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, 2004 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, 2004 was 4,418,391.
1
LINCOLN BANCORP AND SUBSIDIARY
FORM 10-Q
INDEX
Page No.
FORWARD LOOKING STATEMENT 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statements of Comprehensive Income 6
Consolidated Condensed Statement of Shareholders' Equity 7
Consolidated Condensed Statements of Cash Flows 8
Notes to Unaudited Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 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
2
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.
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
March 31, December 31,
2004 2003
--------------------- --------------------
(Unaudited)
Assets
Cash and due from banks $ 2,120,195 $ 1,946,033
Short-term interest-bearing demand deposits in other banks 4,541,517 14,829,890
--------------------- --------------------
Cash and cash equivalents 6,661,712 16,793,923
Investment securities
Available for sale 88,649,866 94,136,926
Held to maturity (market value $1,720,000 and $1,745,000) 1,720,000 1,745,000
--------------------- --------------------
Total investment securities 90,369,866 95,881,926
Loans held for sale 1,577,250 354,900
Loans, net of allowance for loan losses of $3,675,074 and $3,532,000 440,345,471 437,671,971
Premises and equipment 8,079,245 7,647,150
Investments in limited partnerships 1,216,777 1,249,777
Federal Home Loan Bank stock 9,386,400 9,270,200
Interest receivable 2,277,734 2,441,270
Goodwill 1,563,594 1,563,594
Cash surrender value life insurance 12,643,563 12,506,227
Other assets 6,235,601 6,304,312
--------------------- --------------------
Total assets $ 580,357,213 $ 591,685,250
===================== ====================
Liabilities
Deposits
Noninterest-bearing $ 17,590,573 $ 17,175,958
Interest-bearing 304,081,674 304,663,176
--------------------- --------------------
Total deposits 321,672,247 321,839,134
Borrowings 171,701,165 184,692,618
Interest payable 890,394 913,705
Other liabilities 5,736,846 5,013,042
--------------------- --------------------
Total liabilities 500,000,652 512,458,499
--------------------- --------------------
Commitments and Contingencies
Shareholders' Equity
Common stock, without par value
Authorized - 20,000,000 shares
Issued and outstanding - 4,418,391 and 4,411,891 shares 43,464,636 43,383,386
Retained earnings 40,893,371 40,526,766
Accumulated other comprehensive income (loss) 430,697 (8,118)
Unearned recognition and retention plan (RRP) shares (759,413) (918,983)
Unearned employee stock ownership plan (ESOP) shares (3,672,730) (3,756,300)
--------------------- --------------------
Total shareholders' equity 80,356,561 79,226,751
--------------------- --------------------
Total liabilities and shareholders' equity $ 580,357,213 $ 591,685,250
===================== ====================
See notes to consolidated condensed financial statements.
4
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended
March 31
------------------ -------------------
2004 2003
------------------ -------------------
Interest Income
Loans, including fees $ 6,669,171 $ 6,154,725
Investment securities 692,707 1,114,643
Deposits with financial institutions 17,046 51,140
Dividend income 116,960 104,235
------------------ -------------------
Total interest and dividend income 7,495,884 7,424,743
------------------ -------------------
Interest Expense
Deposits 1,433,185 1,614,008
Federal Home Loan Bank advances 2,034,194 1,971,144
------------------ -------------------
Total interest expense 3,467,379 3,585,152
------------------ -------------------
Net Interest Income 4,028,505 3,839,591
Provision for loan losses 200,172 164,531
------------------ -------------------
Net Interest Income After Provision for Loan Losses 3,828,333 3,675,060
------------------ -------------------
Other Income
Service charges on deposit accounts 213,956 199,559
Net realized and unrealized gains on loans 70,366 251,136
Net realized losses on sales of available-for-sale securities -- (25,718)
Equity in losses of limited partnerships (33,000) (36,000)
Point of sale income 86,689 72,357
Loan servicing fees 82,901 106,504
Increase in cash value of life insurance 137,336 169,309
Other income 113,238 125,038
------------------ -------------------
Total other income 671,486 862,185
------------------ -------------------
Other Expenses
Salaries and employee benefits 1,853,601 1,769,682
Net occupancy expenses 237,103 216,458
Equipment expenses 185,787 239,377
Advertising and business development 102,997 109,758
Data processing fees 360,719 325,714
Professional fees 114,952 113,552
Director and committee fees 79,679 70,202
Other expenses 506,234 515,426
------------------ -------------------
Total other expenses 3,441,072 3,360,169
------------------ -------------------
Income Before Income Tax 1,058,747 1,177,076
Income tax expense 246,999 274,110
------------------ ------------------
Net Income $ 811,748 $ 902,966
================== ===================
Basic earnings per share $ .21 $ .23
Diluted earnings per share .20 .22
Dividends per share .13 .12
See notes to consolidated condensed financial statements.
5
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
2004 2003
------------------ ------------------
Net Income $ 811,748 $902,966
Other comprehensive income, net of tax
Unrealized gains (losses) on securities available for sale
Unrealized holding gains (losses) arising during the period, net
of tax expense (benefit) of $226,147 and $(102,859) 438,815 (195,169)
Less: Reclassification adjustment for losses included in net
income, net of tax benefit of $8,744 -- (16,974)
------------------ ------------------
438,815 (178,195)
------------------ ------------------
Comprehensive income $1,250,563 $ 724,771
================== ==================
See notes to consolidated condensed financial statements.
6
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Three Months Ended March 31, 2004
(Unaudited)
Common Stock Accumulated
--------------------------- Other Unearned
Shares Retained Comprehensive Unearned ESOP
Outstanding Amount Earnings Income (Loss) Compensation Shares Total
-------------- ------------ --------------------------- --------------- ------------- ---------------
Balances, January 1, 2004 4,411,891 $ 43,383,386 $ 40,526,766 $ (8,118) $ (918,983) $(3,756,300) $79,226,751
Net income for the period 811,748 811,748
Unrealized gains on
securities, net of
reclassification
adjustment 438,815 438,815
Stock options exercised 6,500 81,250 81,250
ESOP shares earned 86,996 83,570 170,566
Amortization of unearned
compensation expense (6,580) 159,570 152,990
Cash dividends ($.13 per
share) (525,559) (525,559)
-------------- ------------ --------------------------- --------------- ------------- ---------------
Balances, March 31, 2004 4,418,391 $ 43,464,636 $ 40,893,371 $430,697 $ (759,413) $(3,672,730) $80,356,561
============== ============ =========================== =============== ============= ===============
See notes to consolidated condensed financial statements.
7
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
-------------------- -------------------
2004 2003
-------------------- -------------------
Operating Activities
Net income $ 811,748 $ 902,966
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Provision for loan losses 200,172 164,531
Investment securities accretion, net (57,703) 39,565
Loans originated for sale in the secondary market (5,785,900) (5,862,619)
Proceeds from sale of loans in the secondary market 4,611,948 8,859,153
Gain on sale of loans (70,366) (251,136)
Amortization of net loan origination fees (71,035) (179,419)
Depreciation and amortization 179,047 184,602
Amortization of unearned compensation expense 152,990 162,580
ESOP shares earned 170,566 149,238
Net change in:
Interest receivable 163,536 53,101
Interest payable (23,311) (30,924)
Other adjustments (268,850) (585,210)
-------------------- -------------------
Net cash provided by operating activities 12,842 3,606,428
-------------------- -------------------
Investing Activities
Purchases of securities available for sale (17,468,470) (18,983,123)
Proceeds from sales of securities available for sale -- 1,043,661
Proceeds from maturities of securities available for sale 23,678,176 16,409,049
Proceeds from maturities of securities held to maturity 25,000 10,000
Net change in loans (2,950,367) (26,951,205)
Purchases of property and equipment (611,142) (188,203)
Proceeds from sale of foreclosed real estate 116,000 --
-------------------- -------------------
Net cash provided by (used in) investing activities 2,789,197 (28,659,821)
-------------------- -------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand,
money market and savings deposits 5,136,503 18,790,866
Certificates of deposit (5,303,390) (2,029,430)
Proceeds from borrowings 8,000,000 15,000,000
Repayment of borrowings (21,000,000) (10,248,501)
Dividends paid (524,714) (511,937)
Exercise of stock options 81,250 85,182
Purchase of common stock -- (4,307,258)
Net change in advances by borrowers for taxes and insurance 676,101 687,691
-------------------- -------------------
Net cash provided by (used in) financing activities (12,934,250) 17,466,613
-------------------- -------------------
Net Change in Cash and Cash Equivalents (10,132,211) (7,586,780)
Cash and Cash Equivalents, Beginning of Period 16,793,923 27,298,093
-------------------- -------------------
Cash and Cash Equivalents, End of Period $ 6,661,712 $ 19,711,313
==================== ===================
Additional Cash Flows and Supplementary Information
Interest paid $ 3,490,690 $ 3,616,076
Income tax paid 250,000
Loan balances transferred to foreclosed real estate 166,652 203,192
See notes to consolidated condensed financial statements.
8
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, 2003 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, 2004, and for the
three months ended March 31, 2004 and 2003, 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, 2004, 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, 2003
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, 2004 March 31, 2003
-------------- --------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
-------- -------- ------ ------ -------- ------
Basic earnings per share
Income available to
common shareholders $ 811,748 3,950,280 $ .21 $ 902,966 3,987,113 $ .23
===== =====
Effect of dilutive RRP
awards and stock options 159,954 141,962
---------- ---------- --------- ----------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions
$ 811,748 4,110,234 $ .20 $ 902,966 4,129,075 $ .22
========= ========= ====== ========= ========= ======
9
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, 2003
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
March 31, 2004 31, 2003
----------------------------------------------------
Net income, as reported $ 811,748 $ 902,966
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 9,104 36,257
----------------------------------------------------
Pro forma net income $ 802,644 $ 866,709
====================================================
Earnings per share:
Basic - as reported $ .21 $ .23
Basic - pro forma $ .20 $ .22
Diluted - as reported $ .20 $ .22
Diluted - pro forma $ .20 $ .21
Note 4: Business Combination
On March 10, 2004, the Company signed a definitive agreement to acquire First
Shares Bancorp, Inc., Greenwood, Indiana (First Shares). Under the terms of the
agreement, the Company will exchange either .75 shares of the Company's common
stock or $14.80 in cash for each share of First Shares' common stock. However,
50 percent of the aggregate consideration must be paid in shares of the
Company's stock, and there may be pro rata allocations of cash or stock made to
the shareholders of First Shares to ensure that this requirement is satisfied.
The transaction is subject to approval by the shareholders of the Company and
First Shares as well as regulatory authorities. As of December 31, 2003, First
Shares had total assets and equity of $175,788,000 and $9,033,000, respectively.
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 Bank 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. On September 1, 2003, the Bank adopted the name, Lincoln Bank.
10
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,
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; (xii) certificates of deposit; and (xiii) financial planning.
Lincoln 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 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'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 28 through 31 of
the Annual Report to Shareholders for the year ended December 31, 2003, which
was filed on Form 10-K with the Securities and Exchange Commission on March 30,
2004. 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 represents management's estimate of probable
losses inherent in the Company's loan portfolios. In determining the appropriate
amount of the allowance for loan losses, management makes numerous assumptions,
estimates and assessments.
The Company's strategy for credit risk management includes conservative,
centralized credit policies, and uniform underwriting criteria for all loans as
well as an overall credit limit for each customer significantly below legal
lending limits. The strategy also emphasizes diversification on a geographic,
industry and customer level, regular credit quality reviews and quarterly
management reviews of large credit exposures and loans experiencing
deterioration of credit quality. A standard credit scoring system is used to
assess credit risks during the loan approval process of all consumer loans while
commercial loans are individually reviewed by a credit analyst with formal
presentations to the Bank's Loan Committee.
The Company's allowance consists of two components: probable losses estimated
from individual reviews of specific loans and probable losses estimated from
11
historical loss rates. Also, probable losses resulting from economic or other
deterioration above and beyond what is reflected in the first two components of
the allowance are considered.
Larger commercial loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated to
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and legal options available to the Company. Included in the review of individual
loans are those that are impaired as provided in SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. Any allowances for impaired loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or fair value of the underlying collateral.
The Company evaluates the collectibility of both principal and interest when
assessing the need for a loss accrual. Estimated loss rates are applied to other
commercial loans not subject to specific reserve allocations
Homogenous loans, such as consumer installment and residential mortgage loans
are not individually risk graded. Rather, standard credit scoring systems are
used to assess credit risks. Reserves are established for each category of loans
based on the expected net charge-offs for one year. Loss rates are based on the
average net charge-off estimated by loan category.
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring loss when evaluating reserves for individual loans or categories
of loans. Allowances on individual loans and historical loss rates are reviewed
quarterly and adjusted as necessary based on changing borrower and/or collateral
conditions.
The Company's primary market area for lending is central Indiana. When
evaluating the adequacy of allowance, consideration is given to this regional
geographic concentration and the closely associated effect changing economic
conditions have on the Company's customers.
The Company has not substantively changed any aspect to its overall approach in
the determination of the allowance for loan losses. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period allowance.
Mortgage servicing rights
The Company recognizes the rights to service sold 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.
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 $580.4 million at March 31, 2004, a decrease from December 31,
2003 of $11.3 million. The decline in assets occurred in cash and interest
bearing deposits in other banks, down $10.1 million, and investment securities
available for sale, down $5.5 million. This decline was partially offset by an
increase in net loans, including loans held for sale, up $3.9 million.
Commercial loans increased by $7.8 million while residential loans decreased by
$3.8 million.
12
Total deposits were $321.7 million at March 31, 2004, virtually unchanged from
the $321.8 million at December 31, 2003. Growth occurred in money market
deposits, up $5.0 million, and savings deposits, up $1.5 million. This growth
was offset by lower balances in checking, down $1.4 million, and certificates of
deposit, down $5.3 million. Federal Home Loan Bank advances declined $13.0
million from December 31, 2003 to March 31, 2004.
Shareholders' Equity increased $1.1 million from December 31, 2003 to March 31,
2004. The increase was a result of net income of $812,000, an increase in
unrealized gains on investment securities available for sale of $439,000, stock
options exercised of $81,000, Employee Stock Ownership Plan shares earned of
$171,000 and unearned compensation amortization of $153,000. These increases
were partially offset by cash dividends of $526,000.
Comparison of Operating Results for the Three Months Ended March 31, 2004 and
2003
Net income for the first quarter ended March 31, 2004 was $812,000, or $.21 for
basic and $.20 for diluted earnings per share. This compared to net income for
the comparable period in 2003 of $903,000, or $.23 for basic and $.22 diluted
earnings per share. Return on assets was .55% and return on equity was 4.04% for
the first quarter of 2004 compared to .68% and 4.50%, respectively, for the same
period last year.
Interest income for the first quarter of 2004 was $7,496,000 compared to
$7,425,000 for the same period in 2003. The increase was a result of an increase
in the average balance of interest-earning assets from period to period offset
by a decrease in the average yield on interest-earning assets. Interest expense
for the first quarter of 2004 was $3,467,000 compared to $3,585,000 for the same
period in 2003. The decrease was a result of a decrease in the average costs of
interest-bearing liabilities partially offset by an increase in the average
balance of interest-bearing liabilities from period to period. Net interest
income for the first quarter of 2004 was $4,029,000 compared to $3,840,000 for
the same period in 2003. Net interest margin was 2.88% for the three-month
period ended March 31, 2004 compared to 3.07% for the same period in 2003. The
average yield on earning assets declined 58 basis points in the first quarter
2004 compared to the same period in 2003 while the average cost of
interest-bearing liabilities declined 50 basis points for the same period. This
decreased spread from 2.59% at March 31, 2003 to 2.51% at March 31, 2004, or 8
basis points.
The Bank's provision for loan losses for the first quarter of 2004 was $200,000
compared to $165,000 for the same period in 2003. The increased provision in
2004 was primarily the result of an increase in the loan portfolio.
Nonperforming loans to total loans at March 31, 2004 increased slightly to .44%
from .43% at December 31, 2003. Nonperforming assets to total assets were .49%
at March 31, 2004 compared to .46% at December 31, 2003. The allowance for loan
losses as a percent of loans at March 31, 2004 was .82% compared .80% at
December 31, 2003.
Other income for the three months ended March 31, 2004 was $671,000 compared to
$862,000 for the same quarter of 2003. The decrease in other income was
primarily related to the decrease in net realized and unrealized gains on sale
of loans. Net realized and unrealized gains on sale of loans were $70,000 in the
first quarter of 2004 compared to $251,000 during the same period of 2003. The
decrease in gain on sale of loans was the result of selling fewer loans and at a
lower price than during the first quarter of 2004 compared to the same quarter
in 2003. Proceeds from loan sales were $4,612,000 for the first quarter of 2004
compared to $8,859,000 for the first quarter of 2003. The decline in loan sales
was a product of a decline in refinancing activity and a policy change made in
2003 to retain certain types of residential loan production that had previously
been sold in the secondary market. The decision to sell or retain loans is
evaluated regularly depending on the Bank's interest rate sensitivity and excess
investable funds.
Other expenses were $3,441,000 for the three months ended March 31, 2004
compared to $3,360,000 for the same three months of 2003. The primary increase
was in salaries and employee benefits, which increased $84,000 during the first
quarter of 2004 compared to the same period in 2003.
Income tax expense was approximately 23% of pretax income for the first quarter
of 2004 and 2003.
13
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
$7.9 million and $5.2 million of loans classified as special mention as of March
31, 2004 and December 31, 2003, respectively. In addition, Lincoln had $3.9
million and $2.5 million of loans classified as substandard at March 31, 2004
and December 31, 2003, respectively. At March 31, 2004 and December 31, 2003, no
loans were classified as doubtful or loss. At March 31, 2004, and December 31,
2003, respectively, non-accrual loans were $1.7 million and $1.6 million. At
March 31, 2004 and December 31, 2003, respectively, accruing loans delinquent 90
days or more totaled $253,000 and $272,000. At March 31, 2004 and December 31,
2003, the allowance for loan losses was $3.7 million and $3.5 million,
respectively or approximately .82% and .80% 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, 2004, 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, 2004, Lincoln'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.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Presented below, as of December 31, 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.
December 31, 2003
-----------------
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change %Change NPV Ratio Change
-------- -------- -------- ------- --------- ------
(Dollars in thousands)
+300 bp $56,836 $(15,957) (22)% 9.77% (208) bp
+200 bp 64,353 (8,441) (12) 10.84 (102) bp
+100 bp 69,694 (3,099) (4) 11.53 (32) bp
0 bp 72,794 11.85
-100 bp 71,494 (1,300) (2) 11.52 (34) bp
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
Management believes at March 31, 2004 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, 2003.
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.
15
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, Use of Proceeds and Issuer Purchases of Equity
Securities
The Company announced a stock repurchase program on April 23, 2003,
and up to 127,963 additional shares may be repurchased under that
program. No shares were repurchased during the quarter ended March 31,
2004. The repurchase program does not have an expiration date.
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 2004.
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
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Lincoln Bancorp filed two Current Reports on Form 8-K during the
quarter ended March 31, 2004:
(1) Date of report: January 22, 2004
Items reported: News release dated January 20, 2004
regarding the announcement of results of
operations for the quarter and year
ended December 31, 2004.
(2) Date of report: March 11, 2004
Items reported: The Company filed a current report on
Form 8-K disclosing the merger between
Lincoln Bancorp and First Shares
Bancorp, Inc., the Agreement and Plan of
Reorganization attached to which is as
exhibit thereto.
16
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 17, 2004 By: /s/ T. Tim Unger
--------------------------------------
T. Tim Unger
President and Chief Executive Officer
Date: May 17, 2004 By: /s/ John M. Baer
--------------------------------------
John M. Baer
Treasurer
17