***

**2005**

2004

2004

**Assets**

 

 

 

Cash and due from banks

**$22,080**

$14,770

$13,777

Investments:

 

 

 

Available for sale

**52,348**

51,892

53,642

Held to maturity (market values $108,639 at 6/30/2005, 

$75,601 at 12/31/2004, and $87,248 at 6/30/2004)

**107,693**

74,935

87,659

Loans held for sale (fair value approximates cost)

**412**

-

-

Loans

**718,376**

478,332

443,433

Less: allowance for loan losses

**6,518**

4,714

4,580

Net loans

**711,858**

473,618

438,853

Accrued interest receivable

**5,492**

2,791

3,055

Bank premises and equipment

**16,949**

9,061

8,843

Other real estate owned

**-**

-

44

Goodwill

**27,960**

125

125

Other assets

**13,780**

7,046

7,974

**Total assets**

**$958,572**

$634,238

$613,972

**Liabilities & shareholders' equity**

 

 

 

Demand deposits

**$56,421**

$31,181

$27,504

NOW deposits

**106,105**

60,550

55,938

Money market deposits

**110,463**

76,411

78,233

Savings deposits

**111,990**

68,673

65,336

Certificates of deposit

**127,708**

63,900

76,170

Certificates $100,000 and over

**159,567**

69,129

83,392

Total deposits

**672,254**

369,844

386,573

Borrowed funds

**177,729**

207,206

173,661

Other liabilities

**8,017**

4,373

4,223

Total Liabilities

**858,000**

581,423

564,457

**Shareholders' equity**

 

 

 

Common stock

**99**

74

74

Additional paid-in capital

**48,220**

3,973

3,721

Retained earnings

**50,773**

46,809

44,006

Accumulated other comprehensive income

 

 

 

Net unrealized gains on available-for-sale securities

**1,480**

1,959

1,714

Total Shareholders' Equity

**100,572**

52,815

49,515

**Total liabilities & shareholders' equity**

**$958,572**

$634,238

$613,972

**Common stock**

 

 

 

Number of shares authorized

**18,000,000**

18,000,000

18,000,000

Number of shares issued and outstanding

**9,819,801**

7,356,836

7,342,690

Book value per share

**$10.24**

$7.18

$6.74

 

Share and per share data have been adjusted to reflect the three-for-one stock split, in the form of a 200% stock dividend, paid June 1, 2004, to shareholders of record on May 12, 2004.

See Report of Independent Registered Public Accounting Firm. 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 3

 

 

 

***Consolidated Statements of Income (Unaudited)***

First National Lincoln Corporation and Subsidiary

 

 

**For the six months**

**For the quarters**

 

**ended June 30,******

**ended June 30,******

*In thousands of dollars***

**2005**

2004

**2005**

2004

**Interest income**

 

 

 

 

Interest and fees on loans

**$ 19,462**

$ 11,298 

**$ 10,377**

$ 5,745 

Interest on deposits with other banks

**5**

3 

**5**

- 

Interest and dividends on investments

**3,724**

3,237 

**1,912**

1,672 

Total interest income

**23,191**

14,538 

**12,294**

7,417 

**Interest expense**

 

 

 

 

Interest on deposits

**5,196**

2,526 

**2,926**

1,265 

Interest on borrowed funds

**2,715**

1,827 

**1,474**

919 

Total interest expense

**7,911**

4,353 

**4,400**

2,184 

Net interest income

**15,280**

10,185 

**7,894**

5,233 

Less: provision for loan losses

**100**

480 

**100**

240 

Net interest income after provision for loan losses

**15,180**

9,705 

**7,794**

4,993 

**Non-interest income**

 

 

 

 

Investment management and fiduciary income

**819**

430 

**420**

216 

Service charges on deposit accounts

**1,151**

580 

**663**

310 

Mortgage origination and servicing income

**375**

250 

**247**

85 

Other operating income

**1,546**

962 

**898**

509 

Total non-interest income

**3,891**

2,222 

**2,228**

1,120 

**Non-interest expense**

 

 

 

 

Salaries and employee benefits

**5,474**

3,303 

**2,848**

1,640 

Occupancy expense

**697**

428 

**348**

216 

Furniture and equipment expense

**1,035**

754 

**581**

389 

Other operating expense

**3,307**

1,872 

**1,889**

991 

Total non-interest expense

**10,513**

6,357 

**5,666**

3,236 

Income before income taxes

**8,558**

5,570 

**4,356**

2,877 

Applicable income taxes

**2,428**

1,589 

**1,223**

821 

**Net income**

**$ 6,130**

**$ 3,981**

**$ 3,133**

**$ 2,056**

**Earnings per common share:**

 

 

 

 

 

Basic earnings per share

**$0.63**

$0.54

 

**$0.32**

$0.28

Diluted earnings per share

**$0.62**

$0.53

 

**$0.31**

$0.28

Weighted average number of shares outstanding

**9,662,951******

7,310,150

 

**9,849,065******

7,320,965

Incremental shares

**151,800******

147,768

 

**150,741******

151,025

Cash dividends declared per share

**$0.255**

$0.213

 

**$0.130**

$0.110

 

Share and per share data have been adjusted to reflect the three-for-one stock split, in the form of a 200% stock dividend, paid June 1, 2004, to shareholders of record on May 12, 2004.

See Report of Independent Registered Public Accounting Firm. 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 4

 

 

 

***Consolidated Statements of Changes in Shareholders' Equity (Unaudited)***

First National Lincoln Corporation and Subsidiary

 

*In thousands of dollars except per share amounts***

Number of common shares

Common stock

Additional paid-in capital

Retained earnings

Net unrealized gain (loss) on securities available for sale

Treasury stock

Total 

shareholders’

equity

**Balance at December 31, 2003**

**7,264,140**

**$74**

**$4,650**

**$42,988**

**$2,497**

**($2,491)**

**$47,718**

Net income

-

-

-

3,981

-

-

3,981

Net unrealized loss on securities available for sale, net of tax benefit of $403

-

-

-

-

(783)

-

(783)

Comprehensive income

-

-

-

3,981

(783)

-

3,198

Cash dividends declared

-

-

-

(1,567)

-

-

(1,567)

Stock issued

-

 

-

-

-

-

-

Treasury stock purchases

(24,345)

-

-

-

-

(404)

(404)

Treasury stock sold

102,895

-

(877)

-

-

1,447

570

Retirement of treasury Stock

-

-

(52)

(1,396)

-

1,448

-

**Balance at June 30, 2004**

**7,342,690**

**$74**

**$3,721**

**$44,006**

**$1,714**

**$-**

**$49,515**

 

 

 

 

 

 

 

 

**Balance at December 31, 2004**

**7,356,836**

**$74**

**$3,973**

**$46,809**

**$1,959**

**$-**

**$52,815**

Net income

-

-

-

6,130

-

-

6,130

Net unrealized loss on securities available for sale, net of tax benefit of $247

-

-

-

-

(479)

-

(479)

Comprehensive income

 

-

-

6,130

(479)

-

5,651

Cash dividends declared

-

-

-

(2,515)

-

-

(2,515)

Payment to repurchase common stock

(121,977)

(1)

(2,057)

-

-

-

(2,058)

Proceeds from sale of common stock

120,344

1

943

-

-

-

944

Tax benefit of disqualifying disposition of incentive stock option shares

-

-

-

349

-

-

349

Acquisition of FNB Bankshares

2,464,598

25

45,361

-

-

-

45,386

**Balance at June 30, 2005******

**9,819,801**

**$99**

**$48,220**

**$50,773**

**$1,480**

**$-**

**$100,572**

 

Share and per share data have been adjusted to reflect the three-for-one stock split, in the form of a 200% stock dividend, paid June 1, 2004, to shareholders of record on May 12, 2004.

See Report of Independent Registered Public Accounting Firm. 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 5

 

 

 

***Consolidated Statements of Cash Flows (Unaudited)***

First National Lincoln Corporation and Subsidiary

 

*In thousands of dollars*

**Six Months ended June 30,****

**2005**

2004

Net income 

**$6,130**

$3,981

**Adjustments to reconcile net income to net cash provided by operating activities:**

 

 

Depreciation 

**657**

522

Provision for loan losses 

**100**

480

Loans originated for resale 

**(12,254)**

(8,372)

Proceeds from sales and transfers of loans 

**12,433**

9,354

Net increase in other assets and accrued interest 

**(1,880)**

(515)

Net increase in other liabilities 

**2,002**

431

Net amortization of premiums on investments 

**206**

94

Net amortization of acquisition costs 

**98**

-

Net cash provided by operating activities 

**7,492**

5,975

**Cash flows from investing activities:**

 

 

Proceeds from maturities, payments and calls of securities available for sale 

**1,469**

3,415

Proceeds from maturities, payments and calls of securities to be held to maturity 

**16,005**

26,863

Proceeds from sales of other real estate owned 

**-**

7

Purchases of securities available for sale 

**(683)**

(823)

Purchases of securities to be held to maturity 

**(24,243)**

(35,347)

Net increase in loans 

**(55,321)**

(44,638)

Capital expenditures 

**(778)**

(780)

Cash for acquisition net of cash aquired 

**3,493**

-

Net cash used in investing activities 

**(60,058)**

(51,303)

**Cash flows from financing activities:**

 

 

Net increase in demand deposits, savings, money market and club accounts 

**6,603**

2,034

Net increase in certificates of deposit 

**103,006**

25,462

Advances on long-term borrowings 

**-**

8,216

Repayment on long-term borrowings 

**(37,118)**

(16,000)

Net (decrease) increase in short-term borrowings 

**(9,384)**

23,623

Payment to repurchase common stock 

**(2,058)**

(404)

Proceeds from sale of common stock 

**944**

570

Dividends paid 

**(2,117)**

(1,483)

Net cash provided by financing activities 

**59,876**

42,018

Net increase (decrease) in cash and cash equivalents 

**7,310**

(3,310)

Cash and cash equivalents at beginning of period 

**14,770**

17,087 

Cash and cash equivalents at end of period 

**$22,080**

$13,777 

Interest paid

**$7,507******

$4,314

Income taxes paid

**$2,150******

$1,607

**Non-cash transactions**

 

 

Change in net unrealized gain on available for sale securities

**$(726)**

$(1,186)

Non-cash assets acquired with common stock

**$258,631**

$-

Less liabilities assumed

**$214,266**

$-

 

See Report of Independent Registered Public Accounting Firm. 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 6

 

 

 

**Notes to Consolidated Financials Statements**

First National Lincoln Corporation and Subsidiary

 

***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 N.A. (the Bank). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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. On January 14, 2005, the Company completed the acquisition of FNB Bankshares (FNB) of Bar Harbor,Maine, and operating results include the effect of the FNB acquisition only after the closing date (see Note 6 --  Pro-Forma Financial Information).

The income reported for the 2005 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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, 2004.

 

***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 200% 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.

On January 20, 2005, the Company announced that its Board of Directors has authorized the repurchase of up to 250,000 shares of the Company's common stock or approximately 2.5% of the outstanding 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.

As of June 30, 2005, the Company had repurchased 121,966 shares under the new repurchase plan at an average price of $16.86.

 

***Note 3 – Stock Options***

 

The Company established a stock option plan in 1995. Under the plan, the Company may grant options to its employees for up to 600,000 shares of common stock. Only incentive stock options may be granted under the plan. The option price of each option grant is determined by the Options Committee of the Board of Directors, and in no instance shall be less than the fair market value on the date of the grant. An option's maximum term is ten years from the date of grant. As a result of the FNB acquisition, options to acquire 40,630 FNB shares were converted into options to acquire an aggregate of 95,479 common shares of the Company at a purchase price of $3.80 per share.

A summary of the status of the Company's Stock Option Plan as of June 30, 2005, and changes during the six months then ended, is presented below.

 

 

Number of Shares

Weighted Average Exercise Price

Balance at December 31, 2004

205,500

$4.81

Granted in 2005

42,000

18.00

Assumed in 2005 

95,479

3.80

Exercised in 2005 

(84,886)

4.08

Balance at June 30, 2005

258,093

$6.82

 

 

Page 7

 

 

 

The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the stock option plan. Accordingly, no compensation cost has been recognized. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation. Share and per share data have been adjusted to reflect the three-for-one stock split in the form of a 200% stock dividend paid June 1, 2004, to shareholders of record on May 12, 2004.

 

 ****

**For the six months******

**For the quarters******

 ****

**ended June 30,******

**ended June 30,******

*In thousands of dollars***

**2005**

2004

**2005******

2004

Net income

 

 

 ****

 

As reported

**$6,130**

3,981

**3,133******

2,056

Value of option grants, net of tax

**129**

-

**-******

-

Pro forma

**$6,001**

3,981

**3,133******

2,056

Basic earnings per share 

 

 

 ****

 

As reported

**$0.63**

0.54

**0.32******

0.28

Value of option grants, net of tax

**0.01**

-

**-******

-

Pro forma

**$0.62**

0.54

**0.32******

0.28

Diluted earnings per share  

 

 

 ****

 

As reported

**$0.62**

0.53

**0.31******

0.28

Value of option grants, net of tax

**0.01**

-

**-******

-

Pro forma

**$0.61**

0.53

**0.31******

0.28

 

The fair market value of options granted, net of tax, was $129,000 in 2005. No options were granted in 2004. The weighted average fair market value of options granted was $4.71 in 2005. The fair market value in 2005 is estimated using the Black-Scholes option pricing model and the following assumptions: quarterly dividends of $0.12, risk-free interest rate of 4.20%, volatility of 27.95%, and an expected life of 10 years.

 

***Note 4 – Earnings Per Share***

 

The following table sets forth the computation of basic and diluted earnings per share for the six months ended June 30, 2005 and 2004:

 

 **

Income

Shares

Per-Share

*In thousands, except for number of shares and per share data***

(Numerator)

(Denominator)

Amount

**For the six months ended June 30, 2005**

 

 

 

Net income as reported

$6,130 

 

 

Basic EPS: Income available to common shareholders

$6,130 

9,662,951

$0.63 

Effect of dilutive securities: incentive stock options

 

151,800

 

Diluted EPS: Income available to common shareholders plus assumed conversions

$6,130 

9,814,751

$0.62 

**For the six months ended June 30, 2004**

 

 

 

Net income as reported

$3,981 

 

 

Basic EPS: Income available to common shareholders

$3,981 

7,310,150

$0.54 

Effect of dilutive securities: incentive stock options

 

147,768

 

Diluted EPS: Income available to common shareholders plus assumed conversions

$3,981 

7,457,918

$0.53 

 

 

Page 8

 

 

 

The following table sets forth the computation of basic and diluted earnings per share for the quarter ended June 30, 2005 and 2004:

 

 **

Income

Shares

Per-Share

*In thousands, except for number  of shares and per share data***

(Numerator)

(Denominator)

Amount

**For the quarter ended June 30, 2005**

 

 

 

Net income as reported

$3,133 

 

 

Basic EPS: Income available to common shareholders

$3,133 

9,849,065

$0.32 

Effect of dilutive securities: incentive stock options

 

150,741

 

Diluted EPS: Income available to common shareholders plus assumed conversions

$3,133 

9,999,806

$0.31 

**For the quarter ended June 30, 2004**

 

 

 

Net income as reported

$2,056 

 

 

Basic EPS: Income available to common shareholders

$2,056 

7,320,965

$0.28 

Effect of dilutive securities: incentive stock options

 

151,025

 

Diluted EPS: Income available to common shareholders plus assumed conversions

$2,056 

7,471,990

$0.28 

 

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.

 

***Note 5 – Postretirement Benefit Plans***

 

The Bank sponsors postretirement benefit plans which provide certain life insurance and health insurance benefits for certain retired employees and health insurance for retired directors. None of these plans are pre-funded. The following table sets forth the accumulated post-retirement benefit obligation and funded status:

 

 

**At June 30,**

*In thousands of dollars*

**2005**

2004

**Change in benefit obligations**

 

 

Benefit obligation at beginning of year

**$531**

$542

Plan assumed in FNB acquisition

**1,392**

-

Service cost

**7**

4

Interest cost

**62**

16

Benefits paid

**(95)**

(21)

Actuarial (gain) loss

**-**

-

Benefit obligation at end of period

**1,897**

541

**Funded status**

 

 

Benefit obligation at end of period

**(1,897)**

(541)

Unamortized prior service cost

**232**

(11)

Unamortized net actuarial loss

**40**

48

Unrecognized transition obligation

**214**

251

Accrued benefit cost

**$(1,411)**

$(253)

 

 

Page 9

 

 

 

The following table sets forth the net periodic pension cost:

 

 

**For six months ended June 30,**

**For the quarters ended June 30,**

*In thousands of dollars*

**2005**

2004

**2005**

2004

**Components of net periodic benefit cost**

 

 

 

 

Service cost

**$7**

$4

**$4**

$2

Interest cost

**62**

16

**31**

8

Amortization of unrecognized transition asset

**23**

14

**11**

7

Amortization of prior service cost

**2**

2

**1**

1

Amortization of accumulated losses

**3**

2

**2**

1

Net periodic benefit cost

**$97**

$38

**$49**

$19

 

A weighted average discount rate of 6.8% 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 related benefit expense in 2005 is $190,000, and the estimated amount of benefits to be paid is $151,000.

 

***Note 6 – Pro-Forma Financial Information***

 

On August 25, 2004, the Company entered into an agreement to acquire FNB Bankshares (FNB) of Bar Harbor, Maine, and its subsidiary, The First National Bank of Bar Harbor. This acquisition was completed on January 14, 2005. In its 2004 Strategic Plan, the Company identified certain markets in which it would consider future growth opportunities, including the area served by FNB Bankshares. Management expects that the products and services available in the FNB Bankshares market area will be enhanced as a result of the combination of the two companies, and this will also provide a larger capacity to lend money and a stronger overall funding base. It is expected that the combined entity will realize cost savings from redundant expenses, such as regulatory fees, audit costs, legal costs, and outsourced costs.

As part of the acquisition, the Company issued 2.35 shares of its common stock to the shareholders of FNB in exchange for each of the 1,048,814 shares of the common stock outstanding of FNB. Cash in lieu of fractional shares of the Company's stock was paid at the rate of $17.87 per share, which was the average high/low price of the Company's stock for the 30-day period ending January 9, 2005, under terms specified in the Merger Agreement. At the time of the acquisition, there were outstanding options to purchase 126,208 shares of FNB common stock under the FNB Bankshares Stock Option Plan. Of these, options to acquire 40,630 FNB shares were converted into options to acquire an aggregate of 95,479 common shares of the Company at a purchase price of $3.80 per share. Holders of unexercised options to purchase FNB shares that were not converted were paid cash to retire their options at the rateof $42.00 for each share subject to the option, less the option exercise price per share. The total amount paid to retire the remaining options was approximately $2.6 million. 

The total value of the transaction was $47,955,000, and all of the voting equity interest of FNB was acquired in the transaction. The Company assumed all outstanding liabilities of FNB, including liabilities under certain Employment Continuity Agreements and Split Dollar Agreements with executive officers of FNB. The acquisition was intended to qualify as a reorganization for federal income tax purposes and provide for a tax-free exchange of shares.

The transaction was accounted for as a purchase and, accordingly, the operations of FNB are included in the Company’s consolidated financial statements from the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed at the date of acquisition. The excess of purchase price over the fair value of net tangible assets acquired was recorded as goodwill, none of which is expected to be deductible for tax purposes. Goodwill related to the core deposit intangible is being amortized over its expected economic life, and remaining goodwill is evaluated annually for possible impairment under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. In the tables which follow, pro forma financial information is presented. 

The pro forma balance sheets in the following table show how the financial position of the Company would have been presented if the transaction had closed prior to June 30, 2004. The adjustments show the effect of recording all assets and liabilities acquired to current fair value as well as the amount of identified intangibles (core deposit intangible). The excess of purchase price over the fair value of net tangible and intangible assets acquired is recorded as goodwill.

 

Page 10

 

 

 

 

*In thousands of dollars***

**June 30, 2005**

December 31, 2004

June 30, 2004

**Assets**

 

 

 

Cash and due from banks

**$  22,080**

$  22,777

$  24,434

Investments

**160,041**

154,081

172,040

Loans held for sale (fair value approximates cost)

**412**

179

168

Loans

**718,376**

664,466

621,191

Less: allowance for loan losses

**6,518**

6,719

6,631

Net loans

**711,858**

657,747

614,560

Bank premises and equipment

**16,949**

16,861

16,344

Goodwill

**27,960**

27,960

27,960

Other assets

**19,272**

18,573

20,626

**Total assets**

**$958,572**

$898,178

$876,132

**Liabilities & shareholders' equity**

 

 

 

Deposits

**$672,254**

$559,500

$572,862

Borrowed funds

**177,729**

228,241

198,063

Other liabilities

**8,017**

9,193

8,700

Total liabilities

**858,000**

796,934

779,625

Shareholders' equity

**100,572**

101,244

96,507

**Total liabilities & shareholders' equity**

**$958,572**

$898,178

$876,132

 

The pro forma statements of income in the following table show how the Company's results of operations would have been presented if the Company and FNB had operated as one entity for the entire periods presented. Management has made adjustments to reflect the amortization of the premium on loans acquired, increased depreciation on premises, and amortization of the core deposit intangible. Average shares outstanding and incremental shares used in earnings per share calculations are based upon the exchange ratio of 2.35 shares of the Company for each share of FNB.

 

*In thousands of dollars,*

*except share and per share information*

**For six months ended June 30,**

**For quarters ended June 30,**

**2005**

2004

**2005**

2004

Interest income

**$23,572**

$19,656 

**$12,294**

$9,937 

Interest expense

**8,019**

5,596 

**4,400**

2,782 

Net interest income

**15,553**

14,060 

**7,894**

7,155 

Provision for loan losses

**100**

600 

**100**

300 

Net interest income after provision for loan losses

**15,453**

13,460 

**7,794**

6,855 

Non-interest income

**4,035**

3,999 

**2,228**

2,027 

Non-interest expense

**11,207**

10,570 

**5,666**

5,309 

Income before income taxes

**8,281**

6,889 

**4,356**

3,573 

Applicable income taxes

**2,326**

1,907 

**1,223**

989 

Net Income

**$5,955**

$4,982 

**$3,133**

$2,584 

**Operating Statistics**

 

 

 

 

Basic earnings per share

**$0.62**

$0.51 

**$0.32**

$0.26 

Diluted earnings per share

**$0.61**

$0.50 

**$0.31**

$0.26 

Cash dividends declared per share

**$0.255**

$0.213 

**$0.130**

$0.110 

Dividend payout ratio

**41.13%**

39.14%

**40.63%**

39.24%

Return on average assets

**1.32%**

1.25%

**1.33%**

1.28%

Return on average equity

**12.43%**

15.52%

**12.57%**

15.82%

Return on average tangible equity

**16.93%**

15.55%

**17.44%**

15.85%

Efficiency ratio (tax equivalent)

**54.53%**

55.85%

**53.33%**

55.34%

 

Page 11

 

 

 

**Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations**

First National Lincoln Corporation and Subsidiary

 

***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 of America. 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 and the valuation of mortgage servicing rights. 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 othersources. Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions.

**Allowance for Loan Losses.** Management believes the allowance for loan losses 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.

**Mortgage Servicing Rights.** The valuation of mortgage servicing rights also 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 varydepending 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.

**Acquired Assets and Liabilities.**Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required under SFAS No. 142. In addition, goodwill from a purchase acquisition is subject to ongoing periodic impairment tests which include an evaluation of the ongoing assets. liabilities and revenues from an acquisition and an estimation of the impact of business conditions. Different estimates or assumptions are also utilized to determine the appropriate carrying value of other assets including, but not limited to, property, plant and equipment, overall collectibility of loans and receivables. The use of different estimates or assumptions could produce different estimates of carrying value. Management prepares the valuation analyses, which are thenreviewed by the Board of Directors of the Company. 

 

***GAAP vs. Pro-Forma Results***

 

Operating results for the Company are prepared using accounting principles generally accepted in the United States of America (GAAP) which, under the purchase methods of accounting, exclude FNB Bankshares results prior to the closing date of the acquisition on January 14, 2005. This discussion also includes pro-forma information which shows how the Company's results of operations would have been presented if the Company and FNB had operated as one entity for the entire periods presented (for a presentation of pro-forma results, see Note 6 to the Consolidated Financial Statements -- Pro-Forma Financial Information).

 

 

Page 12

 

 

 

***Executive Summary***

 

Net income for the six months ended June 30, 2005 was $6,130,000, an increase of 54.0% over net income of $3,981,000 for the comparable period of 2004. The Company's increase in net income for the six months ended June 30, 2005 in comparison to the same period in 2004 was the result of a 50.0% increase in net interest income. In addition, non-interest income increased 75.1% in comparison to 2004. The level of increase in operating expenses was lower than growth in revenues and assets as a result of economies realized from the FNB acquisition.  Fully diluted earnings per share for the six months ended June 30, 2005 were $0.62, a 17.0% increase over the $0.53 reported for the second quarter of 2004.

Net income for the three months ended June 30, 2005 was $3,133,000, an increase of 52.4% over net income of $2,056,000 in the comparable period of 2004. The increase in net income for the three months ended June 30, 2005 in comparison to 2004 included a 50.9% increase in net interest income. In addition, non-interest income increased 98.9% in comparison to 2004.  The level of increase in operating expenses was lower than growth in revenues and assets as a result of economies realized from the FNB acquisition.  Fully diluted earnings per share for the three months ended June 30, 2005 were $0.31, a 10.7% increase over the $0.28 reported for the second quarter of 2004.

On a pro-forma basis, net income for the six months ended June 30, 2005, was $5,955,000, an increase of $972,000 or 19.5% over pro-forma net income of $4,983,000 for the first six months of 2004. Pro-forma fully diluted earnings per share for the first six months of 2005 were $0.61, and increase of $0.11 or 22.0% over the $0.50 reported for the first six months of 2004.

On a pro-forma basis, net income for the three months ended June 30, 2005, was $3,133,000, an increase over pro-forma net income of $2,584,000 for the three months ended June 30, 2004. Pro-forma fully diluted earnings per share for the three months ended June 30, 2005 were $0.31, and increase of $0.05 or 19.2% over the $0.26 reported for the three months ended June 30, 2004.

 

***Net Interest Income***

 

Total interest income of $23,191,000 for the six months ended June 30, 2005 is a 59.5% increase from total interest income of $14,538,000 in the comparable period of 2004. In addition to the interest income related to the FNB acquisition, rising interest rates resulted in higher asset yields in 2005 compared to 2004. Total interest expense of $7,911,000 for the first six months of 2005 is a 81.7% increase from total interest expense of $4,353,000 for the first six months of 2004. This was a direct result of the rising interest rate climate and the FNB acquisition.

The combination of higher interest rates, asset growth and the FNB acquisition resulted in net interest income of $15,280,000 for the six months ended June 30, 2005, which represents a 50.0% increase from the $10,185,000 reported for the same period in 2004.

The Company's net interest margin on a tax-equivalent basis remained the same at 3.92% in the first six months of 2004 to the first six months of 2005. Tax-exempt interest income amounted to $870,000 and $543,000 for the six months ended June 30, 2005 and 2004, respectively. Tax equivalency is calculated using a 35% effective tax rate. These results are consistent with the Company's expectations for changes in its net interest margin in the current rate environment.

Total interest income of $12,294,000 for the three months ended June 30, 2005 is a 65.8% increase from total interest income of $7,417,000 in the comparable period of 2004. In addition to the interest income related to the FNB acquisition, rising interest rates resulted in higher asset yields in 2005 compared to 2004. At the same time, total interest expense of $4,400,000 for the three months ended June 30, 2005 is a 101.5% increase from total interest expense of $2,184,000 for the second quarter of 2004. This was a direct result of the rising interest rate climate and the FNB acquisition.

The combination of higher interest rates, asset growth and the FNB acquisition resulted in net interest income of $7,894,000 for the three months ended June 30, 2005, a 50.9% increase from the $5,233,000 reported for the same period in 2004.

The Company's net interest margin on a tax-equivalent basis decreased from 3.97% in the three months ended June 30, 2004 to 3.87% for the three months ended June 30, 2005 due to liability costs accruing at a faster rate than the yield on assets. Tax-exempt interest income amounted to $459,000 and $281,000 for the three months ended June 30, 2005 and 2004, respectively. Tax equivalency is calculated using a 35% effective tax rate. 

The following table presents the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2005 and 2004.

 

Page 13

 

 

 

 

**Six months ended June 30,**

**2005**

2004

*Dollars in thousands***

**Amount of interest**

**Average Yield/Rate**

Amount of interest

Average Yield/Rate

**Interest on earning assets**

 

 

 

 

Interest-bearing deposits

**$          5**

**2.81%**

$         3

0.72%

Investments

**4,359**

**5.64%**

3,712

5.52%

Loans held for sale

**13**

**3.64%**

7

2.92%

Loans  

**19,684**

**5.88%**

11,359

5.53%

Total interest-earning assets

**24,061**

**5.83%**

15,081

5.52%

**Interest-bearing liabilities**

 

 

 

 

Deposits

**5,196**

**1.77%**

2,526

1.34%

Other borrowings

**2,715**

**2.66%**

1,827

2.58%

Total interest-bearing liabilities

**7,911**

**2.00%**

4,353

1.68%

**Net interest income**

**$16,150**

 

$10,728

 

Interest rate spread

 

**3.84%**

 

3.84%

Net interest margin

 

**3.92%**

 

3.92%

 

The following table presents changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and interest-bearing liabilities. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2005 and 2004.

 

**Six months ended June 30, 2005 compared to 2004**

 

 

*Dollars in thousands***

Volume

Rate

Rate/Volume1

Total

**Interest on earning assets**

 

 

 

 

Interest-bearing deposits

$    (2)

$         9

$       (5)

$       2

Investment securities

567

69

11

647

Loans held for sale

(2)

11

(3)

6

Loans  

7,193

692

440

8,325

Total interest income

7,756

781

443

8,980

**Interest expense**

 

 

 

 

Deposits

1,414

805

451

2,670

Other borrowings2

816

50

22

888

Total interest expense

2,230

855

473

3,558

Change in net interest income

$5,526

$   (74)

$    (30)

$5,422

1 Represents the change attributable to a combination of change in rate and change in volume.

2 Includes federal funds purchased.

 

The following table presents the effect of tax-exempt income on the calculation of the net interest margin, using a 35.0% tax rate in 2005 and 2004:

 

 

**For the six months******

**For the quarter******

 ****

**ended June 30,******

**ended June 30,******

 

**2005**

2004

**2005**

2004

Net interest income as presented

**$15,280**

$10,185

**$7,894**

$5,232

Effect of tax-exempt income

**870**

543

**459**

281

Net interest income, tax equivalent

**$16,150**

$10,728

**$8,353**

$5,513

 

 

Page 14

 

 

 

On a pro-forma basis, net interest income for the first six months of 2005 was $15,553,000, an increase of $1,492,000 or 10.6% over net interest income of $14,061,000 for the first six months of 2004. This increase was the result of asset growth, primarily in the loan portfolio.

On a pro-forma basis, net interest income for the three months ended June 30, 2005 was $7,894,000, an increase of $739,000 or 10.3% over net interest income of $7,155,000 for the three months ended June 30, 2004. This increase was the result of asset growth, primarily in the loan portfolio.

 

***Provision for Loan Losses***

 

A $100,000 provision to the allowance for loan losses was made during the first six months of 2005, compared to  the $480,000 provision made for the same period of 2004. The decrease in provision is a result of the analysis of credit quality in the loan portfolio.

 

***Non-Interest Income***

 

Non-interest income was $3,891,000 for the six months ended June 2005, an increase of 75.1% from the $2,222,000 reported for the first six months of 2004. The increase in non-interest income was due to the acquisition of FNB Bankshares. On a pro-forma basis, non-interest income increased by $37,000 or 0.9% from $3,999,000 in 2004 to $4,036,000 in 2005. Although investment management and fiduciry income increased by 9.8%, income from mortgage origination declined due to higher interest rates and lower levels of loans sold to the secondary market.

Non-interest income was $2,228,000 for the three months ended June 2005, an increase of 98.9% from the $1,120,000 reported for the three months ended June 30, 2004. The increase in non-interest income was due to the acquisition of FNB Bankshares. On a pro-forma basis, non-interest income increased by $202,000 or 9.9% from $2,026,000 in 2004 to $2,208,000 in 2005, with increases in deposit account income, fiduciary fees, and mortgage servicing income.

 

***Non-Interest Expense***

 

Non-interest expense of $10,513,000 for the six months ended June 30, 2005, is an increase of 65.4% over non-interest expense of $6,357,000 for the first six months of 2004. In addition to expenses as a result of the FNB acquisition, this increase is primarily due to higher personnel and premises costs to provide more comprehensive and competitive services for customers, as well as increased costs for marketing, supplies and professional fees, in line with the Company's revenue and asset growth. On a pro-forma basis, non-interest expense increased by $637,000 or 6.0% during the first six months of 2005 compared to the first six months of 2004, with the largest increase in employee costs, which were up by 6.1%.

Non-interest expense of $5,666,000 for the three months ended June 30, 2005, is an increase of  75.1% over non-interest expense of $3,236,000 for the three months ended June 30, 2004. This level of increase in non-interest expense for the quarter was for the same reasons cited above. On a pro-forma basis, non-interest expense increased by $357,000 or 6.7% during the three months ended June 30, 2005 compared to the three months ended June 30, 2004, with the largest increase in employee costs, which were up by 5.0%. 

 

***Income Taxes***

 

Income taxes on operating earnings increased to $2,428,000 for the first six months of 2005 from $1,589,000 for the same period a year ago. The increase is in line with the increase in pre-tax income.

 

 

Page 15

 

 

 

***Average Daily Balance Sheets***

 

The following table shows the Company's average daily balance sheets for the six-month periods ended June 30, 2005 and 2004.

 

 ****

**For six months ended June 30,******

*In thousands of dollars***

**2005**

2004

**Assets**

 

 

Cash and due from banks

**$18,524**

$11,343

Interest-bearing deposits

**359**

836

**Investments**

 

 

U.S. Treasury securities & government agency securities

**63,948**

59,181

Obligations of states and political subdivisions

**49,348**

33,319

Other securities

**42,530**

42,680

Total investments

**155,826**

135,180

Loans held for sale

**369**

-

**Loans**

 

 

Commercial

**271,479**

143,064

Consumer

**34,396**

26,027

State and municipal

**22,591**

8,757

Real estate

**346,710**

235,549

Total loans

**675,176**

413,397

Allowance for loan losses

**(6,523)**

(4,334)

Net loans

**668,653**

409,063

Fixed assets

**16,324**

9,001

Other assets

**17,754**

10,295

Goodwill

**25,652**

125

**Total assets**

**$903,461**

$575,843

**Liabilities and shareholders' equity**

 

 

**Deposits**

 

 

Demand

**$54,210**

$26,898

NOW

**102,000**

52,796

Money market

**110,850**

80,739

Savings

**109,089**

63,508

Certificates of deposit

**107,553**

75,011

Certificates of deposit over $100,000

**109,276**

81,242

Total deposits

**592,978**

380,194

Borrowed funds

**205,780**

142,270

Other liabilities

**8,788**

4,607

**Total liabilities**

**807,546**

527,071

Common stock

**98**

74

Additional paid-in capital

**45,342**

4,319

Retained earnings

**48,721**

43,849

Unrealized gain on AFS Securities

**1,754**

2,620

Treasury stock

**-**

(2,090)

**Total shareholders' equity**

**95,915**

48,772

**Total liabilities and shareholders' equity**

**$903,461**

$575,843

 

 

 

Page 16

 

 

 

***Value of Assets Acquired***

 

On January 14, 2005, the Company completed the FNB acquisition. In its 2004 Strategic Plan, the Company identified certain markets in which it would consider future growth opportunities, including the area served by FNB Bankshares. Management expects that the products and services available in the FNB Bankshares market area will be enhanced as a result of the combination of the two companies, and this will also provide a larger capacity to lend money and a stronger overall funding base. It is expected that the combined entity will realize cost savings from redundant expenses, such as regulatory fees, audit costs, legal costs, and outsourced costs which the company has experienced in the period since the transaction closed.

The total value of the transaction was $47,955,000, and all of the voting equity interest of FNB was acquired in the transaction. As required under GAAP, the purchase price was allocated to assets acquired and liabilities assumed at the date of acquisition. The excess of purchase price over the fair value of net tangible and identified intangible assets acquired was recorded as goodwill, which totaled $27,835,000 and included $972,000 for direct expenses to consummate the transaction. The majority of the $1,830,000 difference between actual goodwill booked and the $26,005,000 of goodwill which Management estimated in the Company's December 31, 2004 financial statements was due to deferred income taxes.

There have been no changes in the opening balance sheet since the end of the first quarter.  The following table shows the fair value of assets and liabilities recorded on the Company's balance sheet from the FNB acquisition, including the associated goodwill in the transaction:

 

*In thousands of dollars***

**January 14, 2005**

**Assets**

 

Cash and due from banks

**$6,963**

Investments

**26,562**

Loans held for sale (fair value approximates cost)

**591**

Loans

**185,357**

Less: allowance for loan losses

**(2,164)**

Net loans

**183,193**

Bank premises and equipment

**7,767**

Goodwill

**27,835**

Other assets

**9,311**

**Total assets**

**$262,222**

**Liabilities & shareholders' equity**

 

Deposits

**$192,860**

Borrowed funds

**17,044**

Other liabilities

**4,362**

Total liabilities

**214,266**

Shareholders' equity

**47,956**

**Total liabilities & shareholders' equity**

**$262,222**

 

 

Page 17

 

 

 

***Investments***

 

The Company's investment portfolio increased by $33.2 million or 26.2% to $160.0 million between December 31, 2004, and June 30, 2005. At June 30, 2005, the Company's available-for-sale portfolio had an unrealized gain, net of taxes, of $1.5 million. Between June 30, 2004 and June 30, 2005, the Company's investment portfolio increased by $18.7 million or 13.3%. This growth was the result of the FNB acquisition.

On a pro-forma basis, the Company's investment portfolio increased by $6.0 million or 3.9% during the first six months of 2005. Year-over-year, the investment portfolio declined by $12.0 million or 7.0% on a pro-forma basis, the result of the decline in investments on the FNB balance sheet was to fund loan growth.

 

***Loans***

 

Loans grew by $240.0 million or 50.2% during the first six months of 2005. The growth in commercial loans was $138.0 million or 87.4% and municipal loans increased $9.7 million or 70.6%. The residential mortgage portfolio increased by $65.3 million or 30.4%, and home equity lines of credit grew $18.9 million or 29.1% year-to-date. The majority of this growth was due to the FNB acquisition. Between June 30, 2004 and June 30, 2005, the loan portfolio increased $274.9 million or 62.0%, as a result of strong customer demand and the FNB acquisition

On a pro-forma basis, the loan portfolio increased by $53.9 million or 8.1% during the six months ended June 30, 2005. Year-over-year, the loan portfolio increased by $97.2 million or 15.6% on a pro-forma basis, the result of strong loan growth seen by the Company in both the Mid-Coast and Down East Maine regions.

 

***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.

Adequacy of the allowance for loan losses is determined using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectibility of specific loans when determining the adequacy of the allowance for loan losses, Management also takes into consideration other factors such as changes in the mix and size of the loan portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, and economic trends. The adequacy of the allowance for loan losses is assessed by an allocation process whereby specific loss allocations are made against certain adversely classified loans, and general loss allocations are made against segments of the loan portfolio which have similar attributes. The Company’s historical loss experience, industry trends, and the impact of the local and regional economy on theCompany’s borrowers, were considered by Management in determining the adequacy of the allowance for loan losses. 

The allowance for loan losses is increased by provisions charged against current earnings. Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. While Management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic conditions, growth in loan portfolios, or for other reasons. Any future additions to the allowance would be recognized in the period in which they were determined to be necessary. In addition, various regulatory agencies periodically review the Company’s allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to record additions to the allowancebased on judgments different from those of Management. 

Credit quality of the commercial portfolios is quantified by a corporate credit rating system designed to parallel regulatory criteria and categories of loan risk. Individual loan officers monitor their loans to ensure appropriate rating assignments are made on a timely basis. Risk ratings and quality of the commercial loan portfolio are also assessed on a regular basis by an independent loan review consulting firm. An ongoing portfolio trend analyses and individual credit reviews to evaluate loan risk and compliance with corporate lending policies are also performed. The level of allowance allocable to each group of risk-rated loans is then determined by applying a loss factor that estimates the amount of probable loss in each category. The assigned loss factor for each risk rating is based upon Management’s assessment of historical loss data, portfolio characteristics, economictrends, overall market conditions and past experience. 

 

Page 18

 

 

 

Consumer loans, which include residential mortgages, home equity loans/lines, and direct/indirect loans, are generally evaluated as a group based on product type and on the basis of delinquency data and other credit data available due to the large number of such loans and the relatively small size of individual credits. Allocations for these loan categories are principally determined by applying loss factors that represent Management’s estimate of inherent losses. In each category, inherent losses are estimated based upon Management’s assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions and past experience. In addition, certain loans in these categories may be individually risk-rated if considered necessary by Management. 

The other method used to allocate the allowance for loan losses entails the assignment of reserve amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when Management believes it is probable that the Company will not collect all of the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based on internal risk ratings or non-accrual status. A specific reserve is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value. At June 30, 2005, impaired loans with specific reserves totaled $1,588,000 million (all of these loans were on non-accrual status) andthe amount of such reserves were $385,000 million.

All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition. As a result of these analyses, the Company has concluded that the level of the allowance for loan losses was adequate as of June 30, 2005. As of that date, the balance of $6,518,000 was 0.91% of total loans, compared to 0.99% at December 31, 2004 and 1.03% at June 30, 2004. Loans considered to be impaired according to SFAS 114/118 totaled $3,208,000 at June 30, 2005, compared to $1,601,000 at December 31, 2004. The portion of the allowance for loan losses allocated to impaired loans at June 30, 2005, was $385,000 compared to $228,000 at December 31, 2004.

On a pro-forma basis, the allowance for loan losses decreased by $201,000 or 3.0% in the first six months of 2005. This was the result of limited additional provision to the allowance due to the analysis of credit quality in the loan portfolio and the level of loan chargeoffs during the period.

 

***Deposits***

 

During the first six months of 2005, deposits increased by $302.4 million or 81.8% over December 31, 2004. Core deposits (demand, NOW, savings and money market accounts) increased by $147.7 million or 62.0% in the first six months of 2005. During the same period, certificates of deposit increased $154.2 million or 115.9%. Between June 30, 2004, and June 30, 2005, deposits grew by 73.9%, or $285.7 million. Demand deposits grew $28.9 million, NOW accounts $50.2 million, savings $46.7 million, and money market accounts $32.2 million, while certificates of deposit increased $127.7 million. The majority of the growth, both year-to-date and year-over-year, was due to the FNB acquisition and in certificates of deposit, primarily from wholesale and brokered sources..

On a pro-forma basis, deposits grew by $112.8 million or 20.2% during the first six months of 2005. This growth was in certificate of deposits, primarily from wholesale and brokered sources.

 

***Borrowed Funds***

 

The Company's funding includes borrowings from the Federal Home Loan Bank of Boston, 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 stategies, and are increased to replace or supplement other sources of funding, including core deposits and certificates of deposit. During the six months ended June 30, 2005, borrowed funds decreased by $29.5 million or 14.2% from December 31, 2004. Between June 30, 2004 and June 30, 2005, borrowed funds increased $4.1 million or 2.3%. These enabled the Company to meet its funding needs for asset growth at a reasonable cost.

On a pro-forma basis, borrowed funds decreased by $50.5 million or 22.1% during the first six months of 2005. This was the result of growth in wholesale and brokered sources, as noted above. Year-over-year, borrowed funds decreased $20.3 million or 10.3%.

 

 

Page 19

 

 

 

***Shareholders' Equity***

 

Shareholders' equity as of June 30, 2005 was $100.6 million, compared to $52.8 million as of December 31, 2004. The Company's strong earnings performance in the first six months of 2005, net of dividends paid, added to shareholders' equity, in addition to the significant increase from the FNB acquisition. The net unrealized gain on available-for-sale securities, presented in accordance with SFAS 115, decreased by $0.5 million from December 31, 2004, as a result of a recent rise in interest rates and by maturing securities replaced at lower yields.

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 200% 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.

In 2005, a cash dividend of 13.0 cents per share was declared in the second quarter compared to 11.0 cents in the second quarter of 2004. The dividend payout ratio was 40.63% in the second quarter of 2005 compared to 39.29% in the second quarter of 2004.

In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy. The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. The amount available for dividends in 2005 is this year's net income plus $9.7 million.

Regulatory leverage capital ratios for the Company were 7.93% and 8.03% at June 30, 2005 and December 31, 2004, respectively. The Company had a tier one risk-based capital ratio of 10.98% and tier two risk-based capital ratio of 11.99% at June 30, 2005, compared to 11.62% and 12.71%, respectively, at December 31, 2004. These are comfortably above the standards to be rated "well-capitalized" by regulatory authorities -- qualifying the Company for lower deposit-insurance premiums.

On January 20, 2005, the Company announced that its Board of Directors has authorized the repurchase of up to 250,000 shares of the Company's common stock or approximately 2.5% of the outstanding 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.

As of June 30, 2005, the Company had repurchased 121,966 shares under the new repurchase plan at an average price of $16.86.

 

***Non-Performing Assets***

 

At June 30, 2005, loans on non-accrual status totaled $3.2 million, which compares to non-accrual loans of $1.6 million as of December 31, 2004. In addition to loans on non-accrual status at June 30, 2005, loans past due 90 days or more and accruing (calculated on a constant 30-day month basis) totaled $547,000 which compares to $281,000 as of December 31, 2004. The Company continues to accrue interest on these loans because it believes collection of the interest is reasonably assured. The majority of the increase in non-performing assets in the second quarter of 2005 was the result of the FNB acquisition.

 

***Off-Balance Sheet Financial Instruments***

 

No material off-balance sheet risk exists that requires a separate liability presentation.

 

***Sale of Loans***

 

No recourse obligations have been incurred in connection with the sale of loans.

 

 

Page 20

 

 

 

***Contractual Obligations***

 

The following table sets forth the contractual obligations of the Company as of June 30, 2005:

 

*In thousands of dollars*

**Total**

**Less than**

**1 year**

**1-3**

**years**

**3-5**

**years**

**More than**

**5 years**

**Borrowed funds**

**$177,729**

$111,013

$25,000

$29,000

$12,716

**Operating leases**

**828**

203

361

181

83

**Certificates of deposit**

**287,275**

229,043

43,620

14,491

121

**Total**

**$465,832**

$340,259

$68,981

$43,672

$12,920

**Commitments to extend credit and unused lines of credit**

**$150,168**

$150,168

$-

$-

$-

 

 

***Liquidity Management***

 

As of June 30, 2005 the Bank had primary sources of liquidity of $97.7 million and an additional $23.3 million of secondary sources. It is Management's opinion this is adequate. In its Asset/Liability policy, the Bank has 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 Company's liquidity, capital resources or results of operations.

 

***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 June 30, 2005, was -3.67% 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.

A summary of the Bank's static gap, as of June 30, 2005 is presented in the following table:

 

 

**0-90**

**90-365**

**1-5**

**5+**

*In thousands of dollars***

**Days**

**Days**

**Years**

**Years**

Investment securities at amortized cost 

$19,555

$27,645

$75,689

$36,695

Loans held for sale

-

-

-

-

Loans 

294,427

114,031

253,694

56,305

Other interest-earning assets  

-

-

-

8,078

Non-rate-sensitive assets

71

213

1,134

42,223

Total assets 

314,053

141,889

330,517

143,301

Interest-bearing deposits 

250,377

96,882

58,297

210,394

Borrowed funds 

128,656

7,026

14,109

27,658

Non-rate-sensitive liabilities and equity

1,281

3,843

20,496

110,741

Total liabilities and equity  

380,314

107,751

92,902

348,793

Period gap   

$(66,261)

$34,138

$237,615

$(205,492)

Percent of total assets   

-7.13%

3.67%

25.56%

-22.10%

Cumulative gap

(66,261)

(32,123)

205,492

-

Percent of total assets 

-7.13%

-3.45%

22.10%

0.00%

 

The earnings simulation model forecasts capture 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 

 

Page 22

 

 

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 increase by approximately 1.97% of stable-rate net interest income if short-term rates affected by Federal Open Market Committee actions fall gradually by two percentage points over the next year, and decrease by approximately 4.91% 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 4.95% in a falling-rate scenario and decrease by 7.19% in a rising rate scenario when compared to the year-one base scenario.

A summary of the Bank's interest rate risk simulation modeling, as of June 30, 2005 is presented in the following table:

 

**Changes in Net Interest Income**

**2005**

**Year 1**

Projected change if rates decrease by 2.0%

+1.97%

Projected change if rates increase by 2.0%

-4.91%

**Year 2**

Projected change if rates decrease by 1.0%

+4.95%

Projected change if rates increase by 2.0%

-7.19%

 

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 goodwill and a small volume of assets and liabilities owned by the Company and included in its consolidated financial statements as of June 30, 2005. 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 predictivenature 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 June 30, 2005, 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 June 30, 2005, 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 will continue to rise in 2005 and believes that the current level of interest rate risk is acceptable.

 

Page 23

 

 

 

**Item 4: Controls and Procedures**

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of June 30, 2005, the end of the quarter covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. 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 reasonable assurance of achieving the desired control objectives, and the Company’s management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level 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. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with itsbusiness. 

 

 

Page 24

 

 

 

**Part II – Other Information**

 

**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.

 

**Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds** 

 

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 six months of 2005, 21,970 shares were issued pursuant to this Plan, as presented in the following table:

 

**Month**

**Shares**

January

6,088

February

1,514

March

560

April

1,417

May

11,292

June

1,099

 

21,970

 

 

**Item 3 – Default Upon Senior Securities**

 

None.

 

 

Page 25

 

 

 

**Item 4 – Submission of Matters to a Vote of Security Holders**

 

The Annual Meeting of Shareholders of First National Lincoln Corporation, the one-bank holding company of The First, N.A., was held at The Samoset Resort, 220 Warrenton Street, Rockport, Maine 04856, on Thursday, April 28, 2005 at 11:00 a.m. Eastern Daylight Time, for the following purposes:

 

**•**      To ratify the Board of Directors’ vote to fix the number of directors at ten.

**•**      To elect as directors of the Company the six (6) nominees listed in the Proxy Statement dated March 25, 2005, as noted.

**•**      To ratify the Audit Committee’s selection of Berry, Dunn, McNeil & Parker as independent auditors of the Company for 2005.

**•**      To transact such other business as may properly come before the meeting or any adjournment thereof.

 

Only shareholders of record at the close of business on February 18, 2005 (the “Voting Record Date”) were entitled to vote at the Annual Meeting. On the Voting Record Date, there were 9,874,710 shares of Common Stock of the Company, $0.01 par value per share, issued and outstanding, and the Company had no other class of equity securities outstanding. Each share of Common Stock was entitled to one vote at the Annual Meeting on all matters properly presented thereat.

The results of voting at the meeting are summarized in the following table:

 

 

**For**

**Against**

**Abstain**

**Total Votes**

**Article # 1 Fixed # of Directors**

8,919,396

60,150

41,464

9,021,010

**Article # 2 Director Election**

 

 

 

 

Tony C. McKim

8,938,657

53,942

28,411

9,021,010

Mark N. Rosborough

8,967,874

24,725

28,411

9,021,010

Katherine M. Boyd

8,972,466

20,133

28,411

9,021,010

Carl S. Poole, Jr.

8,975,077

17,522

28,411

9,021,010

David B. Soule, Jr.

8,973,466

19,133

28,411

9,021,010

Bruce B. Tindal

8,975,077

17,522

28,411

9,021,010

**Article # 3 Independent Auditor**

9,004,372

8,903

7,735

9,021,010

 

 

**Item 5 – Other Information**

 

A.  

None.

 

B.  

None.

 

Page 26

 

 

 

**Item 6 – Exhibits**

 

Exhibit 2.1 Agreement and Plan of Merger With FNB Bankshares Dated August 25, 2004, incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K dated August 25, 2004, filed under item 1.01 on August 27, 2004.

 

Exhibit 3.1 Conformed Copy of the Registrants Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed under item 5.03 on October 7, 2004.

 

Exhibit 3.2 Conformed Copy of the Registrant's Bylaws, incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed under item 5.03 on October 7, 2004.

 

Exhibit 10.1(a) FNB Bankshares' Stock Option Plan. incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed under item 5.03 on October 7, 2004.

 

Exhibit 10.1(b) Specimen FNB Bankshares Non-Qualified Stock Option Agreement entered into with Messrs. Rosborough, McKim, Wrobel, Dalrymple and Lay, whose FNB Bankshares options have been converted into options to purchase 5,287, 34,086, 15,275, 11,750 and 21,150 shares of the Registrant's stock, respectively, all at $3.80 per share, incorporated by reference to Exhibit 10.1(b) to the Company’s Form 8-K filed under item 1.01 on January 14, 2005.

 

Exhibit 10.2(a) Specimen Employment Continuity Agreement entered into with Messrs. McKim, Wroble, Dalrymple and Lay, incorporated by reference to Exhibit 10.2(a) to the Company’s Form 8-K filed under item 1.01 on January 14, 2005.

 

Exhibit 10.2(b) Specimen Amendment to Employment Continuity Agreement entered into with Messrs. McKim, Wrobel, Dalrymple and Lay, incorporated by reference to Exhibit 10.2(b) to the Company’s Form 8-K filed under item 1.01 on January 14, 2005.

 

Exhibit 10.3(a) Specimen Split Dollar Agreement entered into with Messrs. McKim, Wrobel, Dalrymple and Lay. For Mr. McKim, the amount of the death benefit is $250,000; for Messrs. Lay, Dalrymple and Wrobel, the death benefit is $150,000. Incorporated by reference to Exhibit 10.3(a) to the Company’s Form 8-K filed under item 1.01 on January 14, 2005.

 

Exhibit 10.3(b) Specimen Amendment to Split Dollar Agreement entered into with Messrs. McKim, Wrobel, Dalrymple and Lay, incorporated by reference to Exhibit 10.3(b) to the Company’s Form 8-K filed under item 1.01 on January 14, 2005.

 

Exhibit 31.1 Certification of Chief Executive Officer Persuant to Rule 13A-14(A) of The Securities Exchange Act of 1934

 

Exhibit 31.2 Certification of Chief Financial Officer Persuant to Rule 13A-14(A) of The Securities Exchange Act of 1934

 

Exhibit 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

 

Exhibit 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

 

 

Page 27

 

 

 

**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

 

 

/s/ Daniel R. Daigneault

Daniel R. Daigneault

President & Chief Executive Officer

 

Date: August 9, 2005

 

 

/s/ F. Stephen Ward

F. Stephen Ward

Executive Vice President & Chief Financial Officer

 

Date: August 9, 2005

 

 

Page 28

 

 

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