UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(MARK
ONE)
ý
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended March 31, 2008
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OR
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o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ________________ to
________________
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Commission
file number: 000-25219
LINCOLN
BANCORP
(Exact
name of registrant as specified in its charter)
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Indiana
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35-2055553
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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905
Southfield Drive, Plainfield, Indiana
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46168
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(Address
of principal executive offices)
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(Zip
Code)
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(317)
839-6539
(Registrant’s
telephone number, including area code)
[None]
(Former
name, former address and former fiscal year, if changed since last
report)
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 reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
ý
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
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Large Accelerated
Filer
o
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Accelerated Filer
x
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Non-Accelerated
Filer
o
(Do not check if a smaller reporting
company)
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Smaller Reporting
Company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
ý
The
number of shares of the Registrant’s common stock, without par value,
outstanding as of March 31, 2008 was 5,316,356.
LINCOLN
BANCORP AND SUBSIDIARY
FORM
10-Q
INDEX
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Page
No.
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FORWARD-LOOKING
STATEMENTS
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3
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PART I.
FINANCIAL INFORMATION
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4
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Item
1. Financial Statements
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4
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Consolidated
Condensed Balance Sheets
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4
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Consolidated
Condensed Statements of Operations
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5
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Consolidated
Condensed Statements of Comprehensive Income
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6
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Consolidated
Condensed Statement of Shareholders’ Equity
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7
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Consolidated
Condensed Statements of Cash Flows
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8
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Notes
to Unaudited Consolidated Condensed Financial Statements
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10
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Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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12
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Item
3. Quantitative and Qualitative Disclosures about Market
Risk
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18
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Item
4. Controls and Procedures
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19
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PART
II. OTHER INFORMATION
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Item
1. Legal Proceedings
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19
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Item
1A. Risk Factors
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19
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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19
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Item
3. Defaults Upon Senior Securities
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19
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Item
4. Submission of Matters to a Vote of Security Holders
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19
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Item
5. Other Information
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20
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Item
6. Exhibits
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20
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SIGNATURES
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21
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EXHIBIT
INDEX
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21
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FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q (“Form 10-Q”) contains statements that 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 made as of the date of this report and 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. We do not undertake to update any forward-looking statement
that we may make in this Form 10-Q.
PART
I FINANCIAL INFORMATION
Item
1. Financial Statements
LINCOLN
BANCORP AND SUBSIDIARY
Consolidated
Condensed Balance Sheets
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March
31,
2008
(Unaudited)
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December 31,
2007
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Assets
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Cash
and due from banks
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$
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3,390,848
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$
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3,935,172
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Federal
funds sold
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1,864,208
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1,983,662
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Interest-bearing
demand deposits in other banks
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7,232,678
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7,196,435
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Cash
and cash equivalents
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12,487,734
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13,115,269
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Investment
securities available for sale
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135,778,900
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150,405,859
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Loans
held for sale
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3,002,752
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3,956,914
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Loans,
net of allowance for loan losses of $7,987,653 and
$6,581,860
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627,196,162
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635,834,260
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Premises
and equipment
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17,885,160
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18,086,416
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Investments
in limited partnerships
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1,218,965
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1,237,498
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Federal
Home Loan Bank stock
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8,808,200
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8,808,200
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Interest
receivable
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4,485,810
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5,133,487
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Goodwill
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23,906,877
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23,906,877
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Core
deposit intangible
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2,048,338
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2,168,978
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Cash
value of life insurance
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21,255,097
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21,051,945
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Other
assets
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6,352,997
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5,608,162
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Total
assets
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$
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864,426,992
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$
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889,313,865
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Liabilities
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Deposits
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Noninterest-bearing
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$
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47,025,561
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$
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45,955,056
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Interest-bearing
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590,284,965
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610,449,489
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Total
deposits
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637,310,526
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656,404,545
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Securities
sold under repurchase agreements
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16,497,603
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16,766,968
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Borrowings
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103,390,420
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109,177,208
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Interest
payable
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1,861,815
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2,310,627
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Other
liabilities
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6,843,115
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5,668,732
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Total
liabilities
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765,903,479
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790,328,080
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Commitments
and Contingencies
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Shareholders’
Equity
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Common
stock, without par value
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Authorized
- 20,000,000 shares
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Issued
and outstanding - 5,316,356 and 5,312,981 shares
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61,772,509
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61,720,988
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Retained
earnings
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39,682,588
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40,190,154
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Accumulated
other comprehensive loss
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(512,114
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)
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(434,297
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)
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Unearned
employee stock ownership plan (ESOP) shares
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(2,419,470
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)
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(2,491,060
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)
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Total
shareholders’ equity
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98,523,513
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98,985,785
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Total
liabilities and shareholders’ equity
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$
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864,426,992
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$
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889,313,865
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See notes
to consolidated condensed financial statements.
LINCOLN
BANCORP AND SUBSIDIARY
Consolidated
Condensed Statements of Operations
(Unaudited)
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Three
Months Ended
March
31,
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Interest
Income and Dividends
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Loans
receivable, including fees
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$
|
10,504,945
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$
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10,950,120
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Investment
securities
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1,891,718
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1,975,283
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Federal
funds sold
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20,719
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9,775
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Deposits
with financial institutions
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4,975
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175,259
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Dividend
income
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109,861
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114,857
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Total
interest and dividend income
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12,532,218
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13,225,294
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Interest
Expense
|
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|
|
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Deposits
|
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|
5,422,398
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|
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|
6,685,925
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Short-term
borrowings
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|
96,387
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159,696
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Federal
Home Loan Bank advances
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1,175,168
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1,019,056
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Total
interest expense
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6,693,953
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|
7,864,677
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Net
Interest Income
|
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|
5,838,265
|
|
|
|
5,360,617
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Provision
for loan losses
|
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|
1,507,049
|
|
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|
207,000
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|
Net
Interest Income After Provision for Loan Losses
|
|
|
4,331,216
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|
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5,153,617
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Other
Income
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
641,680
|
|
|
|
541,796
|
|
|
Net
realized and unrealized gains (losses) on loans held for
sale
|
|
|
456,699
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|
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|
(1,006,279
|
)
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|
Net
realized and unrealized gains (losses) on securities
|
|
|
70,126
|
|
|
|
(418,723
|
)
|
|
Point
of sale income
|
|
|
262,632
|
|
|
|
193,687
|
|
|
Loan
servicing fees
|
|
|
93,936
|
|
|
|
76,930
|
|
|
Increase
in cash value of life insurance
|
|
|
203,152
|
|
|
|
212,245
|
|
|
Other
income
|
|
|
217,674
|
|
|
|
219,949
|
|
|
Total
other income
|
|
|
1,945,899
|
|
|
|
(180,395
|
)
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|
Other
Expenses
|
|
|
|
|
|
|
|
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|
Salaries
and employee benefits
|
|
|
3,354,100
|
|
|
|
3,095,864
|
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|
Net
occupancy expenses
|
|
|
645,002
|
|
|
|
545,253
|
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|
Equipment
expenses
|
|
|
410,726
|
|
|
|
425,969
|
|
|
Data
processing fees
|
|
|
664,872
|
|
|
|
531,897
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|
|
Professional
fees
|
|
|
213,086
|
|
|
|
144,237
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|
Director
and committee fees
|
|
|
41,287
|
|
|
|
116,476
|
|
|
Advertising
and business development
|
|
|
228,672
|
|
|
|
281,977
|
|
|
Core
deposit intangible amortization
|
|
|
120,640
|
|
|
|
137,230
|
|
|
Other
expenses
|
|
|
670,996
|
|
|
|
658,496
|
|
|
Total
other expenses
|
|
|
6,349,381
|
|
|
|
5,937,399
|
|
|
Loss
Income Before Income Tax
|
|
|
(72,266
|
)
|
|
|
(964,177
|
)
|
|
Income
ta
x
benefit
|
|
|
(253,546
|
)
|
|
|
(539,053
|
)
|
|
Net
Income (Loss)
|
|
$
|
181,280
|
|
|
$
|
(425,124
|
)
|
|
Basic
Earnings (Loss) per Share
|
|
$
|
0.04
|
|
|
$
|
(0.08
|
)
|
|
Diluted
Earnings (Loss) per Share
|
|
$
|
0.04
|
|
|
$
|
(0.08
|
)
|
|
Dividends
per Share
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
See notes
to consolidated condensed financial statements.
LINCOLN
BANCORP AND SUBSIDIARY
Consolidated
Condensed Statements of Comprehensive Income
(Unaudited)
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
181,280
|
|
|
$
|
(425,124
|
)
|
|
Other
comprehensive income (loss), 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 $(44,880) and $122,634
|
|
|
(69,968
|
)
|
|
|
275,418
|
|
|
Less:
Reclassification adjustment for realized gains (losses) included in net
income, net of tax expense (benefit) of $27,665 and
$(161,906)
|
|
|
42,461
|
|
|
|
(256,817
|
)
|
|
Reclassification
adjustment for amortization of additional pension liability recognized in
expense under FAS 158, net of tax benefit of $22,693 and
$3,748
|
|
|
34,612
|
|
|
|
5,715
|
|
|
|
|
|
(77,817
|
)
|
|
|
537,950
|
|
|
Comprehensive
income
|
|
$
|
103,463
|
|
|
$
|
112,826
|
|
See notes
to consolidated condensed financial statements.
LINCOLN
BANCORP AND SUBSIDIARY
Consolidated
Condensed Statement of Shareholders’ Equity
For the
Three Months Ended March 31, 2008
(Unaudited)
|
|
|
Common
Stock
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Amount
|
|
Retained
Earnings
|
|
|
|
Unearned
ESOP S
hares
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2008
|
|
|
5,312,981
|
|
$
|
61,720,988
|
|
$
|
40,190,154
|
|
$
|
(434,297
|
)
|
$
|
(2,491,060
|
)
|
$
|
98,985,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
|
|
|
|
|
|
181,280
|
|
|
|
|
|
|
|
|
181,280
|
|
|
Unrealized
losses on securities, net of reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(112,429
|
)
|
|
|
|
|
(112,429
|
)
|
|
Stock
options exercised
|
|
|
3,375
|
|
|
19,541
|
|
|
|
|
|
|
|
|
|
|
|
19,541
|
|
|
Stock
option expense
|
|
|
|
|
|
15,138
|
|
|
|
|
|
|
|
|
|
|
|
15,138
|
|
|
ESOP
shares earned
|
|
|
|
|
|
|
|
|
21,334
|
|
|
|
|
|
71,590
|
|
|
92,924
|
|
|
Amortization
of unearned compensation expense
|
|
|
|
|
|
16,842
|
|
|
3,243
|
|
|
|
|
|
|
|
|
20,085
|
|
|
Amortization
of additional pension liability recognized under FAS 158
|
|
|
|
|
|
|
|
|
|
|
|
34,612
|
|
|
|
|
|
34,612
|
|
|
Cash
dividends ($.14 per share)
|
|
|
|
|
|
|
|
|
(713,423
|
)
|
|
|
|
|
|
|
|
(713,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
March 31, 2008
|
|
|
5,316,356
|
|
$
|
61,772,509
|
|
$
|
39,682,588
|
|
$
|
(512,114
|
)
|
$
|
(2,419,470
|
)
|
$
|
98,523,513
|
|
See notes
to consolidated condensed financial statements.
LINCOLN
BANCORP AND SUBSIDIARY
Consolidated
Condensed Statements of Cash Flows
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
181,280
|
|
|
$
|
(425,124
|
)
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
1,507,049
|
|
|
|
207,000
|
|
|
Investment
securities accretion, net
|
|
|
(1,057
|
)
|
|
|
5,818
|
|
|
Investment
securities (gains) losses
|
|
|
(70,126
|
)
|
|
|
418,723
|
|
|
Loans
originated for sale
|
|
|
(25,970,077
|
)
|
|
|
(18,757,079
|
)
|
|
Proceeds
from sale of loans and payments received on loans held for
sale
|
|
|
27,339,119
|
|
|
|
20,839,089
|
|
|
Net
realized and unrealized (gains) losses on loans held for
sale
|
|
|
(456,699
|
)
|
|
|
1,006,279
|
|
|
Amortization
of net loan origination costs
|
|
|
162,586
|
|
|
|
118,486
|
|
|
Amortization
of purchase accounting adjustments
|
|
|
94,194
|
|
|
|
79,228
|
|
|
Depreciation
and amortization
|
|
|
433,709
|
|
|
|
442,578
|
|
|
Amortization
of unearned compensation expense
|
|
|
20,085
|
|
|
|
24,586
|
|
|
ESOP
shares earned
|
|
|
92,924
|
|
|
|
145,482
|
|
|
Net
change in:
|
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
|
647,677
|
|
|
|
105,963
|
|
|
Interest
payable
|
|
|
(448,812
|
)
|
|
|
177,964
|
|
|
Other
adjustments
|
|
|
(3,913
|
)
|
|
|
(34,929
|
)
|
|
Net
cash provided by operating activities
|
|
|
3,527,939
|
|
|
|
4,354,064
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
Purchases
of securities available for sale
|
|
|
(5,684,480
|
)
|
|
|
(2,938,919
|
)
|
|
Proceeds
from maturities of securities available for sale
|
|
|
20,197,649
|
|
|
|
3,306,399
|
|
|
Net
change in loans
|
|
|
6,891,909
|
|
|
|
(11,127,986
|
)
|
|
Purchases
of property and equipment
|
|
|
(233,719
|
)
|
|
|
(1,464,299
|
)
|
|
Proceeds
from sales of foreclosed real estate
|
|
|
8,615
|
|
|
|
187,929
|
|
|
Other
investing activities
|
|
|
--
|
|
|
|
2,801
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
21,179,974
|
|
|
|
(12,034,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
Net
change in
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing,
interest-bearing demand, money market and savings deposits
|
|
|
(9,670,900
|
)
|
|
|
12,259,065
|
|
|
Certificates
of deposit
|
|
|
(9,423,119
|
)
|
|
|
11,423,600
|
|
|
Short
term borrowings
|
|
|
(14,152,602
|
)
|
|
|
(1,617,851
|
)
|
|
Proceeds
from FHLB advances
|
|
|
18,100,000
|
|
|
|
9,500,000
|
|
|
Repayment
of FHLB advances
|
|
|
(10,000,000
|
)
|
|
|
(26,050,000
|
)
|
|
Dividends
paid
|
|
|
(712,951
|
)
|
|
|
(707,105
|
)
|
|
Purchase
of common stock
|
|
|
--
|
|
|
|
(18,750
|
)
|
|
Exercise
of stock options
|
|
|
19,541
|
|
|
|
396,638
|
|
|
Net
change in advances by borrowers for taxes and insurance
|
|
|
504,583
|
|
|
|
797,214
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(25,335,448
|
)
|
|
|
5,982,811
|
|
|
|
|
Three
Months Ended
March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
(627,535
|
)
|
|
|
(1,697,200
|
)
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
13,115,269
|
|
|
|
18,408,717
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
12,487,734
|
|
|
$
|
16,711,517
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Cash Flows and Supplementary Information
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
7,142,765
|
|
|
$
|
7,686,713
|
|
|
Income
tax paid
|
|
|
100,000
|
|
|
|
--
|
|
|
Loan
balances transferred to foreclosed real estate
|
|
|
99,449
|
|
|
|
114,578
|
|
|
Transfer
of loans to held for sale loans - net
|
|
|
--
|
|
|
|
44,198,542
|
|
|
Transfer
of investment securities available for sale to trading
securities
|
|
|
--
|
|
|
|
29,718,011
|
|
See notes
to consolidated condensed financial statements.
LINCOLN
BANCORP AND SUBSIDIARY
Notes to
Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of
Presentation
The
consolidated financial statements include the accounts of Lincoln Bancorp (the
“Company”), its wholly owned subsidiary, Lincoln Bank, a state chartered
commercial 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, 2007 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, 2008 and for the three
months ended March 31, 2007, 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, 2008 are not necessarily
indicative of the results that may be expected for the entire year. The
consolidated condensed balance sheet of the Company as of December 31, 2007 has
been derived from the audited consolidated balance sheet of the Company as of
that date.
Reclassifications
of certain amounts in the 2007 consolidated financial statements have been made
to conform to the 2008 presentation.
Note 2: Earnings (Loss) 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
March
31, 2008
|
|
Three
Months Ended
March
31 , 2007
|
|
|
|
Income
|
|
Weighted
Average Shares
|
|
Per
Share Amount
|
|
Loss
|
|
Weighted
Average Shares
|
|
Per
Share Amount
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders
|
|
$
|
181,280
|
|
5,041,438
|
|
$
|
.
04
|
|
$
|
(425,124)
|
|
5,032,649
|
|
$
|
(.
08)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive RRP awards and stock options
|
|
|
|
|
30,216
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) available to common shareholders and assumed
conversions
|
|
$
|
181,280
|
|
5,071,654
|
|
$
|
.
04
|
|
$
|
(425,124)
|
|
5,032,649
|
|
$
|
(.
08)
|
Options
to purchase 289,796 shares of common stock at exercise prices of $13.89 to
$19.40 per share were outstanding at March 31, 2008, but were not included in
the computation of diluted earnings per share because the options were
anti-dilutive.
Options
to purchase 682,372 shares of common stock at exercise prices of $7.32 to $18.75
per share were outstanding at March 31, 2007, but were not included in the
computation of diluted earnings per share because the options were
anti-dilutive.
Note 3: Disclosures About
Fair Value of Assets and Liabilities
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157,
Fair Value
Measurements
(FAS 157). FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FAS 157 has been applied prospectively
as of the beginning of the period.
FAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. FAS 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair
value:
|
|
Level 1
|
Quoted
prices in active markets for identical assets or
liabilities
|
|
|
Level 2
|
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or
liabilities
|
|
|
Level 3
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities
|
Following
is a description of the valuation methodologies used for instruments measured at
fair value on a recurring basis and recognized in the accompanying balance
sheet, as well as the general classification of such instruments pursuant to the
valuation hierarchy.
Available-for-sale
Securities
Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. If quoted
market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted
cash flows. Level 2 securities include certain collateralized
mortgage obligations, mortgage backed securities, corporate trust
preferred notes and certain municipal securities. In
certain cases where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy and include certain trust preferred
stock pools and structured government agency securities which are less liquid
securities.
Loans
Held for Sale
Loans
held for sale are initially recorded at cost and evaluated for lower of cost or
fair value at each reporting period. As of March 31, 2008 the fair value of
loans held for sale approximated cost and as such no fair value disclosure is
included on these loans in the tables below.
The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying balance sheet measured at fair value on a
recurring basis and the level within the FAS 157 fair value hierarchy in which
the fair value measurements fall at March 31, 2008.
|
|
|
|
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
|
Fair
Value
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
135,778,900
|
|
|
$
|
-0-
|
|
|
$
|
128,683,328
|
|
|
$
|
7,095,572
|
|
The
following is a reconciliation of the beginning and ending balances of recurring
fair value measurements recognized in the accompanying balance sheet using
significant unobservable (Level 3) inputs:
|
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
7,185,799
|
|
|
|
|
|
|
|
|
|
|
Total
realized and unrealized gains and losses
|
|
|
|
|
|
|
Amortization
included in net income
|
|
|
(4,234
|
)
|
|
|
Unrealized
losses included in other comprehensive income
|
|
|
(78,900
|
)
|
|
|
Purchases,
issuances and settlements including paydowns
|
|
|
(7,093
|
)
|
|
|
Transfers
in and/or out of Level 3
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
7,095,572
|
|
|
|
|
|
|
|
|
|
|
Total
gains or losses for the period included in net income attributable to the
change in unrealized gains or losses related to assets and liabilities
still held at the reporting date
|
|
$
|
-0-
|
|
Realized
and unrealized gains and losses included in net income for the period from
January 1, 2008, through March 31, 2008, are reported in the consolidated
statements of income as follows:
|
|
|
|
Operating
Income
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gains and losses
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
Change
in unrealized gains or losses relating to assets still held at the balance
sheet date
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
Following
is a description of the valuation methodologies used for instruments measured at
fair values on a non-recurring basis and recognized in the accompanying balance
sheet, as well as the general classification of such instruments pursuant to the
valuation hierarchy.
Impaired
Loans
Loan
impairment is reported when full payment under the contractual loan terms is not
expected. Impaired loans are carried at the present value of estimate
future cash flows using the loan’s existing rate, or the fair value of
collateral if the loan is collateral dependent. Loans are evaluated for
impairment quarterly. During the first quarter of 2008, the Bank evaluated $8.6
million of loans for impairment and determined specific impairment on these
loans totaling $2.0 million. Certain of these impaired loans were impaired for
the first time, partially charged-off or re-evaluated, resulting in a remaining
balance for these loans, net of specific allowance, of $3.9 million. This
valuation would be considered Level 3. Level 3 inputs for impaired loans
included current and prior appraisals, discounting factors, the borrowers’
financial results and other considerations including expected cash
flows.
Mortgage
Servicing rights
Mortgage
servicing rights are initially recorded at fair value and are subsequently
reported at amortized cost and periodically evaluated for impairment as
described in (SFAS) No. 156,
Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140.
New mortgage
servicing rights recorded during the current accounting period are recorded at
fair value and are disclosed as a nonrecurring measurement.
Mortgage
servicing rights recorded as an asset and into income during the three months
ended March 31, 2008 totaled $42,000. Mortgage servicing rights do
not trade in an active, open market with readily observable
prices. Accordingly, fair values of new mortgage servicing rights are
estimated using discounted cash flow models. Due to the nature of the
valuation inputs, recording initial mortgage servicing rights are classified
within Level 3 of the hierarchy.
Note
4
: Recent Accounting
Pronouncements
In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements”. This statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
standard is effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued Staff Position (FSP) 157-2,
Effective Date of FASB Statement No. 157. This FSP delays the
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The impact of
the adoption was not material.
In
February 2006, FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Liabilities” (“SFAS 159”). Adoption of SFAS 159 is required
for January 1, 2008. This statement allows, but does not require, companies to
record certain assets and liabilities at their fair value. The fair value
determination is made at the instrument level, so similar assets or liabilities
could be partially accounted for using the historical cost method, while other
similar assets or liabilities are accounted for using the fair value method.
Changes in fair value are recorded through the income statement in subsequent
periods. The statement provides for a one time opportunity to transfer existing
assets and liabilities to fair value at the point of adoption with a cumulative
effect adjustment recorded against equity. After adoption, the election to
report assets or liabilities at fair value must be made at the point of their
inception. The adoption of this statement did not have a material impact on the
Corporation’s consolidated financial statements.
Financial
Accounting Standards Board Statement No. 141 (SFAS 141R), “Business Combinations
(Revised 2007),” was issued in December 2007 and replaces SFAS 141 which applies
to all transactions and other events in which one entity obtains control over
one or more other businesses. SFAS 141R requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets,
liabilities and any non-controlling interest in the acquiree at fair value as of
the acquisition date. Contingent consideration is required to be
recognized and measured at fair value on the date of acquisition rather than at
a later date when the amount of that consideration may be determinable beyond a
reasonable doubt. This fair value approach replaces the cost
allocation process required under SFAS 141 whereby the cost of an acquisition
was allocated to the individual asset acquired and liabilities assumed based on
their estimated fair value. SFAS 141R requires acquirers to expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed.
Under
SFAS 141R, the requirements of SFAS 146, “Accounting for Costs Associated with
Exit or Disposal Activities,” would have to be met in order to accrue for a
restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting. Instead, that contingency would be
subject to the probable and estimable recognition criteria under SFAS 5,
“Accounting for Contingencies.” The Company is evaluating the
requirements of SFAS 141R to determine if it will have a significant impact on
the Company’s financial condition or results of operations. This statement is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008 with early adoption prohibited.
Financial
Accounting Standards Board Statement No. 160 (SFAS 160), “Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB Statement No.
51,” was issued in December 2007 and establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as a
minority interest, is an ownership interest in the consolidated entity that
should be reported as a component of equity in the consolidated financial
statements. Among other requirements, SFAS 160 requires consolidated
net income to be reported at amounts that are attributable to both the parent
and the non-controlling interest. It also requires disclosure, on the
face of the consolidated income statement, of the amounts of consolidated net
income attributable to the parent and to the non-controlling
interest. SFAS 160 is effective for the Company on January 1, 2009
and is not expected to have a significant impact on the Company’s financial
statements.
Financial
Accounting Standards Board Statement No. 161 (SFAS 161), “Disclosures About
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133,” was issued in March 2008 and amends and expands the disclosure
requirements of SFAS 133 to provide greater transparency about (i) how and why
an entity uses derivative instruments, (ii) how derivative instruments and
related hedge items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations and cash
flows. To meet those objectives, SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS 161 is effective for the Company on
January 1, 2009 and is not expected to have a significant impact on the
Company’s financial statements.
Item
2: Management’s Discussion and Analysis of Financial Condition and Results of
Operations
General
The
Company was organized in September 1998. On December 30, 1998, it acquired the
common stock of Lincoln upon the conversion of Lincoln from a federal mutual
savings bank to a federal stock savings bank. The Bank converted from a federal
thrift charter to a state commercial bank charter on November 1,
2006.
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. As noted above, the Bank converted from a federal thrift charter
to a state commercial bank charter on November 1, 2006, and provides full
banking services in a single significant business segment. As a state chartered
bank, the Bank is subject to regulation by the Department of Financial
Institutions, State of Indiana and the Federal Deposit Insurance
Corporation.
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. The Bank also has 2 loan production
offices located in Carmel and Greenwood, Indiana. 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
by commercial real estate, inventory, accounts receivable as well as first
mortgage liens on one- to four-family residential real estate. Lincoln’s deposit
accounts are insured up to applicable limits by the Deposit 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 Bloomington Housing Associates, L.P. (“BHA”). 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, Citizens Loan and Service Corporation (“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, FDIC
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. As noted above,
effective November 1, 2006, the Bank changed its charter from a federal savings
bank charter to an Indiana commercial bank charter. Unlike federal savings
banks, commercial banks are not permitted to participate in real estate
development joint ventures. Under terms of the approval granted by the Federal
Reserve Bank of Chicago the Company agreed to cause Lincoln Bank to conform the
existing direct and indirect nonbanking activities and investments conducted by
CLSC, including by divestiture if necessary, to the requirements of the Bank
Holding Company Act within two years of the consummation of the charter
conversion.
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.
As noted
in our 2007 Annual Report on Form 10-K, because we focus our business in central
Indiana, an economic slowdown in this area could hurt our business. An economic
slowdown could have the following consequences:
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·
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Loan
delinquencies may increase;
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Problem
assets and foreclosures may increase;
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Demand
for the products and services of Lincoln Bank may decline;
and
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Collateral
for loans made by Lincoln Bank may decline in value, in turn reducing
customers’ borrowing power, and making existing loans less
secure.
|
The
Company has not experienced many of the challenges facing the banking industry
as a whole due in large part to its policy of not investing in sub-prime
mortgage loans or any (so-called “off-balance sheet”) activity related to the
structuring and sale of such loans. As the economy worsens some of the
Company’s customers will experience stress, in some cases severe enough to
impact their ability to repay loans in a timely manner. Our plan is
to work closely with our customers to help them work through the stress if
possible and, where necessary, to liquidate the credit. Our policy of
requiring prudent underwriting and the fact that Midwest property values have
not been as severely impacted as other areas of the country should help mitigate
the level of losses that the Company may incur.
Critical
Accounting Policies
Note 1 to
the consolidated financial statements contains a summary of the Company’s
significant accounting policies presented on pages 31 through 33 of the Annual
Report to Shareholders for the year ended December 31, 2007, which was filed on
Form 10-K with the Securities and Exchange Commission on March 14, 2008. 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 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. The Company estimates probable
losses from individual reviews of specific loans and probable losses from
historical loss rates. Also, factors affecting probable losses resulting from
economic or environmental factors that may not be captured 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. 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 the 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. See Note 3 for a
discussion of (SFAS) No. 156,
Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 14
0
.
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 $864.4 million at March 31, 2008, a decrease from December 31, 2007 of
$24.9 million. The decrease in assets occurred in net loans including
loans held for sale, down $9.6 million and investment securities available for
sale, down $14.6 million. Investments declined as several callable
securities were called as interest rates declined. The proceeds of these
securities were used to reduce higher cost borrowings and certificates of
deposit. The decline in loans occurred in real estate mortgages, down
$8.8 million and consumer loans, down $4.7 million. We experienced growth of
$5.3 million in commercial loans. The increase in allowance for
loan losses accounted for $1.4 million of the decline in net loans. Generally,
the Bank continues to sell the majority of our residential mortgage loan
production in the secondary market.
Total
deposits were $637.3 million at March 31, 2008, a decline of $19.1 million since
December 31, 2007. Our public funds money market product balances
declined by $29.4 million as year end balances in these accounts were
distributed by the public fund entities. In addition, public fund certificates
of deposit and consumer certificates declined slightly, by $2.6 million and $6.8
million respectively from December 31, 2007. These declines were partially
offset by increases in our interest bearing demand products, up $7.3 million,
our non-public funds money market accounts, up $5.2 million and our savings
account products and other, up $6.1 million. Our growth in interest bearing
demand continues as we introduced new products in combination with a direct mail
and premium campaign. Generally, this program has worked well in
creating new relationships with the Bank. Noninterest bearing deposits increased
by $1.1 million from December 31, 2007 to $47.0 million at March 31, 2008.
Securities sold under agreement to repurchase were $16.5 million and borrowings
were $103.4 million at March 31, 2008. Both declined by $.3 million and $5.8
million, respectively, from year end 2007. The decline in borrowings was the
result of repayment of short-term Federal Home Loan Bank advances from cash as a
result of securities maturities and calls.
Shareholders’
equity declined by $.5 million from $99.0 million at December 31, 2007 to $98.5
million at March 31, 2008. The majority of the decline was the result
of dividends paid out in excess of earnings. Accumulated other comprehensive
loss worsened as unrealized losses on available securities increased.
Management’s review of available-for-sale securities in a loss position
determined that the impairments were not other-than-temporary impairment because
the fluctuation in values was primarily the result of changes in interest
rates. As of March 31, 2008 management has both the ability and the intent
to hold these securities until recovery. Management does classify these
securities as “available-for-sale” under the definition of Statement of
Financial Accounting Standards No. 115,
Accounting for Certain Investments
in Debt and Equity Securities
so certain circumstances, such as changes
in market interest rates and related changes in the security's prepayment risk,
needs for liquidity (for example, due to the withdrawal of deposits, increased
demand for loans), changes in the availability of and the yield on alternative
investments or changes in funding sources and terms could change management’s
assessment of its ability and intent to hold these securities.
Comparison
of Operating Results for the Three Months Ended March 31, 2008 and
2007
Net
income for the quarter ended March 31, 2008 was $181,000, or $.04 for both basic
and diluted earnings per share. This compared to a net loss for the comparable
period in 2007 of $425,000, or $.08 loss for basic and $.08 loss for diluted
earnings per share.
Net
interest income for the first quarter of 2008 was $5,838,000 compared
to $5,361,000 for the same period in 2007. Net interest margin improved to 2.90%
for the three-month period ended March 31, 2008 compared to 2.60% for the same
period in 2007. The average yield on earning assets declined only 20 basis
points for the first quarter of 2008 compared to the same period in 2007 while
the average cost of interest-bearing liabilities declined 59 basis points in
2008 compared to 2007. Interest rate spread increased from 2.14% for
the quarter ending March 31, 2007 to 2.53% for the like quarter in 2008. Falling
rates have allowed the Bank to benefit from a liability sensitive
position. In addition, a more “normal”, positively sloped yield curve
has allowed the Bank to support slightly longer asset maturities with cheaper,
somewhat shorter term, liabilities. Our deposit environment has been one where
competition has kept certain types of interest bearing deposit account costs
higher than wholesale funding that has been available. We have
deliberately reduced certain higher cost funding sources, primarily public fund
certificates and certain single service customer certificate relationships in
areas where competition seems irrational. As noted above, maturities of
investments, a slight decline in loans and growth in certain other deposit
categories has provided the funding for this strategy.
The
Bank’s provision for loan losses for the first quarter of 2008 was $1,507,000
million compared to $207,000 for the same period in 2007. The increase in the
provision expense was primarily the result of downgrades of over a dozen
relationships totaling over $30 million. These loans were primarily development
and commercial real estate loans affected by the downturn in the economy. The
determination for these downgrades followed review of the borrower’s financial
information. At this time, no charge-off’s are deemed necessary for these
credits and certain of the credits are still performing. Non-performing loans to
total loans at March 31, 2008 were 1.43% compared to 1.22% at December 31, 2007,
while non-performing assets to total assets were 1.13% at March 31, 2008
compared to 0.95% at December 31, 2007. The allowance for loan losses as a
percent of loans was 1.25% at March 31, 2008 and 1.02% at December 31, 2007.
During the first quarter of 2008, the Bank incurred $101,000 in net charged off
loans compared to net charged off loans in the same quarter of 2007 totaling
$107,000. Although management believes the allowance for loan losses is
appropriate to absorb probable future losses inherent in the portfolio as of
March 31, 2008, further deterioration in either the economy or our borrower’s
individual financial condition may necessitate additional provision expense in
the future.
Other
income for the three months ended March 31, 2008 was $1,946,000 compared to a
loss of $180,000 for the same quarter of 2007 or an increase of
$2,126,000. The 2007 results were affected by a restructuring that
began in March of 2007. This restructuring resulted in certain
mortgage loans and securities being transferred to loans held for sale and
trading securities. These transfers resulted in a mark to market
charge to net realized and unrealized losses on loans held for sale of
$1,327,000 for the mortgage loans and net realized and unrealized losses on sale
of securities of $419,000 for the securities. Excluding these two charges
noninterest income would have totaled $1,566,000 for the period ending March 31,
2007. Service charges on deposit accounts and point of sale income totaled
$642,000 and $263,000, respectively for March 31, 2008. This resulted in
increases of $100,000 and $69,000 respectively, when compared to the same period
last year. As noted above, a new consumer marketing program was instituted in
early 2007 resulting in additional transaction accounts that have increased
these income sources. Cash value of life insurance income was
$203,000 for the first quarter of 2008. This was a decrease of $9,000 from 2007
to 2008 as a result of decreased yields on the variable rate
policies. Excluding the losses associated with the restructuring net
realized gains on loans held for sale would have totaled $321,000 for the three
months ended March 31, 2007. This compares to the first quarter of 2008 gains on
sale of loans held for sale of $457,000, an increase of $136,000 or
42%. This increase is the result of increased volume of loans sold as
well as slightly improved pricing. There were no realized gains or losses on
sale of securities for the first quarter of 2007 excluding the restructuring.
The first quarter of 2008 gains on sales of securities totaled $70,000, which
was primarily the result of called securities that had been carried at a
discount.
Other
expenses were $6,349,000 for the three months ended March 31, 2008, a $412,000
increase compared to $5,937,000 for the same three months of
2007. The increase in salary and benefits of $258,000 to $3,354,000
from the three months ended March 31, 2007 to the three months ended March 31,
2008 included an increase in salaries of $171,000. This increase represented
normal annual increases as well as the addition of several new positions in key
areas, including Business Development, Brokerage, Mortgage Lending and
Commercial Lending. Full-time equivalent employees were 239 for the first
quarter of 2008 compared to 235 for the same quarter in 2007. Net occupancy
expenses were $645,000 for the first quarter of 2008, an increase of $100,000
over the same three month period in 2007. Two new offices that were opened
during 2007 and higher real estate taxes make up most of this increase.
Data processing fees totaled $665,000 for the first quarter of 2008 or
$133,000 more than the same quarter in 2007 as a result of new services as well
as additional activity relating to new deposit accounts opened. Advertising and
business development expenses declined from $282,000 for the first quarter of
2007 to $229,000 in the quarter ended March 31, 2008. Much of this decline is
due to the timing of certain campaigns as well as an increased focus on cost
control in this area. Income tax expense for the three months ended
March 31, 2008 was a benefit of $254,000. This compares to a benefit of $539,000
for the period ended March 31, 2007. The difference between the actual rate
recorded and the statutory rates was primarily due to permanent, non-taxable
income recorded such as qualifying municipal interest and increases in cash
value of life insurance.
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
$22.5 million and $13.7 million of loans classified as special mention as of
March 31, 2008 and December 31, 2007, respectively. In addition, Lincoln had
$14.3 million and $8.5 million of loans classified as substandard at March 31,
2008 and December 31, 2007, respectively. Loans classified as doubtful totaled
$.3 million at March 31, 2008 and $.7 million at December 31, 2007. At March 31,
2008 and December 31, 2007 there were no loans classified as
loss. The increases in classified loans occurred after loan officers
of the Bank reviewed annual financial statements of certain of its loan
customers as they became available and determined that the customers’ financial
condition had declined and warranted downgrades of the credits. These
loans were primarily development and commercial real estate loans affected by
the downturn in the economy. Loans that were downgraded totaled over $30
million and spanned over a dozen relationships. Many of these loans
are still performing. However, the downgraded credits affected the outcome of
the Bank’s consistently applied methodology for determining loan loss allowances
and resulted in a required increase to the allowance for loan losses.
Nonperforming assets of the Bank increased only $1.3 million from December 31,
2007.
At March
31, 2008, and December 31, 2007, non-accrual loans were $8.8 million and $7.7
million respectively. At March 31, 2008 and December 31, 2007, respectively,
accruing loans delinquent 90 days or more totaled $280,000 and $192,000. At
March 31, 2008 and December 31, 2007, the allowance for loan losses was $8.0
million and $6.6 million, respectively or 1.25% of total loans including loans
held for sale at March 31, 2008 and 1.02% at December 31, 2007.
Liquidity
and Capital Resources
The
Company’s primary sources of funds are deposits, borrowings and the proceeds
from principal and interest payments on loans. In addition, securities
maturities and amortization of mortgage-backed securities are structured to
provide a source of liquidity. Sales of loans and available for sale securities
can also provide liquidity should the need arise. While maturities and scheduled
amortization of loans and mortgage-backed securities are a predictable source of
funds, deposit flows and mortgage and mortgage-backed securities prepayments are
greatly influenced by general interest rates, economic conditions and
competition. Liquidity management is both a daily and long-term function of the
Company’s management strategy. In the event that the Company should require
funds beyond its ability to generate them internally, additional funds are
available through the use of FHLB advances, brokered deposits and federal funds
purchased.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the subsidiary bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined).
Management
believes, as of March 31, 2008, that the Company and the Bank meet all capital
adequacy requirements to which they are subject. The Company and Bank’s actual
capital amounts and ratios under the state charter are presented in the
following table.
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For
Capital Adequacy Purposes
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To
Be Well Capitalized Under Prompt Corrective Action
Provisions
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As
of March 31, 2008
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Total
Capital (to Risk-Weighted Assets)
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Consolidated
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$
|
80,406
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11.1
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%
|
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$
|
57,983
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8.0
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%
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N/A
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Bank
|
|
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80,809
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|
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11.2
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|
|
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57,874
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8.0
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$
|
72,343
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|
|
10.0
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%
|
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|
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|
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Tier
I Capital (to Risk-Weighted Assets)
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Consolidated
|
|
|
72,417
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|
|
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10.0
|
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28,991
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4.0
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N/A
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Bank
|
|
|
72,821
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|
|
|
10.1
|
|
|
|
28,937
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4.0
|
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|
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43,406
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6.0
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|
|
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|
Tier
I Capital (to Average Assets)
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|
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Consolidated
|
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|
72,417
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8.5
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34,136
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4.0
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|
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N/A
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|
Bank
|
|
|
72,821
|
|
|
|
8.6
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|
|
|
34,070
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4.0
|
|
|
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42,587
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5.0
|
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Other
The
Securities and Exchange Commission maintains a Web site that contains reports,
proxy information statements, and other information regarding registrants that
file electronically with the Commission, including the Company. The address is
http://www.sec.gov.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
An
important component of Lincoln Bank’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 the economic value
of its assets. 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 Bank’s assets mature or reprice more quickly or to a greater extent than
its liabilities, economic 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 Bank’s assets mature or reprice more
slowly or to a lesser extent than its liabilities, economic value and net
interest income would tend to decrease during periods of rising interest rates
but increase during periods of falling interest rates.
The
Bank’s board of directors has delegated responsibility for the day-to-day
management of interest rate risk to the Asset/Liability (“ALCO”) Committee. The
ALCO Committee meets monthly to manage and review Lincoln Bank’s assets and
liabilities. The ALCO Committee reviews interest rates for deposits and loan
product pricing. The committee considers the Bank’s interest rate risk position,
liquidity needs and competitive pricing.
Presented
below, as of March 31, 2008 is an analysis showing the present value impact of
changes in interest rates, assuming a comprehensive mark-to-market environment.
Noninterest sensitive assets and liabilities such as cash, accounts receivable,
fixed assets, and other liabilities are excluded from the analysis.
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Economic
Value
|
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Present
Value at March 31, 2008
Change
in Interest Rates of:
|
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-2%
|
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-1%
|
|
Current
|
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+1%
|
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+2%
|
|
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(In
Thousands)
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Interest
Sensitive Assets
|
|
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|
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|
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|
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Investments
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$
|
148,590
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$
|
146,544
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$
|
144,294
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|
$
|
139,179
|
|
$
|
134,391
|
|
|
Loans
|
|
|
652,799
|
|
|
644,318
|
|
|
634,068
|
|
|
622,888
|
|
|
613,989
|
|
|
Total
interest sensitive assets
|
|
|
801,389
|
|
|
790,862
|
|
|
778,362
|
|
|
762,067
|
|
|
748,380
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
Interest
Sensitive Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(597,734
|
)
|
|
(592,831
|
)
|
|
(587,555
|
)
|
|
(583,027
|
)
|
|
(579,640
|
)
|
|
Borrowings
and repurchase agreements
|
|
|
(127,596
|
)
|
|
(125,173
|
)
|
|
(122,843
|
)
|
|
(120,802
|
)
|
|
(118,813
|
)
|
|
Total
interest sensitive liabilities
|
|
|
(725,330
|
)
|
|
(718,004
|
)
|
|
(710,398
|
)
|
|
(703,829
|
)
|
|
(698,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
market value as of March 31, 2008
|
|
$
|
76,059
|
|
$
|
72,858
|
|
$
|
67,964
|
|
$
|
58,238
|
|
$
|
49,927
|
|
|
Change
from current
|
|
$
|
8,095
|
|
$
|
4,894
|
|
$
|
---
|
|
$
|
(9,726
|
)
|
$
|
(18,037
|
)
|
The same
information as of December 31, 2007 is presented below.
|
|
|
Economic
Value
|
|
|
|
|
Present
Value at December 31, 2007
Change
in Interest Rates of:
|
|
|
|
|
-2%
|
|
-1%
|
|
Current
|
|
+1%
|
|
+2%
|
|
|
|
|
(In
Thousands)
|
|
|
Interest
Sensitive Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
163,320
|
|
$
|
161,479
|
|
$
|
159,105
|
|
$
|
154,097
|
|
$
|
148,183
|
|
|
Loans
|
|
|
657,051
|
|
|
648,369
|
|
|
640,463
|
|
|
631,998
|
|
|
624,378
|
|
|
Total
interest sensitive assets
|
|
|
820,371
|
|
|
809,848
|
|
|
799,568
|
|
|
786,095
|
|
|
772,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Sensitive Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(613,495
|
)
|
|
(608,583
|
)
|
|
(603,091
|
)
|
|
(597,349
|
)
|
|
(592,118
|
)
|
|
Borrowings
and repurchase agreements
|
|
|
(131,492
|
)
|
|
(128,570
|
)
|
|
(126,546
|
)
|
|
(124,434
|
)
|
|
(123,945
|
)
|
|
Total
interest sensitive liabilities
|
|
|
(744,987
|
)
|
|
(737,153
|
)
|
|
(729,637
|
)
|
|
(721,783
|
)
|
|
(716,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
market value as of December 31, 2007
|
|
$
|
75,384
|
|
$
|
72,695
|
|
$
|
69,931
|
|
$
|
64,312
|
|
$
|
56,498
|
|
|
Change
from current
|
|
$
|
5,453
|
|
$
|
2,764
|
|
$
|
---
|
|
$
|
(5,619
|
)
|
$
|
(13,433
|
)
|
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 (the “Exchange Act”)) 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
are effective in ensuring that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and are designed to ensure
that information required to be disclosed in those reports is accumulated and
communicated to management as appropriate to allow timely decisions regarding
required disclosure.
(b)
Changes in internal control
over financial reporting
. There were no 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 have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
Although
the Company and its subsidiaries are involved, from time to time, in various
legal proceedings arising in the ordinary course of business, there are no
material legal proceedings to which they are a party or to which their property
is subject.
Item
1A. Risk Factors
There
have been no material changes with respect to the risk factors disclosed in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Not
applicable
Item
3. Defaults Upon Senior Securities.
None
Item
4. Submission of Matters to Vote of Security
Holders.
Not
Applicable
Item
5. Other Information.
None
Item
6. Exhibits
None
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
12, 2008
|
By:
|
/s/
Jerry R. Engle
|
|
|
|
Jerry
R. Engle
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
Date: May
12, 2008
|
By:
|
/s/
John M. Baer
|
|
|
|
John
M. Baer
|
|
|
|
Secretary
and Treasurer
|
EXHIBIT
INDEX
|
No.
|
|
Description
|
|
Location
|
|
31(1)
|
|
CEO
Certification required by 17 C.F.R. Section 240.13a-14(a)
|
|
Attached
|
|
31(2)
|
|
CFO
Certification required by 17 C.F.R. Section 240.13a-14(a)
|
|
Attached
|
|
32
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
Attached
|
25
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