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 September 30, 2007 and 2006. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2007 and 2006.
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 September 30, 2007 compared to 2006. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2007 and 2006.
Provision for Loan Losses
An $850,000 provision to the allowance for loan losses was made during the first nine months of 2007, compared to a $900,000 provision made for the same period of 2006. The amount of provision made during the first nine months of 2007 and 2006 was to maintain the allowance for loan losses at an adequate level given continued growth in our loan portfolio and our level of chargeoffs. For the quarters ended September 30, 2007 and 2006, a $300,000 provision each quarter was made to the allowance for loan losses for the same reasons noted above.
Non-Interest Income
Non-interest income was $7,603,000 for the nine months ended September 30, 2007, a decrease of 1.0% from the $7,679,000 reported for the first nine months of 2006. This decrease in non-interest income year-to-date was primarily due to decreased levels of investment management and fiduciary income.
Non-interest income was $2,985,000 for the three months ended September 30, 2007, a decrease of 8.0% from the $3,246,000 reported in the same period for 2006. This decrease in non-interest income for the quarter was primarily due to decreased levels of investment management and fiduciary income as well as a decrease in other operating income.
Non-Interest Expense
Non-interest expense of $16,602,000 for the nine months ended September 30, 2007, is a decrease of 0.9% compared to non-interest expense of $16,752,000 for the same period in 2006. This decrease was attributable to lower employee costs and occupancy expense. Due to the challenges produced by the current interest rate environment, the Company has aggressively sought to control operating expense during 2007.
Non-interest expense of $6,000,000 for the three months ended September 30, 2007, is a decrease of 3.8% compared to non-interest expense of $6,235,000 for the three months ended September 30, 2006. This level of decrease is due to the reasons stated above.
Income Taxes
Income taxes on operating earnings were $3,872,000 for the nine months ended September 30, 2007, up from $3,683,000 in the same period a year ago. For the quarter ended September 30, 2007, income taxes on operating earnings were $1,428,000, up from the $1,272,000 for the same quarter in 2006. This is in line with the Company’s level of income before taxes.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company has adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48. However, certain amounts have been reclassified in the statement of financial position in order to comply with the requirements of the statement. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2004 through 2006.
Investments
The Company’s investment portfolio increased by $39.3 million or 21.8% to $219.9 million between December 31, 2006, and September 30, 2007. Due to the slight steepening in the yield curve in 2007, there has been opportunity to add to the investment portfolio at levels that have not been available for some time. Between June 30, 2007, and September 30, 2007, the Company's investment portfolio increased $19.7 million. At September 30, 2007, the Company’s available for sale portfolio had an unrealized gain, net of taxes, of $0.5 million. Between September 30, 2006, and September 30, 2007, the Company’s investment portfolio increased by $40.9 million or 22.9%.
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Loans
During the first nine months of 2007, loans grew by $53.5 million or 6.4%. The growth in commercial loans was $28.2 million or 8.5% while municipal loans increased by $4.4 million or 18.6%. The residential mortgage portfolio increased by $16.8 million or 4.7% and home equity lines of credit decreased $3.2 million or 4.4% year-to-date. Between June 30, 2007, and September 30, 2007, the Company’s loan portfolio increased $14.5 million or 1.6%. Between September 30, 2006 and September 30, 2007 the loan portfolio increased $63.1 million or 7.6%, as a result of customer demand.
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
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anticipated future cash flows, or its net realizable value. At September 30, 2007, impaired loans with specific reserves totaled $1.1 million (all of these loans were on non-accrual status) and the amount of such reserves were $0.6 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 September 30, 2007. As of that date, the balance of $6,714,000 was 0.75% of total loans, compared to 0.76% at December 31, 2006 and 0.75% at September 30, 2006. Loans considered to be impaired according to SFAS 114/118 totaled $1.8 million at September 30, 2007 compared to $3.5 million at December 31, 2006. The portion of the allowance for loan losses allocated to impaired loans at September 30, 2007, was $0.6 million compared to $0.2 million at December 31, 2006.
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, which typically reflects a much lower level of credit risk. The Company’s actual historical experience supports this by the overall credit quality of the portfolio and historically low level of chargeoffs.
Non-Performing Assets
At September 30, 2007, loans on non-accrual status totaled $1.8 million, which compares to non-accrual loans of $3.5 million as of December 31, 2006. In addition to loans on non-accrual status at September 30, 2007, loans past due 90 days or more and accruing (calculated on a constant 30-day month basis) totaled $2.3 million which compares to $0.7 million as of December 31, 2006. 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 of Bar Harbor, Maine, and its subsidiary, The First National Bank of Bar Harbor, which was merged into the Bank. The total value of the transaction was $48.0 million, and all of the voting equity interest of FNB Bankshares was acquired in the transaction. As of December 31, 2006, in accordance with SFAS No. 142, the Company completed its annual review of goodwill and determined there has been no impairment.
Deposits
During the first nine months of 2007, total deposits increased by $6.2 million or 0.8% over December 31, 2006. Low-cost deposits (demand, NOW, and savings accounts) increased by $14.5 million or 5.6% in the first nine months of 2007, and during the same period, certificates of deposit increased $14.2 million or 3.5%. Between September 30, 2006, and September 30, 2007, deposits decreased by 4.3%, or $36.7 million. Certificates of deposit decreased by $3.5 million, while low-cost deposits decreased by $4.2 million and money market accounts decreased $29.0 million or 20.2%. During the third quarter of 2007, the Company experienced its usual seasonal lift in low-cost deposits, which increased $19.6 million or 7.7%, while certificates of deposit declined by $52.6 million or 11.1%. The decrease in in certificates of deposit in the third quarter was due to a change in funding from wholesale certificates of deposit to borrowed funds as a result of current rates available from the Federal Home Loan Bank.
Borrowed Funds
The Company uses funding from the Federal Home Loan Bank of Boston, the Federal Reserve System, and repurchase agreements, enabling it to grow its balance sheet and its revenues. This funding may also be used to carry out interest rate risk management stategies, and is increased to replace or supplement other sources of funding, including core deposits and certificates of deposit. During the nine months ended September 30, 2007, borrowed funds increased $87.1 million or 48.5% from December 31, 2006. Between September 30, 2006 and September 30, 2007, borrowed funds increased by $136.7 million or 104.9%. These increases are due to a change in funding from certificates of deposit to borrowed funds as a result of current rates available from the Federal Home Loan Bank.
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Shareholders’ Equity
Shareholders’ equity as of September 30, 2007 was $112.1 million, compared to $107.3 million as of December 31, 2006. The Company’s earnings in the first nine months of 2007, 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 $0.2 million from December 31, 2006.
In 2007, a cash dividend of 17.5 cents per share was declared in the third quarter compared to 15.5 cents in the third quarter of 2006. The dividend payout ratio was 50.00% in the third quarter of 2007 compared to 48.44% in the third quarter of 2006. 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 2007 is this year’s net income plus retained earnings of $10.2 million from 2006 and 2005.
Regulatory leverage capital ratios for the Company were 7.29% and 7.22% at September 30, 2007 and December 31, 2006, respectively. The Company had a tier one risk-based capital ratio of 10.51% and tier two risk-based capital ratio of 11.39% at September 30, 2007, compared to 10.40% and 11.26%, respectively, at December 31, 2006. These are comfortably above the standards to be rated “well-capitalized” by regulatory authorities – qualifying the Company for lower deposit-insurance premiums.
On August 16, 2007, the Company announced that its Board of Directors had authorized a new program for the repurchase of up to 300,000 shares of the Company’s common stock or approximately 3.1% of the outstanding shares. The Board of Directors feels that repurchasing shares continues to be in the best interest of the Company's shareholders and sees stock repurchases as an appropriate use of capital, especially given the recent decline in stock prices for the banking industry.
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 September 30, 2007, the Company had repurchased seven shares under the new repurchase plan at an average price of $15.28.
This new stock plan supersedes the buyback program that had been in place since July 21, 2006, which had authorized the repurchase of up to 250,000 or 2.5% of the Company’s outstanding shares. As of August 16, 2007, the date the new plan was effective, the Company had repurchased 130,186 shares under the old repurchase plan at an average price of $16.89 and at a total cost of $2.2 million.
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Average Daily Balance Sheets
The following table shows the Company’s average daily balance sheets for the nine month and three month periods ended September 30, 2007 and 2006.
| For the nine months | For the quarters |
ended September 30, | ended September 30, |
In thousands of dollars | 2007 | 2006 | 2007 | 2006 |
Assets | | | | |
Cash and due from banks | $ 20,993 | $ 21,066 | $ 22,451 | $ 21,465 |
Interest-bearing deposits | - | 1,530 | - | 2,295 |
Investments | | | | |
U.S. Treasury & government agency securities | 105,218 | 89,947 | 122,592 | 89,369 |
Obligations of states and political subdivisions | 60,284 | 56,830 | 62,318 | 57,298 |
Other securities | 38,734 | 39,598 | 36,578 | 39,089 |
Total investments | 204,236 | 186,375 | 221,488 | 185,756 |
Loans held for sale | 156 | 51 | 302 | 60 |
Loans | | | | |
Commercial | 351,366 | 327,932 | 363,288 | 329,353 |
Consumer | 57,866 | 45,307 | 61,858 | 46,829 |
State and municipal | 24,884 | 21,816 | 26,476 | 22,122 |
Real estate | 428,878 | 409,364 | 434,475 | 411,430 |
Total loans | 862,994 | 804,419 | 886,097 | 809,734 |
Allowance for loan losses | (6,569) | (6,131) | (6,707) | (6,129) |
Net loans | 856,425 | 798,288 | 879,390 | 803,605 |
Premises and equipment | 15,706 | 16,413 | 15,600 | 16,357 |
Goodwill | 15,080 | 22,719 | 15,202 | 22,703 |
Other assets | 27,684 | 27,684 | 27,684 | 27,679 |
Total assets | $1,140,280 | $1,074,126 | $1,182,117 | $1,079,920 |
Liabilities and shareholders' equity | | | | |
Deposits | | | | |
Demand | $ 60,310 | $ 61,377 | $ 67,908 | $ 63,020 |
NOW | 100,290 | 101,131 | 106,222 | 101,668 |
Money market | 126,423 | 121,885 | 114,440 | 123,071 |
Savings | 92,943 | 102,698 | 92,634 | 102,441 |
Certificates of deposit | 329,302 | 164,614 | 343,409 | 170,125 |
Certificates of deposit over $100,000 | 116,867 | 228,927 | 121,873 | 236,593 |
Total deposits | 826,135 | 780,632 | 846,486 | 796,918 |
Borrowed funds | 193,908 | 179,192 | 213,873 | 168,301 |
Other liabilities | 10,765 | 9,058 | 10,930 | 9,241 |
Total liabilities | 1,030,808 | 968,882 | 1,071,289 | 974,460 |
Common stock | 98 | 99 | 98 | 99 |
Additional paid-in capital | 45,748 | 47,126 | 45,882 | 46,965 |
Retained earnings | 63,262 | 57,457 | 64,765 | 57,872 |
Unrealized gains on securities available for sale | 597 | 562 | 428 | 524 |
Unrealized loss on postretirement benefit costs | (233) | - | (345) | - |
Total shareholders' equity | 109,472 | 105,244 | 110,828 | 105,460 |
Total liabilities and shareholders' equity | $1,140,280 | $1,074,126 | $1,182,117 | $1,079,920 |
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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 September 30, 2007:
In thousands of dollars | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
Borrowed funds | $ 267,011 | 129,818 | 92,000 | 25,000 | 20,193 |
Operating leases | 370 | 132 | 171 | 58 | 9 |
Certificates of deposit | 422,419 | 351,209 | 66,516 | 4,694 | - |
Total | $ 689,800 | 481,159 | 158,687 | 29,752 | 20,202 |
Unused line, collateralized by residential real estate | $ 78,083 | 78,083 | - | - | - |
Other unused commitments | $ 50,126 | 50,126 | - | - | - |
Standby letters of credit | $ 1,466 | 1,466 | - | - | - |
Commitments to extend credit | $ 20,869 | 20,869 | - | - | - |
Total loan commitments and unused lines of credit | $ 136,870 | 136,870 | - | - | - |
Liquidity Management
As of September 30, 2007 the Bank had primary sources of liquidity of $167.3 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.
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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, September 30, 2007, was -11.11% 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 September 30, 2007 is presented in the following table:
| 0-90 | 90-365 | 1-5 | 5+ |
| Days | Days | Years | Years |
Investment securities at amortized cost | $ 30,639 | $ 22,827 | $ 69,657 | $ 95,565 |
Loans held for sale | 1,313 | - | - | - |
Loans | 314,503 | 120,763 | 354,822 | 101,587 |
Other interest-earning assets | 8,711 | - | - | - |
Non-rate-sensitive assets | 74 | 221 | 1,140 | 52,337 |
Total assets | 355,240 | 143,811 | 425,619 | 249,489 |
Interest-bearing deposits | 256,319 | 216,066 | 71,329 | 195,084 |
Borrowed funds | 129,759 | 20,060 | 117,059 | 133 |
Non-rate-sensitive liabilities and equity | 1,750 | 5,550 | 37,200 | 123,850 |
Total liabilities and equity | 387,828 | 241,676 | 225,588 | 319,067 |
Period gap | $ (32,588) | $ (97,865) | $200,031 | $ (69,578) |
Percent of total assets | -2.78% | -8.33% | 17.04% | -5.93% |
Cumulative gap (current) | (32,588) | (130,453) | 69,578 | - |
Percent of total assets | -2.78% | -11.11% | 5.93% | 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
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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 4.78% 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 6.24% 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 17.08% in a falling-rate scenario, and lower than that earned in a stable rate environment by 13.07% 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 September 30, 2007 is presented in the following table:
| Changes in Net Interest Income | 2007 |
Year 1
| Projected change if rates decrease by 2.0% | +4.78% |
| Projected change if rates increase by 2.0% | -6.24% |
Year 2
| Projected change if rates decrease by 2.0% | +17.08% |
| Projected change if rates increase by 2.0% | -13.07% |
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 September 30, 2007. 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 September 30, 2007, the Company was using interest rate caps 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 September 30, 2007, there were no significant differences between the views of the independent consultant and Management regarding the Company’s interest rate risk exposure. Management expects interest rates may decline in the next two-to-four quarters and believes that the current level of interest rate risk is acceptable.
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Item 4: Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of September 30, 2007, 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 September 30, 2007 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.
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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, 2006.
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 2007 | 1,191 | $16.61 | $ 20,000 |
February 2007 | 1,381 | 16.54 | 22,000 |
March 2007 | 776 | 16.19 | 13,000 |
April 2007 | 957 | 16.02 | 15,000 |
May 2007 | 484 | 16.13 | 8,000 |
June 2007 | 353 | 16.18 | 6,000 |
July 2007 | 320 | 16.48 | 5,000 |
August 2007 | 535 | 15.17 | 8,000 |
September 2007 | 319 | 14.95 | 4,000 |
Total | 6,316 | $16.18 | $102,000 |
b. None
c. On August 16, 2007, the Company announced that its Board of Directors had authorized a new program for the repurchase of up to 300,000 shares of the Company’s common stock or approximately 3.1% of the outstanding shares. The Board of Directors feels that repurchasing shares continues to be in the best interest of the Company's shareholders and sees stock repurchases as an appropriate use of capital, especially given the recent decline in stock prices for the banking industry. 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 September 30, 2007, the Company had repurchased seven shares under the new repurchase plan at an average price of $15.28. This new stock plan supersedes the buyback program that had been in place since July 21, 2006, which had authorized the repurchase of up to 250,000 or 2.5% of the Company’s outstanding shares. As of August 16, 2007, the date the new plan was effective, the Company had repurchased 130,186 shares under the old repurchase plan at an average price of $16.89 and at a total cost of $2.2 million. The following table details repurchases under both the old and new programs during the nine months ended September 30, 2007:
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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 2007 | 5,210 | $16.49 | 5,210 | 137,753 |
February 2007 | 808 | 16.50 | 808 | 136,945 |
March 2007 | 650 | 16.31 | 650 | 136,295 |
April 2007 | 91 | 15.97 | 91 | 136,204 |
May 2007 | 11,803 | 16.13 | 11,803 | 124,401 |
June 2007 | 735 | 15.66 | 735 | 123,666 |
July 2007 | - | - | - | 123,666 |
August 2007 | 3,859 | 15.73 | 3,859 | 299,994 |
September 2007 | 1 | 15.08 | 1 | 299,993 |
Total | 23,157 | $16.15 | 23,157 | 299,994 |
Item 3 – Default Upon Senior Securities
None.
Item 4 – Submission of Matters to a Vote of Security Holders
None.
Item 5 – Other Information
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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 10.2(a) Specimen Employment Continuity Agreement entered into with Messrs. McKim, Wroble and Dalrymple, 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 and Dalrymple, 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 and Dalrymple. For Mr. McKim, the amount of the death benefit is $250,000; for Messrs. 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 and Dalrymple, 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 10.4 Specimen Amendment to Employment Continuity Agreement entered into with Mr. Dalrymple, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed under item 1.01 on September 27, 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
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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: November 7, 2007
/s/ F. Stephen Ward
F. Stephen Ward
Executive Vice President & Chief Financial Officer
Date: November 7, 2007
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