FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 333-63373
LINCOLN BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-2055553
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
1121 East Main Street
Plainfield, Indiana 46168
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(317) 839-6539
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES _____ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (N/A)
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 25, 1999 was $62,333,000.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of December 31, 1998, was 7,009,250 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page E-1
Page 1 of 82 Pages
<PAGE>
LINCOLN BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement.................................................
PART I
Item 1 Business..................................................
Item 2. Properties................................................
Item 3. Legal Proceedings.........................................
Item 4. Submission of Matters to a Vote of Security Holders.......
Item 4.5. Executive Officers of the Registrant......................
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters...................................
Item 6. Selected Financial Data...................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................
Item 7A. Quantitative and Qualitative
Disclosures about Market Risks........................
Item 8. Financial Statements and Supplementary Data...............
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................
PART III
Item 10. Directors and Executive Officers of Registrant............
Item 11. Executive Compensation....................................
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................
Item 13. Certain Relationships and Related Transactions............
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...............................
SIGNATURES................................................................
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<PAGE>
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), or
its directors or officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
Item 1. Business
General
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. Lincoln Federal
currently conducts its business from five full-service offices located in
Hendricks, Montgomery and Clinton Counties, Indiana, with its main office
located in Plainfield. Lincoln Federal opened its newest office in Avon, Indiana
in January, 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.
Lending Activities
The Bank has historically concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
Lincoln Federal's loan origination activities, representing 76.2% of its total
loan portfolio at December 31, 1998. Lincoln Federal also offers commercial real
estate loans, real estate construction loans and consumer loans. To a limited
extent, Lincoln Federal also offers multi-family loans, land loans and
commercial loans. Commercial real estate loans totaled approximately 7.3% of the
Bank's total loan portfolio, and real estate construction loans totaled
approximately 3.7% of Lincoln Federal's total loans as of December 31, 1998.
Consumer loans, which consist primarily of home equity and second mortgage
loans, have increased significantly in the past three years from $16.4 million,
or 5.2% of Lincoln Federal's loan portfolio at December 31, 1996, to $22.0
million, or 11.0% of its loan portfolio at December 31, 1998.
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<PAGE>
Loan Portfolio Data. The following table sets forth the composition of
Lincoln Federal's loan portfolio (including loans held for sale) by loan type
and security type as of the dates indicated, including a reconciliation of gross
loans receivable after consideration of the allowance for loan losses, deferred
loan fees and loans in process.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ---------------- ----------------- -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN Real estate mortgage loans:
One-to-four-family
residential (1)................ $152,893 76.19% $205,976 81.03% $269,618 84.84% $248,947 84.48% $228,489 83.78%
Multi-family..................... 1,022 .51 1,133 .45 1,111 .35% 1,012 .34 559 .20
Commercial real estate........... 14,548 7.25 14,914 5.87 14,830 4.66% 15,727 5.34 12,780 4.69
Construction..................... 7,411 3.69 9,912 3.90 13,159 4.14% 7,838 2.66 19,343 7.09
Land............................. 2,664 1.33 1,455 .57 2,725 .86% 9,877 3.35 1,435 .53
Commercial.......................... 122 .06 242 .10 --- --- --- --- --- ---
Consumer loans:
Home equity and
second mortgages............... 18,482 9.21 17,218 6.77 13,239 4.17 7,858 2.67 7,018 2.57
Other............................ 3,532 1.76 3,340 1.31 3,124 .98 3,409 1.16 3,108 1.14
-------- ------ -------- ------ -------- ------ -------------- -------- ------
Gross loans receivable......... $200,674 100.00% $254,190 100.00% $317,806 100.00% $294,668100.00% $272,732 100.00%
======== ====== ======== ====== ======== ====== ============== ======== ======
TYPE OF SECURITY
One-to-four-family
residential real estate (1).... $177,837 88.62% $232,966 91.65% $290,956 91.55% $264,142 89.64% $253,150 92.82%
Multi-family real estate......... 1,022 .51 1,133 .45 1,111 .35 1,012 .34 559 .21
Commercial real estate........... 15,498 7.72 15,054 5.92 19,890 6.26 16,229 5.51 14,480 5.31
Land............................. 2,664 1.33 1,455 .57 2,725 .86 9,877 3.35 1,435 .53
Deposits......................... 962 .48 1,106 .44 1,155 .37 995 .34 959 .35
Auto............................. 2,127 1.06 2,041 .80 1,502 .47 1,690 .57 1,635 .60
Other security................... 475 .24 426 .17 356 .11 611 .21 392 .14
Unsecured ....................... 89 .04 9 -- 111 .03 113 .04 122 .04
-------- ------ -------- ------ -------- ------ -------------- -------- ------
Gross loans receivable......... 200,674 100.00 254,190 100.00 317,806 100.00 294,668100.00 272,732 100.00
Deduct:
Allowance for loan losses........... 1,512 .75 1,361 .54 1,241 .39 1,121 .38 1,047 .39
Deferred loan fees (1).............. 893 .45 1,690 .66 2,707 .85 2,854 .97 2,703 .99
Loans in process.................... 2,348 1.17 2,504 .99 8,086 2.55 5,347 1.81 8,728 3.20
-------- ------ -------- ------ -------- ------ -------------- -------- ------
Net loans receivable............. $195,921 97.63% $248,635 97.81% $305,772 96.21% $285,346 96.84% $260,254 95.42%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Mortgage Loans:
Adjustable-rate.................. $56,014 28.43% $95,106 37.95% $117,062 37.20% $112,193 38.52% $84,365 31.29%
Fixed-rate....................... 141,006 71.57 155,502 62.05 197,620 62.80 179,066 61.48 185,259 68.71
-------- ------ -------- ------ -------- ------ -------------- -------- ------
Total.......................... $197,020 100.00% $250,608 100.00% $314,682 100.00% $291,259100.00% $269,624 100.00%
======== ====== ======== ====== ======== ====== ============== ======== ======
</TABLE>
(1) Net loans held for sale included in the above categories amounted to
$24,201,000, $15,534,000 and $16,141,000 at December 31, 1996, 1995 and
1994, respectively. There were no loans held for sale at December 31,
1998 and 1997.
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<PAGE>
The following table sets forth certain information at December 31, 1998,
regarding the dollar amount of loans maturing in Lincoln Federal's loan
portfolio based on the contractual terms to maturity. Demand loans having no
stated schedule of repayments and no stated maturity and overdrafts are reported
as due in one year or less. This schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses. Management expects
prepayments will cause actual maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due During Years Ended December 31,
Outstanding at 2002 2004 2009 2014
December 31, to to to and
1998 1999 2000 2001 2003 2008 2013 following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
One- to four-family
residential loans................ $152,893 $ 15 $ 113 $ 661 $1,786 $16,415 $34,630 $99,273
Multi-family loans.................... 1,022 --- --- --- 127 118 130 647
Commercial real estate loans....... 14,548 1,171 349 27 3,720 3,290 1,908 4,083
Construction loans................. 7,411 6,053 1,358 --- --- --- --- ---
Land loans......................... 2,664 1,696 15 --- 723 230 --- ---
Commercial......................... 122 32 25 17 48 --- --- ---
Consumer loans:
Installment loans................. 2,570 194 320 653 1,340 55 8 ---
Loans secured by deposits.......... 962 696 113 123 30 --- --- ---
Home equity loans and
and second mortgages............. 18,482 1,239 99 207 984 15,953 --- ---
-------- ------- ------ ------ ------ ------- ------- --------
Total consumer loans............. 22,014 1,529 532 983 2,354 16,008 8 ---
-------- ------- ------ ------ ------ ------- ------- --------
Total........................ $200,674 $11,096 $2,392 $1,688 $8,758 $36,061 $36,676 $104,003
======== ======= ====== ====== ====== ======= ======= ========
</TABLE>
The following table sets forth, as of December 31, 1998, the dollar amount
of all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1999
-------------------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
<S> <C> <C> <C>
Real estate mortgage loans:
One- to four-family residential loans............. $120,550 $32,328 $152,878
Multi-family loans................................ 307 715 1,022
Commercial real estate loans...................... 8,023 5,354 13,377
Construction loans................................ 1,358 --- 1,358
Land loans........................................ 968 --- 968
Commercial........................................... 90 --- 90
Installment loans.................................... 2,376 --- 2,376
Loans secured by deposits............................ 266 --- 266
Home equity loans and second mortgages............... 4,600 12,643 17,243
-------- ------- --------
Total............................................. $138,538 $51,040 $189,578
======== ======= ========
</TABLE>
One- to Four-Family Residential Loans. Lincoln Federal's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in its primary market area. Lincoln Federal
generally does not originate one- to four-family residential mortgage loans if
the ratio of the loan amount to the lesser of the current cost or appraised
value of the property (the "Loan-to-Value Ratio") exceeds 95%. Lincoln Federal
requires private mortgage insurance on loans with a Loan-to-Value Ratio in
excess of 80%. The cost of such insurance is factored into the annual percentage
rate on such loans.
In the past, Lincoln Federal's underwriting criteria for one- to
four-family residential loans focused heavily on the value of the collateral
securing the loan and placed less emphasis on the borrower's debt servicing
capacity and other credit factors. Lincoln Federal recently revised its lending
policies to emphasize factors other than the value of the underlying collateral,
such as the income, debt-to-income ratio, stability of earnings and past credit
history of a potential borrower, in making credit decisions. These revised
underwriting criteria are based upon FHLMC lending guidelines. The Bank
originates fixed-rate loans which provide for the payment of principal and
interest over a period of up to 30 years.
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<PAGE>
Lincoln Federal also offers adjustable-rate mortgage ("ARM") loans
pegged to the one-year U.S. Treasury securities yield adjusted to a constant
maturity. Lincoln Federal no longer offers adjustable rate loans with interest
rates pegged to the 11th District Cost of Funds Index ("COFI") because that
index adjusts less rapidly to changes in interest rates compared to other
indices. Lincoln Federal may offer discounted initial interest rates on ARM
loans, but requires that the borrower qualify for the loan at the fully-indexed
rate (the index rate plus the margin). A substantial portion of the ARM loans in
the Bank's portfolio at December 31, 1998 provide for maximum rate adjustments
per year and over the life of the loan of 2% and 6%, respectively. Lincoln
Federal's residential ARMs are amortized for terms up to 30 years. Although
Lincoln Federal would generally prefer to originate mortgage loans that have
adjustable rather than fixed interest rates, the current low-interest rate
environment has reduced borrower demand for ARM loans.
In two separate transactions in August, 1997 and April, 1998, Lincoln
Federal securitized approximately $41.1 million of the COFI loans in its
portfolio and sold the resulting mortgage-backed securities on the secondary
market. In June, 1998 Lincoln Federal sold in a direct, whole-loan sale to a
private investor an additional $19.3 million of COFI loans. Following the
closing of this whole-loan sale, the amount of COFI loans in Lincoln Federal's
portfolio was reduced to $4.8 million. Lincoln Federal also pooled $75.0 million
of fixed-rate one- to four-family residential loans into FHLMC mortgage-backed
securities. Lincoln Federal sold on the secondary market $34.3 million of these
securities which were backed by lower-yielding, fixed-rate loans. Lincoln
Federal continues to hold in its investment portfolio $38.0 million of these
securities that are backed by higher-yielding, fixed-rate mortgage loans that it
originated.
With the exception of the loans that were securitized during 1997 and
1998 and in the whole-loan sale in 1998, Lincoln Federal determines when it
originates a one- to four-family residential loan whether it intends to hold the
loan until maturity or sell it in the secondary market. Lincoln Federal
generally sells on the secondary market all of the fixed-rate loans that it
originates with terms of more than 20 years that are written to FHLMC standards,
and retains in its loan portfolio any loans that it originates that are not
written to FHLMC standards. Lincoln Federal retains the servicing rights on the
loans that it sells.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because, as interest rates
increase, the underlying payments by the borrower also increase, thus increasing
the potential for default by the borrower. At the same time, the marketability
of the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At December 31, 1998, approximately
21.1% of Lincoln Federal's one- to four-family residential loans had adjustable
rates of interest.
All of the one- to four-family residential mortgage loans that Lincoln
Federal originates include "due-on-sale" clauses, which give Lincoln Federal the
right to declare a loan immediately due and payable in the event that, among
other things, the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. However, Lincoln Federal
occasionally permits assumptions of existing residential mortgage loans on a
case-by-case basis.
At December 31, 1998, approximately $152.9 million, or 76.2% of Lincoln
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $775,000, or .5% of total residential loans, were included
in non-performing assets as of that date.
Commercial Real Estate and Multi-Family Loans. Lincoln Federal's
commercial real estate loans are secured by churches, warehouses, office
buildings, hotels and other commercial properties. Lincoln Federal generally
originates commercial real estate loans as five-year balloon loans amortized
over a 10- or 15-year period, with an adjustable interest rate indexed primarily
to the prime rate. At December 31, 1998 Lincoln Federal had $3.3 million in
outstanding balloon loans secured by commercial and multi-family real estate.
Lincoln Federal generally requires a Loan-to-Value Ratio of at least 75% on
commercial real estate loans, although it may make loans with a Loan-to-Value
Ratio of up to 80% on loans secured by owner-occupied commercial real estate or
by multi-family residential properties.
Commercial real estate loans generally are larger than one- to
four-family residential loans and involve a greater degree of risk. Commercial
real estate loans often involve large loan balances to single borrowers or
groups of related borrowers. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate. In addition, balloon loans may involve a
greater degree of risk to the extent the borrower is unable to obtain financing
or cannot repay the loan when the loan matures and the balloon payment is due.
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<PAGE>
At December 31, 1998 Lincoln Federal's largest commercial real estate
borrower had loans outstanding in the aggregate amount of $1.9 million which
were secured by motels located throughout Central Indiana. Also as of that date,
Lincoln Federal's largest commercial real estate loan had an outstanding balance
of $1.2 million and was secured by a church located in Plainfield, Indiana. At
December 31, 1998, approximately $14.5 million, or 7.3% of Lincoln Federal's
total loan portfolio, consisted of commercial real estate loans. On the same
date, commercial real estate loans in the amount of $103,000 were included in
non-performing assets.
At December 31, 1998, approximately $1.0 million, or .5% of Lincoln
Federal's total loan portfolio, consisted of mortgage loans secured by
multi-family dwellings (those consisting of more than four units). Lincoln
Federal writes multi-family loans on terms and conditions similar to its
commercial real estate loans. The largest multi-family loan as of December 31,
1998 was $346,000 and was secured by an apartment building in Clayton, Indiana.
On the same date, there were no multi-family loans included in non-performing
assets.
Multi-family loans, like commercial real estate loans, involve greater
risk than do residential loans. Also, the loans-to-one-borrower limitation
limits Lincoln Federal's ability to make loans to developers of apartment
complexes and other multi-family units.
Construction Loans. Lincoln Federal offers construction loans to
developers for the acquisition and development of residential and nonresidential
real estate and to builders of one- to four-family residential properties. A
significant portion of these loans are made on a speculative basis (i.e., before
the builder/developer obtains a commitment from a buyer). At December 31, 1998,
approximately $7.4 million, or 3.7% of Lincoln Federal's total loan portfolio,
consisted of construction loans. Of these loans, approximately $2.7 million were
for the acquisition and development of residential housing developments, $3.8
million financed the construction of one- to four-family residential properties
and $950,000 financed the construction of commercial real estate. As of December
31, 1998, Lincoln Federal's largest construction loan relationship and largest
construction loan had a balance of $1.3 million and was secured by a residential
housing development located in Avon, Indiana. As of December 31, 1998, this loan
was peforming according to its terms. Also on that date, construction loans in
the amount of $300,000 were included in non-performing assets.
Construction loans on residential properties where the borrower has
entered into a verifiable sales contract to a non-related party to purchase the
completed home may be made with a maximum Loan-to-Value Ratio of the lesser of
90% of the price stipulated in the sales contract or 80% of the appraised value
of the property. With respect to residential properties constructed on a
speculative basis, Lincoln Federal generally requires a Loan-to-Value Ratio of
75% of the "as completed" appraised value of the property. Although speculative
loans make up a significant percentage of Lincoln Federal's construction loan
portfolio, Lincoln Federal generally will finance only one speculative
construction project per builder. Residential construction loans are generally
written with a fixed rate of interest and for an initial term of six months.
Lincoln Federal generally offers construction loans on commercial land
development projects with a maximum Loan-to-Value Ratio of 75% of the appraised
value of the property or 80% of the property's cost plus 80% of the cost of
verifiable improvements to the property. Construction loans on commercial real
estate properties are generally written for a term not to exceed 30 months.
While providing a comparable, and in some cases higher, yield than a
conventional mortgage loan, construction loans involve a higher level of risk.
For example, if a project is not completed and the borrower defaults, Lincoln
Federal may have to hire another contractor to complete the project at a higher
cost. Also, a project may be completed, but may not be salable, resulting in the
borrower defaulting and requiring that Lincoln Federal take title to the
project.
Land Loans. At December 31, 1998, approximately $2.7 million, or 1.3%
of Lincoln Federal's total loan portfolio, consisted of mortgage loans secured
by undeveloped real estate. Lincoln Federal imposes a maximum Loan-to-Value
Ratio of 65% of the appraised value of the land or 90% of the cost of the
undeveloped land for pre-development land acquisition loans. Lincoln Federal
writes these loans for a maximum term of 12 months. At December 31, 1998, the
Bank's largest land loan totaled $468,000 and was secured by bare land located
in Plainfield, Indiana.
Land loans present greater risk than conventional loans since land
development borrowers who are over budget may divert the loan funds to cover
cost-overruns rather than direct them toward the purpose for which such loans
were made. In addition, land loans are more difficult to monitor than
conventional mortgage loans. As such, a defaulting borrower could cause Lincoln
Federal to take title to partially improved land that is unmarketable without
further capital investment.
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<PAGE>
Consumer Loans. Lincoln Federal's consumer loans consist of variable-
and fixed-rate home equity loans and lines of credit, automobile, recreational
vehicle, boat and motorcycle loans and loans secured by deposits. Lincoln
Federal does not make indirect consumer loans. Consumer loans tend to have
shorter terms and higher yields than permanent residential mortgage loans. At
December 31, 1998, Lincoln Federal's consumer loans aggregated approximately
$22.0 million, or 11.0% of Lincoln Federal's total loan portfolio. Included in
consumer loans at December 31, 1998 were $12.7 million of variable-rate home
equity lines of credit. These variable-rate loans improve Lincoln Federal's
exposure to interest rate risk.
Lincoln Federal's home equity lines of credit and fixed-term loans are
generally written for up to 95% of the available equity (the appraised value of
the property less any first mortgage amount) if Lincoln Federal holds the first
mortgage, and up to 90% of the available equity if Lincoln Federal does not hold
the first mortgage. Lincoln Federal's home equity and second mortgage loans
increased significantly from $13.2 million at December 31, 1996 to $18.5 million
at December 31, 1998, primarily as the result of a marketing campaign directed
at its existing customers. Lincoln Federal generally will write automobile loans
for up to 100% of the acquisition price for a new automobile and up to the NADA
retail value for a used automobile. New car loans are written for terms of up to
60 months and used car loans are written for terms up to 48 months, depending on
the age of the car. Loans for recreational vehicles and boats are written for no
more than 80% of the purchase price or "verified value," whichever is less, for
a maximum term of 120 months and 84 months, respectively. Motorcycles loans are
written for no more than 75% of the purchase price or "verified value" with a
term not to exceed 48 months. All of Lincoln Federal's consumer loans have a
fixed rate of interest except for home equity lines of credit, which are offered
at a variable rate. At December 31, 1998, consumer loans in the amount of
$114,000 were included in non-performing assets.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or are secured by
rapidly depreciable assets, such as automobiles. Further, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance. In addition, consumer loan
collections depend on the borrower's continuing financial stability, and thus
are more likely to be affected by adverse personal circumstances. Furthermore,
the application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Commercial Loans. Lincoln Federal offers commercial loans, which
consist primarily of loans to businesses that are secured by assets other than
real estate. As of December 31, 1998, commercial loans amounted to $122,000.
Commercial loans tend to bear somewhat greater risk than residential mortgage
loans, depending on the ability of the underlying enterprise to repay the loan.
Although commercial loans have not historically comprised a large portion of
Lincoln Federal's loan portfolio, Lincoln Federal intends to increase the amount
of loans it makes to small businesses in the future in order to increase its
rate of return and diversify its portfolio. As of December 31, 1998, none of
Lincoln Federal's commercial loans were included in nonperforming assets.
Origination, Purchase and Sale of Loans. Historically, Lincoln Federal
has confined its loan origination activities primarily to Hendricks, Montgomery
and Clinton Counties. At December 31, 1998, Lincoln Federal did not have any
mortgage loans secured by property located outside of Indiana. Lincoln Federal's
loan originations are generated from referrals from existing customers, real
estate brokers, and newspaper and periodical advertising. Loan applications are
underwritten and processed at Lincoln Federal's main office in Plainfield.
Lincoln Federal's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the adequacy
of the value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors.
Lincoln Federal generally requires appraisals on all real property
securing its first-mortgage loans and requires an attorney's opinion and a valid
lien on the mortgaged real estate. Appraisals for all real property securing
first-mortgage loans are performed by independent appraisers who are
state-licensed. Lincoln Federal requires fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan and also requires
flood insurance to protect the property securing its interest if the property is
in a flood plain. Lincoln Federal also generally requires private mortgage
insurance for all residential mortgage loans with Loan-to-Value Ratios of
greater than 80%. Lincoln Federal generally requires escrow accounts for
insurance premiums and taxes for residential mortgage loans that it originates.
Lincoln Federal's underwriting standards for consumer loans are intended
to protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
- 8 -
<PAGE>
Lincoln Federal occasionally purchases participation interests in loans
originated by other financial institutions in order to diversify its portfolio,
supplement local loan demand and to obtain more favorable yields. The
participations that Lincoln Federal purchases normally represent a portion of
residential or commercial real estate loans originated by other Indiana
financial institutions, most of which are secured by property located in
Indiana. As of December 31, 1998, Lincoln Federal had no loan participations in
its asset portfolio.
The following table shows loan origination and repayment activity for
Lincoln Federal during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable at
beginning of period............................. $254,190 $317,806 $294,668
-------- -------- --------
Loans Originated:
Real estate mortgage loans:
One-to-four family loans (1)................ 59,556 44,472 54,396
Multi-family loans.......................... --- 68 140
Commercial real estate loans................ 5,271 6,608 3,033
Construction loans.......................... 7,584 10,411 15,640
Land loans.................................. 2,042 3,053 6,227
Commercial loans.............................. 10 242 ---
Consumer loans................................ 14,924 12,432 14,303
-------- -------- --------
Total originations........................ 89,387 77,286 93,739
-------- -------- --------
Purchases (sales) of participation loans, net...... (67,369) (78,887) (4,681)
Reductions:
Repayments and other deductions............... 75,169 61,904 65,818
Transfers from loans to real estate owned..... 365 111 102
-------- -------- --------
Total reductions............................ 75,534 62,015 65,920
-------- -------- --------
Total gross loans receivable at
end of period........................... $200,674 $254,190 $317,806
======== ======== ========
</TABLE>
(1) Includes certain home equity loans.
Lincoln Federal's total loan originations during the year ended December
31, 1998 totaled $89.4 million, compared to $77.3 million during the year ended
December 31, 1997 and $93.7 million for the year ended December 31, 1996.
Origination and Other Fees. Lincoln Federal realizes income from late
charges, checking account service charges, loan servicing fees and fees for
other miscellaneous services. Late charges are generally assessed if a loan
payment is not received within a specified number of days after it is due. The
grace period depends on the individual loan documents. The Bank also receives a
loan servicing fee of 1/4% on fixed-rate loans and 3/8% on ARM loans that it
services for others.
Non-Performing and Problem Assets
After a mortgage loan becomes 10 days past due, Lincoln Federal delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Lincoln Federal sends additional delinquency notices and makes personal contact
by telephone with the borrower to establish acceptable repayment schedules. When
loans become 60 days in default, Lincoln Federal again contacts the borrower,
this time in person, to establish acceptable repayment schedules. When a
mortgage loan is 90 days delinquent, Lincoln Federal will have either entered
into a workout plan with the borrower or referred the matter to its attorney for
collection. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.
Lincoln Federal reviews mortgage loans on a regular basis and places one-
to four-family residential loans on a non-accrual status when they become 120
days delinquent. Other loans are placed on a non-accrual status when they become
90 days delinquent. Generally, when loans are placed on a non-accrual status,
unpaid accrued interest is written off.
Non-performing Assets. At December 31, 1998, $1,395,000, or .4% of Lincoln
Federal's total assets, were non-performing (non-performing loans and
- 9 -
<PAGE>
non-accruing loans) compared to $3,669,000, or 1.1%, of its total assets at
December 31, 1997. At December 31, 1998, residential loans accounted for
$775,000 of Lincoln Federal's non-performing assets, construction loans
accounted for $300,000 of its non-performing assets, commercial mortgage loans
accounted for $103,000 of its non-performing assets, and consumer loans
accounted for $114,000 of non-performing assets. Lincoln Federal had real estate
owned ("REO") properties in the amount of $103,000 as of December 31, 1998.
The table below sets forth the amounts and categories of Lincoln Federal's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Lincoln Federal's policy
that earned but uncollected interest on all loans be reviewed monthly to
determine if any portion thereof should be classified as uncollectible for any
loan past due in excess of 90 days. Lincoln Federal deems any delinquent loan
that is 90 days or more past due to be a non-performing asset.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-performing loans......................... $1,292 $ 3,257 $ 2,397 $1,797 $134
Troubled debt restructurings................. --- 367 46 598 ---
------ ------- ------ ------ ----
Total non-performing loans................. 1,292 3,624 2,443 2,395 134
Foreclosed real estate....................... 103 45 75 --- ---
------ ------- ------ ------ ----
Total non-performing assets................ $1,395 $ 3,669 $2,518 $2,395 $134
====== ======= ====== ====== ====
Non-performing loans to total loans............. .65% 1.45% .80% .83% .05%
Non-performing assets to total assets........... .38% 1.14% .73% .75% .04%
</TABLE>
Interest income of $116,000 for the year ended December 31, 1998, was
recognized on the non-performing loans summarized above. Interest income of
$72,000 for the year ended December 31, 1998, respectively, would have been
recognized under the original loan terms of these loans.
At December 31, 1998, Lincoln Federal held loans delinquent from 30 to 89
days totalling $4.7 million. As of that date, Lincoln Federal was not aware of
any other loans in which borrowers were experiencing financial difficulties and
was not aware of any assets that would need to be disclosed as non-performing
assets.
Delinquent Loans. The following table sets forth certain information at
December 31, 1998, 1997, and 1996, relating to delinquencies in Lincoln
Federal's portfolio. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997 At December 31, 1996
------------------------------------ --------------------------------- ----------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More
-------------------- ---------------- ----------------- ---------------- ---------------- ----------------
Principal Principal Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Residential
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
mortgage loans.... 99 $4,254 18 $ 775 140 $6,040 26 $1,228 143 $6,613 11 $797
Commercial
real estate loans. 3 335 1 103 1 100 1 367 2 609 --- ---
Multi-family
mortgage loans.... --- --- --- --- --- --- --- --- 4 1,594
Construction loans... 2 300 --- --- 3 1,214 --- --- --- ---
Land loans........... --- --- --- --- --- --- 4 47 --- ---
Consumer loans....... 15 158 3 114 29 379 20 448 7 39 1 6
--- ------ -- ------ --- ------ -- ------ --- ------ -- -----
Total............. 117 $4,747 24 $1,292 170 $6,519 50 $3,257 156 $7,308 16 2,397
=== ====== == ====== === ====== == ====== === ====== == =====
Delinquent loans to
total loans....... 3.06% 3.91% 3.16%
==== ==== ====
</TABLE>
- 10 -
<PAGE>
Classified assets. Federal regulations and Lincoln Federal's Asset
Classification Policy provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser quality
as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
Lincoln Federal regularly reviews its loan portfolio to determine
whether any loans require classification in accordance with applicable
regulations. Lincoln Federal's classified assets are made up entirely of
non-performing assets.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The allowance for loan losses is
determined in conjunction with Lincoln Federal's review and evaluation of
current economic conditions (including those of its lending area), changes in
the character and size of the loan portfolio, loan delinquencies (current status
as well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, Lincoln Federal's allowance for loan losses is adequate to absorb
probable losses inherent in the loan portfolio at December 31, 1998. However,
there can be no assurance that regulators, when reviewing the Bank's loan
portfolio in the future, will not require increases in its allowances for loan
losses or that changes in economic conditions will not adversely affect its loan
portfolio.
- 11 -
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past five fiscal years ended December 31, 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period...................$1,361 $ 1,241 $ 1,121 $1,047 $1,056
------ --------- ------- ------ ------
Charge-offs:
One- to four-family
residential mortgage loans.................. (31) --- --- (15) (8)
Commercial real estate mortgage loans......... (178) --- --- ---
Construction loans............................ (301) --- --- (12) ---
Consumer loans................................ (25) --- --- (2) ---
------ --------- ------- ------ ------
Total charge-offs........................... (357) (178) --- (29) (8)
------ --------- ------- ------ ------
Recoveries:
One- to four-family
residential mortgage loans.................. 15 --- --- 3 ---
Commercial real estate mortgage loans......... 1 --- --- --- ---
Construction loans............................ 301 --- --- --- ---
Consumer loans................................ 18 --- --- --- ---
------ --------- ------- ------ ------
Total recoveries............................ 335 --- --- 3 ---
------ --------- ------- ------ ------
Net charge-offs.................................. (22) (178) --- (26) (8)
------ --------- ------- ------ ------
Provision for losses on loans.................... 173 298 120 100 (1)
------ --------- ------- ------ ------
Balance end of period............................$1,512 $ 1,361 $ 1,241 $1,121 $1,047
====== ========= ======= ====== ======
Allowance for loan losses as a percent of
total loans outstanding.......................... 0.77% 0.54% 0.40% 0.39% 0.40%
Ratio of net charge-offs to average
loans outstanding................................ .01% .06% --- .01% ---
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Lincoln Federal's allowance for loan losses at the
dates indicated. The information for 1994 is not included because Lincoln
Federal did not make the computation.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- -------------------- --------------------
Percent Percent Percent Percent
of loans of loans of loans of loans
in each in each in each in each
category category category category
to total total to total to total
Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to:
Real estate mortgage loans:
One- to four-family
residential............. $600 76.19% $401 81.03% $206 84.84% $77 84.48%
Multi-family.............. 10 .51 11 .45 --- .35 --- .34
Commercial................ 218 7.25 221 5.87 468 4.66 214 5.34
Construction loans........ 113 3.69 249 3.90 367 4.14 402 2.66
Land loans................ 40 1.33 15 .57 --- .86 --- 3.35
Commercial loans............ 2 .06 11 .10 --- --- --- ---
Consumer loans.............. 349 10.97 268 8.08 98 5.15 72 3.83
Unallocated................. 180 --- 185 --- 102 --- 356 ---
------ ------ ------ ------ ------ ------ ------ ------
Total....................... $1,512 100.00% $1,361 100.00% $1,241 100.00% $1,121 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- 12 -
<PAGE>
Investments
Investments. During the third quarter of 1997, the Bank adopted a revised
investment policy that authorizes investments in U.S. Treasury securities,
securities guaranteed by the Government National Mortgage Association ("GNMA"),
securities issued by agencies of the U.S. Government, mortgage-backed securities
issued by the FHLMC or the Federal National Mortgage Association ("FNMA") and in
highly-rated mortgage-backed securities, collateralized mortgage obligations and
investment-grade corporate debt securities. This revised policy permits the
Bank's management to react quickly to market conditions. Most of the securities
in its portfolio are considered available-for-sale. At December 31, 1998,
Lincoln Federal's investment portfolio consisted of investments in
mortgage-backed securities, corporate securities, federal agency securities,
FHLB stock, an investment in Pedcor Investments - 1987 - I, L.P., an investment
in Bloomington Housing Associates, L.P., and an investment in an insurance
company. See "-Investments in Multi-Family, Low- and Moderate-Income Housing
Projects" and "Service Corporation Subsidiary." At December 31, 1998,
approximately $138.5 million, or 37.8%, of Lincoln Federal's total assets
consisted of such investments. The Bank also had $18.7 million in
interest-earning deposits with the FHLB-Indianapolis as of that date. As of that
date, Lincoln Federal also had pledged to the FHLB-Indianapolis as collateral,
investment securities with a carrying value of $97.5 million, including $80.6
million in mortgage-backed securities and $16.9 million in other securities.
Investment Securities. The following table sets forth the amortized cost
and the market value of Lincoln Federal's investment portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------- ------- ------ ------ --- ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available for sale:
Federal agencies.................................. $ 15,598 $ 15,670 $ ---$ --- $ --- $ ---
Mortgage-backed securities........................ 89,658 90,609 28,495 29,399 --- ---
Corporate debt obligations........................ 23,544 22,997 --- --- --- ---
Federated liquid cash fund........................ --- --- --- --- 17 17
FHLMC stock....................................... --- --- -- --- 100 101
Total investment securities
available for sale............................ 128,800 129,276 28,495 29,399 117 118
------- ------- ------ ------ --- ---
Investment securities held to maturity--
Federal agency securities....................... 1,250 1,264 9,635 9,615 15,185 14,997
Total investment securities....................... 130,050 130,540 38,130 39,014 15,302 15,115
Investment in limited partnerships................ 2,387 (1) 2,706 (1) 3,187 (1)
Investment in insurance company................... 650 (1) --- --- --- ---
FHLB stock (2).................................... 5,447 5,447 5,447 5,447 4,797 4,797
-------- ------- -------
Total investments................................. $138,534 $46,283 $23,286
======== ======= =======
</TABLE>
(1) Market values are not available
(2) Market value is based on the price at which the stock may be resold to the
FHLB of Indianapolis.
The following table sets forth the amount of investment securities
excluding mortgage-backed securities which mature during each of the periods
indicated and the weighted average yields for each range of maturities at
December 31, 1998.
<TABLE>
<CAPTION>
Amount at December 31, 1998 which matures in
----------------------------------------------------------------------------------
One Year One Year Five to After
or Less to Five Years Ten Years Ten Years
------------------- ------------------ ------------------- ------------------
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Federal agency securities - available for sale.. $ --- ---% $ --- ---% $15,598 6.55%$ --- ---%
Corporates securities -- available for sale..... --- --- --- --- --- --- 23,544 6.13
Federal agency securities -- held to maturity... 250 6.25 1,000 6.05 --- --- --- ---
---- ---- ------ ---- ------- ---- ------- ----
$250 6.25% $1,000 6.05% $15,598 6.55% $23,544 6.13%
==== ==== ====== ==== ======= ==== ======= ====
</TABLE>
At December 31, 1998, Lincoln Federal had no corporate investments the
aggregate book value of which exceeded 10% of its equity capital.
Mortgage-backed Securities. The following table sets forth the composition
of Lincoln Federal's mortgage-backed securities portfolio at December 31, 1998
and 1997. There were no mortgage-backed securities outstanding at December 31,
1996.
- 13 -
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------------- ---------------------------------------------
Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value
------- ----- ------- ------- ----- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $31,939 35.6% $32,909 $20,997 73.7% $21,859
Federal National
Mortgage Association 6,013 6.7 6,065 7,498 26.3 7,540
Collateralized mortgage
obligations 51,706 57.7 51,635 --- --- ---
------- ----- ------- ------- ----- -------
Total mortgage-backed
securities $89,658 100.0% $90,609 $28,495 100.0% $29,399
======= ===== ======= ======= ===== =======
</TABLE>
All mortgage-backed securities outstanding at December 31, 1998 and
1997 mature after ten years and have a weighted average yield of 6.74% and
7.34%, respectively.
The following table sets forth the changes in Lincoln Federal's
mortgage-backed securities portfolio for the years ended December 31, 1998 and
1997. There were no mortgage-backed securities outstanding during the year ended
December 31, 1996.
For the Year Ended
-----------------------------------------
December 31, 1998 December 31, 1997
(Dollars in thousands)
Beginning balance $29,399 $ ---
Securitization of loans 39,728 76,455
Purchases 52,406 7,574
Monthly repayments (9,999) (1,237)
Proceeds from sales (21,089) (54,415)
Net accretion 4 ---
Gains on sales 113 118
Change in unrealized gain on
securities available for sale 47 904
------- -------
Ending balance $90,609 $29,399
======= =======
Investments in Multi-Family, Low- and Moderate-Income Housing Projects.
Lincoln Federal has an investment in Pedcor Investments - 1987 - I, L.P.
("Pedcor"), an Indiana limited partnership that was organized to construct, own
and operate a 208-unit apartment complex in Indianapolis, Indiana (the "Pedcor
Project"). The Pedcor Project, which is operated as a multi-family, low- and
moderate-income housing project, has been completed and is performing as
planned. At the inception of the Pedcor Project in August, 1988, Lincoln Federal
committed to invest $2.7 million in Pedcor. In January, 1998, the Bank made its
final payment pursuant to this commitment and is no longer liable to contribute
additional funds for the Pedcor Project.
Lincoln Federal holds a separate investment in a multi-family, low- and
moderate-income housing project through its wholly-owned subsidiary, LF Service
Corp. ("LF"). LF has invested in Bloomington Housing Associates, L.P. ("BHA"),
which is an Indiana limited partnership that was organized to construct, own and
operate a 130-unit apartment complex in Bloomington, Indiana (the "BHA
Project"). Development of the BHA Project has been completed and the project is
performing as planned. LF committed to invest approximately $4.9 million in BHA
at the inception of the Bloomington Project in August, 1992. Through December
31, 1998, LF had invested cash of approximately $2.7 million in BHA with five
additional annual capital contributions remaining to be paid in January of each
year through January, 2003, totaling $2.2 million.
A low- and moderate-income housing project qualifies for certain
federal income tax credits if (i) it is a residential rental property, (ii) the
- 14 -
<PAGE>
units are used on a nontransient basis, and (iii) 20% or more of the units in
the project are occupied by tenants whose incomes are 50% or less of the area
median gross income, adjusted for family size, or alternatively, at least 40% of
the units in the project are occupied by tenants whose incomes are 60% or less
of the area median gross income. Qualified low income housing projects generally
must comply with these and other rules for fifteen years, beginning with the
first year the project qualified for the tax credit, or some or all of the tax
credit together with interest may be recaptured. The tax credit is subject to
the limitations on the use of general business credit, but no basis reduction is
required for any portion of the tax credit claimed. As of December 31, 1998,
88.9% of the units in the Pedcor Project and 93.1% of the units in the
Bloomington Project were occupied and each project complied with the low income
occupancy requirements described above.
Lincoln Federal has received tax credits of $242,000 from the operation
of the Pedcor Project and $355,000 from the operation of the Bloomington Project
for the year ended December 31, 1998. The tax credits from the Pedcor Project
will be available through 1999 and the tax credits from the BHA project will be
available through 2012. Although Lincoln Federal has reduced income tax expense
by the full amount of the tax credit available each year, it has not been able
to fully utilize available tax credits to reduce income taxes payable because it
may not use tax credits that would reduce its regular corporate tax liability
below its alternative minimum tax liability. Lincoln Federal may carry forward
unused tax credits for a period of fifteen years and management believes that
the Bank will be able to utilize available tax credits during the carry-forward
period. Additionally, Pedcor and BHA have incurred operating losses in the early
years of their operations primarily due to accelerated depreciation of assets.
Lincoln Federal has accounted for its investment in Pedcor, and LF has accounted
for Lincoln Federal's investment in BHA, on the equity method. Accordingly,
Lincoln Federal and LF have each recorded their share of these losses as
reductions to their investments in Pedcor and BHA, respectively. At December 31,
1998, Lincoln Federal had no remaining investment on the books for Pedcor, and
LF's investment in BHA was $2.4 million.
The following summarizes Lincoln Federal's equity in Pedcor's losses
and tax credits and LF's equity in BHA's losses and tax credits recognized in
Lincoln Federal's consolidated financial statements.
Year Ended December 31,
1998 1997 1996
---------------------------------
(In Thousands)
Investment in Pedcor...................... $ --- $ 76 $ 153
======= ===== =======
Equity in losses, net
of income tax effect................... $(164) $(167) $ (120)
Tax credit................................ 242 300 300
------- ----- -------
Increase in after-tax net income from
Pedcor investment...................... $ 78 $ 133 $ 180
======= ===== =======
Year Ended December 31,
-------------------------------
1998 1997 1996
(In Thousands)
Investment in BHA......................... $2,387 $2,630 $3,034
======= ===== =======
Equity in losses, net
of income tax effect................... $ (147) $ (244) $ (240)
Tax credit................................ 355 355 355
------- ----- -------
Increase in after-tax net income from
BHA investment......................... $ 208 $ 111 $ 115
======= ===== =======
Sources of Funds
General. Deposits have traditionally been Lincoln Federal's primary source
of funds for use in lending and investment activities. In addition to deposits,
Lincoln Federal derives funds from scheduled loan payments, investment
maturities, loan prepayments, retained earnings, income on earning assets and
borrowings. While scheduled loan payments and income on earning assets are
relatively stable sources of funds, deposit inflows and outflows can vary widely
and are influenced by prevailing interest rates, market conditions and levels of
competition. Borrowings from the FHLB of Indianapolis have been used in the
short-term to compensate for reductions in deposits or deposit inflows at less
than projected levels.
Deposits. Lincoln Federal attracts deposits principally from within
Hendricks, Montgomery and Clinton Counties through the offering of a broad
- 15 -
<PAGE>
selection of deposit instruments, including fixed-rate passbook accounts, NOW
accounts, variable rate money market accounts, fixed-term certificates of
deposit, individual retirement accounts and savings accounts. Lincoln Federal
does not actively solicit or advertise for deposits outside of Hendricks,
Montgomery and Clinton Counties, and substantially all of Lincoln Federal's
depositors are residents of those counties. Deposit account terms vary, with the
principal differences being the minimum balance required, the amount of time the
funds remain on deposit and the interest rate. Lincoln Federal does not accept
brokered deposits. Although the Bank sometimes may bid for public deposits, it
held only $2.3 million of such funds, or 1.1% of its total deposits, at December
31, 1998. Lincoln Federal periodically runs specials on certificates of deposit
with specific maturities.
Lincoln Federal establishes the interest rates paid, maturity terms,
service fees and withdrawal penalties on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and applicable regulations. Lincoln
Federal relies, in part, on customer service and long-standing relationships
with customers to attract and retain its deposits. The Bank also closely prices
its deposits to the rates offered by its competitors.
Approximately 69.6% of Lincoln Federal's deposits consist of
certificates of deposit, which generally have higher interest rates than other
deposit products that it offers. Certificates of deposit have increased 1.0%
during the year ended December 31, 1998. Money market savings accounts represent
15.5% of Lincoln Federal's deposits and have grown 26.7% during the year ended
December 31, 1998. Lincoln Federal offers special rates on certificates of
deposit with maturities that fit its asset and liability strategies.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that Lincoln Federal offers has
allowed it to compete effectively in obtaining funds and to respond with
flexibility to changes in consumer demand. Lincoln Federal has become more
susceptible to short-term fluctuations in deposit flows as customers have become
more interest rate conscious. Lincoln Federal manages the pricing of its
deposits in keeping with its asset/liability management and profitability
objectives. Based on its experience, management believes that Lincoln Federal's
savings accounts, NOW and MMDAs are relatively stable sources of deposits.
However, the ability to attract and maintain certificates of deposit, and the
rates Lincoln Federal pays on these deposits, have been and will continue to be
significantly affected by market conditions.
An analysis of Lincoln Federal's deposit accounts by type and maturity at
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at
Opening December 31, % of
Type of Account Balance 1998 Deposits
- -------------------------------------------------------------------------------------------------
(Unaudited)
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C>
Savings accounts.............................. $ 25 $20,582 9.71%
Money market.................................. 1,000 32,942 15.54
NOW accounts.................................. 200 8,541 4.03
Non-interest bearing demand accounts.......... 200 2,484 1.17
-------- ------
Total withdrawable.......................... 64,549 30.45
-------- ------
Certificates (original terms):
3 months or less.............................. 1,000 606 .29
6 months...................................... 1,000 3,775 1.78
12 months..................................... 1,000 32,170 15.17
18 months..................................... 1,000 9,244 4.36
24 months..................................... 1,000 21,571 10.18
30 months..................................... 1,000 58,163 27.43
36 months .................................... 1,000 8,932 4.21
60 months..................................... 1,000 10,661 5.03
Public fund certificates......................... 2,339 1.10
-------- ------
Total certificates............................... 147,461 69.55
-------- ------
Total deposits................................... $212,010 100.00%
======== ======
</TABLE>
- 16 -
<PAGE>
The following table sets forth by various interest rate categories the
composition of Lincoln Federal's time deposits at the dates indicated:
At December 31,
------------------------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
3.00 to 3.99%....... $ 191 $ --- $ ---
4.00 to 4.99%....... 24,274 15,926 14,672
5.00 to 5.99%....... 81,030 81,199 106,675
6.00 to 6.99%....... 41,966 48,872 36,071
7.00 to 7.99%....... --- --- ---
-------- -------- --------
Total............ $147,461 $145,997 $157,418
======== ======== ========
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1998. Matured certificates, which have not been renewed as of
December 31, 1998, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 1998 Maturing In
--------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
3.00 to 3.99%...... $ 191
4.00 to 4.99%...... 20,401 $ 2,730 $1,143 $ ---
5.00 to 5.99%...... 50,443 24,692 3,997 1,898
6.00 to 6.99%...... 35,783 1,541 4,542 100
-------- ------- ------ ------
Total........... $106,818 $28,963 $9,682 $1,998
======== ======= ====== ======
The following table indicates the amount of Lincoln Federal's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1998.
At December 31, 1998
--------------------
Maturity Period (In thousands)
Three months or less............................... $ 5,526
Greater than three months through six months....... 5,839
Greater than six months through twelve months...... 2,311
Over twelve months................................. 2,657
-------
Total......................................... $16,333
=======
- 17 -
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
-------------------------------------------------------------------------------------------
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
1998 Deposits 1997 1997 Deposits 1996 1996 Deposits
---- -------- ---- ---- -------- ---- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts................... $20,582 9.71% $(1,385) $21,967 10.78% $(7,747) $29,714 14.09%
Money market accounts.............. 32,942 15.54 6,940 26,002 12.75 11,573 14,429 6.84
NOW accounts....................... 8,541 4.03 976 7,565 3.71 (986) 8,551 4.06
Noninterest-bearing
demand accounts.................. 2,484 1.17 163 2,321 1.14 1,610 711 0.34
-------- ------ ------ -------- ------ ------- -------- ------
Total withdrawable............... 64,549 30.45 6,694 57,855 28.38 4,450 53,405 25.33
-------- ------ ------ -------- ------ ------- -------- ------
Certificates (original terms):
91 days............................ 606 .29 284 322 0.16 (212) 534 0.25
6 months........................... 3,775 1.78 (787) 4,562 2.24 (1,657) 6,219 2.95
12 months.......................... 32,170 15.17 2,457 29,713 14.58 (26,010) 55,723 26.43
18 months.......................... 9,244 4.36 (8,642) 17,886 8.77 1,969 15,917 7.55
24 months.......................... 21,571 10.18 20,298 1,273 0.62 1,273 --- ---
30 months.......................... 58,163 27.43 (7,527) 65,690 32.22 29,101 36,589 17.36
36 months ......................... 8,932 4.21 (2,318) 11,250 5.52 (11,192) 22,442 10.65
60 months.......................... 10,661 5.03 (3,510) 14,171 6.95 2,595 11,576 5.49
Public fund certificates.............. 2,339 1.10 1,209 1,130 0.56 (7,288) 8,418 3.99
-------- ------ ------ -------- ------ ------- -------- ------
Total certificates.................... 147,461 69.55 1,464 145,997 71.62 (11,421) 157,418 74.67
-------- ------ ------ -------- ------ ------- -------- ------
Total deposits........................ $212,010 100.00% $8,158 $203,852 100.00% $(6,971) $210,823 100.00%
======== ====== ====== ======== ====== ======= ======== ======
</TABLE>
Total deposits at December 31, 1998 were approximately $212.0 million,
compared to approximately $210.8 million at December 31, 1996. Lincoln Federal's
deposit base depends somewhat upon the manufacturing sector of Hendricks,
Montgomery and Clinton Counties. Although the manufacturing sector in these
counties is relatively diversified and does not significantly depend upon any
industry, a loss of a material portion of the manufacturing workforce could
adversely affect Lincoln Federal's ability to attract deposits due to the loss
of personal income attributable to the lost manufacturing jobs and the attendant
loss in service industry jobs.
In the unlikely event of the Bank's liquidation, all claims of creditors
(including those of deposit account holders, to the extent of their deposit
balances) would be paid first followed by distribution of the liquidation
account to certain deposit account holders, with any assets remaining thereafter
distributed to the Holding Company as the sole shareholder of Lincoln Federal.
Borrowings. Lincoln Federal focuses on generating high quality loans and
then seeking the best source of funding from deposits, investments or
borrowings. At December 31, 1998, Lincoln Federal had borrowings in the amount
of $33.3 million from the FHLB of Indianapolis which bear fixed and variable
interest rates and which are due at various dates through 2008. Lincoln Federal
is required to maintain eligible loans and investment securities, including
mortgage-backed securities, in its portfolio of at least 160% of outstanding
advances as collateral for advances from the FHLB of Indianapolis. Lincoln
Federal also has available a $2 million line of credit with the FHLB of
Indianapolis. Lincoln Federal does not anticipate any difficulty in obtaining
advances appropriate to meet its requirements in the future.
- 18 -
<PAGE>
The following table presents certain information relating to Lincoln
Federal's borrowings at or for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
------------------------------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB Advances:
Outstanding at end of period................. $33,263 $70,136 $91,232
Average balance outstanding for period....... 49,773 92,121 87,621
Maximum amount outstanding at any
month-end during the period............. 35,136 106,932 93,932
Weighted average interest rate
during the period....................... 5.74% 5.70% 5.57%
Weighted average interest rate
at end of period........................ 5.50 5.71 5.49
Note payable to Bloomington.................. $ 2,203 $ 2,691 $ 3,180
</TABLE>
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
Lincoln Federal currently owns one subsidiary, LF, whose assets consist
of an investment in Family Financial Life Insurance Company ("Family Financial")
and in BHA. See "- Investments in Low- and Moderate-Income Housing Projects." LF
received regulatory approval in February, 1998 to invest in Family Financial, an
Indiana stock insurance company. In May, 1998, LF acquired a 16.7% interest in
Family Financial for $650,000. The remaining interests are held in equal amounts
by service corporations of five other financial institutions, four of which are
located in Indiana and one in South Carolina. Fifty percent of the common stock
of Family Financial is held by Consortium Partners, a Louisiana general
partnership in which the six participating service corporations own equal
interests. The service corporations directly own, in equal amounts, the
remaining 50% of the common stock of Family Financial.
Family Financial primarily engages in retail sales of mortgage and
credit insurance products in connection with loans originated by Lincoln
Federal's constituent shareholder financial institutions. Products offered by
Family Financial include group and individual term mortgage life insurance,
group mortgage disability insurance, group accidental death insurance, group
credit life insurance, and group credit accident and disability insurance
policies. Family Financial also markets a variety of tax-deferred annuity
contracts which are wholly reinsured by other insurance companies. LF expects to
receive (1) dividends paid on Family Financial shares owned directly by it, (2)
a pro rata allocation of dividends received on shares held by Consortium
Partners, which are divided among the partners based on the actuarially
determined value of Family Financial's various lines of insurance generated by
customers of these partners, and (3) commissions on sales of insurance products
made to customers. For the period ended December 31, 1998, Lincoln Federal
received no income from commissions and dividends paid on Family Financial
activities.
- 19 -
<PAGE>
Employees
As of December 31, 1998, Lincoln Federal employed 74 persons on a
full-time basis and five on a part-time basis. None of Lincoln Federal's
employees are represented by a collective bargaining group and management
considers employee relations to be good.
Employee benefits for Lincoln Federal's full-time employees include, among
other things, an employee stock ownership plan, a Pentegra Group (formerly known
as Financial Institutions Retirement Fund) defined benefit pension plan, which
is a noncontributory, multiple-employer comprehensive pension plan (the"Pension
Plan"), and hospitalization/major medical insurance, long-term disability
insurance, life insurance, and participation in the Lincoln Federal 401(k) Plan,
which is administered by Pentegra Group.
Lincoln Federal considers its employee benefits to be competitive with
those offered by other financial institutions and major employers in its area.
See "Executive Compensation and Related Transactions of Lincoln Federal."
COMPETITION
Lincoln Federal originates most of its loans to and accepts most of its
deposits from residents of Hendricks, Montgomery and Clinton Counties, Indiana.
Lincoln Federal is subject to competition from various financial institutions,
including state and national banks, state and federal savings associations,
credit unions, and certain nonbanking consumer lenders that provide similar
services in those counties with significantly larger resources than are
available to Lincoln Federal. Lincoln Federal also competes with money market
funds with respect to deposit accounts and with insurance companies with respect
to individual retirement accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Lincoln Federal competes for
loan originations primarily through the efficiency and quality of the services
that it provides borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that management cannot readily predict.
REGULATION
General
As a federally chartered, SAIF-insured savings association, Lincoln
Federal is subject to extensive regulation by the OTS and the FDIC. For example,
Lincoln Federal must obtain OTS approval before it may engage in certain
activities and must file reports with the OTS regarding its activities and
financial condition. The OTS periodically examines Lincoln Federal's books and
records and, in conjunction with the FDIC in certain situations, has examination
and enforcement powers. This supervision and regulation are intended primarily
for the protection of depositors and federal deposit insurance funds. The OTS
recently amended how saving associations calculate the semi-annual assessment
owed to the OTS. This revision includes a marginal assessment rate that
decreases as the asset size of a savings association increases and includes a
fixed-cost component that is assessed on all savings associations. The
assessment rate that applies to a savings association depends upon the
institution's size, condition, and the complexity of its operations. Lincoln
Federal's semi-annual assessment is $36,000.
Lincoln Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
Lincoln Federal's securities, and limitations upon other aspects of banking
operations. In addition, Lincoln Federal's activities and operations are subject
to a number of additional detailed, complex and sometimes overlapping federal
and state laws and regulations. These include state usury and consumer credit
laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and
Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the
Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining
legislation and antitrust laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as Lincoln Federal, to either convert to
a national bank or a state-chartered bank by a specified date to be determined.
- 20 -
<PAGE>
In addition, under the legislation, the Holding Company likely would not be
regulated as a savings and loan holding company but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer Lincoln
Federal's functions among the other federal banking regulators. Certain aspects
of the legislation remain to be resolved and, therefore, no assurance can be
given as to whether or in what form the legislation will be enacted or Lincoln
Federal's effect on the Holding Company and Lincoln Federal.
Savings and Loan Holding Company Regulation
Under current law, the Holding Company will be regulated as a
"non-diversified savings and loan holding company" within the meaning of the
Home Owners' Loan Act, as amended (the "HOLA"), and subject to regulatory
oversight of the Director of the OTS. As such, the Holding Company is registered
with the OTS and thereby subject to OTS regulations, examinations, supervision
and reporting requirements. As a subsidiary of a savings and loan holding
company, Lincoln Federal is subject to certain restrictions in Lincoln Federal's
dealings with the Holding Company and with other companies affiliated with the
Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from acquiring control of another
savings association or savings and loan holding company or retaining more than
5% of the voting shares of a savings association or of another holding company
which is not a subsidiary. The HOLA also restricts the ability of a director or
officer of the Holding Company, or any person who owns more than 25% of the
Holding Company's stock, from acquiring control of another savings association
or savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
The Holding Company's Board of Directors presently intends to operate the
Holding Company as a unitary savings and loan holding company. Under current
law, there are generally no restrictions on the permissible business activities
of a unitary savings and loan holding company. However, Congress is considering
legislation which could significantly restrict the types of activities in which
a savings and loan holding company may engage. If such legislation is enacted,
the Holding Company's ability to engage in diversified business activities would
be restricted.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) See "-Qualified
Thrift Lender." At December 31, 1998, Lincoln Federal's asset composition was in
excess of that required to qualify us as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with
Lincoln Federal, the Holding Company would thereupon become a multiple savings
and loan holding company. Except where such acquisition is pursuant to the
authority to approve emergency thrift acquisitions and where each subsidiary
savings association meets the QTL test, the activities of the Holding Company
and any of Lincoln Federal's subsidiaries (other than Lincoln Federal or other
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings association, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings association, (iv) holding or managing
properties used or occupied by a subsidiary savings association, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the Federal
Reserve Board (the "FRB") as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS before a multiple holding
company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
- 21 -
<PAGE>
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on Lincoln Federal's permanent or nonwithdrawable
stock unless it first gives the Director of the OTS 30 days advance notice of
such declaration and payment. Any dividend declared during such period or
without giving notice shall be invalid.
Federal Home Loan Bank System
Lincoln Federal is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for Lincoln
Federal's members within Lincoln Federal's assigned region. It is funded
primarily from funds deposited by savings associations and proceeds derived from
the sale of consolidated obligations of the FHLB system. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB. All FHLB advances must be fully secured
by sufficient collateral as determined by the FHLB. The Federal Housing Finance
Board ("FHFB"), an independent agency, controls the FHLB System, including the
FHLB of Indianapolis.
As a member, Lincoln Federal is required to purchase and maintain stock in
the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year. At December 31, 1998, Lincoln
Federal's investment in stock of the FHLB of Indianapolis was $5.4 million. The
FHLB imposes various limitations on advances such as limiting the amount of
certain types of real estate-related collateral to 30% of a member's capital and
limiting total advances to a member. Interest rates charged for advances vary
depending upon maturity, the cost of funds to the FHLB of Indianapolis and the
purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. For the fiscal year ended
December 31, 1998, dividends paid by the FHLB of Indianapolis to Lincoln Federal
totaled approximately $436,000, for an annual rate of 8.0%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations such as Lincoln
Federal and banks that have acquired deposits from savings associations. The
FDIC is required to maintain designated levels of reserves in each fund. As of
September 30, 1996, the reserves of the SAIF were below the level required by
law, primarily because a significant portion of the assessments paid into the
SAIF had been used to pay the cost of prior thrift failures, while the reserves
of the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law. See "- Assessments"
below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to Lincoln Federal's deposit insurance fund. An institution's
risk level is determined based on Lincoln Federal's capital level and the FDIC's
level of supervisory concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
- 22 -
<PAGE>
significant premium disparity between the BIF and the SAIF. Under the new law,
Lincoln Federal was charged a one-time special assessment equal to $.657 per
$100 in assessable deposits at March 31, 1995. Lincoln Federal recognized this
one-time assessment as a non-recurring operating expense of approximately $1.3
million ($785,000 after tax) during the three-month period ending September 30,
1996, and paid this assessment on November 27, 1996. The assessment was fully
deductible for both federal and state income tax purposes. Beginning January 1,
1997, Lincoln Federal's annual deposit insurance premium was reduced from .23%
to .0644% of total assessable deposits. BIF institutions pay lower assessments
than comparable SAIF institutions because BIF institutions pay only 20% of the
rate paid by SAIF institutions on their deposits with respect to obligations
issued by the federally-chartered corporation which provided some of the
financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also
provides for the merger of the SAIF and the BIF by 1999, but not until such time
as bank and thrift charters are combined. Until the charters are combined,
savings associations with SAIF deposits may not transfer deposits into the BIF
system without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
The OTS recently amended this requirement to require a core capital level of 3%
of total adjusted assets for savings associations that receive the highest
rating for safety and soundness, and 4% to 5% for all other savings
associations. This amendment becomes effective April 1, 1999. Under the tangible
capital requirement, a savings association must maintain tangible capital (core
capital less all intangible assets except purchased mortgage servicing rights
which may be included after making the above-noted adjustment in an amount up to
100% of tangible capital) of at least 1.5% of total assets. Under the risk-based
capital requirements, a minimum amount of capital must be maintained by a
savings association to account for the relative risks inherent in the type and
amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%). A credit risk-free asset, such as cash, requires no risk-based
capital, while an asset with a significant credit risk, such as a non-accrual
loan, requires a risk factor of 100%. Moreover, a savings association must
deduct from capital, for purposes of meeting the core capital, tangible capital
and risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At December 31, 1998, Lincoln Federal was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. Even though the OTS has delayed implementing this
rule, Lincoln Federal nevertheless measures its interest rate risk in conformity
with the OTS regulation and, as of December 31, 1998, would have been required
to deduct $3.6 million from its total capital available to calculate its
risk-based capital requirement. The OTS recently updated its standards regarding
the management of interest rate risk to include summary guidelines to assist
savings associations in determining their exposures to interest rate risk.
If an association is not in compliance with the capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operating activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
- 23 -
<PAGE>
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: Lincoln Federal capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At December 31, 1998, Lincoln Federal was categorized as "well
capitalized," meaning that its total risk-based capital ratio exceeded 10%, its
Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and
it was not subject to a regulatory order, agreement or directive to meet and
maintain a specific capital level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
The OTS recently adopted a regulation, which becomes effective on April
1, 1999, that revises the current restrictions that apply to "capital
distributions" by savings associations. The amended regulation defines a capital
distribution as a distribution of cash or other property to a savings
association's owners, made on account of their ownership. This definition
includes a savings association's payment of cash dividends to shareholders, or
any payment by a savings association to repurchase, redeem, retire, or otherwise
acquire any of its shares or debt instruments that are included in total
capital, and any extension of credit to finance an affiliate's acquisition of
those shares or interests. The amended regulation does not apply to dividends
consisting only of a savings association's shares or rights to purchase such
shares.
The amended regulation exempts certain savings associations from the
current requirement that all savings associations file either a notice or an
application with the OTS before making any capital distribution. As revised, the
regulation requires a savings association to file an application for approval of
a proposed capital distribution with the OTS if the association is not eligible
for expedited treatment under OTS's application processing rules, or the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years (the "retained net
income standard"). At December 31, 1998, Lincoln Federal's retained net income
standard was approximately $7.6 million. A savings association must also file an
application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because
Lincoln Federal is a subsidiary of a savings and loan holding company, this
latter provision will require, at a minimum, that Lincoln Federal file a notice
with the OTS 30 days before making any capital distributions to the Holding
Company.
In addition to these regulatory restrictions, Lincoln Federal's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires Lincoln
Federal to establish and maintain a liquidation account for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders and prohibits
Lincoln Federal from making capital distributions to the Holding Company if its
net worth would be reduced below the amount required for the liquidation
account.
- 24 -
<PAGE>
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well-capitalized," "adequately-capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. Management does not believe that these regulations
will have a materially adverse effect on Lincoln Federal's current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of Lincoln
Federal's operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that Lincoln Federal's lending
policies continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, Lincoln Federal may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. Additional amounts may be lent, not in excess of
10% of unimpaired capital and surplus, if such loans or extensions of credit are
fully secured by readily marketable collateral, including certain debt and
equity securities but not including real estate. In some cases, a savings
association may lend up to 30% of unimpaired capital and surplus to one borrower
for purposes of developing domestic residential housing, provided that the
association meets Lincoln Federal's regulatory capital requirements and the OTS
authorizes the association to use this expanded lending authority. Lincoln
Federal has established an "in-house" lending limit of $2 million to a single or
related group of borrowers, which is significantly lower than the regulatory
lending limit described above. Any loan that exceeds this "in-house" lending
limit up to the regulatory lending limit must first be approved by Lincoln
Federal's board of directors. At December 31, 1998, Lincoln Federal had no loan
relationships that exceeded its "in-house" lending limit. Also on that date,
Lincoln Federal did not have any loans or extensions of credit to a single or
related group of borrowers in excess of its regulatory lending limits.
Management does not believe that the loans-to-one-borrower limits will have a
significant impact on Lincoln Federal's business operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test. If Lincoln Federal maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
- 25 -
<PAGE>
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Indianapolis. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting Lincoln
Federal's business and liquid assets equal to 10% of total assets). Certain
assets are subject to a percentage limitation of 20% of portfolio assets. In
addition, savings associations may include shares of stock of the FHLBs, FNMA,
and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis
in nine out of every twelve months. As of December 31, 1998, Lincoln Federal was
in compliance with its QTL requirement, with approximately 95.2% of its assets
invested in QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but Lincoln Federal's deposit insurance assessments and payments will
be those of and paid to the SAIF) or be subject to the following penalties: (i)
it may not enter into any new activity except for those permissible for a
national bank and for a savings association; (ii) Lincoln Federal's branching
activities shall be limited to those of a national bank; (iii) it shall not be
eligible for any new FHLB advances; and (iv) it shall be bound by regulations
applicable to national banks respecting payment of dividends. Three years after
failing the QTL test the association must (i) dispose of any investment or
activity not permissible for a national bank and a savings association and (ii)
repay all outstanding FHLB advances. If such a savings association is controlled
by a savings and loan holding company, then such holding company must, within a
prescribed time period, become registered as a bank holding company and become
subject to all rules and regulations applicable to bank holding companies
(including restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formatio of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks
in other states and, with state consent and subject to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion, provided that such transactions are not permitted to out-of-state
banks unless the laws of their home states permit Indiana banks to merge or
establish de novo banks on a reciprocial basis. The Indiana Branching Law became
effective March 15, 1996.
Transactions with Affiliates
Lincoln Federal is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which restrict financial transactions between banks and their
- 26 -
<PAGE>
directors, executive officers and affiliated companies. The statute limits
credit transactions between a bank or savings association and Lincoln Federal's
executive officers and Lincoln Federal's affiliates, prescribes terms and
conditions for bank affiliate transactions deemed to be consistent with safe and
sound banking practices, and restricts the types of collateral security
permitted in connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company have been registered
with the SEC under the 1934 Act and, as a result, the Holding Company is subject
to the information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following Lincoln Federal's conversion to stock form, if the Holding
Company has fewer than 300 shareholders, it may deregister its shares under the
1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company
meets the current public information requirements under Rule 144, each affiliate
of the Holding Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that Lincoln Federal's members must maintain for
continued access to long-term advances from the FHLBs. The standards take into
account a member's performance under the CRA and Lincoln Federal's record of
lending to first-time home buyers. The OTS has designated Lincoln Federal's
record of meeting community credit needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as Lincoln Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using the experience method. As a result of the repeal of the
percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
associations meeting a residential mortgage loan origination test. Lincoln
Federal does not have any reserves taken after 1987 that must be recaptured. In
addition, the pre-1988 reserve, for which no deferred taxes have been recorded,
need not be recaptured into income unless (i) the savings association no longer
qualifies as a bank under the Code, or (ii) the savings association pays out
excess dividends or distributions. Although Lincoln Federal does have some
reserves from before 1988, Lincoln Federal is not required to recapture these
reserves.
Depending on the composition of its items of income and expense, a savings
association may be subject to the alternative minimum tax. A savings association
must pay an alternative minimum tax on the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid can be credited against
regular tax due in later years.
For federal income tax purposes, Lincoln Federal has been reporting its
income and expenses on the accrual method of accounting. Lincoln Federal's
federal income tax returns have not been audited in recent years.
- 27 -
<PAGE>
State Taxation
Lincoln Federal is subject to Indiana's Financial Institutions Tax
("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income."
"Adjusted gross income," for purposes of FIT, begins with taxable income as
defined by Section 63 of the Code and, thus, incorporates federal tax law to the
extent that it affects the computation of taxable income. Federal taxable income
is then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
Lincoln Federal's state income tax returns have not been audited in recent
years.
Item 2. Properties.
The following table provides certain information with respect to
Lincoln Federal's offices as of December 31, 1998:
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures (1) Footage
---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<C> <C> <C> <C> <C>
1121 East Main Street Owned 1970 $92,400 $1,450 9,925
Plainfield, IN 46168
134 South Washington Street Owned 1962 53,300 446 9,340
Crawfordsville, IN 47933
1900 East Wabash Street Owned 1974 33,700 286 2,670
Frankfort, IN 46041
975 East Main Street Owned 1981 32,600 304 2,890
Brownsburg, IN 46112
</TABLE>
(1) Land and other capitalized costs associated with the future Avon, Indiana
branch totalled $893,000.
The Bank opended a new branch in Avon, Indiana in January, 1999.
Lincoln Federal owns computer and data processing equipment which it uses
for transaction processing, loan origination, and accounting. The net book value
of Lincoln Federal's electronic data processing equipment was approximately
$254,000 at December 31, 1998.
Lincoln Federal currently operates five automatic teller machines
("ATMs"), with one ATM located at its main office and each of its branch
offices. Lincoln Federal's ATMs participate in the Cirrus(R) and MAC(R)
networks.
Lincoln Federal has also contracted for the data processing and reporting
services of On-Line Financial Services, Inc. in Oak Brook, Illinois. The cost of
these data processing services is approximately $45,000 per month.
Lincoln Federal has also executed a Correspondent Services Agreement with
the FHLB of Indianapolis under which it receives item processing and other
services for a fee of approximately $3,400 per month.
Item 3. Legal Proceedings.
Although the Holding Company and Lincoln Federal are involved, from
time to time, in various legal proceedings in the normal course of business,
there are no material legal proceedings to which they presently are a party or
to which any of the Holding Company's or Lincoln Federal's property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 1998.
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<PAGE>
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
---- -----------------------------
T. Tim Unger Chairman of the Board, President and
Chief Executive Officer
John M. Baer Secretary and Treasurer
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. Mr. Unger has served the banking industry since 1966.
John M. Baer (age 50) has served as Lincoln Federal's Chief Financial
Officer since June, 1997 and as Lincoln Federal's Secretary and Treasurer since
January, 1998. Before working for Lincoln Federal, Mr. Baer served as Vice
President and Chief Financial Officer of the Community Bank Group of Bank One in
Indianapolis, Indiana from June, 1996 through June, 1997. From October, 1989
through June, 1996 he served as Senior Vice President and Chief Financial
Officer of Bank One, Merrillville, NA, in Merrillville, Indiana. Mr. Baer has
served the banking industry since 1978.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
a) 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.
The Holding Company paid no dividends to its shareholders in the fiscal
year ended December 31, 1998.
b) Use of Proceeds.
The Registration Statement filed by the Holding Company pursuant to the
Securities Act of 1933 was declared effective by the Securities and Exchange
Commission on November 12, 1998 (SEC File No. 333-63373). The offering of the
- 29 -
<PAGE>
Holding Company's common stock (the "Common Stock") commenced on that date and
terminated at 12:00 noon, Plainfield, Indiana time, on December 14, 1997. The
Holding Company sold each of the 6,809,250 shares of Common Stock registered
pursuant to the Registration Statement at $10 per share and contributed an
additional 200,000 shares of Common Stock to the Lincoln Federal Charitable
Foundation, Inc. The Lincoln Bancorp Employee Stock Ownership Plan and Trust
(the "ESOP") purchased 560,740 shares of the Common Stock with the proceeds of a
loan it received from the Holding Company. Charles Webb and Company, a division
of Keefe, Bruyette, and Woods, Inc., acted as the Holding Company's exclusive
agent in marketing the Common Stock on a best efforts basis.
The following table indicates the net proceeds from the offering of the
Common Stock by the Holding Company:
Gross proceeds from sale of
6,809,250 shares at $10/share $68,092,500
Expenses:
Underwriting commissions $561,194
Underwriting expenses 25,000
Other expenses 626,933
--------
Total expenses 1,213,127
-----------
Net proceeds $66,879,373
===========
As described in the prospectus, the Holding Company used 50% of the net
proceeds (or $33,439,686) to purchase all of the capital stock of Lincoln
Federal. From the proceeds that it retained, the Holding Company made a loan to
the ESOP for the purchase of 560,740 shares of the Common Stock. After providing
for this loan and for the purchase of Lincoln Federal's capital stock, the
Holding Company retained $27,832,287 of the net proceeds, as the following table
indicates:
Net proceeds $66,879,373
Purchase of Bank capital stock $33,439,686
Loan to ESOP 5,607,400
-----------
Total 39,047,086
-----------
Net proceeds retained by Holding Company $27,832,287
===========
The Holding Company deposited the remainder of the net proceeds that it
retained in an account with Lincoln Federal, thereby increasing Lincoln
Federal's working capital.
The payments described above reflect reasonable estimates of amounts
paid by the Holding Company and Lincoln Federal. Neither the Holding Company nor
Lincoln Federal paid any of the expenses indicated above, either directly or
indirectly, to Lincoln Federal's directors, officers or their associates, or to
any person owning 10% or more of any class of the Holding Company's securities,
or to any affiliate. The Holding Company's and Lincoln Federal's use of the
proceeds from the offering of the Common Stock described above does not
represent a material change in the use of proceeds described in the prospectus.
- 30 -
<PAGE>
Item 6. Selected Financial Data.
The following selected consolidated financial data of Lincoln Federal
and its subsidiary is qualified in its entirety by, and should be read in
conjunction with, the consolidated financial statements, including notes
thereto, included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Summary of Financial Condition Data:
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>
<PAGE>
<TABLE>
<CAPTION>
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.
- 31 -
<PAGE>
Item 7. 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:
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.
- 32 -
<PAGE>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
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.
- 33 -
<PAGE>
Interest Rate Spread
Lincoln Federal'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 Lincoln Federal 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
---- ---- ----
<S> <C> <C> <C>
Weighted average interest rate earned on:
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
(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. No net yield figure is presented at
December 31, 1998 because the computation of net yield is applicable only
over a period rather than at a specific date.
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
Lincoln Federal'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.
- 34 -
<PAGE>
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>
- 35 -
<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.
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
- 36 -
<PAGE>
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.
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.
- 37 -
<PAGE>
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.
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.
- 38 -
<PAGE>
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.
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
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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.
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.
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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.
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:
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<PAGE>
<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.
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.
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<PAGE>
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.
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
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<PAGE>
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.
Quarterly Results of Operations
The following table sets forth certain quarterly results for hte years
ended December 31, 1998 and 1997.
Quarter Interest Interest Net Interest Provision For Net
Ended Income Expense Income Loan Losses Income
----- ------ ------- ------ ----------- ------
1998:
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
======= ======= ====== ==== ======
Earnings per share information for the periods before Lincoln Federal's
conversion to a stock savings bank on Decmeber 31, 1998 is not meaningful.
Item 7A. 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.
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<PAGE>
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
us 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
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 us 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
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<PAGE>
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
$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.
<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> <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.
- 46 -
<PAGE>
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> <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
* Basis points.
</TABLE>
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.
- 47 -
<PAGE>
Item 8. Financial Statements and Supplementary Data.
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.
/s/ Olive LLP
Indianapolis, Indiana
February 11, 1999
- 48 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
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.
- 49 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income
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.
- 50 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Consolidated Statement 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.
- 51 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
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.
- 52 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Consolidated Statement of Cash Flows
<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)
----------- ----------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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.
- 53 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
- 54 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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.
- 55 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
- 56 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 3 -- Investment Securities
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available for sale
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
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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>
- 57 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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> <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
======== ========
- 58 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
<TABLE>
<CAPTION>
December 31 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
- 59 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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
======= =======
Year Ended December 31 1998 1997 1998
- --------------------------------------------------------------------------------
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)
======= ======= =======
- 60 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- Deposits
<TABLE>
<CAPTION>
December 31 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
======== ========
</TABLE>
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
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturities in years ending December 31
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
2003 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>
- 61 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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
======= ======= =======
- 62 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
- 63 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
- 64 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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.
- 65 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
- 66 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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%
</TABLE>
1 As defined by regulatory agencies
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------
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) $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%
</TABLE>
1 As defined by regulatory agencies
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.
- 67 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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.
- 68 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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
<S> <C> <C> <C> <C>
Cash and 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>
- 69 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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
=======
- 70 -
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1998
- ----------------------------------------------------------------------------------
<S> <C>
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
</TABLE>
- 71 -
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the Holding Company's executive officers is
included in Item 4.5 in Part I of this report. Section 16(a) of the Securities
Exchange Act of 1934 ("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 the Holding Company's 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, the Holding Company believes
that during the fiscal year ended December 31, 1998, all filing requirements
applicable to Lincoln Federal's officers, directors and greater than 10%
beneficial owners with respect to Section 16(a) of the 1934 Act were complied
with.
Presented below is certain information concerning the directors of the
Holding Company:
<TABLE>
<CAPTION>
Director of Director of Position Position
Holding Company Lincoln Federal Expiration with Holding with
Director Since Since of Term Company Lincoln Federal
- -------- ----- ----- ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Lester N. Bergum, Jr. 1998 1996 2000 Director Director
W. Thomas Harmon 1998 1982 2001 Director Director
Jerry R. Holifield 1998 1992 2001 Director Director
Wayne E. Kessler 1998 1976 2000 Director Director
David E. Mansfield 1998 1997 1999 Director Director
John C. Milholland 1998 1988 2001 Director Director
T. Tim Unger 1998 1996 1999 Director, Director, President
President and and Chief
Chief Executive Executive Officer
Officer
Edward E. Whalen 1998 1961 1999 (1) Director Chairman of the Board
John L. Wyatt 1998 1992 1999 Director Director
(1) Mr. Whalen will retire as an active director and will become an emeritus
director in July, 1999.
</TABLE>
Presented below is certain information concerning the directors of Lincoln
Federal:
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.
- 72 -
<PAGE>
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.
John L. Wyatt (age 62) is a District Agent for Northwestern Mutual Life
Insurance Company where he has been employed since 1960.
Lincoln Federal also has a director emeritus program pursuant to which
its 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. See "Executive
Compensation and Related Transactions of Lincoln Federal - Compensation of
Directors."
Item 11. Executive Compensation.
No cash compensation is paid directly by the Holding Company to any of
its executive officers. Each of such officers is compensated by Lincoln Federal.
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to Lincoln Federal's President
and Chief Executive Officer for the fiscal year ended December 31, 1998. Other
than Messrs. Unger and Baer, Lincoln Federal had no executive officers who
earned over $100,000 in salary and bonuses during that fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
Name Other Securities All
and Annual Restricted Underlying LTIP Other
Principal Compen- Stock Options/ Payouts Compen-
Position Year Salary ($) Bonus ($) sation($)(1) Award(s)($) SARs (#) ($) sation($) (2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T. Tim Unger 1998 $135,000 (3)(4) $30,000 $3,555
1997 $125,000 (3)(4) $10,000 --- --- --- --- $3,330
John M. Baer 1998 $ 95,000 (4) $ 9,500 $ 990
</TABLE>
(1) The named executive officer received certain perquisites, but the
incremental cost of providing such perquisites did not exceed the
lesser of $50,000 or 10% of his salary and bonus.
(2) Other Compensation includes Lincoln Federal'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 Code under
Lincoln Federal's 401(k) Plan.
Management Remuneration and Related Transactions
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 Corporation'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 Holding Company's shareholders will vote on whether to adopt a
Stock Option Plan ("SOP") and a Management Recognition and Retention Plan
("RRP") at the first meeting of shareholders, which will be held in July, 1999.
If the shareholders approve the adoption of the SOP and RRP, it is expected that
the Holding Company's Stock Compensation Committee will administer both plans.
Membership of the Stock Compensation Committee is the same as the Compensation
Committee.
- 73 -
<PAGE>
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 Corporation'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 Corporation's shares increases.
At present, the Holding Company's executive compensation program is
comprised of base salary and annual incentive bonuses. Assuming shareholder
approval of the SOP 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 Corporation'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. At the Holding Company's initial meeting of shareholders
in July, 1999, the Board of Directors will submit the adoption of the SOP for
directors and officers for shareholder approval. The Stock 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 Stock 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 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 Corporation.
RRP. The Holding Company's shareholders will also vote at the initial
meeting of shareholders on whether to adopt the RRP, which 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
- 74 -
<PAGE>
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 up to 4% of the shares of Common Stock sold in the
Conversion. 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.
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 73 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
Employment Contract
Lincoln Federal has entered into a three-year employment contract with Mr.
Unger. The contract with Mr. Unger, which became effective as of December 30,
1998, the effective date of the Conversion, extends annually for an additional
one-year term to maintain its three-year term if Lincoln Federal'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 an initial salary
under the contract equal to his current salary 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 Lincoln
Federal's employees. Mr. Unger may terminate his employment upon 60 days'
written notice to Lincoln Federal. Lincoln Federal may discharge Mr. Unger for
cause (as defined in the contract) at any time or in certain specified events.
If Lincoln Federal 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 of control. In addition, during such period, Mr. Unger will
continue to participate in Lincoln Federal'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 Lincoln Federal 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 Lincoln Federal, 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 Lincoln Federal 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
either after a change of control of the Holding Company, without cause by
Lincoln Federal, 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 Lincoln Federal's confidential business
information and protects Lincoln Federal from competition by Mr. Unger should he
voluntarily terminate his employment without cause or should Lincoln Federal
terminate his employment for cause.
- 75 -
<PAGE>
Compensation of Directors
Lincoln Federal 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. Lincoln
Federal's directors emeritus receive a $500 monthly retainer plus $100 for each
meeting they attend. Total fees paid to Lincoln Federal's directors and
directors emeritus for the year ended December 31, 1998 were approximately
$181,000.
Lincoln Federal'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 two
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.
Directors of the Holding Company and LF 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.
Lincoln Federal 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 Lincoln Federal's board of
directors. 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 25, 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
of Beneficial Owner(1) Beneficially Owned Class
---------------------- ------------------ -----
Home Federal Savings Bank 560,740(2) 8.0%
501 Washington Street
Columbus, IN 47201
(1) The information in this chart is based on Schedule 13D and 13G
Report(s) filed by the above-listed person(s) with the SEC containing
information concerning shares held by them. It does not reflect any
changes in those shareholdings which may have occurred since the date
of such filings.
(2) These shares are held by the Trustee of the Lincoln Bancorp ESOP. The
Employees participating in the ESOP are entitled to instruct the
Trustee how to vote shares held in their accounts under the ESOP.
Unallocated shares held in a suspense account under the ESOP are
required to be voted by the Trustee in the same proportion as allocated
shares are voted.
The following table sets forth certain information regarding the
nominees for the position of director of the Holding Company, including the
- 76 -
<PAGE>
number and percent of shares of Common Stock beneficially owned by such persons
as of March 25, 1999. Unless otherwise indicated, each nominee has sole
investment and/or voting power with respect to the shares shown as beneficially
owned by him. 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>
Common Stock
Expiration of Director of the Beneficially
Term as Holding Owned as of Percentage
Name Director Company Since March 25, 1998 of Class(1)
- ---------------------- --------------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
Lester N. Bergum, Jr. 2000 1998 20,000 .29
W. Thomas Harmon 2001 1998 50,000 .71
Jerry R. Holifield 2001 1998 25,000 .36
Wayne E. Kessler 2000 1998 10,000 .14
David E. Mansfield 1999 1998 10,000 .14
John C. Milholland 2001 1998 46,962 .67
T. Tim Unger 1999 1998 50,000 .71
Edward E. Whalen 1999 (2) 1998 30,000 .43
John L. Wyatt 1999 1998 30,325 .47
All directors and executive 312,078 4.45
officers as a group (10 persons)
</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) Mr. Whalen will retire as an active director and will become an
emeritus director in July, 1999.
Item 13. Certain Relationships and Related Transactions.
Lincoln Federal has followed 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 us to make loans or
extensions of credit to its executive officers, directors, and principal
shareholders on the same terms that are available with respect to loans made to
all of Lincoln Federal's employees. At present, Lincoln Federal offer 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. Lincoln Federal's policy regarding loans to directors and
employees meets the requirements of current law. Loans to directors, executive
officers and their associates totaled approximately $1.3 million, or 1.2% of
equity capital at December 31, 1998.
- 77 -
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements
Consolidated Balance Sheet at December 31, 1998, and 1997
Consolidated Statement of Income for the Years Ended December 31, 1998,
1997, and 1996
Consolidatd Statement of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Changes in Shareholders' Equity for the
Years Ended December 31, 1998, 1997, and 1996.
Consolidated Statement of Cash Flows for the Years Ended December 31,
1998, 1997, and 1996
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1998.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits is
an executive compensation plan and arrangement which is identified as
Exhibit 10(5).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
- 78 -
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
LINCOLN BANCORP
Date: March 31, 1999 By: /s/ T. Tim Unger
------------------------------
T. Tim Unger, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 31st day of March, 1999.
Signatures Title Date
(1) Principal Executive Officer:
/s/ T. Tim Unger )
--------------------------- )
T. Tim Unger President and )
Chief Executive Officer )
)
)
(2) Principal Financial and )
Accounting Officer: )
)
)
/s/ John M. Baer Treasurer )
--------------------------- )
John M. Baer )
)
)March 31, 1999
)
(3) The Board of Directors: )
)
)
/s/ Lester N. Bergum Director )
--------------------------- )
Lester N. Bergum )
)
)
/s/ W. Thomas Harmon Director )
--------------------------- )
W. Thomas Harmon )
)
)
/s/ Jerry R. Holifield Director )
--------------------------- )
Jerry R. Holifield )
- 79 -
<PAGE>
/s/ Wayne E. Kessler Director )
--------------------------- )
Wayne E. Kessler )
)
)
/s/ David E. Mansfield Director )
--------------------------- )
David E. Mansfield )
)
)March 31, 1999
/s/ John C. Milholland Director )
--------------------------- )
John C. Milholland )
)
)
/s/ T. Tim Unger Director )
--------------------------- )
T. Tim Unger )
)
)
/s/ Edward E. Whalen Director )
--------------------------- )
Edward E. Whalen )
)
)
/s/ John L. Wyatt Director )
--------------------------- )
John L. Wyatt )
- 80 -
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
3(1) Registrant's Articles of Incorporation are incorporated
by reference to to Exhibit 3(1) to the Registration
Statement
(2) Registrant's Code of By-Laws is incorporated by reference
to to Exhibit 3(2) to the Registration Statement
10(5) Employment Agreement between Lincoln Federal Savings Bank
and T. Tim Unger is incorporated by reference to to
Exhibit 10(5) to the Registration Statement
21 Subsidiaries of the Registrant
27 Financial Data Schedule (filed electronically)
Exhibit 21
SUBSIDIARIES OF LINCOLN BANCORP
Subsidiaries of Lincoln Bancorp:
Name Jurisdiction of Incorporation
---- -----------------------------
Lincoln Federal Savings Bank Federal
LF Service Corp. Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001070259
<NAME> Lincoln Bancorp
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 4,245
<INT-BEARING-DEPOSITS> 18,662
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 129,276
<INVESTMENTS-CARRYING> 1,250
<INVESTMENTS-MARKET> 1,264
<LOANS> 197,433
<ALLOWANCE> 1,512
<TOTAL-ASSETS> 366,448
<DEPOSITS> 212,010
<SHORT-TERM> 7,489
<LIABILITIES-OTHER> 12,865
<LONG-TERM> 27,977
<COMMON> 68,879
0
0
<OTHER-SE> 37,229
<TOTAL-LIABILITIES-AND-EQUITY> 366,448
<INTEREST-LOAN> 17,024
<INTEREST-INVEST> 3,995
<INTEREST-OTHER> 1,980
<INTEREST-TOTAL> 22,999
<INTEREST-DEPOSIT> 10,972
<INTEREST-EXPENSE> 13,827
<INTEREST-INCOME-NET> 9,172
<LOAN-LOSSES> 173
<SECURITIES-GAINS> 113
<EXPENSE-OTHER> 8,110
<INCOME-PRETAX> 1,260
<INCOME-PRE-EXTRAORDINARY> 1,267
<EXTRAORDINARY> 150
<CHANGES> 0
<NET-INCOME> 1,117
<EPS-PRIMARY> 0
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<YIELD-ACTUAL> 3.00
<LOANS-NON> 959
<LOANS-PAST> 333
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 1,361
<CHARGE-OFFS> 357
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<ALLOWANCE-CLOSE> 1,512
<ALLOWANCE-DOMESTIC> 1,512
<ALLOWANCE-FOREIGN> 0
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</TABLE>
