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 MARCH 31, 2003 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 March 31, 2003 was 4,451,823.
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. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
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
CERTIFICATIONS 18
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
March 31, December 31,
2003 2002
------------- ------------
(Unaudited)
Assets
Cash and due from banks $ 1,830,651 $ 2,366,192
Short-term interest-bearing demand deposits in other banks 17,880,662 24,931,901
------------- ------------
Cash and cash equivalents 19,711,313 27,298,093
Investment securities
Available for sale 100,793,108 99,600,288
Held to maturity (market value $1,770,000 and $1,780,000) 1,770,000 1,780,000
------------- ------------
Total investment securities 102,563,108 101,380,288
Loans held for sale -- 3,072,689
Loans, net of allowance for loan losses of $3,048,702 and $2,931,968 380,282,838 353,195,588
Premises and equipment 6,639,360 6,639,023
Investments in limited partnerships 1,351,777 1,387,777
Federal Home Loan Bank stock 8,910,400 8,160,400
Interest receivable 2,112,529 2,165,630
Goodwill 1,563,594 1,563,594
Cash surrender value life insurance 12,074,758 11,905,449
Other assets 4,861,001 5,088,394
------------- ------------
Total assets $540,070,678 $521,856,925
============= ============
Liabilities
Deposits
Noninterest-bearing $ 15,308,900 $ 13,289,178
Interest-bearing 271,819,199 257,077,485
------------- ------------
Total deposits 287,128,099 270,366,663
Borrowings 168,018,186 163,258,142
Interest payable 911,326 942,250
Other liabilities 5,563,959 5,170,287
------------- ------------
Total liabilities 461,621,570 439,737,342
------------- ------------
Commitments and Contingencies
Shareholders' Equity
Common stock, without par value
Authorized - 20,000,000 shares
Issued and outstanding - 4,451,823 and 4,676,401 shares 43,537,302 45,790,320
Retained earnings 39,954,582 41,455,452
Accumulated other comprehensive income 374,214 552,409
Unearned recognition and retention plan (RRP) shares (1,400,995) (1,576,038)
Unearned employee stock ownership plan (ESOP) shares (4,015,995) (4,102,560)
------------- ------------
Total shareholders' equity 78,449,108 82,119,583
------------- ------------
Total liabilities and shareholders' equity $540,070,678 $521,856,925
============= ============
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended
March 31
-------------------------------
2003 2002
---------- ----------
Interest Income
Loans, including fees $6,154,725 $6,175,559
Investment securities 1,114,643 1,429,528
Deposits with financial institutions 51,140 72,760
Dividend income 104,235 114,427
---------- ----------
Total interest and dividend income 7,424,743 7,792,274
---------- ----------
Interest Expense
Deposits 1,614,008 2,015,407
Repurchase agreements -- 211,875
Federal Home Loan Bank advances 1,971,144 1,713,008
---------- ----------
Total interest expense 3,585,152 3,940,290
---------- ----------
Net Interest Income 3,839,591 3,851,984
Provision for loan losses 164,531 15,165
---------- ----------
Net Interest Income After Provision for Loan Losses 3,675,060 3,836,819
---------- ----------
Other Income
Service charges on deposit accounts 199,559 173,128
Net realized and unrealized gains on loans 251,136 228,991
Net realized losses on sales of available-for-sale securities (25,718) --
Equity in losses of limited partnerships (36,000) (39,000)
Other income 473,208 274,008
---------- ----------
Total other income 862,185 637,127
---------- ----------
Other Expenses
Salaries and employee benefits 1,769,682 1,534,982
Net occupancy expenses 216,458 167,841
Equipment expenses 239,377 160,709
Advertising and business development 109,758 81,756
Data processing fees 325,714 274,083
Professional fees 113,552 71,681
Director and committee fees 70,202 65,290
Other expenses 515,426 478,470
---------- ----------
Total other expenses 3,360,169 2,834,812
---------- ----------
Income Before Income Tax 1,177,076 1,639,134
Income tax expense 274,110 529,475
---------- ----------
Net Income $ 902,966 $1,109,659
========== ==========
Basic earnings per share $.23 $.25
Diluted earnings per share .22 .24
Dividends per share .12 .10
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
------------------------------
2003 2002
--------- ----------
Net Income $ 902,966 $1,109,659
Other comprehensive income, net of tax
Unrealized gains (losses) on securities available for sale
Unrealized holding losses arising during the period, net of
tax benefit of $102,859 and $415,133 (195,169) (632,918)
Less: Reclassification adjustment for losses included in
net income, net of tax benefit of $8,744 (16,974) ---
-------- ----------
(178,195) (632,918)
-------- ----------
Comprehensive income $ 724,771 $ 476,741
========= ==========
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Three Months Ended March 31, 2003
(Unaudited)
Common Stock Accumulated
------------------------- Other Unearned
Shares Retained Comprehensive Unearned ESOP
Outstanding Amount Earnings Loss Compensation Shares Total
----------- ----------- ----------- ------------- ------------ ----------- -----------
Balances, January 1, 2003 4,676,401 $45,790,320 $41,455,452 $552,409 $(1,576,038) $(4,102,560) $82,119,583
Net income for the period 902,966 902,966
Unrealized gains on
securities, net of
reclassification
adjustment (178,195) (178,195)
Purchase of common stock (233,820) (2,338,200) (1,969,058) (4,307,258)
Stock options exercised 9,242 85,182 85,182
ESOP shares earned 62,673 86,565 149,238
Amortization of unearned
compensation expense (12,463) 175,043 162,580
Cash dividends ($.12 per
share) (484,988) (484,988)
--------- ----------- ----------- -------- ----------- ----------- -----------
Balances, March 31, 2003 4,451,823 $43,537,302 $39,954,582 $374,214 $(1,400,995) $(4,015,995) $78,449,108
========= =========== =========== ======== =========== =========== ===========
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
------------------------------
2003 2002
------------ -----------
Operating Activities
Net income $ 902,966 $ 1,109,659
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Provision for loan losses 164,531 15,165
Investment securities accretion, net 39,565 104,191
Investment securities losses 25,718 --
Equity in losses of limited partnerships 36,000 39,000
Amortization of net loan origination fees (179,419) (162,866)
Depreciation and amortization 184,602 137,163
Amortization of purchase accounting adjustments 8,643 15,362
Amortization of unearned compensation expense 162,580 167,550
ESOP shares earned 149,238 100,374
Net change in: -- --
Loans held for sale 3,072,689 2,330,181
Interest receivable 53,101 304,857
Interest payable (30,924) (74,825)
Other adjustments 66,138 320,447
------------ -----------
Net cash provided by operating activities 4,655,428 4,406,258
------------ -----------
Investing Activities
Net change in interest-bearing deposits -- 1,000,000
Purchases of securities available for sale (18,983,123) (5,003,125)
Proceeds from sales of securities available for sale 1,043,661 --
Proceeds from maturities of securities available for sale 16,409,049 12,881,666
Proceeds from maturities of securities held to maturity 10,000 10,000
Net change in loans (27,250,205) 1,226,992
Purchases of property and equipment (188,203) (248,041)
Purchases of Federal Home Loan Bank stock (750,000) --
Proceeds from sale of foreclosed real estate -- 74,749
------------ -----------
Net cash provided by (used in) investing activities (29,708,821) 9,942,241
------------ -----------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand, money market
and savings deposits 18,790,866 6,168,078
Certificates of deposit (2,029,430) 1,096,538
Proceeds from repurchase agreements -- --
Proceeds from FHLB advances 15,000,000 --
Repayment of FHLB advances (10,000,000) --
Payment on note payable to limited partnership (248,501) (488,500)
Dividends paid (511,937) (467,182)
Exercise of stock options 85,182 161,250
Purchase of common stock (4,307,258) (2,286,096)
Net change in advances by borrowers for taxes and insurance 687,691 465,325
------------ -----------
Net cash provided by financing activities 17,466,613 4,649,413
------------ -----------
Net Change in Cash and Cash Equivalents (7,586,780) 18,997,912
Cash and Cash Equivalents, Beginning of Period 27,298,093 10,403,023
------------ -----------
Cash and Cash Equivalents, End of Period $ 19,711,313 $29,400,935
============ ===========
Additional Cash Flows and Supplementary Information
Interest paid $ 3,616,076 $ 4,015,115
Income tax paid 250,000 300,000
Loan balances transferred to foreclosed real estate 203,192 68,660
Securitization of loans -- 13,702,413
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, 2002 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 March 31, 2003, and for the
three months ended March 31, 2003 and 2002, 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 three-month period ended March 31, 2003, 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, 2002
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
March 31, 2003 March 31, 2002
------------------ -----------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ --------- ------ ------ -------- ------
Basic earnings per share
Income available to
common shareholders $902,966 3,987,113 $.23 $1,109,659 4,467,733 $.25
==== ====
Effect of dilutive RRP
awards and stock options 141,962 149,353
---------------------- ----------------------
Diluted earnings per share
Income available to
common shareholders
and assumed
conversions $902,966 4,129,075 $.22 $1,109,659 4,617,086 $.24
======================================================================
Note 3: Stock Options
- ----------------------
The Company has a stock-based employee compensation plan, which is described
more fully in Notes to Financial Statements included in the December 31, 2002
Annual Report to shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
------------------ ------------------
Net income, as reported $902,966 $1,109,659
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 36,257 63,827
-------- ----------
Pro forma net income $866,709 $1,045,832
======== ==========
Earnings per share:
Basic - as reported $.23 $.25
Basic - pro forma $.22 $.23
Diluted - as reported $.22 $.24
Diluted - pro forma $.21 $.23
Note 4: Effect of Recent Accounting Pronouncements
- ---------------------------------------------------
The Financial Accounting Standards Board ("FASB") recently adopted Statement of
Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation.
Under the provisions of SFAS No. 123, companies that adopted the fair value
based method were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the first few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 also improves the clarity and prominence of disclosures about the
proforma effects of using the fair value based method of accounting for
stock-based compensation for all companies - regardless of the accounting method
used - by requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
SFAS No. 148 improves the timeliness of those disclosures by requiring that this
information be included in interim as well as annual financial statements. In
the past, companies were required to make proforma disclosures only in annual
financial statements.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002.
The FASB has stated it intends to issue a new statement on accounting for
stock-based compensation and will require companies to expense stock options
using a fair value based method at date of grant. The implementation for this
proposed statement is not known.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"). FIN 45 will change current practice in the
accounting for and disclosure of guarantees. Guarantees meeting the
characteristics described in FIN 45 are required to be initially recorded at
fair value, which is different from the general current practice of recording a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, Accounting for Contingencies. FIN 45 also
requires a guarantor to make new disclosures for virtually all guarantees even
if the likelihood of the guarantor's having to make payments under the guarantee
is remote.
In general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying asset, liability, or an equity security of the
guaranteed party such as financial standby letters of credit.
Disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 31, 2002. The initial
recognition and measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
issued prior to the date of FIN 45 initial applications should not be revised or
restated to reflect the provisions of FIN 45.
The Company adopted FIN 45 on January 1, 2003. The adoption of FIN 45 does not
currently have a material impact on the Company's consolidated financial
statements.
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. Citizens Loan
and Service Corporation ("CLSC"), a wholly-owned subsidiary of Citizens Savings,
continues 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.
Lincoln Federal offers a variety of lending, deposit and other financial
services to its retail and commercial customers. 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 Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation. Lincoln Federal
offers a number of financial services, which includes: (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 primarily engages in the purchase and development of tracts
of undeveloped land. Because CLSC engages in activities that are not permissible
for a national bank, OTS regulations prohibit Lincoln Federal from including its
investment in CLSC in its calculation of regulatory capital. CLSC purchases
undeveloped land, constructs improvements and infrastructure on the land, and
then sells lots to builders, who construct homes for sale to home buyers. Third,
LF Portfolio, which is located in Nevada and holds and manages a significant
portion of Lincoln Federal's investment portfolio.
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 26 through 29 of
the Annual Report to Shareholders for the year ended December 31, 2002, which
was filed on Form 10-K with the Securities and Exchange Commission on March 31,
2003. 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, delinquency status and trends, 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 March 31, 2003 and December 31, 2002, mortgage servicing
rights had carrying values of $479,000 and $505,000, 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 $540.1 million at March 31, 2003, an increase from December 31,
2002 of $18.2 million. Net loans, including loans held for sale, were up $24.0
million and investment securities available for sale, were up $1.2 million. The
growth was partially funded by a $7.6 million decline in cash and
interest-bearing deposits and the balance with customer deposit growth.
Deposits totaled $287.1 million at March 31, 2003, an increase of $16.8 million
from December 31, 2002. Growth occurred in every major category of deposits with
the exception of certificates of deposit. The largest gain was in money market
deposits, up $16.2 million. Federal Home Loan Bank advances increased $5.0
million from year-end 2002.
Shareholders' Equity decreased $3.7 million from December 31, 2002 to March 31,
2003. The decrease was primarily the result of the $4.3 million repurchase of
233,820 shares of common stock, cash dividends of $485,000 and a decrease in
unrealized gains on investment securities available for sale of $178,000. These
decreases were partially offset by net income of $903,000, stock options
exercised of $85,000, Employee Stock Ownership Plan shares earned of $149,000,
and unearned compensation amortization of $163,000.
Comparison of Operating Results for the Three Months Ended March 31, 2003 and
2002
Net income for the first quarter ended March 31, 2003 was $903,000, or $.23 for
basic and $.22 for diluted earnings per share. This compared to net income for
the comparable period in 2002 of $1,110,000, or $.25 for basic and $.24 diluted
earnings per share. Return on assets was .68% and return on equity was 4.50% for
the first quarter of 2003 compared to .90% and 5.14%, respectively, for the same
period in 2002.
Net interest income is the primary source of the Company's revenue. Net interest
income represents the excess of interest and fees earned on interest-earning
assets (loans, investments and short-term interest-bearing deposits) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets. Net
interest income for the first quarter of 2003 was $3,840,000 compared to
$3,852,000 for the same period in 2002. Net interest margin was 3.07% for the
three-month period ended March 31, 2003 compared to 3.24% for the same period in
2002. The average yield on earning assets declined .61% for the first quarter
2003 compared to the same period in 2002 while the average cost of
interest-bearing liabilities declined .66% for the same period. This increased
spread from 2.54% to 2.59%, or .05%.
The Company's provision for loan losses for the first quarter of 2003 was
$165,000 compared to $15,000 for the same period in 2002. The increased
provision in 2003 was the result of added risk in the loan portfolio due to a
higher concentration of commercial loans. The Company's ratio of non-performing
loans to total loans at March 31, 2003 improved slightly to .53% from .58% at
December 31, 2002. The Company's ratio of non-performing assets to total assets
were .48% at March 31 compared to .44% at December 31, 2002. The allowance for
loan losses as a percent of loans at March 31, 2003 was .80% versus .82% at
December 31, 2002.
Other income for the three months ended March 31, 2003 was $862,000 compared to
$637,000 for the same quarter of 2002. Service charges on deposit accounts
increased to $200,000 at March 31, 2003 compared to $173,000 for the same period
one year ago. Net realized and unrealized gains on sale of loans were $251,000
in the first quarter of 2003 compared to $229,000 during the same period of
2002. Other income increased to $473,000 for the first quarter of 2003 compared
to $274,000 one year ago. This was primarily from the increased cash surrender
value of additional bank owned life insurance.
Other expenses were $3,360,000 for the three months ended March 31, 2003
compared to $2,835,000 for the same three months of 2002. Increases were noted
in all major categories and are primarily the result of a second de novo branch
opened in the Greenwood market during the fourth quarter of 2002 and continued
upgrading of our technology infrastructure.
Income taxes were 23% of pre-tax income for the first quarter of 2003 compared
to 32% for the same period in 2002. This was the result of tax strategies
involving the purchase of nontaxable municipal securities and bank owned life
insurance and the establishment of an investment subsidiary.
Asset Quality
The Company 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 $2.9 million and $3.2 million of loans classified as special mention as of
March 31, 2003 and December 31, 2002, respectively. In addition, Lincoln Federal
had $2.3 million and $2.6 million of loans classified as substandard at March
31, 2003 and December 31, 2002, respectively. At March 31, 2003 and December 31,
2002, no loans were classified as doubtful or loss. At March 31, 2003, and
December 31, 2002, respectively, non-accrual loans were $1.7 million and $1.3
million. At March 31, 2003 and December 31, 2002, respectively, accruing loans
delinquent 90 days or more totaled $348,000 and $747,000. At March 31, 2003 and
December 31, 2002, the allowance for loan losses was $3.0 million and $2.9
million, respectively or approximately .80% and .82% 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 March 31, 2003, 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 March 31, 2003, 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 December 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 300 basis
points and down 100 basis points.
December 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 $68,068 $(6,156) (8)% 13.23% (51) bp
+200 bp 72,441 (1,783) (2) 13.81 7 bp
+100 bp 75,504 1,280 2 14.14 40 bp
0 bp 74,224 13.74
- -100 bp 69,200 (5,024) (7) 12.71 (103) bp
December 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 $49,487 $(28,045) (36)% 10.51% (475) bp
+200 bp 59,001 (18,531) (24) 12.22 (304) bp
+100 bp 68,621 (8,912) (11) 13.85 (141) bp
0 bp 77,532 15.26
- -100 bp 81,023 3,490 5 15.68 42 bp
Management believes at March 31, 2003 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, 2002.
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 and 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
Although the Company and its subsidiaries are involved, from time to
time in various legal proceedings arising in the ordinary course of business,
there are no material legal proceedings to which they are a party or to which
their property is subject.
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.
No matter was submitted to a vote of the Company's shareholders during
the first quarter of 2003.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 99.1 Certifications of the Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of
2003.
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: May 14, 2003 By: /s/ T. Tim Unger
-------------------------------------
T. Tim Unger
President and Chief Executive Officer
Date: May 14, 2003 By: /s/ John M. Baer
-------------------------------------
John M. Baer
Treasurer
CERTIFICATIONS
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: May 14, 2003
/s/ T. Tim Unger
-------------------------------------
T. Tim Unger
President and Chief Executive Officer
CERTIFICATIONS
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: May 14, 2003
/s/ John M. Baer
-------------------------------------
John M. Baer
Secretary and Treasurer