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,
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 September 30, 2003 was 4,409,791.
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. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20
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,
2003 2002
--------------------- --------------------
(Unaudited)
Assets
Cash and due from banks $ 2,050,699 $ 2,366,192
Short-term interest-bearing demand deposits in other banks 12,379,836 24,931,901
--------------------- --------------------
Cash and cash equivalents 14,430,535 27,298,093
Investment securities
Available for sale 93,273,264 99,600,288
Held to maturity (market value $1,745,000 and $1,780,000) 1,745,000 1,780,000
--------------------- --------------------
Total investment securities 95,018,264 101,380,288
Loans held for sale 439,200 3,072,689
Loans, net of allowance for loan losses of $3,444,450 and $2,931,968 429,221,267 353,195,588
Premises and equipment 6,751,558 6,639,023
Investments in limited partnerships 1,282,777 1,387,777
Federal Home Loan Bank stock 9,138,100 8,160,400
Interest receivable 2,354,048 2,165,630
Goodwill 1,563,594 1,563,594
Cash surrender value life insurance 12,376,755 11,905,449
Other assets 6,001,699 5,088,394
--------------------- --------------------
Total assets $ 578,577,797 $ 521,856,925
===================== ====================
Liabilities
Deposits
Noninterest-bearing $ 17,145,477 $ 13,289,178
Interest-bearing 307,817,083 257,077,485
--------------------- --------------------
Total deposits 324,962,560 270,366,663
Borrowings 168,035,280 163,258,142
Interest payable 880,556 942,250
Other liabilities 6,302,512 5,170,287
--------------------- --------------------
Total liabilities 500,180,908 439,737,342
--------------------- --------------------
Commitments and Contingencies
Shareholders' Equity
Common stock, without par value
Authorized - 20,000,000 shares
Issued and outstanding - 4,409,791 and 4,676,401 shares 43,285,229 45,790,320
Retained earnings 40,167,432 41,455,452
Accumulated other comprehensive income (124,436) 552,409
Unearned recognition and retention plan (RRP) shares (1,088,471) (1,576,038)
Unearned employee stock ownership plan (ESOP) shares (3,842,865) (4,102,560)
--------------------- --------------------
Total shareholders' equity 78,396,889 82,119,583
--------------------- --------------------
Total liabilities and shareholders' equity $ 578,577,797 $ 521,856,925
===================== ====================
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,
------------------ ------------------ ----------------- ------------------
2003 2002 2003 2002
------------------ ------------------ ----------------- ------------------
Interest Income
Loans, including fees $ 6,549,026 $ 6,302,880 $19,125,978 $18,706,833
Investment securities 866,764 1,520,286 2,962,482 4,408,701
Deposits with financial institutions 22,345 90,322 129,846 250,396
Dividend income 103,523 121,843 325,803 356,789
------------------ ------------------ ----------------- ------------------
Total interest and dividend income 7,541,658 8,035,331 22,544,109 23,722,719
------------------ ------------------ ----------------- ------------------
Interest Expense
Deposits 1,592,419 1,903,226 4,880,658 5,882,785
Repurchase agreements - 156,911 - 568,097
Federal Home Loan Bank advances 2,042,617 1,766,779 6,021,573 5,208,397
------------------ ------------------ ----------------- ------------------
Total interest expense 3,635,036 3,826,916 10,902,231 11,659,279
------------------ ------------------ ----------------- ------------------
Net Interest Income 3,906,622 4,208,415 11,641,878 12,063,440
Provision for loan losses 188,635 82,926 622,798 162,912
------------------ ------------------ ----------------- ------------------
Net Interest Income After Provision for Loan Losses 3,717,987 4,125,489 11,019,080 11,900,528
------------------ ------------------ ----------------- ------------------
Other Income
Service charges on deposit accounts 228,126 190,654 635,807 541,009
Net realized and unrealized gains on loans 74,619 665,326 737,708 1,087,082
Net realized losses on sales of available-for-sale
securities - 165,110 (34,824) 165,110
Increase in cash value of life insurance 141,843 23,427 471,306 70,281
Equity in losses of limited partnerships (33,000) (39,000) (105,000) (117,000)
Other income 333,272 262,242 1,027,487 763,850
------------------ ------------------ ----------------- ------------------
Total other income 744,860 1,267,759 2,732,484 2,510,332
------------------ ------------------ ----------------- ------------------
Other Expenses
Salaries and employee benefits 1,818,628 1,685,482 5,262,858 4,866,025
Net occupancy expenses 199,685 169,844 612,945 482,083
Equipment expenses 211,219 171,043 691,336 506,978
Advertising and business development 104,972 111,789 314,429 308,380
Data processing fees 304,746 259,143 955,297 811,554
Professional fees 90,465 116,671 291,582 297,390
Director and committee fees 66,848 56,309 203,222 180,549
Other expenses 522,054 599,583 1,700,728 1,665,267
------------------ ------------------ ----------------- ------------------
Total other expenses 3,318,617 3,169,864 10,032,397 9,118,226
------------------ ------------------ ----------------- ------------------
Income Before Income Tax 1,144,230 2,223,384 3,719,167 5,292,634
Income tax expense 306,220 780,383 941,087 1,797,949
------------------ ------------------ ----------------- ------------------
Net Income $ 838,010 $ 1,443,001 $ 2,778,080 $ 3,494,685
================== ================== ================= ==================
Basic earnings per share $ .21 $ .33 $ .70 $ .80
Diluted earnings per share .20 .32 .68 .77
Dividends per share .12 .10 .36 .30
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ---------------- ----------------- ----------------
2003 2002 2003 2002
----------------- ---------------- ----------------- ----------------
Net Income $ 838,010 $ 1,443,001 $ 2,778,080 $ 3,494,685
Other comprehensive income, net of tax
Unrealized gains (losses) on securities available for
sale
Unrealized holding losses arising during the
period, net of tax expense (benefit) of
$(101,011), $266,625, $(367,596) and $473,488 (196,083) 445,780 (699,829) 761,166
Less: Reclassification adjustment for losses
included in net income, net of tax expense
(benefit) of $56,137, $(11,840), and $56,137 - 108,973 (22,984) 108,973
----------------- ---------------- ----------------- ----------------
(196,083) 336,807 (676,845) 652,193
----------------- ---------------- ----------------- ----------------
Comprehensive income $ 641,927 $ 1,779,808 $ 2,101,235 $ 4,146,878
================= ================ ================= ================
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Nine Months Ended September 30, 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) $82,119,583
Net income for the period 2,778,080 2,778,080
Unrealized gains on
securities, net of
reclassification
adjustment (676,845) (676,845)
Purchase of common stock (328,448) (3,284,480) (2,799,369) (6,083,849)
Stock options exercised 61,838 594,389 594,389
Tax benefit on stock
options and RRP 185,000 185,000
ESOP shares earned 209,314 259,695 469,009
Amortization of unearned
compensation expense (27,994) 487,567 459,573
Cash dividends
($.36 per share) (1,448,051) (1,448,051)
----------- -------------- --------------- ---------------- --------------- -------------- -----------
Balances, September 30, 2003 4,409,791 $43,285,229 $40,167,432 $(124,436) $(1,088,471) $(3,842,865) $78,396,889
============ ============== =============== ================ =============== ============= ===========
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------------- -------------------
2003 2002
-------------------- -------------------
Operating Activities
Net income $ 2,778,080 $ 3,494,685
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
Provision for loan losses 622,798 162,912
Loss on sale of foreclosed real estate 34,704 107,614
Investment securities accretion, net 166,912 218,837
Investment securities losses 34,824 (165,110)
Equity in losses of limited partnerships 105,000 117,000
Amortization of net loan origination fees (520,467) (475,124)
Depreciation and amortization 541,750 421,820
Amortization of purchase accounting adjustments 27,224 44,140
Amortization of unearned compensation expense 459,573 509,690
ESOP shares earned 469,009 498,204
Net change in:
Loans held for sale 2,633,489 (5,124,090)
Interest receivable (188,418) 316,498
Interest payable (61,694) (246,586)
Other adjustments (1,389,299) 1,103,863
-------------------- -------------------
Net cash provided by operating activities 5,713,485 984,353
-------------------- -------------------
Investing Activities
Net change in interest-bearing deposits - 1,900,030
Purchases of securities available for sale (39,234,451) (19,511,510)
Proceeds from sales of securities available for sale 1,950,580 5,218,750
Proceeds from maturities of securities available for sale 42,376,558 31,941,967
Proceeds from maturities of securities held to maturity 35,000 20,000
Net change in loans (76,636,447) (4,830,272)
Purchases of property and equipment (660,162) (1,192,977)
Proceeds from sale of foreclosed real estate 143,028 368,466
-------------------- -------------------
Net cash provided by (used in) investing activities (72,025,894) 13,914,454
-------------------- -------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand, money market and savings 46,803,406 6,374,485
deposits
Certificates of deposit 7,792,491 (3,751,885)
Proceeds from repurchase agreements - (5,000,000)
Proceeds from FHLB advances 31,000,000 30,000,000
Repayment of FHLB advances (26,000,000) (20,000,000)
Payment on note payable to limited partnership (248,501) (488,500)
Dividends paid (1,480,044) (1,378,411)
Exercise of stock options 594,389 307,832
Purchase of common stock (6,083,849) (6,975,567)
Net change in advances by borrowers for taxes and insurance 1,066,959 29,642
-------------------- -------------------
Net cash provided by (used in) financing activities 53,444,851 (882,404)
-------------------- -------------------
Net Change in Cash and Cash Equivalents (12,867,558) 14,016,403
Cash and Cash Equivalents, Beginning of Period 27,298,093 10,403,023
-------------------- -------------------
Cash and Cash Equivalents, End of Period $ 14,430,535 $ 24,419,426
==================== ===================
Additional Cash Flows and Supplementary Information
Interest paid $ 10,963,925 $ 11,905,865
Income tax paid 1,245,000 1,280,000
Loan balances transferred to foreclosed real estate 577,965 302,664
Securitization of loans - 18,222,209
See notes to consolidated condensed financial statements.
LINCOLN BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Lincoln Bancorp
(the "Company"), its wholly owned subsidiary, Lincoln Bank, a federally
chartered savings bank ("Lincoln" or the "Bank"), and Lincoln'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 September 30, 2003, and for the
three and nine months ended September 30, 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 nine-month period ended
September 30, 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
September 30, 2003 September 30, 2002
------------------ ------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------------- -------------- --------- --------------- ------------ ----------
Basic earnings per share
Income available to
common shareholders $838,010 3,944,284 $ .21 $ 1,443,001 4,339,497 $ .33
========= ==========
Effect of dilutive RRP
awards and stock options 148,694 157,396
------------- -------------- -------------- ------------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $838,010 4,092,978 $ .20 $ 1,443,001 4,496,893 $ .32
============== =============== ========= ============== ============= ==========
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------------- -------------- --------- --------------- ------------ ----------
Basic earnings per share
Income available to
common shareholders $2,778,080 3,946,873 $ .70 $3,494,685 4,387,604 $ .80
========= ===========
Effect of dilutive RRP
awards and stock options 146,264 157,503
------------- -------------- --------------- ------------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $2,778,080 4,093,137 $ .68 $ 3,494,685 4,545,107 $ .77
============== =============== ========== ============== ============= ===========
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 Nine Months
Three Months Ended Ended Nine Months Ended Ended
September 30, September 30, September 30, 2003 September 30,
2003 2002 2002
------------------------------------------------------------------------
Net income, as reported $ 838,010 $1,443,001 $2,778,080 $3,494,685
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes 36,257 63,832 108,772 191,495
------------------------------------------------------------------------
Pro forma net income $ 801,753 $1,379,169 $2,669,308 $3,303,190
========================================================================
Earnings per share:
Basic - as reported $ .21 $ .33 $ .70 $ .80
Basic - pro forma .20 .32 .68 .75
Diluted - as reported .20 .32 .68 .77
Diluted - pro forma .20 .31 .65 .73
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 SFAS 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 expensing of stock options
is expected to become mandatory in 2005.
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 upon the conversion of Lincoln from a federal mutual
savings bank to a federal stock savings bank.
Lincoln 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 the 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. Lincoln 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 opened its newest office in Greenwood, Indiana on October
14, 2002. On September 1, 2003, the Bank adopted the name, Lincoln Bank.
Lincoln 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's deposit accounts are insured up
to applicable limits by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation. Lincoln 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 currently owns three subsidiaries: LF Service, CLSC, and LF Portfolio.
The assets of LF Service consist of investments 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 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. CLSC 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 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 individuals and builders, for construction of single-family
residences. LF Portfolio, which is located in Nevada, holds and manages a
significant portion of Lincoln's investment portfolio.
Lincoln'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'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 September 30, 2003 and December 31, 2002, mortgage
servicing rights had carrying values of $456,000 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 $578.6 million at September 30, 2003, an increase from December
31, 2002 of $56.7 million for an annualized growth rate of over 14%. Net loans,
including loans held for sale, increased $73.4 million from December 31, 2002.
The growth was partially funded by a $12.9 decrease in cash and interest-bearing
deposits in other banks and a $6.3 million decline in investment securities
available for sale. Loan growth was also funded by customer deposit growth.
Deposits totaled $325.0 million at September 30, 2003, an increase of $54.6
million or an annualized rate of nearly 27% from December 31, 2002. The majority
of this growth came from demand deposits, up $14.8 million, money market
deposits, up $29.4 million and certificates of deposit up $7.8 million from
December 31, 2002. Federal Home Loan Bank advances increased $5.0 million to
$168.0 million.
Shareholders' equity decreased $3.7 million from December 31, 2002 to September
30, 2003. The decrease was primarily the result of the $6.1 million repurchase
of 328,448 shares of common stock, cash dividends of $1,448,000 and a decrease
in unrealized gains on investment securities available for sale of $677,000.
These decreases were partially offset by net income of $2.8 million, stock
options exercised of $594,000, Employee Stock Ownership Plan shares earned of
$469,000, unearned compensation amortization of $460,000 and tax benefit on
stock options and RRP of $185,000.
Comparison of Operating Results for the Three Months Ended September 30, 2003
and 2002
Net income for the third quarter ended September 30, 2003 was $838,000, or $.21
for basic and $.20 for diluted earnings per share. This compared to net income
for the comparable period in 2002 of $1,443,000, or $.33 for basic and $.32 for
diluted earnings per share. Return on assets was .59% and return on equity was
4.25% for the third quarter of 2003 compared to 1.13% and 6.75%, respectively,
for the same period last year.
Net interest income for the third quarter of 2003 was $3,907,000 compared to
$4,208,000 for the same period in 2002. Net interest margin was 2.89% for the
three-month period ended September 30, 2003 compared to 3.42% for the same
period in 2002. The average yield on earning assets decreased .95% for the third
quarter of 2003 compared to the same period in 2002. The average cost of
interest-bearing liabilities decreased .64% from the third quarter of 2002 to
the third quarter of 2003. This decreased spread from 2.77% to 2.46%, or .31%.
During 2003, the Company has taken steps to help mitigate the effect of
continued shrinking spreads. Steps include the reduction of the amount of
residential real estate loans sold to the secondary market and continuing to
grow the commercial portfolio. These loan products provide a higher rate of
return than the alternative short-term cash investments.
The Bank's provision for loan losses for the third quarter 2003 was $189,000
compared to $83,000 for the same period in 2002. The increased provision in 2003
was the result of loan growth and added risk in the loan portfolio due to a
higher concentration of commercial loans. Non-performing loans to total loans at
September 30, 2003 were .50% compared to .58% at December 31, 2002, while
non-performing assets to total assets were .49% at September 30, 2003 compared
to .44% at December 31, 2002. The allowance for loan losses as a percentage of
loans, including loans held for sale, at September 30, 2003 was .80% compared to
..82% at December 31, 2002.
Other income for the three months ended September 30, 2003 was $745,000 compared
to $1,268,000 for the same quarter of 2002. Net realized and unrealized gains
(losses) on sale of loans declined to $75,000 for the third quarter of 2003 from
$665,000 during the same period in 2002. As mentioned previously, the Company
adopted a strategy during the third quarter of 2003 to reduce the number of
loans sold to the secondary market. In addition, there were no gains on sale of
securities for the third quarter of 2003 compared to $165,000 of gains during
the third quarter of 2002. The increase in cash value of life insurance was
$142,000 for the three months ended September 30, 2003 as compared to $23,000
for the comparable period in 2002. In December of 2002, the Company invested an
additional $10.0 million into bank-owned life insurance. Miscellaneous other
income increased to $333,000 during the third quarter of 2003 from $262,000
during the same quarter of 2002. The increase in miscellaneous other income was
primarily related to increased loan and ATM fees.
Other expenses were $3,319,000 for the three months ended September 30, 2003
compared to $3,170,000 for the same period in 2002, or a 4.7% increase. Primary
reasons for the increase were from normal operating cost increases, improvements
made to our information technology infrastructure plus the addition of our
second de novo branch in the Greenwood market during October 2002.
Income taxes were 27% of pre-tax income for the third quarter of 2003 compared
to 35% for the same period in 2002. This decline 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.
Comparison of Operating Results for the Nine Months Ended September 30, 2003 and
2002
Net income for the nine-month period ended September 30, 2003 was $2,778,000, or
$.70 for basic and $.68 for diluted earnings per share. This compared to
$3,495,000, or $.80 for basic and $.77 for diluted earnings per share for the
same period of 2002. Return on average assets was .67% and return on average
equity was 4.67% compared to .93% and 5.45%, respectively, for the same period
ended September 30, 2002.
Net interest income for the nine-month period ended September 30, 2003 was
$11,642,000 compared to $12,063,000 for the same period in 2002. Net interest
margin was 2.97% through September 30, 2003 down from 3.33% for the same
nine-month period one year ago. Net interest income was down from one year ago
as a result of declining margins and reduced spreads.
The provision for loan losses for the first nine months of 2003 was $623,000
compared to $163,000 last year for the same nine-month period. The increased
provision in 2003 was primarily the result of loan growth and added risk in the
loan portfolio due to a higher concentration of commercial loans.
Other income for the nine months ended September 30, 2003 was $2,732,000
compared to $2,510,000 for the same period last year. The increase in other
income primarily resulted from an increase in cash value of life insurance and
other income offset by a decline in gains on loan sales. As a result of the
additional investment in cash surrender value life insurance in December of
2002, the increase in cash value of life insurance was $471,000 for the nine
months ended September 30, 2003 as compared to $70,000 for the comparable period
in 2002. Miscellaneous other income increased to $1,027,000 for the nine months
ended September 30, 2003 as compared to $764,000 for the nine months ended
September 30, 2002. The increase was primarily due to an increase in loan and
ATM fees. Net realized and unrealized gains (losses) on sale of loans declined
to $738,000 for the nine months ended September 30, 2003 from $1,087,000 during
the same period in 2002.
Other expenses for the nine months ended September 30, 2003 were $10,032,000
compared to $9,118,000 for the same period last year, an increase of $914,000.
Salaries and employee benefits increased $397,000, net occupancy expenses
increased $131,000, equipment expenses increased $184,000, data processing
expenses increased $144,000 and all other expenses increased $58,000 during the
nine months ended September 30, 2003 over the same period in 2002. A majority of
the increase was due to the addition of the new Greenwood branch, remodeling of
our Brownsburg branch and improvements made to our information technology
infrastructure.
Income taxes were 25% of pre-tax income for the third quarter of 2003 compared
to 34% for the same period in 2002. This reduction 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'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 had
$4.7 million and $3.2 million of loans classified as special mention as of
September 30, 2003 and December 31, 2002, respectively. In addition, Lincoln had
$2.3 million and $2.6 million of loans classified as substandard at September
30, 2003 and December 31, 2002, respectively. At September 30, 2003 and December
31, 2002, no loans were classified as doubtful or loss. At September 30, 2003,
and December 31, 2002, respectively, non-accrual loans were $2.0 million and
$1.3 million. At September 30, 2003 and December 31, 2002, respectively,
accruing loans delinquent 90 days or more totaled $154,000 and $747,000. At
September 30, 2003 and December 31, 2002, the allowance for loan losses was $3.4
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 September 30, 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 September 30, 2003, Lincoln's capital
levels exceeded all applicable regulatory capital requirements in effect as of
that date.
Off-balance Sheet Arrangements
As of the date of this Report, the Company does not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on the Company's financial condition, change in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors. The term "off-balance sheet
arrangement" generally means any transaction, agreement, or other contractual
arrangement to which an entity unconsolidated with the Company is a party under
which the Company has (i) any obligation arising under a guarantee contract,
derivative instrument or variable interest; of (ii) a retained or contingent
interest in assets transferred to such entity or similar arrangement that serves
as credit, liquidity or market risk support for such assets.
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, 2003 and 2002, is an analysis performed by the
OTS of Lincoln's interest rate risk as measured by changes in Lincoln'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.
June 30, 2003
-------------
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change %Change NPV Ratio Change
-------- -------- --------- ------- --------- ------
(Dollars in thousands)
+300 bp $ 53,780 $ (8,088) (13)% 9.79% (93)bp
+200 bp 58,506 (3,362) (5) 10.46 (27)bp
+100 bp 61,593 (274) 0 10.83 10 bp
0 bp 61,868 10.73
-100 bp 57,732 (4,135) (7) 9.92 (81)bp
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
Management believes at June 30, 2003 and September 30, 2003 there have been no
material changes in Lincoln'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
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the
Securities Exchange Act of 1934, as amended), as of the end of the most recent
fiscal quarter covered by this quarterly report (the "Evaluation Date"), have
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and are designed to ensure that material information
relating to the Company would be made known to such officers by others within
the Company on a timely basis.
(b) Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting identified in connection
with the Company's evaluation of controls that occurred during the Company's
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31(1) Certification required by 17 C.F.R. ss. 240.13a-14(a)
31(2) Certification required by 17 C.F.R. ss. 240.13a-14(a)
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Lincoln Bancorp filed one Form 8-K report during the quarter ended
September 30, 2003.
(1) Date of report: July 16, 2003
Items reported: News release dated July 16, 2003 regarding the
announcement of results of operations for the
quarter ended June 30, 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: November 12, 2003 By: /s/ T. Tim Unger
-------------------------------------
T. Tim Unger
President and Chief Executive Officer
Date: November 12, 2003 By: /s/ John M. Baer
-------------------------------------
John M. Baer
Treasurer