FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24270
Lincoln Financial Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 61-1262732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 West Main Street, Stanford, Kentucky 40484
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (606) 365-2129
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 ninety days.
X
YES NO
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock $0.01 Par Value 440,128
Title of Class Number of Shares Outstanding
as of May 7, 1996
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, March 31, 1996
and June 30, 1995. . . . . . . . . . . . . . . . . . .1
Consolidated Statements of Income, Three and Nine Months
Ended March 31, 1996 and 1995. . . . . . . . . . . . .2
Consolidated Statements of Cash Flows, Nine
Months Ended March 31, 1996 and 1995 . . . . . . . . .3
Notes to Consolidated Financial Statements. . . . . . . . .4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . .9
Item 2. Changes in Securities . . . . . . . . . . . . . . . .9
Item 3. Defaults upon Senior Securities . . . . . . . . . . .9
Item 4. Submission of Matters to a Vote of Security Holders .9
Item 5. Other Information . . . . . . . . . . . . . . . . . .9
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 9
SIGNATURES
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of As of
March 31, June 30,
ASSETS 1996 1995
(Unaudited)
Cash and due from banks $ 2,544 $ 1,774
Overnight deposits 1,200 200
Certificates of deposit 270 360
Securities held to maturity (estimated market values
of $5,329,408 and $5,818,215 at March 31, 1996,
and June 30, 1995, respectively) 5,090 5,897
Securities available for sale at market values -- 1,992
Mortgage-backed securities (estimated market
values of $70,467 and $78,559 at March 31,
1996 and June 30, 1995, respectively) 65 77
Loans, net 40,533 36,954
Real estate owned, net -- 68
Premises and equipment 346 362
Federal Home Loan Bank Stock, at cost 352 334
Accrued interest receivable 186 140
Income tax refund receivable 33 33
Prepaid expenses and other assets 21 27
_______ _______
Total assets $50,640 $48,218
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $42,412 $40,452
Federal income taxes
Current 67 --
Deferred 12 13
Liability for Directors Retirement Plan 84 92
Liability for Management Recognition Plan -- 33
Liability for Funds Held in Escrow 250 --
Accrued expenses and other liabilities 112 83
_______ _______
Total liabilities $42,937 $40,673
Stockholders' Equity:
Common stock $ 4 $ 4
Additional Paid In Capital 4,117 3,944
Retained earnings-substantially restricted 3,956 3,854
Unrealized gain on securities available for sale -- 1
Unearned ESOP Plan Share (258) (258)
Unearned MRP Plan Share (116) --
_______ _______
Total Stockholders' equity $ 7,703 $ 7,545
_______ _______
Total liabilities and Stockholders' equity $50,640 $48,218
See the Notes to Unaudited Condensed Consolidated Financial Statements
included elsewhere herein.
1
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three-Month Periods For the Nine-Month Periods
Ended March 31, Ended March 31,
1996 1995 1996 1995
____ ____ ____ ____
(In thousands, except earnings per share )
Interest income:
Interest on loans $868 $688 $2,507 $2,039
Interest and dividends on investment
and mortgage-backed securities 105 122 338 379
Total interest income 973 810 2,845 2,418
Interest expense:
Deposits 527 430 1,571 1,209
Net interest income 446 380 1,274 1,209
Provision for loan losses -- -- 11 3
Net interest income after provision for
loan losses 446 380 1,263 1,206
Non-interest income:
Commissions 8 8 22 19
Service charges and miscellaneous 33 33 94 85
Total non-interest income 41 41 116 104
Non-interest expense:
Salaries and employee benefits 161 126 481 367
Net occupancy and equipment 18 17 55 50
Real estate owned, including provision
for loss on disposition -- -- -- 2
Advertising 6 4 19 11
Directors' fees 13 15 43 45
Directors Retirement Plan Expense 2 -- 5 --
Deposit insurance 27 29 81 86
Office supplies, postage, telephone 17 18 57 54
Data processing expense 21 18 56 55
Other operating expense 52 67 199 188
Total non-interest expense 317 294 996 858
Income before income taxes 170 127 383 452
Federal income taxes 58 42 131 126
Net income $112 $ 85 $ 252 $ 326
Earnings Per Share $0.26 $0.20 $ 0.61 $ 0.77
See the Notes to Unaudited Condensed Consolidated Financial Statements
included elsewhere herein.
2
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CASH FLOWS
(Unaudited)
For the Nine-Month Periods
Ended March 31,
1996 1995
(In thousands)
Cash flows from operating activities:
Net income $ 252 $ 326
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 24 29
Amortization of securities premiums 6 11
Accretion of securities discounts (12) (34)
Amortization of deferred loan fees 8 8
Provision for loan losses 11 3
Provision for losses on real estate owned -- 1
Provision for management recognition plan 23 --
Stock dividends (18) (15)
Changes in:
Interest receivable (46) (4)
Liability for directors retirement plan (8) --
Liability for funds held in escrow 250 --
Prepaid expenses and other assets 6 3
Accrued federal income taxes 66 12
Accrued expenses and other liabilities 29 (30)
Total adjustments 339 (16)
Net cash provided by (used in) operating activities 591 310
Cash flows from investing activities:
Net (increase) decrease in overnight deposits (1,000) 50
Purchase of securities available for sale -- (2,204)
Purchase of investment securities -- (242)
Purchase of certificates of deposit -- (360)
Maturities of certificates of deposit 90 --
Maturities of securities held to maturity 805 1,815
Maturities of securities available for sale 2,000 250
Maturities of mortgage-backed securities 12 16
Net (increase) decrease in loans (3,530) (1,302)
Purchase of premises and equipment (8) (51)
Net cash provided by (used in) investing activities (1,631) (2,028)
Cash flows from financing activities:
Net increase in demand deposit accounts 530 (324)
Net increase (decrease) in savings accounts (223) (1,659)
Net increase (decrease) in other deposits 1,653 1,274
Cash dividends paid (146) (67)
Purchase of Treasury Stock (25) --
Proceeds from sale of treasury stock 21 --
Net cash provided (used) by financing activities 1,810 (776)
3
Net increase (decrease) in cash and cash equivalents 770 (2,494)
Cash and cash equivalents at beginning of period 1,774 3,464
Cash and cash equivalents at end of period $ 2,544 $ 970
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 64 $ 106
Cash paid for interest $ 1,572 $ 1,206
Supplemental disclosure of non-cash activities:
Additions to real estate acquired in settlement of
loans or through foreclosures -- 67
Common stock issued to management recognition plan 172 --
See the Notes to Unaudited Condensed Consolidated Financial Statements
included elsewhere herein.
4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Lincoln Financial Bancorp, Inc. (the "Company") was
incorporated in 1994 at the direction of Lincoln Federal
Savings Bank (the "Bank") to become the holding company of the
Bank upon the conversion of the Bank from mutual to stock
form. On June 28, 1994, the Bank converted from mutual to
stock form as a wholly owned subsidiary of the Company. In
conjunction with the conversion, the Company issued 423,200
shares of its common stock to the public. The Company's
primary assets are the outstanding capital stock of the Bank,
cash, a note receivable from the Bank, and a note receivable
from the ESOP, and its sole business is that of the Bank.
Accordingly, the financial statements and discussions herein
include both the Company and the Bank.
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for
fair presentation have been included. The results of
operations and other data for the three and nine month periods
ended March 31, 1996 are not necessarily indicative of results
that may be expected for the entire fiscal year ending June
30, 1996.
(2) EARNINGS PER SHARE
For purposes of determining earnings per share for the three
month and nine month periods ended March 31, 1996, net
earnings have been divided by the weighted average number of
shares of common stock issued and outstanding, and the
weighted average number of common stock equivalents. Stock
options are regarded as common stock equivalents and therefore
have been included.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Recent Developments -- Acquisition Agreement with First Southern
Bancorp, Inc.
On March 25, 1996, the Company announced that it had entered
into an agreement with First Southern Bancorp, Inc. (the "First
Southern"), the holding company for five banks in Central Kentucky,
that provides for the acquisition of Lincoln by First Southern.
The Agreement, as amended, provides for the merger of Lincoln with
a wholly owned subsidiary of First Southern, in which Lincoln
5
shareholders would receive $22.01 in cash for each of the 436,757
shares of Lincoln common stock currently outstanding. Directors
and officers of Lincoln would receive $9.51 per share in cash for
the currently outstanding options to purchase 36,922 shares of
Lincoln common stock. The total value of the transaction is
approximately $9,965,000. Lincoln also granted First Southern an
option to acquire up to 19.9% of the outstanding shares of Lincoln
in certain circumstances. The transaction is subject to regulatory
approvals, approval by Lincoln shareholders, and certain other
conditions. The parties anticipate the transaction will be
completed during the third quarter of 1996.
Financial Condition
At March 31, 1996, the total assets of the Bank were $51
million, an increase of $2.4 million or 5.0% from June 30, 1995.
The increase in assets primarily reflects an increase in loans and
deposits from June 30, 1995 to March 31, 1996.
Cash, due from banks, and overnight deposits increased from
$2.0 million at June 30, 1995 to $3.7 million at March 31, 1996, an
increase of 90% due to the large increase in deposits from June 30,
1995 to March 31, 1996. Investment securities, securities
available for sale, and mortgage-backed securities were $5.2
million at March 31, 1996, a decrease of $2.8 million from June 30,
1995 or 35.3%. The decrease resulted from the increased demand in
lending as funds provided by maturing investment securities and
securities available for sale were used to finance the increase in
loans.
Loans receivable, net of the provision of loan losses,
increased from $36.9 million at June 30, 1995 to $40.5 million at
March 31, 1996, an increase of $3.6 million or 9.7%. The increase
primarily resulted from greater loan demand from consumers
attributable to stable interest rates charged during the quarter
and the possibility of higher rates in the future.
At March 31, 1996, total non-performing loans and other non-performing
assets amounted to $283,000 and $0, respectively, as compared to $79,000
and $68,000, respectively, at June 30, 1995. The increase of $204,000 or
258% is due to the increased number of delinquent loans. Potential problem
loans at March 31, 1996 amounted to $1.2 million as compared to $1.1
million at June 30, 1995. Potential problem loans increased $0.1 million
during the nine months ended March 31, 1996, due to the addition of several
loans that are consistently late. During the three and nine months
ended March 31, 1996, the Bank's provision for loan loss was $0 and
$11,000, respectively, and at March 31, 1996, its allowance for
loan losses was $260,000 as compared to $264,000 at June 30, 1995,
and represented 92% of total non-performing loans at March 31, 1996.
Deposits increased from $40.4 million at June 30, 1995 to
$42.4 million at March 31, 1996, an increase of $2.0 million or
4.8%. Management believes that this increase is primarily due to
the Bank's pricing of interest rates payable on its deposits to be
competitive with its market area.
6
Results of Operations
Net Income. Net income for the three months ended March 31,
1996 increased $27,000, or 31.8%, to $112,000 from $85,000 for the
three months ended March 31, 1995. The increase was primarily
attributable to the steady increase in net interest income earned
by the Bank on its adjustable rate mortgage loans, which exceeded
the increase in the interest rates paid on the Bank's deposits.
Net income for the nine months ended March 31, 1996, decreased
$74,000, or 22.3%, to $252,000 from $326,000 for the nine months
ended March 31, 1995. Such decrease was primarily attributable to
an increase in interest expense, an increase in provision for loan
losses, a general increase in salary and employee benefits, which
include the accruals for the ESOP and MRP, an increase in other
operating expenses due to consultation fees as a public company,
and offset in part by an increase in interest income.
Net Interest Income. Net interest income for the quarter
ended March 31, 1996 was $446,000, an increase of $66,000 or 17.4%
as compared to $380,000 for the quarter ended March 31, 1995. This
increase was due primarily to the steady increase in net interest
income earned by the Bank on its adjustable rate mortgage loans,
which exceeded the increase in the interest rates paid on the
Bank's deposits. The net yield on interest-earning assets increased
to 2.84% for the quarter ended March 31, 1996, from 2.48% for the
quarter ended March 31, 1995, while the ratio of average interest-earning
assets to average interest-bearing liabilities increased from 112.8%
to 114.5% for the same respective periods.
Net interest income increased by $65,000 for the nine months
ended March 31, 1996 compared to the nine months ended March 31,
1995. This increase was also due primarily to the steady increase
in net interest income earned by the Bank on its adjustable rate
mortgage loans that exceeded the increase in the interest rates
paid on deposits. The net yield on interest-earning assets
decreased to 2.73% for the nine month period ended March 31, 1996,
from 2.78% for the nine month period ended March 31, 1995, due to
the Bank's use of maturing investment securities and proceeds from
the sale of securities available for sale to fund increased loan
demand, and due to an increase in rates offered on certificates of
deposit to reduce the outflow of deposits. The ratio of average
interest-earning assets to average interest-bearing liabilities
increased to 113.2% from 112.1% for the same respective periods.
The effect on net interest income of such decrease in net yield was
more than offset by the increase in the ratio of interest-earning
assets to interest-bearing liabilities during the same period.
Interest Income. Interest income for the quarter ended March
31, 1996, was $973,000, an increase of $163,000 or 20.1% as
compared to $810,000 for the quarter ended March 31, 1995. The
increase resulted primarily from a 80 basis point increase in the
average yield on interest-bearing assets, from 7.02% during the
quarter ended March 31, 1995 to 7.82% during the quarter ended
March 31, 1996. The increase in average yield reflects the $3.6
million or 9.7% increase in net loans receivable during the quarter
ended March 31, 1996, as compared to the quarter ended March 31,
1995.
7
Interest income for the nine month period ended March 31,
1996, was $2,845,000, an increase of $427,000 or 17.8% as compared
to $2,418,000 for the nine month period ended March 31, 1995. The
increase in interest income resulted primarily from a 89 basis
point increase in the average yield on interest-bearing assets,
from 6.81% for the nine month period ended March 31, 1995 to 7.70%
for the nine month period ended March 31, 1996.
Interest Expense. Total interest expense increased from $0.4
million for the quarter ended March 31, 1995 to $0.5 million for
the quarter ended March 31, 1996, reflecting the increase in the
Bank's deposit rates to maintain deposit accounts and to be more
competitive with the other banks in the area. The average cost of
deposits increased by 44 basis points from 4.54% for the quarter
ended March 31, 1995 to 4.98% for the quarter ended March 31, 1996.
Interest expense increased from $1.2 million for the nine
month period ended March 31, 1995 to $1.6 million for the nine
month period ended March 31, 1996. The increase of $0.4 million
reflects the increase in the deposit rates paid in order to
maintain deposit accounts. The average cost of deposits increased
by 94 basis points from 4.03% for the nine month period ended March
31, 1995 to 4.97% for the nine month period ended March 31, 1996.
Provision for Loan Losses. The provision for loan losses for
the three and nine months ended March 31, 1996 was $0 and $11,000,
respectively, as compared to $0 and $3,000, respectively, for the
same three and nine month period in 1995. The increase in the
provision of $8,000 for the nine months ended March 31, 1996 is
primarily due to reflect the current level of the Bank's allowance
for loan losses. Charge-offs during the three and nine months
ended were $0 and $14,000 respectively. Further, the Bank's total
allowance for loan losses was $260,000 at March 31, 1996 as
compared to $263,000 at March 31, 1995. Classified assets at March
31, 1996 increased to $1,148,000, an increase of $106,000 or 10.2%,
as compared to $1,042,000 at March 31, 1995 due to the addition of
several loans that are classified as scheduled items. In
determining its provision for loan losses, management considers
various factors, including the current level of the allowance for
loan losses as compared to the total non-performing loans, the
assessment of the risk inherent in the potential problem loans
identified as of March 31, 1996, and the overall composition of its
loan portfolio. Therefore, no provision was made during this
quarter.
Non-interest Income. Non-interest income for the quarters
ended March 31, 1996 and March 31, 1995 was $41,000. These
accounts reflect NOW account fee charges, life insurance commission
revenues, and fees earned from premature redemption of certificates
of deposits.
Non-interest income increased to $116,000 for the nine months
ended March 31, 1996 as compared to $104,000 for the same period in
1995. The increase of $12,000 was primarily due to increases in
NOW account fee charges, life insurance commission revenues, and
premature redemption of certificates of deposits.
8
Non-interest Expense. Non-interest expense for the quarter
ended March 31, 1996 was $317,000, an increase of $23,000 or 7.8%
as compared to $294,000 for the quarter ended March 31, 1995. The
increase was due primarily to a $35,000 increase in salaries and
the accruals for the ESOP and MRP plans, a $3,000 increase in data
processing expense, offset by a decrease of $15,000 in other
operating expenses.
Non-interest expense increased by $138,000 or 16.1%, to
$996,000 for the nine months ended March 31, 1996 from $858,000 for
the same period in 1995. Such increase was due primarily to a
$114,000 increase in salaries and the accruals for the ESOP and MRP
plans, an $8,000 increase in advertising, the addition of the
accruals for the Directors Retirement Plan of $5,000, and a
$11,000 increase in other operating expenses due to increased
professional fees incurred in connection with the proposed merger
transaction.
Liquidity and Capital Resources
The Bank's primary source of funds are deposits and principal
and interest payments on loans, mortgage-backed securities and
investment securities. While maturities and scheduled amortization
of loans, mortgage-backed securities and investment securities are
predicable sources of funds, deposit flows and loan and mortgage-backed
securities prepayments are strongly influenced by changes in general
interest rates, economic conditions and competition.
The Bank's most liquid assets are cash and cash equivalents
and short-term investments. The levels of the Bank's cash and cash
equivalents are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At March
31, 1996, the Bank's cash and cash equivalents totaled $3.7 million
compared to $2.0 million at June 30, 1995. The increase in cash and
cash equivalents was due primarily to the Bank's pricing of its
deposits to reflect the range of those offered in it market area,
and due to investment securities held to maturity and securities
available for sale maturing and the proceeds disbursed to the Bank
and Company.
The Bank is required by federal regulations to maintain
specified levels of "liquid" assets consisting of cash and other
eligible investments. At March 31, 1996, the Bank's liquidity ratio
of 17.90% satisfied these requirements. At March 31, 1996, the
Bank exceeded all fully phased-in regulatory capital requirements.
The table below presents certain information relating to the Bank's
capital compliance at March 31, 1996 and June 30, 1995.
At March 31, 1996 At June 30, 1995
% of % of
Amount Assets Amount Assets
(Dollars in thousands)
Tangible Capital $6,263 12.4% $5,930 12.6%
Core Capital 6,263 12.4% 5,930 12.6%
Risk Based Capital 6,514 22.7% 6,184 24.5%
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a
Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
2. Agreement and Plan of Reorganization as of March
23, 1996 between First Southern Bancorp, Inc. and
Lincoln Financial Bancorp, Inc., is incorporated by
reference to Exhibit 2 to Current Report on Form 8-K
dated March 25, 1996.
11. Calculations of Earnings Per Share.
27. Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated
March 25, 1996 to announce the signing of an agreement
with First Southern Bancorp, Inc., providing for the
acquisition of the Company by First Southern.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Lincoln Financial Bancorp, Inc.
Date: May 7, 1996 /s/ Bruce Edgington
Bruce Edgington
President, Chief Executive
Officer
(Director and Principal
Executive Officer)
Date: May 7, 1996 /s/ Donna Delaney
Donna Delaney
Chief Financial Officer
(Principal Finance and
Accounting Officer)
11