SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 000-25219
LINCOLN BANCORP
(Exact name of registrant specified in its charter)
Indiana 35-2055553
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1121 East Main Street
Plainfield, Indiana 46168-0510
(Address of principal executive offices, including Zip Code)
(317) 839-6539
(Registrant's telephone number, including area code)
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 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of June 30, 2002 was 4,971,621.
LINCOLN BANCORP AND SUBSIDIARY
FORM 10-Q
INDEX
Page No.
--------
FORWARD LOOKING STATEMENT 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statements of Comprehensive Income 6
Consolidated Condensed Statement of Shareholders' Equity 7
Consolidated Condensed Statements of Cash Flows 8
Notes to Unaudited Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined in the notes to the
consolidated condensed financial statements), its directors or its officers
primarily with respect to future events and the future financial performance of
the Company. Readers of this Form 10-Q are cautioned that any such forward
looking statements are not guarantees of future events or performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-Q identifies important
factors that could cause such differences. These factors include changes in
interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; or regulatory changes.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
June 30, December 31,
2002 2001
--------------------- --------------------
(Unaudited)
Assets
Cash and due from banks $ 2,208,877 $ 2,434,342
Short-term interest-bearing demand deposits in other banks 19,466,279 7,968,681
--------------------- --------------------
Cash and cash equivalents 21,675,156 10,403,023
Interest-bearing deposits 600,000 1,900,030
Investment securities
Available for sale 110,472,239 97,858,831
Held to maturity 1,790,000 1,800,000
--------------------- --------------------
Total investment securities 112,262,239 99,658,831
Loans held for sale 2,330,181
Loans 349,851,186 355,334,443
Allowance for loan losses 2,738,346 2,648,111
--------------------- --------------------
Net Loans 347,112,840 352,686,332
Premises and equipment 5,856,699 5,486,033
Investments in limited partnerships 1,456,777 1,534,777
Federal Home Loan Bank stock 7,734,400 7,734,400
Interest receivable 2,642,598 2,459,230
Goodwill 1,563,594 1,563,594
Other assets 6,901,618 6,914,002
--------------------- --------------------
Total assets $ 507,805,921 $ 492,670,433
===================== ====================
Liabilities
Deposits
Noninterest-bearing $ 11,234,168 $ 9,229,089
Interest-bearing 263,120,732 242,877,247
--------------------- --------------------
Total deposits 274,354,900 252,106,336
Securities sold under repurchase agreements 10,000,000 15,000,000
Federal Home Loan Bank advances 133,137,706 133,120,613
Note payable 248,501 737,001
Interest payable 986,810 1,159,166
Other liabilities 3,989,529 4,304,012
--------------------- --------------------
Total liabilities 422,717,446 406,427,128
--------------------- --------------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, without par value
Authorized and unissued - 2,000,000 shares
Common stock, without par value
Authorized - 20,000,000 shares
Issued and outstanding - 4,971,621 and 5,154,920 shares 48,559,385 50,342,175
Retained earnings 42,492,857 42,712,497
Accumulated other comprehensive income 258,596 (56,790)
Unearned recognition and retention plan (RRP) shares (1,940,683) (2,293,777)
Unearned employee stock ownership plan (ESOP) shares (4,281,680) (4,460,800)
--------------------- --------------------
Total shareholders' equity 85,088,475 86,243,305
--------------------- --------------------
Total liabilities and shareholders' equity $ 507,805,921 $ 492,670,433
===================== ====================
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------- ---------------- ---------------- ----------------
2002 2001 2002 2001
--------------- ---------------- ---------------- ----------------
Interest Income
Loans, including fees $ 6,228,394 $ 6,849,081 $12,403,953 $13,624,400
Investment securities 1,458,887 2,123,257 2,888,415 4,386,098
Deposits with financial institutions 87,314 137,387 160,074 247,285
Dividend income 120,519 149,444 234,946 302,013
--------------- ---------------- ---------------- ----------------
Total interest and dividend income 7,895,114 9,259,169 15,687,388 18,559,796
--------------- ---------------- ---------------- ----------------
Interest Expense
Deposits 1,964,152 3,342,886 3,979,559 6,646,116
Repurchase agreements 199,311 214,877 411,186 437,639
Federal Home Loan Bank advances 1,728,610 1,659,095 3,441,618 3,482,206
--------------- ---------------- ---------------- ----------------
Total interest expense 3,892,073 5,216,858 7,832,363 10,565,961
--------------- ---------------- ---------------- ----------------
Net Interest Income 4,003,041 4,042,311 7,855,025 7,993,835
Provision for loan losses 64,821 24,533 79,986 138,578
--------------- ---------------- ---------------- ----------------
Net Interest Income After Provision for Loan Losses 3,938,220 4,017,778 7,775,039 7,855,257
--------------- ---------------- ---------------- ----------------
Other Income
Service charges on deposit accounts 177,227 169,620 350,355 312,456
Net realized and unrealized gains on loans 192,765 210,037 421,756 299,526
Equity in losses of limited partnerships (39,000) (99,900) (78,000) (193,200)
Other income 274,454 189,537 548,462 421,511
--------------- ---------------- ---------------- ----------------
Total other income 605,446 469,294 1,242,573 840,293
--------------- ---------------- ---------------- ----------------
Other Expenses
Salaries and employee benefits 1,645,561 1,570,657 3,180,543 3,086,408
Net occupancy expenses 144,398 155,518 312,239 307,581
Equipment expenses 175,226 143,360 335,935 323,694
Advertising and business development 114,835 132,097 196,591 228,364
Data processing fees 278,328 256,276 552,411 508,195
Professional fees 109,038 118,101 180,719 202,165
Director and committee fees 58,950 66,408 124,240 136,014
Other expenses 587,214 473,463 1,065,684 881,518
--------------- ---------------- ---------------- ----------------
Total other expenses 3,113,550 2,915,880 5,948,362 5,673,939
--------------- ---------------- ---------------- ----------------
Income Before Income Tax 1,430,116 1,571,192 3,069,250 3,021,611
Income tax expense 488,091 538,427 1,017,566 984,050
--------------- ---------------- ---------------- ----------------
Net Income $ 942,025 $ 1,032,765 $ 2,051,684 $ 2,037,561
=============== ================ ================ ================
Basic earnings per share $ .22 $ .21 $ .47 $ .41
Diluted earnings per share .21 .21 .45 .41
Dividends per share .10 .09 .20 .18
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------ ----------------- -----------------
2002 2001 2002 2001
------------------ ------------------ ----------------- -----------------
Net Income $ 942,025 $ 1,032,765 $2,051,684 $ 2,037,561
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale
Unrealized holding gains (losses) arising
during the period, net of tax benefit
(expense) of $621,996, $(301,962),
$206,863 and $533,159 948,304 (460,376) 315,386 812,862
------------------ ------------------ ----------------- -----------------
Comprehensive income $ 1,890,329 $ 572,389 $2,367,070 $ 2,850,423
================== ================== ================= =================
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Six Months Ended June 30, 2002
(Unaudited)
Common Stock Accumulated
---------------------------- Other Unearned
Shares Retained Comprehensive Unearned ESOP
Outstanding Amount Earnings Loss Compensation Shares Total
-------------- ------------- -------------- ---------------- --------------- ------------- ------------
Balances, January 1, 2002 5,154,920 $ 50,342,175 $ 42,712,497 $ (56,790) $ (2,293,777) $(4,460,800) $ 86,243,305
Net income for the period 2,051,684 2,051,684
Unrealized gains of
securities, net of
reclassification
adjustment 315,386 315,386
Purchase of common stock (203,199) (2,031,990) (1,501,321) (3,533,311)
Stock options exercised 19,900 249,200 249,200
ESOP shares earned 159,219 179,120 338,339
Amortization of unearned
compensation expense (17,994) 353,094 335,100
Cash dividends ($.20
per share) (911,228) (911,228)
-------------- ------------- -------------- ---------------- --------------- ------------- -------------
Balances, June 30, 2002 4,971,621 $ 48,559,385 $ 42,492,857 $ 258,596 $ (1,940,683) $(4,281,680) $ 85,088,475
============== ============= ============== ================ =============== ============= =============
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
-------------------- -------------------
2002 2001
-------------------- -------------------
Operating Activities
Net income $ 2,051,684 $ 2,037,561
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
Provision for loan losses 79,986 138,578
Loss on sale of foreclosed real estate 72,642 14,034
Investment securities amortization (accretion), net 199,426 (224,422)
Equity in losses of limited partnerships 78,000 193,200
Amortization of net loan origination fees (289,122) (275,324)
Depreciation and amortization 275,541 285,665
Amortization of purchase accounting adjustments 32,751 60,590
Amortization of unearned compensation expense 335,100 332,742
ESOP shares earned 338,339 242,493
Net change in:
Loans held for sale 2,330,181
Interest receivable (183,368) 433,313
Interest payable (172,356) (72,282)
Other adjustments (460,064) (227,536)
-------------------- -------------------
Net cash provided by operating activities 4,688,740 2,938,612
-------------------- -------------------
Investing Activities
Net change in interest-bearing deposits 1,300,030 791,970
Purchases of securities available for sale (13,102,980)
Proceeds from maturities of securities available for sale 19,034,603 7,662,321
Proceeds from maturities of securities held to maturity 10,000 500,000
Net change in loans (12,669,608) (10,147,521)
Purchases of property and equipment (646,207) (197,627)
Proceeds from sale of foreclosed real estate 178,017 78,864
-------------------- -------------------
Net cash used in investing activities (5,896,145) (1,311,993)
-------------------- -------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand, money market and savings 3,691,390 6,335,507
deposits
Certificates of deposit 18,543,723 20,365,396
Proceeds from repurchase agreements (5,000,000) 400,000
Proceeds from FHLB advances 10,000,000 20,000,000
Repayment of FHLB advances (10,000,000) (32,000,000)
Payment on note payable to limited partnership (488,500) (488,500)
Dividends paid (925,856) (933,390)
Purchase of common stock (3,533,311) (2,933,650)
Stock options exercised 249,200 72,612
Net change in advances by borrowers for taxes and insurance (57,108) 72,732
-------------------- -------------------
Net cash provided by financing activities 12,479,538 10,890,707
-------------------- -------------------
Net Change in Cash and Cash Equivalents 11,272,133 12,517,326
Cash and Cash Equivalents, Beginning of Period 10,403,023 10,985,843
-------------------- -------------------
Cash and Cash Equivalents, End of Period $ 21,675,156 $ 23,503,169
==================== ===================
Additional Cash Flows and Supplementary Information
Interest paid $ 8,004,719 $ 10,638,243
Income tax paid 1,030,000 1,170,000
Loan balances transferred to foreclosed real estate 279,829 202,651
Securitization of loans 18,222,209 --
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Lincoln Bancorp
(the "Company"), its wholly owned subsidiary, Lincoln Federal Savings Bank, a
federally chartered savings bank ("Lincoln Federal"), and Lincoln Federal's
wholly owned subsidiaries, LF Service Corporation ("LF Service") and Citizens
Loan and Service Corporation, an Indiana corporation, ("CLSC"). A summary of
significant accounting policies is set forth in Note 1 of Notes to Financial
Statements included in the December 31, 2001 Annual Report to Shareholders. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 2002, and for the
three and six months ended June 30, 2002 and 2001, have not been audited by
independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods. The results of operations for the six month period ended June 30,
2002, are not necessarily indicative of the results which may be expected for
the entire year. The consolidated condensed balance sheet of the Company as of
December 31, 2001 has been derived from the audited consolidated balance sheet
of the Company as of that date.
Note 2: Earnings Per Share
Earnings per share have been computed based upon the weighted-average common
shares outstanding. Unearned Employee Stock Ownership Plan shares have been
excluded from the computation of average common shares outstanding.
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ -------- ------ ------ ------ ------
Basic earnings per share
Income available to
common shareholders $ 942,025 4,357,687 $ .22 $ 1,032,765 4,897,536 $ .21
=========== ===========
Effect of dilutive RRP
awards and stock options 165,760 58,909
---------------------------- -------------------------------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions
$ 942,025 4,523,447 $ .21 $1,032,765 4,956,445 $ .21
============= ============== =========== ================ ============== ===========
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $2,051,684 4,412,371 $ .47 $2,037,561 4,913,520 $ .41
=========== ===========
Effect of dilutive RRP awards
and stock options 157,556 46,541
------------- --------------- ---------------- --------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $2,051,684 4,569,927 $ .45 $2,037,561 4,960,061 $ .41
============= =============== =========== ================ ============== ===========
Note 3: Effect of Recent Accounting Pronouncements
The Financial Accounting Standards Board recently adopted Statement of Financial
Accounting Standards ("SFAS") 142, Goodwill and Other Intangible Assets. This
Statement establishes new financial accounting and reporting standards for
acquired goodwill and other intangible assets. The Statement addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. It also addresses how goodwill and
other intangible assets (including those acquired in a business combination)
should be accounted for after they have been initially recognized in the
financial statements. SFAS 142 was effective for fiscal years beginning after
December 15, 2001. In adopting SFAS 142, the goodwill will no longer be
amortized after 2001, but will subject to testing for impairment. During the
second quarter of 2002, the Company tested goodwill for impairment and
determined there had been no impairment.
Note 4: Reclassifications
Certain reclassifications have been made to the 2001 consolidated condensed
financial statements to conform to the June 30, 2002 presentation.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company was organized in September 1998. On December 30, 1998, it acquired
the common stock of Lincoln Federal upon the conversion of Lincoln Federal from
a federal mutual savings bank to a federal stock savings bank.
Lincoln Federal was originally organized in 1884 as Ladoga Federal Savings and
Loan Association, located in Ladoga, Indiana. In 1979 Ladoga Federal merged with
Plainfield First Federal Savings and Loan Association, a federal savings and
loan association located in Plainfield, Indiana which was originally organized
in 1896. Following the merger, the Bank changed its name to Lincoln Federal
Savings and Loan Association and, in 1984, adopted its current name, Lincoln
Federal Savings Bank. On September 26, 2000, the Company acquired Citizens
Bancorp ("Citizens"), the holding company of Citizens Savings Bank of Frankfort
("Citizens Savings"), a federally chartered savings bank. Citizens was merged
into the Company and Citizens Savings was merged into the Bank. CLSC, a
wholly-owned subsidiary of Citizens Savings, will continue as a subsidiary of
Lincoln Federal. Lincoln Federal currently conducts its business from eight
full-service offices located in Hendricks, Montgomery, Clinton, Johnson and
Morgan Counties, Indiana, with its main office located in Plainfield. Lincoln
Federal opened its newest office in Greenwood, Indiana in September 2000 and is
constructing a second Greenwood office scheduled to open in the fall of 2002.
The merger of Citizens Savings into Lincoln Federal resulted in a second branch
location in Frankfort, Indiana.
The Bank's principal business consists of attracting deposits from the general
public and originating fixed-rate and adjustable-rate loans secured primarily by
first mortgage liens on one- to four-family residential real estate. Lincoln
Federal's deposit accounts are insured up to applicable limits by the SAIF of
the FDIC.
Lincoln Federal offers a number of financial services, including: (i) one- to
four-family residential real estate loans; (ii) commercial real estate loans;
(iii) real estate construction loans; (iv) land loans; (v) multi-family
residential loans; (vi) consumer loans, including home equity loans and
automobile loans; (vii) commercial loans; (viii) money market demand accounts;
(ix) savings accounts; (x) checking accounts; (xi) NOW accounts; and (xii)
certificates of deposit.
Lincoln Federal currently owns two subsidiaries, LF Service, whose assets
consist of an investment in Family Financial Life Insurance Company ("Family
Financial"), Pedcor Investments - 1987 - I ("Pedcor"), and in Bloomington
Housing Associates, L.P. ("BHA"), and CLSC, which develops land for residential
housing. Family Financial is an Indiana stock insurance company that primarily
engages in retail sales of mortgage and credit insurance products in connection
with loans originated by its shareholder financial institutions. Pedcor was
organized to build, own and operate low income apartments. BHA is an Indiana
limited partnership that was organized to construct, own and operate a 130-unit
apartment complex in Bloomington, Indiana.
Lincoln Federal's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investments, and costs incurred with
respect to interest-bearing liabilities, primarily deposits and borrowings.
Results of operations also depend upon the level of Lincoln Federal's
non-interest income, including fee income and service charges, and the level of
its non-interest expenses, including general and administrative expenses.
Critical Accounting Policies
Note 1 to the consolidated financial statements contains a summary of the
Company's significant accounting policies presented on pages 25 through 27 of
the Annual Report to Shareholders for the year ended December 31, 2001, which
was filed on Form 10-K with the Commission on March 29, 2002. Certain of these
policies are important to the portrayal of the Company's financial condition,
since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
Management believes that its critical accounting policies include determining
the allowance for loan losses, the valuation of mortgage servicing rights, and
the valuation of intangible assets.
Allowance for loan losses
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current economic
and business conditions, among other factors. Management reviews the adequacy of
the allowance for loan losses at least on a quarterly basis. The evaluation by
management includes consideration of past loss experience, changes in the
composition of the loan portfolio, the current economic condition, the amount of
loans outstanding, certain identified problem loans, and the probability of
collecting all amounts due.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loan loss reserves.
Mortgage servicing rights
The Company recognizes the rights to service mortgage loans as separate assets
in the consolidated balance sheet. The total cost of loans when sold is
allocated between loans and mortgage servicing rights based on the relative fair
values of each. Mortgage servicing rights are subsequently carried at the lower
of the initial carrying value, adjusted for amortization, or fair value.
Mortgage servicing rights are evaluated for impairment based on the fair value
of those rights. Factors included in the calculation of fair value of the
mortgage servicing rights include, estimating the present value of future net
cash flows, market loan prepayment speeds for similar loans, discount rates,
servicing costs, and other economic factors. Servicing rights are amortized over
the estimated period of net servicing revenue. It is likely that these economic
factors will change over the life of the mortgage servicing rights, resulting in
different valuations of the mortgage servicing rights. The differing valuations
will affect the carrying value of the mortgage servicing rights on the
consolidated balance sheet as well as the amounts recorded in the consolidated
income statement. As of June 30, 2002 and December 31, 2001, mortgage servicing
rights had carrying values of $443,000 and $464,000, respectively.
Intangible assets
Management periodically assesses the impairment of its goodwill and the
recoverability of its core deposit intangible. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value. If
actual external conditions and future operating results differ from management's
judgments, impairment and/or increased amortization charges may be necessary to
reduce the carrying value of these assets to the appropriate value.
Financial Condition
Assets totaled $507.8 million at June 30, 2002, an increase from December 31,
2001 of $15.1 million for an annualized growth rate of over 6%. This growth
occurred primarily in cash and interest-bearing deposits in other banks, up
$10.0 million and investment securities available for sale, up $12.6 million
from year-end 2001. Net loans, including loans held for sale, declined by $7.9
million as a result of sales and securitization of residential mortgages during
the first six months of 2002.
Deposits totaled $274.4 million at June 30, 2002, an increase of $22.2 million
or an annualized rate of nearly 18% from December 31, 2001. The majority of this
growth was in certificates of deposit, up $18.6 million. Federal Home Loan Bank
advances and repurchase agreements were reduced by $5.0 million to $143.1
million.
Shareholders' equity decreased approximately $1.2 million from $86.2 million at
December 31, 2001 to $85.1 million at June 30, 2002. The decrease was the result
of the $3.5 million repurchase of 203,199 shares of common stock and cash
dividends of $911,000. These decreases were partially offset by net income for
the six months ended June 30, 2002 of $2.1 million, stock options exercised of
$249,000, Employee Stock Ownership Plan shares earned of $338,000, unearned
compensation amortization of $335,000 and an increase in unrealized gains on
investment securities available for sale of $315,000.
Comparison of Operating Results for the Three Months Ended June 30, 2002 and
2001
Net income for the second quarter ended June 30, 2002 was $942,000, or $.22 for
basic and $.21 for diluted earnings per share. This compared to net income for
the comparable period in 2001 of $1,033,000, or $.21 for both basic and diluted
earnings per share. Return on assets was .76% and return on equity was 4.45% for
the second quarter of 2002 compared to .80% and 4.57%, respectively, for the
same period in 2001.
Net interest income for the second quarter of 2002 was $4,003,000 compared to
$4,042,000 for the same period in 2001. The net interest margin was 3.34% for
the three-month period ended June 30, 2002 compared to 3.24% for the same period
in 2001. The average yield on earning assets decreased .84% for the second
quarter of 2002 compared to the same period in 2001. The average cost of
interest-bearing liabilities decreased 1.13% from the second quarter of 2001 to
the second quarter of 2002. This increased spread from 2.38% for the second
quarter of 2001 to 2.67% for the second quarter of 2002, or .29%.
The Bank's provision for loan losses for the second quarter 2002 was $65,000
compared to $25,000 for the same period in 2001. Nonperforming loans to total
loans at June 30, 2002 were .18% compared to .36% at December 31, 2001, while
nonperforming assets to total assets were .20% at June 30, 2002 compared to .34%
at December 31, 2001. The allowance for loan losses as a percentage of loans at
June 30, 2002 was .78% compared to .74% at December 31, 2001.
Other income for the second quarter of 2002 was $605,000 compared to $469,000
for the same quarter of 2001. Equity in losses of limited partnership improved
from a loss of $100,000 in the second quarter of 2001 to a loss of $39,000 for
the second quarter of 2002 due to the improved operating results of the limited
partnership investment. Miscellaneous other income increased to $274,000 during
the first quarter of 2002 from $190,000 during the same quarter of 2001. There
was no single item that caused the increase.
Other expenses were $3,114,000 for the three months ended June 30, 2002 as
compared to $2,916,000 for the same period in 2001, or a 6.8% increase. The
increase was from normal operating cost increases plus an increase in mortgage
servicing rights amortization of $85,000 and an increase in other real estate
owned (OREO) expense of $61,000 for the second quarter of 2002 as compared to
the same quarter of 2001.
Comparison of Operating Results for the Six Months Ended June 30, 2002 and 2001
Net income for the six-month period ended June 30, 2002 was $2,052,000, or $.47
for basic and $.45 for diluted earnings per share. This compared to $2,038,000,
or $.41 for both basic and diluted earnings per share for the same period of
2001. Return on average assets was .83% and return on average equity was 4.80%
for the six months ended June 30, 2002 as compared to .80% and 4.52%,
respectively, for same period in 2001.
Net interest income year-to-date through June 30, 2002 was $7,855,000 compared
to $7,994,000 for the same period in 2001. Net interest margin was 3.29% for the
six months ended June 30, 2002 as compared to 3.23% for the same period in 2001.
The interest rate spread increased from 2.35% for the six months ended June 30,
2001 to 2.60% for the comparable period in 2002. Although the level of net
interest income declined in the 2002 period as compared to 2001, the interest
rate spread and margin for the six months ended June 30, 2002 have improved due
to a $17.0 million reduction in earning assets during the 2002 period as
compared to 2001. The balance sheet was reduced by using cash to retire certain
high cost liabilities and to repurchase shares of the Company's stock. The
Company has repurchased over 542,000 shares during the last twelve months at a
cost of $8.7 million.
The Bank's provision for the first six months of 2002 was $80,000 compared to
$139,000 for the comparable period in 2001.
Other income for the six months ended June 30, 2002 was $1,243,000 compared to
$840,000 for the same period in 2001. Due to the Company's efforts to increase
demand deposit accounts, service charges on deposit accounts increased 12% to
$350,000 for the six months ended June 30, 2002 as compared to $312,000 for the
same period in 2001. Net realized and unrealized gains on sale of loans were
$422,000 for the first six months of 2002 compared to $300,000 during the same
period of 2001 due to an increase in secondary market activity. The equity in
losses of limited partnership improved to a loss of $78,000 for the six months
ended June 30, 2002 from a loss of $193,000 for the same period in 2001 due to
the improved operating results of the limited partnership investment.
Miscellaneous other income increased to $548,000 during the first six months of
2002 from $422,000 during the same period in 2001. There was no single item that
caused the increase.
Other expenses were $5,948,000 for the six months ended June 30, 2002 compared
to $5,674,000 for the same period in 2001. Salaries and employee benefits
increased $94,000 or .3%. The line item other expense increased to $1,066,000
for the six months ended June 30, 2002 from $882,000 during the comparable
period in 2001. The amortization of mortgage servicing rights increased $74,000,
and OREO expense increased $59,000 during the six months ended June 30, 2002 as
compared to the same period in 2001.
Asset Quality
Lincoln Federal currently classifies loans as special mention, substandard,
doubtful and loss to assist management in addressing collection risks and
pursuant to regulatory requirements. Special mention loans represent credits
that have potential weaknesses that deserve management's close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the
repayment prospects or Lincoln Federal's credit position at some future date.
Substandard loans represent credits characterized by the distinct possibility
that some loss will be sustained if deficiencies on the loans are not corrected.
Doubtful loans possess the characteristics of substandard loans, but collection
or liquidation in full is doubtful based upon existing facts, conditions and
values. A loan classified as a loss is considered uncollectible. Lincoln Federal
had $2.4 million and $3.6 million of loans classified as special mention as of
June 30, 2002 and December 31, 2001, respectively. In addition, Lincoln Federal
had $1.2 million and $1.4 million of loans classified as substandard at June 30,
2002 and December 31, 2001, respectively. At June 30, 2002 and December 31,
2001, no loans were classified as doubtful or loss. At June 30, 2002, and
December 31, 2001, respectively, non-accrual loans were $443,000 and $959,000.
At June 30, 2002 and December 31, 2001, the allowance for loan losses was $2.7
million and $2.6 million, respectively or approximately .78% and .74% of loans,
respectively.
Liquidity and Capital Resources
The Financial Regulatory Relief and Economic Efficiency Act of 2000, which was
signed into law on December 27, 2000, repealed the former statutory requirement
that all savings associations maintain an average daily balance of liquid assets
in a minimum amount of not less than 4% or more than 10% of their withdrawable
accounts plus short-term borrowings. The OTS adopted an interim final rule in
March 2001 that implemented this revised statutory requirement, although savings
associations remain subject to the OTS regulation that requires them to maintain
sufficient liquidity to ensure their safe and sound operation.
Pursuant to OTS capital regulations in effect at June 30, 2002, savings
associations were required to maintain a 1.5% tangible capital requirement, a 4%
leverage ratio (or core capital) requirement, and a total risk-based capital to
risk-weighted assets ratio of 8%. At June 30, 2002, Lincoln Federal's capital
levels exceeded all applicable regulatory capital requirements in effect as of
that date.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is http://www.sec.gov.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Presented below, as of March 31, 2002 and 2001, is an analysis performed by the
OTS of Lincoln Federal's interest rate risk as measured by changes in Lincoln
Federal's net portfolio value ("NPV") for instantaneous and sustained parallel
shifts in the yield curve, in 100 basis point increments, up and down 300 basis
points.
March 31, 2002
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change %Change NPV Ratio Change
- -------- -------- --------- ------- --------- ------
(Dollars in thousands)
+300 bp $ 65,762 -27,475 -29% 13.73% -437 bp
+200 bp 75,180 -18,057 -19 15.32 -279 bp
+100 bp 84,529 -8,708 -9 16.81 -130 bp
0 bp 93,237 18.11
- -100 bp 98,278 5,041 +5 18.77 +66 bp
- -200 bp 0 0 0 0 0 bp
- -300 bp 0 0 0 0 0 bp
March 31, 2001
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change %Change NPV Ratio Change
- -------- -------- --------- ------- --------- ------
(Dollars in thousands)
+300 bp $ 60,635 -32,909 -35% 12.58% -525 bp
+200 bp 71,648 -21,896 -23 14.44 -339 bp
+100 bp 82,846 -10,699 -11 16.22 -160 bp
0 bp 93,544 17.83
- -100 bp 100,274 6,729 +7 18.74 +92 bp
- -200 bp 103,495 9,950 +11 19.10 +127 bp
- -300 bp 105,587 12,043 +13 19.28 +145 bp
Management believes at March 31, 2002 and June 30, 2002 there have been no
material changes in Lincoln Federal's interest rate sensitive instruments which
would cause a material change in the market risk exposures which affect the
quantitative and qualitative risk disclosures as presented in Item 7A of the
Company's Annual Report on Form 10-K for the period ended December 31, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
On April 16, 2002, the Company held its Annual Meeting of the
Shareholders. A total of 4,345,902 shares were represented in person
or by proxy at the meeting. David E. Mansfield was elected to the
Board of Directors for a three-year term expiring in 2005. 4,316,492
shares were voted in favor of the election of the nominee and there
were 29,410 votes withheld. T. Tim Unger was elected to the Board of
Directors for a three-year term expiring in 2005. 4,081,108 shares
were voted in favor of the election of the nominee and there were
264,793 votes withheld. John L. Wyatt was elected to the Board of
Directors for a three-year term expiring in 2005. 4,294,161 shares
were voted in favor of the election of the nominee and there were
51,741 votes withheld.
The terms of office of the following directors of Lincoln Bancorp
continued after the Annual Shareholder Meeting:
Name Term Expires In
---- ---------------
W. Thomas Harmon 2004
Jerry R. Holifield 2004
John C. Milholland 2004
Lester N. Bergum, Jr. 2003
Dennis W. Dawes 2003
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) No reports on Form 8-K were filed during the quarter ended
June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LINCOLN BANCORP
Date: August 13, 2002 By: /s/ T. Tim Unger
--------------------------------------------
T. Tim Unger
President and Chief Executive Officer
Date: August 13, 2002 By: /s/ John M. Baer
--------------------------------------------
John M. Baer
Secretary and Treasurer
CERTIFICATION
By signing below, each of the undersigned officers hereby certifies pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to his knowledge, (i) this report fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and (ii)
the information contained in this report fairly presents, in all material
respects, the financial condition and results of operations of Lincoln Bancorp.
Signed this 13th day of August 2002.
/s/ John M. Baer /s/ T. Tim Unger
- ------------------------------------- -----------------------------------------
John M. Baer, Secretary and Treasurer T. Tim Unger, President and Chief
Executive Officer