SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
LINCOLN BANCORP
(Name Of Registrant As Specified In Its Charter)
LINCOLN BANCORP
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction
applies: N/A
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing. N/A
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
Lincoln Bancorp
P.O. Box 510
1121 East Main Street
Plainfield, Indiana 46168
(317) 839-6539
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
To Be Held On July 6, 1999
Notice is hereby given that the Annual Meeting of Shareholders of Lincoln
Bancorp (the "Holding Company") will be held at the Guilford Township Community
Center, 1500 S. Center Street, Plainfield, Indiana, on Tuesday, July 6, 1999, at
12:00 p.m., Eastern Standard Time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of all nine of the directors of the
Holding Company to serve staggered terms, with terms expiring in 2000,
2001 and 2002.
2. Approval of Stock Option Plan. Approval and ratification of the
Lincoln Bancorp Stock Option Plan (the "Option Plan").
3. Approval of Recognition and Retention Plan and Trust. Approval and
ratification of the Lincoln Federal Savings Bank Recognition and
Retention Plan and Trust (the "RRP").
4. Other Business. Such other matters as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on May 17, 1999, are
entitled to vote at the meeting or any adjournment thereof.
We urge you to read the enclosed Proxy Statement carefully so that you may
be informed about the business to come before the meeting, or any adjournment
thereof. At your earliest convenience, please sign and return the accompanying
proxy in the postage-paid envelope furnished for that purpose.
A copy of our Annual Report for the fiscal year ended December 31, 1998, is
enclosed. The Annual Report is not a part of the proxy soliciting material
enclosed with this letter.
By Order of the Board of Directors
/s/ T. Tim Unger
T. Tim Unger,
Chairman, President and
Chief Executive Officer
Plainfield, Indiana
May 27, 1999
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
Lincoln Bancorp
P.O. Box 510
1121 East Main Street
Plainfield, Indiana 46168
(317) 839-6539
---------------
PROXY STATEMENT
---------------
FOR
ANNUAL MEETING OF SHAREHOLDERS
July 6, 1999
This Proxy Statement is being furnished to the holders of common stock,
without par value (the "Common Stock"), of Lincoln Bancorp (the "Holding
Company"), an Indiana corporation, in connection with the solicitation of
proxies by the Board of Directors of the Holding Company to be voted at the
Annual Meeting of Shareholders to be held at 3:00 p.m., Eastern Standard Time,
on July 6, 1999, at the Holding Company's principal office at 1121 E. Main
Street, Plainfield, Indiana, and at any adjournment of such meeting. The
principal asset of the Holding Company consists of 100% of the issued and
outstanding shares of common stock, $.01 par value per share, of Lincoln Federal
Savings Bank (the "Bank"). This Proxy Statement is expected to be mailed to the
shareholders of the Holding Company on or about May 27, 1999.
The proxy solicited hereby, if properly signed and returned to the Holding
Company and not revoked prior to its use, will be voted in accordance with the
instructions contained therein. If no contrary instructions are given, each
proxy received will be voted for each of the matters described below and, upon
the transaction of such other business as may properly come before the meeting,
in accordance with the best judgment of the persons appointed as proxies.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Holding Company
written notice thereof (John M. Baer, P.O. Box 510, 1121 East Main Street,
Plainfield, Indiana 46168), (ii) submitting a duly executed proxy bearing a
later date, or (iii) by appearing at the Annual Meeting and giving the Secretary
notice of his or her intention to vote in person. Proxies solicited hereby may
be exercised only at the Annual Meeting and any adjournment thereof and will not
be used for any other meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on April 30, 1999
("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 7,009,250 shares of the Common Stock issued and
outstanding, and the Holding Company had no other class of equity securities
outstanding. Each share of Common Stock is entitled to one vote at the Annual
Meeting on all matters properly presented at the Annual Meeting. The holders of
over 50% of the outstanding shares of Common Stock as of the Voting Record Date
must be present in person or by proxy at the Annual Meeting to constitute a
quorum. In determining whether a quorum is present, shareholders who abstain,
cast broker non-votes, or withhold authority to vote on one or more director
nominees will be deemed present at the Annual Meeting.
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of April 30, 1999, by each person who is known
by the Holding Company to own beneficially 5% or more of the Common Stock.
Unless otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares.
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner(1) Beneficially Owned of Class
- ---------------------- ------------------ --------
Home Federal Savings Bank, as Trustee
501 Washington Street
Columbus, Indiana 47201 560,740 (2) 8.0%
(1) The information in this chart is based on a Schedule 13G Report filed
by the above-listed person with the Securities and Exchange Commission
(the "SEC") containing information concerning shares held by it. It
does not reflect any changes in those shareholdings which may have
occurred since the date of such filing.
(2) These shares are held by the Trustee of the Lincoln Bancorp Employee
Stock Ownership Plan and Trust (the "ESOP"). The Employees
participating in that Plan are entitled to instruct the Trustee how to
vote shares held in their accounts under the Plan. Unallocated shares
held in a suspense account under the Plan are required under the Plan
terms to be voted by the Trustee in the same proportion as allocated
shares are voted. Prior to the initial allocation of shares, the ESOP
shares will be voted by the ESOP committee.
PROPOSAL I -- ELECTION OF DIRECTORS
The Board of Directors consists of nine members. The By-Laws provide that
the Board of Directors is to be divided into three classes as nearly equal in
number as possible. The members of each class are to be elected for a term of
three years and until their successors are elected and qualified. One class of
directors is to be elected annually. Directors must have their primary domicile
in Clinton, Hendricks or Montgomery Counties, Indiana, must have had a loan or
deposit relationship with the Bank for a continuous period of nine months prior
to their nomination to the Board (or in the case of directors in office on
September 10, 1998, prior to that date), and non-employee directors must have
served as a member of a civic or community organization based in Clinton,
Hendricks or Montgomery Counties, Indiana for at least a continuous period of 12
months during the five years prior to their nomination to the Board. Since this
is the first Annual Meeting of Shareholders following the organization of the
Holding Company, it is necessary to elect all of the directors for the terms set
forth below. In addition to the current directors of the Holding Company, Dennis
W. Dawes has been nominated for a one-year term to replace Edward E. Whalen who
will be retiring from the Board at the annual shareholder meeting.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed below. If any
person named as a nominee should be unable or unwilling to stand for election at
the time of the Annual Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board of Directors. At this time, the
Board of Directors knows of no reason why the nominees listed below may not be
able to serve as directors if elected.
<PAGE>
The following table sets forth certain information regarding the nominees
for the position of director of the Holding Company, including the number and
percent of shares of Common Stock beneficially owned by such persons as of the
Voting Record Date. Unless otherwise indicated, each nominee has sole investment
and/or voting power with respect to the shares shown as beneficially owned by
him. No nominee for director is related to any other nominee for director or
executive officer of the Holding Company by blood, marriage, or adoption, and
there are no arrangements or understandings between any nominee and any other
person pursuant to which such nominee was selected. The table also sets forth
the number of shares of Holding Company Common Stock beneficially owned by all
directors and executive officers of the Holding Company as a group.
<TABLE>
<CAPTION>
Director Common Stock
Expiration of Director of the of the Beneficially
Term as Holding Bank Owned as of Percentage
Name Director Company Since Since May 17, 1999 of Class(1)
- --------------------- ------------- -------------- ---------- --------------- -----------
Director Nominees
- -----------------
<S> <C> <C> <C> <C> <C>
Lester N. Bergum, Jr. 2000 1998 1996 20,000 (2) .29%
W. Thomas Harmon 2001 1998 1982 50,000 .71%
Jerry R. Holifield 2001 1998 1992 20,132 .29%
Wayne E. Kessler 2000 1998 1976 10,000 (3) .14%
David E. Mansfield 2002 1998 1997 10,000 .14%
John C. Milholland 2001 1998 1988 46,962 .67%
T. Tim Unger 2002 1998 1996 50,000 .71%
John L. Wyatt 2002 1998 1992 30,000 (4) .43%
Dennis W. Dawes 2000 New Nominee New Nominee 0 .00%
All directors and
executive officers
as a group (11 persons) 282,985 4.04%
</TABLE>
(1) Based upon information furnished by the respective director nominees.
Under applicable regulations, shares are deemed to be beneficially
owned by a person if he or she directly or indirectly has or shares the
power to vote or dispose of the shares, whether or not he or she has
any economic power with respect to the shares. Includes shares
beneficially owned by members of the immediate families of the
directors residing in their homes.
(2) Of these shares, 7,610 are held jointly by Mr. Bergum and his spouse.
(3) These shares are held jointly by Mr. Kessler and his spouse.
(4) Includes 16,791 shares held jointly by Mr. Wyatt with his spouse.
Presented below is certain information concerning the director nominees of
the Holding Company:
<PAGE>
Lester N. Bergum, Jr. (age 50) is an attorney and partner with the firm
of Robison, Robison, Bergum & Johnson in Frankfort, Indiana, where he has
practiced since 1974. He has also served since 1989 as president of Title
Insurance Services, Inc., a title agency located in Frankfort, Indiana.
Dennis W. Dawes (age 53) has served as President and Treasurer of
Hendricks Community Hospital and President of Hendricks Community Hospital
Foundation in Danville, Indiana for over five years.
W. Thomas Harmon (age 59) has served as the co-owner, Vice President,
Treasurer and Secretary of Crawfordsville Town & Country Homecenter, Inc. in
Crawfordsville, Indiana, since 1978. Mr Harmon is also a co-owner and officer of
RGW, Inc., in Crawfordsville, a company that develops real estate subdivisions
and manages apartment rental properties, a position he has held since 1965.
Jerry Holifield (age 57) has been the School Superintendent of the
Plainfield Community School Corporation since 1991.
Wayne E. Kessler (age 68) has been a self-employed farmer in
Crawfordsville, Indiana since 1949. Mr. Kessler is currently semi-retired.
David E. Mansfield (age 56) is an Administrative Supervisor for Marathon
Oil Company where he has worked since 1973.
John C. Milholland (age 62) has been Principal of Frankfort Senior High
School in Frankfort, Indiana since 1989.
T. Tim Unger (age 58) has been President and Chief Executive Officer of
Lincoln Federal since January, 1996. Before then, Mr. Unger served as President
and Chief Executive Officer of Summit Bank of Clinton County from 1989 through
1995.
John L. Wyatt (age 62) is a District Agent for Northwestern Mutual Life
Insurance Company where he has been employed since 1960.
The Bank also has a director emeritus program pursuant to which our former
directors may continue to serve as advisors to the Board of Directors upon their
retirement or resignation from the Board. Currently, Frank A. Beardsley and
Charles Jones serve as directors emeritus. Following the shareholder annual
meeting, Edward E. Whalen will also serve as a director emeritus of the Bank.
THE DIRECTORS SHALL BE ELECTED UPON RECEIPT OF A PLURALITY OF VOTES CAST AT
THE ANNUAL SHAREHOLDERS MEETING. PLURALITY MEANS THAT INDIVIDUALS WHO RECEIVE
THE LARGEST NUMBER OF VOTES CAST ARE ELECTED UP TO THE MAXIMUM NUMBER OF
DIRECTORS TO BE CHOSEN AT THE MEETING. ABSTENTIONS, BROKER NON-VOTES, AND
INSTRUCTIONS ON THE ACCOMPANYING PROXY TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR
MORE OF THE NOMINEES WILL RESULT IN THE RESPECTIVE NOMINEE RECEIVING FEWER
VOTES. HOWEVER, THE NUMBER OF VOTES OTHERWISE RECEIVED BY THE NOMINEE WILL NOT
BE REDUCED BY SUCH ACTION.
The Board of Directors and its Committees
During the fiscal year ended December 31, 1998, the Board of Directors of
the Holding Company acted by written consent two times. No director attended
fewer than 75% of the aggregate total number of meetings during the last fiscal
year of the Board of Directors of the Holding Company held while he served as
director and of meetings of committees which he served during that fiscal year.
The Board of Directors of the Holding Company has an Audit Committee and a Stock
Compensation Committee, among its other Board Committees. All committee members
are appointed by the Board of Directors.
<PAGE>
The Audit Committee, the members of which are W. Thomas Harmon, Wayne E.
Kessler and Jerry R. Holifield, recommends the appointment of the Holding
Company's independent accountants, and meets with them to outline the scope and
review the results of such audit. The Audit Committee did not meet during the
fiscal year ended December 31, 1998, because the stock conversion of the Bank
did not close until December 30, 1998.
The Stock Compensation Committee administers the Option Plan and the RRP
which are being submitted to a vote of the shareholders at the Annual Meeting.
The members of that Committee are Messrs. Harmon, Holifield, Mansfield and
Milholland. It did not meet during fiscal 1998 because the plans were not
adopted until April 20, 1999.
The Board of Directors of the Holding Company nominated the slate of
directors set forth in the Proxy Statement. Although the Board of Directors of
the Holding Company will consider nominees recommended by shareholders, it has
not actively solicited recommendations for nominees from shareholders nor has it
established procedures for this purpose. Directors must satisfy certain
qualification requirements set forth in the Holding Company's By-Laws. Article
III, Section 12 of the Holding Company's By-Laws provides that shareholders
entitled to vote for the election of directors may name nominees for election to
the Board of Directors but there are certain requirements that must be satisfied
in order to do so. Among other things, written notice of a proposed nomination
must be received by the Secretary of the Holding Company not less than 120 days
prior to the Annual Meeting; provided, however, that in the event that less than
130 days' notice or public disclosure of the date of the meeting is given or
made to shareholders (which notice or public disclosure includes the date of the
Annual Meeting specified in the Holding Company's By-Laws if the Annual Meeting
is held on such date), notice must be received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made.
Management Remuneration and Related Transactions
Remuneration of Named Executive Officer
During the fiscal year ended December 31, 1998, no cash compensation was
paid directly by the Holding Company to any of its executive officers. Each of
such officers was compensated by the Bank.
The following tables set forth information as to annual, long term and
other compensation for services in all capacities to the President and Chief
Executive Officer of the Holding Company for the two fiscal years ended December
31, 1998 and the Chief Financial Officer, Secretary and Treasurer of the Holding
Company for the fiscal year ended December 31, 1998 (the "Named Executive
Officers"). There were no other executive officers of the Holding Company who
earned over $100,000 in salary and bonuses during either of the two fiscal years
ended December 31, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Long Term Compensation
Annual Compensation Awards
Other All
Annual Restricted Securities Other
Name and Fiscal Compen- Stock Underlying Compen-
Principal Position Year Salary ($) Bonus ($) sation($)(1) Awards($) Options(#) sation($)(2)
- ------------------ ---- ---------- --------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Tim Unger, President 1998 $135,000 (3)(4) $30,000 --- --- --- $3,555
and Chief Executive Officer1997 $125,000 (3)(4) $10,000 --- --- --- $3,330
John M. Baer 1998 $ 95,000 $ 9,500 --- --- --- $ 990
</TABLE>
(1) The Named Executive Officers received certain perquisites, but the
incremental cost of providing such perquisites did not exceed the lesser of
$50,000 or 10% of their salary and bonus.
(2) All Other Compensation includes the Bank's matching contributions under its
401(k) Plan.
(3) Mr. Unger does not receive any directors fees.
(4) Includes amounts deferred pursuant to Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code") under the Bank's 401(k) Plan.
<PAGE>
Stock Options
No stock options were granted during fiscal 1998 to, or held as of December
31, 1998 by, the Named Executive Officers. For information concerning grants of
stock options made in fiscal 1999, including a grant of a stock option for
175,231 shares of the Common Stock to T. Tim Unger and a grant of a stock option
for 60,092 shares to John M. Baer, see "Proposal II--Stock Option Plan."
Employment Contract
The Bank entered into a three-year employment contract with Mr. Unger. The
contract with Mr. Unger extends annually for an additional one-year term to
maintain its three-year term if the Bank's Board of Directors determines to so
extend it, unless notice not to extend is properly given by either party to the
contract. Mr. Unger receives a salary under the contract equal to his current
salary with the Bank subject to increases approved by the Board of Directors.
The contract also provides, among other things, for participation in other
fringe benefits and benefit plans available to the Bank's employees. Mr. Unger
may terminate his employment upon 60 days' written notice to the Bank. The Bank
may discharge Mr. Unger for cause (as defined in the contract) at any time or in
certain specified events. If the Bank terminates Mr. Unger's employment for
other than cause or if Mr. Unger terminates his own employment for cause (as
defined in the contract), Mr. Unger will receive his base compensation under the
contract for an additional three years if the termination follows a change of
control in the Holding Company, and for the balance of the contract if the
termination does not follow a change in control. In addition, during such
period, Mr. Unger will continue to participate in the Bank's group insurance
plans and retirement plans, or receive comparable benefits. Moreover, within a
period of three months after such termination following a change of control, Mr.
Unger will have the right to cause the Bank to purchase any stock options he
holds for a price equal to the fair market value (as defined in the contract) of
the shares subject to such options minus their option price. If the payments
provided for in the contract, together with any other payments made to Mr. Unger
by the Bank, are deemed to be payments in violation of the "golden parachute"
rules of the Code, such payments will be reduced to the largest amount which
would not cause the Bank to lose a tax deduction for such payments under those
rules. As of the date hereof, the cash compensation which would be paid under
the contract to Mr. Unger if the contract were terminated after a change of
control of the Holding Company, without cause by the Bank, or for cause by Mr.
Unger, would be $405,000. For purposes of this employment contract, a change of
control of the Holding Company is generally an acquisition of control, as
defined in regulations issued under the Change in Bank Control Act and the
Savings and Loan Holding Company Act.
The employment contract protects the Bank's confidential business
information and protects the Bank from competition by Mr. Unger should he
voluntarily terminate his employment without cause or be terminated by the Bank
for cause.
Compensation of Directors
The Bank pays its non-employee directors a monthly retainer of $850 plus
$400 for each regular meeting attended and $200 for each committee meeting
attended, with a maximum of $1,200 in annual committee fees. The Bank's
directors emeritus receive a $500 monthly retainer plus $100 for each meeting
they attend. Total fees paid to Bank directors and directors emeritus for the
year ended December 31, 1998 were approximately $181,000.
The Bank's directors and directors emeritus may, pursuant to a deferred
compensation agreement, defer payment of some or all of their directors fees,
bonuses or other compensation into a retirement account. Under this agreement,
deferred directors fees are to be distributed either in a lump-sum payment or in
equal annual or monthly installments over any period of from five to ten years.
The lump sum or first installment is payable to the director, at the director's
discretion, on the first day of the calendar year immediately following the year
in which he ceases to be a director, or in the year in which the director
attains that age specified by the retirement income test of the Social Security
Act. Any additional installments will be paid on the first day of each
succeeding year thereafter. At present, the following directors participate in
the deferred compensation plan: Lester N. Bergum, Jr., W. Thomas Harmon, Wayne
E. Kessler and Edward E. Whalen.
<PAGE>
Directors of the Holding Company and the Bank are not currently paid
directors' fees. The Holding Company may, if it believes it is necessary to
attract qualified directors or is otherwise beneficial to the Holding Company,
adopt a policy of paying directors' fees.
The Bank has also adopted a Deferred Director Supplemental Retirement Plan
(the "Supplemental Plan") which provides for the continuation of directors fees
to a director upon the later of a director's attainment of age 70 or the date on
which he ceases to be a director. A director's interest in the Supplemental Plan
will vest gradually over a five-year period commencing upon the director's
completion of five years of service on our board. Upon completing nine years of
service, the director's interest in the Supplemental Plan will be fully vested.
The interests of directors who, as of December 1, 1997, had served at least one
year on the Board vested immediately upon the adoption of the Supplemental Plan.
The benefits payable to a director under the Supplemental Plan are calculated by
multiplying the director's vested percentage times the rate of directors fees
paid to the director immediately prior to his attainment of age 70 or, if
earlier, the date his status as a director terminated. In the event that a
director's death occurs prior to the commencement of payments under the
Supplemental Plan, the director's designated beneficiary shall receive a monthly
payment calculated by multiplying the director's vested percentage times the
rate of directors fees in effect immediately prior to the director's death or,
if earlier, the date on which his status as a director terminated. Payments
under the Supplemental Plan will continue for 120 months.
Pension Plan
The Bank's full-time employees are included in the Pension Plan. Separate
actuarial valuations are not made for individual employer members of the Pension
Plan. The Bank's employees are eligible to participate in the plan once they
have attained the age of 21 and completed one year of service for the Bank and
provided that the employee is expected to complete a mimimum of 1,000 hours of
service in the 12 consecutive months following his enrollment date. An
employee's pension benefits are 100% vested after five years of service.
The Pension Plan provides for monthly or lump sum retirement benefits
determined as a percentage of the employee's average salary (for the employee's
highest five consecutive years of salary) times his years of service. Salary
includes base annual salary as of each January 1, exclusive of overtime,
bonuses, fees and other special payments. Early retirement, disability, and
death benefits are also payable under the Pension Plan, depending upon the
participant's age and years of service. The Bank recorded no expense for the
Pension Plan during the fiscal year ended December 31, 1998, as the Plan was
fully funded that year.
The estimated base annual retirement benefits presented on a straight-line
basis payable at normal retirement age (65) under the Pension Plan to persons in
specified salary and years of service classifications are as follows (benefits
noted in the table are not subject to any offset).
Years of Service
Highest 5-Year
Average
Compensation 15 20 25 30 35 40 45
- -------------------------------------------------------------------------------
$ 60,000 18,000 24,000 30,000 36,000 42,000 48,000 54,000
80,000 24,000 32,000 40,000 48,000 56,000 64,000 72,000
100,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
120,000 36,000 48,000 60,000 72,000 84,000 96,000 108,000
140,000 42,000 56,000 70,000 84,000 98,000 112,000 126,000
<PAGE>
Benefits are currently subject to maximum Code limitations of $130,000 per
year. The years of service credited to Mr. Unger under the Pension Plan as of
December 31, 1998 were three.
Transactions With Certain Related Persons
The Bank follows a policy of offering to its directors, officers, and
employees real estate mortgage loans secured by their principal residence as
well as other loans. Current law authorizes the Bank to make loans or extensions
of credit to our executive officers, directors, and principal shareholders on
the same terms that are available with respect to loans made to all of our
employees. At present, the Bank offers loans to its executive officers,
directors, principal shareholders and employees with an interest rate that is
.5% lower than the rate generally available to the public, but otherwise are
offered with substantially the same terms as those prevailing for comparable
transactions. All loans to directors and executive officers must be approved in
advance by a majority of the disinterested members of the Board of Directors.
Loans to directors, executive officers and their associates totaled
approximately $1.3 million, or 1.2% of equity capital at December 31, 1998.
The law firm Robison Robison Bergum & Johnson, based in Frankfort,
Indiana, of which Lester N. Bergum, Jr., a director of the Holding Company is a
partner, serves as counsel to the Bank in connection with loan delinquencies,
title searches, and related matters. The Bank expects to continue using the
services of the law firm for such matters in the current fiscal year.
Joint Report of the Compensation Committee and the Stock Compensation Committee
The Compensation Committee of the Board of Directors was comprised
during fiscal 1998 of Messrs. Harmon, Holifield, Mansfield and Milholland. The
Committee reviews payroll costs, establishes policies and objectives relating to
compensation, and approves the salaries of all employees, including executive
officers. All decisions by the Compensation Committee relating to salaries of
the Holding Company's executive officers are approved by the full Board of
Directors. In fiscal 1998, there were no modifications to Compensation Committee
actions and recommendations made by the full Board of Directors. In approving
the salaries of executive officers, the Committee has access to and reviews
compensation data for comparable financial institutions in the Midwest.
Moreover, from time to time the Compensation Committee reviews information
provided to it by independent compensation consultants in making its decisions.
The objectives of the Compensation Committee and the Stock Compensation
Committee with respect to executive compensation are the following:
(1) provide compensation opportunities comparable to those offered
by other similarly situated financial institutions in order to
be able to attract and retain talented executives who are
critical to the Holding Company's long-term success;
(2) reward executive officers based upon their ability to achieve
short-term and long-term strategic goals and objectives and to
enhance shareholder value; and
(3) align the interests of the executive officers with the
long-term interests of shareholders by granting stock options
which will become more valuable to the executives as the value
of the Holding Company's shares increases.
<PAGE>
At present, the Holding Company's executive compensation program is
comprised of base salary and annual incentive bonuses. Assuming shareholder
approval of the Option Plan and RRP, long-term incentive bonuses in the form of
stock options and awards of Common Stock will be added to the Holding Company's
Compensation program. Reasonable base salaries are awarded based on salaries
paid by comparable financial institutions, particularly in the Midwest, and
individual performance. The annual incentive bonuses are tied to the Holding
Company's performance in the areas of growth, profit, quality, and productivity
as they relate to earnings per share and return on equity for the current fiscal
year, and it is expected that stock options will have a direct relation to the
long-term enhancement of shareholder value. In years in which the performance
goals of the Holding Company are met or exceeded, executive compensation tends
to be higher than in years in which performance is below expectations.
Base Salary. Base salary levels of the Holding Company's executive
officers are intended to be comparable to those offered by similar financial
institutions in the Midwest. In determining base salaries, the Compensation
Committee also takes into account individual experience and performance.
Mr. Unger was the Holding Company's Chief Executive Officer throughout
fiscal 1998. Mr. Unger received a base salary of $125,000 in 1997 and $135,000
in 1998.
Annual Incentive Bonuses. Under the Holding Company's Annual Incentive
Plan, all employees of the Holding Company receive a cash bonus for any fiscal
year in which the Holding Company achieves certain goals, as established by the
Board of Directors, in the areas of growth, profit, quality and productivity as
they relate to earnings per share and return on equity. Individual bonuses are
equal to a percentage of the employee's base salary, which percentage varies
with the extent to which the Holding Company exceeds these goals for the fiscal
year.
The Holding Company believes that this program provides an excellent
link between the value created for shareholders and the incentives paid to
executives, since executives receive no bonuses unless the above-mentioned goals
are achieved and since the level of those bonuses will increase with greater
achievement of those goals.
Mr. Unger's bonus for fiscal 1998 was $30,000 compared to $10,000 for
fiscal 1997.
Stock Options. The Option Plan is intended to align executive and
shareholder long-term interests by creating a strong and direct link between
executive pay and shareholder return, and enable executives to acquire a
significant ownership position in the Holding Company's Common Stock. If the
Option Plan is approved, stock options will be granted at the prevailing market
price and will only have a value to the executives if the stock price increases.
The Stock Compensation Committee has determined and will determine the number of
option grants to make to executive officers based on the practices of comparable
financial institutions as well as the executive's level of responsibility and
contributions to the Holding Company.
RRP. The RRP is intended to provide directors and officers with an
ownership interest in the Holding Company in a manner designed to encourage them
to continue their service with the Holding Company. Assuming shareholder
approval, the Bank will contribute funds to the RRP from time to time to enable
the RRP to acquire an aggregate amount of Common Stock equal to up to 280,370
shares of Common Stock. These shares will be awarded to the Holding Company's
directors and officers, but would vest gradually over a five-year period at a
rate of 20% of the shares awarded at the end of each 12-month period of service
by the director or officer with the Holding Company. This gradual vesting of a
director's or officer's interest in the shares awarded under the RRP is intended
to create a long-term incentive for the director or officer to continue his
service with the Holding Company.
<PAGE>
Finally, the Committee notes that Section 162(m) of the Internal
Revenue Code, in certain circumstances, limits to $1 million the deductibility
of compensation, including stock-based compensation, paid to top executives by
public companies. None of the compensation paid to the executive officers named
in the compensation table on page 5 for fiscal 1998 exceeded the threshold for
deductibility under section 162(m).
The Compensation Committee and the Stock Compensation Committee believe
that linking executive compensation to corporate performance results in a better
alignment of compensation with corporate goals and the interests of the Holding
Company's shareholders. As performance goals are met or exceeded, most probably
resulting in increased value to shareholders, executives are rewarded
commensurately. The Committee believes that compensation levels during fiscal
1998 for executives and for the chief executive officer adequately reflect the
Holding Company's compensation goals and policies.
Compensation Committee Members Stock Compensation Committee Members
- ------------------------------ ------------------------------------
W. Thomas Harmon W. Thomas Harmon
Jerry R. Holifield Jerry R. Holifield
David E. Mansfield David E. Mansfield
John C. Milholland John C. Milholland
PROPOSAL II -- STOCK OPTION PLAN
The Board of Directors of the Holding Company adopted the Lincoln Bancorp
Stock Option Plan (the "Option Plan") on April 20, 1999. The essential features
of the Option Plan are summarized below, but the Option Plan is set forth in
full in Exhibit A to this Proxy Statement, and all statements made in this
summary are qualified by reference to the full text of the Option Plan.
Purpose
The purpose of the Option Plan is to provide to certain directors, officers
and other key employees of the Holding Company and its subsidiaries (the
"Subsidiaries") (currently approximately 23 persons) a favorable opportunity to
acquire Common Stock of the Holding Company and thereby increase the incentive
of such persons to work for the success of the Holding Company and its
subsidiaries and better enabling such entities to attract or retain capable
directors and executive personnel.
The Option Plan provides for the grant of both incentive stock options
(options that afford favorable tax treatment to recipients upon compliance with
certain restrictions and that do not normally result in tax deductions to the
Holding Company) and options that do not so qualify (non-qualified stock
options).
Administration
The Option Plan is administered, construed and interpreted by a committee
consisting of at least two members of the Holding Company's Board of Directors.
Currently, the Holding Company's Stock Compensation Committee (the "Stock
Compensation Committee") administers the Option Plan. The Stock Compensation
Committee selects the individuals to whom options will be granted and determines
the time of grant, the number of shares of stock to be covered by each option,
the option price, the period within which the option may be exercised, whether
the option is an incentive stock option or non-qualified stock option, and any
other terms and conditions of the options granted. Members of the Stock
Compensation Committee must be nonemployee directors of the Holding Company. The
current members of that Committee are set forth on page 4 of this Proxy
Statement.
<PAGE>
Reservation of Shares
The Holding Company has reserved 700,925 shares of its Common Stock for
issuance upon exercise of options to be granted under the Option Plan, and stock
options for 544,780 of such shares have already been granted, subject to and
effective as of the date the Holding Company's shareholders approve the Option
Plan. Shares issued under the Option Plan may be authorized but unissued shares
or treasury shares of the Holding Company. In the event of corporate changes
affecting the Holding Company's Common Stock, such as reorganizations,
recapitalizations, stock splits, stock dividends, mergers, consolidations,
extraordinary distributions or liquidations, the Stock Compensation Committee
may make appropriate adjustments in the number and kind of shares reserved under
the Option Plan and in the option price under, and the number and kind of shares
covered by, outstanding options granted under the Option Plan. Any shares
subject to an option which expires or is terminated before exercise will again
be available for issuance under the Option Plan.
Options may be granted to officers (including officers who are members of
the Board of Directors), directors, directors emeritus and other key employees
of the Holding Company and its subsidiaries who are materially responsible for
the management or operation of the business of the Holding Company or its
subsidiaries and have provided valuable services to the Holding Company or its
subsidiaries. Such individuals may be granted more than one option under the
Option Plan. No employee of the Holding Company may receive options for 250,000
shares Common Stock in any one calendar year.
Since its adoption by the Board of Directors, the following incentive stock
options have been granted under the Option Plan. All such options were granted
effective as of the date the Holding Company's shareholders approve the Option
Plan, have an option price per share equal to the average between the high and
low sales prices for a share of the Holding Company's Common Stock ("Market
Value") on that date (or the closest trading date if there is no trading on that
date), and have ten-year terms. These options become exercisable at the rate of
20% per year beginning on the anniversary of the date of grant, subject to
earlier vesting in the event of the death or disability of the option holder,
and subject to any requirement to extend the vesting period to preserve
incentive stock option treatment. Such grants of incentive stock options are as
follows:
Shares Subject
Optionee To Options
-------- ----------
T. Tim Unger 175,231
John M. Baer 60,092
All other employees 99,185
-------
Total 334,508
=======
In addition, non-qualified stock options were granted to the eight
directors of the Holding Company who are not employees of the Holding Company or
its subsidiaries ("Outside Directors"). These options for such Outside Directors
were granted effective as of the date the Holding Company's shareholders approve
the Option Plan and are each non-qualified stock options to purchase 26,284
shares of the Holding Company Common Stock at the Market Value of such shares on
such date. The terms of these options end ten years and one day following the
date of grant, and became exercisable at the rate of 20% per year beginning on
the anniversary of the date of the grant, subject to earlier vesting in the
event of the death or disability of the option holder. At May 14, 1999, the last
sale price for a share of the Holding Company's Common Stock was $11 3/8 per
share.
<PAGE>
Terms of the Options
Stock Option Price. The price to be paid for shares of Common Stock upon
the exercise of each incentive stock option shall not be less than the fair
market value of such shares on the date on which the option is granted.
Incentive stock options granted to holders of more than 10% of the combined
voting power of all classes of stock of the Holding Company may be granted at an
option price no less than 110% of the fair market value of the stock on the date
of grant.
Option Term. No option may have a term longer than ten years and one day
from the date of grant. However, under the Code, incentive stock options may not
have terms in excess of ten years. Incentive stock options granted to holders of
more than 10% of the combined voting power of all classes of stock of the
Holding Company may not have terms in excess of five years.
Exercise of Option. The option price of each share of stock is to be paid
in full in cash at the time of exercise. Under certain circumstances, the Option
Plan permits optionees to deliver a notice to their broker to deliver to the
Holding Company the total option price in cash and the amount of any taxes to be
withheld from the optionee's compensation as a result of any withholding tax
obligation of the Holding Company. Beginning on December 30, 2001, payment of
the option price may also be effected by tendering whole shares of the Holding
Company's Common Stock owned by the Optionee and cash having a fair market value
equal to the cash exercise price of the shares with respect to which the option
is being exercised. Options may be exercisable in full at any time during their
term or in such installments, on a cumulative basis, as the Stock Compensation
Committee may determine, except that no option may be exercised at any time as
to fewer than 100 shares unless the exercise is with respect to an entire
residue of fewer than 100 shares, no option may be exercised during the first
six months of its term, and options are exercisable no earlier than 20% per year
beginning on the anniversary of the date of grant of such options, except in the
event of death or disability.
Exercise of Options by Other Than Outside Directors. Except as provided
below, upon termination of an optionholder's employment by the Holding Company
and its subsidiaries, all rights under any options granted to him but not yet
exercised terminate. In the event that an optionee retires pursuant to any then
existing pension plan of the Holding Company or its subsidiaries, his option may
be exercised by him in whole or in part within three years after his retirement
until the expiration of the option term fixed by the Committee, to the extent
the option was otherwise exercisable by him at his date of retirement; provided,
however, that if he remains a director or director emeritus of the Holding
Company or any of its subsidiaries the option granted to him continues to vest
while he serves as a director or director emeritus and he may exercise such
option until the later of (a) three years after his retirement or (b) six months
after he ceases to be a director or director emeritus of the Holding Company or
any of its subsidiaries. If an optionee's employment by the Holding Company and
its subsidiaries terminates by reason of permanent and total disability, his
option may be exercised by him in whole or in part within one year after such
termination of employment, whether or not the option was otherwise exercisable
by him at the time of such termination of employment. If the optionee dies while
employed by the Holding Company or its subsidiaries, within three years after
his retirement (or, if later, six months following his termination of service as
a director or director emeritus of the Holding Company or its subsidiaries), or
within one year after his termination of employment because of permanent and
total disability, his option may be exercised by his estate or by the person or
persons entitled thereto by will or by the applicable laws of descent or
distribution at any time within one year after the date of such death, whether
or not the option was otherwise exercisable by the optionee at the date of his
death. Notwithstanding the foregoing, in no event may any option be exercised
after the expiration of the option term set by the Stock Compensation Committee.
<PAGE>
Exercise of Options by Outside Directors. Options granted to Outside
Directors terminate six months after the date such Outside Director ceases to be
a director and director emeritus of the Holding Company and the subsidiaries for
any reason. If an optionee who is an Outside Director ceases to be a director
and a director emeritus of the Holding Company or a subsidiary by reason of
disability, any option granted to him may be exercised in whole or in part
within one year of such termination of service, whether or not the option was
otherwise exercisable by him at the time of such termination of service. In the
event of the death of an Outside Director while serving as a director or
director emeritus of the Holding Company or a subsidiary, within six months
after he ceases to be a director or a director emeritus of the Holding Company
or the subsidiaries, or within one year after he ceases to be a director and a
director emeritus of the Holding Company or a subsidiary by reason of
disability, any option granted to him may be exercised by his estate or by the
person or persons entitled thereto by will or by the applicable laws of descent
or distribution at any time within one year after the date of such death,
whether or not the option was exercisable by the optionee at the date of his
death. Notwithstanding the foregoing, in no event may any option be exercised
after the expiration of the option term set by the Stock Compensation Committee.
Nontransferability of Option. Options may not be transferred except by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order. During the lifetime of an optionee, they may be exercised only
by him or his guardian or legal representative.
Maximum Incentive Stock Options. The aggregate fair market value of stock
with respect to which incentive stock options are exercisable for the first time
by an optionee during any calendar year under the Option Plan may not exceed
$100,000. For purposes of these computations, the fair market value of the
shares is to be determined as of the date the option is granted and computed in
the manner determined by the Stock Compensation Committee consistent with the
requirements of the Code. This limitation does not apply to non-qualified stock
options granted under the Option Plan.
Other Provisions
The Stock Compensation Committee may provide for such other terms,
provisions and conditions of an option as are not inconsistent with the Option
Plan. The Stock Compensation Committee may also prescribe, and amend, waive and
rescind rules and regulations relating to the Option Plan, may accelerate the
vesting of stock options granted the Option Plan, may make amendments or
modifications in the terms and conditions (including exercisability) of the
options relating to the effect of termination of employment of the optionees,
and may waive any restrictions or conditions applicable to any option or the
exercise thereof.
Amendment and Termination
The Board of Directors of the Holding Company may amend the Option Plan
from time to time, and, with the consent of the optionee, the terms and
provisions of his option, provided, however, that (1) no amendment may, without
the consent of an optionee, make any changes in any outstanding option which
would adversely affect the rights of the optionee and (2) without approval of
the holders of at least a majority of the shares of the Holding Company voting
in person or by proxy at a duly constituted meeting, or adjournment thereof, the
following changes in the Option Plan may not be made: an increase in the number
of shares reserved for issuance under the Option Plan (except as permitted by
the antidilutive provisions in the Option Plan); an extension of the option
terms to more than 10 years and one day from the date of grant of the option; or
a material modification of the class of employees eligible to receive options
under the Option Plan. The Board of Directors of the Holding Company may
terminate the Option Plan at any time. In any event, no incentive stock options
may be granted under the Stock Option Plan after July 6, 2009.
It is possible that the Option Plan will be amended after December 30,
1999, to permit stock options to vest upon a change in control of the Holding
Company or an optionee's retirement or at some earlier time. Such an amendment
could be made without seeking shareholder approval.
<PAGE>
Federal Income Tax Consequences
The grant of incentive and non-qualified stock options will have no federal
tax consequences to the Holding Company or the optionee. Moreover, if an
incentive stock option is exercised (a) while the employee is employed by the
Holding Company or its subsidiaries, (b) within three months after the optionee
ceases to be an employee of the Holding Company or its subsidiaries, (c) after
the optionee's death, or (d) within one year after the optionee ceases to be an
employee of the Holding Company or its subsidiaries if the optionee's employment
is terminated because of permanent and total disability (within the meaning of
ss. 22(e)(3) of the Code), the exercise of the incentive stock option will
ordinarily have no federal income tax consequences to the Holding Company or the
optionee. However, the amount by which the fair market value of the shares at
the time of exercise exceeds the option price of the option will, along with
other specified items, be considered taxable income in the taxable year of the
optionee in which the option was exercised for purposes of determining the
applicability of the alternative minimum tax. As a result, the exercise of an
incentive stock option may subject an optionee to an alternative minimum tax
depending on that optionee's particular circumstances.
On the other hand, the recipient of a non-qualified stock option generally
will realize taxable ordinary income at the time of exercise of his option in an
amount equal to the excess of the fair market value of the shares acquired at
the time of such exercise over the option price. A like amount is generally
deductible by the Holding Company for federal income tax purposes as of that
date, as long as the Holding Company withholds federal income tax with respect
to that taxable amount, assuming the optionholder's income is subject to income
tax witholding by the Holding Company. The Option Plan permits, under certain
circumstances, holders of non-qualified stock options to satisfy their
withholding obligation by having shares equal in value to the applicable
withholding taxes withheld from the shares which they would otherwise receive
upon the exercise of a non-qualified stock option.
Upon the sale of the shares acquired upon the exercise of an incentive
stock option no sooner than two years after the grant of the option and no
sooner than one year after receipt of the shares by the optionee, any capital
gain recognized would be taxed to the optionee at long-term rates. Upon the sale
of shares acquired upon the exercise of an incentive stock option prior to two
years after the grant of an option or prior to one year after receipt of the
shares by the optionee, the optionee will generally recognize, in the year of
disposition, ordinary income equal to the lesser of (a) the spread between the
fair market value of the shares on the date of exercise and the exercise price;
and (b) the gain realized upon the disposition of those shares. The Holding
Company will be entitled to a deduction equal to the amount of income recognized
as ordinary income by the optionee, so long as the Holding Company withholds
federal income tax with respect to that taxable amount (assuming the
optionholder's income is subject to income tax witholding by the Holding
Company). If the spread is the basis for determining the amount of ordinary
income realized by the optionee, there will be additional long-term or
short-term capital gain realized if the proceeds of such sale exceed such
spread.
Upon the subsequent sale of shares acquired upon exercise of a
non-qualified stock option, the optionholder will recognize long-term capital
gain or loss if the shares are deemed to have been held for more than 12 months,
and short-term capital gain or loss in all other cases. Currently, long-term
capital gains for noncorporate taxpayers are generally taxed at a maximum rate
of 20%. Short-term capital gains are taxed at the same rates as ordinary income.
<PAGE>
Financial Accounting Consequences
At this time, neither the grant of incentive or non-qualified stock options
nor the issuance of shares upon exercise of such options will result in a
compensation expense charge to the Holding Company's earnings for financial
accounting purposes. Option proceeds from the exercise of these options and tax
savings from non-qualified stock options are credited to capital. The Financial
Accounting Standards Board (the "FASB") has adopted rules that require increased
disclosure about the value of stock options in financial statements for the
Holding Company, including their impact on earnings.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE AND
RATIFY THE OPTION PLAN. SUCH ACTION REQUIRES THE APPROVAL OF THE HOLDERS OF AT
LEAST A MAJORITY OF THE SHARES OF THE HOLDING COMPANY'S COMMON STOCK ENTITLED TO
VOTE AT THE ANNUAL MEETING, OR ANY ADJOURNMENT THEREOF. ABSTENTIONS AND BROKER
NON-VOTES WILL BE INCLUDED IN THE NUMBER OF SHARES PRESENT AND ENTITLED TO VOTE
ON THE PROPOSAL AND ACCORDINGLY TREATED AS "NO" VOTES.
PROPOSAL III -- RECOGNITION AND RETENTION PLAN AND TRUST
The Board of Directors of the Holding Company and the Bank adopted the
Lincoln Federal Savings Bank Recognition and Retention Plan and Trust (the
"RRP") on April 20, 1999. The central features of the RRP are summarized below,
but the RRP is set forth in full in Exhibit B to this Proxy Statement, and all
statements made in this summary are qualified by reference to the full text of
the RRP.
Purpose
The purpose of the RRP is to retain directors and key employees of the
Holding Company and its subsidiaries by providing such persons with a
proprietary interest in the Holding Company, as compensation for their
contributions to the Holding Company and its subsidiaries and as an incentive to
make such contributions in the future.
Administration
The RRP is administered by the Stock Compensation Committee (the "Stock
Compensation Committee") of the Holding Company's Board of Directors, which must
at all times consist of at least two directors of the Holding Company, each of
whom is a non-employee director within the meaning of the definition of that
term contained in Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The current members of the Stock Compensation
Committee are set forth on page 4 of this Proxy Statement. The Stock
Compensation Committee selects recipients and establishes terms of awards made
under the RRP. The Stock Compensation Committee's interpretations and
constructions of the RRP provisions or any award made under the RRP are final
and binding.
The Committee may adopt rules or regulations under the RRP. The Trustee of
the RRP is Fifth Third Bank, Indiana. The Trustee acquires, holds and
distributes shares of Common Stock and other RRP assets in accordance with the
terms of the RRP.
The Holding Company has agreed to indemnify the Trustee, the Committee
members, and any director of the Holding Company or the Bank against liability
for good faith determinations made under the RRP. The Holding Company has also
agreed to indemnify the Trustee for actions under the RRP not constituting
negligence or willful misconduct.
Eligibility
Employees of the Holding Company and its affiliated corporations who elect
to participate in the RRP ("Affiliates"), the Outside Directors, and future
directors and directors emeritus are eligible to receive awards under the RRP.
The Committee is to consider the position and responsibilities of the eligible
employees and directors, the length and value of their services, their level of
compensation, and any other factors the Committee deems relevant.
<PAGE>
Contributions
The Board of Directors of the Bank determines the amount or method of
computing the amount of cash contributions to be made to the RRP by the Bank. No
employee contributions are permitted.
Investment of Contributions
Contributions made to the RRP are to be invested by the Trustee in Common
Stock, to the fullest extent possible. At the time the Plan became effective,
280,370 shares of the Holding Company's Common Stock were reserved for purchase
under the RRP. Such shares may be authorized but unissued shares, treasury
shares, or issued and outstanding shares. In the event additional authorized but
unissued shares or treasury shares are acquired by the RRP, the interests of
existing shareholders will be diluted. Earnings, gains and losses with respect
to Trust assets (including dividends and distributions payable with respect to
shares of Common Stock) will be allocated to recipients of RRP awards, to the
extent allocable to awards made to those recipients, and, otherwise, to the
general account of the Trust. All expenses and costs of administering the RRP
are to be paid by the Holding Company or its Affiliates.
If the RRP is approved by shareholders, the Bank will make contributions to
the RRP in an amount necessary to purchase at least 280,370 shares of the
Holding Company's Common Stock on the open market to fund the RRP. Based on the
market price of such Common Stock on May 14, 1999, the amount of such
contribution is estimated to be $3,189,209. Effective as of the date the RRP is
approved by the Holding Company's shareholders, shares will be awarded to the
following persons in the following amounts:
Recipient of Award Number of Shares Awarded
------------------ ------------------------
T. Tim Unger 56,074
John M. Baer 35,046
All other employees 25,083
-------
Total 116,203
=======
These awards vest at a rate of 20% per year commencing with the date of the
award, subject to earlier vesting in the event of the death or disability of the
grantee.
In addition, each of the eight Outside Directors of the Holding Company
will receive awards of 10,513 shares as of the date the Plan is approved by the
Holding Company's shareholders. These awards also vest at a rate of 20% per year
commencing with the date of the award, subject to earlier vesting in the event
of the death or disability of the grantee.
Awards
Under the RRP, awards are granted to eligible employees and directors in
the form of shares of Common Stock held by the RRP. Awards are nontransferable
and nonassignable, other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order, and during the lifetime of the
recipient may only be earned by and paid to him. Unless the Committee provides
otherwise, at the time an RRP award is granted, the shares which are the subject
of the award are to vest and be earned by the recipient at the rate of 20% of
the shares awarded at the end of each full 12 months of service with the Bank
after the date of grant of the award. Awards are adjusted for capital changes
such as stock dividends and stock splits. Awards are subject to the claims of
the creditors of the Bank until distributed.
<PAGE>
Notwithstanding the foregoing, awards will be 100% vested upon termination
of employment or service as a director or director emeritus due to death or
disability. In the event that a grantee terminates employment with the Holding
Company and an Affiliate and service as a director and director emeritus for any
other reason, the nonvested awards will be forfeited. If an employee's
employment or a director's or director emeritus' service is terminated for cause
(as defined in the RRP), or if his conduct would have justified termination for
cause, shares not already delivered to him under the RRP, whether or not vested,
may be forfeited by resolution of the Board of Directors of the Holding Company
or the Bank. Earned shares are distributed to recipients as soon as practicable
following the day on which they are earned. When shares become vested and are
actually distributed in accordance with the RRP, the participants will also
receive amounts equal to any accrued dividends and other earnings or
distributions payable with respect thereto.
Voting
Prior to vesting, shares held in the RRP will be voted by the RRP Trustee
taking into account the best interests of the award recipients.
Federal Income Tax Consequences
The Trust should be treated as a grantor trust under the Code and, thus, in
computing the taxable income and credits of the Holding Company, those items of
income, deductions and credits which are attributable to the Trust shall be
taken into account by the Holding Company. When shares become vested in
accordance with the RRP, the participants will recognize income equal to the
fair market value of the Common Stock at that time; provided however that
participants may make a ss. 83(b) election under the Code with respect to all or
part of their awards prior to vesting and in such situations restricted stock
certificates will be delivered to such participants and those participants will
be taxed on the the fair market value of the shares at the time the ss. 83(b)
election is made. The amount of income recognized by the participants will be a
deductible expense for tax purposes for the Holding Company assuming the
employer satisfies its withholding tax obligation with respect to persons
subject to such withholding.
Accounting Treatment
When the Stock Compensation Committee makes an RRP award, an amount equal
to the fair market value at the date of grant of the awarded stock is charged to
compensation expense over the period of the restriction. The unearned portion of
the award is included in the Holding Company's balance sheet as a reduction of
shareholders' equity.
Amendment or Termination
The Board of Directors of the Holding Company or the Bank may amend or
terminate the RRP. The RRP remains in effect until the earlier of 21 years from
its effective date, termination by the Board of Directors as provided above, or
the distribution of all Trust assets.
It is possible that the RRP will be amended after December 30, 1999, to
permit RRP awards to vest upon a change in control of the Holding Company or an
optionee's retirement or at some earlier time. Such an amendment could be made
without seeking shareholder approval.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE THE
RRP. SUCH ACTION REQUIRES THE APPROVAL OF THE HOLDERS OF AT LEAST A MAJORITY OF
THE SHARES OF THE HOLDING COMPANY'S COMMON STOCK ENTITLED TO VOTE AT THE ANNUAL
MEETING, OR ANY ADJOURNMENT THEREOF. ABSTENTIONS AND BROKER NON-VOTES WILL BE
INCLUDED IN THE NUMBER OF SHARES PRESENT AND ENTITLED TO VOTE ON THE PROPOSAL
AND ACCORDINGLY TREATED AS "NO" VOTES.
<PAGE>
ACCOUNTANTS
Olive, LLP has served as auditors for the Bank since November 30, 1995, and
for the Holding Company since its formation in 1998. The Holding Company
believes that a representative of Olive, LLP will be present at the Annual
Meeting with the opportunity to make a statement if he or she so desires. He or
she will also be available to respond to any appropriate questions shareholders
may have. The Board of Directors of the Holding Company has not yet completed
the process of selecting an independent public accounting firm to audit its
books, records and accounts for the fiscal year ended December 31, 1999.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires that the Holding Company's officers
and directors and persons who own more than 10% of the Holding Company's Common
Stock file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Holding Company with
copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, he Holding Company believes that during the
fiscal year ended December 31, 1998, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the next
Annual Meeting of the Holding Company and included in the Proxy Statement and
form of proxy relating to that meeting must be received at the main office of
the Holding Company for inclusion in the proxy statement no later than 120 days
in advance of March 24, 2000. Any such proposal should be sent to the attention
of the Secretary of the Holding Company at P.O. Box 510, 1121 East Main Street,
Plainfield, Indiana 46168. A shareholder proposal being submitted outside the
processes of Rule 14a-8 promulgated under the 1934 Act, will be considered
untimely if it is received by the Holding Company later than 45 days in advance
of March 24, 2000.
OTHER MATTERS
Management is not aware of any business to come before the Annual Meeting
other than those matters described in the Proxy Statement. However, if any other
matters should properly come before the Annual Meeting, it is intended that the
proxies solicited hereby will be voted with respect to those other matters in
accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Holding Company.
The Holding Company will reimburse brokerage firms and other custodians,
nominees and fiduciaries for reasonable expenses incurred by them in sending
proxy material to the beneficial owners of the Common Stock. In addition to
solicitation by mail, directors, officers, and employees of the Holding Company
may solicit proxies personally or by telephone without additional compensation.
Each shareholder is urged to complete, date and sign the proxy and return
it promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ T. Tim Unger
T. Tim Unger,
Chairman, President and
Chief Executive Officer
May 27, 1999
<PAGE>
LINCOLN BANCORP
STOCK OPTION PLAN
1. Purpose. The purpose of the Lincoln Bancorp Stock Option Plan (the
"Plan") is to provide to directors, officers and other key employees of Lincoln
Bancorp (the "Holding Company") and its majority-owned and wholly-owned
subsidiaries (individually a "Subsidiary" and collectively the "Subsidiaries"),
including, but not limited to, Lincoln Federal Savings Bank upon its conversion
to stock form ("Lincoln"), who are materially responsible for the management or
operation of the business of the Holding Company or a Subsidiary and have
provided valuable services to the Holding Company or a Subsidiary, a favorable
opportunity to acquire Common Stock, without par value ("Common Stock"), of the
Holding Company, thereby providing them with an increased incentive to work for
the success of the Holding Company and its Subsidiaries and better enabling each
such entity to attract and retain capable directors and executive personnel.
2. Administration of the Plan. The Plan shall be administered,
construed and interpreted by a committee (the "Committee") consisting of at
least two members of the Board of Directors of the Holding Company, each of whom
is a "Non-Employee Director" within the meaning of the definition of that term
contained in Reg. ss. 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The members of the Committee shall be
designated from time to time by the Board of Directors of the Holding Company.
The decision of a majority of the members of the Committee shall constitute the
decision of the Committee, and the Committee may act either at a meeting at
which a majority of the members of the Committee is present or by a written
consent signed by all members of the Committee. The Committee shall have the
sole, final and conclusive authority to determine, consistent with and subject
to the provisions of the Plan:
(a) the individuals (the "Optionees") to whom options or
successive options shall be granted under the Plan;
(b) the time when options shall be granted hereunder;
(c) the number of shares of Common Stock to be covered under each
option;
(d) the option price to be paid upon the exercise of each option;
(e) the period within which each such option may be exercised;
(f) the extent to which an option is an incentive stock option or
a non-qualified stock option; and
(g) the terms and conditions of the respective agreements by which
options granted shall be evidenced.
The Committee shall also have authority to prescribe, amend, waive, and rescind
rules and regulations relating to the Plan, to accelerate the vesting of any
stock options made hereunder (subject to Office of Thrift and Supervision
regulations), to make amendments or modifications in the terms and conditions
(including exercisability) of the options relating to the effect of termination
of employment of the optionee (subject to the last sentence of Section 9
hereof), to waive any restrictions or conditions applicable to any option or the
exercise thereof, and to make all other determinations necessary or advisable in
the administration of the Plan.
<PAGE>
3. Eligibility. The Committee may, consistent with the purposes of the
Plan, grant options to officers and other key employees and directors or
directors emeritus (whether or not also employees) of the Holding Company or of
a Subsidiary who in the opinion of the Committee are from time to time
materially responsible for the management or operation of the business of the
Holding Company or of a Subsidiary and have provided valuable services to the
Holding Company or a Subsidiary; provided, however, that in no event may any
employee who owns (after application of the ownership rules in ss. 425(d) of the
Internal Revenue Code of 1986, as amended (the "Code")) shares of stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Holding Company or any of its Subsidiaries be granted an
incentive stock option hereunder unless at the time such option is granted the
option price is at least 110% of the fair market value of the stock subject to
the option and such option by its terms is not exercisable after the expiration
of five (5) years from the date such option is granted. No employee may be
granted options under the Plan for more than 250,000 shares of Common Stock in
any calendar year. Subject to the foregoing provisions, an individual who has
been granted an option under the Plan (an "Optionee"), if he is otherwise
eligible, may be granted an additional option or options if the Committee shall
so determine.
4. Stock Subject to the Plan. There shall be reserved for issuance upon
the exercise of options granted under the Plan, shares of Common Stock of the
Holding Company equal to 10% of the total number of shares of Common Stock
issued by the Holding Company upon the conversion of Lincoln from mutual to
stock form (including any such shares issued at the time of the Conversion to
the private foundation being created as part of the Conversion), which may be
authorized but unissued shares or treasury shares of the Holding Company.
Subject to Section 7 hereof, the shares for which options may be granted under
the Plan shall not exceed that number. If any option shall expire or terminate
or be surrendered for any reason without having been exercised in full, the
unpurchased shares subject thereto shall (unless the Plan shall have terminated)
become available for other options under the Plan.
5. Terms of Options. Each option granted under the Plan shall be
subject to the following terms and conditions and to such other terms and
conditions not inconsistent therewith as the Committee may deem appropriate in
each case:
(a) Option Price. The price to be paid for shares of stock
upon the exercise of each option shall be determined by the Committee
at the time such option is granted, but such price in no event shall be
less than the fair market value, as determined by the Committee
consistent with Treas. Reg. ss. 20.2031-2 and any requirements of ss.
422A of the Code, of such stock on the date on which such option is
granted.
(b) Period for Exercise of Option. An option shall not be
exercisable after the expiration of such period as shall be fixed by
the Committee at the time of the grant thereof, but such period in no
event shall exceed ten (10) years and one day from the date on which
such option is granted; provided, that incentive stock options granted
hereunder shall have terms not in excess of ten (10) years and
non-qualified options shall be for a period of not in excess of ten
(10) years and one day from the date of grant thereof. Options shall be
subject to earlier termination as hereinafter provided.
<PAGE>
(c) Exercise of Options. The option price of each share of
stock purchased upon exercise of an option shall be paid in full at the
time of such exercise. Payment may be in (i) cash, (ii) if the Optionee
may do so in conformity with Regulation T (12 C.F.R. ss. 220.3(e)(4))
without violating ss. 16(b) or ss. 16(c) of the 1934 Act, pursuant to a
broker's cashless exercise procedure, by delivering a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Holding Company the total option price in cash
and, if desired, the amount of any taxes to be withheld from the
Optionee's compensation as a result of any withholding tax obligation
of the Holding Company or any of its Subsidiaries, as specified in such
notice, or (iii) beginning on a date which is three years following
Lincoln's conversion from mutual to stock form and with the approval of
the Committee, by tendering whole shares of the Holding Company's
Common Stock owned by the Optionee and cash having a fair market value
equal to the cash exercise price of the shares with respect to which
the option is being exercised. For this purpose, any shares so tendered
by an Optionee shall be deemed to have a fair market value equal to the
mean between the highest and lowest quoted selling prices for the
shares on the date of exercise of the option (or if there were no sales
on such date the weighted average of the means between the highest and
lowest quoted selling prices for the shares on the nearest date before
and the nearest after the date of exercise of the option as prescribed
by Treas. Reg. ss. 20-2031-2), as reported in The Wall Street Journal
or a similar publication selected by the Committee. The Committee shall
have the authority to grant options exercisable in full at any time
during their term, or exercisable in such installments at such times
during their term as the Committee may determine; provided, however,
that options shall not be exercisable during the first six (6) months
of their term, and provided further that options shall become
exercisable no earlier than at the rate of 20% per year beginning on
the anniversary of the date of grant of such options, subject to
earlier vesting in the event of death or disability. Installments not
purchased in earlier periods shall be cumulated and be available for
purchase in later periods. Subject to the other provisions of this
Plan, an option may be exercised at any time or from time to time
during the term of the option as to any or all whole shares which have
become subject to purchase pursuant to the terms of the option or the
Plan, but not at any time as to fewer than one hundred (100) shares
unless the remaining shares which have become subject to purchase are
fewer than one hundred (100) shares. An option may be exercised only by
written notice to the Holding Company, mailed to the attention of its
Secretary, signed by the Optionee (or such other person or persons as
shall demonstrate to the Holding Company his or their right to exercise
the option), specifying the number of shares in respect of which it is
being exercised, and accompanied by payment in full in either cash or
by check in the amount of the aggregate purchase price therefor, by
delivery of the irrevocable broker instructions referred to above, or,
if the Committee has approved the use of the stock swap feature
provided for above, followed as soon as practicable by the delivery of
the option price for such shares.
(d) Certificates. The certificate or certificates for the
shares issuable upon an exercise of an option shall be issued as
promptly as practicable after such exercise. An Optionee shall not have
any rights of a shareholder in respect to the shares of stock subject
to an option until the date of issuance of a stock certificate to him
for such shares. In no case may a fraction of a share be purchased or
issued under the Plan, but if, upon the exercise of an option, a
fractional share would otherwise be issuable, the Holding Company shall
pay cash in lieu thereof.
<PAGE>
(e) Termination of Option. If an Optionee (other than a
director or director emeritus of the Holding Company or its
Subsidiaries who is not an employee of the Holding Company or its
Subsidiaries ("Outside Director")) ceases to be an employee of the
Holding Company and the Subsidiaries for any reason other than
retirement, permanent and total disability (within the meaning of ss.
22(e)(3) of the Code), or death, any option granted to him shall
forthwith terminate. Leave of absence approved by the Committee shall
not constitute cessation of employment. If an Optionee (other than an
Outside Director) ceases to be an employee of the Holding Company and
the Subsidiaries by reason of retirement, any option granted to him may
be exercised by him in whole or in part within three (3) years after
the date of his retirement, to the extent the option was otherwise
exercisable at the date of his retirement; provided, however, that if
such employee remains a director or director emeritus of the Holding
Company, the option granted to him shall continue to vest while he
serves as a director or director emeritus and may be exercised by him
in whole or in part until the later of (a) three (3) years after the
date of his retirement, or (b) six months after his service as a
director or director emeritus of the Holding Company terminates. (The
term "retirement" as used herein means such termination of employment
as shall entitle such individual to early or normal retirement benefits
under any then existing pension plan of the Holding Company or a
Subsidiary.) If an Optionee (other than an Outside Director) ceases to
be an employee of the Holding Company and the Subsidiaries by reason of
permanent and total disability (within the meaning of ss. 22(e)(3) of
the Code), any option granted to him may be exercised by him in whole
or in part within one (1) year after the date of his termination of
employment by reason of such disability whether or not the option was
otherwise exercisable at the date of such termination. Options granted
to Outside Directors shall cease to be exercisable six (6) months after
the date such Outside Director is no longer a director or director
emeritus of the Holding Company or its Subsidiaries for any reason
other than death or disability. If an Optionee who is an Outside
Director ceases to be a director or a director emeritus of the Holding
Company or its Subsidiaries by reason of disability, any option granted
to him may be exercised in whole or in part within one (1) year after
the date the Optionee ceases to be a director or a director emeritus by
reason of such disability, whether or not the option was otherwise
exercisable at such date. In the event of the death of an Optionee
while in the employ or service as a director or director emeritus of
the Holding Company or a Subsidiary, or, if the Optionee is not an
Outside Director, within three (3) years after the date of his
retirement (or, if later, six months following his termination of
service as a director or director emeritus of the Holding Company or
its Subsidiaries) or within one (1) year after the termination of his
employment by reason of permanent and total disability (within the
meaning of ss. 22(e)(3) of the Code), or, if the Optionee is an Outside
Director, within six (6) months after he is no longer a director or
director emeritus of the Holding Company or its Subsidiaries for
reasons other than disability or, within one (1) year after the
termination of his service by reason of disability, any option granted
to him may be exercised in whole or in part at any time within one (1)
year after the date of such death by the executor or administrator of
his estate or by the person or persons entitled to the option by will
or by applicable laws of descent and distribution until the expiration
of the option term as fixed by the Committee, whether or not the option
was otherwise exercisable at the date of his death. Notwithstanding the
foregoing provisions of this subsection (e), no option shall in any
event be exercisable after the expiration of the period fixed by the
Committee in accordance with subsection (b) above.
<PAGE>
(f) Nontransferability of Option. No option may be transferred
by the Optionee otherwise than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder, and during the lifetime of the
Optionee options shall be exercisable only by the Optionee or his
guardian or legal representative.
(g) No Right to Continued Service. Nothing in this Plan or in
any agreement entered into pursuant hereto shall confer on any person
any right to continue in the employ or service of the Holding Company
or its Subsidiaries or affect any rights the Holding Company, a
Subsidiary, or the shareholders of the Holding Company may have to
terminate his service at any time.
(h) Maximum Incentive Stock Options. The aggregate fair market
value of stock with respect to which incentive stock options (within
the meaning of ss. 422A of the Code) are exercisable for the first time
by an Optionee during any calendar year under the Plan or any other
plan of the Holding Company or its Subsidiaries shall not exceed
$100,000. For this purpose, the fair market value of such shares shall
be determined as of the date the option is granted and shall be
computed in such manner as shall be determined by the Committee,
consistent with the requirements of ss. 422A of the Code.
(i) Agreement. Each option shall be evidenced by an agreement
between the Optionee and the Holding Company which shall provide, among
other things, that, with respect to incentive stock options, the
Optionee will advise the Holding Company immediately upon any sale or
transfer of the shares of Common Stock received upon exercise of the
option to the extent such sale or transfer takes place prior to the
later of (a) two (2) years from the date of grant or (b) one (1) year
from the date of exercise.
(j) Investment Representations. Unless the shares subject to
an option are registered under applicable federal and state securities
laws, each Optionee by accepting an option shall be deemed to agree for
himself and his legal representatives that any option granted to him
and any and all shares of Common Stock purchased upon the exercise of
the option shall be acquired for investment and not with a view to, or
for the sale in connection with, any distribution thereof, and each
notice of the exercise of any portion of an option shall be accompanied
by a representation in writing, signed by the Optionee or his legal
representatives, as the case may be, that the shares of Common Stock
are being acquired in good faith for investment and not with a view to,
or for sale in connection with, any distribution thereof (except in
case of the Optionee's legal representatives for distribution, but not
for sale, to his legal heirs, legatees and other testamentary
beneficiaries). Any shares issued pursuant to an exercise of an option
may bear a legend evidencing such representations and restrictions.
6. Incentive Stock Options and Non-Qualified Stock Options. Options
granted under the Plan may be incentive stock options under ss. 422A of the Code
or non-qualified stock options, provided, however, that Outside Directors shall
be granted only non-qualified stock options. All options granted hereunder will
be clearly identified as either incentive stock options or non-qualified stock
options. In no event will the exercise of an incentive stock option affect the
right to exercise any non-qualified stock option, nor shall the exercise of any
non-qualified stock option affect the right to exercise any incentive stock
option. Nothing in this Plan shall be construed to prohibit the grant of
incentive stock options and non-qualified stock options to the same person,
provided, further, that incentive stock options and non-qualified stock options
shall not be granted in a manner whereby the exercise of one non-qualified stock
option or incentive stock option affects the exercisability of the other.
<PAGE>
7. Adjustment of Shares. In the event of any change after the effective
date of the Plan in the outstanding stock of the Holding Company by reason of
any reorganization, recapitalization, stock split, stock dividend, combination
of shares, exchange of shares, merger or consolidation, liquidation,
extraordinary distribution (consisting of cash, securities, or other assets), or
any other change after the effective date of the Plan in the nature of the
shares of stock of the Holding Company, the Committee shall determine what
changes, if any, are appropriate in the number and kind of shares reserved under
the Plan, and the Committee shall determine what changes, if any, are
appropriate in the option price under and the number and kind of shares covered
by outstanding options granted under the Plan. Any determination of the
Committee hereunder shall be conclusive.
8. Tax Withholding. Whenever the Holding Company proposes or is
required to issue or transfer shares of Common Stock under the Plan, the Holding
Company shall have the right to require the Optionee or his or her legal
representative to remit to the Holding Company an amount sufficient to satisfy
any federal, state and/or local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares, and whenever under
the Plan payments are to be made in cash, such payments shall be net of an
amount sufficient to satisfy any federal, state and/or local withholding tax
requirements. If permitted by the Committee and pursuant to procedures
established by the Committee, an Optionee may make a written election to have
shares of Common Stock having an aggregate fair market value, as determined by
the Committee, consistent with the requirements of Treas. Reg. ss. 20.2031-2,
sufficient to satisfy the applicable withholding taxes, withheld from the shares
otherwise to be received upon the exercise of a non-qualified option.
9. Amendment. Subject to Section 13, the Board of Directors of the
Holding Company may amend the Plan from time to time and, with the consent of
the Optionee, the terms and provisions of his option, except that without the
approval of the holders of at least a majority of the shares of the Holding
Company voting in person or by proxy at a duly constituted meeting or
adjournment thereof:
(a) the number of shares of stock which may be reserved for
issuance under the Plan may not be increased except as provided in
Section 7 hereof;
(b) the period during which an option may be exercised may not
be extended beyond ten (10) years and one day from the date on which
such option was granted; and
(c) the class of persons to whom options may be granted under
the Plan shall not be modified materially.
No amendment of the Plan, however, may, without the consent of the
Optionees, make any changes in any outstanding options theretofore granted under
the Plan which would adversely affect the rights of such Optionees.
10. Termination. The Board of Directors of the Holding Company may
terminate the Plan at any time and no option shall be granted thereafter. Such
termination, however, shall not affect the validity of any option theretofore
granted under the Plan. In any event, no incentive stock option may be granted
under the Plan after the date which is ten (10) years from the effective date of
the Plan.
<PAGE>
11. Successors. This Plan shall be binding upon the successors and
assigns of the Holding Company.
12. Governing Law. The terms of any options granted hereunder and the
rights and obligations hereunder of the Holding Company, the Optionees and their
successors in interest shall, except to the extent governed by federal law, be
governed by Indiana law.
13. Government and Other Regulations. The obligations of the Holding
Company to issue or transfer and deliver shares under options granted under the
Plan shall be subject to compliance with all applicable laws, governmental rules
and regulations (including Office of Thrift and Supervision regulations), and
administrative action. In particular, grants of stock options under the Plan
shall comply with the requirements of 12. C.F.R. ss. 563b.3(g)(4)(vi), to the
extent applicable to such grants.
14. Effective Date. The Plan shall become effective on the date it is
approved by the holders of at least a majority of the shares of the Holding
Company entitled to vote at a duly constituted meeting or adjournment thereof.
The options granted pursuant to the Plan may not be exercised until the Board of
Directors of the Holding Company has been advised by counsel that such approval
has been obtained and all other applicable legal requirements have been met.
<PAGE>
LINCOLN FEDERAL SAVINGS BANK
RECOGNITION AND RETENTION PLAN AND TRUST
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Lincoln Federal Savings Bank hereby establishes the Recognition and
Retention Plan (the "Plan") and Trust (the "Trust") upon the terms and
conditions hereinafter stated in this Recognition and Retention Plan and Trust
Agreement (the "Agreement").
1.02 The Trustee, which initially shall be Fifth Third Bank, Indiana,
hereby accepts this Trust and agrees to hold the Trust assets existing on the
date of this Agreement and all additions and accretions thereto upon the terms
and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to retain directors and executive officers
in key positions by providing such persons with a proprietary interest in the
Holding Company (as hereinafter defined) as compensation for their contributions
to the Holding Company and to the Bank and its Affiliates (as hereinafter
defined) and as an incentive to make such contributions and to promote the
Holding Company's and the Bank's growth and profitability in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Affiliate" means the Holding Company and those subsidiaries or
affiliates of the Holding Company or the Bank which, with the consent of the
Board, agree to participate in this Plan.
3.02 "Bank" means Lincoln Federal Savings Bank and its successors, whether
in mutual or stock form.
3.03 "Beneficiary" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or, if none, his estate.
3.04 "Board" means the Board of Directors of the Bank.
3.05 "Committee" means the Stock Compensation Committee of the Board of
Directors of the Holding Company. At all times during its administration of this
Plan, the Committee shall consist of two or more directors of the Holding
Company, each of whom shall be a "Non-Employee Director" within the meaning of
the definition of that term contained in Regulation 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934, as amended (the "1934
Act").
<PAGE>
3.06 "Common Stock" means shares of the common stock, without par value, of
the Holding Company.
3.07 "Conversion" shall mean the conversion of the Bank from the mutual to
stock form of organization and the simultaneous acquisition of the Bank by the
Holding Company.
3.08 "Director" means a member of the Board of Directors of the Bank or the
Holding Company.
3.09 "Director Emeritus" shall mean an honorary, non-voting member of the
Board of Directors of the Bank or the Holding Company.
3.10 "Disability" means any physical or mental impairment which qualifies
an Employee, Director or Director Emeritus for disability benefits under the
applicable long-term disability plan maintained by the Bank or an Affiliate, or,
if no such plan applies, which would qualify such Employee, Director or Director
Emeritus for disability benefits under the long-term disability plan maintained
by the Bank, if such Employee, Director or Director Emeritus were covered by
that Plan.
3.11 "Employee" means any person who is currently employed by the Bank or
an Affiliate, including officers.
3.12 "Holding Company" shall mean Lincoln Bancorp.
3.13 "Outside Director" means a member of the Board of Directors of the
Bank or the Holding Company, who is not also an Employee and who may be a
Director or Director Emeritus.
3.14 "Plan Shares" means shares of Common Stock held in the Trust and
issued or issuable to a Recipient pursuant to the Plan.
3.15 "Plan Share Award" or "Award" means a right granted under this Plan to
earn Plan Shares.
3.16 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
3.17 "Recipient" means an Employee or Outside Director who receives a Plan
Share Award under the Plan.
3.18 "Trustee" means that person(s) or entity nominated by the Committee
and approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title
to the Plan assets for the purposes set forth herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and interpreted
by the Committee, which shall have all of the powers allocated to it in this and
other Sections of the Plan. The interpretation and construction by the Committee
of any provisions of the Plan or of any Plan Share Award granted hereunder shall
be final and binding. The Committee shall act by vote or written consent of a
majority of its members. Subject to the express provisions and limitations of
the Plan, the Committee may adopt such rules, regulations and procedures as it
deems appropriate for the conduct of its affairs. If permitted by applicable
law, the Committee, with the consent of Recipients, may change the vesting
schedule for Awards after the date of grant thereof. The Committee shall
recommend to the Board one or more persons or entities to act as Trustee in
accordance with the provisions of this Plan and Trust and the terms of Article
VIII hereof.
<PAGE>
4.02 Role of the Board. The members of the Committee and the Trustee shall
be appointed or approved by, and will serve at the pleasure of, the Board of
Directors of the Holding Company. The Board of Directors of the Holding Company
may in its discretion from time to time remove members from, or add members to,
the Committee, and may remove, replace or add Trustees.
4.03 Limitation on Liability. Neither a Director nor the Committee nor the
Trustee shall be liable for any determination made in good faith with respect to
the Plan or any Plan Shares or Plan Share Awards granted under it. If a Director
or the Committee or any Trustee is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of anything done or
not done by him in such capacity under or with respect to the Plan, the Bank
shall indemnify such person against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in the best interests of the
Bank and its Affiliates and, with respect to any criminal action or proceeding,
if he had no reasonable cause to believe his conduct was unlawful. The
indemnification of officers and directors of the Bank pursuant to this Section
4.03 shall be subject to 12 C.F.R. ss. 545.121.
ARTICLE V
CONTRIBUTION; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Bank shall be permitted to
contribute to the Trust an amount sufficient to purchase up to 4% of the shares
of Common Stock issued by the Holding Company in connection with the Conversion
(including any shares isued at the time of the Conversion to the private
foundation being created in connection with the Conversion). Such amounts shall
be paid to the Trustee no later than the date required to purchase shares of
Common Stock for Awards made under this Plan. No contributions by Employees or
Outside Directors shall be permitted.
5.02 Initial Investment. Any amounts held by the Trust until such amounts
are invested in accordance with Section 5.03, shall be invested by the Trustee
in such interest-bearing account or accounts at the Bank as the Trustee shall
determine to be appropriate.
5.03 Investment of Trust Assets; Creation of Plan Share Reserve. As soon as
practicable following the first shareholder meeting of the Holding Company
following the Conversion ("First Shareholder Meeting Date"), the Trustee shall
invest all of the Trust's assets exclusively in the number of shares of Common
Stock, designated by the Bank as subject to Awards made under the Plan, which
may be purchased directly from the Holding Company, on the open market, or from
any other source; provided, however that the Trust shall not invest in an amount
of Common Stock greater than 4.0% of the shares of the Common Stock sold in the
Conversion (including any shares issued at the time of the Conversion to the
private foundation being created in connection with the Conversion), which shall
constitute the "Plan Share Reserve" and provided, further that if the Trustee is
required to purchase such shares on the open market or from the Holding Company
for an amount per share greater than the price per share at which shares were
trading on the date the contributions therefor were made to the Trust, the Bank
shall have the discretion to reduce the number of shares to be awarded and
purchased. The Trust may hold cash in interest-bearing accounts pending
investment in Common Stock for periods of not more than one year after deposit.
The Trustee, in accordance with applicable rules and regulations and Section
5.01 hereof, shall purchase shares of Common Stock in the open market and/or
shall purchase authorized but unissued shares of the Common Stock from the
Holding Company sufficient to acquire the requisite percentage of shares. Any
earnings received or distributions paid with respect to Common Stock held in the
Plan Share Reserve shall be held in an interest-bearing account. Any earnings
received or distributions paid with respect to Common Stock subject to a Plan
Share Award shall be held in an interest-bearing account on behalf of the
individual Recipient.
<PAGE>
5.04 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Sections 6.02 and 6.03
after acquisition by the Trustee of such shares, or the decision of the
Committee to return Plan Shares to the Holding Company, the Plan Share Reserve
shall be reduced by the number of Plan Shares so allocated or returned. Any
shares subject to an Award which may not be earned because of a forfeiture by
the Recipient pursuant to Section 7.01 shall be returned (added) to the Plan
Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Employees and Outside Directors are eligible to receive
Plan Share Awards provided in Section 6.02.
6.02 Allocations. The Committee may determine which of the Employees and
Outside Directors referenced in Section 6.01 above will be granted Plan Share
Awards and the number of Plan Shares covered by each Award, including grants
effective upon the First Shareholder Meeting Date, provided, however, that the
number of Plan Shares covered by such Awards may not exceed the number of Plan
Shares in the Plan Share Reserve immediately prior to the grant of such Awards,
and provided further, that in no event shall any Awards be made which will
violate the Charter, Articles of Incorporation, Bylaws or Plan of Conversion of
the Holding Company or the Bank or any applicable federal or state law or
regulation and provided further that Awards may not be granted at any time in
which the Bank fails to meet its applicable minimum capital requirements. In the
event Plan Shares are forfeited for any reason and unless the Committee decides
to return the Plan Shares to the Holding Company, the Committee may, from time
to time, determine which of the Employees or Outside Directors referenced in
Section 6.01 above will be granted additional Plan Share Awards to be awarded
from forfeited Plan Shares. In selecting those Employees or Outside Directors to
whom Plan Share Awards will be granted and the number of Plan Shares covered by
such Awards, the Committee shall consider the position and responsibilities of
the eligible Employees or Outside Directors, the length and value of their
services to the Bank and its Affiliates, the compensation paid to such Employees
or Outside Directors, and any other factors the Committee may deem relevant.
6.03 Form of Allocation. As promptly as practicable after a determination
is made pursuant to Section 6.02 that a Plan Share Award is to be made, the
Committee shall notify the Recipient in writing of the grant of the Award, the
number of Plan Shares covered by the Award, and the terms upon which the Plan
Shares subject to the Award may be earned. The stock certificates for Plan Share
Awards shall be registered in the name of the Recipient until forfeited or
transferred to the Recipient after such Award has been earned. The Committee
shall maintain records as to all grants of Plan Share Awards under the Plan.
6.04 Allocations Not Required. Notwithstanding anything to the contrary in
Sections 6.01 and 6.02, no Employee or Outside Director shall have any right or
entitlement to receive a Plan Share Award hereunder, such Awards being at the
total discretion of the Committee, nor shall the Employees or Outside Directors
as a group have such a right. The Committee may, with the approval of the Board
(or, if so directed by the Board, shall) return all Common Stock in the Plan
Share Reserve not yet allocated to the Holding Company at any time, and cease
issuing Plan Share Awards.
6.05. Distribution Election Before Plan Shares Are Earned. Notwithstanding
anything contained in the Plan to the contrary, an Employee or an Outside
Director who has received an allocation of Plan Shares in accordance with
Article VI may request in writing that the Committee authorize the distribution
to him or her of all or a portion of the Plan Shares awarded before the date on
which the Plan Shares become earned in accordance with Article VII. The decision
as to whether to distribute to any Employee or Outside Director who requests
distribution shall be made by the Committee, in its sole discretion. In
addition, the distribution shall be subject to the following parameters:
<PAGE>
(a) The Committee shall be required to make a separate determination
for each request received by an Employee or Outside Director for
distribution.
(b) Any Plan Shares awarded shall be required to have a legend on the
Plan Shares confirming that the Plan Shares are subject to
restriction and transfer in accordance with the terms set forth
in the Plan. This legend may not be removed until the date that
the Plan Shares become earned in accordance with Article VII.
(c) The Plan Shares distributed shall be voted by the Trustee in
accordance with Section 7.04.
(d) Any cash dividends or other cash distributions paid with respect
to the Plan Shares before the date that the Plan Shares are
earned shall be paid to the Trustee to be held for the Employee
or Outside Director, whichever is applicable, until the date that
the Plan Shares are earned.
(e) At the date on which the Plan Shares are earned, the Trustee may
withhold from any cash dividends or other cash distributions held
on behalf of such Employee or Outside Director the amount needed
to cover any applicable withholding and employment taxes arising
at the time that the Plan Shares are earned. If the amount of
such cash dividends or distributions is insufficient, the Trustee
may require the Employee or Outside Director to pay to the
Trustee the amount required to be withheld as a condition of
removing the legend on the Plan Shares.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earning Plan Shares; Forfeitures.
(a) General Rules. Plan Shares subject to an Award shall be earned by
a Recipient at the rate of twenty percent (20%) of the aggregate
number of Shares covered by the Award at the end of each full
twelve months of consecutive service with the Bank or an
Affiliate after the date of grant of the Award. If the term of
service of a Recipient terminates as an Employee, as a Director
and as a Director Emeritus prior to the fifth anniversary (or
such later date as the Committee shall determine) of the date of
grant of an Award for any reason (except as specifically provided
in Subsection (b) below or in Section 4.01 hereof), the Recipient
shall forfeit the right to earn any Shares subject to the Award
which have not theretofore been earned.
In determining the number of Plan Shares which are earned,
fractional shares shall be rounded down to the nearest whole
number, provided that such fractional shares shall be aggregated
and earned, on the fifth anniversary of the date of grant.
(b) Exception for Terminations due to Death and Disability.
Notwithstanding the general rule contained in Section 7.01(a)
above, all Plan Shares subject to a Plan Share Award held by a
Recipient whose term of service as an Employee and as a Director
or Director Emeritus with the Holding Company, Bank or an
Affiliate terminates due to death or Disability shall be deemed
earned as of the Recipient's last day of service with the Holding
Company, Bank or an Affiliate as a result of such death or
Disability.
<PAGE>
(c) Revocation for Misconduct. Notwithstanding anything
hereinafter to the contrary, the Board may by resolution
immediately revoke, rescind and terminate any Plan Share
Award, or portion thereof, previously awarded under this
Plan, to the extent Plan Shares have not been delivered
thereunder to the Recipient, whether or not yet earned, in
the case of an Employee who is discharged from the employ of
the Holding Company, Bank or an Affiliate for cause (as
hereinafter defined), or who is discovered after termination
of employment to have engaged in conduct that would have
justified termination for cause or, in the case of an
Outside Director who is removed from the Board of Directors
of the Bank and the Holding Company or an Affiliate for
cause (as hereinafter defined), or who is discovered after
termination of service as an Outside Director to have
engaged in conduct which would have justified removal for
cause. "Cause" is defined as personal dishonesty, willful
misconduct, any breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, or the
willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or order which
results in a loss to the Holding Company, Bank or any
Affiliate or in a final cease and desist order.
7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Recipient or
Beneficiary under Section 7.03, such Recipient or Beneficiary shall also be
entitled to receive, with respect to each Plan Share paid, an amount equal to
any cash dividends or cash distributions and a number of shares of Common Stock
or other assets equal to any stock dividends and any other assets distributions
declared and paid with respect to a share of Common Stock between the date the
Plan Shares are being distributed and the date the Plan Shares were granted.
There shall also be distributed an appropriate amount of net earnings, if any,
of the Trust with respect to any cash dividends or cash distributions so paid
out. Until the Plan Shares are vested and distributed to any such Recipient or
Beneficiary, such dividends, distributions and net earnings thereon, if any,
shall be retained by the Trust.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Plan Shares shall be
distributed to the Recipient or his Beneficiary, as the case may
be, as soon as practicable after they have been earned.
(b) Form of Distribution. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of
Common Stock. One share of Common Stock shall be given for each
Plan Share earned and payable. Payments representing accumulated
cash dividends and cash or other distributions (and earnings
thereon) shall be made in cash or in the form of such non-cash
distributions.
(c) Withholding. The Trustee may withhold from any payment or
distribution made under this Plan sufficient amounts of cash or
shares of Common Stock to cover any applicable withholding and
employment taxes, and if the amount of such payment is
insufficient, the Trustee may require the Recipient or
Beneficiary to pay to the Trustee the amount required to be
withheld as a condition of delivering the Plan Shares.
Alternatively, a Recipient may pay to the Trustee that amount of
cash necessary to be withheld in taxes in lieu of any withholding
of payments or distribution under the Plan. The Trustee shall pay
over to the Holding Company, the Bank or Affiliate which employs
or employed such Recipient any such amount withheld from or paid
by the Recipient or Beneficiary.
<PAGE>
(d) Cessation of Payment. The Trustee shall cease payment of benefits
to Recipients or, if applicable, their Beneficiaries in the event
of the Bank's insolvency. The Bank shall be considered insolvent
for purposes of this RRP if the Bank is unable to pay its debts
as they become due or if a receiver is appointed for the Bank
under applicable law. If payments cease by reason of this
subsection, payments will be resumed, with appropriate make-up
payments, once the Bank ceases to be insolvent but only to the
extent the payments were not made directly by the Bank or its
Affiliates.
7.04 Voting of Plan Shares. All shares of Common Stock held by the Trust
shall be voted by the Trustee, taking into account the best interests of the
Plan Share Award recipients.
ARTICLE VIII
TRUST
8.01 Trust. The Trustee shall receive, hold, administer, invest and make
distributions and disbursements from the Trust in accordance with the provisions
of the Plan and Trust and the applicable directions, rules, regulations,
procedures and policies established by the Committee pursuant to the Plan.
8.02 Management of Trust. It is the intent of this Plan and Trust that,
subject to the provisions of this Plan, the Trustee shall have complete
authority and discretion with respect to the management, control and investment
of the Trust, and that the Trustee shall invest all assets of the Trust, except
those attributable to cash dividends paid with respect to Plan Shares, in Common
Stock to the fullest extent practicable, and except to the extent that the
Trustee determines that the holding of monies in cash or cash equivalents is
necessary to meet the obligation of the Trust. Neither the Holding Company, the
Bank, nor any Affiliate shall exercise any direct or indirect control or
influence over the time when, or the prices at which, the Trustee may purchase
such shares, the number of shares to be purchased, the manner in which the
shares are to be purchased, or the broker (if any) through whom the purchases
may be executed. In performing its duties, the Trustee shall have the power to
do all things and execute such instruments as may be deemed necessary or proper,
including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in
Common Stock without regard to any law now or hereafter in force
limiting investments for Trustees or other fiduciaries. The
investment authorized herein and in paragraph (b) constitutes the
only investment of the Trust, and in making such investment, the
Trustee is authorized to purchase Common Stock from the Holding
Company or an Affiliate or from any other source and such Common
Stock so purchased may be outstanding, newly issued, or treasury
shares.
(b) To invest any Trust assets not otherwise invested in accordance
with (a) above in such deposit accounts, and certificates of
deposit (including those issued by the Bank), securities of any
open-end or closed-end management investment company or
investment trust registered under the Investment Company Act of
1940, whether or not the Trustee or any affiliate of the Trustee
is being compensated for providing services to the investment
company or trust as investment advisor or otherwise, obligations
of the United States government or its agencies or such other
investments as shall be considered the equivalent of cash.
<PAGE>
(c) To sell, exchange or otherwise dispose of any property at any
time held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be registered in
the name of a nominee, without the addition of words indicating
that such security is an asset of the Trust (but accurate records
shall be maintained showing that such security is an asset of the
Trust).
(e) To hold cash without interest in such amounts as may be in the
opinion of the Trustee reasonable for the proper operation of the
Plan and Trust and to hold cash pending investment.
(f) To employ brokers, agents, custodians, consultants and
accountants.
(g) To hire counsel to render advice with respect to their rights,
duties and obligations hereunder, and such other legal services
or representation as they may deem desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Recipient or his or her Beneficiary as a
consequence of a dispute as to the disposition thereof, whether
in a segregated account or held in common with other assets of
the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.03 Records and Accounts. The Trustee shall maintain accurate and detailed
records and accounts of all transactions of the Trust, which shall be available
at all reasonable times for inspection by any legally entitled person or entity
to the extent required by applicable law, or any other person determined by the
Committee.
8.04 Earnings. All earnings, gains and losses with respect to Trust assets
shall be allocated, in accordance with a reasonable procedure adopted by the
Committee, to bookkeeping accounts for Recipients or to the general account of
the Trust, depending on the nature and allocation of the assets generating such
earnings, gains and losses. In particular, any earnings on cash dividends or
distributions received with respect to shares of Common Stock shall be allocated
to accounts for Recipients, if such shares are the subject of outstanding Plan
Share Awards, or otherwise to the Plan Share Reserve. Recipients (or their
Beneficiaries) shall not be entitled to any such allocations until the Plan
Share Awards to which they relate are vested and distributed to those Recipients
(or their Beneficiaries).
8.05 Expenses. All costs and expenses incurred in the operation and
administration of this Plan, including those incurred by the Trustee, shall be
borne by the Bank or the Holding Company.
<PAGE>
8.06 Indemnification. The Bank shall indemnify, defend and hold the Trustee
harmless against all claims, expenses and liabilities arising out of or related
to the exercise of the Trustee's powers and the discharge of its duties
hereunder, unless the same shall be due to its negligence or willful misconduct.
ARTICLE IX
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number of Plan Shares
available for issuance pursuant to the Plan Share Awards (which, as of the
effective date of this Plan, shall not exceed 4% of the shares of the Holding
Company's Common Stock issued in the Conversion, including any shares issued at
the time of the Conversion to the private foundation being created in connection
with the Conversion), and the number of shares to which any Plan Share Award
relates shall be proportionately adjusted for any increase or decrease in the
total number of outstanding shares of Common Stock issued subsequent to the
effective date of the Plan resulting from any stock dividend or split,
recapitalization, merger, consolidation, spin-off, reorganization, combination
or exchange of shares, extraordinary cash or non-cash distribution, or other
similar capital adjustment, or other increase or decrease in such shares
effected without receipt or payment of consideration, by the Committee.
9.02 Amendment and Termination of Plan. The Board may, by resolution, at
any time amend or terminate the Plan. The power to amend or terminate shall
include the power to direct the Trustee to return to the Holding Company all or
any part of the assets of the Trust, including shares of Common Stock held in
the Plan Share Reserve, as well as shares of Common Stock and other assets
subject to Plan Share Awards but not yet earned by the Employees or Outside
Directors to whom they are allocated. However, the termination of the Trust
shall not affect a Recipient's right to the distribution of Common Stock
relating to Plan Share Awards already earned, including earnings thereon, in
accordance with the terms of this Plan and the grant by the Committee.
9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not
be transferable by a Recipient other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined by
the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder, and
during the lifetime of the Recipient, Plan Shares may only be earned by and paid
to the Recipient who was notified in writing of the Award by the Committee
pursuant to Section 6.03. The assets of the RRP, prior to the distribution of
Plan Shares to a Recipient or his or her Beneficiary, shall be subject to the
claims of creditors of the Bank. Unless Plan Shares are distributed in
accordance with Section 6.05 or 7.03 to a Recipient or his or her Beneficiary,
such Recipient or, if applicable, Beneficiary shall not have any right in or
claim to any specific assets of the RRP or Trust and shall only be an unsecured
creditor of the Bank, nor shall the Holding Company or the Bank be subject to
any claim for benefits hereunder.
9.04 Employment Rights. Neither the Plan nor any grant of a Plan Share
Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right on the
part of any Employee to continue in the employ of, or of any Outside Director to
continue in the service of, the Bank, the Holding Company or any Affiliate
thereof.
<PAGE>
9.05 Voting and Dividend Rights. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by a Plan Share Award, except as expressly provided in Sections 7.02 and
7.04 above, prior to the time said Plan Shares are actually distributed to him.
9.06 Governing Laws. The Plan and Trust shall be governed by the laws of
the State of Indiana, except to the extent governed by federal law, including
regulations of the Office of Thrift Supervision. In particular, grants of Plan
Share Awards under the Plan shall comply with the requirements of 12 C.F.R. ss.
563b.3(g)(4)(vi) to the extent applicable thereto.
9.07 Effective Date. This Plan shall be effective as of the date of its
approval by the shareholders of the Holding Company.
9.08 Term of Plan. This Plan shall remain in effect until the earlier of
(1) 21 years from the effective date of its adoption, (2) termination by the
Board, or (3) the distribution of all assets of the Trust. Termination of the
Plan shall not affect any Plan Share Awards previously granted, and such Awards
shall remain valid and in effect until they have been earned and paid, or by
their terms expire or are forfeited.
9.09 Tax Status of Trust. It is intended that the trust established hereby
be treated as a grantor trust of the Bank under the provisions of Section 671,
et seq., of the Internal Revenue Code of 1986, as amended.
9.10. Compensation. The Trustee shall be entitled to receive fair and
reasonable compensation for its services hereunder, as agreed to by the Trustee
and the Bank, and shall also be entitled to be reimbursed for all reasonable
out-of-pocket expenses, including, but not by way of limitation, legal,
actuarial and accounting expenses and all costs and expenses incurred in
prosecuting or defending any action concerning the Plan or the Trust or the
rights or responsibilities of any person hereunder, brought by or against the
Trustee. Such reasonable compensation and expenses shall be paid by the Bank or
the Holding Company.
9.11. Resignation of Trustee. The Trustee may resign at any time by giving
sixty (60) calendar days' prior written notice to the Bank, and the Trustee may
be removed, with or without cause, by the Bank on sixty (60) calendar days'
prior written notice to the Trustee. Such prior written notice may be waived by
the party entitled to receive it. Upon any such resignation or removal becoming
effective, the Trustee shall render to the Bank a written account of its
administration of the Plan and the Trust for the period since the last written
accounting and shall do all necessary acts to transfer the assets of the Trust
to the successor Trustee or Trustees.
<PAGE>
REVOCABLE PROXY LINCOLN BANCORP
Annual Meeting of Shareholders
July 6, 1999
The undersigned hereby appoints John M. Baer and Maxwell D. Magee, with
full powers of substitution, to act as attorneys and proxies for the undersigned
to vote all shares of common stock of Lincoln Bancorp which the undersigned is
entitled to vote at the Annual Meeting of Shareholders to be held at the
Guilford Township Community Center, 1500 S. Center Street, Plainfield, Indiana,
on Tuesday, July 6, 1999, at 12:00 p.m., and at any and all adjournments
thereof, as follows:
1. The election as directors of all nominees listed below, except as marked to
the contrary [ ] FOR [ ] VOTE WITHHELD
INSTRUCTIONS: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name on the list below:
Lester N. Bergum, Jr. Wayne E. Kessler Dennis W. Dawes
(each for a one-year term)
W. Thomas Harmon Jerry R. Holifield John C. Milholland
(each for a two-year term)
David E. Mansfield T. Tim Unger John L. Wyatt
(for a three-year term)
2. Approval and Ratification of the Lincoln Bancorp Stock Option Plan
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval and Ratification of the Lincoln Federal Savings Bank
Recognition and Retention Plan and Trust.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" each of the listed propositions.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
<PAGE>
This Proxy may be revoked at any time prior to the voting thereof.
The undersigned acknowledges receipt from Lincoln Bancorp, prior to the
execution of this Proxy, of a Notice of the Meeting, a Proxy Statement and an
Annual Report to Shareholders.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS
IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS
PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS
OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING. __________________, 1999
--------------------------- -----------------------------
Print Name of Shareholder Print Name of Shareholder
--------------------------- -----------------------------
Signature of Shareholder Signature of Shareholder
Please sign as your name appears on the envelope in which this
card was mailed. When signing as attorney, executor,
administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.
[LINCOLN BANCORP 1998 ANNUAL REPORT COVER]
<PAGE>
Message to Shareholders..................................................... 2
Selected Consolidated Financial Data........................................ 3
Management's Discussion and Analysis........................................ 4
Report of Independent Auditor............................................... 21
Consolidated Balance Sheet.................................................. 22
Consolidated Statement of Income............................................ 23
Consolidated Statement of Comprehensive Income.............................. 24
Consolidated Statement of Shareholders' Equity.............................. 24
Consolidated Statement of Cash Flows........................................ 25
Notes to Consolidated Financial Statements.................................. 26
Directors and Officers...................................................... 39
Shareholder Information..................................................... 40
Officers and Branch Locations of Lincoln Federal Savings Bank............... 41
Lincoln Bancorp (the "Holding Company" and together with the Bank, as
defined below, the "Company") is an Indiana corporation organized in September,
1998 to become a savings and loan holding company upon its acquisition of all
the issued and outstanding capital stock of Lincoln Federal Savings Bank
("Lincoln Federal" or the "Bank") in connection with the Bank's conversion from
mutual to stock form. The Holding Company became the Bank's holding company on
December 30, 1998. The principal asset of the Holding Company currently consists
of 100% of the issued and outstanding shares of capital stock, $.01 par value
per share, of the Bank. Lincoln Federal was originally organized in 1884 as
Ladoga Federal Savings and Loan Association, located in Ladoga, Indiana. In 1979
Ladoga Federal merged with Plainfield First Federal Savings and Loan
Association, a federal savings and loan association located in Plainfield,
Indiana which was originally organized in 1896. Following the merger, the Bank
changed its name to Lincoln Federal Savings and Loan Association and, in 1984,
adopted its current name, Lincoln Federal Savings Bank. At December 31, 1998,
Lincoln Federal conducted its business from four full-service offices located in
Hendricks, Montgomery and Clinton Counties, Indiana, with its main office
located in Plainfield. Lincoln Federal opened its newest offices in Avon,
Indiana in January, 1999 and in Mooresville, Indiana in April, 1999. The Bank's
principal business consists of attracting deposits from the general public and
originating fixed-rate and adjustable-rate loans secured primarily by first
mortgage liens on one- to four-family residential real estate. Lincoln Federal's
deposit accounts are insured up to applicable limits by the SAIF of the FDIC.
Lincoln Federal offers a number of financial services, including: (i)
one- to four-family residential real estate loans; (ii) commercial real estate
loans; (iii) real estate construction loans; (iv) land loans; (v) multi-family
residential loans; (vi) consumer loans, including home equity loans and
automobile loans; (vii) commercial loans; (viii) money market demand accounts
("MMDAs"); (ix) savings accounts; (x) checking accounts; (xi) NOW accounts; and
(xii) certificates of deposit.
- 1 -
<PAGE>
TO OUR SHAREHOLDERS AND FRIENDS:
The directors and staff of Lincoln Bancorp and its wholly owned subsidiary,
Lincoln Federal Savings Bank, are very proud to present this first annual report
to our shareholders. We also want to express gratitude for the great support to
our initial public offering of 7,009,250 shares of Lincoln Bancorp stock on
December 30, 1998, which included 200,000 shares issued to the Lincoln Federal
Charitable Foundation. Our common stock is listed for quotation on the Nasdaq
National Market System under the symbol "LNCB."
As you examine our financial results for 1998, you will note that our balance
sheet restructuring and the contribution to the Lincoln Federal Charitable
Foundation had a considerable effect on our net income. We believe the issues
addressed during 1998 will greatly enhance our flexibility and future earnings
growth.
I want to take this opportunity to recognize the countless hours and effort put
forth by our entire staff in converting Lincoln Federal from a mutual
institution to a publicly traded company, while at the same time, maintaining a
high level of service to our customers. The Employee Stock Ownership Plan was
established to reward the valuable contribution of our staff.
Technology continues to be an important focus for Lincoln Federal. A new
software package was acquired to enhance, expedite and simplify our lending
process. A database marketing system was installed that we intend to use to
develop targeted strategies to successfully market products and services to our
customers. Also, our phone banking system will offer customers the opportunity
to inquire about their accounts and even make certain transactions over the
phone, 24 hours a day, 7 days a week. As the new century draws near, we will
continue to verify our systems and processes to insure a seamless transition.
Integrated tests on equipment and transaction processing have been performed and
we feel very confident in our preparedness.
We are very attentive to the constantly changing landscape and challenges in the
financial services arena. For more than 115 years, Lincoln Federal has believed
in providing financial services, quality banking and a sense of community in the
markets we serve. Our commitment is to continue that tradition. Thank you for
your continued support and confidence.
/s/ T. Tim Unger
T. Tim Unger
President and CEO
- 2 -
<PAGE>
The following selected consolidated financial data of the Company is
qualified in its entirety by, and should be read in conjunction with, the
consolidated financial statements, including notes thereto, included elsewhere
in this Shareholder Annual Report.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- -------- -------- ---------
(In thousands)
Summary of Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets............................................ $366,448 $321,391 $345,552 $319,777 $309,010
Cash and interest bearing deposits in other banks (1)... 22,907 18,958 10,394 8,882 21,488
Investment securities available for sale................ 129,276 29,399 118 116 114
Investment securities held to maturity.................. 1,250 9,635 15,185 11,600 12,748
Mortgage loans held for sale............................ --- --- 24,200 15,534 16,141
Loans................................................... 197,433 249,996 282,813 270,933 245,160
Allowance for loan losses............................... (1,512) (1,361) (1,241) (1,121) (1,047)
Net loans............................................... 195,921 248,635 281,572 269,812 244,113
Investment in limited partnerships...................... 2,387 2,706 3,187 3,583 5,019
Deposits................................................ 212,010 203,852 210,823 196,117 185,219
Borrowings.............................................. 35,466 72,827 94,412 85,604 90,294
Shareholders' equity.................................... 106,108 41,978 37,919 34,930 31,546
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- -------- -------- ---------
(In thousands)
Summary of Operating Data:
Total interest income...................................$ 22,999 $ 25,297 $ 24,453 $ 22,065 $ 18,309
Total interest expense.................................. 13,827 15,652 15,119 14,486 9,418
---------- --------- --------- --------- ---------
Net interest income.................................. 9,127 9,645 9,334 7,579 8,891
Provision for loan losses............................... 173 298 120 100 (1)
---------- --------- --------- --------- ---------
Net interest income after provision for loan losses . 8,999 9,347 9,214 7,479 8,892
---------- --------- --------- --------- ---------
Other income (losses):
Net realized-and unrealized-gain (loss)
on loans held for sale............................. (61) 299 (160) 1,463 (1,380)
Net realized- and unrealized-gains on securities
available for sale................................. 113 118 --- --- ---
Equity in losses of limited partnerships............. (514) (681) (596) (1,595) (663)
Other................................................ 833 674 503 473 529
---------- --------- --------- --------- ---------
Total other income (loss).......................... 371 410 (253) 341 (1,514)
---------- --------- --------- --------- ---------
Other expenses:
Salaries and employee benefits....................... 2,724 2,247 1,719 1,529 1,360
Net occupancy expenses............................... 249 272 236 272 287
Equipment expenses................................... 626 526 361 176 174
Deposit insurance expense............................ 188 194 1,725 438 408
Data processing expense.............................. 658 581 313 228 201
Professional fees.................................... 201 238 69 48 41
Director and committe fees........................... 319 227 110 102 73
Mortgage servicing rights amortization............... 280 67 12 9 54
Charitable contributions............................. 2,023 32 18 37 2
Other................................................ 842 701 540 405 300
---------- --------- --------- --------- ---------
Total other expenses.............................. 8,110 5,085 5,103 3,244 2,900
---------- --------- --------- --------- ---------
Income before income taxes and extraordinary item.... 1,260 4,672 3,858 4,576 4,478
Income taxes (benefit)............................... (7) 1,159 870 1,193 1,095
---------- --------- --------- --------- ---------
Income before extraordinary item........................ 1,267 3,513 2,988 3,383 3,383
Extraordinary item-early extinguishment of debt,
net of income taxes of $99........................... (150) --- --- --- ---
---------- --------- --------- --------- ---------
Net income.........................................$ 1,117 $ 3,513 $ 2,988 $ 3,383 $ 3,383
=========== ========== ========== ========== ==========
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
Supplemental Data:
<S> <C> <C> <C> <C> <C>
Return on assets (2).................................... .35% 1.02% .90% 1.09% 1.32%
Return on equity (3).................................... 2.58 8.71 8.08 9.92 11.08
Equity to assets (4).................................... 28.96 13.06 10.97 10.92 10.21
Interest rate spread during period (5).................. 2.24 2.41 2.36 1.99 3.24
Net yield on interest-earning assets (6)................ 3.02 2.92 2.91 2.55 3.67
Efficiency ratio (7).................................... 84.98 50.57 56.19 40.96 39.31
Other expenses to average assets (8).................... 2.55 1.47 1.54 1.05 1.13
Average interest-earning assets to average
interest-bearing liabilities......................... 117.02 110.88 111.80 111.31 111.18
Non-performing assets to total assets (4)............... .38 1.14 .73 .75 .04
Allowance for loan losses to total
loans outstanding (4) (9)............................ .77 .54 .40 .39 .40
Allowance for loan losses to non-performing loans (4)... 117.03 37.56 50.80 46.81 780.60
Net charge-offs to average total loans outstanding ..... .01 .06 --- .01 ---
Number of full service offices (4)...................... 4 4 4 4 4
</TABLE>
(1) Includes certificates of deposit in other financial institutions.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) At end of period.
(5) Interest rate spread is calculated by substracting combined average
interest cost from combined average interest rate earned for the period
indicated.
(6) Net interest income divided by average interest-earning assets.
(7) Other expenses (excluding federal income tax expense) divided by the sum of
net interest income and noninterest income. Excluding the effect of the
$2.0 million contribution to the charitable foundation, the efficiency
ratio would have been 64.03% for the year ended December 31, 1998.
Excluding the effect of the one-time SAIF assessment, the efficiency ratio
would have been 42.28% for the year ended December 31, 1996.
(8) Other expenses divided by average total assets.
(9) Total loans include loans held for sale.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
General
The Holding Company was incorporated for the purpose of owning all of
the outstanding shares of Lincoln Federal. The following discussion and analysis
of the Holding Company's financial condition as of December 31, 1998 and Lincoln
Federal's results of operations should be read in conjunction with and with
reference to the consolidated financial statements and the notes thereto
included herein.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. The Holding Company's operations and actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the nation
and the Holding Company's general market area. The forward-looking statements
contained herein include, but are not limited to, those with respect to the
following matters:
- 4 -
<PAGE>
1. Management's determination of the amount of loan loss allowance;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums; and
4. Proposed legislation that would eliminate the federal thrift
charter and the separate federal regulation of thrifts.
Average Balances and Interest Rates and Yields
The following tables present the years ended December 31, 1998, 1997 and
1996, the average daily balances, of each category of Lincoln Federal's
interest-earning assets and interest-bearing liabilities, and the interest
earned or paid on such amounts.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
Average Average Average Average Average Average
Balance Interest(6)Yield/Cost Balance Interest(6)Yield/Cost Balance Interest(6)Yield/Cost
------- ---------- ---------- ------- ----------- --------- -------- --------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits............$29,949 $1,544 5.16% $11,853 $ 653 5.51% $ 3,969 $ 256 6.45%
Mortgage-backed securities
available for sale (1)............. 41,011 2,962 7.22 13,089 1,086 8.30 --- --- ---
Other investment securities
available for sale (1)............. 11,940 785 6.57 66 5 7.58 117 9 7.69
Other investment securities
held to maturity .................. 4,176 248 5.94 12,758 768 6.02 15,355 933 6.08
Loans receivable (2) (5) (6).........211,260 17,024 8.06 286,912 22,369 7.80 296,288 22,902 7.73
Stock in FHLB of Indianapolis........ 5,447 436 8.00 5,199 416 8.00 4,522 353 7.81
------ ----- ------ ----- ------ -----
Total interest-earning assets......303,783 22,999 7.57 329,877 25,297 7.67 320,251 24,453 7.64
------- ------- ------
Non-interest earning assets, net of allowance
for loan losses and unrealized gain/loss
on securities available for sale..... 14,587 15,694 11,243
-------- -------- --------
Total assets......................$318,370 $345,571 $331,494
======== ======== ========
Liabilities and equity capital:
Interest-bearing liabilities:
Interest-bearing demand deposits..... $7,905 150 1.90 $ 7,438 154 2.07 $ 7,198 151 2.10
Savings deposits..................... 20,691 625 3.02 25,159 781 3.10 32,253 1,092 3.39
Money market savings deposits........ 29,883 1,440 4.82 21,278 1,044 4.91 7,003 320 4.57
Certificates of deposit..............151,344 8,757 5.79 151,507 8,425 5.56 152,381 8,675 5.69
FHLB advances........................ 49,773 2,855 5.74 92,121 5,248 5.70 87,621 4,881 5.57
------ ----- ------ ----- ------ -----
Total interest-bearing liabilities.259,596 13,827 5.33 297,503 15,652 5.26 286,456 15,119 5.28
------- ------- ------
Other liabilities....................... 15,497 7,729 8,070
------ ----- -----
Total liabilities................275,093 305,232 294,526
Equity capital.......................... 43,277 40,339 36,968
------ ------ ------
Total liabilities and
equity capital..............$318,370 $345,571 $331,494
======== ======== ========
Net interest-earning assets............$ 44,187 $ 32,374 $33,795
Net interest income..................... $ 9,172 $ 9,645 $9,334
======= ======= ======
Interest rate spread (3)................ 2.24% 2.41% 2.36%
==== ==== ====
Net yield on weighted average
interest-earning assets (4).......... 3.02% 2.92% 2.91%
==== ==== ====
Average interest-earning assets to average
interest-bearing liabilities........ 117.02% 110.88% 111.80%
====== ====== ======
</TABLE>
(1) Mortgage-backed securities available for sale and other investment
securities available for sale are at amortized cost prior to SFAS No. 115
adjustments.
(2) Total loans, including loan held for sale, less loans in process.
(3) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate yield for the period
indicated.
(4) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated. No net yield amount is presented at December 31,
1998, because the computation of net yield is applicable only over a period
rather than at a specific date.
(5) The balances include nonaccrual loans.
(6) Interest income on loans receivable includes loan fee income of $511,000,
$554,000 and $490,000 for the years ended December 31, 1998, 1997 and 1996.
- 5 -
<PAGE>
Interest Rate Spread
The Company's results of operations have been determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
general and administrative expenses. Net interest income is determined by the
interest rate spread between the yields earned on interest-earning assets and
the rates paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest
rate that the Company earned on its loan and investment portfolios, the weighted
average effective cost of its deposits and advances, its interest rate spread
and the net yield on weighted average interest-earning assets for the periods
and as of the dates shown. Average balances are based on average daily balances.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1998 1997 1996
----- ------ -----
Weighted average interest rate earned on:
<S> <C> <C> <C>
Interest-earning deposits......................... 5.16% 5.51% 6.45%
Mortgage-backed securities available for sale..... 7.22 8.30 ---
Other investment securities available for sale.... 6.57 7.58 7.69
Other investment securities held to maturity...... 5.94 6.02 6.08
Loans............................................. 8.06 7.80 7.73
FHLB stock........................................ 8.00 8.00 7.81
Total interest-earning assets................... 7.57 7.67 7.64
Weighted average interest rate cost of:
Interest-bearing demand deposits.................. 1.90 2.07 2.10
Savings deposits.................................. 3.02 3.10 3.39
Money market savings deposits..................... 4.82 4.91 4.57
Certificates of deposit........................... 5.79 5.56 5.69
FHLB advances..................................... 5.74 5.70 5.57
Total interest-bearing liabilities.............. 5.33 5.26 5.28
Interest rate spread (1)............................. 2.24 2.41 2.36
Net yield on weighted average
interest-earning assets (2)....................... 3.02 2.92 2.91
</TABLE>
(1) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. Interest rate spread figures must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated.
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
the Company's interest income and expense during the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in rate (changes in rate
multiplied by old volume) and (2) changes in volume (changes in volume
multiplied by old rate). Changes attributable to both rate and volume which
cannot be segregated have been allocated proportionally to the change due to
volume and the change due to rate.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
------------------------------------------
Total
Due to Due to Net
Rate Volume Change
------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Year ended December 31, 1998 compared
to year ended December 31, 1997
Interest-earning assets:
Interest-earning deposits.................................. $ (45) $ 936 $ 891
Mortgage-backed securities available for sale.............. (158) 2,034 1,876
Other investment securities available for sale............. (1) 781 780
Other investment securities held to maturity............... (10) (510) (520)
Loans receivable........................................... 729 (6,074) (5,345)
FHLB stock................................................. --- 20 20
------- --------- ----------
Total.................................................... 515 (2,813) (2,298)
------- --------- ----------
Interest-bearing liabilities:
Interest-bearing demand deposits........................... (13) 9 (4)
Savings deposits........................................... (21) (135) (156)
Money market savings deposits.............................. (19) 415 396
Certificates of deposit.................................... 341 (9) 332
FHLB advances.............................................. 36 (2,429) (2,393)
------- --------- ----------
Total.................................................... 324 (2,149) (1,825)
------- --------- ----------
Net change in net interest income............................ $ 191 $ (664) $ (473)
========= ========= ==========
Year ended December 31, 1997 compared
to year ended December 31, 1996
Interest-earning assets:
Interest-earning deposits.................................. $ (42) $ 439 $ 397
Mortgage-backed securities available for sale.............. --- 1,086 1,086
Other investment securities available for sale............. --- (4) (4)
Other investment securities held to maturity............... (9) (156) (165)
Loans receivable........................................... 197 (730) (533)
FHLB stock................................................. 9 54 63
------- --------- ----------
Total.................................................... 155 689 844
------- --------- ----------
Interest-bearing liabilities:
Interest-bearing demand deposits........................... (2) 5 3
Savings deposits........................................... (85) (226) (311)
Money market savings deposits.............................. 25 699 724
Certificates of deposit.................................... (200) (50) (250)
FHLB advances.............................................. 112 255 367
------- --------- ----------
Total.................................................... (150) 683 533
------- --------- ----------
Net change in net interest income............................ $ 305 $ 6 $ 311
========= =========== ===========
Year ended December 31, 1996 compared
to year ended December 31, 1995
Interest-earning assets:
Interest-earning deposits.................................. $ (27) $ (49) $ (76)
Mortgage-backed securities available for sale.............. --- --- ---
Other investment securities available for sale............. --- --- ---
Other investment securities held to maturity............... 8 69 77
Loans receivable........................................... 690 1,683 2,373
FHLB stock................................................. (4) 18 14
------- --------- ----------
Total.................................................... 667 1,721 2,388
------- --------- ----------
Interest-bearing liabilities:
Interest-bearing demand deposits........................... (6) 14 8
Savings deposits........................................... (91) (112) (203)
Money market savings deposits.............................. 51 161 212
Certificates of deposit.................................... 14 205 219
FHLB advances.............................................. (419) 816 397
------- --------- ----------
Total.................................................... (451) 1,084 633
------- --------- ----------
Net change in net interest income............................ $ 1,118 $ 637 $ 1,755
======= ========= ==========
</TABLE>
- 7 -
<PAGE>
Financial Condition at December 31, 1998 Compared to Financial Condition at
December 31, 1997
Total assets increased $45.1 million, or 14.0%, at December 31, 1998,
compared to December 31, 1997. The primary increases were in investment
securities available for sale and held to maturity which increased $91.5 million
and cash and interest-bearing deposits in other banks which increased $3.9
million. These increases were primarily due to net proceeds from the conversion
and the loan securitization and sales. Net proceeds of the Holding Company's
stock issuance, after costs and excluding the shares issued for the ESOP, were
$61.3 million. These increases were in part offset by a $52.7 million decrease
in net loans. The decrease was primarily due to the securitization of
approximately $39.9 million of one- to four- family residential loans and the
subsequent sale of approximately $21.1 million of these mortgage-backed
securities. In addition, $19.6 million of portfolio loans were transferred to
loans held for sale during 1998 and $17.2 million were subsequently sold.
Loans, Loans Held for Sale and Allowance for Loan Losses. The decrease
in net loans including loans held for sale of $52.7 million, or 21.2%, from
December 31, 1997 to December 31, 1998 was due primarily to the securitization
of $39.9 million of loans in the second quarter of 1998 and the sale of $17.2
million of loans in the third quarter of 1998. The loans securitized were one-to
four- family residential loans. The strategy behind the securitization and sale
of mortgage-backed securities was to change the mix of assets on the balance
sheet to reduce interest rate risk and to improve liquidity. Lincoln Federal has
no plans to securitize or sell additional portfolio loans and will continue to
service all loans sold and securitized. The allowance for loan losses as a
percentage of total loans increased to .77% from .54%. The allowance for loan
losses as a percentage of non-performing loans was 117.0% and 37.6% at December
31, 1998 and December 31, 1997, respectively. Non-performing loans were $1.3
million and $3.6 million at each date, respectively. The decline in
non-performing loans was a result of a combination of factors including improved
collection efforts on one-to four- family residential and consumer loans,
payoffs of non-performing loans totaling $1.1 million and receipt of additional
collateral on loans totaling $218,000 allowing these loans to be removed from
non-accrual status. Included in non-performing loans at December 31, 1998 were
impaired loans of approximately $300,000. Impaired loans at December 31, 1998
consisted of two loans to one borrower collateralized by residential acquisition
and development real estate.
Deposits. Deposits increased $8.2 million, or 4.0%, at December 31,
1998, compared to December 31, 1997. Certificates of deposit increased $1.5
million, or 1.0%, while other deposits increased $6.7 million, or 11.6%. The
increase in deposits was primarily due to an increase in money market accounts
of $6.9 million, or 26.7%.
Borrowed Funds. FHLB advances decreased $36.9 million, or 52.6%, at
December 31, 1998 compared to December 31, 1997. Proceeds from the sales of
mortgage-backed securities available for sale and loans were used to repay a
portion of FHLB advances.
Shareholders' Equity. Shareholders' equity increased $64.1 million from
$42.0 million at December 31, 1997 to $106.1 million at December 31, 1998. The
increase was due to net proceeds of the Holding Company's stock issuance after
costs and excluding the shares issued for the ESOP, of $61.3 million, stock
contributed to the charitable foundation of $2.0 and net income for 1998 of $1.1
million. These increases were offset by a decrease in the unrealized gains on
securities available for sale of $258,000.
Financial Condition at December 31, 1997 Compared to Financial Condition at
December 31, 1996
Total assets decreased $24.2 million, or 7.0%, at December 31, 1997
compared to December 31, 1996. The decrease was primarily due to the
securitization of approximately $76.2 million of one- to four- family
residential loans and loans held for sale and the subsequent sale of
approximately $54.3 million of these mortgage-backed securities. Cash and
interest-bearing deposits in other banks increased by $8.6 million, and
mortgage-backed securities available for sale and other investment securities
available for sale and held to maturity increased by $23.7 million at December
31, 1997 compared to December 31, 1996. These increases were primarily due to
the loan securitization. In addition, a portion of the proceeds received from
the sales of mortgage-backed securities available for sale was used to repay
FHLB advances.
- 8 -
<PAGE>
Loans, Loans Held for Sale and Allowance for Loan Losses. Lincoln
Federal's net loans, including loans held for sale, decreased $57.0 million, or
18.6%, from December 31, 1996 to December 31, 1997 due to the securitization of
loans in the third quarter of 1997. The loans securitized were one- to
four-family residential loans. Lincoln Federal's strategy behind the
securitization was to change the mix of assets on its balance sheet to reduce
interest rate risk and to improve the liquidity of its assets. The loan to
deposit ratio had grown as high as 156% in recent years, and it was necessary to
obtain Federal Home Loan Bank advances to fund its loan growth. The allowance
for loan losses as a percentage of total loans, including loans held for sale,
increased to .54% from .40% as a result of the decrease in loans outstanding
during the period. The allowance for loan losses as a percentage of
non-performing loans was 37.6% and 24.5% at December 31, 1997 and 1996,
respectively. Non-performing loans were $3.6 million and $2.4 million at each
date, respectively. Included in non-performing loans at December 31, 1997 were
impaired loans of $1.6 million. 77.8% of Lincoln Federal's impaired loans at
December 31, 1997, consisting of loans to three borrowers, were collateralized
by residential acquisition and development real estate. A provision for losses
of $237,000 had been recorded on impaired loans.
Other Assets. At December 31, 1997, other assets were approximately
$1.3 million. The components of other assets at December 31, 1997 were
capitalized mortgage servicing rights of $530,000, cash surrender value of life
insurance of $320,000 and various other assets totaling $429,000. At December
31, 1996, other assets were approximately $334,000. The increase at December 31,
1997 of $945,000 as compared to the balance at December 31, 1996 was primarily
due to a $445,000 increase in capitalized mortgage servicing rights and an
investment in the cash surrender value of life insurance in 1997. Mortgage
servicing rights increased as a direct result of the adoption of new accounting
standards and an increase in Lincoln Federal's mortgage servicing portfolio. At
December 31, 1997 and 1996, Lincoln Federal serviced loans of $85.0 million and
$36.8 million, respectively.
Deposits. Deposits decreased $7.0 million, or 3.3%, during the period
ended December 31, 1997. Certificates of deposit decreased $11.4 million, or
7.3%, while other deposits increased $4.4 million, or 8.3%. The decrease in
deposits was primarily due to a reduction in public funds of approximately $7.3
million at December 31, 1997 as compared to 1996. This decline was a result of
less aggressive bidding on public funds when other lower cost funding options
were available.
Borrowed Funds. FHLB advances decreased $21.1 million, or 23.1%, at
December 31, 1997 compared to December 31, 1996. Proceeds from the sales of
mortgage-backed securities available for sale were used to repay a portion of
these FHLB advances.
Other Liabilities. At December 31, 1997, other liabilities were
approximately $1.6 million. The components of other liabilities at December 31,
1997 were advances by borrowers for taxes and insurance of $723,000, deferred
directors fees of $550,000 and various other liabilities totaling $308,000. At
December 31, 1996, other liabilities were approximately $1.9 million. The
components of other liabilities at December 31, 1996 were advances by borrowers
for taxes and insurance of $937,000, deferred directors fees of $421,000 and
various other liabilities totaling $555,000.
Equity Capital. Equity capital increased $4.1 million, or 10.7%, from
$37.9 million at December 31, 1996 to $42.0 million at December 31, 1997. The
increase was due to net income of $3.5 million and a net change in holding gains
on investments available for sale of $545,000.
Comparison of Operating Results For Years Ended December 31, 1998 and 1997
General. Net income for the year ended December 31, 1998 decreased $2.4
million to $1.1 million compared to $3.5 million for the year ended December 31,
1997. The decline in net income was primarily a result of a reduction in net
interest income, an increase in other expenses, an extraordinary item related to
the prepayment of FHLB advances offset by a reduction in the provision for loan
losses and tax expense. The largest single reason for the decrease was the $2.0
million contribution to the Lincoln Federal Charitable Foundation, Inc. (the
"Foundation") made in connection with the stock conversion. Return on average
assets for the year ended December 31, 1998 and 1997 was .35% and 1.02%,
respectively. Return on average equity was 2.58% for the year ended December 31,
1998 and 8.71% for the year ended December 31, 1997.
Interest Income. Total interest income was $23.0 million for 1998
compared to $25.3 million for 1997. The decrease in interest income was due
primarily to a decrease in average earning assets. Average earning assets
decreased $26.1 million, or 7.9%, primarily due to a decrease in average loans
of $75.7 million offset by an increase in average mortgage-backed securities and
other investment securities available for sale and held to maturity of $31.2
million. The average yield on interest-earning assets was 7.57% and 7.67% for
the years ended December 31, 1998 and 1997, respectively.
- 9 -
<PAGE>
Interest Expense. Interest expense decreased $1.8 million, or 11.7%,
during the year ended December 31, 1998 as compared to 1997. The decrease in
interest expense was primarily the result of a decrease in average
interest-bearing liabilities of $37.9 million, or 12.7%. The decline in average
interest-bearing liabilities was primarily attributable to the repayment of FHLB
advances. The average balances of FHLB advances decreased $42.3 million. The
average cost of interest-bearing liabilities increased from 5.26% for the 1997
period to 5.33% for the 1998 period resulting primarily from a 23 basis points
increase in the cost of certificates of deposit offset by decreases in the
remaining deposit applications.
Net Interest Income. Net interest income decreased $473,000, or 4.9%,
during the year ended December 31, 1998 as compared to 1997. Net interest income
declined $664,000 due to a decrease in volume of net interest earning assets and
liabilities and increased $191,000 as a result of an improvement in net yield on
interest earning assets. The interest rate spread was 2.24% and 2.41% for 1998
and 1997, respectively. The net yield on interest-earning assets was 3.02% and
2.92% for the 1998 and 1997 periods respectively. Although the interest rate
spread decreased during 1998, the yield on interest-earning assets improved
because average interest-earning asset as a percentage of interest-bearing
liabilities increased from 110.9% for 1997 to 117.0% for 1998.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1998 was $173,000 as compared to $298,000 for 1997. During
the year ended December 31, 1998, net charge-offs were $22,000 as compared to
net charge-offs of $178,000 for 1997. The 1998 provision and the allowance for
loan losses were considered adequate based on size, condition and components of
the loan portfolio, past history of loan losses and peer comparisons. While
management estimates loan losses using the best available information, no
assurance can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding problem loans, identification of
additional problem loans and other factors, both within and outside of
management's control.
Net realized and unrealized gain (loss) on loans held for sale. Net
realized and unrealized losses on loans held for sale of $61,000 were recorded
during the year ended December 31, 1998 as compared to net realized and
unrealized gains of $299,000 recorded during 1997. The primary reason for the
change was due to the recovery during 1997 of an unrealized loss of $266,000
recorded during 1996.
Net realized and unrealized gains on securities available for sale.
Proceeds from sales of securities available for sale during the years ended
December 31, 1998 and 1997 amounted to $21.1 million and $54.5 million,
respectively. Net gains of $113,000 and $118,000 were realized on those sales
during the years ended December 31, 1998 and 1997, respectively.
Equity in losses of limited partnerships. Equity in losses of limited
partnerships decreased $167,000, or 24.5%, from $681,000 for the year ended
December 31, 1997 to $514,000 for 1998 due to the operating results of the
limited partnership investments.
Other Income. Other income increased $159,000, or 23.6%, from $674,000
for the year ended December 31, 1997 to $833,000 for 1998. This increase was due
to increases in a variety of other income categories and was not attributable to
any one item.
Salaries and Employee Benefits. Salaries and employee benefits were
$2.7 million for the year ended December 31, 1998 compared to $2.2 million for
1997, an increase of approximately 22.0%. These increases were primarily a
result of additional personnel. Lincoln Federal had 76 full time equivalent
employees at December 31, 1998 compared to 72 full time equivalent employees at
December 31, 1997. Lincoln Federal increased its number of employees and added
personnel with the specialized skills to more effectively service existing
customers and to position itself for future customer and product growth.
Net Occupancy and Equipment Expenses. Occupancy expenses decreased
$23,000, or 8.5%, and equipment expenses increased $100,000, or 19.0%, from the
year ended December 31, 1997 compared to 1998. The increases in equipment
expenses were primarily attributable to increased deprecation and amortization
on computers, software and other equipment and fees associated with computer
equipment maintenance.
- 10 -
<PAGE>
Deposit Insurance Expense. Deposit insurance expense decreased $6,000,
or 3.1%, from $194,000 in 1997 to $188,000 in 1998.
Data Processing Expense. Data processing expense increased $77,000, or
13.3%, from the year ended December 31, 1997 to the same period in 1998. This
increase was primarily due to additional costs associated with Year 2000
compliance and testing.
Professional Fees. Professional fees decreased $37,000, or 15.5%, from
the year ended December 31, 1997 to the same period in 1998. This decrease was
due to a variety of decreased expenses and was not attributable to any one item.
Director and Committee fees. Director and committee fees increased
$92,000, or 40.5%, from the year ended December 31, 1997 to 1998. This increase
was due to the addition of one director in 1998, an increase in the fee paid per
meeting and additional meetings held during 1998 in connection with the stock
conversion.
Mortgage Servicing Rights Amortization. Mortgage servicing rights
amortization increased $213,000 from $67,000 for the year ended December 31,
1997 to $280,000 for the same period in 1998 due to increased servicing activity
and the adoption of Statement of Financial Accounting Standards ("SFAS") No.
122, "Accounting for Mortgage Serving Rights", and SFAS No. 125, "Accounting for
Transfers of Financial Assets, Servicing Rights and Extinguishment of
Liabilities". Average mortgage loans serviced for others were approximately
$91.6 million for the 1998 period as compared to $60.9 million for the 1997
period.
Charitable Contributions. Charitable contributions increased $2.0
million from the year ended December 31, 1997 to 1998 due to the $2.0 million
contribution to the Foundation made in connection with the stock conversion.
Other Expenses. Other expenses, consisting primarily of expenses
related to advertising, loan expenses, supplies, and postage increased $141,000,
or 20.1%, from 1997 to 1998. The increase resulted from increases in a variety
of expense categories and was not attributable to any one item.
Income Tax Expense. Income tax expense decreased $1.2 million, or
100.6%, from the year ended December 31, 1997 to 1998. These variations in
income tax expense are directly related to taxable income and the low income
housing income tax credits earned during those years. The effective tax rate was
(.5)% and 24.8% for 1998 and 1997, respectively. The effective rate declined in
1998 as compared to 1997 because the low-income housing income tax credits
remained relatively constant while the level of income declined. The effective
tax rate is expected to increase in future periods.
Extraordinary Item - Early Extinguishment of Debt, Net of Income Taxes.
Prepayment penalties of $249,000 on FHLB advances were recorded during the year
ended December 31, 1998. Due to the securitization of loans and loans held for
sale and the subsequent sales of a portion of these mortgage-backed securities,
funds were available to prepay a portion of FHLB advances.
Comparison of Operating Results For Years Ended December 31, 1997 and 1996
General. Net income for the years ended December 31, 1997 and 1996 was
$3.5 million and $3.0 million, respectively. Return on average assets for the
years ended December 31, 1997 and 1996 was 1.02% and .90%, respectively. Return
on average equity was 8.71% for 1997 and 8.08% for 1996.
Interest Income. Total interest income increased from $24.5 million in
1996 to $25.3 million in 1997. Average earning assets increased $9.6 million, or
3.0%, from $320.2 million to $329.8 million from 1996 to 1997. Volume increases,
primarily from mortgage-backed securities available for sale and interest
earning deposits, accounted for $689,000 of the increase while higher interest
rates accounted for $155,000 of the increase.
Interest Expense. Interest expense increased $533,000, or 3.5%, from
1996 to 1997. The increase in interest expense was primarily the result of an
increase in average interest-bearing liabilities of $11.0 million, or 3.9%, from
$286.5 million to $297.5 million. The growth in average interest-bearing
liabilities was primarily attributable to the growth in money market savings
deposits and FHLB advances offset by the decline in saving deposits. The average
balance of money market saving deposits and FHLB advances increased $14.3
million, or 203.8%, and $4.5 million, or 5.1%, respectively, while savings
deposits decreased by $7.1 million, or 22.0%. Lincoln Federal utilized the
deposit growth and increased borrowings from the FHLB to fund loan activity and
the subsequent increase in mortgage-backed securities available for sale.
- 11 -
<PAGE>
Net Interest Income. Net interest income increased $311,000, or 3.3%,
from $9.3 million in 1996 to $9.6 million in 1997. $305,000 of Lincoln Federal's
$311,000 increase in net interest income in 1997 was due to an increase in its
interest rate spread.
Provision for Loan Losses. Lincoln Federal's provision for loan losses
for the year ended December 31, 1997 was $298,000. The 1997 provision and the
related increase in the allowance for loan losses were considered adequate,
based on size, condition and components of the loan portfolio. Provision for
loan losses total $120,000 in 1996, which management considered adequate, based
on size, condition, and components of Lincoln Federal's loan portfolios. The
increase in the provision in 1997 was due to the adoption of a more conservative
methodology for determining the adequacy of the allowance for loan losses rather
than a deterioration of the loan portfolio. Lincoln Federal's current
methodology assigns risk factors based on loan type in addition to providing for
non-performing and other classified loans. The methodology used prior to 1997
focused primarily on non-performing and other classified loans and did not
assign risk factors to the remaining loan portfolio based on loan type. While
management estimates loan losses using the best available information, no
assurance can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding problem loans, identification of
additional problem loans and other factors, both within and outside of
management's control.
Net realized and unrealized gain (loss) on loans held for sale. Net
realized and unrealized gains on loans held for sale of $299,000 were recorded
in 1997, an increase of $459,000 over the net losses of $160,000 recorded in
1996.
Net realized and unrealized gains on securities available for sale.
Proceeds from sales of securities available for sale during 1997 amounted to
$54.5 million. Net gains of $118,000 were realized on those sales. No realized
or unrealized gains or losses on securities available for sale were recorded in
1996.
Equity in losses of limited partnerships. Equity in losses of limited
partnerships increased $85,000, or 14.3%, from $596,000 for 1996 to $681,000 for
1997 due to the operating results of the limited partnership investments.
Other Income. Other income increased $171,000, or 34.0%, from $503,000
for 1996 to $674,000 for 1997. This increase was due to an increase in loan
servicing fee income of $104,000 and smaller increases in a variety of other
income categories.
Salaries and Employee Benefits. Salaries and employee benefits
increased 29.4%, from $2.2 million for 1997 compared to $1.7 million for 1996.
These increases were primarily a result of additional personnel. Lincoln Federal
had 72 full-time equivalent employees at December 31, 1997 compared to 69 at
December 31, 1996. Lincoln Federal has increased its number of employees and
added personnel with the specialized skills to more effectively service its
existing customers and to position it for future customer and product growth.
Net Occupancy and Equipment Expenses. Occupancy expenses increased
$36,000, or 15.3%, and equipment expenses increased $165,000, or 45.7%, from
1996 to 1997. The increases in occupancy and equipment expenses were primarily
attributable to increased deprecation and amortization on computers, software
and other equipment.
Deposit Insurance Expense. Deposit insurance expense decreased $1.5
million, or 88.8%, from $1.7 million in 1996 to $194,000 in 1997. This decrease
was due to the recapitalization of the Savings Association Insurance Fund
(`SAIF") in 1996 which resulted in a decline in Lincoln Federal's deposit
insurance assessments in future periods. A one-time SAIF special assessment of
approximately $1.3 million was recorded in 1996. Prior to the recapitalization
of SAIF, Lincoln Federal paid an assessment of $.23 per $100 of deposits.
Subsequent to the recapitalization, the assessment was reduced to $.0644 per
$100 of deposits.
Data Processing Expense. Data processing expense increased $268,000, or
85.6%, from 1996 to 1997 primarily due to expenses relating to the software
conversion of the general ledger and the loan and deposit subsidiary records.
Professional Fees. Professional fees increased $169,000 from $69,000 in
1996 to $238,000 in 1997 primarily due to consulting fees paid in connection
with Lincoln Federal's loan securitization initiative. During 1997, Lincoln
Federal engaged an outside consultant to review its loan portfolio and to
provide assistance in the securitization of loans. Lincoln Federal incurred
$139,000 of expense in relation to this project.
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<PAGE>
Director and Committee fees. Director and committee fees increased
$117,000, or 106.4%, from the year ended December 31, 1996 to 1997. This
increase was due to the introduction of a supplemental retirement plan in 1997.
Mortgage Servicing Rights Amortization. Mortgage servicing rights
("MSR") amortization increased $55,000 from 1996 to 1997 due in part to
increased servicing activity. Average mortgage loans serviced for others were
approximately $68.1 million for 1997 compared to $35.2 million for 1996. In
1997, Lincoln Federal adopted SFAS No. 122, "Accounting for Mortgage Serving
Rights", and SFAS No. 125, "Accounting for Transfers of Financial Assets,
Servicing Rights and Extinguishment of Liabilities". The adoption of these
Statements also contributed to the increase in amortization recorded in 1997.
Charitable Contributions. Charitable contributions increased $14,000
from the year ended December 31, 1996 to 1997.
Other Expense. Other expenses, consisting primarily of expenses related
to advertising, loan expenses, supplies, and postage increased $161,000, or
29.8%, from 1996 to 1997. The increase resulted from increases in a variety of
expense categories and was not attributable to any one item.
Income Tax Expense. Income tax expense increased $289,000, or 33.2%,
from 1996 to 1997. These variations in income tax expense are directly related
to the taxable income for those years. The effective tax rate was 24.8% and
22.6% for 1997 and 1996, respectively.
Liquidity and Capital Resources
Lincoln Federal's primary sources of funds are deposits, borrowings and
the proceeds from principal and interest payments on loans and mortgage-backed
securities and the sales of loans and mortgage-backed securities available for
sale. 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.
Lincoln Federal's primary investing activity is the origination of
loans. During the years ended December 31, 1998, 1997 and 1996, cash used to
originate loans exceeded repayments and other changes by $6.9 million, $20.0
million and $11.4 million, respectively. The growth in loans in 1998 was funded
by growth in deposits, and in 1997 was funded by proceeds from the sale of
mortgage-backed securities available for sale while growth in deposits and FHLB
advances funded Lincoln Federal's 1996 loan growth.
During the years ended December 31, 1998, 1997 and 1996, Lincoln
Federal purchased mortgage-backed securities and other securities available for
sale and held to maturity in the amounts of $81.5 million, $7.8 million and
$11.4 million, respectively. During the years ended December 31, 1998, 1997 and
1996, Lincoln Federal received proceeds from maturities of mortgage-backed
securities and other securities available for sale and held to maturity of $18.4
million, $6.8 million and $7.9 million, respectively. During the year ended
December 31, 1998 and 1997, Lincoln Federal received proceeds for the sale of
mortgage-backed and other securities available for sale of $21.1 million and
$54.5 million which funds were used to fund its loan growth and reduce the level
of FHLB advances. Lincoln Federal did not receive any proceeds for the sale of
securities during 1996.
Lincoln Federal had outstanding loan commitments and unused lines of
credit of $21.3 million at December 31, 1998. Management anticipates that
Lincoln Federal will have sufficient funds from loan repayments, loan sales, and
from its ability to borrow additional funds from the FHLB of Indianapolis to
meet current commitments. Certificates of deposit scheduled to mature in one
year or less at December 31, 1998 totaled $106.8 million. Management believes
that a significant portion of such deposits will remain with Lincoln Federal
based upon historical deposit flow data and Lincoln Federal's competitive
pricing in its market area.
Liquidity management is both a daily and long-term function of Lincoln
Federal's management strategy. In the event that Lincoln Federal should require
funds beyond its ability to generate them internally, additional funds are
available through the use of FHLB advances. Lincoln Federal had outstanding FHLB
advances in the amount of $33.3 million at December 31, 1998.
- 13 -
<PAGE>
Federal law requires that savings associations maintain an average
daily balance of liquid assets in a minimum amount not less than 4% or more than
10% of their withdrawable accounts plus short-term borrowings. Liquid assets
include cash, certain time deposits, certain bankers' acceptances, specified
U.S. government, state or federal agency obligations, certain corporate debt
securities, commercial paper, certain mutual funds, certain mortgage-related
securities, and certain first-lien residential mortgage loans. The OTS recently
amended its regulation that implements this statutory liquidity requirement to
reduce the amount of liquid assets a savings association must hold from 5% of
net withdrawable accounts and short-term borrowings to 4%. The OTS also
eliminated the requirement that savings associations maintain short-term liquid
assets constituting at least 1% of their average daily balance of net
withdrawable deposit accounts and current borrowings. The revised OTS rule also
permits savings associations to calculate compliance with the liquidity
requirement based upon their average daily balance of liquid assets during each
quarter rather than during each month, as was required under the prior rule. The
OTS may impose monetary penalties on savings associations that fail to meet
these liquidity requirements. As of December 31, 1998, Lincoln Federal had
liquid assets of $78.3 million, and a regulatory liquidity ratio of 38.6%.
Lincoln Federal also had available $2.0 million under a line of credit with the
FHLB-Indianapolis. Lincoln Federal's unfunded loan commitments at December 31,
1998 were $21.3 million, and it had $366,000 in standby letters of credit
outstanding at that date.
Pursuant to OTS capital regulations in effect at December 31, 1998,
savings associations were required to maintain a 1.5% tangible capital
requirement, a 3% leverage ratio (or core capital) requirement, and a total
risk-based capital to risk-weighted assets ratio of 8%. At December 31, 1998,
Lincoln Federal's capital levels exceeded all applicable regulatory capital
requirements in effect as of that date. The following table provides the minimum
regulatory capital requirements and Lincoln Federal's capital ratios as of
December 31, 1998:
<TABLE>
<CAPTION>
At December 31, 1998
OTS Requirement Lincoln Federal's Capital Level
--------------- -------------------------------
% of % of Amount
Capital Standard Assets Amount Assets(1) Amount of Excess
- ---------------- ------ ------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital 1.5% $ 5,484 21.1% $77,303 $71,819
Core capital (2) 4.0 14,624 21.1 77,303 62,679
Risk-based capital 8.0 15,222 41.4 78,815 63,593
</TABLE>
(1) Tangible and core capital levels are shown as a percentage of adjusted
total assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(2) The OTS recently adopted a core capital requirement for savings
associations comparable to that recently adopted by the OCC for national
banks. The new regulation requires at least 3% of total adjusted assets for
savings associations that receive the highest supervisory rating for safety
and soundness, and 4% to 5% for all other savings associations. Lincoln
Federal expects to be in compliance with this requirement when it takes
effect. See "Regulation - Savings Association Regulatory Capital."
Current Accounting Issues
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires companies to record
derivatives on the balance sheet at their fair value. SFAS No. 133 also
acknowledges that the method of recording a gain or loss depends on the use of
the derivative. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
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<PAGE>
o For a derivative designated as hedging the exposure to changes
in the fair value of a recognized asset or liability or a firm
commitment (referred to as a fair value hedge), the gain or
loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. The effect of that
accounting is to reflect in earnings the extent to which the
hedge is not effective in achieving offsetting changes in fair
value.
o For a derivative designated as hedging the exposure to
variable cash flows of a forecasted transaction (referred to
as a cash flow hedge), the effective portion of the
derivative's gain or loss is initially reported as a component
of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted
transaction affects earnings. The ineffective portion of the
gain or loss is reported in earnings immediately.
o For a derivative designated as hedging the foreign currency
exposure of a net investment in a foreign operation, the gain
or loss is reported in other comprehensive income (outside
earnings) as part of the cumulative translation adjustment.
The accounting for a fair value hedge described above applies
to a derivative designated as a hedge of the foreign currency
exposure of an unrecognized firm commitment or an
available-for-sale security. Similarly, the accounting for a
cash flow hedge described above applies to a derivative
designated as a hedge of the foreign currency exposure of a
foreign-currency-denominated forecasted transaction.
o For a derivative not designated as a hedging instrument, the
gain or loss is recognized in earnings in the period of
change.
The new Statement applies to all entities. If hedge accounting is
elected by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established at the inception of the hedge.
SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105, and
119. SFAS No. 107 is amended to include the disclosure provisions about the
concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task
Force consensuses are also changed or nullified by the provisions of SFAS No.
133.
SFAS No. 133 will be effective for all fiscal years beginning after
June 15, 1999. Early application is encouraged; however, this Statement may not
be applied retroactively to financial statements of prior periods.
FASB has issued Statement of Financial Accounting Standards No. 134,
Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This Statement
establishes accounting standards for certain activities of mortgage banking
enterprises and for other enterprises with similar mortgage operations. This
Statement amends Statement of Financial Accounting Standards (SFAS) No. 65.
SFAS No. 65, as previously amended by SFAS Nos. 115 and 125, required a
mortgage banking enterprise to classify a mortgage-backed security as a trading
security following the securitization of the mortgage loan held for sale. This
Statement further amends SFAS No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
must classify the resulting mortgage-backed security or other retained interests
based on the entity's ability and intent to sell or hold those investments.
The determination of the appropriate classification for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise now conforms to SFAS No. 115. The only requirement the new Statement
adds is that if an entity has a sales commitment in place, the security must be
classified into trading.
This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. On the date this Statement is initially applied, an
entity may reclassify mortgage-backed securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, except for those with sales commitments in place. Those
securities and other interests shall be classified based on the entity's present
ability and intent to hold the investments.
Impact of Inflation
The consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
- 15 -
<PAGE>
The Company's primary assets and liabilities are monetary in nature. As
a result, interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest rates,
however, do not necessarily move in the same direction or with the same
magnitude as the price of goods and services, since such prices are affected by
inflation. In a period of rapidly rising interest rates, the liquidity and
maturities structures of the Company's assets and liabilities are critical to
the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that Lincoln Federal has made. Lincoln Federal is unable to
determine the extent, if any, to which properties securing its loans have
appreciated in dollar value due to inflation.
Year 2000 Compliance
Lincoln Federal's lending and deposit activities depend significantly
upon computer systems to process and record transactions. Management is aware of
the potential Year 2000 related problems that may affect the operating systems
that control the Company's computers as well as those of its third-party data
service providers that maintain many of its records. In 1997, management began
the process of identifying any Year 2000 related problems that may affect the
Company's computer systems, and management is closely monitoring the data
service providers' progress in making their systems Year 2000 compliant.
Management currently expects to complete testing for Year 2000 compliance by the
second quarter of 1999.
Management has contacted the approximately 20 companies that supply or
service the Company's material operations requesting that they certify that they
have plans to make their respective computer systems Year 2000 compliant.
Management established a December 31, 1998 deadline for these companies to
provide this certification and, as of that date, approximately 90% of these
companies had responded to this inquiry. The Company has delivered a second
notice to the service providers who did not respond to the first inquiry and has
established a deadline of June 30, 1999 for these companies to respond. Once a
certification is received from a service provider, management intends to
continuously monitor the progress that the service provider makes in meeting the
Company's targeted schedule for becoming Year 2000 compliant. Lincoln Federal's
electronic data service provider, whose services are integral to its operations,
has provided certification to management that its computer systems are Year 2000
compliant. Lincoln Federal is currently testing the data that is maintained on
its electronic data service provider's system and will continue testing
throughout 1999 to ensure that the system is Year 2000 compliant. The deadline
that management has established for Lincoln Federal's remaining service
providers to certify that their systems are Year 2000 compliant should provide
management sufficient time to identify and contract with alternative service
providers to replace any provider that cannot certify that it is, or soon will
be, Year 2000 compliant. Management does not expect the expense of such changes
in suppliers or servicers to be material to its operations, financial condition
or results. Notwithstanding the efforts management has made, no assurances can
be given that the systems of its service providers will be timely renovated to
address the Year 2000 issue.
In addition to possible expenses related to Lincoln Federal's own
systems and those of its service providers, the Bank could incur losses if Year
2000 problems affect any of its significant borrowers or impair the payroll
systems of large employers in its market area, either of which could delay loan
payments by Lincoln Federal's borrowers. Management has contacted the
approximately 23 commercial borrowers with outstanding loans in excess of
$300,000 to request that they certify by the end of November, 1998 that their
computer systems were, or soon would be, Year 2000 compliant. In addition,
Lincoln Federal currently requires that borrowers under new commercial loans
that it originates to certify that they are aware of the Year 2000 issue and
will give all necessary attention to insure that their information technology
will be Year 2000 compliant. Because Lincoln Federal's loan portfolio to
individual borrowers is diversified and its market area does not depend
significantly upon one employer or industry, the Bank does not expect any
significant or prolonged Year 2000 related difficulties that will affect net
earnings or cash flow. Management believes that Lincoln Federal's expenses
related to upgrading its systems and software for Year 2000 compliance will not
exceed $300,000. At December 31, 1998, Lincoln Federal had spent approximately
$100,000 in connection with Year 2000 compliance. Management does not consider
the additional cost of these efforts to be significant.
- 16 -
<PAGE>
Quarterly Results of Operations
The following table sets forth certain quarterly results for the years
ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Quarter Interest Interest Net Interest Provision For Net
Ended Income Expense Income Loan Losses Income
----- ------ ------- ------ ----------- ------
1998:
<S> <C> <C> <C> <C> <C>
March $ 5,788 $ 3,448 $2,340 $ 45 $ 731
June 5,625 3,407 2,218 365 86
September 5,564 3,384 2,180 41 681
December 6,022 3,588 2,434 (278) (381)
------- ------- ------ ---- ------
$22,999 $13,827 $9,172 $173 $1,117
======= ======= ====== ==== ======
1997:
March$ 6,230 $ 3,769 $2,471 $ 20 $1,036
June 6,637 3,976 2,651 30 827
September 6,475 4,145 2,330 30 1,172
December 5,955 3,762 2,193 218 478
------- ------- ------ ---- ------
$25,297 $15,652 $9,645 $298 $3,513
======= ======= ====== ==== ======
</TABLE>
Earnings per share information for the periods before Lincoln Federal's
conversion to a stock savings bank on Decmeber 31, 1998 is not meaningful.
Quantitative and Qualitative Disclosures about Market Risks
An important component of Lincoln Federal's asset/liability management policy
includes examining the interest rate sensitivity of its assets and liabilities
and monitoring the expected effects of interest rate changes on the net
portfolio 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 Federal's assets mature or reprice more quickly or to a
greater extent than its liabilities, net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. Conversely, if Lincoln Federal's
assets mature or reprice more slowly or to a lesser extent than its liabilities,
net portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling interest
rates. Lincoln Federal's policy has been to mitigate the interest rate risk
inherent in the historical business of savings associations, the origination of
long-term loans funded by short-term deposits, by pursuing certain strategies
designed to decrease the vulnerability of Lincoln Federal's earnings to material
and prolonged changes in interest rates.
ALCO Committee. 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, which consists of its President, T. Tim
Unger, Chief Financial Officer John M. Baer, Vice President-Lending Maxwell O.
Magee, Branch Coordinator Jim Standish, and Marketing Director Angela Coleman.
The ALCO Committee meets weekly to manage and review Lincoln Federal's assets
and liabilities. The ALCO Committee establishes daily interest rates for
deposits and approves the interest rates on one- to four-family residential
loans, which are based upon current rates established by the Federal Home Loan
Mortgage Corporation ("FHLMC"). The ALCO Committee also approves interest rates
for other types of loans based upon the national prime rate and local market
rates.
Loan Portfolio Restructuring. The Bank's principal strategy to reduce
exposure to fluctuating market interest rates is to manage the interest-rate
sensitivity of its interest-earning assets and interest-bearing liabilities. In
early 1997, the Bank's new management concluded that its asset portfolio exposed
the Bank to significant risks in the event of a material and prolonged increase
or decrease in interest rates. To address this problem, in 1997 the Bank
securitized and sold certain one- to four-family residential loans in its
- 17 -
<PAGE>
portfolio in order to reduce its exposure to interest rate risk. The Bank
presented to FHLMC pools of one- to four-family residential mortgage loans with
either fixed interest rates or variable interest rates pegged to the 11th
District Cost of Funds Index ("COFI"). COFI loans increase the Bank's exposure
to interest rate risk because the COFI index does not follow, and usually lags
behind, the U.S. Treasury yield curve, which is the index the Bank uses to
establish the interest rates for its deposits. In addition, many of the COFI
loans did not adjust quickly enough to changes in market interest rates as the
result of annual rate adjustment limitations in the loan agreements.
Many of the loans the Bank securitized did not include all of the
documentation required by FHLMC. The Bank was able to securitize these loans by
representing to FHLMC that, other than the loans with the missing documentation
specifically identified in the FHLMC Master Commitment, the loans that the Bank
securitized did not otherwise vary from FHLMC's standard underwriting and
mortgage eligibility requirements.
After grouping these loans into pools with similar loans that
originated, the Bank assigned the notes and mortgages to FHLMC in consideration
for several mortgage-backed securities representing the different loan pools. In
August, 1997, the Bank securitized approximately $76.2 million of one- to
four-family residential mortgage loans in this manner, consisting of $26.9
million in COFI loans and $49.3 million in fixed-rate loans. The Bank
immediately sold on the secondary market all of the mortgage-backed securities
representing the COFI loans and $27.4 million of the securities backed by
lower-yielding fixed-rate loans for a gain of $118,000. The Bank retained in its
investment portfolios mortgage-backed securities representing $21.9 million of
higher-yielding fixed-rate loans.
In April, 1998, the Bank securitized an additional $39.9 million of its
one- to four-family residential mortgage loans, consisting of $14.2 million of
COFI loans and $25.7 million of fixed-rate loans for a gain of $105,000. The
Bank sold on the secondary market the mortgage-backed security representing the
COFI loans and $6.9 million of lower-yielding fixed-rate loans. The Bank
retained in its investment portfolio mortgage-backed securities representing
$18.8 million of higher-yielding fixed-rate loans.
The Bank continues to service all of the loans that it originated that
have been securitized by FHLMC in consideration of a fee of .25% and .375% of
the outstanding loan balance for fixed-rated and variable-rate loans,
respectively. Investors who purchased the mortgage-backed securities are repaid
from the regular principal and interest payments made by the borrowers on the
underlying loans, which "pass through" to the investors. FHLMC acts as a
guarantor with respect to these regular payments to the investors in
consideration of a fee that varies up to .375% of the outstanding balance on
loans in the different loan pools.
Although the loans that the Bank securitized were sold without
recourse, the Bank agreed to indemnify FHLMC pursuant to the Master Commitment
in the event that FHLMC makes a payment to an investor pursuant to its guarantee
on certain loans noted in the Master Commitment as lacking the documentation
required by FHLMC's underwriting standards. The Bank's indemnification to FHLMC
pursuant to this provision is limited, however, solely to losses that arise as a
result of the documentation exception or discrepancy noted in the Master
Commitment. FHLMC may also require the Bank to repurchase a loan upon a
borrower's default if the due diligence information contained in the loan data
report that the Bank provided to FHLMC was not accurate, true or complete, if
the Bank fails to provide additional information or documentation to FHLMC upon
request, or if the Bank breaches any representation or warranty in the Master
Commitment. The Bank has not experienced any significant losses on these loans
in the past and do not anticipate any significant losses as a result of this
indemnification.
In June, 1998, the Bank sold an additional $19.3 million of its
adjustable-rate COFI loans in a whole-loan sale to a private investor that
closed in July, 1998. The Bank recognized a loss of $218,000 from this
transaction. The securitization of certain of the Bank's loans and the whole
loan sale reduced the heavy concentration of fixed-rate and adjustable-rate COFI
mortgages in its portfolio while converting those assets to more liquid and
marketable mortgage-backed securities. In the aggregate, the Bank has sold $75.4
million of the securities generated from the securitization and have retained
securities with a face value of $40.7 million in its available-for-sale
securities portfolio. The Bank used the proceeds from these sales of
mortgage-backed securities to repay outstanding FHLB advances from a balance of
- 18 -
<PAGE>
$106.9 million at June 30, 1997 to $45.7 million at June 30, 1998. The Bank also
used some of the proceeds from these sales to purchase interest rate-sensitive
securities. The Bank also restructured its remaining FHLB debt by prepaying
advances with higher interest rates and extending the repayment terms of other
debt, thereby reducing the Bank's exposure to interest rate risk and reducing
its cost of funds.
Because of the lack of customer demand for adjustable rate loans in its
market area, Lincoln Federal primarily originates fixed-rate real estate loans,
which accounted for approximately 71.6% of its loan portfolio at December 31,
1998. Lincoln Federal continues to offer and attempts to increase its volume of
adjustable rate loans when market interest rates make these type loans more
attractive to customers.
Management believes it is critical to manage the relationship between
interest rates and the effect on Lincoln Federal's net portfolio value ("NPV").
This approach calculates the difference between the present value of expected
cash flows from assets and the present value of expected cash flows from
liabilities, as well as cash flows from off-balance sheet contracts. Lincoln
Federal manages assets and liabilities within the context of the marketplace,
regulatory limitations and within limits established by Lincoln Federal's Board
of Directors on the amount of change in NPV which is acceptable given certain
interest rate changes.
The OTS issued a regulation, which uses a net market value methodology
to measure the interest rate risk exposure of savings associations. Under this
OTS regulation, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the institution's
NPV in an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. Because Lincoln
Federal's assets exceed $300 million, it is required to file Schedule CMR. Under
the regulation, associations which must file are required to take a deduction
(the interest rate risk capital component) from their total capital available to
calculate their risk based capital requirement if their interest rate exposure
is greater than "normal." The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) the institution's "normal" level of exposure
which is 2% of the present value of its assets.
Presented below, as of December 31, 1998, is an analysis performed by the
OTS of Lincoln Federal's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 200 basis
point increments, up and down 400 basis points and in accordance with the
proposed regulations. At December 31, 1998, 2% of the present value of Lincoln
Federal's assets was approximately $7.3 million. Because the interest rate risk
of a 200 basis point increase in market rates (which was greater than the
interest rate risk of a 200 basis point decrease) was $14.4 million at December
31, 1998, Lincoln Federal would have been required to deduct $3.6 million from
its capital if the OTS' NPV methodology had been in effect. Lincoln Federal's
exposure to interest rate risk results primarily from the concentration of fixed
rate mortgage loans in its portfolio.
- 19 -
<PAGE>
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp* $52,941 $(31,051) (37)% 15.68% $(680)bp
+200 bp 69,565 (14,427) (17) 19.51 (297)bp
0 bp 83,993 --- --- 22.48 ---
-200 bp 89,343 5,350 6 23.38 90bp
-400 bp 94,582 10,590 13 24.20 172bp
</TABLE>
* Basis points.
In contrast, the following chart presents the calculation of Lincoln
Federal's exposure to interest rate risk as of December 31, 1997, as determined
by the OTS.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp* $23,979 $(23,812) (50)% 8.21% (640)bp
+200 bp 36,885 (10,905) (23) 11.88 (273)bp
0 bp 47,790 --- --- 14.60 ---
-200 bp 50,162 2,372 5 14.93 32bp
-400 bp 50,346 2,555 5 14.67 6bp
</TABLE>
* Basis points.
These charts indicate the extent to which Lincoln Federal's exposure to
interest rate risk declined during 1998. For example, in the event of a 200
basis point (or 2%) increase in interest rates, the net portfolio value of
Lincoln Federal's assets would have declined by $10.9 million, or 23%, at
December 31, 1997, and by $14.4 million, or 17%, at December 31, 1998. This
reduction in Lincoln Federal's exposure to interest rate risk is largely
attributable to the securitization and sale of the adjustable-rate COFI loans
and certain fixed-rate loans in its portfolio during 1997 and 1998.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
- 20 -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Lincoln Bancorp
Plainfield, Indiana
We have audited the accompanying consolidated balance sheet of Lincoln Bancorp
and subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Lincoln
Bancorp and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Olive LLP
/s/ Olive LLP
Indianapolis, Indiana
February 11, 1999
- 21 -
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 1998 1997
- -------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 4,245,128 $ 4,190,199
Interest-bearing demand deposits in other banks 18,662,229 14,767,482
------------- -------------
Cash and cash equivalents 22,907,357 18,957,681
Investment securities
Available for sale 129,275,575 29,399,376
Held to maturity (market value $1,264,375 and $9,614,725) 1,250,000 9,634,952
------------- -------------
Total investment securities 130,525,575 39,034,328
Loans, net of allowance for loan losses of
$1,512,205 and $1,360,731 195,920,792 248,635,204
Premises and equipment 3,379,460 2,825,090
Investments in limited partnerships 2,386,994 2,705,997
Federal Home Loan Bank stock 5,446,700 5,446,700
Interest receivable
Loans 745,584 1,138,824
Mortgage-backed securities 446,786 197,664
Other investment securities and interest-bearing deposits 580,693 196,477
Deferred income tax 2,034,327 974,446
Other assets 2,073,836 1,278,828
------------- -------------
Total assets $366,448,104 $321,391,239
============ ============
Liabilities
Deposits
Noninterest bearing $ 2,484,444 $ 2,321,167
Interest bearing 209,525,347 201,530,657
------------- -------------
Total deposits 212,009,791 203,851,824
Federal Home Loan Bank advances 33,263,455 70,136,148
Note payable 2,202,501 2,691,001
Due to broker 10,025,000
Interest payable 1,108,514 1,153,517
Other liabilities 1,731,061 1,581,077
------------- -------------
Total liabilities 260,340,322 279,413,567
------------- -------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, without par value
Authorized and unissued--2,000,000 shares
Common stock, without par value
Authorized--20,000,000 shares
Issued and outstanding--7,009,250 shares 68,879,373
Retained earnings 42,548,260 41,431,674
Accumulated other comprehensive income 287,549 545,998
Unearned employee stock ownership plan ("ESOP") shares (5,607,400)
------------- -------------
Total stockholders' equity 106,107,782 41,977,672
------------- -------------
Total liabilities and stockholders' equity $366,448,104 $321,391,239
============ ============
</TABLE>
See notes to consolidated financial statements.
- 22 -
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Interest and Dividend Income
<S> <C> <C> <C>
Loans receivable, including fees $17,024,353 $22,369,033 $22,901,854
Investment securities
Mortgage-backed securities 2,961,611 1,086,165
Other investment securities 1,033,105 773,033 941,860
Deposits with financial institutions 1,543,391 652,814 255,988
Dividend income 436,148 415,502 353,758
---------- ------------ -----------
Total interest and dividend income 22,998,608 25,296,547 24,453,460
---------- ------------ -----------
Interest Expense
Deposits 10,971,993 10,403,452 10,237,933
Federal Home Loan Bank advances 2,854,876 5,248,400 4,881,244
---------- ------------ -----------
Total interest expense 13,826,869 15,651,852 15,119,177
---------- ------------ -----------
Net Interest Income 9,171,739 9,644,695 9,334,283
Provision for loan losses 172,757 297,555 120,000
---------- ------------ -----------
Net Interest Income After Provision for Loan Losses 8,998,982 9,347,140 9,214,283
---------- ------------ -----------
Other Income
Net realized and unrealized gains (losses) on loans (61,074) 299,020 (159,727)
Net realized gains on sales of available-for-sale securities 112,554 118,283
Equity in losses of limited partnerships (514,003) (681,426) (596,009)
Other income 833,400 674,139 502,506
---------- ------------ -----------
Total other income (loss) 370,877 410,016 (253,230)
---------- ------------ -----------
Other Expenses
Salaries and employee benefits 2,724,332 2,247,436 1,718,974
Net occupancy expenses 248,935 272,101 236,252
Equipment expenses 625,653 525,734 360,775
Deposit insurance expense 187,775 193,672 1,724,734
Data processing fees 657,991 581,087 312,794
Professional fees 200,796 237,819 68,745
Director and committee fees 319,404 226,538 110,300
Mortgage servicing rights amortization 280,214 66,784 12,478
Charitable contributions 2,022,567 31,912 17,704
Other expenses 842,197 702,305 540,539
---------- ------------ -----------
Total other expenses 8,109,864 5,085,388 5,103,295
---------- ------------ -----------
Income Before Income Tax and Extraordinary Item 1,259,995 4,671,768 3,857,758
Income tax expense (benefit) (6,894) 1,158,560 869,539
---------- ------------ -----------
Income Before Extraordinary Item 1,266,889 3,513,208 2,988,219
Extraordinary item--early extinguishment of debt,
net of income taxes of $98,583 (150,303)
---------- ------------ -----------
Net Income $1,116,586 $ 3,513,208 $ 2,988,219
========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
- 23 -
<PAGE>
CONSOLIDATED SATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $1,116,586 $3,513,208 $2,988,219
---------- ---------- ----------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale
Unrealized holding gains (losses) arising during
the period, net of tax expense (benefit) of
$(124,935), $404,318 and $(656) (190,478) 616,429 1,000
Less: Reclassification adjustment for gains
included in net income, net of tax expense
(benefit) of $44,583 and $46,852 67,971 71,431
----------- ---------- ----------
(258,449) 544,998 1,000
----------- ---------- ----------
Comprehensive income $ 858,137 $4,058,206 $2,989,219
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Unearned
Shares Retained Comprehensive ESOP
Outstanding Amount Earnings Income Shares Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 $34,930,247 $ 34,930,247
Net income 2,988,219 2,988,219
Unrealized gains on securities,
net of reclassification adjustment $ 1,000 1,000
--------- ----------- ----------- -------- ----------- ------------
Balances, December 31, 1996 37,918,466 1,000 37,919,466
Net income 3,513,208 3,513,208
Unrealized gains on securities,
net of reclassification adjustment 544,998 544,998
--------- ----------- ----------- -------- ----------- ------------
Balances, December 31, 1997 41,431,674 545,998 41,977,672
Net income 1,116,586 1,116,586
Unrealized losses on securities,
net of reclassification adjustment (258,449) (258,449)
Stock issued in conversion,
net of costs 6,809,250 $66,879,373 66,879,373
Stock contributed to
charitable foundation 200,000 2,000,000 2,000,000
Contribution of unearned
ESOP shares $(5,607,400) (5,607,400)
--------- ----------- ----------- -------- ----------- ------------
Balances, December 31, 1998 7,009,250 $68,879,373 $42,548,260 $287,549 $(5,607,400) $106,107,782
========= =========== =========== ======== =========== ============
</TABLE>
See notes to consolidated financial statements.
- 24 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 1,116,586 $ 3,513,208 $2,988,219
Adjustments to reconcile net income to net cash provided
(used) by operating activities
Provision for loan losses 172,757 297,555 120,000
Common stock contributed to Lincoln Federal Charitable Foundation 2,000,000
Gain on sale of foreclosed real estate (10,550) (17,297) (2,724)
(Gain) loss on disposal of premises and equipment 13,190 (3,147)
Investment securities accretion, net (43,449) (173) (5,764)
Investment securities gains (112,554) (118,283)
Equity in losses of limited partnerships 514,003 681,426 596,009
Amortization of net loan origination fees (417,831) (318,087) (555,738)
Depreciation and amortization 478,784 441,824 379,449
Deferred income tax benefit (890,363) (48,394) (165,948)
Change in
Loans held for sale 19,502,357 1,353,983 (8,666,247)
Interest receivable (240,098) 358,839 (20,227)
Interest payable (45,003) 669,785 192,646
Other liabilities 313,544 242,329 (578,033)
Other assets 98,626 143,797 (80,935)
Income taxes receivable/payable 98,386 (604,950) 14,400
----------- ----------- ----------
Net cash provided (used) by operating activities 22,548,385 6,595,562 (5,788,040)
----------- ----------- ----------
Investing Activities
Net change in interest-bearing deposits 595,000 100,000
Purchases of securities available for sale (81,482,573) (7,798,838) (889)
Proceeds from sales of securities available for sale 21,088,545 54,532,285
Proceeds from maturities of securities available for sale 9,998,768 1,236,765
Purchases of securities held to maturity (11,429,375)
Proceeds from maturities of securities held to maturity 8,385,000 5,550,000 7,850,000
Purchase of loans (999,737)
Other net changes in loans (6,920,309) (20,033,888) (11,425,829)
Purchase of premises and equipment (1,046,344) (677,841) (189,524)
Proceeds from disposal of property and equipment 6,500
Purchase of FHLB of Indianapolis stock (650,000) (496,700)
Proceeds from sale of foreclosed real estate 318,017 157,901 40,000
Improvements to foreclosed real estate (151) (10,294)
Contribution to limited partnership (195,000) (200,000) (200,000)
Other investing activities (650,000) (378,759)
----------- ----------- ----------
Net cash provided (used) by investing activities (50,503,896) 31,332,737 (15,756,111)
----------- ----------- ----------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand,
money market and savings deposits 6,694,106 4,449,683 8,509,585
Certificates of deposit 1,463,861 (11,421,208) 6,197,171
Proceeds from FHLB advances 15,000,000 73,400,000 94,700,000
Repayment of FHLB advances (51,872,693) (94,496,337) (85,403,916)
Payment on note payable to limited partnership (488,500) (488,500) (488,500)
Net change in advances by borrowers for taxes and insurance (163,560) (213,140) (358,426)
Proceeds from sale of common stock, net of costs 61,271,973
----------- ----------- ----------
Net cash provided (used) by financing activities 31,905,187 (28,769,502) 23,155,914
----------- ----------- ----------
Net Change in Cash and Cash Equivalents 3,949,676 9,158,797 1,611,763
Cash and Cash Equivalents, Beginning of Year 18,957,681 9,798,884 8,187,121
----------- ----------- ----------
Cash and Cash Equivalents, End of Year $22,907,357 $18,957,681 $9,798,884
=========== =========== ==========
Additional Cash Flows and Supplementary Information
Interest paid $13,871,872 $14,982,067 $14,944,236
Income tax paid 686,500 1,814,998 994,087
Loan balances transferred to foreclosed real estate 365,108 110,767 102,087
Securitization of loans and loans held for sale 39,903,448 76,229,830
Common stock issued to ESOP leveraged with an employee loan 5,607,400
Transfer of loans to loans held for sale 19,611,025 3,137,084
Due to broker 10,025,000
</TABLE>
See notes to consolidated financial statements.
- 25 -
<PAGE>
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Lincoln Bancorp ("Company") and its
wholly owned subsidiary, Lincoln Federal Savings Bank ("Bank"), and the Bank's
wholly owned subsidiary, L-F Service Corporation ("L-F Service"), conform to
generally accepted accounting principles and reporting practices followed by the
thrift industry. The more significant of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a federal thrift
charter and provides full banking services in a single significant business
segment. As a federally chartered thrift, the Bank is subject to regulation by
the Office of Thrift Supervision.
The Bank generates commercial, mortgage and consumer loans and receives deposits
from customers located primarily in Central Indiana. The Bank's loans are
generally secured by specific items of collateral including real property,
consumer assets and business assets. L-F Service invests in low income housing
partnerships.
Consolidation--The consolidated financial statements include the accounts of the
Company and Bank after elimination of all material intercompany transactions and
accounts.
Investment Securities--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately in accumulated other comprehensive income,
net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
Loan securitizations--The Company securitized certain mortgage loans and created
mortgage-backed securities for sale in the secondary market. Because the
resulting securities were collateralized by the identical loans previously held,
no gain or loss was recognized at the time of the securitization transactions.
When securitized loans are sold to an outside party, the specific-identification
method is used to determine the cost of the security sold, and a gain or loss is
recognized in income.
Loans held for sale are carried at the lower of aggregate cost or market. Market
is determined using the aggregate method. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to income based on the
difference between estimated sales proceeds and aggregate cost.
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Company will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The Company
considers its investment in one-to-four family residential loans and consumer
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. Interest income is accrued on the principal balances
of loans. The accrual of interest on impaired and nonaccrual loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual lives of the loans. When a loan is paid
off or sold, any unamortized loan origination fee balance is credited to income.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
- 26 -
<PAGE>
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1998, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets which range from 3 to 39 years. Maintenance
and repairs are expensed as incurred while major additions and improvements are
capitalized. Gains and losses on dispositions are included in current
operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank (FHLB) system. The required investment in
the common stock is based on a predetermined formula.
Foreclosed assets are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
Mortgage servicing rights on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights, which
include purchased servicing rights, are amortized in proportion to and over the
period of estimated servicing revenues.
Investments in limited partnerships are recorded using the equity method of
accounting. Losses due to impairment are recorded when it is determined that the
investment no longer has the ability to recover its carrying amount. The
benefits of low income housing tax credits associated with the investment are
accrued when earned.
Pension plan costs are based on actuarial computations and charged to current
operations. The funding policy is to pay at least the minimum amounts required
by ERISA.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
Earnings per share will be computed based upon the weighted average common and
common equivalent shares outstanding during the period subsequent to the Bank's
conversion to a stock savings bank on December 30, 1998. Net income per share
for the periods before the conversion, is not meaningful.
Reclassifications of certain amounts in the 1997 and 1996 consolidated financial
statements have been made to conform to the 1998 presentation.
Note 2 -- Conversion
On December 30, 1998, the Bank completed the conversion from a federally
chartered mutual institution to a federally chartered stock savings bank and the
formation of the Company as the holding company of the Bank. As part of the
conversion, the Company issued 6,809,250 shares of common stock at $10 per
share. Net proceeds of the Company's stock issuance, after costs of $1,213,000
and excluding the shares issued for the ESOP, were $61,272,000, of which
$33,440,000 was used to acquire 100% of the stock and ownership of the Bank. The
transaction was accounted for at historical cost in a manner similar to that
utilized in a pooling of interests. In connection with the Conversion, the
Company contributed 200,000 shares of common stock to Lincoln Federal Charitable
Foundation, Inc. (the "Foundation"), a charitable foundation dedicated to
community development activities in the Company's market areas. This resulted in
the recognition of an additional $2,000,000 charitable contribution expense for
the year ended December 31, 1998.
- 27 -
<PAGE>
Note 3 -- Investment Securities
<TABLE>
<CAPTION>
1998
----
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------
Available for sale
<S> <C> <C> <C>
Federal agencies $ 15,598 $ 72 $ 15,670
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 31,939 970 32,909
Federal National Mortgage Corporation 6,013 52 6,065
Collateralized mortgage obligations 51,706 3 $ 74 51,635
Corporate obligations 23,544 59 606 22,997
-------- ------ ---- --------
Total available for sale 128,800 1,156 680 129,276
-------- ------ ---- --------
Held to maturity
Federal agencies 1,250 14 1,264
-------- ------ ---- --------
Total held to maturity 1,250 14 1,264
-------- ------ ---- --------
Total investment securities $130,050 $1,170 $680 $130,540
======== ====== ==== ========
1997
----
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------
Available for sale
Mortgage-backed securities
Federal Home Loan Mortgage Corporation $20,997 $862 $21,859
Federal National Mortgage Corporation 7,498 42 7,540
------- ---- --- -------
Total available for sale 28,495 904 29,399
------- ---- --- -------
Held to maturity
Federal agencies 9,635 5 $25 9,615
------- ---- --- -------
Total held to maturity 9,635 5 25 9,615
------- ---- --- -------
Total investment securities $38,130 $909 $25 $39,014
======= ==== === =======
</TABLE>
- 28 -
<PAGE>
The amortized cost and fair value of securities at December 31, 1998, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
December 31 Cost Value Cost Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 250 $ 251
One to five years 1,000 1,013
Five to ten years $ 15,598 $ 15,670
Over ten years 23,544 22,997
-------- -------- ------ ------
39,142 38,667 1,250 1,264
Mortgage-backed securities 89,658 90,609
-------- -------- ------ ------
Totals $128,800 $129,276 $1,250 $1,264
======== ======== ====== ======
</TABLE>
Securities with a carrying value of $97,503,000 and $38,957,000 were pledged at
December 31, 1998 and 1997 to secure FHLB advances.
Proceeds from sales of securities available for sale during the years ended
December 31, 1998 and 1997 were $21,089,000 and $54,532,000. Gross gains of
$113,000 and $208,000 and gross losses of $0 and $90,000 for the years ended
December 31, 1998 and 1997 were realized on those sales.
Note 4 -- Loans and Allowance
December 31 1998 1997
- -------------------------------------------------------------------
Real estate mortgage loans
One-to-four family $152,893 $205,976
Multi-family 1,022 1,133
Real estate construction loans 7,411 9,912
Commercial, industrial and agricultural loans 17,334 16,611
Consumer loans 22,014 20,558
-------- --------
200,674 254,190
Less
Undisbursed portion of loans 2,348 2,504
Deferred loan fees 893 1,690
Allowance for loan losses 1,512 1,361
-------- --------
Total loans $195,921 $248,635
======== ========
- 29 -
<PAGE>
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $ 1,361 $ 1,241 $ 1,121
Provision for losses 173 298 120
Recoveries on loans 335
Loans charged off (357) (178)
Balances, December 31 $ 1,512 $ 1,361 $ 1,241
Information on impaired loans is summarized below.
December 31 1998 1997
- -----------------------------------------------------------
Impaired loans with an allowance $1,083
Impaired loans for which the
discounted cash flows or
collateral value exceeds the
carrying value of the loan $300 499
---- ------
Total impaired loans $300 $1,582
==== ======
Allowance for impaired loans
(included in the Bank's
allowance for loan losses) $237
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------
Average balance of
impaired loans $951 $1,933 $3,177
Interest income recognized
on impaired loans 9 64 194
Cash-basis interest
included above 9 64 194
Note 5 -- Premises and Equipment
December 31 1998 1997 1996
- ----------------------------------------------------------
Land $ 881 $ 881 $ 493
Buildings and land
improvements 2,720 2,734 2,695
Furniture and equipment 1,778 1,490 1,240
Construction in progress 495
------ ------ ------
Total cost 5,874 5,105 4,428
Accumulated depreciation (2,495) (2,280) (1,839)
------ ------ ------
Net $3,379 $2,825 $2,589
====== ====== ======
Note 6 -- Investments In Limited Partnerships
The Company's investments in limited partnership of $2,387,000 and $2,706,000 at
December 31, 1998 and 1997 represent equity in certain limited partnerships
organized to build, own and operate apartment complexes. The Company records its
equity in the net income or loss of the partnerships based on the Company's
interest in the partnerships, which interests are 49.5 percent in Pedcor
Investments-1987-I (Pedcor) and 99 percent in Bloomington Housing Associates
L.P. (Bloomington Housing). In addition to recording its equity in the losses of
the partnerships, the Company has recorded the benefit of low income housing tax
credits of $597,000 for the year ended December 31, 1998 and $655,000 for the
years ended December 31, 1997 and 1996. Condensed combined financial statements
of the partnerships are as follows:
December 31 1998 1997
- ---------------------------------------------------------------
Assets
Cash $ 202 $ 363
Note receivable--limited partner 2,203 2,691
Land and property 9,339 9,716
Other assets 1,347 1,499
------- -------
Total assets $13,091 $14,269
======= =======
Liabilities
Notes payable $ 9,041 $ 9,536
Other liabilities 706 710
------- -------
Total liabilities 9,747 10,246
Partners' equity 3,344 4,023
------- -------
Total liabilities and
partners' equity $13,091 $14,269
======= =======
December 31 1998 1997 1996
- -------------------------------------------------------------
Condensed statement
of operations
Total revenue $ 1,575 $ 1,677 $ 1,655
Total expenses 2,644 2,633 2,438
------- ------- -------
Net loss $(1,069) $ (956) $ (783)
======= ======= =======
- 30 -
<PAGE>
Note 7 -- Deposits
December 31 1998 1997
- --------------------------------------------------------
Noninterest-bearing
demand deposits $ 2,484 $ 2,321
Interest-bearing demand 8,541 7,565
Money market savings deposits 32,942 26,002
Savings deposits 20,582 21,967
Certificates and other time
deposits of $100,000 or more 16,333 15,334
Other certificates and
time deposits 131,128 130,663
Total deposits $212,010 $203,852
Certificates and other time deposits
maturing in years ending December 31
1999 $106,818
2000 28,963
2001 9,682
2002 773
2003 1,225
$147,461
Note 8 -- Federal Home Loan Bank Advances
<TABLE>
<CAPTION>
1998 1997
---- ----
Weighted Weighted
Average Average
December 31 Amount Rate Amount Rate
- ----------- ------ ---- ------ ----
Maturities in years ending December 31
<S> <C> <C> <C> <C>
1998 $35,000 5.47%
1999 $ 7,000 5.21 %7,000 5.21
2001 3,750 6.15
2002 10,000 5.67 12,700 5.81
200 1,263 5.36 1,686 5.36
2007 10,000 6.67
2008 15,000 5.53
------- -------
$33,263 5.50% $70,136 5.71%
======= =======
</TABLE>
The Company has an available line of credit with the FHLB totaling $2,000,000.
The line of credit expires September 9, 1999 and bears interest at a rate equal
to the current variable advance rate. There were no drawings on this line of
credit at December 31, 1998.
The FHLB advances are secured by first mortgage loans and investment securities
totaling $245,344,000 and $238,781,000 at December 31, 1998 and 1997. Advances
are subject to restrictions or penalties in the event of prepayment.
During 1998, the Company prepaid FHLB advances of $16,450,000. The early
repayments resulted in prepayment penalties of $150,000, net of income taxes of
$99,000, which has been accounted for as an extraordinary item as required by
generally accepted accounting principles.
Note 9 -- Note Payable
The note payable to Bloomington Housing dated August 18, 1992 in the original
amount of $4,945,000 bears no interest so long as there exists no event of
default. In the instance where an event of default has occurred, interest shall
be calculated at a rate of five percent above the Indiana base rate as described
in the note. The following table summarizes the payment terms of the note.
- 31 -
<PAGE>
December 31
Payments due in years ending
1999 $ 489
2000 489
2001 489
2002 489
2003 247
---
$2,203
======
Note 10 -- Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of these loans consist
of the following:
December 31 1998 1997 1996
- -----------------------------------------------------
Mortgage loan portfolio
serviced for
FHLMC $82,815 $84,879 $36,660
Other investors 15,346 84 100
------- ------- -------
$98,161 $84,963 $36,760
======= ======= =======
The aggregate fair value of capitalized mortgage servicing rights at December
31, 1998 and 1997 totaled $605,000 and $530,000. Comparable market values and a
valuation model that calculates the present value of future cash flows were used
to estimate fair value. For purposes of measuring impairment, risk
characteristics including product type, investor type, and interest rates, were
used to stratify the originated mortgage servicing rights.
December 31 1998 1997 1996
- ---------------------------------------------------------
Mortgage Servicing Rights
Balances, January 1 $ 530 $ 85 $ 49
Servicing rights capitalized 355 512 48
Amortization of
servicing rights (280) (67) (12)
----- ----- -----
Balances, December 31 $ 605 $ 530 $ 85
===== ===== =====
Note 11-- Income Tax
Year Ended December 31 1998 1997 1996
- ---------------------------------------------------------------
Income tax expense (benefit)
Currently payable
Federal $ 532 $ 841 $ 695
State 351 366 341
Deferred
Federal (881) (58) (163)
State (9) 10 (3)
------- ------- -------
Total income tax
expense (benefit) $ (7) $ 1,159 $ 870
======= ======= =======
Reconciliation of federal
statutory to actual
tax expense
Federal statutory income
tax at 34% $ 428 $ 1,588 $ 1,312
Effect of state
income taxes 226 248 223
Tax credits (597) (655) (655)
Other (64) (22) (10)
------- ------- -------
Actual tax expense
(benefit) $ (7) $ 1,159 $ 870
======= ======= =======
Effective tax rate (.5)% 24.8% 22.6%
- 32 -
<PAGE>
The components of the deferred tax asset are as follows at:
December 31 1998 1997
- ---------------------------------------------------------------
Assets
Depreciation $ 38 $ 18
Allowance for loan losses 643 578
Loan fees 58 112
Deferred director fees 375 273
Loss on limited partnerships 377 411
Business tax credits 549 294
Charitable
contributions 591
Other 13
----- -----
Total assets 2,631 1,699
===== =====
Liabilities
State income tax 79 76
FHLB stock dividends 79 78
Mortgage
servicing rights 250 213
Securities available for sale 189 358
------ ------
Total liabilities 597 725
------ ------
$2,034 $ 974
====== ======
No valuation allowance was considered necessary at December 31, 1998 and 1997.
At December 31, 1998, the Company had an unused business income tax credit
carryforward of $549,000 expiring in 2012 and a charitable contribution
carryover of $1,739,000 expiring in 2003.
Income tax expense attributable to securities gains was $45,000 and $47,000 for
years ended December 31, 1998 and 1997.
Retained earnings include approximately $5,928,000 for which no deferred income
tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of December 31, 1987 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses would create income
for tax purposes only, which income would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amounts at December 31, 1998 was approximately $2,348,000.
Note 12 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Company uses the same credit policies in making such
commitments as it does for instruments that are included in the consolidated
statement of financial condition.
Financial instruments whose contract amount represents credit risk were as
follows:
December 31 1998 1997
- ---------------------------------------------------------
Loan commitments $21,293 $16,518
Standby letters of credit 366 715
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation. Collateral held varies, but may include residential real
estate, income-producing commercial properties, or other assets of the borrower.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party.
The Company and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate determination of such possible claims or
lawsuits will not have a material adverse effect on the consolidated financial
position of the Company.
- 33 -
<PAGE>
Note 13 -- Year 2000
Like all entities, the Company and its subsidiary are exposed to risks
associated with the Year 2000 Issue, which affects computer software and
hardware; transactions with customers, vendors, and other entities; and
equipment dependent upon microchips. The Company has begun, but not yet
completed, the process of identifying and remediating potential Year 2000
problems. It is not possible for any entity to guarantee the results of its own
remediation efforts or to accurately predict the impact of the Year 2000 Issue
on third parties with which the Company and subsidiary do business. If
remediation efforts of the Company or third parties with which the Company and
subsidiary do business are not successful, the Year 2000 Issue could have
negative effects on the Company's financial condition and results of operations
in the near term.
Note 14 -- Dividend and Capital Restrictions
The Office of Thrift Supervision ("OTS") regulations provide that savings
associations which meet fully phased-in capital requirements and are subject
only to "normal supervision", such as the Bank, may pay out, as a dividend, 100
percent of net income to date over the calendar year and 50 percent of surplus
capital existing at the beginning of the calendar year without supervisory
approval, but with 30 days prior notice to the OTS. OTS regulations also
prohibit a savings association from declaring or paying any dividends if, as a
result, the regulatory capital of the Association would be reduced below the
minimum amount required to be maintained for the liquidation amount established
in connection with the conversion. Any additional amount of capital
distributions would require prior regulatory approval. Savings associations
meeting current minimum capital requirements but not fully phased-in standards
may, with 30 days prior notice but without prior approval, distribute up to 75
percent of net income if they meet the risk-based requirement on January 1,
1993. Savings associations failing to meet current capital standards may only
pay dividends with supervisory approval.
At the time of conversion, a liquidation account was established in an amount
equal to the Banks' net worth as reflected in the latest statement of condition
used in its final conversion offering circular. The liquidation account is
maintained for the benefit of eligible deposit account holders who maintain
their deposit account in the Banks after conversion. In the event of a complete
liquidation, and only in such event, each eligible deposit account holder will
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current adjusted subaccount balance for deposit
accounts then held, before any liquidation distribution may be made to
stockholders. Except for the repurchase of stock and payment of dividends, the
existence of the liquidation account will not restrict the use or application of
net worth. The initial balance of the liquidation account was $42,800,000.
At December 31, 1998, the stockholder's equity of the Bank was $77,590,000, of
which approximately $31,300,000 was available for the payment of dividends to
the Company.
Note 15 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 1998 and 1997,
the Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since December 31, 1998 and 1997
that management believes have changed the Bank's classification.
- 34 -
<PAGE>
The Bank's actual and required capital amounts and ratios are as
follows:
<TABLE>
<CAPTION>
December 31, 1998
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1
(to risk-weighted assets) $78,815 41.4% $15,222 8.0% $19,027 10.0%
Core capital 1
(to adjusted tangible assets) 77,303 21.1% 14,624 4.0% 21,935 6.0%
Core capital 1
(to adjusted total assets) 77,303 21.1% 14,624 4.0% 18,279 5.0%
1 As defined by regulatory agencies
December 31, 1997
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital 1
(to risk-weighted assets) $42,793 25.3% $13,547 8.0% $16,934 10.0%
Core capital 1
(to adjusted tangible assets) 41,432 12.9% 9,625 3.0% 19,250 6.0%
Core capital 1
(to adjusted total assets) 41,432 12.9% 9,625 3.0% 16,042 5.0%
1 As defined by regulatory agencies
</TABLE>
The Bank's tangible capital at December 31, 1998 and 1997 was $77,303,000 and
$41,432,000, which amounts were 21.1 and 12.9 percent of tangible assets and
exceeded the required ratio of 1.5 percent.
Note 16 -- Employee Benefits
The Bank is a participant in a pension fund known as the Financial Institutions
Retirement Fund ("FIRF"). This plan is a multi-employer plan. There was no
pension expense or benefit for the year ended December 31, 1998. Pension expense
(benefit) was $(26,000) and $70,000 for the years ended December 31, 1997 and
1996. This plan provides pension benefits for substantially all of the Bank's
employees.
The Bank has a retirement savings 401(k) plan in which substantially all
employees may participate. The Bank matches employees' contributions at the rate
of 50 percent for the first 5 percent of W-2 earnings contributed by
participants. The Bank's expense for the plan was $29,000, $19,000 and $20,000
for the years ended December 31, 1998, 1997 and 1996.
As part of the conversion in 1998, the Company established an ESOP covering
substantially all employees of the Company and Bank. The ESOP acquired 560,740
shares of the Company common stock at $10 per share in the conversion with funds
provided by a loan from the Company. Accordingly, the $5,607,000 of common stock
acquired by the ESOP is shown as a reduction of stockholders' equity. At
Decmeber 31, 1998, the Company had 560,740 unearned ESOP shares with a fair
value of $6,098,000. Shares are released to participants proportionately as the
loan is repaid. Dividends on allocated shares are recorded as dividends and
charged to retained earnings. Dividends on unallocated shares, which may be
distributed to participants, or used to repay the loan are treated as
compensation expense. Compensation expense is recorded equal to the fair market
value of the stock when contributions, which are determined annually by the
Board of Directors of the Company and Bank, are made to the ESOP. There was no
expense under the ESOP for the year ended December 31, 1998. At December 31,
1998, the ESOP had no allocated shares, 560,740 suspense shares and no
committed-to-be released shares.
In connection with the conversion, the Board of Directors approved a Stock
Option Plan and a Recognition and Retention Plan ("RRP"). The Plans are subject
to stockholders' approval. Under the stock option plan, stock options covering
shares representing an aggregate of up to 10% of the common stock issued in the
conversion may be granted to directors and executive officers. Restricted stock
awards covering up to 4% of the common stock issued in the conversion may be
awarded to directors and executive officers under the RRP.
- 35 -
<PAGE>
Note 17 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument.
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Securities--Fair values are based on quoted market prices.
Loans and Loans Held for Sale--The fair value for loans is estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Interest Receivable/Payable--The fair value of accrued interest
receivable/payable approximates carrying values.
Deposits--Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
FHLB Advances--The fair value of these borrowings is estimated using a
discounted cash flow calculation, based on current rates for similar debt.
Note Payable--Limited Partnership--The fair value of the borrowing is estimated
using a discounted cash flow calculation based on the prime interest rate.
Advance Payments by Borrowers for Taxes and Insurance--The fair value
approximates carrying value.
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage and consumer loans and standby letters of credit and are generally of a
short-term nature. The fair value of such commitments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing. The
carrying amounts of these commitments, which are immaterial, are reasonable
estimates of the fair value of these financial instruments.
- 36 -
<PAGE>
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------
Assets
Cash and
<S> <C> <C> <C> <C>
cash equivalents $22,907 $22,907 $18,958 $18,958
Securities available for sale 129,276 129,276 29,399 29,399
Securities held to maturity 1,250 1,264 9,635 9,615
Loans including loans held for sale, net 195,921 198,972 248,635 250,420
Stock in FHLB 5,447 5,447 5,447 5,447
Interest receivable 1,773 1,773 1,533 1,533
Liabilities
Deposits 212,010 212,903 203,852 204,270
Borrowings
FHLB advances 33,263 33,409 70,136 69,753
Note payable--limited partnership 2,203 1,872 2,691 2,198
Interest payable 1,109 1,109 1,154 1,154
Advances by borrowers for taxes and insurance 560 560 723 723
</TABLE>
Note 18 -- Condensed Financial Information
(Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
December 31 1998
- --------------------------------------------------------------------------------
Assets
Short-term interest-bearing
deposit with subsidiary $ 27,900
Investment in common stock
of subsidiary 77,590
Deferred income tax 591
Other assets 126
--------
Total assets $106,207
--------
Liabilities--other $ 99
Stockholders' Equity 106,108
--------
Total liabilities and stockholders' equity $106,207
========
Condensed Statement of Income
Year Ended December 31 1998
- --------------------------------------------------------------------------------
Income
Interest income on short-term
interest-bearing deposit with subsidiary $ 215
Expenses
Interest expense 206
Charitable contribution 2,000
-------
Total expenses 2,206
-------
Loss before income tax benefit
and equity in undistributed
income of subsidiary (1,991)
Income tax benefit (677)
-------
Loss before equity in
undistributed income of subsidiary (1,314)
Equity in undistributed
income of subsidiary 2,431
-------
Net Income $ 1,117
=======
- 37 -
<PAGE>
Condensed Statement of Cash Flows
Year Ended December 31 1998
- --------------------------------------------------------------------------------
Operating Activities
Net income $ 1,117
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Charitable contribution of Company's common stock 2,000
Deferred income tax benefit (591)
Other (2,458)
--------
Net cash provided by operating activities 68
Investing Activity--capital contribution to subsidiary (33,440)
Financing Activity--proceeds from sale of common stock, net of costs 61,272
--------
Short-term Interest-bearing Deposit with Subsidiary at End of Year $ 27,900
========
Additional Cash Flow and Supplementary Information
Common stock issued to ESOP leveraged with an employee loan $ 5,607
- 38 -
<PAGE>
Board of Directors
T. Tim Unger
Chairman of the Board
President and Chief Executive Officer
Lester N. Bergum, Jr. David E. Mansfield
Attorney Administrative Supervisor,
Marthon Oil Company
W. Thomas Harmon John C. Milholland
Co-owner, Crawfordsville Principal, Frankfort Senior
Town and Country Homecenter, Inc. High School
Jerry Holifield Edward E. Whalen
Superintendent, Plainfield Banker (Retired)
Community School Corporation
Wayne E. Kessler John L. Wyatt
Farmer (Retired) District Agent, Northwestern
Mutal Life Insurance Company
Officers of Lincoln Bancorp
T. Tim Unger John M. Baer
Chairman of the Board, Secretary and Treasurer
President and Chief Executive Officer
Officers of Lincoln Federal Savings Bank
T. Tim Unger Edward E. Whalen John M. Baer
President and Chief Chairman of the Board Chief Financial Officer,
Executive Officer Secretary and Treasurer
Lester N. Bergum, Jr. (age 50) is an attorney and partner with the firm
of Robison, Robison, Bergum & Johnson in Frankfort, Indiana, where he has
practiced since 1974. He has also served since 1989 as president of Title
Insurance Services, Inc., a title agency located in Frankfort, Indiana.
W. Thomas Harmon (age 59) has served as the co-owner, Vice President,
Treasurer and Secretary of Crawfordsville Town & Country Homecenter, Inc. in
Crawfordsville, Indiana, since 1978. Mr Harmon is also a co-owner and officer of
RGW, Inc., in Crawfordsville, a company that develops real estate subdivisions
and manages apartment rental properties, a position he has held since 1965.
Jerry Holifield (age 57) has been the Superintendent of the Plainfield
Community School Corporation since 1991.
Wayne E. Kessler (age 68) has been a self-employed farmer in
Crawfordsville, Indiana since 1949. Mr. Kessler is currently semi-retired.
David E. Mansfield (age 56) is an Administrative Supervisor for
Marathon Oil Company where he has worked since 1973.
John C. Milholland (age 62) has been Principal of Frankfort Senior High
School in Frankfort, Indiana since 1989.
T. Tim Unger (age 58) has been President and Chief Executive Officer of
Lincoln Federal since January, 1996. Before then, Mr. Unger served as President
and Chief Executive Officer of Summit Bank of Clinton County from 1989 through
1995.
Edward E. Whalen (age 70) retired as President and Chief Executive
Officer of Lincoln Federal in 1996. Mr. Whalen was employed by Lincoln Federal
for 36 years and has served on the board of directors since 1961. He currently
serves as Chairman of the Board of the Bank.
John L. Wyatt (age 62) is a District Agent for Northwestern Mutual Life
Insurance Company where he has been employed since 1960.
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<PAGE>
SHAREHOLDER INFORMATION
The Holding Company's common stock, without par value ("Common Stock"),
is listed on the NASDAQ National Market System under the symbol "LNCB" The
Holding Company shares began to trade on December 30, 1998. The high and low bid
prices for the period December 30, 1998 to March 25, 1999, were $11.44 and
$10.19, respectively. Since the Holding Company has no independent operation or
other subsidiaries to generate income, Lincoln Federal's ability to accumulate
earnings for the payment of cash dividends to shareholders directly depends upon
the ability of Lincoln Federal to pay dividends to the Holding Company and upon
the earnings on Lincoln Federal's investment securities. On March 1, 1999, there
were 1,262 shareholders of record.
Under current federal income tax law, dividend distributions to the
Holding Company, to the extent that such dividends paid are from the current or
accumulated earnings and profits of Lincoln Federal (as calculated for federal
income tax purposes), will be taxable as ordinary income to the Holding Company
and will not be deductible by Lincoln Federal. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from Lincoln Federal's accumulated
bad debt reserves, which could result in increased federal income tax liability
for Lincoln Federal. Moreover, Lincoln Federal may not pay dividends to the
Holding Company if such dividends would result in the impairment of the
liquidation account established in connection with the Conversion.
Generally, there is no OTS regulatory restriction on the payment of
dividends by the Holding Company unless there is a determination by the Director
of the OTS that there is reasonable cause to believe that the payment of
dividends constitutes a serious risk to the financial safety, soundness or
stability of Lincoln Federal. The FDIC also has authority under current law to
prohibit a financial institution from paying dividends if, in its opinion, the
payment of dividends would constitute an unsafe or unsound practice in light of
the financial condition of the financial institution. Indiana law, however,
would prohibit the Holding Company from paying a dividend if, after giving
effect to the payment of that dividend, the Holding Company would not be able to
pay its debts as they become due in the usual course of business or the Holding
Company's total assets would be less than the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
Stock Price Dividends
Month Ended High Low Per Share
December 31, 1998 $11.25 $10.625 ---
Transfer Agent and Registrar
The Fifth Third Bank
Corporate Trust Operations
38 Fountain Square Plaza, MD - 1090F5
Cincinnati, Ohio 45202
(513) 579-5320 or (800) 837-2755
GENERAL COUNSEL
Barnes & Thornburg
11 South Meridian Street
Indianapolis, Indiana 46204
INDEPENDENT AUDITOR
Olive LLP
201 N. Illinois Street, Suite 700S
Indianapolis, Indiana 46204
SHAREHOLDERS AND GENERAL INQUIRIES
The Company filed an Annual Report on Form 10-K for its fiscal year ended
December 31, 1998 with the Securities and Exchange Commission. Copies of this
annual report may be obtained without charge upon written request to:
T. Tim Unger
President and Chief Executive Officer
Lincoln Bancorp
1121 East Main Street
P.O. Box 510
Plainfield, Indiana 46168-0510
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<PAGE>
Chairman...............................................Edward E. Whalen
President/CEO..........................................T. Tim Unger
CFO/Secretary/Treasurer................................John M. Baer
Vice President.........................................Maxwell O. Magee
Technology/Operations Manager..........................Roger S. Chalkley
Human Resource Officer.................................Diana L. Rumbaugh
Compliance Officer.....................................Sidnye Georgette
Marketing Director.....................................Angela S. Coleman
Secondary Marketing....................................J. Gary Fraley
Avon Branch Manager....................................Melissa A. Yetter
Brownsburg Branch Manager..............................Paul L. Ross II
Crawfordsville Branch Manager/VP.......................Donald A. Peterson
Frankfort Branch Manager...............................Deborah L. Graves
Mooresville Branch Officer/AVP.........................Rebecca S. Henderson
Plainfield Branch Manager..............................Sonja R. White
Loan Officer/VP........................................James W. Hiatt
Loan Officer/VP........................................Jay H. Oxley
Commercial Loan Officer/AVP............................M. Steve Johnson
Loan Servicing Manager.................................Patti A. Wilcher
Collections Manager....................................Tonda L. Mucho
Financial Analyst......................................Andrew J. LoCascio
Accounting Supervisor..................................Helen Deary
Plainfield
1121 E. Main Street
P.O. Box 510
Plainfield, IN 46168
317-839-6539
Brownsburg
975 E. Main Street
P.O. Box 127
Brownsburg, IN 46112
317-852-3134
Avon
7648 E. US Highway 36
Avon, IN 46168
317-272-0467
Crawfordsville
134 S. Washington
P.O. Box 624
Crawfordsville, IN 47933
765-362-0200
Frankfort
1900 E. Wabash Street
P.O. Box 236
Frankfort, IN 46041
765-654-8742
Mooresville
590 S. State Rd. 67
Mooresville, IN 46158
317-834-4100
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