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 SEPTEMBER 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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Registrant's common stock, without par value,
outstanding as of September 30, 2002 was 4,789,778.
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
Item 4. Controls and Procedures 15
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 16
Item 4. Submission of Matters to a Vote of Security Holders 16
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
September 30, December 31,
2002 2001
--------------------- --------------------
(Unaudited)
Assets
Cash and due from banks $ 1,992,239 $ 2,434,342
Short-term interest-bearing demand deposits in other banks 22,427,187 7,968,681
--------------------- --------------------
Cash and cash equivalents 24,419,426 10,403,023
Interest-bearing deposits 1,900,030
Investment securities
Available for sale 99,447,650 97,858,831
Held to maturity 1,780,000 1,800,000
--------------------- --------------------
Total investment securities 101,227,650 99,658,831
Loans held for sale 7,454,271 2,330,181
Loans 342,195,044 355,334,443
Allowance for loan losses 2,811,413 2,648,111
--------------------- --------------------
Net Loans 339,383,631 352,686,332
Premises and equipment 6,257,190 5,486,033
Investments in limited partnerships 1,417,777 1,534,777
Federal Home Loan Bank stock 7,734,400 7,734,400
Interest receivable 2,142,732 2,459,230
Goodwill 1,563,594 1,563,594
Other assets 6,681,897 6,914,002
--------------------- --------------------
Total assets $ 498,282,568 $ 492,670,433
===================== ====================
Liabilities
Deposits
Noninterest-bearing $ 11,827,654 $ 9,229,089
Interest-bearing 242,921,459 242,877,247
--------------------- --------------------
Total deposits 254,749,113 252,106,336
Securities sold under repurchase agreements 10,000,000 15,000,000
Federal Home Loan Bank advances 143,146,252 133,120,613
Note payable 248,501 737,001
Interest payable 912,580 1,159,166
Other liabilities 5,841,379 4,304,012
--------------------- --------------------
Total liabilities 414,897,825 406,427,128
--------------------- --------------------
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 - 4,789,778 and 5,154,920 shares 46,747,277 50,342,175
Retained earnings 41,991,278 42,712,497
Accumulated other comprehensive income 595,403 (56,790)
Unearned recognition and retention plan (RRP) shares (1,757,095) (2,293,777)
Unearned employee stock ownership plan (ESOP) shares (4,192,120) (4,460,800)
--------------------- --------------------
Total shareholders' equity 83,384,743 86,243,305
--------------------- --------------------
Total liabilities and shareholders' equity $ 498,282,568 $ 492,670,433
===================== ====================
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ---------------- ---------------- ----------------
2002 2001 2002 2001
--------------- ---------------- ---------------- ----------------
Interest Income
Loans, including fees $ 6,302,880 $ 6,595,556 $ 18,706,833 $ 20,219,956
Investment securities 1,520,286 1,900,764 4,408,701 6,286,862
Deposits with financial institutions 90,322 225,902 250,396 473,187
Dividend income 121,843 141,338 356,789 443,351
--------------- ---------------- ---------------- ----------------
Total interest and dividend income 8,035,331 8,863,560 23,722,719 27,423,356
--------------- ---------------- ---------------- ----------------
Interest Expense
Deposits 1,903,226 2,944,015 5,882,785 9,590,131
Repurchase agreements 156,911 491,338 568,097 654,871
Federal Home Loan Bank advances 1,766,779 1,403,127 5,208,397 5,159,439
--------------- ---------------- ---------------- ----------------
Total interest expense 3,826,916 4,838,480 11,659,279 15,404,441
--------------- ---------------- ---------------- ----------------
Net Interest Income 4,208,415 4,025,080 12,063,440 12,018,915
Provision for loan losses 82,926 88,900 162,912 227,478
--------------- ---------------- ---------------- ----------------
Net Interest Income After Provision for Loan Losses 4,125,489 3,936,180 11,900,528 11,791,437
--------------- ---------------- ---------------- ----------------
Other Income
Service charges on deposit accounts 190,654 173,753 541,009 486,209
Net realized and unrealized gains on loans 665,326 116,862 1,087,082 416,388
Net realized gains on sales of available for sale securities 165,110 165,110
Equity in losses of limited partnerships (39,000) (117,000) (193,200)
Other income 285,669 299,921 834,131 721,432
--------------- ---------------- ---------------- ----------------
Total other income 1,267,759 590,536 2,510,332 1,430,829
--------------- ---------------- ---------------- ----------------
Other Expenses
Salaries and employee benefits 1,685,482 1,623,792 4,866,025 4,710,200
Net occupancy expenses 169,844 156,265 482,083 463,846
Equipment expenses 171,043 144,134 506,978 467,828
Advertising and business development 111,789 115,105 308,380 343,469
Data processing fees 259,143 262,169 811,554 770,364
Professional fees 116,671 102,011 297,390 304,176
Director and committee fees 56,309 70,410 180,549 206,424
Mortgage servicing rights amortization 81,103 79,694 243,208 167,959
Other expenses 518,480 499,336 1,422,059 1,292,589
--------------- ---------------- ---------------- ----------------
Total other expenses 3,169,864 3,052,916 9,118,226 8,726,855
--------------- ---------------- ---------------- ----------------
Income Before Income Tax 2,223,384 1,473,800 5,292,634 4,495,411
Income tax expense 780,383 473,389 1,797,949 1,457,439
--------------- ---------------- ---------------- ----------------
Net Income $ 1,443,001 $ 1,000,411 $ 3,494,685 $ 3,037,972
=============== ================ ================ ================
Basic earnings per share $ .33 $ .21 $ .80 $ .62
Diluted earnings per share .32 .21 .77 .62
Dividends per share .10 .09 .30 .27
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -------------------- ----------------- ----------------
2002 2001 2002 2001
------------------ -------------------- ----------------- ----------------
Net Income $1,443,001 $ 1,000,411 $3,494,685 $ 3,037,972
Other comprehensive income, net of tax
Unrealized gains on securities available for
sale
Unrealized holding gains arising during the
period, net of tax benefit of $266,625,
$754,382, $473,488 and $1,287,541 445,780 1,150,142 761,166 1,963,004
Less: Reclassification adjustment for
gains included in net income, net of tax
expense of $56,137 and $56,137 108,973 108,973
------------------ -------------------- ----------------- ----------------
336,807 1,150,142 652,193 1,963,004
------------------ -------------------- ----------------- ----------------
Comprehensive income $1,779,808 $ 2,150,553 $4,146,878 $ 5,000,976
================== ==================== ================= ================
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Nine Months Ended September 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) $86,243,305
Net income for the period 3,494,685 3,494,685
Unrealized gains on
securities, net of
reclassification adjustment 652,193 652,193
Purchase of common stock (390,273) (3,902,730) (3,072,837) (6,975,567)
Stock options exercised 25,131 307,832 307,832
ESOP shares earned 229,524 268,680 498,204
Amortization of unearned
compensation expense (26,992) 536,682 509,690
Cash dividends ($.30 per share) (1,345,599) (1,345,599)
---------------------------------------------------------------------------------------------------
Balances, September 30, 2002 4,789,778 $ 46,747,277 $41,991,278 $595,403 $(1,757,095) $(4,192,120) $83,384,743
===================================================================================================
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------------- -------------------
2002 2001
-------------------- -------------------
Operating Activities
Net income $ 3,494,685 $ 3,037,972
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
Provision for loan losses 162,912 227,478
Investment securities gains (165,110)
Loss on sale of foreclosed real estate 107,614 14,034
Investment securities amortization (accretion), net 218,837 (324,845)
Equity in losses of limited partnerships 117,000 193,200
Amortization of net loan origination fees (475,124) (417,264)
Depreciation and amortization 421,820 429,757
Amortization of purchase accounting adjustments 44,140 90,885
Amortization of unearned compensation expense 509,690 529,155
ESOP shares earned 498,204 377,994
Net change in:
Interest receivable 316,498 387,610
Interest payable (246,586) (190,941)
Loans held for sale (5,124,090)
Other adjustments 1,103,863 208,574
-------------------- -------------------
Net cash provided by operating activities 984,353 4,563,609
-------------------- -------------------
Investing Activities
Net change in interest-bearing deposits 1,900,030 (1,009,040)
Purchases of securities available for sale (19,511,510) (7,601,257)
Proceeds from sales of securities available for sale 5,218,750
Proceeds from maturities of securities available for sale 31,941,967 32,518,407
Purchases of securities held to maturity (1,800,000)
Proceeds from maturities of securities held to maturity 20,000 500,000
Net change in loans (4,830,272) (10,690,578)
Purchases of property and equipment (1,192,977) (627,918)
Proceeds from sale of foreclosed real estate 368,466 78,864
-------------------- -------------------
Net cash provided by investing activities 13,914,454 11,368,478
-------------------- -------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand,
money market and savings deposits 6,374,485 9,355,893
Certificates of deposit (3,751,885) (112,458)
Short-term repurchase agreements (5,000,000) 400,000
Proceeds from FHLB advances 30,000,000 20,000,000
Repayment of FHLB advances (20,000,000) (32,000,000)
Payment on note payable to limited partnership (488,500) (488,500)
Dividends paid (1,378,411) (1,382,367)
Purchase of common stock (6,975,567) (5,565,270)
Stock options exercised 307,832 207,385
Net change in advances by borrowers for taxes and insurance 29,642 685,178
-------------------- -------------------
Net cash used in financing activities (882,404) (8,900,139)
-------------------- -------------------
Net Change in Cash and Cash Equivalents 14,016,403 7,031,948
Cash and Cash Equivalents, Beginning of Period 10,403,023 10,985,843
-------------------- -------------------
Cash and Cash Equivalents, End of Period $ 24,419,426 $ 18,017,791
==================== ===================
Additional Cash Flows and Supplementary Information
Interest paid $ 11,905,865 $ 15,595,382
Income tax paid 1,280,000 1,530,000
Loan balances transferred to foreclosed real estate 302,664 420,008
Securitization of loans 18,222,209
Due to broker 2,026,250
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 ("CLSC"), both Indiana corporations, and LF
Portfolio Services, Inc. ("LF Portfolio"), a Delaware corporation. 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 September 30, 2002, and for the
three and nine months ended September 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 nine month period ended
September 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
September 30, 2002 September 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 $1,443,001 4,339,497 $ .33 $ 1,000,411 4,740,953 $ .21
=========== ===========
Effect of dilutive RRP
awards and stock options 157,396 95,368
------------- -------------- ---------------- --------------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $1,443,001 4,496,893 $ .32 $1,000,411 4,836,321 $ .21
============= ============== =========== ================ ============== ===========
Nine Months Ended Nine Months Ended
September 30, 2002 September 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 $3,494,685 4,387,604 $ .80 $3,037,972 4,864,383 $ .62
=========== ===========
Effect of dilutive RRP awards
and stock options 157,503 62,081
------------- --------------- ---------------- --------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $3,494,685 4,545,107 $ .77 $3,037,972 4,926,464 $ .62
============= =============== =========== ================ ============== ===========
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.
Note 4: Reclassifications
Certain reclassifications have been made to the 2001 consolidated condensed
financial statements to conform to the September 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 nine
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 on October 14, 2002. 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 three subsidiaries. First, LF Service, whose
assets consist of an investment in Family Financial Life Insurance Company
("Family Financial") and in Bloomington Housing Associates, L.P. ("BHA"). 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. BHA is an Indiana limited
partnership that was organized to construct, own and operate a 130-unit
apartment complex in Bloomington, Indiana (the "BHA Project"). Development of
the BHA Project has been completed and the project is performing as planned.
Second, CLSC, which develops land for residential housing. Third, LF Portfolio,
which is located in Nevada and controls, manages and accounts for investment
securities.
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 September 30, 2002 and December 31, 2001, mortgage
servicing rights had carrying values of $505,000 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 $498.3 million at September 30, 2002, an increase from December
31, 2001 of $5.6 million. This growth occurred primarily in cash and
interest-bearing deposits in other banks, up $12.1 million and investment
securities available for sale, up $1.5 million from year-end 2001. Net loans,
including loans held for sale, declined by $8.2 million as a result of sales and
securitization of residential mortgages.
Deposits totaled $254.7 million at September 30, 2002, an increase of $2.6
million from December 31, 2001. All major categories of deposits except
certificates of deposit showed increases. Total certificates of deposit declined
by approximately $3.7 million. Federal Home Loan Bank advances and repurchase
agreements increased by $5.0 million to $153.1 million.
Shareholders' Equity decreased nearly $2.9 million from December 31, 2001 to
September 30, 2002. The decrease was primarily the result of the $7.0 million
repurchase of 390,273 shares of common stock and cash dividends of $1.3 million.
These decreases were partially offset by net income of $3.5 million, stock
options exercised of $308,000, Employee Stock Ownership Plan shares earned of
$498,000, unearned compensation amortization of $510,000, and an increase in
unrealized gains on investment securities available for sale of $652,000, each
for the nine month period ended September 30, 2002.
Comparison of Operating Results for the Three Months Ended September 30, 2002
and 2001
Net income for the third quarter ended September 30, 2002 was $1,443,000, or
$.33 for basic and $.32 for diluted earnings per share. This compared to net
income for the comparable period in 2001 of $1,000,000, or $.21 for both basic
and diluted earnings per share. Return on average assets was 1.13% and return on
average equity was 6.75% for the third quarter of 2002 compared to .78% and
4.52%, respectively, for the same period in 2001.
Net interest income for the third quarter of 2002 was $4,208,000 compared to
$4,025,000 for the same period in 2001. Net interest margin was 3.42% for the
three-month period ended September 30, 2002 compared to 3.26% for the same
period in 2001. The average yield on earning assets decreased .65% for the third
quarter of 2002 compared to the same period in 2001. The average cost of
interest-bearing liabilities decreased .97% from the third quarter of 2001 to
the third quarter of 2002. This increased the spread from 2.45% to 2.77%, or
..32%.
The Bank's provision for loan losses for the third quarter 2002 was $83,000
compared to $89,000 for the same period in 2001. Nonperforming loans to total
loans at September 30, 2002 were .25% compared to .36% at December 31, 2001,
while nonperforming assets to total assets were .21% at September 30, 2002
compared to .34% at December 31, 2001. The allowance for loan losses as a
percentage of loans, including loans held for sale, at September 30, 2002 was
..80% compared to .74% at December 31, 2001.
Other income for the three months ended September 30, 2002 was $1,268,000
compared to $591,000 for the same quarter of 2001. Net realized and unrealized
gains on loans totaled $665,000 for the quarter compared to $117,000 for the
same quarter last year as a result of increased volume of single-family
residential mortgage loan sales. Net realized gains on the sale of securities
available for sale was $165,000 during the third quarter of 2002 compared to no
sales during the same quarter in 2001.
Other expenses were $3,170,000 for the three months ended September 30, 2002
compared to $3,053,000 for the same three months of 2001, or a 3.8% increase.
Comparison of Operating Results for the Nine Months Ended September 30, 2002 and
2001
Net income for the nine-month period ended September 30, 2002 was $3,495,000, or
$.80 for basic and $.77 for diluted earnings per share. This compared to
$3,038,000, or $.62 for both basic and diluted earnings per share for the same
period of 2001. Return on average assets was .93% and return on average equity
was 5.45% compared to .79% and 4.52%, respectively, for same period ended
September 30, 2001.
Net interest income year-to-date through September 30, 2002 was $12,063,000
compared to $12,019,000 for the same period in 2001. Although the level of net
interest income showed relatively little growth compared to one year ago, the
spread and margin did improve. Net interest margin was 3.33% through September
30, 2002 compared to 3.24% for the same nine-month period in 2001. The interest
rate spread increased from 2.38% for the period ended September 30, 2001 to
2.66% for the same period in 2002. The effect of the increase in net interest
margin and interest rate spread was offset by a reduction of $11.7 million in
earning assets during the nine months ended September 30, 2002 compared to the
same period in 2001. The decline in interest-earning assets was primarily due to
the reduction of cash available to reinvest as a result of active stock
repurchases by the Company. The Company has repurchased over 553,000 shares
during the latest twelve months at a cost of $9.5 million.
The Bank's provision for loan losses for the first nine months of 2002 was
$163,000 compared to $227,000 in 2001 for the same nine-month period.
Other income for the nine months ended September 30, 2002 was $2,510,000
compared to $1,431,000 for the same period in 2001. The increase in other income
was primarily due to $1,087,000 of gains realized from loan sales during the
nine months ended September 30, 2002 as compared to $416,000 of gains during the
same period in 2001, an increase of $671,000. Other factors contributing to the
increase in other income from 2001 to 2002 include a $165,000 gain on sale of
securities available for sale versus no sales during 2001, improvement in the
performance of the limited partnership by $76,000 in 2002 over 2001, and
$113,000 of additional miscellaneous other income in 2002.
Other expenses for the nine months ended September 30, 2002 were $9,118,000
compared to $8,727,000 for the same period last year, or a 4.5% increase.
Salaries and employee benefits increased $156,000 during 2002 over 2001 while
miscellaneous other expenses increased by $129,000 from the nine months ended
September 30, 2001 to the same period in 2002.
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 $2.7 million and $3.6 million of loans classified as special mention as of
September 30, 2002 and December 31, 2001, respectively. In addition, Lincoln
Federal had $1.8 million and $1.4 million of loans classified as substandard at
September 30, 2002 and December 31, 2001, respectively. At September 30, 2002
and December 31, 2001, no loans were classified as doubtful or loss. At
September 30, 2002, and December 31, 2001, respectively, non-accrual loans were
$742,000 and $959,000. At September 30, 2002 and December 31, 2001, the
allowance for loan losses was $2.8 million and $2.6 million, respectively or
approximately .80% and .74% of loans, including loans held for sale,
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 September 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 September 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 June 30, 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.
June 30, 2002
-------------
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change %Change NPV Ratio Change
-------- -------- --------- ------- --------- ------
(Dollars in thousands)
+300 bp 55,545 -24,490 -31% 11.35% -391 bp
+200 bp 64,521 -15,514 -19 12.87 -239 bp
+100 bp 73,050 -6,985 -9 14.23 -102 bp
0 bp 80,035 15.26
-100 bp 79,855 -180 0 15.06 -20 bp
June 30, 2001
-------------
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change %Change NPV Ratio Change
-------- -------- --------- ------- --------- ------
+300 bp 63,869 -31,492 -33% 13.16% -495 bp
+200 bp 74,923 -20,438 -21 15.00 -310 bp
+100 bp 86,064 -9,297 -10 16.75 -135 bp
0 bp 95,361 18.10
-100 bp 99,305 3,944 4 18.54 +44 bp
-200 bp 98,537 3,176 3 18.20 +10 bp
-300 bp 95,448 86 0 17.45 -65 bp
Management believes at June 30, 2002 and September 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.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our President and Chief Executive Officer and
our Secretary and Treasurer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934). Based on their evaluation, our President and
Chief Executive Officer and our Secretary and Treasurer have concluded that the
Company's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, our President Chief Executive Officer and our Secretary and
Treasurer have concluded that there were no significant changes in the Company's
internal controls or in other factors that could significantly affect its
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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.
None.
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
September 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: November 13, 2002 By: /s/ T. Tim Unger
--------------------------------------
T. Tim Unger
President and Chief Executive Officer
Date: November 13, 2002 By: /s/ John M. Baer
--------------------------------------
John M. Baer
Secretary and Treasurer
CERTIFICATION
I, T. Tim Unger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lincoln Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ T. Tim Unger
-------------------------------------
T. Tim Unger
President and Chief Executive Officer
CERTIFICATION
I, John M. Baer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lincoln Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 13, 2002
/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 or her knowledge, (i) this report fully complies with the
requirements of Section 13(a) or 15(d) 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 November 2002.
/s/ John M. Baer /s/ T. Tim Unger
- ----------------------------- -------------------------------------
John M. Baer T. Tim Unger
Secretary and Treasurer President and Chief Executive Officer