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 JUNE 30, 1999 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: 333-63373
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 [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of June 30, 1999 was 7,009,250.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
FORM 10-Q
INDEX
Page No.
FORWARD LOOKING STATEMENT 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet (Unaudited) 4
Consolidated Condensed Statement of Income (Unaudited) 5
Consolidated Condensed Statement of Comprehensive
Income (Unaudited) 6
Consolidated Condensed Statement of
Shareholders' Equity (Unaudited) 7
Consolidated Condensed Statement of Cash Flows (Unaudited) 8
Notes to Unaudited Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
FORM 10Q
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.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
Assets
<S> <C> <C>
Cash and due from banks $ 2,263,968 $ 4,245,128
Interest-bearing demand deposits in other banks 3,763,207 18,662,229
------------- -------------
Cash and cash equivalents 6,027,175 22,907,357
Investment securities
Available for sale 155,582,109 129,275,575
Held to maturity 500,000 1,250,000
------------- -------------
Total investment securities 156,082,109 130,525,575
Loans 222,175,630 197,432,997
Allowance for loan losses 1,665,624 1,512,205
------------- -------------
Net loans 220,510,006 195,920,792
Premises and equipment 3,785,264 3,379,460
Investments in limited partnerships 2,217,641 2,386,994
Federal Home Loan Bank stock 5,446,700 5,446,700
Interest receivable 2,295,999 1,773,063
Other assets 5,861,682 4,108,163
------------- -------------
Total assets $ 402,226,576 $ 366,448,104
============= =============
Liabilities
Deposits
Noninterest-bearing $ 2,295,999 $ 2,484,444
Interest-bearing 202,108,616 209,525,347
------------- -------------
Total deposits 204,404,615 212,009,791
Short term borrowings 4,600,000
Federal Home Loan Bank advances 84,263,455 33,263,455
Note payable 1,714,001 2,202,501
Due to broker 10,025,000
Interest payable 998,171 1,108,514
Other liabilities 1,981,983 1,731,061
------------- -------------
Total liabilities 297,962,225 260,340,322
------------- -------------
Commitments and Contingent Liabilities
Shareholders' Equity
Preferred stock, without par value
Authorized and unissued - 2,000,000 shares
Common stock, without par value
Authorized - 20,000,000 shares
Issued and outstanding - 7,009,250 shares 68,883,405 68,879,373
Retained earnings 43,963,770 42,548,260
Accumulated other comprehensive income (3,172,514) 287,549
Unearned employee stock ownership plan ("ESOP") shares (5,410,310) (5,607,400)
------------- -------------
Total shareholders' equity 104,264,351 106,107,782
------------- -------------
Total liabilities and shareholders' equity $ 402,226,576 $ 366,448,104
============= =============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------- -------------- --------------- --------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees $ 4,132,625 $ 4,335,278 $ 8,118,549 $ 9,244,231
Investment securities 2,679,409 809,441 4,952,571 1,467,613
Deposits with financial institutions 59,549 371,536 166,755 485,044
Dividend income 108,635 108,635 216,077 216,077
-------------- -------------- -------------- ---------------
Total interest and dividend income 6,980,218 5,624,890 13,453,952 11,412,965
-------------- -------------- -------------- ---------------
Interest Expense
Deposits 2,356,412 2,717,470 4,817,276 5,335,890
Short term borrowings 59,186 70,242
Federal Home Loan Bank advances 1,072,735 689,336 1,728,537 1,519,472
-------------- -------------- -------------- ---------------
Total interest expense 3,488,333 3,406,806 6,616,055 6,855,362
-------------- -------------- -------------- ---------------
Net Interest Income 3,491,885 2,218,084 6,837,897 4,557,603
Provision for loan losses 200,114 364,568 231,164 409,937
-------------- -------------- -------------- ---------------
Net Interest Income After Provision for Loan Losses 3,291,771 1,853,516 6,606,733 4,147,666
-------------- -------------- -------------- ---------------
Other Income
Net realized and unrealized gains (losses) on loans 9,780 (146,682) 12,615 (114,322)
Net realized gains on sales of available-for-sale securities 104,980 (3,904) 104,980
Equity in losses of limited partnerships (86,882) (153,134) (169,353) (268,134)
Other income 210,204 201,519 443,127 378,663
-------------- -------------- -------------- ---------------
Total other income 133,102 6,683 282,485 101,187
-------------- -------------- -------------- ---------------
Other Expenses
Salaries and employee benefits 871,745 655,105 1,675,103 1,318,489
Net occupancy expenses 82,106 76,780 155,419 135,177
Equipment expenses 122,742 149,977 266,525 299,884
Deposit insurance expense 34,635 53,200 82,306 99,514
Data processing fees 191,294 217,915 355,571 369,173
Professional fees 56,099 134,474 89,162 177,481
Director and committee fees 36,149 40,837 74,097 82,937
Mortgage servicing rights amortization 49,374 70,220 32,290 126,374
Other expenses 360,647 328,693 593,936 486,544
-------------- -------------- -------------- ---------------
Total other expenses 1,804,791 1,727,201 3,324,409 3,095,573
-------------- -------------- -------------- ---------------
Income Before Income Tax 1,620,082 132,998 3,564,809 1,153,280
Income tax expense 607,730 (103,348) 1,308,189 186,388
-------------- -------------- -------------- ---------------
Income Before Extraordinary Item 1,012,352 236,346 2,256,620 966,892
Early extinguishment of debt, net of income taxes (150,303) (150,303)
-------------- -------------- -------------- ---------------
Net Income $ 1,012,352 $ 86,043 $ 2,256,620 $ 816,589
============== ============== ============== ===============
Basic earnings per share $ 16 $ .35
==============
==============
Diluted earnings per share .16 .35
============== ==============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$ 2,256,620 $ 816,589
Net income $ 1,012,352 $ 86,043
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 $(1,935,697), $63,812,
$(2,271,013) and $42,271 (2,951,193) 97,289 (3,462,421) 64,447
Less: Reclassification adjustment for gains (2,358) 63,397
(losses) included in net income, net of tax
expense (benefit) of $41,582, $(1,546) and
$41,582 63,397
---------------- --------------- ---------------- ----------------
(2,951,193) 33,892 (3,460,063) 1,050
---------------- ----------------
================ ===============
Comprehensive income $(1,938,841) $ 119,935 $(1,203,443) $ 817,639
================ =============== ================ ===============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Unearned
----------------------------
Shares Retained Comprehensive ESOP
Outstanding Amount Earnings Income Shares Total
------------ --------------- -------------- ----------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1999 7,009,250 $ 68,879,373 $ 42,548,260 $287,549 $(5,607,400) $ 106,107,782
Net income for the period 2,256,620 2,256,620
Unrealized losses on securities,
net of reclassification adjustment (3,460,063) (3,460,063)
ESOP shares earned 17,738 197,090 214,828
Additional conversion costs (13,706) (13,706)
Cash dividends ($.12 per share) (841,110) (841,110)
------------ --------------- -------------- ----------------------------- -----------------
Balances, June 30, 1999 7,009,250 $ 68,883,405 $ 43,963,770 $ (3,172,514) $(5,410,310) $ 104,264,351
============ =============== ============== =============== ============== ===============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------- -------------------
1999 1998
-------------------- -------------------
Operating Activities
<S> <C> <C>
Net income $ 2,256,620 $ 816,589
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Provision for loan losses 231,164 409,937
Gain on sale of foreclosed real estate (9,449) (434)
(Gain) loss on disposal of premises and equipment 4,219 7,456
Investment securities accretion, net (176,495) (72)
Investment securities (gains) losses 3,904 (104,981)
Equity in losses of limited partnerships 169,353 268,134
Amortization of net loan origination fees (174,123) (216,970)
Depreciation and amortization 202,225 237,569
Deferred income tax benefit 275,315 (150,524)
ESOP shares earned 214,828
Net change in:
Loans held for sale 238,002
Interest receivable (522,936) 105,097
Interest payable (110,343) (15,352)
Other assets (7,834) 122,504
Other liabilities (234,565) (79,552)
Income taxes receivable/payable 261,625 126,829
-------------------- -------------------
Net cash provided by operating activities 2,383,508 1,764,232
-------------------- -------------------
Investing Activities
Purchases of securities available for sale (64,794,311) (14,924,502)
Proceeds from sales of securities available for sale 10,259,375 21,080,952
Proceeds from maturities of securities available for sale 12,646,463 4,137,734
Proceeds from maturities of securities held to maturity 750,000 6,135,000
Net change in loans (19,827,014) 5,312,468
Purchases of loans (4,761,641)
Purchases of property and equipment (612,248) (257,928)
Proceeds from sale of foreclosed real estate 54,907 144,501
Contribution to limited partnership (195,000)
Other investing activities (650,000)
-------------------- -------------------
Net cash provided (used) by investing activities (66,284,469) 20,783,225
-------------------- -------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand,
money market and savings deposits 6,850,440 266,372
Certificates of deposit (14,455,616) 7,042,030
Short-term borrowings 4,600,000
Proceeds from FHLB advances 61,000,000 10,000,000
Repayment of FHLB advances (10,000,000) (34,450,000)
Payment on note payable to limited partnership (488,500) (488,500)
Cash dividends (420,555)
Additional conversion costs (13,706)
Net change in advances by borrowers for taxes and insurance (51,284) (110,498)
-------------------- -------------------
Net cash provided (used) by financing activities 47,020,779 (17,740,596)
-------------------- -------------------
Net Change in Cash and Cash Equivalents (16,880,182) 4,806,861
Cash and Cash Equivalents, Beginning of Period 22,907,357 18,957,681
-------------------- -------------------
Cash and Cash Equivalents, End of Period $ 6,027,175 $ 23,764,542
==================== ===================
Additional Cash Flows and Supplementary Information
Interest paid $ 6,726,398 $ 6,897,070
Income tax paid 771,250 111,500
Loan balances transferred to foreclosed real estate 196,872
Securitization of loans and loans held for sale 39,903,448
Transfer of loans to loans held for sale 19,611,239
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Lincoln Bancorp
(the "Company"), its wholly owned subsidiary, Lincoln Federal Savings Bank, a
federally chartered savings bank ("Lincoln Federal"), and Lincoln Federal's
wholly owned subsidiary, L-F Service Corporation ("L-F Service"). A summary of
significant accounting policies is set forth in Note 1 of the Notes to Financial
Statements included in the December 31, 1998 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 the 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 June 30, 1999, and for the six
and three months ended June 30, 1999 and 1998, 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.
Note 2: Earnings Per Share
Earnings per share have been computed based upon the weighted average common and
common equivalent shares outstanding during the period subsequent to Lincoln
Federal's conversion to a stock savings bank on December 30, 1998. Unearned
Employee Stock Ownership Plan shares have been excluded from the computation of
average common shares outstanding. For the six and three months ended June 30,
1999, weighted average shares outstanding for basic and diluted earnings per
share were 6,458,365 and 6,463,292 respectively.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Lincoln Bancorp, an Indiana corporation (the "Company"), was organized in
September, 1998. On December 30, 1998, it acquired all of the outstanding common
stock of Lincoln Federal Savings Bank ("Lincoln Federal") upon the conversion of
Lincoln Federal from a federal mutual savings bank to a federal stock savings
bank.
Lincoln Federal was originally organized in 1884 as Ladoga Federal Savings and
Loan Association, located in Ladoga, Indiana. In 1979 Ladoga Federal merged with
Plainfield First Federal Savings and Loan Association, a federal savings and
loan association located in Plainfield, Indiana which was originally organized
in 1896. Following the merger, the Bank changed its name to Lincoln Federal
Savings and Loan Association and, in 1984, adopted its current name, Lincoln
Federal Savings Bank. Lincoln Federal currently conducts its business from six
full-service offices located in Hendricks, Montgomery, Clinton and Morgan
Counties, Indiana, with its main office located in Plainfield. Lincoln Federal
opened an office in Avon, Indiana in January, 1999 and its newest office in
Mooresville, Indiana in April, 1999. The Bank's principal business consists of
attracting deposits from the general public and originating fixed-rate and
adjustable-rate loans secured primarily by first mortgage liens on one- to
four-family residential real estate. Lincoln Federal's deposit accounts are
insured up to applicable limits by the SAIF of the FDIC.
Lincoln Federal offers a number of financial services, including: (i) one- to
four-family residential real estate loans; (ii) commercial real estate loans;
(iii) real estate construction loans; (iv) land loans; (v) multi-family
residential loans; (vi) consumer loans, including home equity loans and
automobile loans; (vii) commercial loans; (viii) money market demand accounts
("MMDAs"); (ix) savings accounts; (x) checking accounts; (xi) NOW accounts; and
(xii) certificates of deposit.
Lincoln Federal currently owns one subsidiary, L-F Service corporation ("L-F
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.
Lincoln Federal's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investments, and costs incurred with
respect to interest-bearing liabilities, primarily deposits and borrowings.
Results of operations also depend upon the level of Lincoln Federal's
non-interest income, including fee income and service charges, and the level of
its non-interest expenses, including general and administrative expenses.
Financial Condition
Total assets increased $35.8 million, or 9.7% at June 30, 1999, compared to
December 31, 1998. The increase was primarily in investment securities available
for sale and net loans. Investment securities available for sale increased $26.3
million, or 20.3%. Net loans increased $24.6 million, or 12.6% due in part to
the funding of one- to four-family residential mortgage loans that were in
process at December 31, 1998 and the purchase of approximately $4.0 million of
one- to four-family residential mortgage loans from another financial
institution during the first quarter of 1999. Loan growth continued during the
second quarter of 1999 in nearly all loan categories. These increases in
investment securities available for sale and loans were offset by a decrease in
cash and cash equivalents. Cash and cash equivalents decreased by $16.9 million,
or 73.7%. These balance sheet changes were a result of a leverage strategy to
increase net interest income and improve the Company's return on average assets
and equity.
Deposits decreased $7.6 million to $204.4 million during the six months ended
June 30, 1999. The decline in deposits was primarily a result of the run-off of
maturing certificates of deposit specials.
Total borrowed funds increased $55.1 million from December 31, 1998 to June 30,
1999. The increase in total borrowed funds was comprised of an increase in FHLB
advances of $51.0 million, an increase in repurchase agreements of $4.6 million
and a decrease in the note payable to a limited partnership of $489,000. The
increase in total borrowings reflects the Company's decision to leverage its
earning assets when appropriate. The proceeds from borrowings were used
primarily to fund investments in mortgage-backed and other investment grade
securities available for sale.
Stockholders' equity decreased $1.8 million from $106.1 million at December 31,
1998 to $104.3 million at June 30, 1999. The decrease was due to unrealized
losses of $3.5 million on investment securities available for sale, cash
dividends of $841,000 and additional stock conversion costs of $14,000. Net
income for the six months ended June 30, 1999 of $2.3 million and Employee Stock
Ownership Plan ("ESOP") shares earned of $215,000 offset these decreases.
Comparison of Operating Results for the Three Months Ended June 30, 1999 and
1998
Net income increased $926,000 from $86,000 for the three months ended June 30,
1998 to $1.0 million for the three months ended June 30, 1999. The increase was
primarily due to an increase in net interest income offset by increases in
noninterest expenses and income tax expense. In addition, extraordinary expense
of $150,000 related to the prepayment of FHLB advances was recorded during the
three months ended June 30, 1998. The return on average assets was 1.00% and .11
% for the three months ended June 30, 1999 and 1998, respectively.
Interest income increased $1.4 million, or 24.1%, from $5.6 million for the
three months ended June 30, 1998 to $7.0 million for the same period in 1999.
Interest expense increased $81,000, or 2.4%, from $3.4 million for the three
months ended June 30, 1998 to $3.5 million for the same period in 1999. As a
result, net interest income for the three months ended June 30, 1999 increased
$1.3 million or 57.4%, compared to the same period in 1998. The net interest
margin was 3.55% for the second quarter of 1999 compared to 3.01% for the same
period in 1998. The increase in net interest income and the improved margin were
primarily the result of revenue from the proceeds of the stock conversion and
from balance sheet leveraging. Net proceeds of the Company's stock issuance,
after costs and excluding the shares issued for the ESOP, were $61.3 million. A
$50.0 million leverage strategy was initiated during the first quarter of 1999.
The Company's provision for loan losses for the three months ended June 30, 1999
was $200,000 compared to $365,000 for the same period in 1998. Net charge-offs
were $76,000 and $324,000 for the three months ended June 30, 1999 and 1998,
respectively.
Other income for the second quarter of 1999 was $133,000 compared to $7,000 for
the second quarter of 1998. Equity in losses of limited partnerships decreased
$66,000 from the 1998 period to the 1999 period due to the operating results of
the limited partnerships. In addition, other income increased primarily due to
$147,000 of losses on loans held for sale at June 30, 1998 offset by $105,000 of
gains on sales of investment securities available for sale recorded during the
three months ended June 30, 1998 compared to no gains during the comparable
period in 1999.
Other expense increased $78,000, or 4.5%, for the three months ended June 30,
1999 compared to the same period in 1998. Salaries and employee benefits were
$872,000 for the three months ended June 30, 1999 compared to $655,000 for the
1998 period, an increase of $217,000, or 33.2%. This increase resulted primarily
from $107,000 of compensation expense associated with the ESOP. Also, the
Company's compensation expense increased as a result of additional staffing for
the two branches opened in 1999. The increase in salaries and employee benefits
was in part offset by a decrease in professional fees. Professional fees
decreased $78,000 for the three months ended June 30, 1999 as compared to the
same period in 1998. During 1998, the Bank utilized third parties to assist in
loan packaging for sales and securitizations.
Income tax expense increased $711,000 for the three months ended June 30, 1999
compared to the same period in 1998. The increase was a result of an increase in
taxable income for the period and a decrease in low income tax credits
available. The Company has two low-income housing partnerships of which the
final tax credits for one of the two partnerships were used in 1998.
Comparison of Operating Results for the Six Months Ended June 30, 1999 and 1998
Net income increased approximately $1.4 million from $817,000 for the six months
ended June 30, 1998 to $2.3 million for the six months ended June 30, 1999. The
increase was primarily due to an increase in net interest income offset by
increases in other expenses and income tax expense. In addition, extraordinary
expense of $150,000 related to the prepayment of FHLB advances was recorded
during the six months ended June 30,1998. The return on average assets was 1.16%
and .53 % for the six months ended June 30, 1999 and 1998, respectively.
Interest income increased approximately $2.1 million, or 17.9%, from $11.4
million for the six months ended June 30, 1998 to $13.5 million for the same
period in 1999. Interest expense decreased $239,000, or 3.5%, from approximately
$6.9 million for the six months ended June 30, 1998 to $6.6 million for the same
period in 1999. As a result, net interest income for the six months ended June
30, 1999 increased approximately $2.3 million or 50.0%, compared to the same
period in 1998. The net interest margin was 3.64% for the six months ended June
30, 1999 compared to 3.06% for the same period in 1998. The increase in net
interest income and the improved margin were primarily the result of revenue
from the proceeds of the stock conversion and from balance sheet leveraging.
The Company's provision for loan losses for the six months ended June 30, 1999
was $231,000 compared to $410,000 for the same period in 1998. Net charge-offs
were $77,000 and $339,000 for the six months ended June 30, 1999 and 1998,
respectively.
Other income for the six months ended June 30, 1999 was $282,000, an increase of
$181,000 from the $101,000 for the six months ended June 30, 1998. Equity in
losses of limited partnerships decreased $99,000 from the 1998 period to the
1999 period due to the operating results of the limited partnerships. In
addition, other income increased due in part to $114,000 of losses on loans held
for sale at June 30, 1998 offset by $105,000 of gains on sales of investment
securities available for sale recorded during the six months ended June 30, 1998
compared to losses of $4,000 during the comparable period in 1999.
Other expenses of $3.3 million increased $229,000, or 7.4%, for the six months
ended June 30, 1999 compared to the same period in 1998. Salaries and employee
benefits were $1.7 million for the six months ended June 30, 1999 compared to
$1.3 million for the 1998 period, an increase of $357,000, or 27.0%. This
increase resulted primarily from $215,000 of compensation expense incurred by
the Company in connection with the ESOP. Also, the Company's compensation
expense increased as a result of additional staffing for the two branches opened
in 1999. Other expenses also increased $107,000 for the six months ended June
30, 1999 compared to the same period in 1998. The increase in other expenses
resulted from nominal increases in a variety of expense categories. The
increases in salaries and employee benefits and other expenses were in part
offset by decreases in mortgage servicing rights amortization and professional
fees. Mortgage servicing rights amortization was $32,000 for the six months
ended June 30 1999 compared to $126,000 for the same period in 1998 due to
slower prepayment speeds on serviced mortgages. In addition, professional fees
decreased $88,000 for the six months ended June 30, 1999 as compared to the same
period in 1998. During 1998, the Bank utilized third parties to assist in loan
packaging for sales and securitizations.
Income tax expense increased $1.1 million for the six months ended June 30, 1999
compared to the same period in 1998. The increase was a result of an increase in
taxable income for the period and a decrease in low income tax credits
available. The Company has two low-income housing partnerships of which the
final tax credits for one of the two partnerships were used in 1998.
Asset Quality
Lincoln Federal currently classifies loans as special mention, substandard,
doubtful and loss to assist management in addressing collection risks and
pursuant to regulatory requirements, which are not, necessarily consistent with
generally accepted accounting principles. Special mention loans represent
credits that have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects or Lincoln Federal's credit position at
some future date. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
Lincoln Federal had no loans classified as special mention as of June 30, 1999
and December 31, 1998. In addition, Lincoln Federal had $1.0 million and
$905,000 of loans classified as substandard at June 30, 1999 and December 31,
1998, respectively. The increase in loans classified as substandard was
primarily attributable to an increase in mortgage loans past due greater than
ninety days but not on non-accrual status. Lincoln Federal reviews all loans on
an individual basis when the loan reaches ninety days past due to determine
whether non-accrual status is necessary. At June 30, 1999 and December 31, 1998,
no loans were classified as doubtful or loss. At June 30, 1999, and December 31,
1998, respectively, non-accrual loans were $968,000 and $959,000. The allowance
for loan losses was $1.7 million or .75% of loans at June 30, 1999 and $1.5
million or .77% of loans at December 31, 1998.
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
accounts and borrowings due within one year. The minimum required ratio is
currently set by the Office of Thrift Supervision regulation at 4%. As of June
30, 1999, Lincoln Federal had liquid assets of $93.5 million and a liquidity
ratio of 55.3%.
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).
Year 2000 Compliance
The Company's lending and deposit activities depend significantly upon computer
systems to process and record transactions. Management is aware of the potential
Year 2000 related problems that may affect the operating systems that control
the Company's computers as well as those of its third-party data service
providers that maintain many of its records. In 1997, management began the
process of identifying any Year 2000 related problems that may affect the
Company's computer systems, and management is closely monitoring the data
service providers' progress in making their systems Year 2000 compliant.
Management completed mission critical testing for Year 2000 compliance in the
second quarter of 1999.
Management has contacted the approximately 20 companies that supply or service
the Company's material operations requesting that they certify that they have
plans to make their respective computer systems Year 2000 compliant. Management
established a December 31, 1998 deadline for these companies to provide this
certification and, as of that date, approximately 90% of these companies had
responded to this inquiry. The Company has delivered a second notice to the
service providers who did not respond to the first inquiry and has established a
deadline of June 30, 1999 for these companies to respond. Once a certification
is received from a service provider, management intends to continuously monitor
the progress that the service provider makes in meeting the Company's targeted
schedule for becoming Year 2000 compliant. The Company's electronic data service
provider, whose services are integral to its operations, has provided
certification to management that its computer systems are Year 2000 compliant.
The Company is currently testing the data that is maintained on its electronic
data service provider's system and will continue testing throughout 1999 to
ensure that the system is Year 2000 compliant. The deadline that management has
established for the Company's remaining service providers to certify that their
systems are Year 2000 compliant should provide management sufficient time to
identify and contract with alternative service providers to replace any provider
that cannot certify that it is, or soon will be, Year 2000 compliant. Management
does not expect the expense of such changes in suppliers or services to be
material to its operations, financial condition or results. Notwithstanding the
efforts management has made, no assurances can be given that the systems of its
service providers will be timely renovated to address the Year 2000 issue.
In addition to possible expenses related to the Company's own systems and those
of its service providers, the Company could incur losses if Year 2000 problems
affect any of its significant borrowers or impair the payroll systems of large
employers in its market area, either of which could delay loan payments by the
Company's borrowers. Management contacted, and received replies from, the
approximately 23 commercial borrowers with outstanding loans in excess of
$300,000 certifying that their computer systems are, or soon will be, Year 2000
compliant. In addition, the Company currently requires that borrowers under new
commercial loans that it originates to certify that they are aware of the Year
2000 issue and will give all necessary attention to insure that their
information technology will be Year 2000 compliant. Because the Company's loan
portfolio to individual borrowers is diversified and its market area does not
depend significantly upon one employer or industry, the Company does not expect
any significant or prolonged Year 2000 related difficulties that will affect net
earnings or cash flow. Management believes that the Company's expenses related
to upgrading its systems and software for Year 2000 compliance will not exceed
$300,000. At June 30, 1999, the Company had spent approximately $102,000 in
connection with Year 2000 compliance. Management does not consider the
additional cost of these efforts to be significant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
An important component of Lincoln Federal's asset/liability management policy
includes examining the interest rate sensitivity of its assets and liabilities
and monitoring the expected effects of interest rate changes on its net
portfolio value.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If Lincoln Federal's
assets mature or reprice more quickly or to a greater extent than its
liabilities, Lincoln Federal's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. Conversely, if Lincoln Federal's assets
mature or reprice more slowly or to a lesser extent than its liabilities, its
net portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling interest
rates.
Management believes it is critical to manage the relationship between interest
rates and the effect on Lincoln Federal's net portfolio value ("NPV"). This
approach calculates the difference between the present value of expected cash
flows from assets and the present value of expected cash flows from liabilities,
as well as cash flows from off-balance sheet contracts. Lincoln Federal manages
assets and liabilities within the context of the marketplace, regulatory
limitations and within limits established by its Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. Because Lincoln
Federal's assets exceed $300 million, it is required to file Schedule CMR. Under
the regulation, associations which must file are required to take a deduction
(the interest rate risk capital component) from their total capital available to
calculate their risk based capital requirement if their interest rate exposure
is greater than "normal." The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets.
Presented below, as of June 30, 1999 and December 31, 1998, are analyses
performed by the OTS of Lincoln Federal's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 300 basis points and in
accordance with the proposed regulations. At June 30, 1999, 2% of the present
value of Lincoln Federal's assets was approximately $8.1 million. Because the
interest rate risk of a 200 basis point increase in market rates (which was
greater than the interest rate risk of a 200 basis point decrease) was $20.4
million at June 30, 1999, Lincoln Federal would have been required to deduct
$6.2 million from its capital if the OTS NPV methodology had been in effect.
This amount represents an increase of $2.6 million over the $3.6 million
calculated at December 31, 1998. Lincoln Federal's exposure to interest rate
risk results from a concentration of fixed rate mortgage loans in its portfolio.
<TABLE>
<CAPTION>
June 30, 1999
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change %Change NPV Ratio Change
-------- -------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
+300 bp $51,476 $31,079 38% 14.03% -629 bp
+200 bp 62,130 20,426 25% 16.34% -398 bp
+100 bp 72,781 9,774 12% 18.49% -183 bp
0 bp 82,555 20.33%
- -100 bp 89,561 7,006 8% 21.52% +120 bp
- -200 bp 92,508 9,952 12% 21.91% +158 bp
- -300 bp 94,590 12,035 15% 22.12% +180 bp
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change %Change NPV Ratio Change
-------- -------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
+300 bp $61,270 $-22,722 -27% 17.65% -483 bp
+200 bp 69,565 -14,427 -17% 19.51% -297 bp
+100 bp 77,499 -6,494 -8% 21.19% -130 bp
0 bp 83,993 22.48%
- -100 bp 87,115 3,123 +4% 23.03% +55 bp
- -200 bp 89,343 5,350 +6% 23.38% +90 bp
- -300 bp 92,108 8,116 +10% 23.83% +135 bp
</TABLE>
The chart at June 30, 1999 illustrates, for example, that a 200 basis point (or
2%) increase in interest rates would result in a $20.4 million, or 25% decrease
in the net portfolio value of Lincoln Federal's assets compared to a $14.4
million, or 17% decrease, at December 31, 1998. This hypothetical increase in
interest rates at June 30,1999 would also result in a 398 basis point, or 3.99%
decrease in the ratio of the net portfolio value to the present value of Lincoln
Federal's assets compared to a 297 basis point, or 2.97%, decrease at December
31, 1998.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
<PAGE>
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: August 12, 1999 By: /s/ T. Tim Unger
--------------- --------------------
T. Tim Unger
President and Chief Executive Officer
Date: August 12, 1999 By: /s/ John M. Baer
--------------- --------------------
John M. Baer
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's unaudited consolidated financial statements for the six months
ended June 30, 1999 and is qualified in its entirety by reference to such
statements.
</LEGEND>
<CIK> 0001070259
<NAME> Lincoln Bancorp
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