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 for the quarter ended June 30, 2006 and 2005. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2006 and 2005.
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 for the quarter ended June 30, 2006 compared to 2005. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2006 and 2005.
On a pro-forma basis, net interest income for the first six months of 2006 was $15,242,000, a decrease of $440,000 or 2.8% compared to net interest income of $15,682,000 for the first six months of 2005. The growth in earning assets was offset by margin compression as a result of the flat yield curve. On a pro-forma basis, net interest income for the three months ended June 30, 2006 and 2005 was the same as that reported in the Company’s consolidated financial statements.
Provision for Loan Losses
A $600,000 provision to the allowance for loan losses was made during the first six months of 2006, compared to a $100,000 provision made for the same period of 2005. The increase in provision is a result of increased volume in loans during 2006 and the Company’s calculation of the adequacy of its allowance for loan losses as of June 30, 2006.
Non-Interest Income
Non-interest income was $4,433,000 for the six months ended June 30, 2006, an increase of 13.9% from the $3,891,000 reported for the first six months of 2005. The increase in non-interest income was primarily due to increases in investment management and fiduciary income as well as increased levels of revenue on deposit accounts. On a pro-forma basis, non-interest income increased by $397,000 or 9.8% from $4,036,000 in 2005 to $4,433,000 in 2006.
Non-interest income was $2,360,000 for the three months ended June 30, 2006, an increase of 5.9% from the $2,228,000 reported in the same period for 2005. Although investment management and fiduciary income increased by 13.6%, income from mortgage origination declined due to higher interest rates and lower levels of loans sold to the secondary market. On a pro-forma basis, non-interest income for the three months ended June 30, 2006 and 2005 was the same as that reported in the Company’s consolidated financial statements.
Non-Interest Expense
Non-interest expense of $10,516,000 for the six months ended June 30, 2006, is a decrease of 1.2% compared to non-interest expense of $10,642,000 for the same period in 2005. This decline was attributable to lower employee costs through attrition as well as a reduction in the accrual for the Company’s Stakeholder bonus program and lower health insurance costs. In addition, savings were realized from outsourced services that were absorbed into existing in-house operations. On a pro-forma basis, non-interest expense decreased by $820,000 or 7.2% during the six months ended June 30, 2006 compared to the six months ended June 30, 2005, with the largest decrease in salaries and employee benefits, which were down by 10.1%.
Non-interest expense of $5,081,000 for the three months ended June 30, 2006, is a decrease of 11.4% compared to non-interest expense of $5,736,000 for the three months ended June 30, 2005. This level of decrease in non-interest expense for the quarter was for the same reasons cited above as well as a decrease in other operating expenses. On a pro-forma basis, non-interest expense for the three months ended June 30, 2006 and 2005 was the same as that reported in the Company’s consolidated financial statements.
Income Taxes
Income taxes on operating earnings were $2,411,000 for the six months ended June 30, 2006, virtually the same as the period a year ago.
Investments
The Company's investment portfolio increased by $5.7 million or 3.1% to $189.7 million between December 31, 2005, and June 30, 2006. At June 30, 2006, the Company's available-for-sale portfolio had an unrealized gain, net of taxes, of $0.4 million. Between June 30, 2005, and June 30, 2006, the Company's investment portfolio increased by $29.7 million or 18.5%. This was due to increased investing activities.
Loans
Loans grew by $53.4 million or 6.9% during the first six months of 2006. The growth in commercial loans was $25.9 million or 8.3% and municipal loans increased $3.1 million or 15.2%. The residential mortgage portfolio increased by $19.6 million or 6.2%, and home equity lines of credit decreased $4.7 million or 5.6% year-to-date. Between June 30, 2005 and June 30, 2006, the loan portfolio increased $107.3 million or 14.9%, as a result of strong customer demand.
Page 17
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 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 that have similar attributes. The Company’s historical loss experience, industry trends, and the impact of the local and regional economy on the Company’s borrowers, are 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 allowance based on judgments different from those of Management.
Credit quality of the commercial portfolios is quantified by a 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. 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, economic trends, overall market conditions and past experience.
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, 2006, impaired loans with specific reserves totaled $416,000 (all of these loans were on non-accrual status) and the amount of such reserves were $109,000.
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, 2006. As of that date, the balance of $6,021,000 was 0.73% of total loans, compared to 0.79% at December 31, 2005 and 0.91% at June 30, 2005. Loans considered to be impaired according to SFAS 114/118 totaled $2,543,000 at June 30, 2006 compared to $3,081,000 at December 31, 2005. The portion of the allowance for loan losses allocated to impaired loans at June 30, 2006, was $109,000 compared to $392,000 at December 31, 2005.
Page 18
In Management's opinion, the level of the Company's allowance for loan losses is adequate. Although the allowance is lower as a percentage of loans than many peers, the Bank's loan portfolio has a higher percentage of residential mortgage loans than peers, and the overall credit quality of the portfolio and historically low level of chargeoffs support this.
Non-Performing Assets
At June 30, 2006, loans on non-accrual status totaled $2.5 million, which compares to non-accrual loans of $3.1 million as of December 31, 2005. In addition to loans on non-accrual status at June 2006, loans past due 90 days or more and accruing (calculated on a constant 30-day month basis) totaled $588,000 which compares to $325,000 as of December 31, 2005. The Company continues to accrue interest on these loans because it believes collection of the interest is reasonably assured.
Goodwill
On January 14, 2005, the Company completed the acquisition of FNB Bankshares (“FNB”) of Bar Harbor, Maine, and its subsidiary, The First National Bank of Bar Harbor, which was merged into the Bank. Management believes that the products and services offered in FNB’s market have been enhanced by the combination of the two companies, providing a larger capacity to lend money and a stronger overall funding base. In 2005, the combined entity realized approximately $1.0 million in initial cost savings from redundant expenses, such as regulatory fees, audit costs, legal costs, and outsourced costs.
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 $27,559,000 and included $972,000 in direct expenses.
The following table shows the adjusted 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 | |
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 | 27,559 |
Other assets | 9,311 |
Total Assets | $ 261,946 |
Liabilities & Shareholders’ Equity | |
Deposits | $ 192,860 |
Borrowed funds | 17,044 |
Other liabilities | 4,086 |
Total liabilities | 213,990 |
Shareholders’ equity | 47,956 |
Total Liabilities & Shareholders’ Equity | $ 261,946 |
The majority of the $1,830,000 difference between actual goodwill booked and the $26,005,000 of goodwill estimated in the Company’s December 31, 2004 financial statements was due to deferred income taxes. During the fourth quarter of 2005, goodwill and other liabilities were reduced by $276,000, net of tax, as a result of changes in employment continuity agreements with FNB employees who became employees of the Bank, which resulted in lower reserves for the these agreements.
Page 19
Deposits
During the first six months of 2006, total deposits increased by $73.0 million or 10.2% over December 31, 2005. Although core deposits (demand, NOW, savings and money market accounts) decreased by $35.4 million or 8.7% in the first six months of 2006, during the same period, certificates of deposit increased $108.4 million or 35.5%. Between June 30, 2005, and June 30, 2006, deposits grew by 17.1%, or $114.7 million. Demand deposits grew $4.5 million, and certificates of deposit also grew by $126.6 million, while NOW accounts decreased by $3.5 million, money market accounts decreased by $.2 million and savings decreased by $12.8 million. The majority of the growth in certificates of deposit, both year-to-date and year-over-year, was from wholesale and brokered sources. The Company saw a decline in core deposits in the first six months of 2006 due to the seasonality of deposit flows and transfers to higher-yielding certificates of deposit due to higher interest rates.
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, 2006, borrowed funds decreased by $18.5 million or 8.6% from December 31, 2005, as a result of the deposit growth previously noted. Between June 30, 2005 and June 30, 2006, borrowed funds increased $18.9 million or 10.6%.
Shareholders' Equity
Shareholders' equity as of June 30, 2006 was $105.6 million, compared to $103.4 million as of December 31, 2005. The Company's earnings performance in the first six months of 2006, net of dividends paid, added to shareholders' equity. The net unrealized loss on available-for-sale securities, presented in accordance with SFAS 115, decreased by $0.3 million from December 31, 2005, as a result of a recent rise in interest rates.
In 2006, a cash dividend of 15 cents per share was declared in the second quarter compared to 13 cents in the second quarter of 2005. The dividend payout ratio was 46.88% in the second quarter of 2006 compared to 40.63% in the second quarter of 2005. 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 2006 is this year's net income plus $9.8 million.
Regulatory leverage capital ratios for the Company were 7.19% and 7.66% at June 30, 2006 and December 31, 2005, respectively. The Company had a tier one risk-based capital ratio of 10.13% and tier two risk-based capital ratio of 10.94% at June 30, 2006, compared to 10.74% and 11.61%, respectively, at December 31, 2005. 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 had 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, 2006 the Company had repurchased 248,375 shares under the new repurchase plan at an average price of $17.15.
Page 20
Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for the six month and three month periods ended June 30, 2006 and 2005.
| For the six months | For the quarters |
ended June 30, | ended June 30, |
In thousands of dollars | 2006 | 2005 | 2006 | 2005 |
Assets | | | | |
Cash and due from banks | $ 20,268 | $ 18,524 | $ 20,136 | $ 17,486 |
Interest-bearing deposits | - | 359 | - | 711 |
Investments | | | | |
U.S. Treasury & government agency securities | 91,104 | 63,948 | 94,572 | 64,055 |
Obligations of states and political subdivisions | 55,895 | 49,348 | 55,744 | 52,402 |
Other securities | 40,617 | 42,530 | 40,356 | 42,161 |
Total investments | 187,616 | 155,826 | 190,672 | 158,618 |
Loans held for sale | 46 | 369 | 45 | 734 |
Loans | | | | |
Commercial | 325,091 | 271,479 | 332,272 | 289,944 |
Consumer | 42,263 | 34,396 | 44,182 | 35,350 |
State and municipal | 21,205 | 22,591 | 21,893 | 23,162 |
Real estate | 405,232 | 346,710 | 408,769 | 356,719 |
Total loans | 793,791 | 675,176 | 807,116 | 705,175 |
Allowance for loan losses | (6,136) | (6,523) | (6,104) | (6,570) |
Net loans | 787,655 | 668,653 | 801,012 | 698,604 |
Premises and equipment | 16,525 | 16,324 | 16,422 | 16,928 |
Goodwill | 22,752 | 17,754 | 15,869 | 20,645 |
Other assets | 27,684 | 25,652 | 27,684 | 27,960 |
Total assets | $1,062,546 | $ 903,461 | $1,071,841 | $ 941,686 |
Liabilities and shareholders' equity | | | | |
Deposits | | | | |
Demand | $ 58,092 | $ 54,210 | $ 57,522 | $ 54,318 |
NOW | 100,057 | 102,000 | 98,553 | 107,436 |
Money market | 119,513 | 110,850 | 112,106 | 114,399 |
Savings | 103,212 | 109,089 | 99,751 | 113,178 |
Certificates of deposit | 149,989 | 107,553 | 155,934 | 98,868 |
Certificates of deposit over $100,000 | 217,198 | 109,276 | 229,837 | 136,796 |
Total deposits | 748,061 | 592,978 | 753,703 | 624,994 |
Borrowed funds | 200,975 | 205,780 | 209,480 | 208,570 |
Other liabilities | 8,696 | 8,788 | 3,467 | 8,121 |
Total liabilities | 957,732 | 807,546 | 966,651 | 841,686 |
Common stock | 99 | 98 | 98 | 101 |
Additional paid-in capital | 47,449 | 45,342 | 47,215 | 48,690 |
Retained earnings | 56,628 | 48,721 | 57,333 | 49,881 |
Unrealized gain on securities available for sale | 638 | 1,754 | 544 | 1,329 |
Total shareholders' equity | 104,814 | 95,915 | 105,190 | 100,001 |
Total liabilities and shareholders' equity | $1,062,546 | $ 903,461 | $1,071,841 | $ 941,686 |
Page 21
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.
Contractual Obligations
The following table sets forth the contractual obligations of the Company as of June 30, 2006:
In thousands of dollars | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
Borrowed funds | $196,649 | 179,384 | 2,000 | 15,063 | 202 |
Operating leases | 561 | 131 | 264 | 113 | 53 |
Certificates of deposit | 413,913 | 350,142 | 49,966 | 13,805 | - |
Total | $611,123 | 529,657 | 52,230 | 28,981 | 255 |
Total loan commitments and unused lines of credit | $152,069 | 152,069 | - | - | - |
Liquidity Management
As of June 30, 2006 the Bank had primary sources of liquidity of $171.6 million. 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 that affect the Company's business.
Page 22
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 that reprice within a specified time period. The Bank's cumulative one-year gap, at June 30, 2006, was -13.13% 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, 2006 is presented in the following table:
| 0-90 | 90-365 | 1-5 | 5+ |
| Days | Days | Years | Years |
Investment securities at amortized cost | $24,223 | $ 22,731 | $79,958 | $ 61,740 |
Loans held for sale | 240 | - | - | - |
Loans | 293,895 | 126,533 | 324,350 | 80,921 |
Other interest-earning assets | - | 8,347 | - | - |
Non-rate-sensitive assets | 71 | 213 | 1,134 | 46,459 |
Total assets | 318,429 | 157,824 | 405,442 | 189,120 |
Interest-bearing deposits1 | 263,224 | 182,657 | 90,249 | 203,266 |
Borrowed funds1 | 133,486 | 32,349 | 17,085 | 146 |
Non-rate-sensitive liabilities and equity | 1,281 | 3,843 | 23,058 | 120,171 |
Total liabilities and equity | 397,991 | 218,849 | 130,392 | 323,583 |
Period gap | $(79,562) | $(61,025) | $275,050 | $(134,463) |
Percent of total assets | -7.43% | -5.70% | 25.69% | -12.56% |
Cumulative gap (current) | (79,562) | (140,587) | 134,463 | - |
Percent of total assets | -7.43% | -13.13% | 12.56% | 0.00% |
1 Certain liabilities were reclassed between interest-bearing deposits and borrowed funds in the modeling process.
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 23
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 5.65% 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 8.57% 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 17.80% in a falling-rate scenario, and lower than that earned in a stable rate environment by 17.81% 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, 2006 is presented in the following table:
| Changes in Net Interest Income | 2006 |
Year 1
| Projected change if rates decrease by 2.0% | +5.65% |
| Projected change if rates increase by 2.0% | -8.57% |
| | | |
Year 2
| Projected change if rates decrease by 2.0% | +17.80% |
| Projected change if rates increase by 2.0% | -17.81% |
| | | |
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, 2006. 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 June 30, 2006, 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, 2006, 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 the near term 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 of June 30, 2006, 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 Chief Executive 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, 2006 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 its business.
Page 25
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 1A – Risk Factors
There have been no material changes to the Risk Factors previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the period ended December 31, 2005.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
a. 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, as presented in the following table:
Month | Shares | Average Price | Proceeds |
January 2006 | 599 | $17.41 | $10,000 |
February 2006 | 2,275 | 17.51 | 40,000 |
March 2006 | 454 | 17.55 | 8,000 |
April 2006 | 633 | 17.21 | 11,000 |
May 2006 | 451 | 16.84 | 8,000 |
June 2006 | 456 | 17.25 | 8,000 |
Total | 4,868 | $17.38 | $85,000 |
b. None
c. On January 20, 2005, the Company announced that its Board of Directors had 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, 2006 the Company had repurchased 248,375 shares under the new repurchase plan at an average price of $17.15. Repurchases during the six months ended June 30, 2006, are detailed in the following table.
Month | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | Maximum Number of Shares that may yet be Purchased under the Plan or Program |
January 2006 | 26 | $16.89 | 26 | 73,738 |
February 2006 | 21,025 | 17.77 | 21,025 | 52,713 |
March 2006 | 11,836 | 17.58 | 11,836 | 40,877 |
April 2006 | - | - | - | 40,877 |
May 2006 | 39,033 | 16.53 | 39,033 | 1,844 |
June 2006 | 219 | 17.06 | 219 | 1,625 |
Total | 72,139 | $17.07 | 72,139 | 1,625 |
Page 26
Item 3 – Default Upon Senior Securities
None.
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, 200 Warrenton Street, Rockport, Maine 04856, on Wednesday, April 26, 2006 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 three (3) nominees listed in the Proxy Statement dated March 24, 2006, as noted. |
• | To ratify the Audit Committee’s selection of Berry, Dunn, McNeil & Parker as independent auditors of the Company for 2006. |
• | 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 15, 2006 (the “Voting Record Date”) were entitled to vote at the Annual Meeting. On the Voting Record Date, there were 9,875,097 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 | 8,667,335 | 113,047 | 36,118 | 8,816,500 |
Article # 2 Director Election | | | | |
Daniel R. Daigneault | 8,696,823 | 103,264 | 16,413 | 8,816,500 |
Robert B. Gregory | 8,758,898 | 41,189 | 16,413 | 8,816,500 |
Tony C. McKim | 8,639,320 | 160,767 | 16,413 | 8,816,500 |
Article # 3 Independent Auditor | 8,705,185 | 100,328 | 10,987 | 8,816,500 |
Item 5 – Other Information
Page 27
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 10.4 Specimen Amendment to Employment Continuity Agreement entered into with Messrs. McKim and Wrobel, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed under item 1.01 on January 31, 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 28
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, 2006
/s/ F. Stephen Ward
F. Stephen Ward
Executive Vice President & Chief Financial Officer
Date: August 9, 2006
Page 29
