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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, 2005 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, 2005 was 5,399,653.
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. Unregistered Sales of Equity 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 17
Item 6. Exhibits 17
SIGNATURES 18
EXHIBIT INDEX 19
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,
2005 2004
--------------------- --------------------
(Unaudited)
Assets
Cash and due from banks $ 5,095,296 $ 9,218,265
Short-term interest-bearing demand deposits in other banks 12,865,729 14,581,854
Federal funds sold 975,000 3,990,000
--------------------- --------------------
Cash and cash equivalents 18,936,025 27,790,119
Interest-bearing deposits 1,999,452 2,188,111
Investment securities
Available for sale 134,971,436 118,916,779
Held to maturity (market value $1,695,000 and $1,745,000) 1,665,000 1,695,000
--------------------- --------------------
Total investment securities 136,636,436 120,611,779
Loans held for sale 1,888,969 8,820,890
Loans, net of allowance for loan losses of $5,745,000 and $5,701,000 578,629,139 567,182,726
Premises and equipment 14,780,475 14,416,140
Investments in limited partnerships 979,777 1,024,777
Federal Home Loan Bank stock 10,538,100 10,427,000
Interest receivable 3,272,063 3,194,313
Goodwill 23,906,877 23,906,877
Core deposit intangible 3,824,631 4,017,274
Cash surrender value life insurance 17,972,704 17,751,275
Other assets 6,054,413 7,635,652
--------------------- --------------------
Total assets $ 819,419,061 $ 808,966,933
===================== ====================
Liabilities
Deposits
Noninterest-bearing $ 38,244,538 $ 36,956,251
Interest-bearing 488,299,757 479,372,500
--------------------- --------------------
Total deposits 526,544,295 516,328,751
Securities sold under repurchase agreement 6,930,133 6,500,277
Borrowings 170,829,812 177,829,382
Interest payable 1,367,687 1,145,877
Other liabilities 11,763,440 5,407,828
--------------------- --------------------
Total liabilities 717,435,367 707,212,115
--------------------- --------------------
Commitments and Contingencies
Shareholders' Equity
Common stock, without par value
Authorized - 20,000,000 shares
Issued and outstanding - 5,399,653 and 5,366,563 shares 63,895,579 63,533,976
Retained earnings 42,435,552 42,092,418
Accumulated other comprehensive gain (loss) (379,538) 182,864
Unearned recognition and retention plan (RRP) shares (626,454) (632,420)
Unearned employee stock ownership plan (ESOP) shares (3,341,445) (3,422,020)
--------------------- --------------------
Total shareholders' equity 101,983,694 101,754,818
--------------------- --------------------
Total liabilities and shareholders' equity $ 819,419,061 $ 808,966,933
===================== ====================
See notes to consolidated condensed financial statements.
4
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended
March 31,
------------------ -------------------
2005 2004
------------------ -------------------
Interest Income
Loans, including fees $ 8,741,075 $ 6,669,171
Investment securities 1,186,100 692,707
Deposits with financial institutions and Federal funds
sold 72,246 17,046
Dividend income 109,832 116,960
------------------ -------------------
Total interest and dividend income 10,109,253 7,495,884
------------------ -------------------
Interest Expense
Deposits 2,516,108 1,433,185
Federal Home Loan Bank advances 1,960,833 2,034,194
Other borrowings 65,114 --
------------------ -------------------
Total interest expense 4,542,055 3,467,379
------------------ -------------------
Net Interest Income 5,567,198 4,028,505
Provision for loan losses 13,509 200,172
------------------ -------------------
Net Interest Income After Provision for Loan Losses 5,553,689 3,828,333
------------------ -------------------
Other Income
Service charges on deposit accounts 456,593 213,956
Net realized and unrealized gains on loans 214,519 70,366
Point of sale income 119,182 86,689
Loan servicing fees 106,436 82,901
Increase in cash value of life insurance 225,973 137,336
Equity in losses of limited partnerships (45,000) (33,000)
Other income 148,122 113,238
------------------ -------------------
Total other income 1,225,825 671,486
------------------ -------------------
Other Expenses
Salaries and employee benefits 2,635,095 1,853,601
Net occupancy expenses 437,731 237,103
Equipment expenses 408,902 185,787
Advertising and business development 170,508 102,997
Data processing fees 622,327 360,719
Professional fees 123,533 114,952
Director and committee fees 102,520 79,679
Amortization of core deposit intangibles 192,643 23,487
Office supplies 141,876 75,462
Other expenses 670,132 407,285
------------------ -------------------
Total other expenses 5,505,267 3,441,072
------------------ -------------------
Income Before Income Tax 1,274,247 1,058,747
Income tax expense 295,547 246,999
------------------ -------------------
Net Income $ 978,700 $ 811,748
================== ===================
Basic earnings per share $ .20 $ .21
Diluted earnings per share .19 .20
Dividends per share .14 .13
See notes to consolidated condensed financial statements.
5
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
----------------- -----------------
2005 2004
----------------- -----------------
Net Income $ 978,700 $ 811,748
Other comprehensive income, net of tax
Unrealized losses on securities available for sale
Unrealized holding gains (losses) arising during
the period, net of tax expense (benefit) of
($317,410) and $226,147 (562,402) 438,815
----------------- -----------------
Comprehensive income $ 416,298 $1,250,563
================= =================
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, 2005
(Unaudited)
Common Stock Accumulated
------------------------- Other Unearned
Shares Retained Comprehensive Unearned ESOP
Outstanding Amount Earnings Gain (Loss) Compensation Shares Total
------------ ------------ ------------- --------------- --------------- ------------- -------------
Balances, January 1, 2005 5,366,563 $63,533,976 $42,092,418 $182,864 $(632,420) $(3,422,020) $101,754,818
Net income for the period 978,700 978,700
Unrealized gains (losses) on
securities (562,402) (562,402)
Stock options exercised 33,090 361,603 361,603
ESOP shares earned 70,703 80,575 151,278
Amortization of unearned
compensation expense 1,774 5,966 7,740
Cash dividends ($.14
per share) (708,043) (708,043)
------------ ------------ ------------- --------------- --------------- ------------- -------------
Balances, March 31, 2005 5,399,653 $63,895,579 $42,435,552 $ (379,538) $ (626,454) $(3,341,445) $101,983,694
============ ============ ============= =============== =============== ============= =============
See notes to consolidated condensed financial statements.
7
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
-------------------- -------------------
2005 2004
-------------------- -------------------
Operating Activities
Net income $ 978,700 $ 811,748
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Provision for loan losses 13,509 200,172
Investment securities (amortization)/accretion, net (51,926) (57,703)
Loans originated for sale in the secondary market (2,031,350) (5,785,900)
Proceeds from sale of loans in the secondary market 3,287,593 4,611,948
Gain on sale of loans (214,519) (70,366)
Amortization of net loan origination fees (74,020) (71,035)
Depreciation and amortization 372,983 179,047
Amortization of unearned compensation expense 7,740 152,990
ESOP shares earned 151,278 170,566
Net change in:
Interest receivable (77,750) 163,536
Interest payable 221,810 (23,311)
Other adjustments 978,672 (268,850)
-------------------- -------------------
Net cash provided by operating activities 3,562,720 12,842
-------------------- -------------------
Investing Activities
Purchases of securities available for sale (48,701,776) (17,468,470)
Proceeds from maturities of securities available for sale 36,838,483 23,678,176
Proceeds from maturities of securities held to maturity 30,000 25,000
Net change in loans (5,481,530) (2,950,367)
Purchases of property and equipment (746,466) (611,142)
Proceeds from sale of foreclosed real estate 1,297,993 116,000
Other investing activities 170,298 --
-------------------- -------------------
Net cash provided by (used in) investing activities (16,592,998) 2,789,197
-------------------- -------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand, money market and savings
deposits (11,588,539) 5,136,503
Certificates of deposit 21,941,651 (5,303,390)
Short-term borrowings 429,856 --
Proceeds from FHLB advances 8,000,000 8,000,000
Repayment of FHLB advances (15,000,000) (21,000,000)
Dividends paid (703,411) (524,714)
Exercise of stock options 361,603 81,250
Net change in advances by borrowers for taxes and insurance 735,024 676,101
-------------------- -------------------
Net cash provided by financing activities 4,176,184 (12,934,250)
-------------------- -------------------
Net Change in Cash and Cash Equivalents (8,854,094) (10,132,211)
Cash and Cash Equivalents, Beginning of Period 27,790,119 16,793,923
-------------------- -------------------
Cash and Cash Equivalents, End of Period $ 18,936,025 $ 6,661,712
==================== ===================
Additional Cash Flows and Supplementary Information
Interest paid $ 4,320,245 $ 3,490,690
Income tax paid -- --
Loan balances transferred to foreclosed real estate 54,865 166,652
Security purchased not yet settled 5,019,250 --
Transfer of loans held for sale to loans 5,872,116 --
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, 2004 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, 2005, and for the
three months ended March 31, 2005 and 2004, 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, 2005, 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, 2004,
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, 2005 March 31, 2004
--------------------------------- -----------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ -------- ------ ------ -------- ------
Basic earnings per share
Income available to
common shareholders $978,700 5,001,750 $ .20 $811,748 3,950,280 $ .21
===== ======
Effect of dilutive RRP
awards and stock options 137,119 159,954
-------------------------- ---------------------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions
$978,700 5,138,869 $ .19 $811,748 4,110,234 $ .20
==========================================================================
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, 2004
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 Three Months
Ended Ended
March 31, March 31,
2005 2004
----------------------------------
Net income, as reported $978,700 $ 811,748
Less: Total stock-based employee
compensation cost determined
under the fair value based
method, net of income taxes 25,144 9,104
----------------------------------
Pro forma net income $953,566 $ 802,644
==================================
Earnings per share:
Basic - as reported $ .20 $ .21
Basic - pro forma .19 $ .20
Diluted - as reported .19 $ .20
Diluted - pro forma .19 $ .20
In December, 2004, the Financial Accounting Standards Board (FASB) issued an
amendment to SFAS 123 (SFAS 123R) which eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board Opinion
No. 25 and generally requires that such transactions be accounted for using a
fair value-based method. SFAS 123R will be effective for the Company beginning
January 1, 2006. SFAS 123R applies to all awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that
date. The cumulative effect of initially applying this Statement, if any, is
recognized as of the required effective date.
As of the required effective date, the Company will apply SFAS 123R using either
the modified version of prospective application or the modified version of
retrospective application. Under the prospective transition method, compensation
cost is recognized on or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under SFAS 123 for
either recognition or pro forma disclosures. For periods before the required
effective date, a company may elect to apply a modified version of retrospective
application under which financial statements for prior periods are adjusted on a
basis consistent with the pro forma disclosures required for those periods by
SFAS 123.
The Company is currently evaluating the effect of the recognition and
measurement provisions of SFAS 123R but believes the adoption of SFAS 123R will
not result in a material impact on the Company's results of operations, cash
flows or financial position.
10
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 1, 2003, the Bank adopted the name Lincoln Bank. On
August 2, 2004, the Company acquired First Shares Bancorp, Inc., the holding
company of First Bank, an Indiana commercial Bank. First Shares was merged with
and into the Company and immediately thereafter, First Bank was merged into
Lincoln Bank. Lincoln currently conducts its business from 17 full-service
offices located in Hendricks, Johnson, Morgan, Clinton, Montgomery, and Brown
Counties, Indiana, with its main office located in Plainfield.
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 and commercial property. 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 Holdings, Inc. ("Family Financial")
and in Bloomington Housing Associates, L.P. ("BHA"). Family Financial primarily
engages in retail sales of 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 was completed in 1993 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 for residential home construction. Third, 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 28 through 31 of
the Annual Report to Shareholders for the year ended December 31, 2004, which
was filed on Form 10-K with the Securities and Exchange Commission on March 31,
2005. 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.
11
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 three components: probable losses estimated
from individual reviews of specific loans and probable losses estimated from
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. 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.
12
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 $819.4 million at March 31, 2005, an increase from December 31,
2004 of $10.4 million. The increase in assets occurred in net loans, which
increased $11.4 million, and investment securities available for sale, which
increased $16.0 million. This increase was partially offset by a $8.9 million
decline in cash and cash equivalents and a $6.9 million decline in loans held
for sale. Loan growth was experienced in commercial and consumer lending since
December 31, 2004. The decline in cash and cash equivalents was reinvested into
securities available for sale.
Total deposits were $526.5 million at March 31, 2005, an increase of $10.2
million from the $516.3 million at December 31, 2004. Growth occurred in
certificates of deposit, which increased $21.8 million, while money market
deposits declined by $13.4 million as a result of high competitive pricing in
the market for money market deposits and the migration of funds into
certificates of deposit. Borrowings declined by $7.0 million from year end 2004
to $170.8 million at March 31, 2005.
Shareholders' equity increased $229,000 from December 31, 2004 to March 31,
2005. Shareholders' equity increased due to net income of $979,000 stock options
exercised of $362,000, Employee Stock Ownership Plan shares earned of $151,000,
unearned compensation amortization of $7,000 and a decrease in unrealized gains
on investment securities available for sale of $562,000. Cash dividends of
$708,000 were declared during the first quarter.
Comparison of Operating Results for the Three Months Ended March 31, 2005 and
2004
Net income for the first quarter ended March 31, 2005 was $979,000, or $.20 for
basic and $.19 for diluted earnings per share. This compared to net income for
the comparable period in 2004 of $812,000, or $.21 for basic and $.20 diluted
earnings per share. Return on assets was .48% and return on equity was 3.80% for
the first quarter of 2005 compared to .55% and 4.04%, respectively, for the same
period last year.
Net interest income for the first quarter of 2005 was $5,567,000 compared to
$4,029,000 for the same period in 2004. Net interest margin was 3.00% for the
three-month period ended March 31, 2005 compared to 2.88% for the same period in
2004. The average yield on earning assets increased 9 basis points in the first
quarter 2005 compared to the same period in 2004 while the average cost of
interest-bearing liabilities declined 11 basis points for the same period. This
increased the interest rate spread from 2.51% at March 31, 2004 to 2.71% at
March 31, 2005, or 20 basis points. The acquisition of First Shares Bancorp,
effective August 2, 2004, provided a boost to earning assets and net interest
margin. The merger provided a greater mix of commercial and consumer loans with
higher yields.
The Bank's provision for loan losses for the first quarter of 2005 was $14,000
compared to $200,000 for the same period in 2004. Nonperforming loans to total
loans at March 31, 2005 increased slightly to .95% from .87% at December 31,
2004. Nonperforming assets to total assets were .74% at March 31, 2005 compared
to .85% at December 31, 2004. The allowance for loan losses as a percent of
loans was .98% at both March 31, 2005 and December 31, 2004. Analysis of the
allowance for loan losses at March 31, 2005 indicated no further adjustments
were necessary at this time. During the quarter, the Bank recognized $31,000 in
net recoveries on previously charged-off loans.
Other income for the three months ended March 31, 2005 was $1,226,000 compared
to $671,000 for the same quarter of 2004. The increase of $555,000 in other
income was primarily from the increase in service charges on deposit accounts,
which increased $243,000; net realized and unrealized gains on sale of loans,
which increased $145,000; and an $89,000 increase in cash value of life
insurance. The majority of the service charge increase was the result of the
implementation
13
of the Bank's courtesy overdraft program Lincoln Advantage in the second quarter
of 2004. In addition, the merger of First Shares added service charge revenue
during the first quarter of 2005. During the first quarter of 2004 the Bank also
sold residential mortgages while retaining the servicing rights. During 2005
most loan volume is sold with servicing released to the buyer. In general,
premiums received on loans sold with servicing released exceed those received
where servicing is retained by the Bank. Cash value of life insurance increased
from the addition of policies held by First Bank as a result of the merger
August 2, 2004, plus an increase in dividend rate.
Other expenses were $5,505,000 for the three months ended March 31, 2005
compared to $3,441,000 for the same three months of 2004. The primary reason for
the increase in expenses was the acquisition of First Shares Bancorp during the
third quarter of 2004. Full-time equivalent employees increased from 132.0 for
the quarter ended March 31, 2004 to 220.8 for quarter ended March 31, 2005. Our
branch locations increased from nine to seventeen from the end of the first
quarter in 2004 to the end of the same quarter in 2005.
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
$14.2 million and $19.4 million of loans classified as special mention as of
March 31, 2005 and December 31, 2004, respectively. In addition, Lincoln had
$6.6 million and $5.7 million of loans classified as substandard at March 31,
2005 and December 31, 2004, respectively. Loans classified as doubtful totaled
$233,000 at both March 31, 2005 and December 31, 2004. At March 31, 2005 and
December 31, 2004, no loans were classified as loss. At March 31, 2005, and
December 31, 2004, respectively, non-accrual loans were $5.3 million and $4.8
million. At March 31, 2005 and December 31, 2004, respectively, accruing loans
delinquent 90 days or more totaled $212,000 and $314,000. At March 31, 2005 and
December 31, 2004, the allowance for loan losses was $5.7 million and $5.7
million, respectively or approximately .98% and .98% 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 a rule 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, 2005, 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, 2005, 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
Subsequent Events
At March 31, 2005, loans to a certain borrower totaling $2.2 million were
classified as substandard and appropriate reserves were assigned based on the
information available. In April 2005, the Bank was notified of certain
additional problems experienced by this borrower. Subsequent to that date, the
borrower filed for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy
Code. The initial bankruptcy hearings have taken place but the borrower has
received two extensions of time to file certain schedules necessary for a
creditor meeting to take place.
As of May 16, 2005, a creditors' meeting is tentatively scheduled for June 10,
2005. Pending the results of this meeting, the Bank is unable to determine its
ultimate collateral position and related losses. The Bank will continue to
monitor this situation closely and provide for any additional losses as
information becomes available.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Presented below, as of December 31, 2004 and 2003, 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, 2004
-----------------
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change %Change NPV Ratio Change
-------- -------- --------- ------- --------- ------
(Dollars in thousands)
+300 bp $69,053 (16,332) (19)% 9.00% (168) bp
+200 bp 76,161 (9,224) (11) 9.79 (90) bp
+100 bp 81,958 (3,426) (4) 10.39 (30) bp
0 bp 85,385 10.69
-100 bp 84,237 (1,148) (1) 10.45 (24) bp
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
Management believes that at March 31, 2005, 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, 2004.
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
In connection with the Bank's 2004, 2003 and 2000 examinations by the
Office of Thrift Supervision (the "OTS"), the OTS found certain failures of
the Bank to comply with various laws and regulations, including the Bank
Secrecy Act, the Flood Disaster Protection Act (the "FDPA") and the Truth
in Lending Act ("TILA"). Effective May 2, 2005, the Bank executed a
Stipulation and Consent to the Issuance of an Order to Cease and Desist for
Affirmative Relief ("C&D Stipulation") and a Stipulation and Consent to the
Issuance of an Order of Assessment of Civil Money Penalty ("CMP
Stipulation"), and the OTS issued a Consent Order to Cease and Desist for
Affirmative Relief (the "C&D Order") and an Order of Assessment of Civil
Money Penalty (the "CMP Order").
Pursuant to the C&D Stipulation and C&D Order, the Bank has agreed to take
a number of actions within specified timeframes, including promptly
reviewing and correcting any deficiencies and noncompliance under the FDPA
and TILA and revising its BSA, FDPA and TILA policies and procedures. The
Bank has agreed to engage an outside third party to review and test the
Bank's BSA compliance program, including a review of transactions since
August 1, 2003, and the Bank also has agreed to include in its revised BSA
policy a requirement for annual independent testing of its BSA compliance
program. The revisions to the Bank's FDPA and TILA policies are to include
requirements for additional training of lending staff on the requirements
of the FDPA and TILA laws and regulations and also are to require the
Bank's internal auditor or independent compliance officer to conduct
quarterly reviews to assess the Bank's FDPA and TILA compliance.
The Bank's Board of Directors also has agreed to review the Bank's
compliance deficiencies and to prepare and adopt a staffing plan designed
to strengthen and improve the Bank's management and operations. The Board
is required to appoint a Regulatory Compliance Committee (the "Committee")
to monitor and coordinate the Bank's compliance with the C&D Order. The
Committee must submit to the Board for each quarter a written progress
report on the actions taken to comply with the C&D Order. The directors are
required to certify in writing that they have reviewed the quarterly
Committee reports, and the reports and director certifications, together
with any Board comments, are to be submitted to the OTS Regional Director.
Pursuant to the CMP Stipulation and the CMP Order, the OTS assessed and the
Bank has paid a civil money penalty in the amount of $8,400 for the Bank's
alleged failure to comply with the FDPA. The Bank's Board and management
are continuing to take the actions necessary to comply with the
Stipulations and Orders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company announced a stock repurchase program on April 23, 2003, and up
to 127,963 additional shares may still be repurchased under that program.
No shares were repurchased during the quarter ended March 31, 2005. The
repurchase program does not have an expiration date.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
16
Item 5. Other Information
As previously reported in a Current Report on Form 8-K, T. Tim Unger
resigned and retired from his positions as the Chairman, President and
Chief Executive Officer of the Company and the Bank effective May 1, 2005,
and will retire from the position of Chairman of the Board of Directors of
the Company effective June 1, 2005. A Severance Agreement, dated May 12,
2005, among the Company, the Bank and Mr. Unger, provides for the
termination of Mr. Unger's Employment Agreement with the Bank effective May
31, 2005. Pursuant to the Severance Agreement, Mr. Unger will be paid
compensation at his current rate until December 31, 2005, and also will be
paid the amounts of matching contributions that would have made on his
behalf under the Company's 401(k) Plan and the amount of contributions that
would have been allocated to his account under the Company's Employee Stock
Ownership Plan had he remained employed through December 31, 2005. The
Severance Agreement also contains a general release and waiver of certain
claims and confidentiality and non-competition provisions. A copy of the
Severance Agreement is attached as Exhibit 10(1) to this Report.
Item 6. Exhibits
The exhibits listed in the Exhibit Index are incorporated herein by
reference.
17
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 16, 2005 By: /s/ Jerry R. Engle
--------------------------------------
Jerry R. Engle
President and Chief Executive Officer
Date: May 16, 2005 By: /s/ John M. Baer
--------------------------------------
John M. Baer
Secretary and Treasurer
18
EXHIBIT INDEX
Exhibit No. Description Location
----------- ----------- --------
10(1) Severance Agreement, dated May 12, 2005, Attached
among Lincoln Bancorp, Lincoln Bank and
T. Tim Unger
31(1) Certification required by 17 C.F.R. Section Attached
240.13a-14(a)
31(2) Certification required by 17 C.F.R. Section Attached
240.13a-14(a)
32 Certification pursuant to 18 U.S.C. Attached
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
19