CITIZENS BANCORP
60 South Main Street
Frankfort, Indiana 46041
(765) 654-8533
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 1, 2000
To the Shareholders of Citizens Bancorp:
We will hold a special meeting of the shareholders of Citizens Bancorp
on September 1, 2000, at 3:00 p.m., Frankfort time, at the Frankfort Community
Public Library located at 208 West Clinton Street, Frankfort, Indiana for the
following purposes:
1. To vote on the merger of Citizens Bancorp and Lincoln Bancorp
and related matters. In the merger, you will receive .9375
shares of Lincoln Bancorp common stock and $9.375 in cash for
each share of Citizens Bancorp common stock you own before the
merger. You will also receive cash in lieu of receiving any
fractional shares of Lincoln Bancorp common stock you would
otherwise receive in the merger.
2. To approve a proposal to adjourn the meeting to permit further
solicitation of proxies in the event that an insufficient
number of shares is present in person or by proxy to approve
the merger.
The Boards of Directors of Lincoln Bancorp and Citizens Bancorp have
unanimously approved the agreement to merge Citizens Bancorp with and into
Lincoln Bancorp. The merger must also be approved at the special meeting of
Citizens Bancorp shareholders by the affirmative vote of at least a majority of
the outstanding shares of Citizens Bancorp common stock. Only shareholders of
Citizens Bancorp as of the close of business on July 27, 2000 may vote at the
special meeting. The attached document gives you detailed information about the
merger and includes a copy of the Agreement and Plan of Reorganization as Annex
A. You should read these documents carefully.
You are entitled to assert dissenters' rights as set forth in
Sections 23-1-44-1 through 23-1-44-20 of the Indiana Business Corporation Law,
copies of which are included in the attached Proxy Statement/Prospectus as Annex
C. For a discussion of the procedures to be followed in asserting these
dissenters' rights, please refer to the section entitled "Rights of Dissenting
Shareholders" in the attached Proxy Statement/Prospectus.
Whether or not you plan to attend the special meeting in person, we
urge you to date, sign and return promptly the enclosed proxy in the
accompanying envelope. If no instructions are indicated on your signed proxy,
your shares will be voted "FOR" the merger. You may revoke your proxy prior to
its exercise in the manner provided in the accompanying document. If you do not
return your proxy and do not vote in person at the special meeting, the effect
is the same as a vote against the merger. YOUR VOTE IS VERY IMPORTANT.
By Order of the Board of Directors,
/s/ Cindy S. Chambers
Cindy S. Chambers
Secretary
Frankfort, Indiana
July 27, 2000
<PAGE>
PROXY STATEMENT FOR
CITIZENS BANCORP
SPECIAL MEETING
PROSPECTUS OF
LINCOLN BANCORP
The boards of directors of Citizens Bancorp and Lincoln Bancorp have
agreed that Lincoln Bancorp will acquire Citizens Bancorp in a merger. If the
merger is approved by the shareholders of Citizens Bancorp and all other closing
conditions are satisfied, each outstanding share of Citizens Bancorp common
stock will be exchanged for .9375 shares of Lincoln Bancorp common stock and
$9.375 in cash. The Board of Directors of Citizens Bancorp believes that the
merger is in Citizens Bancorp's and your best interests.
This document is a proxy statement for the solicitation of proxies for
use at the Citizens Bancorp special shareholder meeting to be held to vote on
the merger with Lincoln Bancorp. It is also a prospectus relating to Lincoln
Bancorp's issuance of up to 970,315 shares of common stock of Lincoln Bancorp in
connection with the merger and the exercise of stock options to be assumed by
Lincoln Bancorp at the effective time of the merger.
The merger cannot be completed unless the shareholders of Citizens
Bancorp approve the Agreement and Plan of Reorganization between Lincoln Bancorp
and Citizens Bancorp, and the merger described therein. Citizens Bancorp has
scheduled a special meeting for its shareholders to vote on the Agreement and
Plan of Reorganization. The date, time and place of the special meeting are as
follows:
3:00 p.m., Frankfort Time
September 1, 2000
Frankfort Community Public Library
208 West Clinton Street
Frankfort, Indiana
Whether or not you plan to attend the special meeting, please take the
time to vote by completing and mailing the enclosed proxy card(s) to us. Your
vote is very important.
Lincoln Bancorp common stock is traded on the Nasdaq National Market
System under the symbol "LNCB."
For a description of certain significant considerations in connection
with the merger and related matters described in this document, see "Risk
Factors" beginning on page 18.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this document. Any representation to the contrary is a
criminal offense.
The shares of Lincoln Bancorp common stock are not savings accounts,
deposits or other obligations of any bank or savings association and are not
insured by the Federal Deposit Insurance Corporation or any other governmental
agency.
The date of this proxy statement/prospectus is July 27, 2000 and it
is first being mailed to shareholders on or about August 1, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
Questions and Answers About the Merger...................................... 3
Summary..................................................................... 5
Recent Developments of Lincoln Bancorp...................................... 12
Recent Developments of Citizens Bancorp..................................... 14
Risk Factors................................................................ 18
A Warning about Forward-Looking Information................................. 19
The Citizens Bancorp Special Meeting........................................ 20
The Merger.................................................................. 22
The Agreement and Plan of Reorganization.................................... 32
Unaudited Pro Forma Condensed Combined Financial Information................ 38
Interests of Certain Directors and Executive
Officers of Citizens Bancorp in the Merger............................. 44
Exchange of Citizens Bancorp Common Stock for Lincoln Bancorp Common Stock.. 45
Regulatory Approvals for the Merger......................................... 46
Material Federal Income Tax Consequences.................................... 46
Accounting Treatment of Merger.............................................. 49
Rights of Dissenting Shareholders........................................... 49
NASDAQ National Market Listing.............................................. 50
Directors and Executive Officers............................................ 51
Principal Holders of Common Stock........................................... 55
Management Remuneration and Related Transactions of Lincoln Bancorp......... 57
Management Remuneration and Related Transactions of Citizens Bancorp........ 64
Selected Financial Data..................................................... 65
Management's Discussion and Analysis of Financial Condition and
Results of Operation of Lincoln Bancorp................................ 70
Management's Discussion and Analysis of Financial Condition and
Results of Operation of Citizens Bancorp............................... 88
Business of Lincoln Bancorp.................................................103
Business of Citizens Bancorp................................................122
Competition.................................................................138
Taxation....................................................................139
Regulation..................................................................140
Dividends on Common Equity and Related Shareholder Matters..................148
Description of Lincoln Bancorp Common Stock and
Citizens Bancorp Common Stock..........................................149
Restrictions on Acquisition of Lincoln Bancorp and Citizens Bancorp.........150
Experts.....................................................................156
Legal Matters...............................................................156
Where You Can Find More Information.........................................157
Index to Financial Statements of Lincoln Bancorp............................158
Index to Financial Statements of Citizens Bancorp...........................191
Annexes
Annex A - Agreement and Plan of Reorganization
Annex B - Opinion of Trident Securities
Annex C - Chapter 44 of the Indiana Business Corporation Law
(Dissenter's Rights)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: For each outstanding share of Citizens Bancorp you own before the merger, you
will receive .9375 shares of Lincoln Bancorp common stock plus $9.375 in cash.
Lincoln Bancorp will not issue fractional shares in the merger. Instead, you
will receive a check, equal to the fraction of a share of Lincoln Bancorp common
stock that you would otherwise be entitled to receive multiplied by $18.75.
We estimate that, upon completion of the merger, current Citizens Bancorp
shareholders will own approximately 13.5% of Lincoln Bancorp's outstanding
shares of common stock and current Lincoln Bancorp shareholders will own
approximately 86.5% of Lincoln Bancorp's outstanding shares of common stock.
These figures assume that no stock options of Citizens Bancorp are exercised and
are not adjusted to reflect the cashing out of fractional shares of Lincoln
Bancorp that otherwise would have been received by Citizens Bancorp shareholders
in the merger.
Q: WHAT RISKS SHOULD I CONSIDER BEFORE I VOTE ON THE MERGER?
A: You should review "Risk Factors" on page 18.
Q: WHAT HAPPENS AS THE MARKET PRICE OF LINCOLN BANCORP COMMON STOCK
FLUCTUATES?
A: The value of the merger consideration will fluctuate. We have fixed the
merger consideration at .9375 shares of Lincoln Bancorp common stock plus $9.375
in cash for each share of Citizens Bancorp common stock. However, since the
market value of Lincoln Bancorp common stock will fluctuate before and after the
closing of the merger, the value of the Lincoln Bancorp common stock that
Citizens Bancorp shareholders will receive in the merger could increase or
decrease. As of July 25, 2000, the closing price for Lincoln Bancorp common
stock was $10.63 per share. You should obtain current market prices for shares
of Lincoln Bancorp common stock and Citizens Bancorp common stock. Lincoln
Bancorp common stock is listed on the Nasdaq National Market under the symbol
"LNCB." Citizens Bancorp common stock is listed for quotation on the OTC
"Bulletin Board" under the symbol "CIBC.OB."
Q: WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A: We are working to complete the merger during the third quarter of 2000. We
must first obtain the necessary regulatory approvals and the approvals of the
shareholders of Citizens Bancorp at the special meeting that will be held to
vote on the merger. We cannot assure you as to when or if all the conditions to
the merger will be met, and it is possible we will not complete the merger.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: We expect that the exchange of shares by Citizens Bancorp shareholders
generally will be tax-free to Citizens Bancorp shareholders for U.S. federal
income tax purposes. We expect, however, that shareholders will have to pay
taxes on the cash portion of the merger consideration that they receive and on
any cash they receive for fractional shares.
Your tax consequences will depend on your personal situation. You should consult
your tax advisor for a full understanding of the tax consequences of the merger
to you.
Q: WHAT WILL THE DIRECTORS AND EXECUTIVE OFFICERS OF CITIZENS BANCORP RECEIVE IN
THE MERGER?
A: Following the merger, Fred W. Carter, the President and Chief Executive
Officer of Citizens Bancorp, will serve as a director of Lincoln Bancorp and its
wholly-owned subsidiary, Lincoln Federal Savings Bank, for a two-year term, and
will serve at least one additional one-year term as a director emeritus of
Lincoln Federal. Upon completion of the merger, Mr. Carter will also receive a
payment of $412,000 from Lincoln Bancorp in lieu of the payments that he would
otherwise receive under his employment agreement with Citizens Savings Bank. In
addition, Mr. Carter will enter into a two-year consulting agreement with
Lincoln Federal following the merger under which he will be paid an additional
aggregate amount of $53,000. The other directors and director emeritus of
Citizens Bancorp or Citizens Savings Bank will become advisory directors of
Lincoln Federal following the merger and will each serve three consecutive
one-year terms. The directors and executive officers of Citizens Bancorp will
also receive cash payments for the vested stock options they currently hold, and
will receive options to acquire shares of Lincoln Bancorp common stock in
exchange for their non-vested options to acquire shares of Citizens Bancorp
common stock.
Q: HOW DO THE DIRECTORS PLAN TO VOTE?
A: The Agreement and Plan of Reorganization obligates each of the directors of
Citizens Bancorp, in their individual capacities, to vote their Citizens Bancorp
shares in favor of the merger and, in their capacity as directors, to recommend
approval of the merger to the shareholders of Citizens Bancorp. The Citizens
Bancorp officers and directors collectively own with power to vote 189,759
shares, or approximately 19.8% of the outstanding Citizens Bancorp common stock
as of the voting record date.
Q: WILL I BE ABLE TO DISSENT?
A: You will be able to dissent from the proposed merger of Citizens Bancorp and
Lincoln Bancorp, but only by strictly complying with the applicable provisions
of the Indiana Business Corporation Law.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: No. Your broker will vote your shares of Citizens Bancorp common stock only
if you provide instructions on how to vote. You should instruct your broker how
to vote your shares, following the directions your broker provides. If you do
not provide instructions to your broker, your broker will not be able to vote
your shares on the proposed merger and this will have the effect of voting
against the merger.
Q: IF I AM A CITIZENS BANCORP SHAREHOLDER, SHOULD I SEND IN MY STOCK
CERTIFICATES NOW?
A: No. After the merger is completed, the transfer agent will send Citizens
Bancorp shareholders written instructions for exchanging their stock for shares
of Lincoln Bancorp. Lincoln Bancorp shareholders will keep their existing stock
certificates.
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY
NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE
UNDERSTANDING OF THE MERGER AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE MERGER, YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY, AS WELL AS
THE ADDITIONAL DOCUMENTS WE REFER YOU TO, INCLUDING THE AGREEMENT AND PLAN OF
REORGANIZATION WHICH WE HAVE ATTACHED AS ANNEX A. SEE "WHERE YOU CAN FIND MORE
INFORMATION" AT PAGE 157.
General
We are proposing a merger between Citizens Bancorp and Lincoln Bancorp,
which we believe will create opportunities for the combined company to realize
enhanced revenues through asset growth and operating efficiencies. In the
merger, each Citizens Bancorp shareholder will receive .9375 shares of Lincoln
Bancorp common stock plus $9.375 in cash for each share of Citizens Bancorp
common stock. Lincoln Bancorp will also pay cash in lieu of issuing fractional
shares of Lincoln Bancorp common stock to current holders of Citizens Bancorp
common stock.
The Companies
Lincoln Bancorp
1121 East Main Street
Plainfield, Indiana 46168
(317) 839-6539
Lincoln Bancorp, which was formed in September, 1998 as an Indiana
corporation, is a unitary savings and loan holding company that primarily
conducts business through its wholly-owned subsidiary, Lincoln Federal Savings
Bank. Both Lincoln Bancorp and Lincoln Federal have their headquarters in
Plainfield, Indiana. At March 31, 2000, Lincoln Bancorp had $417.9 million in
total assets, $219.4 million in total deposits, $240.2 million in net loans, and
shareholders' equity of $87.2 million. For the fiscal year ended December 31,
1999, Lincoln Federal had net income of $4.3 million, a return on assets of
1.09% and a return on equity of 4.3%, and for the three-month period ended March
31, 2000, Lincoln Federal had net income of $930,000, a return on assets of .90%
and a return on equity of 4.2%, on an annualized basis.
Lincoln Federal has operated for more than 110 years as an independent,
community-oriented savings association. Lincoln Federal was originally organized
in 1884 as Ladoga Federal Savings and Loan Association, located in Ladoga,
Indiana. In 1979, it 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, and changed its name to Lincoln
Federal Savings and Loan Association. In 1984, Lincoln Federal changed its name
to its current form, Lincoln Federal Savings Bank. In December 1998, Lincoln
Federal converted from a mutual to a stock institution, with Lincoln Bancorp as
its sole shareholder.
Lincoln Federal currently conducts its business from six full-service
offices located in Hendricks, Montgomery, Clinton and Morgan Counties, Indiana,
with its main office located in Plainfield. Lincoln Federal offers a variety of
lending, deposit and other financial services to its retail and commercial
customers.
Lincoln Federal attracts deposits from the general public and
originates mortgage loans, most of which are secured by one- to four-family
residential real property in Hendricks, Montgomery, Clinton and Morgan Counties.
Lincoln Federal also offers commercial real estate loans, real estate
construction loans, land loans, multi-family residential loans, consumer loans,
including home equity loans and automobile loans, and commercial loans. Lincoln
Federal derives most of its funds for lending from deposits of its customers,
which consist primarily of certificates of deposit, demand accounts and savings
accounts.
Citizens Bancorp
60 South Main Street
Frankfort, Indiana 46041
(765) 654-8533
Citizens Bancorp, which was organized in 1997 as an Indiana
corporation, is a unitary savings and loan holding company that primarily
conducts business through its wholly-owned subsidiary, Citizens Savings Bank of
Frankfort. At March 31, 2000, Citizens Bancorp had $63.5 million in total
assets, $36.3 million in total deposits, $56.0 million in net loans, and
shareholders' equity of $15.1 million. For the fiscal year ended June 30, 1999,
Citizens Bancorp had net income of $832,000, a return on assets of 1.4% and a
return on equity of 5.5%, and for the nine-month period ended March 31, 2000,
had net income of $609,000, a return on assets of 1.3% and a return on equity of
5.5% on an annualized basis. Citizens Savings Bank has historically experienced
very few asset quality problems in its total loan portfolio, and at March 31,
2000, its ratio of non-performing assets to total assets was .8%.
Citizens Savings Bank was originally organized as a state-chartered
building and loan association in 1916 and has operated since then as an
independent, community-oriented savings association. In 1997, Citizens Savings
Bank converted to a federal charter and converted from a mutual to a stock
institution, with Citizens Bancorp as its sole shareholder. Citizens Savings
Bank conducts its business from a full-service office located in Frankfort,
Indiana, which is located in Clinton County. Citizens Savings Bank offers a
variety of lending, deposit and other financial services to its retail and
commercial customers.
Citizens Savings Bank attracts deposits from the general public and
originates mortgage loans, most of which are secured by one- to four-family
residential real property in Clinton County. Citizens Savings Bank also offers
multi-family loans, construction loans, non-residential real estate loans, home
equity loans and consumer loans, including single-pay loans, loans secured by
deposits, and installment loans. Citizens Savings Bank derives most of its funds
for lending from the deposits of its customers, which consist primarily of
certificates of deposit, demand accounts and savings accounts.
The Citizens Bancorp Special Meeting (Page 20)
The Citizens Bancorp special shareholders' meeting will be held at the
Frankfort Community Public Library located at 208 West Clinton Street,
Frankfort, Indiana, at 3:00 p.m., Frankfort time, on September 1, 2000. At the
meeting, Citizens Bancorp shareholders will vote upon a proposal to approve the
merger and a proposal to adjourn or postpone the meeting to allow additional
time to solicit additional proxies should there not be sufficient votes in favor
of the merger.
Record Date; Voting Power (Page 20)
You are entitled to vote at the Citizens Bancorp special meeting if you
owned shares of Citizens Bancorp on July 27, 2000. As of that date, there were
959,401 shares of Citizens Bancorp common stock issued and outstanding held by
approximately 350 shareholders of record. Each holder of Citizens Bancorp common
stock will be entitled to one vote per share on any matter that may properly
come before the meeting.
Vote Required (Page 20 and 21)
Approval by the Citizens Bancorp shareholders of the proposal to
approve and adopt the Agreement and Plan of Reorganization requires the
affirmative vote of a majority of the outstanding shares of Citizens Bancorp
common stock. Approval by the Citizens Bancorp shareholders of the proposal to
adjourn or postpone the meeting to allow extra time to solicit proxies requires
the affirmative vote of a majority of the shares present at the meeting in
person or by proxy and entitled to vote. The Agreement and Plan of
Reorganization obligates the directors of Citizens Bancorp, in their individual
capacities, to vote in favor of the merger. Collectively, these individuals own
with power to vote 132,205 shares, or 13.8% of the outstanding shares of
Citizens Bancorp common stock.
Recommendation of Board of Directors (Page 21)
The Citizens Bancorp Board of Directors has unanimously approved and
adopted the Agreement and Plan of Reorganization, and recommends a vote "FOR"
approval of the merger. You also should refer to the reasons that the Citizens
Bancorp Board of Directors considered in determining whether to approve and
adopt the Agreement and Plan of Reorganization on pages 23 and 24. The Citizens
Bancorp Board of Directors also recommends a vote "FOR" the proposal to adjourn
or postpone the meeting to allow extra time to solicit proxies.
Opinion of Trident Securities, a Division of McDonald Investments, Inc.,
Financial Advisors to Citizens (Pages 26 to 32)
Trident Securities, a division of McDonald Investments Inc., financial
advisor to Citizens Bancorp, rendered an opinion dated as of March 21, 2000 to
the Citizens Bancorp Board of Directors that as of that date, the merger
consideration was fair to the Citizens Bancorp shareholders from a financial
point of view. Trident Securities subsequently confirmed its March 21, 2000
opinion by delivery to the Citizens Bancorp Board of Directors of a written
confirmation of its prior opinion dated as of the date of this document. A copy
of the fairness opinion, setting forth the information reviewed, assumptions
made and matters considered by Trident Securities, is attached to this document
as Annex B. Citizens Bancorp shareholders should read the fairness opinion in
its entirety. The Agreement and Plan of Reorganization requires, as a condition
to closing, that Trident Securities update its fairness opinion as of the date
of the closing of the merger of Citizens Bancorp and Lincoln Bancorp.
Our Reasons for the Merger (page 23 and 24)
Lincoln Bancorp. The Board of Directors of Lincoln Bancorp considered a
number of financial and non-financial factors in making its decision to merge
with Citizens Bancorp, including its respect for the ability and integrity of
the Citizens Bancorp Board of Directors, management and staff. The Board
believes that increasing its presence in Frankfort, Indiana offers long range
strategic benefits to Lincoln Bancorp.
Citizens Bancorp. Citizens Bancorp's Board of Directors considered
several financial and non-financial factors in determining to approve the merger
into Lincoln Bancorp, including, among other things, the price Lincoln Bancorp
offered to the Citizens Bancorp shareholders, the form of consideration, the
nature of the merger, the fairness opinion of its independent financial advisor,
Trident Securities, and the underlying analysis included therein, the impact of
the merger on Citizens Bancorp's shareholders, customers, employees and on its
community, and Lincoln Federal's continuing commitment to the Frankfort, Indiana
community and to the other communities in which it operates.
Terms of the Agreement and Plan of Reorganization (Pages 32 to 37)
THE AGREEMENT AND PLAN OF REORGANIZATION IS ATTACHED TO THIS DOCUMENT
AS ANNEX A. WE ENCOURAGE YOU TO READ THE AGREEMENT IN ITS ENTIRETY. IT IS THE
LEGAL DOCUMENT THAT GOVERNS THE MERGER. WE ALSO ENCOURAGE YOU TO READ THE RISK
FACTORS BEGINNING ON PAGE 18.
General. The Agreement and Plan of Reorganization provides that
Citizens Bancorp will merge with and into Lincoln Bancorp, with Lincoln Bancorp
as the surviving corporation, and that Citizens Savings Bank will merge with and
into Lincoln Federal, with Lincoln Federal as the surviving entity.
Merger Consideration. You will receive .9375 shares of Lincoln Bancorp
common stock and $9.375 in cash for each share of Citizens Bancorp common stock
that you own. You will not receive fractional shares of Lincoln Bancorp common
stock, but rather will receive, in addition to the cash portion of the merger
consideration, cash in the amount of any fractional share of Lincoln Bancorp
common stock that you would otherwise receive multiplied by $18.75.
Completion of the Merger. The merger will become effective when we file
Articles of Merger with the Secretary of State of Indiana, or at such later date
and time as may be set forth in the Articles of Merger.
Conditions to the Merger. The completion of the merger depends upon the
satisfaction of a number of conditions, including:
o approval of the Agreement and Plan of Reorganization by the
Citizens Bancorp shareholders;
o notification to the Nasdaq Stock Market regarding the common
stock that Lincoln Bancorp will issue in the merger;
o receipt of all necessary authorizations, orders, and consents
of governmental authorities and the expiration of any
regulatory waiting periods;
o Citizens Savings Bank shall have received an opinion of Barnes
& Thornburg that the merger will be treated for U.S. federal
income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as
amended, and that no gain or loss will be recognized by
Citizens Bancorp shareholders in the merger to the extent they
receive shares of Lincoln Bancorp common stock as
consideration for their shares of Citizens Bancorp common
stock;
o Lincoln Bancorp shall have received an opinion from Bose
McKinney & Evans LLP that the merger constitutes a
"reorganization" for purposes of Section 368(a) of the
Internal Revenue Code.
o Lincoln Bancorp shall have received from Fred W. Carter, the
President and Chief Executive Officer of Citizens Bancorp, an
acknowledgment and binding commitment that the obligations
assumed by Lincoln Federal in respect of Mr. Carter's
employment agreement with Citizens Savings Bank are limited to
those set forth in the Agreement and Plan of Reorganization.
o Lincoln Federal shall have entered into a mutually acceptable
Consulting Agreement with Fred W. Carter.
o Citizens Bancorp shall have received an updated opinion of
Trident Securities, dated as of the effective date of the
merger, that the consideration to be received in the merger by
the shareholders of Citizens Bancorp is fair from a financial
point of view.
o other customary conditions and obligations of the parties set
forth in the Agreement and Plan of Reorganization.
Unless prohibited by law, either Lincoln Bancorp or Citizens Bancorp
could elect to waive a condition that has not been satisfied and complete the
merger anyway.
Fees and Expenses. Lincoln Bancorp and Citizens Bancorp will pay their
own fees, costs, and expenses incurred in connection with the merger except that
printing and postage expenses and registration fees paid to the Securities and
Exchange Commission will be shared. In addition, Citizens Bancorp and Lincoln
Bancorp have agreed that if the Citizens Bancorp Board of Directors fails to
recommend the approval of the Agreement and Plan of Reorganization to the
shareholders of Citizens Bancorp or, in good faith and after consulting with
legal counsel and Trident Securities, accepts what it considers to be a superior
proposal from a third party to acquire Citizens Bancorp, Citizens Bancorp shall
pay to Lincoln Bancorp a termination fee of $500,000. Further, the Agreement and
Plan of Reorganization provides that if the merger is terminated under certain
circumstances prior to the effective time of the merger and, within 12 months of
the date of termination, a change in control of Citizens Bancorp is consummated,
Citizens Bancorp will pay Lincoln Bancorp a termination fee of $500,000.
Termination. Either Citizens Bancorp or Lincoln Bancorp may call off
the merger under certain circumstances, including if:
o we both consent in writing;
o the merger is not completed before December 31, 2000;
o we are not able to obtain required governmental approvals;
o the Citizens Bancorp shareholders do not approve the Agreement
and Plan of Reorganization;
o the other party breaches in a material manner any of the
representations or warranties or any covenant or agreement it
has made under the Agreement and Plan of Reorganization and
the breach is not cured within 30 days; or
o any condition to a party's obligations under the Agreement and
Plan of Reorganization has not been met or waived.
In addition, Lincoln Bancorp may call off the merger if Citizens
Bancorp's Board of Directors withdraws, modifies, or changes in an adverse
manner its recommendation with respect to the merger or the Agreement and Plan
of Reorganization, and Citizens Bancorp may terminate the merger if its Board of
Directors accepts what it considers in good faith, after consulting with legal
counsel and Trident Securities, to be a superior offer from a third party,
provided that in such an event, Citizens Bancorp shall pay to Lincoln Bancorp a
termination fee of $500,000.
Interests of Certain Directors and Executive Officers of Citizens Bancorp in the
Merger (Pages 44 and 45)
When you consider the Citizens Bancorp Board of Director's
recommendation, you should be aware that a number of directors and executive
officers of Citizens Bancorp have interests in the merger as employees and/or
directors that are different from, and may conflict with, your interests as a
shareholder of Citizens Bancorp. The Citizens Bancorp Board of Directors
recognized these interests and determined that they did not affect the benefits
of the merger to the Citizens Bancorp shareholders.
Directors of Lincoln Bancorp Following the Merger (Page 51)
Upon completion of the merger, the current directors of Lincoln Bancorp
and Lincoln Federal will continue to serve in such capacities. In addition, Mr.
Fred W. Carter, President and Chief Executive Officer of Citizens Bancorp and
Citizens Savings Bank, will be appointed for a two-year term to the Board of
Directors of Lincoln Bancorp and Lincoln Federal. In the event Mr. Carter is
unable to serve as a director of Lincoln Bancorp and Lincoln Federal, another
director of Citizens Bancorp will be selected to serve in his place. Upon the
expiration of Mr. Carter's two-year term on the Board of Directors of Lincoln
Bancorp and Lincoln Federal, he will be appointed to serve for at least a
one-year term as a director emeritus of Lincoln Federal. The directors and
director emeritus of Citizens Bancorp other than Mr. Carter will become advisory
directors of Lincoln Federal upon the completion of the merger.
Accounting Treatment (Page 49)
We expect the merger to be accounted for using the purchase method of
accounting. This means that all of the assets and liabilities of Citizens
Bancorp will be marked to fair market value. Any excess payment by Lincoln
Bancorp over the fair market value of the net assets of Citizens Bancorp will be
recorded as goodwill on the financial statements of Lincoln Bancorp.
Resales of Lincoln Bancorp Common Stock (Page 37)
Shares of Lincoln Bancorp common stock which Citizens Bancorp
shareholders receive in the merger will be freely transferable by the holders,
except for those shares held by holders who may be "affiliates." Affiliates
generally include directors, executive officers, and holders of 10% or more of
Citizens Bancorp common stock. Citizens Bancorp has provided to Lincoln Bancorp
the written agreement of each person who may be deemed its "affiliate" that such
person will not dispose of his or her shares of Citizens Bancorp common stock
and, to the extent applicable, Lincoln Bancorp common stock, except in
compliance with the Securities Act of 1933.
Regulatory Approvals (Page 46)
We must make filings with or obtain approvals from regulatory
authorities to effect the merger of Citizens Bancorp into Lincoln Bancorp and of
Citizens Savings Bank into Lincoln Federal. These include, without limitation,
the approval of the Office of Thrift Supervision. In addition, Lincoln Bancorp
must notify the Nasdaq Stock Market of the common stock issued to Citizens
Bancorp shareholders and must file Articles of Merger with the Indiana Secretary
of State.
We cannot predict whether or when we will obtain all required
regulatory approvals.
Comparative Per Share Data
The tables below show the earnings, book value, and dividends per share
for Lincoln Bancorp and Citizens Bancorp both on an historical and a pro forma
basis. We derived the Lincoln Bancorp and Citizens Bancorp pro forma data as we
describe under "Unaudited Pro Forma Condensed Combined Financial Information" on
page 38. You should read the respective audited and unaudited historical
consolidated financial statements and related notes of Lincoln Bancorp and
Citizens Bancorp beginning at page 158 of this proxy statement/prospectus.
We urge you to obtain current market quotations for Lincoln Bancorp
common stock and Citizens Bancorp common stock. We expect that the market price
of Lincoln Bancorp common stock will fluctuate between the date of this document
and the date on which the merger is completed and thereafter. Because the market
price of Lincoln Bancorp common stock is subject to fluctuation, the value of
the shares of Lincoln Bancorp common stock that Citizens Bancorp shareholders
will receive in the merger may increase or decrease prior to and after the
merger.
Three Months Ended Year Ended
Lincoln Bancorp Historical March 31, 2000 December 31, 1999
-------------- -----------------
Earnings per share:
Basic............................. $ 0.17 $ 0.71
Diluted........................... 0.17 0.71
Book value per share................... 14.86 14.54
Dividends per share.................... 0.08 0.28
Year Ended
Citizens Bancorp Historical June 30, 1999
-----------------
Earnings per share:
Basic............................. $ 0.24 $ 0.87
Diluted........................... 0.24 0.87
Book value per share................... 17.24 16.62
Dividends per share.................... 0.07 0.23
Three Months Ended Year Ended
Lincoln Bancorp Unaudited Pro Forma March 31, 2000 December 31, 1999
-------------- -----------------
Earnings per share:
Basic............................. $ 0.17 $ 0.71
Diluted........................... 0.17 0.70
Book value per share................... 14.17 13.94
Dividends per share.................... 0.08 0.28
Citizens Bancorp Unaudited Pro Forma
Earnings per share:
Basic............................. $ 0.16 $ 0.67
Diluted........................... 0.16 0.66
Book value per share................... 13.28 13.07
Dividends per share.................... 0.08 0.26
<PAGE>
Historical Market Prices and Dividend Information
Lincoln Bancorp. Lincoln Bancorp common stock is listed on the Nasdaq
National Market System under the symbol "LNCB." On July 27, 2000, there were
approximately 1,055 shareholders of record of Lincoln Bancorp common stock. The
following table sets forth for the calendar quarter indicated the high and low
bid prices per share of Lincoln Bancorp common stock as reported on the Nasdaq
National Market System, and the dividends per share of Lincoln Bancorp common
stock.
Stock Price Dividends
Quarter Ended High Low Per Share
March 31, 1999 $ 11 7/16 $10 3/16 $.06
June 30, 1999 12 1/2 9 11/16 .06
September 30, 1999 13 5/8 11 5/8 .08
December 31, 1999 12 1/4 9 7/8 .08
March 31, 2000 10 11/16 9 1/2 .08
Citizens Bancorp. Citizens Bancorp common stock is listed for quotation
on the OTC Electronic Bulletin Board under the symbol "CIBC.OB." On July 27,
2000, the Voting Record Date for the special meeting of shareholders of Citizens
Bancorp, there were approximately 350 shareholders of record of Citizens Bancorp
common stock. The following table sets forth for the calendar quarter indicated
the high and low sales prices per share of Citizens Bancorp common stock as
reported on the OTC Bulletin Board, and the dividends per share of Citizens
Bancorp common stock.
Market Price of Citizens Bancorp Common Stock
Stock Price Dividends
Quarter Ended High Low Per Share
September 30, 1997 $14 1/4 $13 7/8 $ ---
December 31, 1997 15 1/2 14 1/4 ---
March 31, 1998 16 14 7/8 .05
June 30, 1998 16 14 .05
September 30, 1998 14 3/4 11 1/8 .05
December 31, 1998 13 11 1/2 .06
March 31, 1999 12 11 .06
June 30, 1999 12 5/8 11 5/8 .06
September 30, 1999 15 12 .07
December 31, 1999 13 7/8 11 7/8 .07
March 31, 2000 17 1/8 10 1/8 .07
Comparative Market Price Information
The following table presents quotation information for Lincoln Bancorp
common stock on the Nasdaq National Market System and trading information for
Citizens Bancorp common stock on the OTC Bulletin Board on March 21, 2000 and
July 25, 2000. March 21, 2000 was the last business day prior to our
announcement of the signing of the Agreement and Plan of Reorganization. July
25, 2000 was the last practicable trading day for which information was
available prior to the date of this document.
Lincoln Bancorp Common Stock Citizens Bancorp Common Stock
---------------------------- -----------------------------
(dollars per share)
High Low Close High Low Close
March 21, 2000 $10.00 $9.50 $9.75 $11.00 $11.00 $11.00
July 25, 2000 $10.81 $10.63 $10.63 $18.12 $18.00 $18.00
RECENT DEVELOPMENTS OF LINCOLN BANCORP
The following table sets forth selected consolidated financial
condition data for Lincoln Bancorp at June 30, 2000, and December 31, 1999, and
selected consolidated operating data for Lincoln Bancorp for the three months
and six months ended June 30, 2000 and 1999. Information at June 30, 2000 and
for the three and six months ended June 30, 2000 and 1999 is unaudited but, in
the opinion of management, includes all adjustments (comprising only normal
recurring accruals) necessary for a fair presentation of the financial position
and results of operations as of and for such dates. The selected financial and
other data of Lincoln Bancorp set forth below do not purport to be complete and
should be read in conjunction with, and is qualified in its entirety by, the
more detailed information, including the consolidated financial statements and
related notes thereto, appearing elsewhere herein. The operating results for the
three and six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
<TABLE>
<CAPTION>
At June 30, At December 31,
Summary of Financial Condition Data: 2000 1999
----------- ---------------
(In Thousands)
<S> <C> <C>
Total assets $418,806 $410,828
Cash and interest bearing deposits in other banks 5,541 10,819
Investment securities available for sale 141,219 145,875
Investment securities held to maturity 500 500
Net loans 249,792 233,000
Deposits 214,772 204,982
Borrowings 113,763 110,252
Shareholders' equity 86,107 91,743
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
Summary of Operating Data: 2000 1999 2000 1999
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Total interest income $ 7,685 $ 6,980 $15,023 $13,454
Total interest expense 4,266 3,488 8,238 6,616
------- ------- ------- -------
Net interest income 3,419 3,492 6,785 6,838
Provision for loan losses 71 200 49 231
------- ------- ------- -------
Net interest income after provision
for losses on loans 3,348 3,292 6,736 6,607
Other income 172 133 281 282
Other expenses 2,173 1,805 4,311 3,324
------- ------- ------- -------
Income before income tax 1,347 1,620 2,706 3,565
Income taxes 278 608 707 1,308
------- ------- ------- -------
Net income $ 1,069 $ 1,012 $ 1,999 $ 2,257
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
Supplemental Data: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share $0.22 $0.16 $0.39 $0.35
Diluted earnings per share 0.22 0.16 0.39 0.35
Dividends per share 0.08 0.06 0.16 0.12
Dividend payout ratio 36.36% 37.50% 41.03% 34.29%
Return on assets (1)(2) 1.03 1.00 0.96 1.16
Return on equity (1)(3) 4.97 3.79 4.57 4.23
Average equity to average assets 20.63 26.43 21.10 27.48
Equity to assets 20.56 25.92 20.56 25.92
</TABLE>
(1) Information for the three and six months ended June 30, 2000 and 1999
has been annualized.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
<PAGE>
LINCOLN BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Condition at June 30, 2000 Compared to Financial Condition at December
31, 1999
Assets totaled $418.8 million at June 30, 2000, an increase from
December 31, 1999 of $8.0 million. This growth occurred in net loans, up $16.8
million from year-end 1999, and was reflected in every major category of loans,
especially commercial loans, up $7.3 million. Loan growth was funded primarily
by growth of deposits and cash flow from investments. Deposits totaled $214.8
million at June 30, 2000, an increase of $9.8 million from December 31, 1999.
The majority of this growth was in public fund certificates of deposit. Federal
Home Loan Bank advances and repurchase agreements increased $4.0 million to
$112.5 million.
The book value of Lincoln Bancorp common stock was $15.17 per share at
June 30, 2000 compared to $14.54 at December 31, 1999. The book value has been
affected positively by the repurchase of 630,832 shares of Lincoln Bancorp
common stock during the first and second quarter of 2000. Lincoln Bancorp
successfully completed its second 10% stock repurchase totaling 630,832 shares
in April. This brought total shares repurchased to 1,331,757 shares, or 19% of
the original shares issued in the stock conversion, which was consummated on
December 30, 1998. The repurchase was accomplished from August 1999 through
April 2000.
Comparison of Operating Results for the Three Months Ended June 30, 2000 and
1999
Net Income. Net income for the three months ended June 30, 2000 was
$1,069,000, or $.22 for both basic and diluted earnings per share. This compared
to net income for the comparable period in 1999 of $1,012,000, or $.16 for both
basic and diluted earnings per share. Return on assets was 1.03% and return on
equity was 4.97% for the second quarter of 2000 compared to 1.00% and 3.79%,
respectively, for the same period last year.
Net Interest Income. Net interest income for the second quarter of 2000
was $3,419,000 compared to $3,492,000 for the same period in 1999. Net interest
margin was 3.32% for the three-month period ended June 30, 2000, compared to
3.55% for the same period in 1999. The average yield on earning assets increased
.36% in 2000 while the average cost of interest-bearing liabilities increased
.47% from the second quarter of 1999 to the second quarter of 2000. This reduced
spread from 2.28% to 2.16%, or 12 basis points.
Provision for Loan Losses. Lincoln Bancorp's provision for loan losses
for the three-month period ended June 30, 2000 was $71,000 compared to a
provision expense of $200,000 for the same period in 1999.
Other Income. Other income for the three months ended June 30, 2000 was
$172,000 compared to $133,000 for the same quarter of 1999. Equity in losses of
limited partnerships increased $15,000 from the second quarter of 1999 due to
the operating results of the limited partnerships. Service fee income on deposit
accounts increased $35,000 for the quarter over the same quarter last year.
Other Expenses. Other expenses were $2,173,000 for the three months
ended June 30, 2000 compared to $1,805,000 for the comparable period in 1999.
The increase in expenses was primarily the result of additional costs associated
with key management additions and costs of the management recognition and
retention plan not incurred in the first half of 1999.
Income Tax Expense. Income taxes were $278,000, or 21% of pretax income
for the second quarter of 2000, compared to income taxes of $608,000, or nearly
38% of pretax income for the same period in 1999. This decline resulted from a
decrease in pretax income and from a recent revision to the Indiana Code that
permits financial institutions incorporated in Indiana to apportion income in
the same manner as financial institutions incorporated in other states. This
revision to the statute was made retroactive to January 1, 1999. Lincoln Bancorp
recognized a single adjustment to its income tax expense in the second quarter
of 2000.
Comparison of Operating Results for the Six Months Ended June 30, 2000 and 1999
Net Income. Net income for the six months ended June 30, 2000 was
$1,999,000, or $.39 for both basic and diluted earnings per share. This compared
to $2,257,000, or $.35 for both basic and diluted earnings per share for the
same period of 1999. Return on assets was .96% and return on equity was 4.57%
compared to 1.16% and 4.23%, respectively, for same period ended June 30, 1999.
Net Interest Income. Net interest income for the six months ended June
30, 2000 was $6,785,000 compared to $6,838,000 for the same period in 1999. Net
interest margin was 3.31% through June 30, 2000, which is a reduction from 3.64%
in 1999. Continued pressure on net interest margin was partially the result of
the repurchase by Lincoln Bancorp of its common stock pursuant to the company's
stock repurchase program, and from the 18 basis point reduction in its interest
rate spread.
Provision for Loan Losses. Lincoln Bancorp's provision for loan losses
for the six-month period ended June 30, 2000 was $49,000, compared to $231,000
for the same period during 1999. Nonperforming loans to total loans at June 30,
2000 were .24% compared to .47% at December 31, 1999 while nonperforming assets
to total assets declined from .28% at December 31, 1999 to .17% at the end of
June 2000. The allowance for loan losses as a percentage of loans at June 30,
2000 and December 31, 1999 was .75%.
Other Income. Other income for the six months ended June 30, 2000 was
$281,000 compared to $282,000 for the same period last year.
Other Expenses. For the six month period ended June 30, 2000, other
expenses were $4,311,000 compared to $3,324,000 for the same period in 1999. The
increase in expenses was primarily the result of additional costs associated
with key management additions and costs of the management recognition and
retention plan not incurred in the first half of 1999.
Income Tax Expense. Income tax expense for the six month period ended
June 30, 2000 was $707,000, a decrease of $601,000, or 46% from the same period
during 1999. This decrease resulted primarily from a decrease in pretax income
and from a recent revision to the Indiana Code that permits financial
institutions incorporated in Indiana to apportion income in the same manner as
financial institutions incorporated in other states. This revision to the
statute was made retroactive to January 1, 1999. Lincoln Bancorp recognized a
single adjustment in its income tax expense in the second quarter of 2000.
RECENT DEVELOPMENTS OF CITIZENS BANCORP
The following table sets forth selected consolidated financial
condition data for Citizens Bancorp at June 30, 2000 and June 30, 1999, and
selected consolidated operating data for Citizens Bancorp for the three months
and twelve months ended June 30, 2000 and 1999. Information at June 30, 2000 and
for the three months and twelve months ended June 30, 2000 is unaudited but, in
the opinion of management, includes all adjustments (comprising only normal
recurring accruals) necessary for a fair presentation of the financial position
and results of operations as of and for such dates. The selected financial and
other data of Citizens Bancorp set forth below do not purport to be complete and
should be read in conjunction with, and is qualified in its entirety by, the
more detailed information, including the consolidated financial statements and
related notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
At June 30, At June 30,
2000 1999
----------- ----------
(In Thousands)
Summary of Selected Consolidated
Financial Condition Data:
<S> <C> <C>
Total assets $63,732 $59,470
Loans receivable, net (1) 56,320 53,104
Cash on hand and in other institutions (2) 2,833 2,082
Investment securities available for sale 396 388
Cash surrender value of life insurance contract 1,216 1,162
FHLB advances 12,000 7,000
Deposits 35,454 36,976
Total shareholders' equity 15,126 14,640
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Year Ended
June 30, June 30,
----------------------- --------------------------
2000 1999 2000 1999
------ ------ -------- --------
(In Thousands)
Summary of Selected
Consolidated Operating Data:
<S> <C> <C> <C> <C>
Total interest income $1,212 $1,115 $ 4,671 $4,439
Total interest expense 556 477 2,104 1,919
----- ------ ------- ------
Net interest income 656 638 2,567 2,520
Provision for loan losses 15 15 60 65
----- ------ ------- ------
Net interest income after
provision for loan losses 641 623 2,507 2,455
----- ------ ------- ------
Other income:
Fees and service charges 33 34 134 136
Gain on sale of real estate 3 3 13 16
Other 30 15 80 58
----- ------ ------- ------
Total other income 66 52 227 210
----- ------ ------- ------
Other expense:
Salaries and employee benefits 168 179 707 669
Net occupancy expenses 17 19 66 71
Equipment expenses 26 28 98 94
Data processing fees 30 38 130 141
Deposit insurance expense 2 5 16 23
Legal and professional fees 118 9 167 74
Other expenses 130 59 330 240
----- ------ ------- ------
Total other expense 491 337 1,514 1,312
----- ------ ------- ------
Income before income taxes 216 338 1,220 1,353
Income taxes 131 114 526 521
----- ------ ------- ------
Net income $ 85 $ 224 $ 694 $ 832
===== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Year Ended
June 30, June 30,
----------------------- -----------------------
Supplemental Data: 2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basis earnings per share $ .09 $ .24 $ .77 $ .87
Diluted earnings per share .09 .24 .77 .87
Dividends per share .07 .06 .28 .23
Dividend payout ratio 77.78% 25.00% 36.36% 26.44%
Return on assets (3) (4) 0.54 1.51 1.12 1.43
Return on equity (3) (5) 2.25 6.01 4.64 5.53
Average equity to average assets 23.78 25.00 24.03 25.80
Equity to assets (6) 23.73 24.62 23.73 24.62
</TABLE>
(1) Net of allowance for loan losses and deferred fees.
(2) Includes certificates of deposit in other financial institutions.
(3) Information for the three months ended June 30, 2000 and 1999 has been
annualized.
(4) Net income divided by average total assets.
(5) Net income divided by average total equity.
(6) At end of period.
<PAGE>
CITIZENS BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Condition at June 30, 2000 Compared to Financial Condition at June 30,
1999
Total consolidated assets of Citizens Bancorp increased $4.2 million,
or 7.1%, to $63.7 million at June 30, 2000, from $59.5 million at June 30, 1999.
Cash increased $288,000 to $732,000 at June 30, 2000, from $444,000 at June 30,
1999, while interest-bearing deposits, consisting primarily of overnight
deposits at the Federal Home Loan Bank of Indianapolis and certificates of
deposit at other FDIC insured financial institutions, increased to $2.1 million
at June 30, 2000, from $1.6 million at June 30, 1999. Net loans receivable
increased $3.2 million, or 6.0%, to $56.3 million at June 30, 2000, from $53.1
million at June 30, 1999. The increase in loans and interest-bearing deposits
was funded by an increase in borrowings during the period. Borrowings at the
Federal Home Loan Bank increased $5.0 million to $12.0 million at June 30, 2000,
from $7.0 million at June 30, 1999. This was offset by a decrease in deposits of
$1.5 million to $35.5 million at June 30, 2000, from $37.0 million at June 30,
1999.
Shareholders' equity increased $486,000 during the year ended June 30,
2000. This was primarily a result of the profit of $694,000 for the year, which
increased shareholders' equity, less the cost of Citizens Bancorp's repurchase
of $79,000 of its common stock (6,353 shares) at various times and market prices
during the year. Shareholders' equity also decreased by $250,000 as a result of
the payment of dividends on the outstanding shares of Citizens Bancorp common
stock during the year.
Comparison of Operating Results for the Three Months Ended June 30, 2000 and
1999
Net Income. Net income decreased $139,000, or 62.1%, to $85,000 for the
three months ended June 30, 2000, from $224,000 for the three-month period ended
June 30, 1999. The decrease was primarily due to an increase of $154,000 in
non-interest expense during the 2000 period, due primarily to expenses related
to the proposed merger of Citizens Bancorp with and into Lincoln Bancorp. Net
interest income increased $18,000, and non-interest income increased $14,000
during the 2000 period. Income tax expense increased $17,000 during the 2000
period.
Net Interest Income. Net interest income increased $18,000, or 2.8%, to
$656,000 for the quarter ended June 30, 2000, from $638,000 for the same period
in 1999. The increase resulted primarily from an increase in earning assets
during the 2000 period, offset by a decrease in net interest margin to 4.42% for
the quarter ended June 30, 2000, from 4.58% for the same period in 1999.
Provision for Loan Losses. The provision for loan losses was $15,000
for the three-month periods ended June 30, 2000 and June 30, 1999. At June 30,
2000, the allowance for loan losses was 0.61% of total loans, which was
unchanged from June 30, 1999.
Other Income. Total non-interest income increased $14,000, or 26.9%, to
$66,000 for the quarter ended June 30, 2000, from $52,000 during the same period
in 1999. The increase resulted primarily from an increase of $15,000 in
miscellaneous income during the 2000 period.
Other Expenses. Total non-interest expense increased $154,000, or
45.7%, to $491,000 for the quarter ended June 30, 2000, from $337,000 for the
same quarter in 1999. The increase was primarily due to an increase of $109,000
in legal and professional fees to $118,000 for the three months ended June 30,
2000, from $9,000 for the same period in 1999. This increase was primarily due
to legal and audit fees incurred during the 2000 period related to the proposed
merger of Citizens Bancorp with and into Lincoln Bancorp. Other expenses
increased $71,000 during the three months ended June 30, 2000, due primarily to
payments of $39,000 to Trident Securities for services provided in connection
with the merger with Lincoln Bancorp and for the fairness opinion required under
the Agreement and Plan of Reorganization. Salaries and benefits decreased
$11,000 to $168,000 for the three months ended June 30, 2000, from $179,000 for
the same period in 1999. Office occupancy, equipment, data processing and
deposit insurance expenses decreased by $15,000 during the period ended June 30,
2000.
Income Tax Expense. Income tax expense increased $17,000, or 14.9%, to
$131,000 for the three months ended June 30, 2000, from $114,000 for the same
period in 1999. While income before income taxes decreased, income taxes
increased due to the non-deductible tax status of all expenses incurred by
Citizens Bancorp relating to the proposed merger with Lincoln Bancorp.
Comparison of Operating Results for the Fiscal Years Ended June 30, 2000 and
1999
Net Income. Net income decreased $138,000, or 16.6%, to $694,000 in
2000, from $832,000 in 1999. The decrease was primarily due to an increase of
$202,000 in non-interest expense in 2000, due primarily to expenses related to
the proposed merger of Citizens Bancorp with and into Lincoln Bancorp. This was
partially offset by an increase of $47,000 in net interest income and an
increase of $17,000 in non-interest income in 2000.
Net Interest Income. Net interest income increased $47,000, or 1.9%, to
$2,567,000 in 2000, from $2,520,000 in 1999. The increase resulted primarily
from an increase in earning assets in 2000, offset by a decrease in net interest
margin to 4.43% in 2000, from 4.60% in 1999.
Provision for Loan Losses. The provision for loan losses was $60,000 in
2000, compared to $65,000 in 1999. Citizens Savings Bank had charge-offs of
$42,000 and recoveries of $2,000 in 2000, compared to charge-offs of $12,000 and
recoveries of $5,000 in 1999. At June 30, 2000, the allowance for loan loss was
0.61% of total loans, which was unchanged from June 30, 1999.
Other Income. Total non-interest income increased $17,000, or 8.1%, to
$227,000 in 2000, from $210,000 in 1999. The increase was primarily due to an
increase of $22,000 in miscellaneous income in 2000.
Other Expenses. Total non-interest expense increased $202,000, or
15.4%, to $1,514,000 in 2000, from $1,312,000 in 1999. Legal and professional
fees increased $93,000 to $167,000 in 2000, from $74,000 in 1999, due primarily
to legal and accounting fees related to the proposed merger with Lincoln
Bancorp. Other expenses increased $90,000 in 2000, due primarily to payments of
$54,000 to Trident Securities to deliver a fairness opinion and to negotiate and
arrange the Agreement and Plan of Reorganization between Citizens Bancorp and
Lincoln Bancorp. Salaries and benefits increased $38,000 in 2000, due primarily
to expenses related to the early vesting of the RRP shares of Advisory Director
Ralph C. Hinshaw. Office occupancy, equipment, data processing and deposit
insurance expenses decreased $19,000 during the 2000 period.
Income Tax Expense. Income tax expense increased $5,000, or 1.0%, to
$526,000 in 2000, from $521,000 in 1999. While income before income taxes
decreased, income taxes increased due to the non-deductible tax status of all
expenses incurred by Citizens Bancorp relating to the merger between Citizens
Bancorp and Lincoln Bancorp.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS DOCUMENT,
INCLUDING THE MATTERS ADDRESSED IN "A WARNING ABOUT FORWARD-LOOKING
INFORMATION," YOU SHOULD CONSIDER THE MATTERS DESCRIBED BELOW CAREFULLY IN
DETERMINING WHETHER TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION. WHERE
"WE" AND "OUR" IS USED IN THIS SECTION, IT IS MEANT TO REFER TO BOTH CITIZENS
BANCORP AND LINCOLN BANCORP BEFORE THE MERGER AND TO LINCOLN BANCORP FOLLOWING
ITS PROPOSED ACQUISITION OF CITIZENS BANCORP.
The Value of the Merger Consideration You Receive May Fluctuate.
Because you will receive a fixed amount of cash and Lincoln Bancorp common stock
in the merger and the market price of the Lincoln Bancorp common stock may
fluctuate, you will not know the value of the merger consideration you will
receive until the date that we consummate the merger. For each outstanding share
of Citizens Bancorp common stock that you own, you will receive .9375 shares of
Lincoln Bancorp common stock and $9.375 in cash. We urge you to obtain current
market quotations for Lincoln Bancorp common stock and Citizens Bancorp common
stock because the value of what you receive may be more or less than the value
as of the date of this proxy statement/prospectus.
There are Uncertainties in Integrating our Business Operations and
Realizing Enhanced Earnings. The success of the merger depends, in part, upon
our ability to integrate the operations of Citizens Bancorp into Lincoln
Bancorp, and there are uncertainties in integrating the operations of the
companies that could affect whether the merger will enhance our earnings.
Successful integration of Citizens Bancorp's consolidated operations will depend
primarily on Lincoln Bancorp's ability to consolidate operations, systems, and
procedures and to eliminate redundancies and costs. No assurance can be given
that Lincoln Bancorp and Citizens Bancorp will be able to integrate their
operations without encountering difficulties including, without limitation, the
loss of key employees and customers, the disruption of their respective ongoing
businesses, or possible inconsistencies in standards, controls, procedures, and
policies.
The Closing of the Merger Depends upon Citizens Bancorp and Lincoln
Bancorp Obtaining Tax Opinions from their Respective Legal Counsel. The
Agreement and Plan of Reorganization establishes as a condition to the closing
of the proposed merger a requirement that Citizens Bancorp and Lincoln Bancorp
shall each have received the opinions of its tax counsel to the effect the
proposed merger constitutes a "reorganization" within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code. For those firms to render such a tax
opinion at the effective date of the merger, the value of the Lincoln Bancorp
common stock received by the shareholders of Citizens Bancorp in the merger must
constitute not less than 45% of the aggregate value of the formerly outstanding
shares of Citizens Bancorp common stock. As a result, if the market price of the
Lincoln Bancorp common stock relative to the market price of Citizens common
stock declines as of the effective time of the merger so that the market price
of Lincoln Bancorp common stock as of the effective time of the merger
constitutes less than 45% of the value of Citizens Bancorp, this provision of
the Agreement and Plan of Reorganization will not be satisfied and, as a result,
neither Citizens Bancorp nor Lincoln Bancorp will be obligated to consummate the
merger.
The Closing of the Merger Depends upon Citizens Bancorp Obtaining an
Updated Fairness Opinion from its Financial Advisor. The Agreement and Plan of
Reorganization also requires as a condition to closing that Citizens Bancorp
receive from its financial advisor, Trident Securities, an updated opinion,
dated as of the effective time of the merger, that the consideration to be
received by Citizens Bancorp shareholders in the merger is fair from a financial
point of view. Because the market conditions that will exist at the effective
time of the merger cannot be predicted, no assurance can be given that Trident
Securities will be able to issue such an update to its fairness opinion. If
Citizens does not receive the updated fairness opinion from Trident Securities,
this provision of the Agreement and Plan of Reorganization will not be satisfied
and, as a result, Citizens Bancorp will not be obligated to consummate the
merger with Lincoln Bancorp.
An Economic Slowdown in Central Indiana Could Hurt Our Business.
Because we focus our business in central Indiana in Hendricks, Montgomery,
Clinton and Morgan Counties, an economic slowdown in this area could hurt our
business. An economic slowdown could have the following consequences:
o Loan delinquencies may increase;
o Problem assets and foreclosures may increase;
o Demand for the products and services of Lincoln Federal may
decline;
o Collateral for loans made by Lincoln Federal or Citizens
Savings Bank, especially real estate, may decline in value, in
turn reducing customers' borrowing power, and reducing the
value of assets and collateral associated with existing loans
of Lincoln Federal.
A WARNING ABOUT FORWARD-LOOKING INFORMATION
Lincoln Bancorp and Citizens Bancorp have each made forward-looking
statements in this document that are subject to risks and uncertainties. These
statements are based on the beliefs and assumptions of each company's
management, and on information currently available to such management.
Forward-looking statements include the information concerning possible or
assumed future results of operations of Lincoln Bancorp and/or Citizens Bancorp
set forth under "Questions and Answers About the Merger," "Summary," "The
Merger" and "Unaudited Pro Forma Condensed Combined Financial Information," and
statements preceded by, followed by, or that include the words "will,"
"believes," "expects," "anticipates," "intends," "plans," "estimates" or similar
expressions.
In particular, we have made statements in this document regarding
expected cost savings from the merger, the anticipated effect of the merger and
Lincoln Bancorp's anticipated performance in future periods. With respect to
estimated cost savings, Lincoln Bancorp has made assumptions regarding, among
other things, the extent of operational overlap between Lincoln Bancorp and
Citizens Bancorp, the amount of general and administrative expense
consolidation, costs relating to converting Citizens Savings Bank's operations
and outside data processing to Lincoln Bancorp's systems, the amount of
severance expenses, and the costs related to the merger. The realization of cost
savings is subject to the risk that the foregoing assumptions are not accurate.
Moreover, any statements in this document regarding the anticipated
effect of the merger and Lincoln Bancorp's anticipated performance in future
periods are subject to risks relating to, among other things, the following:
o Lincoln Bancorp may not realize expected cost savings from the
merger within the expected time frame;
o Lincoln Bancorp's revenues following the merger may be lower
than expected, or deposit attrition, operating costs, or
customer loss and business disruption following the merger may
be greater than expected;
o competitive pressures among depository and other financial
institutions may increase significantly;
o Lincoln Bancorp may experience greater than expected costs or
difficulties relating to the integration of the businesses of
Lincoln Bancorp and Citizens Bancorp;
o changes in the interest rate environment may reduce profits;
o there may be less than favorable general economic or business
conditions, either nationally or in central Indiana, resulting
in, among other things, a deterioration in credit quality or a
reduced demand for credit; and
o competitors of Lincoln Bancorp and Citizens Bancorp may have
greater financial resources and develop products that enable
such competitors to compete more successfully than Lincoln
Bancorp and Citizens Bancorp.
Management of Lincoln Bancorp and Citizens Bancorp believe these
forward-looking statements are reasonable; however, you should not place undue
reliance on such forward-looking statements, which are based on current
expectations.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties, and assumptions. The future results and
shareholder values of Lincoln Bancorp following completion of the merger may
differ materially from those expressed in these forward-looking statements. Many
of the factors that will determine these results and values are beyond Lincoln
Bancorp's and Citizens Bancorp's ability to control or predict. For those
statements, Lincoln Bancorp and Citizens Bancorp claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
THE CITIZENS BANCORP SPECIAL MEETING
General
We are furnishing this document to shareholders of Citizens Bancorp in
connection with the solicitation of proxies by the Citizens Bancorp Board of
Directors for use at the special meeting of Citizens Bancorp shareholders,
including any meeting adjournments or postponements, to be held on September 1,
2000.
The purpose of the special meeting is for you to consider and vote upon
the Agreement and Plan of Reorganization, dated as of March 21, 2000, providing
for the merger of Citizens Bancorp with and into Lincoln Bancorp, and of
Citizens Savings Bank with and into Lincoln Federal. The Agreement and Plan of
Reorganization is attached to this document as Annex A and is incorporated in
this document by this reference. For a description of the Agreement and Plan of
Reorganization, see "The Agreement and Plan of Reorganization."
The Agreement and Plan of Reorganization provides that Citizens Bancorp
will merge with and into Lincoln Bancorp. In the merger, shareholders of
Citizens Bancorp will receive .9375 shares of common stock of Lincoln Bancorp
and $9.375 in cash for each share of Citizens Bancorp common stock that they
own. Citizens Bancorp shareholders will also receive cash in the amount of
$18.75 multiplied by any fraction of a share of Lincoln Bancorp common stock
that would otherwise be issued to them in connection with the merger.
Time and Place. Citizens Bancorp will hold its special meeting on
September 1, 2000 at 3:00 p.m., Frankfort time, at the Frankfort Community
Public Library, 208 West Clinton Street, Frankfort, Indiana.
Record Date; Voting Power. If you were a Citizens Bancorp shareholder
at the close of business on July 27, 2000, you may vote at the meeting. As of
July 27, 2000, there were 959,401 issued and outstanding shares of Citizens
Bancorp common stock held by approximately 350 shareholders of record. These
shareholders have one vote per share on any matter that may properly come before
the special meeting. Brokers who hold shares of Citizens Bancorp common stock as
nominees will not have discretionary authority to vote these shares without
instructions from the beneficial owners. Any shares of Citizens Bancorp common
stock for which a broker has submitted an executed proxy but for which the
beneficial owner has not given instructions on voting to such broker are
referred to as "broker non-votes."
Vote Required. The presence in person or by proxy of the holders of a
majority of the shares of Citizens Bancorp common stock outstanding on the
record date will constitute a quorum for the transaction of business at the
special meeting. Citizens Bancorp will count abstentions and broker non-votes
for purposes of establishing the presence of a quorum at the meeting. The
approval of the proposal to approve the Agreement and Plan of Reorganization
requires the affirmative vote of a majority of the shares of Citizens Bancorp
common stock outstanding on the Voting Record Date. The proposal to adjourn or
postpone the Citizens Bancorp special meeting for the purpose of allowing
additional time for the solicitation of proxies from Citizens Bancorp
shareholders to approve the Agreement and Plan of Reorganization requires the
affirmative vote of a majority of the shares of Citizens Bancorp common stock
present in person or by proxy at the meeting. Because broker non-votes and
abstentions are not affirmative votes, they will have the effect of a vote
against the proposals to approve the Agreement and Plan of Reorganization and to
adjourn or postpone the meeting for the purpose of allowing additional time for
the solicitation of proxies.
On the Voting Record Date, the executive officers and directors of
Citizens Bancorp, including their affiliates, had voting power with respect to
an aggregate of 189,759 shares of Citizens Bancorp common stock or approximately
19.8% of the shares of Citizens Bancorp common stock then outstanding. The
Agreement and Plan of Reorganization obligates the directors of Citizens
Bancorp, in their individual capacities, to vote all of their shares in favor of
the merger.
Recommendation of the Citizens Bancorp Board of Directors. The Citizens
Bancorp Board of Directors has unanimously approved and adopted the Agreement
and Plan of Reorganization. The Citizens Bancorp Board of Directors believes
that the merger is fair to and in the best interests of Citizens Bancorp and the
Citizens Bancorp shareholders, and unanimously recommends that you vote "FOR"
approval of the Agreement and Plan of Reorganization and the transactions
contemplated thereby. In addition, the Citizens Bancorp Board of Directors
unanimously recommends that you vote "FOR" the proposal to adjourn or postpone
the meeting to allow extra time to solicit proxies requires the affirmative vote
of a majority of the shares of Citizens Bancorp present at the meeting in person
or by proxy.
Solicitation and Revocation of Proxies. We have enclosed a form of
proxy with this document. Shares represented by a proxy will be voted at the
special meeting as specified in the proxy. Proxies that are properly signed and
dated but which do not have voting instructions will be voted by the proxy
holders FOR the merger and FOR the proposal to adjourn or postpone the meeting
for the purpose of allowing additional time for the solicitation of proxies.
Properly signed and dated proxies will also confer on the proxy holder the power
to vote in the discretion of the proxy holder as to any other matter which may
properly come before the special meeting, which the proxy holder was not aware
of a reasonable time before the meeting, and in the discretion of the proxy
holder as to any matter incident to the conduct of the meeting.
CITIZENS BANCORP ASKS YOU TO VOTE BY COMPLETING, DATING AND SIGNING THE
ACCOMPANYING PROXY CARD AND RETURNING IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE. YOU SHOULD NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARDS.
If you are a Citizens Bancorp shareholder who delivers a properly
executed proxy, you may revoke your proxy at any time before its exercise. You
may revoke your proxy by
o filing with the Secretary of Citizens Bancorp prior to the special
meeting, at Citizens Bancorp's principal executive offices, either
a written revocation of your proxy or a duly executed proxy
bearing a later date or
o attending the special meeting and voting in person. Presence at
the special meeting will not revoke your proxy unless you vote in
person. If your shares are held in the name of your broker, bank,
or other nominee, and you wish to vote in person, you must bring
an account statement and authorization from your nominee so that
you may vote your shares.
Citizens Bancorp is soliciting proxies for use at its special meeting.
Citizens Bancorp will bear the cost of solicitation of proxies from its own
shareholders. Citizens Bancorp and Lincoln Bancorp will share equally the cost
of printing and mailing this document. In addition to solicitation by mail,
Citizens Bancorp directors, officers, and employees may solicit proxies from
shareholders by telephone, in person or through other means. These persons will
not receive additional compensation, but they will be reimbursed for the
reasonable out-of-pocket expenses they incur in connection with this
solicitation. Citizens Bancorp will also make arrangements with brokerage firms,
fiduciaries, and other custodians who hold shares of record to forward
solicitation materials to the beneficial owner of these shares. Citizens Bancorp
will reimburse these brokerage firms, fiduciaries, and other custodians for
their reasonable out-of-pocket expenses in connection with this solicitation.
Other Matters. Citizens Bancorp is unaware of any matter to be
presented at the special meeting other than the proposals to approve the
Agreement and Plan of Reorganization and if necessary, to adjourn or postpone
the meeting for the purpose of soliciting additional proxies. If other matters
are properly presented at the special meeting, the persons named in the proxy
will have authority to vote all properly executed proxies in accordance with
their judgment on any such matter, including, without limitation, any proposal
to adjourn or postpone the special meeting for any purpose other than to allow
time for the solicitation of additional proxies. Proxies that have been
designated to vote against approval of the Agreement and Plan of Reorganization
will not be voted in favor of any proposal to adjourn or postpone the special
meeting for the purpose of soliciting additional proxies to approve the
Agreement and Plan of Reorganization unless the shareholder so indicates on the
proxy.
THE MERGER
THE DETAILED TERMS OF THE MERGER ARE CONTAINED IN THE AGREEMENT AND
PLAN OF REORGANIZATION ATTACHED AS ANNEX A TO THIS DOCUMENT. THE FOLLOWING
DISCUSSION AND THE DISCUSSION UNDER "THE AGREEMENT AND PLAN OF REORGANIZATION"
DESCRIBE THE MORE IMPORTANT ASPECTS OF THE MERGER AND ALL OF THE MATERIAL TERMS
OF THE AGREEMENT AND PLAN Of Reorganization. THESE DESCRIPTIONS ARE QUALIFIED BY
REFERENCE TO THE AGREEMENT AND PLAN OF REORGANIZATION, WHICH WE ENCOURAGE YOU TO
READ CAREFULLY.
Structure of the Merger
General. The Agreement and Plan of Reorganization provides that, after
approval by the Citizens Bancorp shareholders and the satisfaction or waiver of
the other conditions to the merger, Citizens Bancorp will merge with and into
Lincoln Bancorp. Immediately after the merger, Citizens Savings Bank will merge
with and into Lincoln Federal. The Articles of Incorporation and Bylaws of
Lincoln Bancorp, as in effect immediately prior to the merger, will be the
Articles of Incorporation and Bylaws of Lincoln Bancorp after the merger. The
directors and officers of Lincoln Bancorp immediately prior to the merger will
be the directors and officers of Lincoln Bancorp after the merger until they
resign or until their respective successors are duly elected and qualified. In
addition, Mr. Fred W. Carter, President and Chief Executive Officer of Citizens
Bancorp and Citizens Savings Bank, will join the Board of Directors of Lincoln
Bancorp and Lincoln Federal immediately following the merger. The directors and
director emeritus of Citizens other than Mr. Carter will become advisory
directors of Lincoln Federal.
Timing of Closing. The closing of the merger will occur after all
regulatory approvals have been obtained, or such other day mutually agreed to by
Lincoln Bancorp and Citizens Bancorp after the satisfaction or waiver of all
conditions and after all regulatory approvals have been obtained. The merger
will become effective when Articles of Merger are filed with the Secretary of
State of Indiana or such later date and time as may be specified in the Articles
of Merger. The parties anticipate that the merger will be completed during the
third quarter of 2000.
Conversion of Shares. At the completion of the merger, each issued and
outstanding share of Citizens Bancorp common stock will convert into the right
to receive .9375 shares of Lincoln Bancorp common stock and $9.375 in cash.
Lincoln Bancorp will also pay cash in lieu of issuing fractional shares of
Lincoln Bancorp common stock in an amount equal to such fraction multiplied by
$18.75. Assuming that no options to acquire shares of Citizens Bancorp common
stock are exercised before the merger, Lincoln Bancorp will issue approximately
885,074 shares of Lincoln Bancorp common stock and will pay approximately $8.3
million in cash to the shareholders of Citizens Bancorp in the merger. Following
the merger, the current shareholders of Citizens Bancorp will own approximately
13.5% of Lincoln Bancorp.
If Lincoln Bancorp changes the number of outstanding shares of Lincoln
Bancorp common stock before the merger through any stock split or other
combination, or if Lincoln Bancorp declares a stock dividend, then Lincoln
Bancorp will adjust the conversion ratio appropriately.
Citizens Bancorp and Lincoln Bancorp shareholders should obtain current
market quotations for Lincoln Bancorp common stock and Citizens Bancorp common
stock. We expect that the market price of Lincoln Bancorp common stock will
fluctuate between the date of this document and the date of the merger and
thereafter. Because the number of shares of Lincoln Bancorp common stock
Citizens Bancorp shareholders will receive in the merger is fixed and the market
price of Lincoln Bancorp common stock may fluctuate, the value of the shares of
Lincoln Bancorp common stock that Citizens Bancorp shareholders receive in the
merger may increase or decrease prior to and after the merger.
Treatment of Stock Options. The Agreement and Plan of Reorganization
provides that each option to acquire shares of Citizens Bancorp common stock
that has vested as of the effective time of the merger shall be converted into
the right to receive from Citizens Bancorp, at the effective time, an amount in
cash equal to the excess of $18.75 over the per share exercise price for the
share of Citizens Bancorp common stock subject to the stock option. The
Agreement and Plan of Reorganization further provides that each option to
acquire shares of Citizens Bancorp common stock that has not vested as of the
effective time of the merger shall be converted into an option to acquire a
specified number of shares of Lincoln Bancorp common stock. The number of
shares, and the purchase price therefor, will be determined pursuant to a
formula set forth in the Agreement and Plan of Reorganization which is based
upon the exchange ratio (.9375 shares of Lincoln Bancorp common stock for each
share of Citizens Bancorp common stock), the cash consideration to be received
in exchange for each share of Citizens Bancorp common stock ($9.375), and the
market value of the shares of Lincoln Bancorp common stock to be issued in the
merger on the effective date of the merger.
Conditions to Closing of Merger. The Agreement and Plan of
Reorganization establishes as a condition to the closing of the merger of
Citizens Bancorp with Lincoln Bancorp, among other items, a requirement that
Citizens Bancorp shall have received the opinion of its counsel stating (i) that
the proposed merger constitutes a "reorganization" within the meaning of Section
368 of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) that
shareholders of Citizens Bancorp will not recognize gain or loss in the merger
to the extent they receive shares of Lincoln Bancorp common stock as
consideration in exchange for their shares of Citizens Bancorp common stock. In
addition, the Agreement and Plan of Reorganization requires as a condition to
closing that Citizens Bancorp receive from its financial advisor, Trident
Securities, an updated opinion, dated as of the effective time of the merger,
that the consideration to be received by Citizens Bancorp shareholders in the
merger is fair from a financial point of view.
Lincoln Bancorp's Reasons for the Merger
In adopting the Agreement and Plan of Reorganization, the Lincoln
Bancorp Board of Directors considered a number of factors concerning the
benefits of the merger. Without assigning any relative or specific weights to
the factors, the Lincoln Bancorp Board considered the following material
factors:
(a) Lincoln Bancorp's respect for the ability and integrity of the
Citizens Bancorp Board of Directors, management, and staff, and Lincoln
Bancorp's belief that expanding its presence in Frankfort, Indiana offers
important long range strategic benefits to Lincoln Bancorp;
(b) a review of (i) the business, operations, earnings, and financial
condition including the capital levels and asset quality, of Citizens Bancorp on
an historical, prospective, and pro forma basis in comparison to other financial
institutions in the area, (ii) the demographic, economic, and financial
characteristics of the Frankfort, Indiana market, including the resulting
increase in Lincoln Bancorp's market share in the community following the
merger, as well as existing competition, the history of the market area with
respect to financial institutions, and average demand for credit, on an
historical and prospective basis, and (iii) the results of Lincoln Bancorp's due
diligence review of Citizens Bancorp; and
(c) a variety of factors affecting and relating to the overall
strategic focus of Lincoln Bancorp, including Lincoln Bancorp's desire to expand
its presence in Frankfort, Indiana and its desire to pursue the mortgage lending
and other business lines pursued by Citizens Bancorp.
THE BOARD OF DIRECTORS OF LINCOLN BANCORP HAS UNANIMOUSLY APPROVED THE AGREEMENT
AND PLAN OF REORGANIZATION AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Citizens Bancorp's Reasons for the Merger
Citizens Bancorp's board of directors believes that the merger is in
the best interest of Citizens Bancorp shareholders. Citizens Bancorp's board of
directors considered a number of factors in deciding to approve and recommend
the terms of the merger to Citizens Bancorp shareholders, including:
o the financial condition, results of operations, and future
prospects of Citizens Bancorp;
o the value of the consideration to be received by Citizens
Bancorp shareholders relative to the book value and earnings
per share of Citizens Bancorp common stock;
o the competitive and regulatory environment for financial
institutions generally;
o the fact that many Citizens Bancorp shareholders will be able
to exchange their Citizens Bancorp common stock, in part, for
shares of common stock of a larger and more diversified
entity, the stock of which is more widely held and more
actively traded;
o the likelihood of receiving requisite regulatory approvals;
o the prospects for growth and expanded products and services,
and other anticipated positive impacts on the employees,
customers and communities served by Citizens Bancorp;
o the opinion delivered by Trident Securities, that the merger
consideration is fair, from a financial standpoint, to the
shareholders of Citizens Bancorp;
o the potential for appreciation in the value of Lincoln Bancorp
common stock; and
o the nature and compatibility of Lincoln Bancorp's management
and business philosophy with Citizens Bancorp.
The foregoing discussion of the information and factors considered by
Citizens Bancorps board of directors is not intended to be exhaustive. Citizens
Bancorps board of directors did not assign any relative or specific weights to
the foregoing factors, and individual directors may have given different weights
to different factors.
THE BOARD OF DIRECTORS OF CITIZENS BANCORP HAS UNANIMOUSLY APPROVED THE
AGREEMENT AND PLAN OF REORGANIZATION AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Background of the Merger
Because of various changes to the banking laws, as well as other
factors, acquisition activity among financial institutions located in Indiana
and in other states during the last several years has increased. This
acquisition activity has resulted in regional and large financial institutions
entering Indiana and other markets in the midwestern United States. In addition,
developments and deregulation in the financial services industry generally have
led to increases in competition for bank services. Further, recent increases in
bank regulatory burdens have resulted in increased costs to most financial
institutions. These increased costs and competitive factors have created an
environment in which it is increasingly difficult for community banks such as
Citizens Bancorp's subsidiary, Citizens Savings Bank, to compete effectively
with other larger financial institutions and financial services providers.
In light of the competitive and regulatory factors described above and
other financial, legal and market considerations, the Board of Directors of
Citizens Bancorp discussed from time to time whether to remain independent or
whether to pursue an affiliation with another financial institution. In
addition, Citizens Bancorp had been approached from time to time by other
financial institutions, including Lincoln Bancorp, concerning possible
affiliations.
In July, September and November 1999, Trident Securities met with the
Board of Directors of Citizens Bancorp to discuss the state of the trading and
merger markets and to discuss the strategic alternatives available to Citizens
Bancorp to improve shareholder value. Based on their discussions with Trident
Securities, the Board of Directors determined that there were certain factors
that might limit the ability of Citizens Bancorp to continue to create
shareholder value. These factors included:
o shrinking profit margins in the traditional mortgage and
deposit gathering banking business;
o the need to broaden Citizen Savings Bank's product line in
order to diversify revenues and reduce dependence on
residential real estate lending;
o the likelihood of lower earnings during the implementation and
start-up periods of broadening Citizen Savings Bank's product
line;
o the uncertainty of successfully diversifying revenues;
o the need to address management succession issues;
o the need for a more significant commitment of resources to
technology; and
o the highly competitive and rapidly changing financial services
industry.
Faced with these factors, Citizen's Board of Directors retained Trident
Securities in January 2000 to formally explore its strategic options, including
the possibility of entering into a merger agreement with a strategic partner.
The Chief Executive Officers of Citizens Bancorp and Lincoln Bancorp
have known each other for many years. Even prior to each company's mutual to
stock conversions, the two executives had informally discussed the benefits of a
potential merger between the two companies. Upon deciding that Citizens Bancorp
should explore the possibility of merging with another company, the Board of
Directors felt that Citizens Bancorp should contact Lincoln Bancorp regarding
their interest in a potential merger. The decision to approach Lincoln Bancorp
was supported by Trident's analysis that showed Lincoln Bancorp had the ability
to fairly compensate Citizens Bancorp's shareholders and that they would likely
have a strong interest based on the previous informal discussions and their
Clinton County market presence.
Citizens Bancorp's Board of Directors instructed Trident Securities to
contact Lincoln Bancorp regarding their interest in a potential merger. In
January 2000, Trident Securities obtained a confidentiality agreement from
Lincoln Bancorp and provided them with certain public and non-public information
to evaluate. On January 28, 2000, Lincoln Bancorp submitted an indication of
interest to Trident Securities that stated their willingness to acquire the
outstanding shares of Citizens Bancorp for an approximately equal mix of cash
and Lincoln Bancorp common stock. On February 8, 2000, Trident Securities
reviewed the indication of interest with Citizens Bancorp's Board of Directors.
The Board of Directors instructed Trident Securities to seek certain
modifications to the terms proposed by Lincoln Bancorp in the indication of
interest. Upon obtaining revised terms acceptable to Citizens Bancorp's
directors, both sides began negotiating a definitive merger agreement.
In March 2000, Trident Securities performed a due diligence examination
of Lincoln Bancorp.
At a special meeting of the Board of Directors held on March 14, 2000,
the Board reviewed with legal counsel and Trident Securities a draft form of the
Agreement and Plan of Reorganization and established a target date of March 21,
2000 for completing the negotiations with Lincoln Bancorp in connection with the
merger.
On March 21, 2000, the Board of Directors met again to review the
proposed final version of the Agreement and Plan of Reorganization and to
discuss with legal counsel and Trident Securities the issues arising in
connection with the proposed merger with Lincoln Bancorp. Trident Securities
presented its analysis and delivered its opinion that the merger consideration
to be paid by Lincoln Bancorp is fair to the Citizens Bancorp shareholders from
a financial point of view. Following general discussion of the proposed merger,
the Board unanimously concluded that it was in the best interests of Citizens
Bancorp and its shareholders to merge with Lincoln Bancorp, and approved the
execution of the Agreement and Plan of Reorganization.
Effects of the Merger
The Boards of Directors of Lincoln Bancorp and Citizens Bancorp believe
that, over the long-term, the merger will be beneficial to Lincoln Bancorp
shareholders, including the current shareholders of Citizens Bancorp who will
become Lincoln Bancorp shareholders if the merger is completed. The Lincoln
Bancorp Board of Directors believes that one of the potential benefits of the
merger is the cost savings that may be realized by combining the two companies,
which savings are expected to enhance Lincoln Bancorp's earnings.
Lincoln Bancorp currently expects to reduce expenses by combining
accounting, data processing, retail and lending support, and other
administrative functions after the merger, which will enable Lincoln Bancorp to
achieve economies of scale in these areas. Promptly following the completion of
the merger, which is expected to occur during the third quarter of 2000, Lincoln
Bancorp plans to begin the process of eliminating redundant functions, and
identifying and eliminating duplicative expenses.
Because Lincoln Bancorp believes that this process will take the
remainder of 2000 to complete, it has not attempted to quantify what cost
savings might be achieved during 2000. The amount of any cost savings Lincoln
Bancorp may realize in 2000 will depend upon how quickly and efficiently Lincoln
Bancorp is able to implement the processes outlined above during the year.
Lincoln Bancorp believes that it will achieve cost savings based on the
assumption that it will be able to:
o reduce external data processing costs;
o achieve economies of scale in advertising and marketing budgets;
o reduce legal and accounting fees; and
o achieve other savings through reduction or elimination of
miscellaneous items such as insurance premiums, travel and
automobile expense, and investor relations expenses.
Lincoln has based these assumptions on its present assessment of where
savings could be realized based upon the present independent operations of the
two companies. Actual savings in some or all of these areas could be higher or
lower than is currently expected.
Opinion of Financial Advisor to Citizens Bancorp
Citizens Bancorp retained Trident Securities to act as its financial
advisor in connection with a possible merger and related matters. As part of its
engagement, Trident Securities agreed, if requested by Citizens Bancorp, to
render an opinion with respect to the fairness, from a financial point of view,
to the holders of Citizens Bancorp common stock, of the merger consideration as
set forth in the Agreement and Plan of Reorganization. Trident Securities is a
nationally recognized specialist for the financial services industry, in
general, and for thrifts in particular. Trident Securities is regularly engaged
in evaluations of similar businesses and in advising institutions with regard to
mergers and acquisitions, as well as raising debt and equity capital for such
institutions. Citizens Bancorp selected Trident Securities as its financial
advisor based upon Trident Securities' qualifications, expertise and reputation
in such capacity.
Trident Securities delivered a written opinion dated March 21, 2000
that the merger consideration was fair to Citizens Bancorp shareholders, from a
financial point of view, as of the date of such opinion. Trident Securities
updated its March 21, 2000 opinion as of the date of this proxy
statement/prospectus. No limitations were imposed by Citizens Bancorp on Trident
Securities with respect to the investigations made or the procedures followed in
rendering its opinion.
The full text of Trident Securities' written opinion to the Citizens
Bancorp Board, dated as of the date of this proxy statement/prospectus, which
sets forth the assumptions made, matters considered and extent of review by
Trident Securities, is attached as Annex B and is incorporated herein by
reference. It should be read carefully and in its entirety in conjunction with
this proxy statement/prospectus. The following summary of Trident Securities'
opinion is qualified in its entirety by reference to the full text of the
opinion. Trident Securities' opinion is addressed to the Citizens Bancorp Board
and does not constitute a recommendation to any shareholder of Citizens Bancorp
as to how such shareholder should vote at the Citizens Bancorp special meeting
described in this document.
Trident Securities, in connection with rendering its opinion:
o reviewed Citizens Bancorp's Annual Report to Shareholders and
Annual Report on Form 10-K for each of the two years in the
period ended June 30, 1999, including the audited financial
statements contained therein; and Citizens Bancorp's Quarterly
Report on Form 10-Q for the three month periods ended
September 30, 1999 and December 31, 1999;
o reviewed Lincoln Bancorp's Annual Report to Shareholders and
Annual Report on Form 10-K for the year ended December 31,
1998 including the audited financial statements contained
therein, and Lincoln Bancorp's Quarterly Report on Form 10-Q
for the three month periods ended March 31, 1999, June 30,
1999 and September 30, 1999;
o reviewed certain other public and non-public information,
primarily financial in nature, relating to the respective
businesses, earnings, assets and prospects of Citizens Bancorp
and Lincoln Bancorp provided to Trident Securities or publicly
available;
o participated in meetings and telephone conferences with
members of senior management of Citizens Bancorp and Lincoln
Bancorp concerning the financial condition, business, assets,
financial forecasts and prospects of the respective companies,
as well as other matters Trident Securities believed relevant
to its inquiry;
o reviewed certain stock market information for Citizens Bancorp
common stock and Lincoln Bancorp common stock and compared it
with similar information for certain companies, the securities
of which are publicly traded;
o compared the results of operations and financial condition of
Citizens Bancorp and Lincoln Bancorp with that of certain
companies which Trident Securities deemed to be relevant for
purposes of its opinion;
o reviewed the financial terms, to the extent publicly
available, of certain acquisition transactions which Trident
Securities deemed to be relevant for purposes of its opinion;
o reviewed the Agreement and Plan of Reorganization dated March
21, 2000 and its schedules and exhibits and certain related
documents; and
o performed such other reviews and analyses as Trident
Securities deemed appropriate.
The oral and written opinions provided by Trident Securities to
Citizens Bancorp were necessarily based upon economic, monetary, financial
market and other relevant conditions as of the dates thereof.
In connection with its review and arriving at its opinion, Trident
Securities relied upon the accuracy and completeness of the financial
information and other pertinent information provided by Citizens Bancorp and
Lincoln Bancorp to Trident Securities for purposes of rendering its opinion.
Trident Securities did not assume any obligation to independently verify any of
the provided information as being complete and accurate in all material
respects. With regard to the financial forecasts established and developed for
Citizens Bancorp and Lincoln Bancorp with the input of their respective
managements, as well as projections of cost savings and operating synergies,
Trident Securities assumed that this information reflects the best available
estimates and judgments of Citizens Bancorp and Lincoln Bancorp as to the future
performance of the separate and combined entities and that the projections
provided a reasonable basis upon which Trident Securities could formulate its
opinion. Neither Citizens Bancorp nor Lincoln Bancorp publicly discloses such
internal management projections of the type utilized by Trident Securities in
connection with Trident Securities' role as financial advisor to Citizens
Bancorp. Therefore, such projections cannot be assumed to have been prepared
with a view towards public disclosure. The projections were based upon numerous
variables and assumptions that are inherently uncertain, including, among
others, factors relative to the general economic and competitive conditions
facing Citizens Bancorp and Lincoln Bancorp. Accordingly, actual results could
vary significantly from those set forth in the respective projections.
Trident Securities does not claim to be an expert in the evaluation of
loan portfolios or the allowance for loan losses with respect thereto and
therefore assumes that such allowances for Citizens Bancorp and Lincoln Bancorp
are adequate to cover such losses. In addition, Trident Securities does not
assume responsibility for the review of individual credit files and did not make
an independent evaluation, appraisal or physical inspection of the assets or
individual properties of Citizens Bancorp or Lincoln Bancorp, nor was Trident
Securities provided with such appraisals. Furthermore, Trident Securities
assumes that the merger will be consummated in accordance with the terms set
forth in the Agreement and Plan of Reorganization, without any waiver of any
material terms or conditions by Citizens Bancorp, and that obtaining the
necessary regulatory approvals for the merger will not have an adverse effect on
either separate institution or the combined entity. Moreover, in each analysis
that involves per share data for Citizens Bancorp, Trident Securities adjusted
the data to reflect full dilution, i.e., the effect of the exercise of all
outstanding stock options. In particular, Trident Securities assumes that the
merger will be recorded as a "purchase" in accordance with generally accepted
accounting principles.
In connection with rendering its opinion to Citizens Bancorp's Board,
Trident Securities performed a variety of financial and comparative analyses,
which are briefly summarized below. Such summary of analyses does not purport to
be a complete description of the analyses performed by Trident Securities.
Moreover, Trident Securities believes that these analyses must be considered as
a whole and that selecting portions of such analyses and the factors considered
by it, without considering all such analyses and factors, could create an
incomplete understanding of the scope of the process underlying the analyses
and, more importantly, the opinion derived from them. The preparation of a
financial advisor's opinion is a complex process involving subjective judgments
and is not necessarily susceptible to partial analyses or a summary description
of such analyses. In its full analysis, Trident Securities also included
assumptions with respect to general economic, financial market and other
financial conditions. Furthermore, Trident Securities drew from its past
experience in similar transactions, as well as its experience in the valuation
of securities and its general knowledge of the banking industry as a whole. Any
estimates in Trident Securities' analyses are not necessarily indicative of
actual future results or values, which may significantly diverge more or less
favorably from such estimates. Estimates of company valuations do not purport to
be appraisals nor to necessarily reflect the prices at which companies or their
respective securities actually may be sold. None of the analyses performed by
Trident Securities were assigned a greater significance by Trident Securities
than any other in deriving its opinion.
Contribution Analysis: Trident Securities compared the contribution of
Citizens Bancorp to the pro forma company relative to the approximate ownership
of the pro forma company. The analysis indicated that Citizens Bancorp
shareholders would hold approximately 12.4% of the pro forma shares of Lincoln
Bancorp. Citizens Bancorp's approximate contributions are listed below by
category:
Citizens Bancorp Contribution (1)
Assets 12.2%
Loans 19.1%
Deposits 14.9%
Equity 8.5%
Tangible equity 5.1%
Last twelve months reported earnings (2) 11.6%
Pro Forma Ownership 12.4%
(1) Based on financial condition of both companies as of December 31, 1999.
(2) Includes estimated cost savings of Citizens' 1999 non-interest expense
base attributable to the merger.
Comparable Transaction Analysis: Trident Securities reviewed and
compared financial performance and pricing information for groups of comparable
pending and completed thrift merger transactions (through March 3, 2000) it
deemed pertinent to an analysis of the merger. The pricing ratios for the merger
were compared to the average and median ratios of (i) price to last twelve
months earnings, (ii) price to tangible book value, (iii) price to
capital-adjusted tangible book value, (iv) tangible book value premium to core
deposits (v) price to ending assets for each of the following comparable
transaction groups:
o all recent thrift acquisitions in the United States announced
within the preceding 12 months ("All Recent Median");
o all thrift acquisitions in the United States announced within
the preceding 90 days ("Last 90 Days Median");
o all pending thrift acquisitions in the United States that have
been announced but have yet to close ("All Pending Median");
o all Midwest thrift acquisitions announced within the preceding
12 months ("Midwest Recent Median");
o all Indiana thrift acquisitions announced within the preceding
12 months ("Indiana Recent Median");
o all thrift acquisitions in the United States announced within
the preceding 12 months involving acquired thrifts with assets
of $25-$100 Million ("Assets $25mm-$100mm Median");
o all thrift acquisitions in the United States announced within
the preceding 12 months with a total deal size of $10-$30
Million ("Deal Size $10mm-$30mm Median");
o all thrift acquisitions in the United States announced within
the preceding 12 months involving acquired thrifts with
returns on average assets of 120bp-160bp ("ROAA 120bp-160bp
Median");
o all thrift acquisitions in the United States announced within
the preceding 12 months involving acquired thrifts with
returns on average equity of 4%-7% ("ROAE 4%-7% Median");
o all thrift acquisitions in the United States announced within
the preceding 12 months involving acquired thrifts with
tangible capital of 15%-30% ("Tangible Capital 15%-30%
Median");
o Guideline thrift acquisitions announced since April 1999
involving acquired thrifts with capital levels, and returns on
average equity similar to Citizens Bancorp ("Guideline
Median").
The following table represents a summary analysis of the comparable
transactions analyzed by Trident Securities based on the announced transaction
values:
<TABLE>
<CAPTION>
Price/Capital
Price/ Adjusted Core
Tangible Tangible Price/ Deposit
Number Book Value Book Value (2) Earnings (3) Premium (4)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
All Recent Median 74 157.7% 189.0% 23.8x 10.8%
Last 90 Days Median 19 153.8% 175.8% 29.9x 11.1%
All Pending Median 36 161.4% 192.6% 26.6x 11.1%
Midwest Recent Median 29 158.6% 187.3% 24.8x 9.9%
Indiana Recent Median 2 147.5% 166.1% 27.7x 8.8%
Assets $25mm-$100mm Median 25 144.2% 174.1% 25.6x 7.1%
Deal Size $10mm-$30mm Median 23 178.5% 192.6% 21.4x 9.5%
ROAA 120bp-160bp Median 4 114.3% 165.9% 21.5x 6.4%
ROAE 4%-7% Median 24 137.9% 189.0% 25.3x 9.6%
Tangible Capital 15%-30% Median 13 123.2% 175.8% 23.4x 7.1%
Guideline Median 8 119.0% 163.2% 23.5x 6.1%
Citizens Bancorp (1) 118.2% 179.7% 22.2x 10.4%
</TABLE>
Footnotes on following page
<PAGE>
(1) Citizens Bancorp pricing data based on per share consideration of
$18.52 and financial condition as of December 31, 1999
(2) Price and capital adjusted to eliminate the impact of excess capital
(assumes 7% capital is adequate)
(3) Last 12 months earnings per share
(4) Tangible book value premium as a percentage of core deposits
The pricing multiples shown in the table above are generally higher
than the corresponding multiples for Citizens Bancorp represented by the merger
consideration. However, there are two important distinctions between the merger
and the other transactions. First, the trading market for bank and thrift
equities has declined considerably in recent months. Lower trading prices for
banks and thrifts generally result in lower multiples for thrift mergers and
acquisitions, but a change in market conditions may take several months to
become apparent from transactions data. Therefore, the data shown in the table
above may not accurately reflect current thrift merger pricing. Secondly, the
most relevant and comparable group is the guideline median. The eight
transactions that compose this group were all announced in 1999. Since that
time, equity markets have declined considerably, but Citizens Bancorp's pricing
multiples are very similar. Based on these factors, Trident Securities placed
appropriate consideration on the comparable transaction analysis in arriving at
its opinion.
Accretion/Dilution Analysis: On the basis of financial projections
developed with the assistance of management, and estimates of on-going cost
savings accruing to the pro forma company, as well as estimated one-time costs
related to the transaction, Trident Securities compared pro forma equivalent
earnings, cash dividends, book value and tangible book value to the stand-alone
projections for Citizens Bancorp and Lincoln Bancorp. No assumptions were made
regarding revenue enhancements and capital management following the completion
of the transaction.
The accretion/dilution analysis demonstrated, among other things, the
merger would result in:
o 4.4% accretion to earnings for Lincoln Bancorp shareholders in
the first year of combined operations;
o 10.7% higher cash dividends for Citizens Bancorp shareholders,
assuming the Lincoln Bancorp Board maintained its current
dividend policy;
o no change in cash dividends for Lincoln Bancorp shareholders;
and
o 2.5% dilution to book value and 5.6% dilution to tangible book
value for Lincoln Bancorp shareholders.
Discounted Cash Flow Analysis: Trident Securities prepared a discounted
cash flow analysis with regard to Citizens Bancorp's estimated acquisition value
through March 2004. This analysis utilized a discount rate of 15%; assumed
annual asset growth rate of 10%; assumed return on average assets of 1.50%; and
assumed an earnings multiple of 26.8x. The analyses resulted in a range of
present values of between $16.61 and $18.71 for acquisition values. This
analysis was based on estimates by Trident Securities in determining the
earnings multiples used in projecting Citizens Bancorp's acquisition value and
is not necessarily indicative of actual values or actual future results and does
not purport to reflect the prices at which any securities may trade at the
present or at any time in the future. Trident Securities noted that the
discounted cash flow analysis was included because it is a widely used valuation
methodology, but noted that the results of such methodology are highly dependent
upon the numerous assumptions that must be made, including earnings growth
rates, dividend pay-out rates and discount rates.
Due Diligence Examination of Lincoln Bancorp: Trident Securities
reviewed its on-site due diligence examination of Lincoln Bancorp. Trident
Securities examined Lincoln Bancorp's historical balance sheets and income
statements, along with recent operating results and a variety of financial
ratios through December 31, 1999. Trident Securities discussed Lincoln Bancorp's
business strategy, strengths and weaknesses, profitability, growth, net interest
margin, non-interest income, operating expenses, intangible assets, borrowed
funds, market area, capital, asset quality and reserve coverage, concentrations
of credit and loan portfolio composition, interest-rate risk, year 2000
preparations, subsidiary activities, culture, use of technology, stock pricing,
recent bank analysts' reports, and other issues.
Comparable Company Analysis: Trident Securities reviewed and compared
stock market data and selected financial information for Lincoln Bancorp with
corresponding information for actively-traded thrifts possessing similar
financial and performance characteristics as Lincoln Bancorp. The comparison
thrifts ("Comparable Groups") were grouped according to the parameters listed
below:
<TABLE>
<CAPTION>
Comparable Groups Companies in Group
----------------- ------------------
<S> <C>
Median for All U.S. Thrifts 322
Median for Midwest Thrifts 116
Median for Indiana Thrifts 27
Median for Thrifts with Assets - $300-$600 Million 74
Median for Thrifts with Market Capitalization - $50-$75 Million 38
Median for Thrifts with Return on Average Assets - 80bp-100bp 60
Median for Thrifts with Return on Average Equity - 3%-6% 91
Median for Thrifts with Tangible Capital Median - 15%-30% 62
Median for Guideline Companies* 13
</TABLE>
* Consists of actively-traded companies of similar asset size, tangible
capital levels, and return on equity.
The table below represents a summary analysis of all of the comparable
groups based on market prices as of March 15, 2000 and the latest publicly
available financial data as of or for the twelve months ended December 31, 1999:
<TABLE>
<CAPTION>
Mean Median Lincoln Bancorp
---- ------ ---------------
<S> <C> <C> <C>
Price to last twelve months reported earnings 12.0x 11.5x 13.7x
Price to last twelve months adjusted earnings (1) 12.5x 11.8x 13.1x
Price to last twelve months core earnings (2) 11.7x 12.4x 11.1x
Price to book value 79.3% 78.0% 67.0%
Price to tangible book value 80.8% 82.7% 67.0%
Dividend yield 3.5% 3.5% 3.3%
Return on average assets 0.86% 0.86% 1.09%
Return on average equity 6.3% 6.6% 4.3%
Equity / Assets 12.3% 10.8% 22.3%
Assets $334.6m $354.6m $410.8m
</TABLE>
(1) Adjusted earnings are defined as pre-tax earnings, minus non-recurring
gains, plus non-recurring losses, taxed at a 35% rate
(2) Core earnings are defined as pre-tax earnings, minus non-recurring
gains, plus non-recurring losses, plus loan loss provisions, taxed at a
35% rate
The analysis reveals that Lincoln Bancorp trades at a slight premium to
thrifts included in comparable groups based on price to earnings for the last
twelve months but at a slight discount based on price to book value and price to
tangible book value. In consideration of Lincoln Bancorp's profitability,
capital level and asset size, Lincoln Bancorp's stock price is not significantly
different from the comparable groups.
Based on the aforementioned analyses and Trident Securities' experience
with numerous mergers involving thrift institutions, it is Trident Securities'
opinion that the merger consideration to be received by Citizens Bancorp
shareholders in the merger is fair from a financial point of view.
No company used as a comparison in the above analyses is identical to
Citizens Bancorp, Lincoln Bancorp or the combined entity and no other
transaction is identical to the merger. Accordingly, an analysis of the results
of the foregoing is not purely mathematical; rather, such analyses involve
complex considerations and judgments concerning differences in financial market
and operating characteristics of the companies and other factors that could
affect the public trading volume of the companies to which Citizens Bancorp,
Lincoln Bancorp and the combined entity are being compared.
In connection with the delivery of its opinion dated as of the date of
this proxy statement/prospectus, Trident Securities performed procedures to
update, as necessary, certain of the analyses described above and reviewed the
assumptions on which the analyses described above were based and the factors
considered in connection therewith. Trident Securities did not perform any
analyses in addition to those described above in updating the opinion.
For its financial advisory services provided to Citizens Bancorp,
Trident Securities has been paid fees of $50,000 to date and will be paid an
additional fee that will amount to 2% of the aggregate consideration received by
Citizens Bancorp stockholders (less the $50,000 previously paid) at the time of
closing of the merger. In addition, Citizens Bancorp has agreed to reimburse
Trident Securities for all reasonable out-of-pocket expenses, incurred by it on
Citizens Bancorp's behalf, and to indemnify Trident Securities against certain
liabilities, including any which may arise under the federal securities laws.
Trident Securities/McDonald Investments is a member of all principal
securities exchanges in the United States and in the conduct of its
broker-dealer activities has from time to time purchased securities from, and
sold securities to, Citizens Bancorp and/or Lincoln Bancorp. As a market maker,
Trident Securities may also have purchased and sold the securities of Citizens
Bancorp and/or Lincoln Bancorp for Trident Securities' own account and for the
accounts of its customers. Additionally, Trident Securities served as Citizens
Bancorp's sales agent in Citizens Savings Bank's mutual-to-stock conversion in
1997, and received total fees and commissions of $119,754 for that transaction.
THE AGREEMENT AND PLAN OF REORGANIZATION
Conditions to the Merger
The obligation of Lincoln Bancorp and Citizens Bancorp to consummate
the merger is subject to the satisfaction or waiver on or before the completion
of the merger of many conditions, including the following:
o no statute, rule, regulation, judgment, decree, injunction or
order of any governmental authority will be in effect which
prohibits the consummation of the transactions described in
the Agreement and Plan of Reorganization;
o the Agreement and Plan of Reorganization must receive the
approval of the shareholders of Citizens Bancorp and the
applicable governmental authorities. The Boards of Directors
of Lincoln Bancorp and Citizens Bancorp have already
unanimously approved the Agreement and Plan of Reorganization;
o no stop order suspending the effectiveness of the registration
statement, of which this proxy statement/prospectus is a part,
shall have been issued and no proceedings for that purpose
shall have been initiated or threatened by the Securities and
Exchange Commission;
o the Nasdaq National Market System shall have been notified of
the shares of Lincoln Bancorp common stock issuable to
Citizens Bancorp shareholders in connection with the merger;
o Citizens Bancorp shall have received an opinion from Barnes &
Thornburg that, as of the closing date of the merger, the
merger constitutes a "reorganization" for purposes of Section
368 of the Code, as amended, and that no gain or loss will be
recognized by Citizens Bancorp shareholders to the extent they
receive shares of Lincoln Bancorp common stock as
consideration for shares of Citizens Bancorp common stock;
o Lincoln Bancorp shall have received an opinion from Bose
McKinney & Evans LLP that the merger constitutes a
"reorganization" for purposes of section 368 of the Code, as
amended;
o all material consents or approvals of persons other than
government authorities that are required for the execution,
delivery and performance of the Agreement and Plan of
Reorganization shall have been obtained;
o all consents, approvals or notices of or to governmental
authorities that are required for the performance of the
transactions contemplated in the Agreement and Plan of
Reorganization shall have been obtained; and
o all permits and other authorizations under federal and state
securities laws necessary to consummate the transactions
contemplated in the Agreement and Plan of Reorganization and
to issue the shares of Lincoln Bancorp common stock to be
issued as consideration in the merger transaction shall have
been obtained.
The obligation of Lincoln Bancorp to consummate the merger is also
subject to fulfillment of other conditions, including the following:
o The representations and warranties of Citizens Bancorp set
forth in the Agreement and Plan of Reorganization shall be
true and correct in all material respects as of the effective
time of the merger;
o Citizens Bancorp shall have performed in all material respects
all obligations required by the Agreement and Plan of
Reorganization to be performed by it at or prior to the
effective time of the merger;
o Lincoln Bancorp shall have received a letter from Olive LLP,
independent public accountants to Citizens Bancorp, regarding
the financial statements and other matters related to the
business of Citizens Bancorp; and
o Lincoln Bancorp shall have received from Fred W. Carter an
acknowledgment and binding commitment that the obligations
assumed by Lincoln Federal in respect of Mr. Carter's
employment agreement with Citizens Savings Bank are limited to
those set forth in the Agreement and Plan of Reorganization.
The obligations of Citizens Bancorp to consummate the merger are also
subject to the fulfillment of other conditions, including the following:
o The representations and warranties of Lincoln Bancorp set
forth in the Agreement and Plan of Reorganization shall be
true and correct as of the effective time of the merger;
o Lincoln Bancorp shall have performed in all material respects
all obligations required to be performed by it under the
Agreement and Plan of Reorganization at or prior to the
effective time of the merger;
o Lincoln Federal shall have entered into a mutually acceptable
Consulting Agreement with Fred W. Carter;
o Citizens shall have received a letter from Olive LLP,
independent public accountants to Lincoln Bancorp regarding
the financial statements and other matters relating to the
business of Lincoln Bancorp; and
o Citizens shall have received an updated opinion of Trident
Securities, dated as of the effective date of the merger, that
the consideration to be received in the merger by the
shareholders of Citizens Bancorp is fair from a financial
point of view.
Additionally, the completion of the merger is subject to the delivery
of documents and the receipt of officers' certificates and other documents.
If these and other conditions are not satisfied or waived, Lincoln
Bancorp or Citizens Bancorp may terminate the Agreement and Plan of
Reorganization.
Expenses
Each party has agreed to pay its own expenses in connection with the
merger transaction. The parties will share the expense of printing and mailing
this proxy statement/prospectus and paying the applicable registration fee with
the Securities and Exchange Commission. If, prior to the effective time of the
merger, the Citizens Bancorp Board of Directors fails to recommend the approval
of the Agreement and Plan of Reorganization to the shareholders of Citizens
Bancorp or, in good faith and after consulting with legal counsel and Trident
Securities, accepts what it considers to be a superior proposal to acquire
Citizens Bancorp from a third party, Citizens Bancorp shall pay a termination
fee of $500,000 to Lincoln Bancorp. Further, if the Agreement and Plan of
Reorganization is terminated under certain circumstances by Citizens Bancorp
and, within 12 months of the date of such termination, a change in control of
Citizens Bancorp is consummated, Citizens Bancorp will be required to pay to
Lincoln Bancorp a termination fee of $500,000.
Treatment of Options to Acquire Shares of Citizens Bancorp Common Stock
The Agreement and Plan of Reorganization provides that each option to
acquire shares of Citizens Bancorp common stock that has vested as of the
effective time of the merger shall be converted into the right to receive from
Citizens Bancorp, at the effective time, an amount in cash equal to the excess
of $18.75 over the per share exercise price for the share of Citizens Bancorp
common stock subject to the stock option. The Agreement and Plan of
Reorganization further provides that each option to acquire shares of Citizens
Bancorp common stock that has not vested as of the effective time of the merger
shall be converted into an option to acquire a specified number of shares of
Lincoln Bancorp common stock at a specified exercise price per share. The number
of shares, and the purchase price therefor, will be determined pursuant to a
formula set forth in the Agreement and Plan of Reorganization which is based
upon the exchange ratio (.9375 shares of Lincoln Bancorp common stock for each
share of Citizens Bancorp common stock), the cash consideration to be received
in exchange for each share of Citizens Bancorp common stock ($9.375) and the
market value of the shares of Lincoln Bancorp common stock to be issued in the
merger on the effective date of the merger. The Agreement and Plan of
Reorganization further provides that service by a person as a director of
Lincoln Bancorp, or as an advisory director, member or member emeritus of the
Lincoln Federal Board of Directors shall permit the person performing such
services to continue to hold options under the Citizens Bancorp Stock Option
Plan (the "Citizens Option Plan") to be assumed by Lincoln Bancorp at the
closing.
Treatment of Recognition And Retention Plan
The Agreement and Plan of Reorganization provides that, at the
effective time of the merger, Lincoln Federal will assume the Citizens Savings
Bank Recognition and Retention Plan and Trust (the "Citizens RRP"). Prior to the
effective time of the merger, Citizens Savings Bank will take the necessary
steps to cause the 9,522 shares of Citizens Bancorp common stock held in the
reserve account of the Citizens RRP to be returned to Citizens Savings Bank and
canceled, and shall make the appropriate amendments to the Citizens RRP to
reflect the transactions set forth in the Agreement and Plan of Reorganization.
Shares of Lincoln Bancorp common stock received by the Citizens RRP in the
merger shall be retained and held subject to the same award requirements to
which the Citizens Bancorp common stock held by the Citizens RRP prior to the
merger was subject. In addition, the cash received by the Citizens RRP in the
merger as consideration for the shares of Citizens Bancorp common stock that it
holds will be used to purchase shares of Lincoln Bancorp common stock on the
open market which will be held by the Citizens RRP subject to the same award
requirements to which the Citizens Bancorp common stock was held prior to the
merger. For purposes of the Citizens RRP, service by a person as a director,
advisory director or director emeritus of Lincoln Federal shall constitute
qualified service for purposes of holding awards under the Citizens RRP.
Treatment of Employee Stock Ownership Plan
Upon the effective time of the merger, the Citizens Bancorp Employee
Stock Ownership Plan (the "Citizens ESOP") will be terminated, and all shares of
Citizens Bancorp common stock held by the Citizens ESOP will be converted into
rights to receive .9375 shares of Lincoln Bancorp common stock and $9.375 in
cash. The cash portion of the merger consideration attributable to the
unallocated shares held by the Citizens ESOP will be applied against the
outstanding indebtedness of the Citizens ESOP, and any remaining balance owed
will be repaid with the proceeds of the sale of unallocated shares of Lincoln
Bancorp common stock by the trustee of the Citizens ESOP upon completion of the
merger. Any assets remaining in the suspense fund under the Citizens ESOP shall
be allocated to the respective participants' accounts, and the net assets of the
Citizens ESOP shall be distributed to the participants and their beneficiaries,
subject to the receipt of a favorable tax ruling on the termination of the
Citizens ESOP from the Internal Revenue Service.
Treatment of Defined Benefit Pension Plan
Citizens Savings Bank and Lincoln Federal each maintain qualified
defined benefit pension programs through participation in the Financial
Institutions Retirement Fund ("FIRF"). The Agreement and Plan of Reorganization
provides that, at the effective time of the merger, Lincoln Federal shall assume
the FIRF Plan of Citizens Savings Bank (the "Citizens FIRF") and shall merge the
Citizens FIRF Plan into its own. The service of employees of Citizens Savings
Bank prior to the effective time of the merger, as determined under the Citizens
FIRF Plan, shall be recognized for eligibility, vesting and benefit accrual
purposes under the resulting FIRF Plans maintained by Lincoln Federal following
the merger; provided that these accrued benefits of Citizens Savings Bank
employees prior to the effective time of the merger shall be based on the
benefit formula in the Citizens FIRF prior to such effective time. The Agreement
and Plan of Reorganization does not preclude Lincoln Bancorp from terminating
the Lincoln Federal FIRF after the effective time of the merger.
Treatment of Executive Supplemental Retirement Income Agreements and Director
Deferred Compensation Agreement
From and after the effective time of the merger, Lincoln Federal will
assume the rights and obligations of Citizens Savings Bank under its executive
supplemental retirement income agreements with Fred W. Carter, Stephen D. Davis
and Cindy S. Chambers, and its director deferred compensation agreement with
Fred W. Carter. Before the closing of the merger, Citizens Savings Bank may
amend such agreements to provide that the agreements cannot be amended following
the effective time of the merger without the consent of the affected employee or
director (or their successors or beneficiaries), and to provide that, in the
event of a change in control of Lincoln Bancorp, an actuarially equivalent lump
sum payment of the entire accrued benefit payable pursuant to such agreements
shall be immediately paid. It is expected that such amendments shall be made
prior to and effective as of the effective time of the merger.
Employee Matters
The Agreement and Plan of Reorganization provides that Lincoln intends
to retain the employees of Citizens Savings Bank (other than Fred W. Carter) for
at least six months following the effective date in positions comparable to
those they held with Citizens Bancorp or Citizens Savings Bank prior to the
merger. For a description of Mr. Carter's responsibilities following the
effective time of the merger, see "Interests of Certain Directors and Executive
Officers of Citizens Bancorp in the Merger-Appointment of Fred W. Carter to
Lincoln Bancorp Board of Directors," and "-- Consulting Agreement." The current
employees of Citizens Savings Bank who become employees of Lincoln Bancorp or
Lincoln Federal following the merger will be provided with benefits under
Lincoln Bancorp's benefit plans that are no less favorable in the aggregate than
the benefits provided to similarly-situated employees by Lincoln Bancorp or
Lincoln Federal. In addition, the Agreement and Plan of Reorganization requires
Lincoln Bancorp, to the extent necessary, to amend each of its employee benefit
plans in which former Citizens Savings Bank employees are to participate so that
such plans will take into account for eligibility, vesting and benefit accrual
purposes, to the same extent as under a comparable plan of Citizens Savings
Bank, the service of such persons with Citizens Savings Bank and to exempt such
persons from any waiting periods or pre-existing condition limitations under the
medical, dental and health plans of Lincoln Bancorp or its subsidiaries in which
they are eligible to participate. The Agreement and Plan of Reorganization
further provides that employees of Citizens Savings Bank who become employees of
Lincoln Federal following the merger will retain credit for unused sick leave
and vacation time accrued during their service with Citizens Savings Bank, and
will become eligible to participate in the Lincoln Federal 401(k) plan on the
first plan entry date following their satisfaction of the eligibility
requirements of such plan. Former Citizens Savings Bank employees who
participated in the Citizens ESOP will become eligible to participate in the
Lincoln Bancorp Employee Stock Ownership Plan on January 1, 2002.
The Agreement and Plan of Reorganization further provides that, with
the exception of Fred W. Carter, those employees of Citizens Bancorp at the
effective time of the merger who are not employed by Lincoln Bancorp after the
effective time of the merger or who resign within six months thereafter are
terminated or resign after being notified that, as a condition of employment,
the employee must work at a location more than 30 miles from the employee's
former location of employment, or such employee's salary will be materially
decreased, shall be entitled to severance pay equal to one week of pay, at the
employee's rate of pay at the effective date, for each full year of continuous
service with Citizens Bancorp or its subsidiaries, not in excess of 26 years of
service. To be eligible for such severance payment, an employee will be required
to execute a release agreement provided by Lincoln Bancorp.
Termination
The Agreement and Plan of Reorganization may be terminated at any time
prior to the completion of the merger:
o By mutual consent of Lincoln Bancorp and Citizens Bancorp in
writing;
o By Lincoln Bancorp or Citizens Bancorp if there has been a
material breach by the other of any of the covenants or
agreements or any of the representations or warranties set
forth in the Agreement and Plan of Reorganization, which
breach is not cured within thirty (30) days following written
notice given by the non-breaching party to the party
committing the breach;
o By Lincoln Bancorp or Citizens Bancorp, if the completion of
the merger has not occurred on or before December 31, 2000
(provided that the right to terminate the Agreement and Plan
of Reorganization is not available to any party whose failure
or whose affiliate's failure to perform any covenant or
obligation under the Agreement and Plan of Reorganization has
been the cause of or resulted in the failure of the merger to
occur on or before such date);
o By Lincoln Bancorp if, prior to the receipt of approval of the
Citizens Bancorp shareholders of the Agreement and Plan of
Reorganization and the merger, the Citizens Bancorp Board of
Directors, in a manner adverse to the interests of Lincoln
Bancorp, withdraws or modifies its recommendation that the
shareholders of Citizens Bancorp provide such approval, in
which event Citizens Bancorp will be obligated to pay Lincoln
Bancorp a termination fee of $500,000; or
o By Citizens Bancorp if, without otherwise breaching the
Agreement and Plan of Reorganization, its Board of Directors
accepts what it considers in good faith, after consulting with
legal counsel and Trident Securities, to be a superior offer
from a third party, provided that, in such event, Citizens
Bancorp must pay to Lincoln Bancorp a termination fee of
$500,000.
Conduct of Business Prior to Completion of the Merger
The Agreement and Plan of Reorganization provides that Citizens Bancorp
will not, from the date of the execution of the Agreement until the effective
time of the merger, take or cause Citizens Savings Bank to take, any of the
following actions without the prior written consent of Lincoln Bancorp:
o Conduct its business other than in the ordinary and usual
course, or fail to use reasonable efforts to preserve intact
its business organizations, assets and existing business
relationships;
o Issue, sell or otherwise increase the number of its
outstanding shares of common stock except pursuant to the
exercise of outstanding options or similar stock-based
employee rights, or as otherwise contemplated in the Agreement
and Plan of Reorganization;
o Repurchase, reclassify or declare a stock split with respect
to its common stock;
o Make or declare any dividend, other than regular quarterly
cash dividends on its common stock in an amount not to exceed
$0.07 per share paid in a manner consistent with past
practice, and dividends payable solely to Citizens Bancorp
from Citizens Savings Bank and its subsidiary service
corporation;
o Enter into any new employment or consulting agreement, or
amend any such existing agreement, with any of its directors,
officers, employees or affiliates, or increase the salary paid
to such persons other than in a manner consistent with past
practice or as otherwise provided in the Agreement and Plan of
Reorganization;
o Amend, modify or terminate any benefit plan or stock-based
compensation plan, or increase any outstanding grants or
accelerate the vesting or exercisability of any rights granted
under such plans, except as otherwise provided in the
Agreement and Plan of Reorganization;
o Sell, transfer, or otherwise dispose of or discontinue any
material portion of its assets, business or properties, or
acquire assets or deposits that would materially affect its
operations;
o Amend its articles of incorporation or by-laws or those of its
subsidiaries;
o Implement or adopt any change in its accounting principles,
practices or methods other than as may be required by
generally accepted accounting principles and upon the
concurrence of its independent financial auditors;
o Enter into, terminate, or make a material modification to any
of its existing material contracts, except in the ordinary
course of business consistent with past practice;
o Settle any material claim, action or proceeding;
o Implement or adopt any change to its interest rate risk
management and hedging policies or fail to follow its existing
policies in this area;
o Incur any indebtedness for borrowed money other than in the
ordinary course of business and consistent with past practice,
or guaranty the indebtedness of a material amount of any other
person, or release any material indebtedness of any other
person;
o Make any loan or advance other than in the ordinary course of
business consistent with its lending policies, or make any
non-mortgage loan in excess of $250,000; or
o Take any action reasonably likely to prevent or impede the
merger of Citizen Bancorp into Lincoln Bancorp from qualifying
as a reorganization within the meaning of Section 368 of the
Code or enter into any agreement which would otherwise result
in a breach of Citizens Bancorp's representations and
warranties set forth in the Agreement and Plan of
Reorganization;
Amendment and Waiver of the Agreement and Plan of Reorganization
Subject to applicable law, any provision of the Agreement and Plan of
Reorganization may be amended or waived by Lincoln Bancorp or Citizens Bancorp
prior to closing if the parties mutually agree to the amendment. In addition,
either Lincoln Bancorp or Citizens Bancorp may waive the other party's
performance of covenants or conditions to the Plan of Reorganization.
Resales of Lincoln Bancorp Common Stock by Citizens Bancorp Shareholders
The shares of Lincoln Bancorp common stock to be issued to Citizens
Bancorp shareholders in the merger will be registered under the Securities Act.
These shares may be traded freely and without restriction by those shareholders
not deemed to be "affiliates" of Citizens Bancorp as of the date of the Citizens
Bancorp special meeting. For one year after the effective time of the merger, if
Lincoln Bancorp remains current in its reporting obligations under the
Securities Exchange Act of 1934 (or two years if Lincoln Bancorp is not
current), affiliates of Citizens Bancorp may only sell their shares of Lincoln
Bancorp
o in accordance with the provisions of Rule 145(d) under the
Securities Act of 1933;
o pursuant to an effective registration statement under the
Securities Act; or
o in transactions otherwise exempt from the registration
requirements of the Securities Act.
In addition, Citizens Bancorp shareholders who become "affiliates" of
Lincoln Bancorp following the merger will be subject to same resale restrictions
as affiliates of Lincoln Bancorp. Generally, persons who are not executive
officers, directors, or greater than ten percent shareholders of Citizens
Bancorp at the effective time of the merger will not be considered affiliates in
the absence of other factors indicating a control relationship. Citizens Bancorp
has delivered to Lincoln Bancorp an agreement by each person who may be deemed
an affiliate of Citizens Bancorp that such person will not dispose of any
Lincoln Bancorp common stock in violation of the Securities Act.
<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Condensed Balance Sheet as
of March 31, 2000 combines the historical consolidated balance sheets of Lincoln
Bancorp and Citizens Bancorp as if the merger had been effective on March 31,
2000. The Unaudited Pro Forma Combined Statements of Income for the period ended
March 31, 2000 and 1999, and for the fiscal year ended December 31, 1999
presents the combined results of operations of Lincoln Bancorp and Citizens
Bancorp as if the merger had been effective at the beginning of the period.
Dollars are in thousands except for per share data.
The Unaudited Pro Forma Combined Condensed Financial Information and
accompanying notes reflect the application of the purchase method of accounting
for the merger. Under this method of accounting, the recorded assets and
liabilities of Citizens Bancorp are marked to their fair values through an
allocation of the purchase price. Any excess of purchase price remaining after
the allocation of the purchase price to assets and liabilities is recorded as
goodwill and amortized over a period of time. The pro forma combined figures are
simply arithmetical combinations of Lincoln Bancorp's and Citizens Bancorp's
separate financial results in order to assist you in analyzing the future
prospects of Lincoln Bancorp. The pro forma combined figures illustrate the
possible scope of the change in Lincoln Bancorp's historical figures caused by
the merger. You should not assume that Lincoln Bancorp and Citizens Bancorp
would have achieved the pro forma combined results if the merger had actually
occurred during the periods presented.
The combined company expects to achieve merger benefits in the form of
operating cost savings. The pro forma earnings, which do not reflect any
potential savings that are expected to result from the consolidation of the
operations of Lincoln Bancorp and Citizens Bancorp, are not indicative of the
results of future operations. No assurances can be given with respect to the
ultimate level of expense savings. See "A Warning About Forward-Looking
Information" and "Risk Factors - There are Uncertainties in Integrating our
Business Operations and Realizing Enhanced Earnings."
For purposes of preparing these financial statements, we used the
audited consolidated financial statements contained in the Lincoln Bancorp
Annual Report to Shareholders for the year ended December 31, 1999 which were
filed with the Securities and Exchange Commission for the year ended December
31, 1999 on Form 10-K. We also used the unaudited consolidated financial
statements of Lincoln Bancorp filed with the Securities and Exchange Commission
for the quarter ended March 31, 2000 on Form 10-Q. In addition, we used the
unaudited consolidated financial statements of Citizens Bancorp for the year
ended December 31, 1999. The December 31, 1999 financial statements were derived
from the audited consolidated financial statements which Citizens Bancorp
previously filed with the Securities and Exchange Commission for the year ended
June 30, 1999 on Form 10-K, and the unaudited consolidated financial statements
of Citizens Bancorp previously filed with the Securities and Exchange Commission
for the quarter ended December 31, 1999, which included financial statements for
the six month periods ended December 31, 1999 and 1998. Also, we used the
unaudited consolidated financial statements of Citizens Bancorp previously filed
with the Securities and Exchange Commission for the quarter ended March 31, 2000
on Form 10-Q to prepare the financial statements as of and for the period ended
March 31, 2000.
Lincoln Bancorp's and Citizens Bancorp's consolidated financial
statements are prepared in conformity with generally accepted accounting
principles. In the opinion of Lincoln Bancorp and Citizens Bancorp, the
unaudited pro forma condensed combined financial statements include all
adjustments necessary to present fairly the results of the periods presented.
Lincoln Bancorp
Unaudited Pro Forma
Combined Balance Sheet
March 31, 2000
<TABLE>
<CAPTION>
Lincoln Citizens ProForma Pro Forma
Bancorp Bancorp Adjustments Combined
------- ------- ----------- --------
Assets
<S> <C> <C> <C> <C>
Cash and due from banks $ 892 $ 607 $ 1,499
Short-term interest-bearing deposits 13,058 867 $(8,905) (a) 5,020
-------- ------- ------- --------
Cash and cash equivalents 13,950 1,474 (8,905) 6,519
Interest bearing deposits 1,486 1,486
Investment securities
Available for sale 142,587 391 142,978
Held to maturity 500 500
-------- ------- ------- --------
Total investment securities 143,087 391 143,478
Loans, net of allowance for loan losses 240,239 55,969 (732) (d) 295,476
Premises and equipment 3,643 560 186 (e) 4,389
Federal Home Loan Bank of
Indianapolis stock, at cost 5,447 625 6,072
Intangible assets 2,895 (b)(h) 2,895
Other assets 11,516 2,979 100 (f) 14,595
-------- ------- ------- --------
Total assets $417,882 $63,484 $(6,456) $474,910
======== ======= ======= ========
Liabilities
Deposits $219,350 $36,323 $ (287) (d) $255,386
Securities sold under
repurchase agreements 4,600 4,600
Federal Home Loan Bank
of Indianapolis advances 100,938 11,000 (584) (d) 111,354
Note payable 1,226 1,226
Other liabilities 4,518 740 1,239 (c) 6,497
-------- ------- ------- --------
Total liabilities 330,632 48,063 368 379,063
-------- ------- ------- --------
Equity Received From Contributions
to the ESOP 343 (343) (a) 0
Shareholders' Equity
Preferred stock, without par value
Common stock, without par value 57,498 8,230 708 (a) 66,436
Retained earnings 43,840 7,309 (7,309) (a) 43,840
Accumulated other comprehensive loss (5,721) (21) 21 (a) (5,721)
Unearned recognition and
retention plan shares (3,252) (440) 99 (g) (3,593)
Unearned ESOP shares (5,115) (5,115)
-------- ------- ------- --------
Total shareholders' equity 87,250 15,078 (6,481) 95,847
-------- ------- ------- --------
Total liabilities and
shareholders' equity $417,882 $63,484 $(6,456) $474,910
======== ======= ======= ========
</TABLE>
--------------
Footnotes on Page 43
<PAGE>
Lincoln Bancorp
Unaudited Pro Forma
Combined Condensed Statement of Income
<TABLE>
<CAPTION>
For the Three Month Period Ended
March 31, 2000
Lincoln Citizens ProForma Pro Forma
Bancorp Bancorp Adjustments Combined
------- ------- ----------- --------
Interest Income
<S> <C> <C> <C> <C>
Loans, including fees $ 4,568 $ 1,134 $ 41 (i) $ 5,743
Investment securities 2,533 16 2,549
Deposits with financial institutions 129 34 163
Dividends 108 108
---------- -------- -------- ----------
Total interest income 7,338 1,184 41 8,563
---------- -------- -------- ----------
Interest Expense
Deposits 2,447 368 36 (k) 2,851
Short term borrowings 62 62
Federal Home Loan Bank advances 1,463 163 18 (l) 1,644
---------- -------- -------- ----------
Total interest expense 3,972 531 54 4,557
---------- -------- -------- ----------
Net Interest Income 3,366 653 (13) 4,006
Provision (adjustment) for loan losses (22) 15 (7)
---------- -------- -------- ----------
Net Interest Income After
Provision (Adjustment) for Loan Losses 3,388 638 (13) 4,013
---------- -------- -------- ----------
Other Income
Equity in losses of limited partnerships (103) (103)
Other income 212 51 263
---------- -------- -------- ----------
Total other income 109 51 0 160
---------- -------- -------- ----------
Other Expenses
Salaries and employee benefits 1,167 182 3 (o) 1,352
Premises and equipment 237 44 1 (j) 282
Data processing fees 205 35 240
Amortization of intangibles 55 (m)(n) 55
Other expenses 529 89 618
---------- -------- -------- ----------
Total other expenses 2,138 350 59 2,547
---------- -------- -------- ----------
Income Before Income Tax 1,359 339 (72) 1,626
Income tax expense 429 122 (7) (p) 544
---------- -------- -------- ----------
Net Income $ 930 $ 217 $ (65) $ 1,082
========== ======== ======== ==========
Basic Earnings per Share $ 0.17 $ 0.24 $ 0.17
Diluted Earnings per Share $ 0.17 $ 0.24 $ 0.17
Weighted Average Shares Outstanding
Basic 5,329,771 899,441 6,185,292
Diluted 5,329,771 899,441 6,203,630
</TABLE>
---------------
Footnotes on Page 43
<PAGE>
Lincoln Bancorp
Unaudited Pro Forma
Combined Condensed Statement of Income
<TABLE>
<CAPTION>
For the Three Month Period Ended
March 31, 1999
Lincoln Citizens ProForma Pro Forma
Bancorp Bancorp Adjustments Combined
------- ------- ----------- --------
Interest Income
<S> <C> <C> <C> <C>
Loans, including fees $3,986 $1,056 $41 (i) $5,083
Investment securities 2,273 10 2,283
Deposits with financial institutions 107 34 141
Dividends 108 108
------ ---- ---- ------
Total interest income 6,474 1,100 41 7,615
------ ---- ---- ------
Interest Expense
Deposits 2,461 381 36 (k) 2,878
Short term borrowings 11 11
Federal Home Loan Bank advances 656 91 18 (l) 765
------ ---- ---- ------
Total interest expense 3,128 472 54 3,654
------ ---- ---- ------
Net Interest Income 3,346 628 (13) 3,961
Provision for loan losses 31 15 46
------ ---- ---- ------
Net Interest Income After
Provision for Loan Losses 3,315 613 (13) 3,915
------ ---- ---- ------
Other Income
Net realized losses on sales of
available for sale securities (4) (4)
Equity in losses of limited partnerships (82) (82)
Other income 235 47 282
------ ---- ---- ------
Total other income 149 47 0 196
------ ---- ---- ------
Other Expenses
Salaries and employee benefits 803 157 3 (o) 963
Premises and equipment 217 41 1 (j) 259
Data processing fees 164 33 197
Amortization of intangibles 55 (m)(n) 55
Other expenses 336 70 406
------ ---- ---- ------
Total other expenses 1,520 301 59 1,880
------ ---- ---- ------
Income Before Income Tax 1,944 359 (72) 2,231
Income tax expense 700 132 (7) (p) 825
------ ---- ---- ------
Net Income $1,244 $227 $(65) $1,406
====== ==== ==== ======
Basic Earnings per Share $0.19 $0.24 $0.19
Diluted Earnings per Share $0.19 $0.24 $0.19
Weighted Average Shares Outstanding
Basic 6,453,437 949,507 7,308,958
Diluted 6,453,437 949,507 7,326,712
</TABLE>
-------------------
Footnotes on Page 43
<PAGE>
Lincoln Bancorp
Unaudited Pro Forma
Combined Condensed Statement of Income
<TABLE>
<CAPTION>
For the Twelve Month Period Ended
December 31, 1999
Lincoln Citizens ProForma Pro Forma
Bancorp Bancorp Adjustments Combined
------- ------- ----------- --------
Interest Income
<S> <C> <C> <C> <C>
Loans, including fees $16,866 $4,325 $163 (i) $21,354
Investment securities 10,177 21 10,198
Deposits with financial institutions 263 115 378
Dividends 436 29 465
------ ---- ----- ------
Total interest income 27,742 4,490 163 32,395
------ ---- ----- ------
Interest Expense
Deposits 9,579 1,524 144 (k) 11,247
Short term borrowings 190 190
Federal Home Loan Bank advances 4,178 442 73 (l) 4,693
------ ---- ----- ------
Total interest expense 13,947 1,966 217 16,130
------ ---- ----- ------
Net Interest Income 13,795 2,524 (54) 16,265
Provision for loan losses 384 60 444
------ ---- ----- ------
Net Interest Income After
Provision for Loan Losses 13,411 2,464 (54) 15,821
------ ---- ----- ------
Other Income
Net realized losses on sales of
available for sale securities (4) (4)
Equity in losses of limited partnerships (323) (323)
Other income 941 209 1,150
------ ---- ----- ------
Total other income 614 209 0 823
------ ---- ----- ------
Other Expenses
Salaries and employee benefits 3,859 693 10 (o) 4,562
Premises and equipment 898 165 4 (j) 1,067
Data processing fees 736 136 872
Amortization of intangibles 220 (m)(n) 220
Other expenses 1,838 317 2,155
------ ---- ----- ------
Total other expenses 7,331 1,311 234 8,876
------ ---- ----- ------
Income Before Income Tax 6,694 1,362 (288) 7,768
Income tax expenses 2,346 518 (27) (p) 2,837
------ ---- ----- ------
Net Income $4,348 $844 $(261) $4,931
====== ==== ===== ======
Basic Earnings per Share $0.71 $0.92 $0.71
Diluted Earnings per Share $0.71 $0.92 $0.70
Weighted Average Shares Outstanding
Basic 6,115,522 918,923 6,979,790
Diluted 6,115,522 918,923 7,003,954
</TABLE>
-----------------
Footnotes on Page 43
<PAGE>
Pro Forma Financial Footnotes
(a) To reflect the issuance of 890,512 shares of Lincoln Bancorp common
stock to holders of Citizens Bancorp stock, cash paid to holders of
Citizens Bancorp stock and elimination of capital accounts of Citizens
Bancorp.
(b) To record the excess cost of acquisition over the estimated market
value of the net assets acquired (goodwill). The purchase price
allocation is summarized as follows:
<TABLE>
<CAPTION>
Purchase price paid as:
<S> <C> <C> <C>
Common stock $ 8,667
Cash to holders of Citizens Bancorp common stock 8,905
Fair value of Citizens Bancorp options acquired 271
Acquisition expenses 150
-------
17,993
Allocated to:
Historical book value of Citizens' assets and liabilities $ 15,421
Adjustments:
Transaction fee due to Trident (352)
Professional fees (160)
Cash payment for stock options vested not exercised (115)
Pre-tax costs of severing data processing contract and
personnel severance package (462)
Tax benefit on above adjustments (excluding non-deductible
fee due to Trident and professional fees) 229
--------
Adjusted book value of Citizens'assets and liabilities $ 14,561
Adjustments to step-up assets and liabilities to fair value:
Loans (732)
Premises and equipment 186
Deposits 287
Federal Home Loan Bank advances 584
Deferred taxes (129)
Unearned RRP compensation 341
Core deposit intangible 996
--------
Total allocation 16,094
------
Excess of purchase price over allocation to identifiable assets
and liabilities (goodwill) $ 1,899
=======
</TABLE>
(c) To adjust for the pre-tax costs of severing data processing contract
and a personnel severance package, payments made for stock options
vested not exercised, professional fees, acquisition expenses and the
transaction fee due to Trident.
(d) To adjust interest-earning assets and interest-bearing liabilities of
Citizens Bancorp to approximate market value.
(e) To adjust premises and equipment of Citizens Bancorp to the estimated
market value.
(f) To record the net deferred tax asset as a result of the adjustments to
Citizens historical book value and the purchase accounting adjustments
using Lincoln Bancorp's statutory rate of 39.61%.
(g) To adjust unearned RRP compensation as result of the cancellation of
shares of Citizens Bancorp common stock held in the reserve account of
the Citizens RRP Plan and to adjust for the difference between the
historical basis of the unearned RRP compensation and the total value
of the consideration received for the non-vested RRP shares.
(h) To record the core deposit intangible.
(i) To record amortization of the fair value adjustment of loans using a
method that approximates the effective interest method over eight
years.
(j) To increase depreciation expense for step-up of Citizens Bancorp's
premises and equipment to estimated fair value.
(k) To record amortization of the fair value adjustment of deposits using
the straight line method over two years.
(1) To record amortization of the fair value adjustment of Federal Home
Loan Bank advances using the straight line method over eight years.
(m) To record amortization of the core deposit intangible using the 125%
declining balance method over 10 years.
(n) To record amortization of goodwill using the straight line method over
20 years.
(o) To record additional unearned RRP compensation amortization.
(p) To record the impact of taxes at 39.61% rate.
<PAGE>
INTERESTS OF CERTAIN DIRECTORS AND EXECUTIVE OFFICERS
OF CITIZENS BANCORP IN THE MERGER
When considering the recommendations of the Citizens Bancorp Board of
Directors, you should be aware that some of the employees of Citizens Bancorp
and Citizens Savings Bank and members of the Citizens Bancorp Board of Directors
and management have interests that are different from, or in conflict with, your
interests. The Board of Directors was aware of these interests when it approved
the merger and the Agreement and Plan of Reorganization. Except as described
below, to the knowledge of Citizens Bancorp, the executive officers and
directors of Citizens Bancorp do not have any material interest in the merger
apart from their interests as shareholders.
Appointment of Fred W. Carter to Lincoln Bancorp Board of Directors.
The Agreement and Plan of Reorganization provides that Fred W. Carter
(or in the event he is not able to serve, another director of Citizens, selected
in the sole discretion of the Citizens Bancorp Board of Directors), shall be
appointed to the Board of Directors of Lincoln Bancorp and Lincoln Federal for a
two-year term ending in 2002. Following his service as a director of Lincoln
Bancorp and Lincoln Federal, Mr. Carter shall be appointed as a director
emeritus of the Board of Directors of Lincoln Federal to serve for at least one
additional year in such position. Under the current policies of Lincoln Federal,
Mr. Carter will receive annual director's fees of $884 plus $416 for each
regular meeting attended and $208 for each committee meeting attended. Upon Mr.
Carter's appointment as a director emeritus he will receive annual fees of
$1,000.
Change in Control Provisions of Existing Employment Contract Between Citizens
Savings Bank and Fred W. Carter.
Fred W. Carter and Citizens Savings Bank entered into an employment
contract (the "Employment Agreement") dated September 18, 1997 which provides,
in part, that in the event of the termination of Mr. Carter's employment with
Citizens Savings Bank following a Change in Control (as defined), he shall be
entitled to receive his annual base compensation at the rates in effect at the
time of termination for three additional 12-month periods. In addition, the
Employment Agreement provides that, during such periods, Citizens Savings Bank
will maintain in full force and effect for the continued benefit of Mr. Carter,
each employee welfare plan and each employee pension plan in which Mr. Carter
was entitled to participate immediately prior to the date of his termination.
The Employment Agreement further provides, however, that Citizens Savings Bank
would not be liable for payments to Mr. Carter in excess of the limitations set
forth at section 280(g) of the Code. As of March 21, 2000, Mr. Carter's base
compensation was $155,000 per year. Thus, this provision of his Employment
Agreement entitles Mr. Carter to receive from Citizens Savings Bank upon the
termination of his employment in connection with the proposed merger an amount
equal to three times his base compensation, or $465,000, plus the continuation
of certain welfare plan and pension plan benefits, subject to limitations set
forth in section 280(g) of the Code. The Agreement and Plan of Reorganization
authorizes Citizens Savings Bank to increase Mr. Carter's salary to the extent
necessary so that his salary for the portion of the year 2000 prior to the
effective date will be $155,000. It is currently expected that Mr. Carter's
salary will be increased in this manner before the effective date of the merger
in order to increase the level of benefits he will receive under the Citizens
FIRF Plan.
The Agreement and Plan of Reorganization provides that, in lieu of
receiving the amounts that would otherwise be payable under the Employment
Agreement, Mr. Carter (or his estate in the event of his death prior to the
effective time of the merger) shall receive in connection with the merger a cash
sum equal to $412,000 minus any amount by which his base compensation during
calendar year 2000 from Citizens Bancorp or Citizens Savings Bank that he
receives prior to the effective time of the merger exceeds the amount that would
have been paid to him during such period had his compensation been paid ratably
at an annual rate of $155,000. This amount is the amount Mr. Carter may receive
under his employment contract without exceeding the limits in section 280(g) of
the Code. Of this amount, $150,000 will be paid to Mr. Carter on January 2,
2001, and the balance will be paid to him at the effective time of the merger;
provided, however, that all of such amount will be paid to Mr. Carter at the
effective time of the merger if an independent accounting firm determines that
this is necessary in order for such amount to be accrued as an expense of
Citizens Bancorp for the accounting period which includes the effective date of
the merger. The amounts payable to Mr. Carter pursuant to these provisions of
the Agreement and Plan of Reorganization shall be paid whether or not Mr. Carter
is required to terminate his employment with Citizens Savings Bank prior to the
effective date for any reason, including, without limitation, his disability.
Consulting Agreement
The Agreement and Plan of Reorganization provides that Lincoln Federal
will offer to enter into a consulting agreement with Mr. Carter following the
effective time of the merger. The proposed consulting agreement provides, for a
period of 24 months following the effective time of the merger, Mr. Carter shall
provide consulting services to Lincoln Bancorp and its subsidiaries with regard
to matters in which he was involved while employed by Citizens Bancorp and its
subsidiaries. These services may include advice regarding the management or
disposition of the investments held by Citizens Bancorp and its subsidiaries as
of the effective time of the merger and advice regarding the maintenance and
strengthening of relationships with persons and entities which are customers of
Citizens Bancorp as of the effective time of the merger. In addition, these
services may but need not include active oversight of the remaining phases of
the real estate development project of Citizens Loan and Service Corporation
("CLSC"), a wholly-owned subsidiary of Citizens Savings Bank, which project is
not expected to be completed until well after the effective time of the merger.
Mr. Carter's services under the consulting agreement will be rendered as an
independent contractor, and not as an employee of Lincoln Bancorp or any of its
subsidiaries, and will be provided under the general direction of Lincoln
Bancorp's President and Chief Executive Officer. As compensation for the
consulting services to be provided, Lincoln will pay Mr. Carter consulting fees
in the amount of approximately $2,200 per month. The consulting agreement will
provide that Mr. Carter will be required to work not more than 500 hours per
year on matters relating to Lincoln Federal.
EXCHANGE OF CITIZENS BANCORP COMMON STOCK
FOR LINCOLN BANCORP COMMON STOCK
Promptly after the completion of the merger, Lincoln Bancorp will
instruct The Fifth Third Bank, the transfer agent for Lincoln Bancorp common
stock, to send to each holder of Citizens Bancorp common stock transmittal
materials for use in exchanging all of their certificates representing shares of
Citizens Bancorp common stock for a certificate or certificates representing
shares of Lincoln Bancorp common stock, and a check for the cash portion of the
merger consideration and for any fractional share interest held by the
shareholder. The transmittal materials will contain information and instructions
with respect to the surrender of certificates of shares of Citizens Bancorp
common stock in exchange for certificates representing shares of Lincoln Bancorp
common stock.
YOU SHOULD NOT SEND IN YOUR SHARE CERTIFICATES UNTIL YOU RECEIVE THE
LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Following the completion of the merger and upon the delivery by a
shareholder of the certificates representing shares of Citizens Bancorp common
stock that he or she holds, or a satisfactory indemnity if any of the
certificates are lost, stolen, or destroyed, together with a properly completed
letter of transmittal, The Fifth Third Bank will mail to the shareholder a
certificate or certificates for the number of shares of Lincoln Bancorp common
stock to which the holder is entitled, together with all undelivered dividends
or distributions, less the amount of any withholding taxes that may be required
for the shares. The Fifth Third Bank will also deliver to each shareholder of
Citizens Bancorp who tenders his or her shares in connection with the merger a
check in the amount of the cash portion of the merger consideration payable to
the shareholder plus, where applicable, any cash to be paid in lieu of
fractional shares of Lincoln Bancorp common stock. Lincoln Bancorp will not pay
interest on any cash payable to shareholders of Citizens Bancorp in connection
with the merger.
Declaration of dividends by Lincoln Bancorp after the completion of the
merger will include dividends on all Lincoln Bancorp common stock issued in the
merger, but no dividend or other distribution payable to the holders of record
of Lincoln Bancorp common stock at or as of any time after the completion of the
merger will be paid to holders of Citizens Bancorp common stock until they
physically surrender all certificates as described above. After the completion
of the merger, the stock transfer books of Citizens Bancorp will close and there
will be no transfers on the transfer books of Citizens Bancorp.
REGULATORY APPROVALS FOR THE MERGER
Office of Thrift Supervision.
The mergers of Citizens Bancorp with and into Lincoln Bancorp, and of
Citizens Savings Bank with and into Lincoln Federal, are subject to prior
approval by the Office of Thrift Supervision under Section 10(e) of the Home
Owners' Loan Act and under the Change in Bank Control Act. These statutes
require the Office of Thrift Supervision, when considering a transaction such as
a merger of two savings and loan holding companies or two savings associations
to take into consideration the financial and managerial resources and the future
prospects of the companies and associations involved, the insurance risk to the
Savings Association Insurance Fund or the Bank Insurance Fund, as applicable,
and the effect of the transaction on the convenience and needs of the
communities to be served. In considering financial resources and future
prospects, the Office of Thrift Supervision will, among other things, evaluate
the adequacy of the capital levels of the parties to a proposed transaction and
of the resulting institutions. In considering the managerial resources, the
Office of Thrift Supervision will consider the competence, experience, and
integrity of the officers, directors, and principal shareholders of the
companies and associations.
The Home Owners' Loan Act prohibits the Office of Thrift Supervision
from approving a merger if the merger:
o would result in a monopoly or be in furtherance of any
combination or conspiracy to monopolize or to attempt to
monopolize the savings and loan business in any part of the
United States; or
o would substantially lessen competition or tend to create a
monopoly in any section of the country, or would result in any
other manner in a restraint of trade, unless the Office of
Thrift Supervision finds that the anti-competitive effects of
the merger are clearly outweighed by the probable effect of
the transaction in meeting the convenience and needs of the
communities to be served.
In addition, under the Community Reinvestment Act of 1977, the Office
of Thrift Supervision must take into account the record of performance of
Lincoln Federal and Citizens Savings Bank in meeting the credit needs of the
communities served by such associations, including low- and moderate-income
neighborhoods.
Lincoln Bancorp and Citizens Bancorp filed an application for approval
of the proposed merger with the Office of Thrift Supervision on June 22, 2000.
The merger may not be completed until the 30th day, or, with the consent of the
relevant agencies, the 15th day, following the date of the Office of Thrift
Supervision approval, during which period the United States Department of
Justice may comment adversely on the merger or challenge the merger on antitrust
grounds. The commencement of an antitrust action would stay the effectiveness of
any approval unless a court specifically orders otherwise.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
As a condition to closing the merger, Citizens Bancorp must obtain the
opinion of Barnes & Thornburg that, for federal income tax purposes, the merger
constitutes a reorganization within the meaning of Section 368 of the Code and
will not result in gain or loss for federal income tax purposes to Citizens
Bancorp. In addition, the opinion must state that the issuance of Lincoln
Bancorp's common stock in the merger will not result in the recognition of gain
or loss by the holders of Citizens Bancorp common stock to the extent they
receive shares of Lincoln Bancorp common stock in the merger in exchange for
shares of Citizens Bancorp common stock.
In addition, Lincoln Bancorp must obtain the opinion of Bose McKinney &
Evans LLP to the effect that the merger constitutes a reorganization within the
meaning of Section 368 of the Code.
Pursuant to the Merger Agreement, Citizens Bancorp and Lincoln Bancorp
may exercise their right to terminate the merger if Barnes & Thornburg and Bose
McKinney & Evans LLP are unable to render their tax opinions at closing. If the
market price of the Lincoln Bancorp common stock as of the effective time
declines relative to the market price of Citizens Bancorp common stock to the
extent that the value of the Lincoln Bancorp common stock received by the
Citizens Bancorp shareholders in the merger is less than 45% of the value of
formerly outstanding shares of Citizens Bancorp common stock, then Citizens
Bancorp and Lincoln Bancorp will not be obligated to consummate the merger
pursuant to the Agreeement and Plan of Reorganization because Barnes & Thornburg
and Bose McKinney & Evans LLP would be unable to render their favorable tax
opinions on the merger.
Barnes & Thornburg has rendered its tax opinion, based on certain
assumptions, as of the date the registration statement relating to this proxy
statement/prospectus was filed. That opinion was based on current market prices
of Citizens Bancorp and Lincoln Bancorp common stock and also assumed that no
shareholders of Citizens Bancorp dissent in the merger. Subject to the
qualifications set forth above, the opinion of Barnes & Thornburg provides:
o Assuming the value of the Lincoln Bancorp common stock is no
less than 45% of the aggregate value of the formerly
outstanding Citizens Bancorp common stock as of the effective
time, the merger will constitute a tax-free reorganization for
Federal income tax purposes within the meaning of Section
368(a)(1)(A) of the Code, meaning that neither Citizens
Bancorp nor Lincoln Bancorp will recognize any gain or loss
with respect to the merger;
o The shareholders of Citizens Bancorp will not recognize any
gain or loss on the transfer of their Citizens Bancorp common
stock to the extent they receive shares of Lincoln Bancorp
common stock as consideration;
o A Citizens Bancorp shareholder who receives a combination of
cash and shares of Lincoln Bancorp common stock in exchange
for Citizens Bancorp common shares in the merger will not
recognize loss but will recognize gain, if any, on the shares
so exchanged to the extent of any cash received. Any such
recognized gain will be treated as capital gain unless, in the
case of the particular shareholder, the receipt of the cash is
deemed to have the effect of a dividend, in which case such
gain will be treated as ordinary dividend income to the extent
of such shareholder's ratable share of Citizens Bancorp's
accumulated earnings and profits. Any capital gain will be
long-term capital gain if, as of the date of the exchange, the
shareholder's holding period for such shares is greater than
one year;
o The stock redemption provisions of Section 302 of the Code
apply in determining whether cash received by a Citizens
Bancorp shareholder pursuant to the merger has the effect of a
dividend under Section 356(a)(2) of the Code (the
"Hypothetical Redemption Analysis"). Under the Hypothetical
Redemption Analysis, a Citizens Bancorp shareholder will be
treated as if the portion of the common shares exchanged for
cash in the merger instead had been exchanged for shares of
Lincoln Bancorp common stock (the "Hypothetical Shares"),
followed immediately by a redemption of the Hypothetical
Shares by Lincoln Bancorp for cash. Under the principles of
Section 302, a Citizens Bancorp shareholder will recognize
capital gain rather than dividend income with respect to the
cash received if the hypothetical redemption is "not
essentially equivalent to a dividend" or is "substantially
disproportionate" with respect to such shareholder. In
applying the principles of Section 302, the constructive
ownership rules of Section 318 of the Code will apply in
comparing a shareholder's ownership interest in Lincoln
Bancorp both immediately after the merger (but before the
hypothetical redemption) and after the hypothetical
redemption. Whether the hypothetical redemption by Lincoln
Bancorp of the Hypothetical Shares for cash is "not
essentially equivalent to a dividend" with respect to a
Citizens Bancorp shareholder will depend upon such
shareholder's particular circumstances. However, the
hypothetical redemption must, in any event, result in a
"meaningful reduction" in such shareholder's percentage
ownership of Lincoln Bancorp stock. In determining whether the
hypothetical redemption by Lincoln Bancorp results in a
meaningful reduction in the shareholder's percentage ownership
of Lincoln Bancorp stock and therefore does not have the
effect of a distribution of a dividend, a Citizens Bancorp
shareholder should compare his or her interest in Lincoln
Bancorp (including interests owned actually, hypothetically
and constructively) immediately after the merger (but before
the hypothetical redemption) to his or her interest after the
hypothetical redemption. The Internal Revenue Service has
indicated, in Revenue Ruling 76-385, that a shareholder in a
publicly held corporation whose relative stock interest in the
corporation is minimal and who exercises no "control" over
corporate affairs is generally treated as having had a
meaningful reduction in his or her stock after a redemption
transaction if his or her percentage stock ownership in the
corporation has been reduced to any extent, taking into
account the shareholder's actual and constructive ownership
before and after the hypothetical redemption. In Revenue
Ruling 76-385, the Internal Revenue Service found a reduction
from .0001118% to .0001081% to be a meaningful reduction. The
hypothetical redemption transaction would be "substantially
disproportionate" and, therefore, would not have the effect of
a distribution of a dividend with respect to a Citizens
Bancorp shareholder who owns less than 50% of the voting power
of the outstanding Lincoln Bancorp common stock if the
percentage of Lincoln Bancorp common stock actually and
constructively owned by such shareholder immediately after the
hypothetical redemption is less than 80% of the percentage of
Lincoln Bancorp common stock actually, hypothetically and
constructively owned by such shareholder immediately before
the hypothetical redemption;
o The aggregate adjusted tax basis of the shares of Lincoln
Bancorp common stock received in such exchange will be equal
to the aggregate tax basis of the shares surrendered therefor,
decreased by the cash received and increased by the amount of
gain (including any amount which is characterized as a
dividend) recognized, if any. The holding period of Lincoln
Bancorp common stock will include the holding period of the
common shares surrendered therefor;
o Cash received in lieu of a fractional share of Lincoln Bancorp
common stock will be treated as received in redemption of such
fractional interest and gain or loss will be recognized,
measured by the difference between the amount of cash received
and the portion of the basis of the share of common stock
allocable to such fractional interest. Such gain or loss will
be long-term capital gain or loss if, as of the date of
exchange, the holding period for such share is greater than
one year;
o If you dissent to the merger and receive solely cash in
exchange for your Citizens Bancorp shares, the cash will be
treated as a distribution in redemption of your Citizens
Bancorp shares, subject to the provisions and limitations of
Section 302 of the Code. Unless the redemption is treated as a
dividend under Section 302(d) of the Code, you will recognize
gain or loss measured by the difference between the amount of
cash received and the tax basis of the Citizens Bancorp shares
redeemed. This gain or loss will be capital gain or loss if
the Citizens Bancorp shares are held by you as a capital asset
at the time of the merger. If, on the other hand, the
redemption is treated as a dividend under Section 302(d) of
the Code, the full amount of cash you receive will be treated
as ordinary income;
o Payments of cash to a Citizens Bancorp shareholder
surrendering shares of common stock will be subject to
information reporting and "backup" withholding at a rate of
31% of the cash payment to the shareholder, unless the
shareholder furnishes its taxpayer identification number in
the manner prescribed in applicable Treasury Regulations,
certifies that such number is correct, certifies as to no loss
of exemption from backup withholding and meets certain other
conditions. Any amounts withheld from payments to a holder
under the backup withholding rules will be allowed as a refund
or credit against the holder's United States federal income
tax liability, provided the required information is furnished
to the Internal Revenue Service;
o The receipt in the merger by a holder of vested options to
acquire shares of Citizens Bancorp common stock of an amount
in cash equal to the excess of $18.75 over the per share
exercise price for each share of common stock subject to such
vested stock options will result in the recognition of taxable
income by the person in the amount of cash received as
consideration for the termination of such vested stock
options; and
o The receipt by a holder of a non-vested option to acquire
shares of Citizens Bancorp common stock of a comparable option
to acquire shares of Lincoln Bancorp common stock will not
result in the recognition of a gain or loss by such person.
This discussion is for general information only. The opinions of Barnes
& Thornburg and Bose McKinney & Evans LLP will be based on current law at the
effective time of the merger, and will assume that the merger is consummated as
described in the Agreement and Plan of Reorganization. Neither this discussion
nor the opinions of Barnes & Thornburg and Bose McKinney & Evans LLP are binding
on the Internal Revenue Service and no ruling from the Internal Revenue Service
has been sought or will be sought with respect to the tax consequences of the
merger.
The foregoing discussion is limited to the material federal income tax
consequences of the proposed merger and does not discuss state, local, or
foreign tax consequences, or all of the tax consequences that might be relevant
to an individual shareholder of Citizens Bancorp. Each shareholder is urged to
consult with his or her own tax advisor concerning the specific tax consequences
of the merger to the shareholder, including the applicability and effect of
foreign, state, local, or other tax laws and of any future changes in the Code,
or regulation issued thereunder, or under any tax rulings or court decisions or
other laws concerning taxes.
ACCOUNTING TREATMENT OF THE MERGER
The merger is expected to be treated as a purchase of assets for
accounting and financial reporting purposes. Accordingly, in connection with the
merger, the assets and liabilities of Citizens Bancorp will be marked to their
fair market value prior to being added to the corresponding balance sheet
categories of Lincoln Bancorp, subject to any adjustments required to conform
the accounting policies and financial statement classifications of the two
companies. Any amount remaining after allocating the purchase price to the
Citizens Bancorp's assets and liabilities will be classified as goodwill and
will be amortized over future periods. In future financial statements, the
results of operations of Lincoln Bancorp will include the results of both
Citizens Bancorp and Lincoln Bancorp only for the periods beginning after the
effective date of the merger. Lincoln Bancorp must treat certain expenses
incurred to effect the merger as current charges against income rather than as
adjustments to its balance sheet.
The unaudited pro forma condensed combined financial information
contained in this document has been prepared using the purchase method of
accounting to account for the merger. See "Unaudited Pro Forma Condensed
Combined Financial Statements" and the footnotes thereto beginning on page 38.
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to Chapter 44 of the Indiana Business Corporation Law (the
"IBCL"), Citizens Bancorp shareholders have dissenters' rights with respect to
the merger of Citizens Bancorp with Lincoln Bancorp. Chapter 44 of the IBCL
authorizes a Citizens Bancorp shareholder to demand payment in cash for the fair
value of his or her shares of Citizens Bancorp common stock immediately before
the effective time of the merger, excluding any appreciation or depreciation in
the value unless a court determines that such exclusion would be inequitable. To
claim this right a Citizens Bancorp shareholder who desires to exercise his or
her rights as a dissenting shareholder: (a) must, before the vote is taken at
the special meeting of Citizens Bancorp shareholders, deliver to Citizens
Bancorp written notice of his or her intent to demand payment for his or her
shares if the merger is effectuated, and (b) must not vote in favor of the
merger in person or by proxy at the Citizens Bancorp Special Meeting.
If the merger is approved by the Citizens Bancorp shareholders,
Citizens Bancorp will send a notice of dissenters' rights to those Citizens
Bancorp shareholders satisfying the above conditions within ten days after the
shareholder approval. The notice will state the procedures the dissenting
Citizens Bancorp shareholders thereafter must follow to exercise his or her
dissenters' rights in accordance with Chapter 44 of the IBCL.
A CITIZENS BANCORP SHAREHOLDER WHO DOES NOT DELIVER WRITTEN NOTICE OF
INTENT TO DEMAND PAYMENT AND EITHER VOTES AGAINST THE MERGER OR REFRAINS FROM
VOTING WILL BE CONSIDERED NOT TO BE ENTITLED TO RIGHTS UNDER CHAPTER 44 OF THE
IBCL.
Citizens Bancorp shareholders who execute and return the enclosed proxy
but do not specify a choice on the merger proposals will be deemed to have voted
in favor of the merger of Citizens Bancorp with Lincoln Bancorp and, accordingly
to have waived their dissenters' rights, unless they revoke the proxy prior to
its being voted.
Upon consummation of the merger, Citizens Bancorp will pay each
dissenting Citizens Bancorp shareholder who has complied with all requirements
of Chapter 44 of the IBCL and of the notice, Citizens Bancorp's estimate of the
fair value of the shares as of the time immediately prior to the merger,
EXCLUDING ANY APPRECIATION IN VALUE IN ANTICIPATION OF THE MERGER. The
determination of the estimate of "fair value" will be based on the value of such
shares of Citizens Bancorp Common Stock on March 21, 2000, the last business day
immediately prior to the announcement of the merger.
Dissenters can object to the fair value by stating their estimate of
the fair value and demanding payment of the additional amount claimed as fair
value within 30 days after Citizens Bancorp makes or offers payments for the
dissenters' shares. Citizens Bancorp can elect to agree to the dissenters' fair
value demand or can commence an action in the Circuit or Superior Court of
Clinton County, Indiana, within 60 days after receiving the demand for payment
for a judicial determination of the fair value. The Court can appoint appraisers
to determine the fair value. The costs of the proceeding, including compensation
and expenses of the appraisers, counsel for the parties, and experts, will be
assessed against all parties to the action in such amounts as the Court finds
equitable. Each dissenter made a party to the action will be entitled to receive
the amount, if any, by which the Court finds the fair value of the dissenters'
shares, plus interest, exceeds the amount paid by Citizens Bancorp.
See the full text of Chapter 44 set forth in Annex C to this
Prospectus/Proxy Statement.
TO PERFECT RIGHTS OF DISSENT, A CITIZENS BANCORP SHAREHOLDER MUST NOT
VOTE IN FAVOR OF THE MERGER AND MUST DELIVER A WRITTEN DEMAND FOR PAYMENT IN
ACCORDANCE WITH THE REQUIREMENTS OF CHAPTER 44 OF THE IBCL. THIS SUMMARY OF THE
DISSENTERS' RIGHTS OF CITIZENS BANCORP SHAREHOLDERS DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE STATUTORY PROVISIONS ATTACHED
TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX C. ANY INDIVIDUAL CONSIDERING
EXERCISING RIGHTS OF DISSENT SHOULD CAREFULLY READ AND CONSIDER THE INFORMATION
DISCLOSED IN ANNEX C AND CONSULT WITH AN INDEPENDENT INVESTMENT ADVISOR BEFORE
EXERCISING RIGHTS OF DISSENT.
NASDAQ NATIONAL MARKET LISTING
Lincoln Bancorp will file a notification with the Nasdaq National
Market System regarding the issuance of Lincoln Bancorp common stock in the
merger. This notification must be made to the Nasdaq National Market System for
the merger to proceed.
DIRECTORS AND EXECUTIVE OFFICERS
Lincoln Bancorp. Upon completion of the merger, Lincoln Bancorp and
Lincoln Federal will retain their respective directors and executive officers.
In addition, Fred W. Carter (or in the event he is not able to serve, another
director of Citizens Bancorp) will be added to the Board of Directors of Lincoln
Bancorp and Lincoln Federal. Furthermore, each director or director emeritus of
Citizens Bancorp other than Mr. Carter will be appointed to serve as an advisory
director of Lincoln Federal, and shall be re-appointed to serve in such capacity
through March 31, 2003. As advisory directors of Lincoln Federal, these
individuals will meet semiannually and will provide advice on how to facilitate
a smooth transition of Citizens Bancorp's business into Lincoln Bancorp
following the merger, and will receive, as compensation for their service,
annual fees of $1,000 each. Prior to the effective time of the merger, Lincoln
Bancorp's Board of Directors consists of eight members. The By-Laws of Lincoln
Bancorp provide that the Board of Directors is to be divided into three classes
as nearly equal in number as possible. The members of each class are to be
elected for a term of three years and until their successors are elected and
qualified. One class of directors is to be elected annually. Directors must have
their primary domicile in Clinton, Hendricks or Montgomery Counties, Indiana,
must have had a loan or deposit relationship with the Lincoln Federal for a
continuous period of nine months prior to their nomination to the Board (or in
the case of directors in office on September 10, 1998, prior to that date), and
non-employee directors must have served as a member of a civic or community
organization based in Clinton, Hendricks or Montgomery Counties, Indiana for at
least a continuous period of 12 months during the five years prior to their
nomination to the Board. The By-laws of Lincoln Bancorp authorize the Board of
Directors to waive these requirements in connection with the appointment of a
representative to the Board in connection with the acquisition of another
financial institution. Pursuant to this authority the Board of Directors of
Lincoln Bancorp will waive these requirements to permit Fred W. Carter to serve
on the Board following the effective time of the merger.
The following table sets forth certain information regarding the
current members of the Board of Directors of Lincoln Bancorp, including the
number and percent of shares of Common Stock beneficially owned by such persons
as of the Voting Record Date. Unless otherwise indicated, each director has sole
investment and/or voting power with respect to the shares shown as beneficially
owned by him. No director of Lincoln Bancorp is related to any other director or
executive officer of the Lincoln Bancorp by blood, marriage, or adoption, and
there are no arrangements or understandings between any nominee and any other
person pursuant to which such director was selected to serve on the Board of
Directors. The table also sets forth the number of shares of Lincoln Bancorp
common stock beneficially owned by John M. Baer, Lincoln Bancorp's Secretary,
Treasurer, and Chief Financial Officer, and by Fred W. Carter, who will become a
director of Lincoln Bancorp upon the effective time of the merger. The chart
also sets forth the number of shares owned by all directors and executive
officers of Lincoln Bancorp following the merger as a group (including Mr.
Carter). The chart also discloses the effects of the issuance of shares of
Lincoln Bancorp common stock in the merger on the percentage of the shares of
Lincoln Bancorp common stock held by the following persons.
<TABLE>
<CAPTION>
Shares of
Common Common Percentage of
Expiration Director of Director Stock Stock Owned Class Upon
of Lincoln of Lincoln Beneficially as of Effective Effective
Term as Bancorp Federal Owned as of Percentage Date of Time
Name Director Since Since July 27, 2000 of Class(1) Merger (2) of Merger (2)
-------------------- --------- ------ ------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lester N. Bergum, Jr. 2003 1998 1996 35,769 (3) .63% 35,769 (3) .54%
Dennis W. Dawes 2003 1999 1999 1,000 (4) .02% 1,000 (4) .02%
W. Thomas Harmon 2001 1998 1982 65,769 (5) 1.16% 65,769 (5) 1.00%
Jerry R. Holifield 2001 1998 1992 35,901 (5) .63% 35,901 (5) .55%
David E. Mansfield 2002 1998 1997 25,769 (5) .45% 25,769 (5) .39%
John C. Milholland 2001 1998 1988 62,731 (5) 1.10% 62,731 (5) .96%
T. Tim Unger 2002 1998 1996 147,418 (6) 2.58% 147,418 (6) 2.23%
John L. Wyatt 2002 1998 1992 45,769 (7) .81% 45,769 (7) .70%
Fred W. Carter --- --- 35,851 (8) .55%
Executive Officer
John M. Baer
Secretary, Treasurer
and Chief Financial
Officer 85,442 (9) 1.50% 85,442 (9) 1.30%
All directors and
executive officers
as a group (11 persons) 505,568 (10) 8.79% 541,419 (10) 8.16%
</TABLE>
(1) Based upon information furnished by the respective directors. 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.
Percentages are based upon 5,677,493 shares of Lincoln Bancorp common stock
outstanding as of July 27, 2000.
(2) Assumes the issuance in the merger of 885,074 shares of Lincoln Bancorp
common stock to the existing shareholders of Citizens Bancorp, and that
none of such shares are acquired by current directors or executive officers
of Lincoln Bancorp. Excludes shares of Lincoln Bancorp common stock which
will be held pursuant to nonvested options by the directors and director
emeritus of Citizens Bancorp upon the consummation of the merger, which
options are not exercisable within 60 days of the Voting Record Date and
which, pursuant to the Agreement and Plan of Reorganization, shall be
granted to such persons as consideration for the conversion of the
nonvested options to acquire shares of Citizens Bancorp common stock they
hold prior to the effective time of the merger pursuant to the Citizens
Option Plan.
(3) Includes 7,610 shares held jointly by Mr. Bergum and his spouse and 8,411
shares held under the Lincoln Federal Recognition and Retention Plan and
Trust (the "Lincoln RRP"), and 5,256 shares subject to options granted
under the Lincoln Bancorp Stock Option Plan (the "Lincoln Option Plan").
Does not include options for 21,028 shares granted to Mr. Bergum under the
Lincoln Option Plan which are not exercisable within 60 days of the Voting
Record Date.
(4) Does not include options for 15,000 shares granted to Mr. Dawes under the
Lincoln Option Plan which are not exercisable within 60 days of the Voting
Record Date.
(5) Includes 8,411 shares held under the Lincoln RRP and 5,256 shares subject
to options under the Lincoln Option Plan. Does not include options for
21,028 shares granted under the Lincoln Option Plan which are not
exercisable within 60 days of the Voting Record Date.
(6) Includes 44,860 shares held under the Lincoln RRP, 35,046 shares subject to
options under the Lincoln Option Plan, and 3,798 shares allocated as of
December 31, 1999 under the Lincoln Bancorp Employee Stock Ownership Plan
and Trust (the "Lincoln ESOP"). Does not include options for 140,185 shares
granted under the Lincoln Option Plan which are not exercisable within 60
days of the Voting Record Date.
(7) Includes 16,791 shares held jointly by Mr. Wyatt with his spouse, 8,411
shares held under the Lincoln RRP and 5,256 shares subject to options
granted under the Lincoln Option Plan. Does not include options for 21,028
shares granted under the Lincoln Option Plan which are not exercisable
within 60 days of the Voting Record Date.
(8) Assumes that the 38,241 shares of Citizens Bancorp common stock held by Mr.
Carter (including shares allocated to his account under the Citizens ESOP
and shares held under the Citizens RRP), are converted into 35,851 shares
of Lincoln Bancorp common stock upon the effective time of the merger, that
Mr. Carter's vested stock options are cashed out in the merger and his
nonvested stock options to acquire shares of Citizens Bancorp common stock
are converted into nonvested options to acquire shares of Lincoln Bancorp
common stock, and that such options are not exercisable within 60 days of
the Voting Record Date, as provided in the Agreement and Plan of
Reorganization.
(9) Includes 10,891 shares held jointly by Mr. Baer and his spouse, 28,037
shares allocated to his account under the Lincoln RRP, 8,000 shares subject
to options granted under the Lincoln Option Plan and 2,605 shares allocated
to Mr. Baer's account as of December 31, 1999 under the Lincoln ESOP. Does
not include 52,092 shares granted under the Lincoln Option Plan which are
not exercisable within 60 days of the Voting Record Date.
(10) Includes 123,363 shares held under the Lincoln RRP, 74,582 shares subject
to options granted under the Lincoln Option Plan, and 6,403 shares
allocated as of December 31, 1999 under the Lincoln ESOP. Does not include
options for 333,425 shares granted under the Lincoln Option Plan which are
not exercisable within 60 days of the Voting Record Date.
Presented below is certain information concerning the current directors
of Lincoln Bancorp:
Lester N. Bergum, Jr. (age 51) is an attorney and partner with the firm
of Robison, Robison, Bergum & Johnson in Frankfort, Indiana, where he has
practiced since 1974. He has also served since 1989 as president of Title
Insurance Services, Inc., a title agency located in Frankfort, Indiana.
Dennis W. Dawes (age 54) has served as President and Treasurer of
Hendricks Community Hospital and President of Hendricks Community Hospital
Foundation in Danville, Indiana for over five years.
W. Thomas Harmon (age 60) 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 59) became Chairman of the Board of the Bank in
December, 1999 and has been the School Superintendent of the Plainfield
Community School Corporation since 1991.
David E. Mansfield (age 58) is an Administrative Supervisor for
Marathon Oil Company where he has worked since 1973.
John C. Milholland (age 64) has been Principal of Frankfort Senior High
School in Frankfort, Indiana since 1989.
T. Tim Unger (age 59) has been President, Chief Executive Officer and
Chairman of the Board of Lincoln Bancorp since 1998, and President and Chief
Executive Officer of Lincoln Federal since January, 1996. Theretofore, Mr. Unger
served as President and Chief Executive Officer of Summit Bank of Clinton County
from 1989 through 1995.
John L. Wyatt (age 63) 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 of Directors. Currently,
Wayne E. Kessler and Edward E. Whalen serve as directors emeritus of Lincoln
Federal.
Following the effective time of the merger, Fred W. Carter will serve a
s a director of Lincoln Bancorp and Lincoln Federal. Presented below is certain
information concerning Mr. Carter.
Fred W. Carter (age 68) served as Chairman, Chief Executive Officer and
President of Citizens Bancorp since 1997 and as President and Chief Executive
Officer of Citizens Savings Bank since 1966.
Citizens Bancorp. The following table sets forth certain information
regarding the directors of the Citizens Bancorp, including the number and
percent of shares of Citizens Bancorp common stock beneficially owned by such
persons as of the Voting Record Date. Unless otherwise indicated, each director
has sole investment and/or voting power with respect to the shares shown as
beneficially owned by him. No director is related to any other director or
executive officer of the Citizens Bancorp by blood, marriage, or adoption,
except that Fred W. Carter is the father of the Cindy S. Chambers, the Secretary
of Citizens Bancorp, and there are no arrangements or understandings between any
director and any other person pursuant to which such director was selected to
serve on the Board of Directors. The table also sets forth the number of shares
of Citizens Bancorp common stock beneficially owned by all directors and
executive officers of the Citizens Bancorp as a group.
<TABLE>
<CAPTION>
Director of Common Lincoln Bancorp
Director of Citizens Stock Common
Expiration of Citizens Savings Beneficially Stock Owned
Term as Bancorp Bank Owned as of Percentage Following Percentage
Name Director Since Since July 27, 2000 of Class(1) Merger (2) of Class
----------------- ---------- ----- ----------- ------------ ----------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert F. Ayres 2002 1997 1979 9,232 (3) .96% 6,671 .10%
Fred W. Carter 2000 1997 1960-1966 48,821 (4) 5.03% 35,851 .55%
1971-Present
Perry W. Lewis 2001 1997 1975 26,232 (3) 2.73% 22,609 .34%
John J. Miller 2001 1997 1995 42,732 (5) 4.44% 38,077 .58%
Billy J. Wray 2002 1997 1992 24,232 (3) 2.52% 23,234 (7) .35%
All directors and
executive officers
as a group (8 persons) 218,325 (6) 22.10% 180,899 (8) 2.76%
</TABLE>
(1) Based upon information furnished by the respective directors. 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. Percentages are based upon 959,401 shares of Citizens
Bancorp common stock outstanding as of July 27, 2000.
(2) Assumes the issuance in the merger of 885,074 shares of Lincoln Bancorp
common stock to the existing shareholders of Citizens Bancorp. Excludes
shares of Lincoln Bancorp common stock which will be held pursuant to
nonvested options by the directors and director emeritus of Citizens
Bancorp upon the consummation of the merger, which options are not
exercisable within 60 days of the Voting Record Date and which,
pursuant to the Agreement and Plan of Reorganization, shall be granted
to such persons as consideration for the conversion of the nonvested
options to acquire shares of Citizens Bancorp common stock they hold
prior to the effective time of the merger pursuant to the Citizens
Option Plan.
(3) Includes stock options for 2,116 shares granted under the Citizens
Option Plan and 1,270 shares held under the Citizens RRP. Does not
include stock options for 3,174 shares granted to the director under
the Citizens Option Plan, which are not exercisable within 60 days of
the Voting Record Date.
(4) Includes 15,116 shares owned jointly by Mr. Carter and his spouse,
6,348 shares held under the Citizens RRP, 10,580 shares subject to
stock options granted under the Citizens Option Plan and 4,661 shares
allocated to Mr. Carter's account as of June 30, 1999 under the
Citizens ESOP. Does not include 15,870 shares subject to a stock option
granted under the Citizens Option Plan which is not exercisable within
60 days of the Voting Record Date.
(5) Includes 10,000 shares owned by a company deemed to be controlled by
Mr. Miller, 1,500 shares held by a profit sharing plan of which Mr.
Miller is a beneficiary, 1,270 shares held under the Citizens RRP, and
2,116 shares subject to stock options granted under the Citizens Option
Plan. Does not include stock options for 3,174 shares granted to the
director under the Citizens Option Plan which are not exercisable
within 60 days of the Voting Record Date.
(6) Includes 17,143 shares held under the Citizens RRP, 28,566 shares
subject to stock options granted under the Citizens Option Plan, and
9,420 whole shares allocated to employees' accounts as of June 30, 1999
under the Citizens ESOP. Excludes 42,849 shares subject to stock
options granted under the Citizens Option Plan which are not
exercisable within 60 days of the Voting Record Date.
(7) Includes 2,500 shares of Lincoln Bancorp common stock owned by Mr. Wray
prior to the effective time of the merger.
(8) Includes 3,000 shares of Lincoln Bancorp common stock owned in the
aggregate by all directors and executive officers of Citizens Bancorp
prior to the effective time of the merger.
PRINCIPAL HOLDERS OF COMMON STOCK
Lincoln Bancorp. The following table sets forth certain information
regarding the beneficial ownership of the Lincoln Bancorp common stock as of
July 27, 2000, by each person who is known by Lincoln Bancorp to own
beneficially 5% or more of the Lincoln Bancorp common stock. Unless otherwise
indicated, the named beneficial owner has sole voting and dispositive power with
respect to the shares.
<TABLE>
<CAPTION>
Number of Percent of Percent of
Shares of Class Class as of
Name and Address Common Stock As of Effective Time
of Beneficial Owner(1) Beneficially Owned July 27, 2000 of Merger (3)
---------------------- ------------------ ----------------- -------------
<S> <C> <C> <C>
Home Federal Savings Bank, as Trustee
501 Washington Street
Columbus, Indiana 47201 560,740 (2) 9.9% 8.5%
</TABLE>
(1) The information in this chart is based on a Schedule 13G Report filed
by the above-listed person with the Securities and Exchange Commission
containing information concerning shares held by it. It does not
reflect any changes in those shareholdings which may have occurred
since the date of such filing.
(2) These shares are held by the Trustee of the Lincoln ESOP. The Employees
participating in that Plan are entitled to instruct the Trustee how to
vote shares held in their accounts under the Plan. Unallocated shares
held in a suspense account under the Plan are required under the Plan
terms to be voted by the Trustee in the same proportion as allocated
shares are voted.
(3) Assumes that 885,074 shares of Lincoln Bancorp common stock are issued
in the merger and that the shareholder listed above does not acquire
any of such shares.
Citizens Bancorp. The following table sets forth certain information
regarding the beneficial ownership of the Citizens Bancorp common stock as of
July 27, 2000, by each person who is known by Citizens Bancorp to own
beneficially 5% or more of the Citizens Bancorp common stock. Unless otherwise
indicated, the named beneficial owner has sole voting and dispositive power with
respect to the shares.
<TABLE>
<CAPTION>
Number of
Shares of Percent
Number of Lincoln of Class
Shares of Percent of Bancorp as of
Common Stock Class Common Stock Effective
Name and Address Beneficially As of owned following Time of
of Beneficial Owner(1) Owned July 27, 2000 Merger (4) Merger
---------------------- ------ ---------------- -------------------------
<S> <C> <C> <C> <C>
The Farmers Bank, as Trustee
9 East Clinton Street
Frankfort, Indiana 46041 84,640 (2) 8.8% 79,350 1.21%
Sandler O'Neill Asset Management LLC
SOAM Holdings, LLC
Malta Partners, L.P.
Malta Partners II, L.P.
Malta Hedge Fund, L.P.
Malta Hedge Fund II, L.P.
Terry Maltese
712 Fifth Avenue
22nd Floor
New York, New York, 10015 95,000 (3) 9.9% 89,062 1.36%
</TABLE>
(1) The information in this chart is based on a Schedule 13G Report filed
by the above-listed person with the Securities and Exchange Commission
containing information concerning shares held by it. It does not
reflect any changes in those shareholdings which may have occurred
since the date of such filing.
(2) These shares are held by the Trustee of the Citizens ESOP. The
Employees participating in that Plan are entitled to instruct the
Trustee how to vote shares held in their accounts under the Plan.
Unallocated shares held in a suspense account under the Plan are
required under the Plan terms to be voted by the Trustee in the same
proportion as allocated shares are voted.
(3) Malta Partners, L.P. and Malta Partners II, L.P., each a Delaware
limited partnership, and Malta Hedge Fund, L.P. and Malta Hedge Fund
II, L.P., each a Delaware limited partnership, beneficially own these
shares. These entities are private partnerships engaged in investment
in securities for their own accounts. SOAM Holdings, LLC, a Delaware
limited liability company ("Holdings"), is the general partner of each
of these entities. Sandler O'Neill Asset Management LLC, a New York
limited liability company ("SOAM"), provides administrative and
management services to these entities. Terry Maltese is president and
managing member of Holdings and SOAM. Each of the listed parties shares
investment and dispositive power with respect to these shares.
(4) Assumes the issuance of 885,074 shares of Lincoln Bancorp common stock
in the merger and the receipt by the shareholder of .9375 shares of
Lincoln Bancorp common stock for each share of Citizens Bancorp common
stock held by the shareholder as of the effective time of the merger.
MANAGEMENT REMUNERATION AND RELATED
TRANSACTIONS OF LINCOLN BANCORP
Remuneration of Named Executive Officers
During the fiscal year ended December 31, 1999, no cash compensation
was paid directly by Lincoln Bancorp to any of its executive officers. Each of
such officers was compensated by Lincoln Federal. The following tables set forth
information as to annual, long term and other compensation for services in all
capacities to the President and Chief Executive Officer of Lincoln Bancorp for
the last three fiscal years and the Chief Financial Officer, Secretary and
Treasurer of Lincoln Bancorp for the last two fiscal years (the "Named Executive
Officers"). There were no other executive officers of Lincoln Bancorp who earned
over $100,000 in salary and bonuses during the fiscal year ended December 31,
1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Long Term Compensation
-----------------------
Annual Compensation Awards
---------------------------------------- -----------------------
Other All
Annual Restricted Securities Other
Name and Fiscal Compen- Stock Underlying Compen-
Principal Position Year Salary ($)(1) Bonus ($) sation($)(2) Awards($) Options(#) sation($)(3)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Tim Unger, President 1999 $165,000 $25,000 --- $700,925 (4) 175,231 $3,451
and Chief Executive Officer1998 $135,000 $30,000 --- --- --- $3,555
1997 $125,000 $10,000 --- --- --- $3,330
John M. Baer, Chief 1999 $105,000 $10,500 --- $438,075 (4) 60,092 $3,618
Financial Officer, 1998 $ 95,000 $15,000 --- --- --- $ 990
Secretary and Treasurer
</TABLE>
(1) Mr. Unger does not receive any directors fees. Includes amounts
deferred pursuant to Section 401(k) of the Code under Lincoln Federal's
401(k) Plan.
(2) The Named Executive Officers received certain perquisites, but the
incremental cost of providing such perquisites did not exceed the
lesser of $50,000 or 10% of their salary and bonus.
(3) All Other Compensation includes Lincoln Federal Saving Bank's matching
contributions under its 401(k) Plan.
(4) The value of the restricted stock awards was determined by multiplying
the fair market values of the Lincoln Bancorp common stock on the date
the shares were awarded by the number of shares awarded. These shares
vest over a five year period commencing July 6, 1999. As of December
31, 1999, the number and aggregate value of restricted stock holdings
by Mr. Unger were 56,074 and $587,025, respectively, and by Mr. Baer
were 35,046 and $366,888, respectively. Awards paid on the restricted
shares are payable to the grantee as the shares are vested and are not
included in the table.
Stock Options
The following table sets forth information related to options granted
during fiscal year 1999 to the Named Executive Officers.
Option Grants - Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
% of Total Annual Rates of Stock
Options Granted Exercise or Price Appreciation
Options to Employees Base Price Expiration for Option Term
Name Granted(#) In Fiscal Year ($/Share)(3) Date 5% ($) 10% ($)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T. Tim Unger 175,231 (1) 47.25% $12.50 7/5/2009 $3,567,910 $5,681,301
John M. Baer 60,092 (2) 16.21% $12.50 7/5/2009 $1,223,544 $1,948,289
</TABLE>
(1) These are options to acquire shares of Lincoln Bancorp common stock.
They are exercisable at the rate of 20% per year over a 5-year period
commencing July 6, 1999. Subject to earlier vesting under certain
circumstances.
(2) These are options to acquire shares of Lincoln Bancorp common stock.
These options are exercisable as to 8,000 shares on July 6, 2000, as to
8,000 shares on July 6, 2001, as to 8,000 shares the first days of
years 2002 - 2006, and as to 4,092 shares on January 1, 2007, subject
to earlier vesting under certain circumstances.
(3) The option exercise price may be paid in cash or with the approval of
the Stock Compensation Committee beginning on December 30, 2001, in
shares of Lincoln Bancorp common stock or a combination thereof. The
option exercise price equaled the market value of a share of Lincoln
Bancorp common stock on the date of grant.
The following table includes the number of shares covered by
exercisable and unexercisable stock options held by the Named Executive Officers
as of December 31, 1999. Also reported are the values for "in-the-money" options
(options whose exercise price is lower than the market value of the shares at
fiscal year end) which represent the spread between the exercise price of any
such existing stock options and the fiscal year-end market price of the stock.
Outstanding Stock Option Grants and Value Realized as of 12/31/99
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End (#) Fiscal Year End ($) (1)
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------
T. Tim Unger --- 175,231 --- ---
John M. Baer --- 60,092 --- ---
(1) Since the average between the high asked and low bid prices for the
shares on December 31, 1999, was $10.46875 per share, and this price is
below the $12.50 per share exercise price of the options, none of these
options were "in-the-money" on December 31, 1999.
No stock options were exercised during fiscal 1999 by the Named
Executive Officers.
Employment Contract
Lincoln Federal entered into a three-year employment contract with Mr.
Unger. The contract with Mr. Unger extends annually for an additional one-year
term to maintain its three-year term if 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 a salary under the contract
equal to his current salary with Lincoln Federal, 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 Lincoln
Bancorp, and for the balance of the contract if the termination does not follow
a change in control. In addition, during such period, Mr. Unger will continue to
participate in 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 after a change of control of
Lincoln Bancorp, without cause by Lincoln Federal, or for cause by Mr. Unger,
would be $525,000. For purposes of this employment contract, a change of control
of Lincoln Bancorp 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 be
terminated by Lincoln Federal for cause.
Compensation of Directors
Lincoln Federal pays its non-employee directors a monthly retainer of
$884 plus $416 for each regular meeting attended and $208 for each committee
meeting attended, with a maximum of $1,600 in annual committee fees. Lincoln
Federal's directors emeritus receive a $1,000 annual retainer. Directors also
typically receive a year-end bonus depending on Lincoln Federal's performance
during the year. Total fees paid to Lincoln Federal's directors and directors
emeritus for the year ended December 31, 1999 were approximately $154,100.
Directors of Lincoln Bancorp are not currently paid directors' fees. Lincoln
Bancorp may, if it believes it is necessary to attract qualified directors or is
otherwise beneficial to Lincoln Bancorp, adopt a policy of paying directors'
fees.
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 five
to ten years. The lump sum or first installment is payable to the director, at
the director's discretion, on the first day of the calendar year immediately
following the year in which he ceases to be a director, or in the year in which
the director attains that age specified by the retirement income test of the
Social Security Act. Any additional installments will be paid on the first day
of each succeeding year thereafter. At present, the following directors
participate in the deferred compensation plan: Lester N. Bergum, Jr., W. Thomas
Harmon, Jerry Holifield, John C. Milholland and John L. Wyatt.
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 our board. Upon completing
nine years of service, the director's interest in the Supplemental Plan will be
fully vested. The interests of directors who, as of December 1, 1997, had served
at least one year on the Board vested immediately upon the adoption of the
Supplemental Plan. The benefits payable to a director under the Supplemental
Plan are calculated by multiplying the director's vested percentage times the
rate of directors fees paid to the director immediately prior to his attainment
of age 70 or, if earlier, the date his status as a director terminated. In the
event that a director's death occurs prior to the commencement of payments under
the Supplemental Plan, the director's designated beneficiary shall receive a
monthly payment calculated by multiplying the director's vested percentage times
the rate of directors fees in effect immediately prior to the director's death
or, if earlier, the date on which his status as a director terminated. Payments
under the Supplemental Plan will continue for 120 months.
Pension Plan
Lincoln Federal participates, and its full-time employees are included,
in the FIRF. Separate actuarial valuations are not made for Lincoln Federal or
for the other employer participants in the FIRF. Lincoln Federal's employees are
eligible to participate in the plan once they have attained the age of 21 and
completed one year of service for Lincoln Federal and provided that the employee
is expected to complete a minimum of 1,000 hours of service in the 12
consecutive months following his enrollment date. An employee's pension benefits
are 100% vested after five years of service.
The FIRF Plan of Lincoln Federal (the "Lincoln FIRF") provides for
monthly or lump sum retirement benefits determined as a percentage of the
employee's average salary (for the employee's highest five consecutive years of
salary) times his years of service. Salary includes base annual salary as of
each January 1, exclusive of overtime, bonuses, fees and other special payments.
Early retirement, disability, and death benefits are also payable under the
Lincoln FIRF, depending upon the participant's age and years of service. Lincoln
Federal recorded no expense for the Lincoln FIRF during the fiscal year ended
December 31, 1999, as the Plan was fully funded that year.
The estimated base annual retirement benefits presented on a
straight-line basis payable at normal retirement age (65) under the Pension Plan
to persons in specified salary and years of service classifications are as
follows (benefits noted in the table are not subject to any offset).
Highest 5-Year Years of Service
Average
Compensation 15 20 25 30 35 40 45
------------- ----------------------------------------------------------------
$ 80,000 18,000 24,000 30,000 36,000 42,000 48,000 54,000
100,000 22,500 30,000 37,500 45,000 52,500 60,000 67,500
120,000 27,000 36,000 45,000 54,000 63,000 72,000 81,000
140,000 31,500 42,000 52,500 63,000 73,500 84,000 94,500
160,000 36,000 48,000 60,000 72,000 84,000 96,000 108,000
180,000 40,500 54,000 67,500 81,000 94,500 108,000 121,500
200,000 45,000 60,000 75,000 90,000 105,000 120,000 135,000
Benefits are currently subject to maximum Code limitations of $135,000
per year. The years of service credited to Mr. Unger under the Lincoln FIRF as
of December 31, 1999 were four, and to Mr. Baer under the Lincoln FIRF as of
December 31, 1999 were three.
Transactions With Certain Related Persons
Lincoln Federal follows a policy of offering to its directors,
officers, and employees real estate mortgage loans secured by their principal
residence as well as other loans. Current law authorizes Lincoln Federal 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 its employees. At present, Lincoln Federal offers loans to
its executive officers, directors, principal shareholders and employees with an
interest rate that is .5% lower than the rate generally available to the public,
but otherwise are offered with substantially the same terms as those prevailing
for comparable transactions. All loans to directors and executive officers must
be approved in advance by a majority of the disinterested members of Lincoln
Federal's Board of Directors. Loans to directors, executive officers and their
associates totaled approximately $1.464 million, or 1.6% of equity capital at
December 31, 1999.
The law firm Robison Robison Bergum & Johnson, based in Frankfort,
Indiana, of which Lester N. Bergum, Jr., a director of Lincoln Bancorp is a
partner, serves as counsel to Lincoln Federal in connection with loan
delinquencies, title searches, and related matters in Frankfort, Clinton County,
Indiana. Lincoln Federal expects to continue using the services of the law firm
for such matters in the current fiscal year.
Joint Report of the Compensation Committee and the Stock Compensation Committee
The Compensation Committee of the Lincoln Bancorp Board of Directors
was comprised during fiscal 1999 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 Lincoln Bancorp's executive officers are approved by the
full Board of Directors. In fiscal 1999, there were no modifications to
Compensation Committee actions and recommendations made by the full Board of
Directors. In approving the salaries of executive officers, the Committee has
access to and reviews compensation data for comparable financial institutions in
the Midwest. Moreover, from time to time the Compensation Committee reviews
information provided to it by independent compensation consultants in making its
decisions.
The objectives of the Compensation Committee and the Stock Compensation
Committee with respect to executive compensation are the following:
(1) provide compensation opportunities comparable to those offered
by other similarly situated financial institutions in order to
be able to attract and retain talented executives who are
critical to Lincoln Bancorp'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 Lincoln Bancorp's shares increases.
At present, Lincoln Bancorp's executive compensation program is
comprised of base salary and annual incentive bonuses. The Lincoln Option Plan
and the Lincoln RRP provide long-term incentive bonuses in the form of stock
options and awards of Lincoln Bancorp common stock. 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 Lincoln Bancorp'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 Lincoln Bancorp 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 Lincoln Bancorp'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 Lincoln Bancorp's Chief Executive Officer throughout
fiscal 1999. Mr. Unger received a base salary of $135,000 in 1998 and $165,000
in 1999.
Annual Incentive Bonuses. Under Lincoln Bancorp's Annual Incentive
Plan, all employees of Lincoln Bancorp receive a cash bonus for any fiscal year
in which Lincoln Bancorp 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 Lincoln Bancorp exceeds these goals for the fiscal year.
Lincoln Bancorp 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 1999 was $25,000 compared to $30,000 for
fiscal 1998.
Stock Options. The Lincoln 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 Lincoln Bancorp's common stock. Stock options
are granted at the prevailing market price and will only have a value to the
executives if the stock price increases. The Stock Compensation Committee has
determined and will determine the number of option grants to make to executive
officers based on the practices of comparable financial institutions as well as
the executive's level of responsibility and contributions to Lincoln Bancorp.
Lincoln RRP. The Lincoln RRP is intended to provide directors and
officers with an ownership interest in Lincoln Bancorp in a manner designed to
encourage them to continue their service with Lincoln Bancorp. Last fiscal year,
Lincoln Federal contributed funds to the Lincoln RRP to enable the Lincoln RRP
to acquire 280,370 shares of Common Stock. Of these shares, 233,724 were awarded
to the Lincoln Bancorp's directors and officers, and 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 Lincoln Bancorp. This
gradual vesting of a director's or officer's interest in the shares awarded
under the Lincoln RRP is intended to create a long-term incentive for the
director or officer to continue his service with Lincoln Bancorp.
Finally, the Committee notes that Section 162(m) of the 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 57 for fiscal 1999 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 Lincoln
Bancorp'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
1999 for executives and for the chief executive officer adequately reflect
Lincoln Bancorp'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
Performance Graph The following graph shows the performance of
Lincoln Bancorp's Common Stock since January 1, 1999, in comparison to the
NASDAQ Combined Bank Index, KBW Bank Index and the SNL Thrift Index.
Relative Return* Analysis
1999 - 2000 Year-to-Date
[graph omitted]
DATE LNCB BKX Nasdaq Combined Bank Index SNL Thrift Index
---- ---- --- -------------------------- ----------------
1/1/99 100% 100% 100% 100%
1/8/99 105% 108% 101% 103%
1/15/99 103% 101% 99% 101%
1/22/99 102% 98% 96% 100%
1/29/99 102% 101% 98% 101%
2/5/99 98% 96% 95% 98%
2/12/99 96% 97% 95% 98%
2/19/99 98% 100% 96% 98%
2/26/99 95% 102% 96% 99%
3/5/99 96% 107% 99% 102%
3/12/99 97% 110% 99% 105%
3/19/99 98% 108% 99% 102%
3/26/99 97% 105% 96% 100%
4/2/99 96% 105% 95% 99%
4/9/99 91% 113% 96% 100%
4/16/99 91% 113% 99% 102%
4/23/99 92% 115% 100% 104%
4/30/99 99% 114% 102% 105%
5/7/99 102% 112% 102% 104%
5/14/99 105% 111% 101% 104%
5/21/99 110% 109% 101% 102%
5/28/99 109% 105% 100% 100%
6/4/99 107% 104% 100% 100%
6/11/99 108% 103% 98% 98%
6/18/99 107% 109% 100% 98%
6/25/99 113% 106% 99% 97%
7/2/99 114% 113% 102% 99%
7/9/99 114% 113% 102% 98%
7/16/99 118% 112% 102% 98%
7/23/99 120% 107% 101% 98%
7/30/99 117% 103% 99% 96%
8/6/99 117% 98% 96% 92%
8/13/99 117% 103% 97% 94%
8/20/99 116% 105% 97% 94%
8/27/99 114% 102% 97% 93%
9/3/99 112% 101% 95% 91%
9/10/99 111% 97% 94% 90%
9/17/99 112% 94% 92% 89%
9/24/99 108% 93% 90% 85%
10/1/99 110% 93% 91% 86%
10/8/99 107% 98% 95% 89%
10/15/99 97% 88% 90% 84%
10/22/99 102% 100% 93% 88%
10/29/99 103% 110% 98% 94%
11/5/99 107% 110% 100% 95%
11/12/99 108% 110% 99% 92%
11/19/99 105% 108% 99% 90%
11/26/99 108% 104% 96% 87%
12/3/99 104% 105% 97% 87%
12/10/99 105% 99% 92% 81%
12/17/99 92% 93% 90% 79%
12/24/99 97% 96% 92% 80%
12/31/99 93% 93% 87% 80%
1/7/00 92% 96% 87% 77%
1/14/00 93% 90% 84% 73%
1/21/00 94% 91% 84% 74%
1/28/00 96% 91% 85% 75%
2/4/00 97% 88% 83% 71%
2/11/00 95% 83% 80% 71%
* $100 invested on 1/1/99 in Stock or Index
Including Reinvestment of Dividends
Fiscal Year Ending December 31
<PAGE>
MANAGEMENT REMUNERATION AND RELATED
TRANSACTIONS OF CITIZENS BANCORP
Remuneration of Named Executive Officer
During the fiscal year ended June 30, 1999, no cash compensation was paid
directly by the Citizens Bancorp to any of its executive officers. Each of such
officers was compensated by Citizens Savings Bank.
The following tables set forth information as to annual, long term and
other compensation for services in all capacities to the President and Chief
Executive Officer of the Citizens Bancorp for each of the last three fiscal
years (the "Named Executive Officer"). There were no other executive officers of
the Citizens Bancorp who earned over $100,000 in salary and bonuses during the
fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
-----------------------
Annual Compensation Awards
--------------------------------------- -----------------------
Other Annual Restricted Securities
Name and Fiscal Compen- Stock Underlying All Other
Principal Position Year Salary (1)($) Bonus ($) sation(3) Awards($) Options(#) Compensation
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fred Carter, President and 1999 $109,100 $53,083 (2) -- --- --- $120 (5)
Chief Executive Officer 1998 103,500 56,729 (2) -- 105,800(4) 26,450 120 (5)
1997 91,000 39,600 (2) -- --- --- 120 (5)
</TABLE>
(1) Includes fees received for service on Citizens Savings Bank's Board of
Directors.
(2) Mr. Carter received a bonus equal to 10% of the profits of Citizens
Savings Bank (after deducting certain specified expenses) in excess of
$626,000, $676,000, and $726,000, respectively, for the fiscal years
ended June 30, 1997, 1998 and 1999, respectively.
(3) Mr. Carter 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.
(4) The value of the restricted stock awards was determined by multiplying
the fair market value of the Citizens Bancorp common stock on the date
the shares were awarded by the number of shares awarded. These shares
vest over a five year period, commencing March 24, 1998. As of June 30,
1999, the number and aggregate value of restricted stock holdings of
Mr. Carter were 8,464 and $107,387, respectively. Dividends paid on the
restricted shares are payable to the grantee as the shares are vested
and are not included in the table.
(5) This column includes amounts paid by Citizens Savings Bank for
insurance premiums with respect to a $10,000 term life insurance policy
for the benefit of Mr. Carter.
The following table includes the number of shares covered by
exercisable and unexercisable stock options held by the Named Executive Officer
as of June 30, 1999. Also reported are the values for "in-the-money" options
(options whose exercise price is lower than the market value of the shares at
fiscal year end) which represent the spread between the exercise price of any
such existing stock options and the fiscal year-end market price of the stock.
Outstanding Stock Option Grants and Value Realized as of June 30, 1999
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End (#) Fiscal Year End ($) (1)
Name Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------
Fred W. Carter 5,290 21,160 --- ---
(1) Since the average between the high asked and low bid prices for the
shares on June 30, 1999, was $12.6875 per share, and this price is below
the $15.25 per share exercise price of the options, none of Mr. Carter's
options were "in-the-money" on June 30, 1999.
No stock options were granted to or exercised by the Named Executive
Officer during fiscal 1999.
Transactions With Certain Related Persons
Citizens Savings Bank has followed a policy of offering to its
directors, officers, and employees real estate mortgage loans secured by their
principal residence and other loans. These loans are made in the ordinary course
of business with the same collateral, interest rates and underwriting criteria
as those of comparable transactions prevailing at the time and do not involve
more than the normal risk of collectibility or present other unfavorable
features.
Loans to advisory directors, directors, executive officers and their
associates totaled approximately $3,094,000, or approximately 21.1% of
consolidated shareholders' equity at June 30, 1999. This amount includes two
loans to directors Billy J. Wray and John J. Miller, neither of whom were
directors or employees of Citizens Savings Bank when the loans were originated.
The first loan, in the original principal amount of approximately $1.5 million,
was originated in October, 1991 to both Mr. Wray and Mr. Miller and is secured
by the 48-unit Clinton Estates apartment complex located in Frankfort. In
October, 1997, the loan was refinanced by Citizens Savings Bank to change it
from a 3-year adjustable mortgage loan to a 7-year adjustable mortgage loan,
with a term of 15 years and an amortization of 20 years. The interest rate on
the loan adjusts based on the 7-year Treasury Constant Maturities index plus a
200 basis point margin. At June 30, 1999, this loan was current with a balance
of approximately $1,227,000. The second loan, dated February, 1994, was a
construction line of credit in the original amount of $620,000 to Mr. Miller,
secured by condominiums, other real estate located in Tipton, Indiana, and
securities. At June 30, 1999, this loan was also current with a balance of
approximately $321,600. Citizens Savings Bank is not obligated to advance
additional funds pursuant to this line of credit. In the opinion of Citizens
Savings Bank's management, these loans are adequately collateralized.
Current law authorizes Citizens Savings Bank 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 its employees.
At present, Citizens Savings Bank's loans to executive officers, directors,
principal shareholders and employees are made on the same terms generally
available to the public. Citizens Savings Bank may in the future, however, adopt
a program under which it may waive loan application fees and closing costs with
respect to loans made to such persons. Loans made to a director or executive
officer in excess of the greater of $25,000 or 5% of Citizens Savings Bank's
capital and surplus (up to a maximum of $500,000) must be approved in advance by
a majority of the disinterested members of the Board of Directors. Citizens
Savings Bank's policy regarding loans to directors and all employees meets the
requirements of current law.
SELECTED FINANCIAL DATA
We are providing the following information to aid you in your analysis
of the financial aspects of the merger. The following tables show financial
results actually achieved by each of Lincoln Bancorp and Citizens Bancorp (the
"historical" figures).
Lincoln Bancorp's annual historical figures are derived from financial
statements audited by Olive LLP, independent auditors of Lincoln Bancorp.
Citizens Bancorp's annual historical figures for fiscal year 1999 are derived
from financial statements audited by Olive LLP, and for fiscal years 1998, 1997,
1996 and 1995 from financial statements audited by Ernst & Young LLP. The annual
historical information presented below should be read together with the
consolidated audited financial statements and related notes of Lincoln Bancorp
and of Citizens Bancorp attached to this document. To find this information, see
"Where You Can Find More Information" (page 157).
We expect to incur restructuring and merger-related expenses as a
result of combining our companies. We also anticipate that the merger will
provide the combined company with financial benefits such as reduced operating
expenses and the opportunity to earn additional revenue. However, none of these
anticipated expenses or benefits has been factored into the pro forma combined
income statement information. For that reason, the pro forma combined
information, while helpful in illustrating the financial attributes of the
combined company under one set of assumptions, does not attempt to predict or
suggest future results.
The following sets forth historical consolidated financial data for
Lincoln Bancorp. Since Lincoln Bancorp began operating as a savings and loan
holding company on December 30, 1998, historical information for periods prior
to that date is derived from the financial statements of Lincoln Federal.
<PAGE>
Lincoln Bancorp Historical Consolidated Financial Data
<TABLE>
<CAPTION>
March 31, December 31,
------------------- ---------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(In thousands)
Summary of Financial Condition Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets.............................. $417,882 $404,751 $410,828 $366,448 $321,391 $345,552 $319,777
Cash and interest bearing deposits
in other banks (1)..................... 13,950 8,726 10,819 22,907 18,958 10,394 8,882
Investment securities available for sale.. 142,587 166,690 145,875 129,276 29,399 118 116
Investment securities held to maturity.... 500 750 500 1,250 9,635 15,185 11,600
Mortgage loans held for sale.............. --- --- --- --- --- 24,200 15,534
Loans..................................... 242,053 212,558 234,761 197,433 249,996 282,813 270,933
Allowance for loan losses................. (1,814) (1,542) (1,761) (1,512) (1,361) (1,241) (1,121)
Net loans................................. 240,239 211,016 233,000 195,921 248,635 281,572 269,812
Investment in limited partnerships........ 1,961 2,304 2,064 2,387 2,706 3,187 3,583
Deposits.................................. 219,350 206,483 204,982 212,010 203,852 210,823 196,117
Borrowings................................ 106,763 87,577 110,252 35,466 72,827 94,412 85,604
Shareholders' equity...................... 87,250 106,517 91,743 106,108 41,978 37,919 34,930
For the Three-Month For the Year Ended
Period Ended, March 31, December 31,
----------------------- ---------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ -------- ------- -------- --------
(In thousands)
Summary of Operating Data:
Total interest income..................... $7,339 $6,474 $27,742 $ 22,999 $ 25,297 $ 24,453 $ 22,065
Total interest expense.................... 3,973 3,128 13,947 13,827 15,652 15,119 14,486
------ ------ ------ -------- ------- -------- --------
Net interest income.................... 3,366 3,346 13,795 9,172 9,645 9,334 7,579
Provision (adjustment) for loan losses.... (22) 31 384 173 298 120 100
------ ------ ------ -------- ------- -------- --------
Net interest income after provision
(adjustment) for loan losses ........ 3,388 3,315 13,411 8,999 9,347 9,214 7,479
------ ------ ------ -------- ------- -------- --------
Other income (losses):
Net realized-and unrealized-gains (losses)
on loans held for sale............... --- 3 11 (61) 299 (160) 1,463
Net realized- and unrealized-gains (losses) on
securities available for sale........ --- (4) (4) 113 118 --- ---
Equity in losses of limited partnerships (103) (83) (323) (514) (681) (596) (1,595)
Other.................................. 212 233 930 833 674 503 473
------ ------ ------ -------- ------- -------- --------
Total other income (loss)............ 109 149 614 371 410 (253) 341
------ ------ ------ -------- ------- -------- --------
Other expenses:
Salaries and employee benefits......... 1,167 803 3,859 2,724 2,247 1,719 1,529
Net occupancy expenses................. 99 73 357 249 272 236 272
Equipment expenses..................... 138 144 541 626 526 361 176
Deposit insurance expense.............. 12 48 150 188 194 1,725 438
Data processing expense................ 205 164 736 658 581 313 228
Professional fees...................... 95 33 209 201 238 69 48
Director and committee fees............ 48 38 224 319 227 110 102
Mortgage servicing rights amortization. 43 (17) 124 280 67 12 9
Charitable contributions............... 3 5 22 2,023 32 18 37
Other.................................. 328 229 1,109 842 701 540 405
------ ------ ------ -------- ------- -------- --------
Total other expenses................ 2,138 1,520 7,331 8,110 5,085 5,103 3,244
------ ------ ------ -------- ------- -------- --------
Income before income taxes
and extraordinary item............... 1,359 1,944 6,694 1,260 4,672 3,858 4,576
Income taxes (benefit)................. 429 700 2,346 (7) 1,159 870 1,193
------ ------ ------ -------- ------- -------- --------
Income before extraordinary item.......... 930 1,244 4,348 1,267 3,513 2,988 3,383
Extraordinary item-early extinguishment
of debt, net of income taxes of $99.... --- --- --- (150) --- --- ---
------ ------ ------ -------- ------- -------- --------
Net income........................... $930 $1,244 $4,348 $ 1,117 $ 3,513 $ 2,988 $ 3,383
====== ====== ====== ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
At and For the Three-Month At and For
Period Ended, March 31, the Year Ended December 31,
----------------------- ---------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ -------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Supplemental Data:
Basic earnings per share.................. $.17 $.19 $.71 --- --- --- ---
Diluted earnings per share................ .17 .19 .71 --- --- --- ---
Dividends per share....................... .08 .06 .28 --- --- --- ---
Dividend payout ratio..................... 47.06% 31.58% 39.44% --- --- --- ---
Return on assets (2)(3)................... .90 1.34 1.09 .35% 1.02% .90% 1.09%
Return on equity (2)(4)................... 4.18 4.68 4.29 2.58 8.71 8.08 9.92
Average equity to average assets.......... 21.57 28.64 25.45 13.59 11.67 11.15 11.02
Equity to assets (5)...................... 20.88 26.32 22.33 28.96 13.06 10.97 10.92
Interest rate spread during period (2) (6) 2.15 2.38 2.32 2.24 2.41 2.36 1.99
Net yield on interest-earning assets (2)(7) 3.30 3.75 3.57 3.02 2.92 2.91 2.55
Efficiency ratio (8)...................... 63.52 45.43 50.88 84.98 50.57 56.19 40.96
Other expenses to average assets (2)(9)... 2.07 1.64 1.84 2.55 1.47 1.54 1.05
Average interest-earning assets to average
interest-bearing liabilities........... 129.49 139.15 134.83 117.02 110.88 111.80 111.31
Non-performing assets to total assets (5). .20 .30 .28 .38 1.14 .73 .75
Allowance for loan losses to total
loans outstanding (5) (10)............. .75 .73 .75 .77 .54 .40 .39
Allowance for loan losses to
non-performing loans (5)............... 243.80 126.78 159.37 117.03 37.56 50.80 46.81
Net charge-offs (recoveries) to average total
loans outstanding ..................... (.03) --- .06 .01 .06 --- .01
Number of full service offices (5)........ 6 4 6 4 4 4 4
</TABLE>
(1) Includes certificates of deposit in other financial institutions.
(2) Information for the three months ended March 31, 2000 and March 31, 1999
has been annualized. Interim results are not necessarily indicative of the
results of operations for the entire year.
(3) Net income divided by average total assets.
(4) Net income divided by average total equity.
(5) At end of period.
(6) Interest rate spread is calculated by substracting combined average
interest cost from combined average interest rate earned for the period
indicated.
(7) Net interest income divided by average interest-earning assets.
(8) Other expenses (excluding 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.
(9) Other expenses divided by average total assets.
(10) Total loans include loans held for sale.
The following sets forth historical consolidated financial data for
Citizens Bancorp. Since Citizens Bancorp did not begin operations as a savings
and loan holding company until September 18, 1997, information for periods prior
to that date is derived from the financial statements of Citizens Savings Bank.
Citizens Bancorp Historical Consolidated Financial Data
<TABLE>
<CAPTION>
March 31, June 30,
------------------- -------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Selected Consolidated
Financial Condition Data:
Total assets.............................. $63,484 $58,311 $59,470 $53,442 $46,353 $44,235 $39,727
Loans receivable, net (1)................. 55,969 51,268 53,104 46,936 38,435 34,391 29,275
Cash on hand and in other institutions (2) 2,960 2,896 2,082 2,533 4,125 3,308 4,310
Investment securities available for sale.. 391 400 388 315 161 3,003 2,832
Cash surrender value of life
insurance contract..................... 1,194 1,151 1,162 1,119 1,076 1,035 991
FHLB advances............................. 11,000 6,000 7,000 3,500 4,000 3,000 1,500
Deposits.................................. 36,323 36,645 36,976 34,067 36,355 35,600 33,175
Total shareholders' equity................ 15,078 15,292 14,640 15,046 5,691 5,320 4,841
For the Nine-Month For the Year Ended
Period Ended, March 31, June 30,
------------------------ --------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------- ------ ------- ------- -------
(In thousands)
Consolidated Operating Data:
Total interest income..................... $3,459 $3,324 $ 4,439 $ 4,052 $3,509 $3,186 $2,742
Total interest expense.................... 1,548 1,442 1,919 1,738 1,814 1,653 1,370
------ ------ --------- -------- ------- ------- -------
Net interest income.................... 1,911 1,882 2,520 2,314 1,695 1,533 1,372
Provision for loan losses................. 45 50 65 72 83 80 32
------ ------ --------- -------- ------- ------- -------
Net interest income after
provision for loan losses............ 1,866 1,832 2,455 2,242 1,612 1,453 1,340
------ ------ --------- -------- ------- ------- -------
Other income:
Fees and service charges............... 101 102 136 142 138 152 151
Loss on sale of investments............ --- --- --- --- (60) --- ---
Gain on sale of real estate............ 10 13 16 180 17 33 2
Other.................................. 50 43 58 62 64 61 68
------ ------ --------- -------- ------- ------- -------
Total other income................... 161 158 210 384 159 246 221
------ ------ --------- -------- ------- ------- -------
Other expense:
Salaries and employee benefits......... 539 490 669 558 479 412 402
Net occupancy expenses................. 49 52 71 67 65 65 68
Equipment expenses..................... 72 66 94 82 81 81 63
Data processing fees................... 100 103 141 122 108 101 105
Deposit insurance expense.............. 14 18 23 23 259 77 75
Legal and professional fees............ 49 65 74 96 32 32 28
Other expenses......................... 200 181 240 224 193 199 183
------ ------ --------- -------- ------- ------- -------
Total other expense.................. 1,023 975 1,312 1,172 1,217 967 924
------ ------ --------- -------- ------- ------- -------
Income before income taxes................ 1,004 1,015 1,353 1,454 554 732 637
Income taxes......................... 395 407 521 580 183 253 231
------ ------ --------- -------- ------- ------- -------
Net income................................ $ 609 $ 608 $ 832 $ 874 $ 371 $ 479 $ 406
====== ====== ========= ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At and For the Nine-Month At and For
Period Ended, March 31, the Year Ended June 30,
------------------------ --------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------- ------ ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Supplemental Data:
Basic earnings per share.................. $.68 $.63 $.87 --- --- --- ---
Diluted earnings per share................ .68 .63 .87 --- --- --- ---
Dividends per share....................... .21 .17 .23 $ .10 --- --- ---
Dividend payout ratio..................... 30.88% 26.98% 26.44% --- --- --- ---
Interest rate spread during period (2).... 3.52 3.52 3.58 3.77% 3.75% 3.75% 3.69%
Net yield on interest-earning
assets (2)(4).......................... 4.43 4.57 4.60 4.78 4.02 3.99 3.92
Return on assets (2)(5)................... 1.31 1.40 1.43 1.69 .82 1.15 1.07
Return on equity (2)(6)................... 5.46 5.31 5.53 6.67 6.81 9.52 8.89
Average equity to average assets.......... 24.10 26.41 25.80 25.38 11.98 12.08 12.04
Equity to assets (7)...................... 23.75 26.22 24.62 28.15 12.28 11.91 12.06
Average interest-earning assets to average
interest-bearing liabilities........... 125.49 129.64 129.16 127.93 106.31 105.61 105.84
Non-performing assets to
total assets (7)....................... .82 .92 .33 .32 .74 .50 .35
Allowance for loan losses to total loans
outstanding (7)........................ .61 .59 .61 .57 .55 .40 .16
Allowance for loan losses to
non-performing loans (7)............... 65.01 56.77 165.36 158.53 61.57 62.51 33.19
Net (charge-offs) recoveries to average
total loans outstanding ............... (.06) (.02) (.02) (.03) (.03) .04 (.12)
Other expenses to
average assets (2)(8).................. 2.21 2.25 2.25 2.27 2.67 2.32 2.44
Number of full service offices (7)........ 1 1 1 1 1 1 1
</TABLE>
(1) Net of allowance for loan losses and deferred fees.
(2) Information for the nine months ended March 31, 2000 and March 31, 1999 has
been annualized. Interim results are not necessarily indicative of the
results of operations for the entire year.
(3) Includes certificates of deposit in other financial institutions.
(4) Net interest income divided by average interest-earning assets.
(5) Net income divided by average total assets.
(6) Net income divided by average total equity.
(7) At end of period.
(8) Other expenses divided by average total assets.
Selected Unaudited Pro Forma Combined Financial Data
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
At and For the At and For the
Three Months Ended Year Ended
March 31, 2000 December 31, 1999
-------------- -----------------
Summary of Financial Condition Data:
<S> <C> <C>
Total assets $474,910 $467,736
Cash and interest bearing deposits in other banks (1) 8,005 5,613
Investment securities available for sale 142,978 146,266
Investment securities held to maturity 500 500
Mortgage loans held for sale
Net loans 295,476 287,304
Deposits 255,386 240,480
Borrowings 117,180 121,168
Shareholders' equity 95,847 100,340
(1) Includes certificates of deposit in other financial institutions
Summary of Operating Data:
Total interest income $8,563 $32,395
Total interest expense 4,557 16,130
------ ------
Net interest income 4,006 16,265
Provision (adjustment) for loan losses (7) 444
------ ------
Net interest income after provision (adjustment) for losses on loans 4,013 15,821
Other income 160 823
Other expenses 2,547 8,876
------ ------
Income before income tax 1,626 7,768
Income taxes 54 2,837
------ ------
Net income $1,082 $4,931
====== ======
Supplemental Data:
Basic earnings per share $.17 $.71
Diluted earnings per share .17 .70
Dividends per share .08 .28
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION OF LINCOLN BANCORP
General
Lincoln Bancorp was incorporated for the purpose of owning all of the
outstanding shares of Lincoln Federal. The following discussion and analysis of
Lincoln Bancorp's financial condition as of December 31, 1999 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. Lincoln Bancorp'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 Lincoln Bancorp'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.
Average Balances and Interest Rates and Yields
The following tables present the years ended December 31, 1999, 1998 and
1997, the average daily balances, of each category of Lincoln Bancorp's
interest-earning assets and interest-bearing liabilities, and the interest
earned or paid on such amounts.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
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............ $6,614 $263 3.98% $29,949 $1,544 5.16% $11,853 $ 653 5.51%
Mortgage-backed securities
available for sale (1)............. 89,385 5,903 6.60 41,011 2,962 7.22 13,089 1,086 8.30
Other investment securities
available for sale (1)............. 64,526 4,234 6.56 11,940 785 6.57 66 5 7.58
Other investment securities
held to maturity .................. 649 40 6.16 4,176 248 5.94 12,758 768 6.02
Loans receivable (2) (5) (6).........219,312 16,866 7.69 211,260 17,024 8.06 286,912 22,369 7.80
Stock in FHLB of Indianapolis........ 5,447 436 8.00 5,447 436 8.00 5,199 416 8.00
-------- ------ ------- ------ ------- ------
Total interest-earning assets......385,933 27,742 7.19 303,783 22,999 7.57 329,877 25,297 7.67
------ ------ ------
Non-interest earning assets,
net of allowance for loan losses
and unrealized gain/loss
on securities available for sale..... 12,107 14,587 15,694
-------- -------- --------
Total assets......................$398,040 $318,370 $345,571
======== ======== ========
Liabilities and equity capital:
Interest-bearing liabilities:
Interest-bearing demand deposits..... $9,296 137 1.47 $7,905 150 1.90 $ 7,438 154 2.07
Savings deposits..................... 17,940 499 2.78 20,691 625 3.02 25,159 781 3.10
Money market savings deposits........ 39,614 1,759 4.44 29,883 1,440 4.82 21,278 1,044 4.91
Certificates of deposit..............136,840 7,184 5.25 151,344 8,757 5.79 151,507 8,425 5.56
FHLB advances and securities sold
under repurchase agreements........ 82,554 4,368 5.29 49,773 2,855 5.74 92,121 5,248 5.70
-------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities.....................286,244 13,947 4.87 259,596 13,827 5.33 297,503 15,652 5.26
------ ------ ------
Other liabilities....................... 10,495 15,497 7,729
-------- -------- --------
Total liabilities................296,739 275,093 305,232
Shareholders' equity....................101,301 43,277 40,339
-------- -------- --------
Total liabilities and
equity capital..............$398,040 $318,370 $345,571
======== ======== ========
Net interest-earning assets............ $99,689 $ 44,187 $ 32,374
Net interest income..................... $13,795 $ 9,172 $ 9,645
======= ======= =======
Interest rate spread (3)................ 2.32% 2.24% 2.41%
==== ==== ====
Net yield on weighted average
interest-earning assets (4).......... 3.57% 3.02% 2.92%
==== ==== ====
Average interest-earning
assets to average
interest-bearing liabilities........ 134.83% 117.02% 110.88%
======== ======== ========
</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 loans 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.
(5) The balances include nonaccrual loans.
(6) Interest income on loans receivable includes loan fee income of
$394,000, $511,000 and $554,000 for the years ended December 31, 1999,
1998 and 1997.
Interest Rate Spread
Lincoln Bancorp'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 Bancorp 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 shown. Average balances are based on average daily balances.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---------------------------------------
Weighted average interest rate earned on:
<S> <C> <C> <C>
Interest-earning deposits.............................. 3.98% 5.16% 5.51%
Mortgage-backed securities available for sale.......... 6.60 7.22 8.30
Other investment securities available for sale......... 6.56 6.57 7.58
Other investment securities held to maturity........... 6.16 5.94 6.02
Loans.................................................. 7.69 8.06 7.80
FHLB stock............................................. 8.00 8.00 8.00
Total interest-earning assets........................ 7.19 7.57 7.67
Weighted average interest rate cost of:
Interest-bearing demand deposits....................... 1.47 1.90 2.07
Savings deposits....................................... 2.78 3.02 3.10
Money market savings deposits.......................... 4.44 4.82 4.91
Certificates of deposit................................ 5.25 5.79 5.56
FHLB advances and securities sold under
repurchase agreements................................ 5.29 5.74 5.70
Total interest-bearing liabilities................... 4.87 5.33 5.26
Interest rate spread (1).................................. 2.32 2.24 2.41
Net yield on weighted average
interest-earning assets (2)............................ 3.57 3.02 2.92
</TABLE>
(1) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. Interest rate spread figures must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated.
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
Lincoln Bancorp'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.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
------------------------------------------
Total
Due to Due to Net
Rate Volume Change
---- ------ ------
(In thousands)
<S> <C> <C> <C>
Year ended December 31, 1999 compared
to year ended December 31, 1998
Interest-earning assets:
Interest-earning deposits.................................... $(291) $(990) $(1,281)
Mortgage-backed securities available for sale................ (274) 3,215 2,941
Other investment securities available for sale............... (2) 3,451 3,449
Other investment securities held to maturity................. 9 (217) (208)
Loans receivable............................................. (793) 635 (158)
FHLB stock................................................... --- --- ---
--------- ----------- -----------
Total...................................................... (1,351) 6,094 4,743
--------- ----------- -----------
Interest-bearing liabilities:
Interest-bearing demand deposits............................. (37) 24 (13)
Savings deposits............................................. (47) (79) (126)
Money market savings deposits................................ (120) 439 319
Certificates of deposit...................................... (773) (800) (1,573)
FHLB advances and securities sold under repurchase agreements (237) 1,750 1,513
--------- ----------- -----------
Total...................................................... (1,214) 1,334 120
--------- ----------- -----------
Net change in net interest income.............................. $(137) $4,760 $4,623
========= =========== ===========
Year ended December 31, 1998 compared
to year ended December 31, 1997
Interest-earning assets:
Interest-earning deposits....................................$ (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
========= =========== ===========
</TABLE>
Financial Condition at December 31, 1999 Compared to Financial Condition at
December 31, 1998
Total assets increased $44.4 million, or 12.1% at December 31, 1999,
compared to December 31, 1998. The increase was primarily in investment
securities available for sale and net loans. Investment securities available for
sale increased $16.6 million, or 12.8%, while net loans increased $37.1 million,
or 18.9%. These increases in investment securities available for sale and net
loans were offset by a decrease in cash and cash equivalents. Cash and cash
equivalents decreased by $12.1 million, or 52.8%. These balance sheet changes
were a result of a leverage strategy to increase interest income and improve
Lincoln Bancorp's return on average equity.
Loans and Allowance for Loan Losses. The increase in net loans from
$195.9 million at December 31, 1998 to $233.0 million at December 31, 1999 was
due in part to the funding of one- to four-family residential mortgage loans
that were in process at December 31, 1998 and the purchase of approximately $4.0
million of one- to four-family residential mortgage loans from another financial
institution during the first quarter of 1999. Loan growth continued throughout
1999 in nearly all loan categories. The allowance for loan losses as a
percentage of total loans decreased slightly to .75% from .77%. The allowance
for loan losses as a percentage of non-performing loans was 159.4% and 117.0% at
December 31, 1999 and December 31, 1998, respectively. Non-performing loans were
$1.1 million and $1.3 million at each date, respectively. Included in
non-performing loans at December 31, 1999 were impaired loans of approximately
$300,000. Impaired loans at December 31, 1999 consisted of two loans to one
borrower collateralized by residential acquisition and development real estate.
Deposits. Deposits decreased $7.0 million, or 3.3%, at December 31,
1999, compared to December 31, 1998. Certificates of deposit decreased
approximately $15.0 million, or 10.0%, while other deposits increased
approximately $8.0 million, or 12.0%. The increase in other deposits was
primarily due to an increase in money market accounts of approximately $9.0
million, or 27.0%.
Borrowed Funds. FHLB advances increased $70.7 million at December 31,
1999 compared to December 31, 1998. During 1999, Lincoln Bancorp sold securities
under repurchase agreements of $4.6 million which was outstanding at December
31, 1999. The additional borrowed funds were primarily used to fund loan growth.
Shareholders' Equity. Shareholders' equity decreased $14.4 million from
$106.1 million at December 31, 1998 to $91.7 million at December 31, 1999. The
decrease was due to unrealized losses of $5.4 million on investment securities
available for sale, a contribution of $3.7 million to fund the Recognition and
Retention Plan ("RRP"), stock repurchases of $8.7 million, cash dividends of
$1.7 million and additional stock conversion costs of $16,000. Net income for
the year of $4.3 million, Employee Stock Ownership Plan ("ESOP") shares earned
of $448,000 and unearned compensation amortization of $292,000 offset these
decreases.
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 Lincoln Bancorp's stock
issuance, after costs and excluding the shares issued to 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 Lincoln Bancorp's stock issuance after costs
and excluding the shares issued to the ESOP, of $61.3 million, stock contributed
to the charitable foundation of $2.0 million 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.
Comparison of Operating Results For Years Ended December 31, 1999 and 1998
General. Net income for the year ended December 31, 1999 increased $3.2
million to $4.3 million compared to $1.1 million for the year ended December 31,
1998. The increase in net income was primarily a result of an increase in net
interest income and a decrease in other expenses offset by an increase in tax
expense. The largest single reason for the increase was the $2.0 million
contribution to the Lincoln Federal Charitable Foundation, Inc. (the
"Foundation") made in 1998 in connection with the stock conversion. Return on
average assets for the years ended December 31, 1999 and 1998 was 1.09% and
.35%, respectively. Return on average equity was 4.29% for the year ended
December 31, 1999 and 2.58% for the year ended December 31, 1998.
Interest Income. Total interest income was $27.7 million for 1999
compared to $23.0 million for 1998. The increase in interest income was due
primarily to an increase in average interest-earning assets. Average
interest-earning assets increased $82.2 million, or 27.0%, primarily due to a
increase in average securities available for sale of $101.0 million and average
loans of $8.1 million offset by a decrease in interest-bearing deposits of $23.3
million. The average yield on interest-earning assets was 7.19% and 7.57% for
the years ended December 31, 1999 and 1998, respectively.
Interest Expense. Interest expense increased $120,000 during the year
ended December 31, 1999 as compared to 1998. While average interest-bearing
liabilities increased $26.6 million, or 10.3%, the average cost of interest
bearing liabilities decreased from 5.33% for the 1998 period to 4.87% for the
1999 period.
Net Interest Income. Net interest income increased $4.7 million, or
51.1%, during the year ended December 31, 1999 as compared to 1998. Net interest
income increased $4.8 million due to an increase in volume of net interest
earning assets and liabilities and decreased $137,000 as a result of the average
rate of the net interest earning assets and liabilities. The interest rate
spread was 2.32% and 2.24% for 1999 and 1998, respectively. The net yield on
interest-earning assets was 3.57% and 3.02% for the 1999 and 1998 periods,
respectively. The increase in net yield on interest-earning assets was greater
than the increase in the interest rate spread because average interest-earning
assets as a percentage of interest-bearing liabilities increased from 117.0% for
1998 to 134.8% for 1999.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1999 was $384,000 as compared to $173,000 for 1998. During
the year ended December 31, 1999, net charge-offs were $135,000 as compared to
net charge-offs of $22,000 for 1998. The 1999 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 gains on loans held for sale of $11,000 were recorded
during the year ended December 31, 1999 as compared to net realized and
unrealized losses of $61,000 recorded during 1998.
Net realized and unrealized gains on securities available for sale.
Proceeds from sales of securities available for sale during the years ended
December 31, 1999 and 1998 amounted to $10.3 million and $21.1 million,
respectively. Net losses of $4,000 and net gains of $113,000 were realized on
those sales during the years ended December 31, 1999 and 1998, respectively.
Equity in losses of limited partnerships. Equity in losses of limited
partnerships decreased $191,000, or 37.2%, from $514,000 for the year ended
December 31, 1998 to $323,000 for 1999 due to the operating results of the
limited partnership investments.
Other Income. Other income increased $97,000, or 11.6%, from $833,000
for the year ended December 31, 1998 to $930,000 for 1999. 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
$3.9 million for the year ended December 31, 1999 compared to $2.7 million for
1998, an increase of approximately 42.0%. This increase resulted primarily from
compensation expense incurred by Lincoln Federal in connection with the ESOP and
the RRP. Also, Lincoln Federal's compensation expense increased as a result of
additional staffing for the two branches opened in 1999. There were 89 full-time
equivalent employees at December 31, 1999 compared to 76 at December 31, 1998.
Net Occupancy and Equipment Expenses. Combined occupancy expenses and
equipment expenses increased $23,000, or 2.6%, from $875,000 in 1998 to $898,000
in 1999 due primarily to the addition of two new branches opened during 1999.
Deposit Insurance Expense. Deposit insurance expense decreased $38,000,
or 20.2%, from $188,000 in 1998 to $150,000 in 1999.
Data Processing Expense. Data processing expense increased $78,000, or
11.9%, from the year ended December 31, 1998 to the same period in 1999.
Professional Fees. Professional fees increased $8,000, or 4.0%, from
the year ended December 31, 1998 to the same period in 1999.
Director and Committee fees. Director and committee fees decreased
$95,000, or 29.8%, from the year ended December 31, 1998 to 1999. This decrease
was due primarily to additional meetings held during 1998 in connection with the
stock conversion.
Mortgage Servicing Rights Amortization. Mortgage servicing rights
amortization decreased $156,000 from $280,000 for the year ended December 31,
1998 to $124,000 for the same period in 1999. The decrease from 1998 to 1999
relates to a reduction in prepayment speeds.
Charitable Contributions. Charitable contributions decreased $2.0
million from the year ended December 31, 1998 to 1999 due to the $2.0 million
contribution to the Foundation made in 1998 in connection with the stock
conversion.
Other Expenses. Other expenses, consisting primarily of expenses
related to advertising, loan expenses, supplies, and postage increased $267,000,
or 31.7%, from 1998 to 1999. 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 $2.4 million from the
year ended December 31, 1998 to 1999. 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 35.1% and (.5)% for 1999
and 1998, respectively.
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 years 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 interest-earning assets. Average
interest-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.
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 assets 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.
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.
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, 1999, 1998 and 1997, cash used to
originate loans exceeded repayments and other changes by $30.5 million, $6.9
million and $20.0 million, respectively. The growth in loans in 1999 was
primarily funded by cash flow generated from monthly repayments of
mortgage-backed securities, and in 1998 was funded by growth in deposits, while
proceeds from the sale of mortgage-backed securities available for sale funded
Lincoln Federal's 1997 loan growth.
During the years ended December 31, 1999, 1998 and 1997, Lincoln
Federal purchased mortgage-backed securities and other securities available for
sale and held to maturity in the amounts of $64.8 million, $81.5 million and
$7.8 million, respectively. These purchases were funded primarily with
borrowings. During the years ended December 31, 1999, 1998 and 1997, Lincoln
Federal received proceeds from maturities of mortgage-backed securities and
other securities available for sale and held to maturity of $20.2 million, $18.4
million and $6.8 million, respectively. During the years ended December 31,
1999, 1998 and 1997, Lincoln Federal received proceeds for the sale of
mortgage-backed and other securities available for sale of $10.3 million, $21.1
million and $54.5 million which funds were used to fund its loan growth. During
1997 and 1998, the funds were also used to reduce the level of FHLB advances.
Lincoln Federal had outstanding loan commitments and unused lines of
credit of $23.4 million and standby letters of credit outstanding of $86,000 at
December 31, 1999. 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, 1999 totaled $74.9 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 $103.9 million at December 31, 1999. As an additional
funding source, Lincoln Federal has also sold securities under repurchase
agreements. Lincoln Federal had outstanding securities sold under repurchase
agreements in the amount of $4.6 million at December 31, 1999.
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
regulation that implements this statutory liquidity requirement requires a
savings association to hold liquid assets in a minimum amount of 4% of the
association's net withdrawable accounts and short-term borrowings. A savings
association may calculate its compliance with this requirement based upon its
average daily balance of liquid assets during each quarter. The OTS may impose
monetary penalties on savings associations that fail to meet these liquidity
requirements. As of December 31, 1999, Lincoln Federal had liquid assets of
$89.3 million, and a regulatory liquidity ratio of 45.9%.
Pursuant to OTS capital regulations in effect at December 31, 1999,
savings associations were required to maintain a 1.5% tangible capital
requirement, a 4% leverage ratio (or core capital) requirement, and a total
risk-based capital to risk-weighted assets ratio of 8%. At December 31, 1999,
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, 1999:
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------------------------------------
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% $6,289 18.5% $77,569 $71,280
Core capital (2) 4.0 16,771 18.5 77,569 60,798
Risk-based capital 8.0 17,931 35.4 79,330 61,399
</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 has adopted a core capital requirement for savings associations
comparable to that required by the OCC for national banks. The regulation
requires core capital of 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
is in compliance with this requirement.
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 was to be effective for all fiscal years beginning after
June 15, 1999. The implementation date has been deferred and SFAS No. 133 will
now be effective for all fiscal quarters beginning after June 15, 2000. Early
application is encouraged; however, this Statement may not be applied
retroactively to financial statements of prior periods.
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.
Lincoln Bancorp's primary assets and liabilities are monetary in
nature. As a result, interest rates have a more significant impact on Lincoln
Bancorp'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 Lincoln Bancorp'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.
Quarterly Results of Operations
The following table sets forth certain quarterly results for the
quarter ended March 31, 2000 and years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Provision
Net For Loan Basic Diluted
Quarter Interest Interest Interest Losses Net Earnings Earnings Dividends
Ended Income Expense Income (Adjustments) Income Per Share Per Share Per Share
----- ------ ------- ------ ------------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000:
March $7,339 $3,973 $3,366 $(22) $930 $.17 $.17 $.08
1999:
March $6,474 $3,128 $3,346 $31 $1,244 $.19 $.19 $.06
June 6,980 3,488 3,492 200 1,013 .16 .16 .06
September 7,072 3,570 3,502 59 1,145 .19 .19 .08
December 7,216 3,761 3,455 94 946 .17 .17 .08
------- ------- ------- ---- ------ ---- ---- ----
$27,742 $13,947 $13,795 $384 $4,348 $.71 $.71 $.28
======= ======= ======= ==== ====== ==== ==== ====
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
======= ======= ====== ==== ======
</TABLE>
Earnings per share information for the periods before Lincoln Federal's
conversion to a stock savings bank on Decmeber 31, 1998 is not meaningful.
Quantitative and Qualitative Disclosures about Market Risks
An important component of Lincoln Federal's asset/liability management policy
includes examining the interest rate sensitivity of its assets and liabilities
and monitoring the expected effects of interest rate changes on the net
portfolio value of its assets. An asset or liability is interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. If Lincoln Federal's assets mature or reprice more quickly or to a
greater extent than its liabilities, net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. Conversely, if Lincoln Federal's
assets mature or reprice more slowly or to a lesser extent than its liabilities,
net portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling interest
rates. Lincoln Federal's policy has been to mitigate the interest rate risk
inherent in the historical business of savings associations, the origination of
long-term loans funded by short-term deposits, by pursuing certain strategies
designed to decrease the vulnerability of Lincoln Federal's earnings to material
and prolonged changes in interest rates.
ALCO Committee. Lincoln Federal'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-Secondary Marketing
Maxwell O. Magee, Retail Sales Manager Rebecca Morgan, Residential Lending
Manager Steve Schilling, 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. Lincoln Federal'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, Lincoln Federal's new management concluded that its
asset portfolio exposed Lincoln Federal to significant risks in the event of a
material and prolonged increase or decrease in interest rates. To address this
problem, in 1997 Lincoln Federal securitized and sold certain one- to
four-family residential loans in its portfolio in order to reduce its exposure
to interest rate risk. Lincoln Federal 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 Lincoln Federal'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 Lincoln Federal 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 Lincoln Federal securitized did not include all of
the documentation required by FHLMC. Lincoln Federal 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 Lincoln Federal securitized did not otherwise vary from FHLMC's standard
underwriting and mortgage eligibility requirements.
After grouping these loans into pools with similar loans that it
originated, Lincoln Federal assigned the notes and mortgages to FHLMC in
consideration for several mortgage-backed securities representing the different
loan pools. In August, 1997, Lincoln Federal 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.
Lincoln Federal 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.
Lincoln Federal retained in its investment portfolios mortgage-backed securities
representing $21.9 million of higher-yielding fixed-rate loans.
In April, 1998, Lincoln Federal 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. Lincoln Federal sold on the secondary market the mortgage-backed
security representing the COFI loans and $6.9 million of lower-yielding
fixed-rate loans. Lincoln Federal retained in its investment portfolio
mortgage-backed securities representing $18.8 million of higher-yielding
fixed-rate loans.
Lincoln Federal 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 Lincoln Federal securitized were sold without
recourse, Lincoln Federal 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. Lincoln Federal'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 Lincoln Federal to
repurchase a loan upon a borrower's default if the due diligence information
contained in the loan data report that Lincoln Federal provided to FHLMC was not
accurate, true or complete, if Lincoln Federal fails to provide additional
information or documentation to FHLMC upon request, or if Lincoln Federal
breaches any representation or warranty in the Master Commitment. Lincoln
Federal has not experienced any significant losses on these loans in the past
and does not anticipate any significant losses as a result of this
indemnification.
In June, 1998, Lincoln Federal sold an additional $17.2 million of its
adjustable-rate COFI loans in a whole-loan sale to a private investor that
closed in July, 1998. Lincoln Federal recognized a loss of $218,000 from this
transaction. The securitization of certain of Lincoln Federal'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, Lincoln
Federal has sold $75.4 million of the securities generated from the
securitization and has retained securities with a face value of $40.7 million in
its available-for-sale securities portfolio. Lincoln Federal 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. Lincoln Federal also used some of the proceeds from these sales
to purchase interest rate-sensitive securities. Lincoln Federal also
restructured its remaining FHLB debt by prepaying advances with higher interest
rates and extending the repayment terms of other debt, thereby reducing Lincoln
Federal'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 during 1999, Lincoln Federal primarily originates fixed-rate real
estate loans, which accounted for approximately 71.3% of its loan portfolio at
December 31, 1999. 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.
During the first quarter of 1999, Lincoln Federal initiated a leverage
strategy that involved buying approximately $54 million of marketable securities
and loans funded by an increase in securities sold under repurchase agreements
and Federal Home Loan Bank ("FHLB") advances. The purpose of this strategy was
to utilize the high equity position of Lincoln Federal to support additional
earning assets in order to increase operating income. Investments were made in
collateralized mortgage obligations, mortgage backed securities, agency notes
and corporate notes as well as a package of variable rate whole mortgage loans.
The leverage positions from these transactions are monitored regularly and no
other leverage transactions were done during the remainder of the year.
Loan growth continued through 1999 in all categories. Most of this
growth was funded by cash flow generated from monthly payments of mortgage
backed securities and collateralized mortgage obligations purchased with funds
generated from the conversion to a stock institution at the end of 1998 and from
the leverage transaction discussed above.
Lincoln Federal manages 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 and applicable 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.
It is estimated that at December 31, 1999, NPV would decrease 28% and
42% in the event of 200 and 300 basis point increases in market interest rates,
respectively, compared to 17% and 27% for the same increases at December 31,
1998. Lincoln Federal's NPV at December 31, 1999 would increase 18% and 21% in
the event of 200 and 300 basis point decreases in market rates, respectively. A
year earlier, 200 and 300 basis point decreases in market rates would have
increased NPV 6% and 10%, respectively.
Presented below, as of December 31, 1999, 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 100 basis
point increments, up and down 300 basis points and in accordance with the
proposed regulations. At December 31, 1999, 2% of the present value of Lincoln
Federal's assets was approximately $8.2 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 $21.2 million at December
31, 1999, Lincoln Federal would have been required to deduct $6.5 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.
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
--------------------------------------------------------------------------------
(Dollars in thousands)
+300 bp* $43,966 $(31,847) (42)% 11.85% (661)bp
+200 bp 54,354 (21,458) (28) 14.16 (431)bp
+100 bp 65,284 (10,528) (14) 16.43 (204)bp
0 bp 75,812 18.46
-100 bp 84,772 8,960 12 20.07 161bp
-200 bp 89,722 13,910 18 20.86 239bp
-300 bp 91,506 15,694 21 21.04 257bp
* Basis points.
In contrast, the following chart presents the calculation of Lincoln
Federal's exposure to interest rate risk as of December 31, 1998, as determined
by the OTS.
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
------------------------------------------------------------------------------
(Dollars in thousands)
+300 bp* $61,270 $(22,722) (27)% 17.65% (483)bp
+200 bp 69,565 (14,427) (17) 19.51 (297)bp
+100 bp 77,499 (6,494) (8) 21.19 (130)bp
0 bp 83,993 22.48
+100 bp 87,115 3,123 4 23.03 55 bp
-200 bp 89,343 5,350 6 23.38 90 bp
-300 bp 92,108 8,116 10 23.83 135 bp
* Basis points.
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.
Financial Condition and Results of Operations at March 31, 2000
Total assets increased $7.1 million, or 1.7% at March 31, 2000,
compared to December 31, 1999. The increase was primarily due to loan growth of
$7.2 million. Net loans increased by 3.1% to $240.2 million due to an increase
in customer demand. Commercial loans including commercial real estate,
construction lot development and lines of credit increased $3.5 million from
December 31, 1999 to March 31, 2000. Loan growth was funded by an increase in
deposits.
Deposits increased $14.4 million to $219.4 million during the first
quarter of 2000. The majority of this growth was in public fund certificates of
deposit, which increased by $13.8 million.
Total borrowed funds decreased by $3.5 million, or 3.3%, from December
31, 1999 to March 31, 2000. The decrease in total borrowed funds resulted from a
decrease in FHLB advances of $3.0 million and a decrease in the note payable to
a limited partnership of $489,000.
Shareholders' equity decreased $4.5 million from $91.7 million at
December 31, 1999 to $87.2 million at March 31, 2000. The decrease was primarily
due to stock repurchases of $4.6 million, cash dividends of $373,000, and
unrealized losses on securities available for sale of $656,000. These decreases
were offset by net income for three months ended March 31, 2000 of $930,000,
Lincoln ESOP shares earned of $105,000 and unearned compensation amortization of
$146,000.
Comparison of Operating Results for the Three Months Ended March 31, 2000 and
1999
Net income decreased $314,000, or 25.2%, from $1.2 million for the
three months ended March 31, 1999 to $930,000 for the three months ended March
31, 2000. The decrease was primarily due to an increase in other expenses, which
were $2.1 million for the three months ended March 31, 2000 compared to $1.5
million for the comparable three months of 1999. Additional costs associated
with a new branch, key management additions, and costs of the management
recognition and retention plan that were not in existence during the first
quarter of 1999 contributed to the increase in other expenses.
Interest income increased $865,000, or 13.4%, from $6.5 million for the
three months ended March 31, 1999 to $7.3 million for the same period in 2000.
Interest expense increased $845,000, or 27.0%, from $3.1 million for the three
months ended March 31, 1999 to $4.0 million for the same period in 2000. As a
result, net interest income for the three months ended March 31, 2000 increased
$20,000 or 0.6%, compared to the same period in 1999. The net interest margin
was 3.30% for the three-month period ended March 31, 2000 compared to 3.75% for
the same period in 1999. The average yield on earning assets declined 5 basis
points in 2000 and the average cost of interest-bearing liabilities increased 18
basis points from the first quarter of 1999 to the first quarter of 2000. This
reduced the spread from 2.38% to 2.15%, or 23 basis points.
The Company's provision for loan losses for the three months ended
March 31, 2000 was a net credit of $22,000 compared to expense of $31,000 for
the same period in 1999, as a result of a large recovery during the first
quarter of 2000.
Other income decreased $40,000, or 26.9%, for the three months ended
March 31, 2000 compared to the same period in 1999 primarily due to a decrease
in service fee income on loans sold of $21,000 and increased limited partnership
losses of $20,000 due to the operating results of the limited partnerships.
Other expenses increased $618,000, or 40.7%, for the first quarter of
2000 compared to the same period in 1999. Additional costs associated with a new
branch, key management additions, and costs of the management recognition and
retention plan that were not in existence during the first quarter of 1999
contributed to the increase in other expenses.
Income tax expense decreased $271,000 for the three months ended March
31, 2000 compared to the same period in 1999. The decrease was directly related
to the decrease in taxable income for the period.
Asset Quality
Lincoln Federal currently classifies loans as special mention,
substandard, doubtful and loss to assist management in addressing collection
risks and pursuant to regulatory requirements, which are not necessarily
consistent with generally accepted accounting principles. Special mention loans
represent credits that have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects or Lincoln Federal's credit position at
some future date. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
Lincoln Federal had $3.5 million of loans classified as special mention as of
March 31, 2000 and no loans classified as special mention as of December 31,
1999. The increase in loans classified as special mention was attributable to
four commercial loan relationships. In addition, Lincoln Federal had $744,000
and $1.1 million of loans classified as substandard at March 31, 2000 and
December 31, 1999, respectively. The decrease in loans classified as substandard
was primarily attributable to a principal reduction in the lone substandard
commercial relationship and a decrease in mortgage loans past due greater than
ninety days and on non-accrual status. Lincoln Federal reviews all loans on an
individual basis when the loan reaches ninety days past due to determine whether
non-accrual status is necessary. At March 31, 2000 and December 31, 1999, no
loans were classified as doubtful or loss. At March 31, 2000, and December 31,
1999, respectively, non-accrual loans were $744,000 and $1.1 million. The
allowance for loan losses was $1.8 million or approximately .7% of net loans at
March 31, 2000 and December 31, 1999.
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio
of cash and eligible investments to a certain percentage of net withdrawable
savings accounts and borrowings due within one year. The minimum required ratio
is currently set by the Office of Thrift Supervision regulation at 4%. As of
March 31, 2000, Lincoln Federal had liquid assets of $91.7 million and a
liquidity ratio of 36.7%.
Quantitative and Qualitative Disclosures About Market Risk
Presented below, as of March 31, 2000 and 1999, is an analysis
performed by the OTS of Lincoln Federal's interest rate risk as measured by
changes in Lincoln Federal's net portfolio value ("NPV") for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments, up
and down 300 basis points.
March 31, 2000
---------------------------------------------------------------------
Changes Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change %Change NPV Ratio Change
-------- -------- -------- ------- --------- ------
+300 bp 44,661 -32,040 -42% 11.81% -658 bp
+200 bp 59,786 -21,915 -29% 14.03% -436 bp
+100 bp 65,925 -10,776 -14% 16.32% -207 bp
0 bp 76,701 18.39%
-100 bp 86,023 9,322 12% 20.05% +166 bp
-200 bp 91,424 14,723 19% 20.92% +253 bp
-300 bp 93,338 16,637 22% 21.13% +274 bp
March 31, 1999
---------------------------------------------------------------------
Changes Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change %Change NPV Ratio Change
-------- -------- -------- ------- --------- ------
+300 bp 53,590 -33,117 -38% 14.45% -657 bp
+200 bp 64,978 -21,730 -25% 16.88% -414 bp
+100 bp 76,289 -10,419 -12% 19.12% -191 bp
0 bp 86,707 21.02%
-100 bp 95,401 8,694 10% 22.48% +146 bp
-200 bp 102,729 16,022 18% 23.62% +260 bp
-300 bp 111,367 24,660 28% 24.91% +389 bp
The analysis at March 31, 2000 indicates that there have been no
material changes in market interest rates or in Lincoln Federal's interest rate
sensitive instruments which would cause a material change in the market risk
exposures which affect the quantitative and qualitative risk disclosures as
presented in Item 7A of the Company's Annual Report on Form 10-K for the period
ended December 31, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CITIZENS BANCORP
General
Citizens Bancorp was incorporated for the purpose of owning all of the
outstanding shares of Citizens Savings Bank. The following discussion and
analysis of Citizens Bancorp's financial condition as of June 30, 1999 and
results of operations for periods prior to that date 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. Citizens Bancorp'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 Citizens Bancorp'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.
Average Balances and Interest Rates and Yields
The following tables present the fiscal years ended June 30, 1999, 1998
and 1997, the average monthly balances of each category of Citizens Bancorp's
interest-earning assets and interest-bearing liabilities, and the interest
earned or paid on such amounts.
AVERAGE BALANCE SHEET/YIELD ANALYSIS
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ---------- -------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits........$ 3,286 $168 5.12% $ 4,557 $292 6.40% $ 3,446 $ 179 5.21%
FHLB stock....................... 367 29 8.03 336 27 8.07 332 26 7.84%
Investment securities
available for sale (1)......... 340 13 3.94 232 10 4.23 1,527 94 6.14%
Loans receivable (2)............. 50,746 4,229 8.33 43,318 3,723 8.60 36,843 3,210 8.71%
------ ----- ------ ----- ------ -----
Total interest-earning
assets..................... 54,739 4,439 8.11 48,443 4,052 8.36 42,148 3,509 8.33%
----- ----- -----
Noninterest-earning assets.......... 3,583 3,165 3,343
-------- ------- --------
Total assets................. $ 58,322 $51,608 $ 45,491
======== ======= ========
Liabilities and
shareholders' equity:
Interest-bearing liabilities:
Deposits......................... $ 36,573 1,589 4.35 $36,137 1,652 4.57 $ 36,436 1,641 4.50%
FHLB advances.................... 5,808 330 5.68 1,731 86 4.96 3,212 173 5.41%
Total interest-bearing
-------- ----- ------- ----- -------- -----
liabilities................ 42,381 1,919 4.53 37,868 1,738 4.59 39,648 1,814 4.58%
----- ----- -----
Noninterest-bearing liabilities..... 702 588 395
-------- ------- ---------
Total liabilities............ 43,083 38,456 40,043
Equity received from contributions
to the ESOP...................... 191 52
Shareholders' equity................ 15,048 13,100 5,448
-------- ------- ---------
Total liabilities and
shareholders' equity....... $ 58,322 $51,608 $ 45,491
======== ======= =========
Net interest-earning assets......... $ 12,358 $10,575 $ 2,500
======== ======= =========
Net interest income................. $2,520 $2,314 $1,695
====== ====== ======
Interest rate spread (3)............ 3.58% 3.77% 3.75%
==== ==== ====
Net yield on weighted average
interest-earning assets (4)...... 4.60% 4.78% 4.02%
==== ==== ====
Average interest-earning assets
to average interest-
bearing liabilities.............. 129.16% 127.93% 106.31%
====== ====== ======
</TABLE>
(1) Includes securities available for sale at amortized cost prior to SFAS No.
115 adjustments.
(2) Total loans less loans in process. Average balances include non-accrual
loans.
(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.
Interest Rate Spread
Citizens Bancorp'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 Citizens Bancorp earned on its loan and investment portfolios, the
weighted average effective cost of its deposits and advances, the interest rate
spread, and net yield on weighted average interest-earning assets for the
periods and as of the dates shown. Average balances are based on average monthly
balances. Management believes that the use of month-end average balances instead
of daily average balances has not caused any material difference in the
information presented.
Year Ended June 30,
-------------------
1999 1998 1997
---- ---- ----
Weighted average interest rate earned on:
Interest-bearing deposits................ 5.12% 6.40% 5.21%
FHLB stock............................... 8.03 8.07 7.84
Investment securities.................... 3.94 4.23 6.14
Loans receivable......................... 8.33 8.60 8.71
Total interest-earning assets.......... 8.11 8.36 8.33
Weighted average interest rate cost of:
Deposits................................. 4.35 4.57 4.50
FHLB advances............................ 5.68 4.96 5.41
Total interest-bearing liabilities..... 4.53 4.59 4.58
Interest rate spread (1).................... 3.58 3.77 3.75
Net yield on weighted average
interest-earning assets (2).............. 4.60 4.78 4.02
(1) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. Interest rate spread figures must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated.
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Citizens Bancorp'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.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
------------------------------------------
Total
Due to Due to Net
Rate Volume Change
---- ------ ------
(In thousands)
Year ended June 30, 1999 compared
to year ended June 30, 1998
Interest-earning assets:
<S> <C> <C> <C>
Interest-bearing deposits........... $ (52) $ (72) $(124)
FHLB stock.......................... (1) 3 2
Investment securities............... (1) 4 3
Loans receivable.................... (119) 625 506
------- ---- ----
Total............................. (173) 560 387
------- ---- ----
Interest-bearing liabilities:
Deposits............................ (83) 19 (64)
FHLB advances....................... 14 230 244
------- ---- ----
Total............................. (69) 249 180
------- ---- ----
Net change in net interest income..... $(104) $ 311 $ 207
======= ==== ====
Year ended June 30, 1998 compared
to year ended June 30, 1997
Interest-earning assets:
Interest-bearing deposits........... $ 46 $ 66 $112
FHLB stock.......................... 1 --- 1
Investment securities............... (22) (62) (84)
Loans receivable.................... (41) 555 514
------- ---- ----
Total............................. (16) 559 543
------- ---- ----
Interest-bearing liabilities:
Deposits............................ 25 (13) 12
FHLB advances....................... (13) (75) (88)
------- ---- ----
Total............................. 12 (88) (76)
------- ---- ----
Net change in net interest income..... $ (28) $ 647 $ 619
======= ==== ====
Year ended June 30, 1997 compared
to year ended June 30, 1996
Interest-earning assets:
Interest-bearing deposits........... $ (21) $ 19 $ (2)
FHLB stock.......................... (1) --- (1)
Investment securities............... 10 (90) (80)
Loans receivable.................... (19) 425 406
------- ---- ----
Total............................. (31) 354 323
------- ---- ----
Interest-bearing liabilities:
Deposits............................ 10 92 102
FHLB advances....................... (11) 70 59
------- ---- ----
Total............................. (1) 162 161
------- ---- ----
Net change in net interest income..... $ (30) $192 $162
======= ==== ====
</TABLE>
Financial Condition at June 30, 1999 Compared to Financial Condition at June 30,
1998
Total consolidated assets of Citizens Bancorp increased $6.1 million,
or 11.3%, to $59.5 million at June 30, 1999, from $53.4 million at June 30,
1998. Cash increased $138,000 to $444,000 at June 30, 1999, from $306,000 at
June 30, 1998, while interest-bearing deposits, consisting primarily of
overnight deposits at the Federal Home Loan Bank ("FHLB") of Indianapolis and
certificates of deposit at other FDIC insured financial institutions, decreased
to $1.6 million at June 30, 1999, from $2.2 million at June 30, 1998. Net loans
receivable increased $6.2 million, or 13.1%, to $53.1 million at June 30, 1999.
The increase in loans was funded by an increase in deposits and borrowings
during the year.
Deposits increased $2.9 million primarily as a result of an increase in
the amount of public funds on deposit. Borrowings at the FHLB of Indianapolis
increased $3.5 million to $7.0 million as of June 30, 1999, from $3.5 million at
June 30, 1998.
Shareholders' equity decreased $406,000 during the year ended June 30,
1999. This was primarily a result of the profit of $832,000 for the year, which
increased shareholders' equity, less the cost of Citizens Bancorp's repurchase
of $1.1 million of its common stock at various times and market prices during
the year. Shareholders' equity also decreased $215,000 as a result of the
declaration of dividends on Citizens Bancorp's common stock during the year.
Financial Condition at June 30, 1998 Compared to Financial Condition at June 30,
1997
Total consolidated assets of Citizens Bancorp increased by $7.0
million, or 15.3%, to $53.4 million at June 30, 1998 from $46.4 million at June
30, 1997. Net loans receivable increased $8.5 million, or 22.1%, to $46.9
million at June 30, 1998. The increase in loans was funded primarily with the
net proceeds from the sale of Citizens Bancorp's common stock on September 18,
1997. Cash decreased by $555,000, while interest-bearing deposits decreased by
$1.0 million during the year.
Deposits decreased by $2.3 million primarily as a result of a decrease
in the amount of public funds on deposit. Borrowings at the Federal Home Loan
Bank decreased by $500,000 as a result of net repayments during the period.
Shareholders' equity increased $9.4 million primarily as a result of
stock issued by Citizens Bancorp in the conversion, less the conversion expenses
and the ESOP shares, plus the net profit for the year. Shareholders' equity
decreased by $667,000 as a result of Citizens' purchase of shares of Citizens
Bancorp's common stock for the Recognition and Retention Plan. Shareholders'
equity also decreased by $97,000 as a result of the declaration of dividends on
Citizens Bancorp's common stock during the year.
Comparison of Operating Results For Fiscal Years Ended June 30, 1999 and 1998
Net Income. Net income decreased $42,000, or 4.8%, to $832,000 in 1999
from $874,000 in 1998. The decrease primarily resulted from the sale of a tract
of real estate for a profit of $172,000 ($103,000 net of tax) included in 1998.
There was an increase of $207,000 in net interest income in 1999, offset by an
increase in other expenses of $140,000 during the year.
Net Interest Income. Net interest income increased $207,000, or 8.9%,
to $2.5 million in 1999 from $2.3 million in 1998. The increase resulted
primarily from an increase in earnings assets during 1999.
Provision for Loan Losses. The provision for loan losses was $65,000
for 1999, compared to $72,000 for 1998. Citizens had charge-offs of $12,000 and
recoveries of $5,000 in 1999, compared to charge-offs of $17,000 and recoveries
of $2,000 in 1998. At June 30, 1999, the allowance for loan losses was $326,000,
or 0.61% of total loans, compared to $269,000, or 0.57% of total loans at June
30, 1998.
Other income. Total non-interest income decreased $175,000, or 45.5%,
to $210,000 in 1999 from $385,000 in 1998. The decrease resulted primarily from
a decrease in the gain on the sale of real estate of $164,000 in 1999. Fees and
service charges decreased by $6,000 in 1999 and miscellaneous income decreased
by $4,000.
Other Expenses. Total non-interest expense increased $140,000, or
12.0%, to $1.3 million in 1999 from $1.2 million in 1998. The increase was
primarily due to an increase in salaries and benefits of $111,000 in 1999 due to
compensation expense related to the ESOP and the RRP. Office occupancy,
equipment and data processing expenses increased $34,000 in 1999, due primarily
to increased expenses related to the Year 2000 computer issue. Legal and
professional fees decreased $22,000 in 1999 due to fees incurred in 1998 related
to the special meeting of shareholders held in March of 1998. Miscellaneous
other expenses increased $16,000 in 1999.
Income Tax Expense. Income tax expense decreased $59,000, or 10.3%, to
$521,000 in 1999 from $580,000 in 1998. This primarily resulted from a decrease
in net income before income taxes in 1999 as a result of the gain on the sale of
real estate that increased non-interest income in 1998.
Comparison of Operating Results For Fiscal Years Ended June 30, 1998 and 1997
Net Income. Net income increased $503,000, or 135.6%, to $874,000 in
1998 from $371,000 in 1997. The increase primarily resulted from Citizens'
recognition of the one-time, non-recurring SAIF special assessment of $211,000
($127,000 net of tax) and the sale of an investment at a loss of approximately
$60,000 during 1997, as well as the sale of a tract of real estate for a profit
of $172,000 ($103,000 net of tax) during 1998. There was also an increase of
$619,000 in net interest income for 1998, offset by an increase in other
expenses, excluding the SAIF assessment, of $167,000. Excluding the gain on the
sale of real estate, the SAIF assessment and the loss on the sale of the
investment, net income would have increased $236,000, or 44.2%, to $770,000 for
the year ended June 30, 1998 from $534,000 in 1997.
Net Interest Income. Net interest income increased $619,000, or 36.5%,
to $2.3 million in 1998 from $1.7 million in 1997. The increase resulted
primarily from an increase in earning assets and a decrease in costing
liabilities in 1998 due to the sale of Citizens Bancorp's common stock.
Provisions for Loan Losses. Provisions for loan losses for 1998 and
1997 were $72,000 and $83,000, respectively. Citizens had charge-offs of $12,000
and recoveries of $2,000 in 1997. Citizens had charge-offs of $17,000 and
recoveries of $2,000 in 1998 and its allowance for loan loss as of June 30, 1998
was $269,000.
Other Income. Other income increased approximately $226,000, or 142.1%,
in 1998 as compared to 1997. This increase resulted from an increase in the gain
on the sale of real estate of $163,000 in 1998 and the $60,000 loss on the sale
of an investment in 1997, plus an increase of $4,000 in 1998 in fees and service
charges and miscellaneous income.
Other Expense. Other expenses decreased $44,000, or 3.7%, in 1998. The
decrease was primarily due to a $236,000 decrease in SAIF insurance premiums
offset by a $79,000 increase in salaries and benefits due to compensation
expense related to the ESOP and the RRP. Office occupancy, equipment and data
processing expenses increased by $17,000 during 1998 and other expenses
increased by $31,000. Legal and professional expenses increased by $64,000 due
to the increased reporting requirements of public companies.
Income Tax Expense. Income tax expense increased $397,000, or 216.6%,
to $580,000 in 1998 from $183,000 in 1997. This primarily resulted from the gain
on the sale of real estate, which increased non-interest income in 1998, and
from the FDIC special assessment, which decreased non-interest income in 1997,
as well as the increase in net interest income for 1998.
Liquidity and Capital Resources
Citizens Savings Bank's primary sources of funds are deposits, borrowings
and the proceeds from principal and interest payments on loans. While maturities
and scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
Citizens Savings Bank's primary investing activity is the origination of
loans. During the years ended June 30, 1999, 1998 and 1997, it originated total
loans in the amounts of $29.7 million, $25.8 million and $17.5 million,
respectively. Citizens Savings Bank purchased loans totaling $61,000 in the
fiscal year ended June 30, 1999. Loan principal repayments totaled $23.6
million, $19.7 million and $13.3 million during the respective periods.
During the years ended June 30, 1999, 1998 and 1997, Citizens Savings Bank
purchased securities in the amounts of $109,000, $148,000 and $65,000,
respectively. Citizens Savings Bank did not sell any securities during 1999 or
1998. During the year ended June 30, 1997, however, Citizens Savings Bank sold
approximately $2.9 million of securities for a loss of approximately $60,000.
Citizens Savings Bank had outstanding loan commitments of $607,000 and
unused lines of credit of approximately $2.96 million at June 30, 1999. The
unused lines primarily represent available borrowings under existing home equity
lines of credit. Citizens Savings Bank anticipates that it will have sufficient
funds from loan repayments and from its ability to borrow additional funds from
the FHLB of Indianapolis to meet its current commitments. Certificates of
deposit scheduled to mature in one year or less at June 30, 1999 totaled $11.5
million. Management believes that a significant portion of such deposits will
remain with Citizens Savings Bank based upon historical deposit flow data and
Citizens Savings Bank's competitive pricing in its market area.
Liquidity management is both a daily and long-term function of Citizens
Savings Bank's management strategy. In the event that Citizens Savings Bank
should require funds beyond its ability to generate them internally, additional
funds are available through the use of FHLB advances. Citizens Savings Bank had
outstanding FHLB advances in the amount of $7.0 million at June 30, 1999.
The following is a summary of Citizens Savings Bank's cash flows, which
are of three major types. Cash flows from operating activities consist primarily
of net income generated by cash. Investing activities generate cash flows
through the origination and principal collection on loans as well as purchases
and sales of securities. Investing activities will generally result in negative
cash flows when Citizens Savings Bank experiences loan growth. Cash flows from
financing activities include savings deposits, withdrawals and maturities and
changes in borrowings. The following table summarizes cash flows for each year
in the three-year period ended June 30, 1999.
Year Ended June 30,
1999 1998 1997
-------- ------ ----
(In thousands)
Operating activities.........................$ 866 $ 1,522 $ 266
-------- ------ ----
Investing activities:
Net change in interest-bearing deposits... 297 693 (695)
Purchases of investment securities....... (109) (148) (65)
Sales of investment securities............ --- --- 2,932
Net change in loans....................... (6,232) (8,655) (4,223)
Loans sold................................ --- --- 91
Purchases of equipment.................... (55) (30) (16)
Change in land held for development....... 52 31 77
Purchases of FHLB stock................... (67) (20) ---
-------- ------ ----
Total from investing activities.............. (6,114) (8,129) (1,899)
-------- ------ ----
Financing activities:
Increase/(decrease) in NOW,
MMDA and passbook deposits.............. 3 (258) 305
Increase/(decrease) in certificates
of deposit.............................. 2,905 (2,030) 450
Advances from FHLB........................ 7,000 3,500 14,500
Payments to FHLB.......................... (3,500) (4,000) (13,500)
Dividends paid on common stock............ (210) (53) ---
Repurchase of common stock................ (1,104) --- ---
Sale of common stock, net of costs........ --- 9,216 ---
Purchase of RRP shares.................... --- (667) ---
-------- ------ ----
Total from financing activities.............. 5,094 5,708 1,755
-------- ------ ----
Net increase/(decrease) in cash
and cash equivalents......................$ (154) $ (899) $122
======== ====== ====
Federal law requires that savings associations maintain a minimum
average daily balance of liquid assets in an 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 regulation that implements this statutory liquidity requirement provides
that a savings association must hold liquid assets in an amount not less than 4%
of the association's net withdrawable accounts and short-term borrowings. The
OTS no longer requires savings associations to maintain short-term liquid assets
constituting at least 1% of their average daily balance of net withdrawable
deposit accounts and current borrowings. In determining their compliance with
this liquidity requirement,savings associations may calculate their liquidity
requirement based upon their average daily balance of liquid assets during each
quarter rather than during each month. The OTS may impose monetary penalties on
savings associations that fail to meet these liquidity requirements. As of June
30, 1999, Citizens Savings Bank had liquid assets of $3.0 million, and a
regulatory liquidity ratio of 7.5%.
Pursuant to OTS capital regulations, savings associations must
currently meet 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 June 30, 1999, Citizens Savings Bank's tangible capital ratio
was 17.8%, its core capital ratio was 17.8%, and its total risk-based capital to
risk-weighted assets ratio was 29.0%. Therefore, at June 30, 1999, Citizens
Savings Bank's capital levels exceeded all applicable regulatory capital
requirements currently in effect.
The following table provides the minimum regulatory capital
requirements and Citizens Savings Bank's capital ratios as of June 30, 1999:
<TABLE>
<CAPTION>
At June 30, 1999
------------------------------------------------------------------------
OTS Requirement Citizens Savings Bank'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% $ 876 17.8% $10,388 $9,512
Core capital (2)........ 3.0 1,751 17.8 10,388 8,637
Risk-based capital...... 8.0 2,957 29.0 10,714 7,757
</TABLE>
(1) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) The OTS has adopted a core capital requirement for savings associations
comparable to that adopted by the OCC for national banks. The regulation
requires core capital of at least 3% of total adjusted assets for savings
associations that received the highest supervisory rating for safety and
soundness, and 4% to 5% for all other savings associations. Citizens is in
compliance with these capital requirements.
As of June 30, 1999, management is not aware of any current recommendations
by regulatory authorities which, if they were to be implemented, would have, or
are reasonably likely to have, a material adverse effect on Citizens Savings
Bank's liquidity, capital resources or results of operations.
Current Accounting Issues
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards ("SFAS") No. 133 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 was to be effective for all fiscal years beginning after
June 15, 1999. The implementation date was deferred, and SFAS No. 133 will now
be effective for all fiscal quarters of all fiscal years beginning after June
15, 2000.
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.
Citizens Savings Bank's primary assets and liabilities are monetary in
nature. As a result, interest rates have a more significant impact on Citizens
Savings Bank'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 Citizens Savings Bank'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 Citizens Savings Bank has made. Management is unable to
determine the extent, if any, to which properties securing Citizens Savings
Bank's loans have appreciated in dollar value due to inflation.
Asset/Liability Management
An important component of Citizens Savings Bank's asset/liability
management policy includes examining the interest rate sensitivity of its assets
and liabilities and monitoring the expected effects of interest rate changes on
its net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If Citizens' assets
mature or reprice more quickly or to a greater extent than its liabilities,
Citizens Savings Bank's net portfolio value and net interest income would tend
to increase during periods of rising interest rates but decrease during periods
of falling interest rates. Conversely, if Citizens Savings Bank's assets mature
or reprice more slowly or to a lesser extent than its liabilities, its net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates.
Citizens Savings Bank'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 its earnings to material and prolonged
changes in interest rates.
Because of the lack of customer demand for adjustable rate loans in its
market area, Citizens Savings Bank primarily originates fixed-rate real estate
loans, which accounted for approximately 65% of its loan portfolio at June 30,
1999. To manage the interest rate risk of this type of loan portfolio, Citizens
Savings Bank limits maturities of fixed-rate loans to no more than 20 years. In
addition, Citizens Savings Bank continues to offer and attempts to increase its
volume of adjustable rate loans when market interest rates make these loans more
attractive to customers.
Management believes it is critical to manage the relationship between
interest rates and the effect on Citizens Savings Bank'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.
Citizens Savings Bank manages assets and liabilities within the context of the
marketplace and applicable regulatory limitations and within limits established
by its Board of Directors on the amount of change in NPV which is acceptable
given certain interest rate changes.
Interest risk exposure is monitored monthly by an Asset/Liability
Management Committee which considers various factors such as current local and
national economic conditions and interest rate outlook as well as Citizens
Savings Bank's loan and deposit demand, pricing and maturity structure. This
Committee periodically updates Citizens Savings Bank's interest rate risk
strategy which primarily involves modifying asset/liability terms and mix as
considered appropriate. An increased emphasis on consumer loans, which generally
have shorter terms to maturity than residential mortgage loans, in addition to
an increase in the volume of adjustable-rate loans, including multi-family and
non-residential mortgage loans and home equity lines of credit, have been the
major strategies for asset management. Citizens Savings Bank has also attempted
to lengthen the average maturity of its liabilities by offering special rates on
longer term certificates of deposit. Long term advances from the FHLB of
Indianapolis are also an available source of funds which could help Citizens
Savings Bank with future liability management.
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. As Citizens
Savings Bank does not meet either of these requirements, it is not required to
file Schedule CMR, although it does so voluntarily. Under the regulation,
associations which must file are required to take a deduction (the interest rate
risk capital component) from their total capital available to calculate their
risk based capital requirement if their interest rate exposure is greater than
"normal." The amount of that deduction is one-half of the difference between (a)
the institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
It is estimated that at June 30, 1999, NPV would decrease 9.0% in the
event of a 200 basis point increase in market interest rates, compared to 9.8%
for the same increase at June 30, 1998. Citizens Savings Bank's NPV at June 30,
1999 would increase 0.5% in the event of a 200 basis point decrease in market
rates. A year earlier, a 200 basis point decrease in market rates would have
increased NPV 3.1%.
Presented below, as of June 30, 1999 and 1998, is an analysis performed
by the OTS of Citizens Savings Bank's interest rate risk as measured by changes
in NPV for instantaneous and sustained parallel shifts in the yield curve up and
down 200 basis points.
June 30, 1999
Net Portfolio Value Summary Performance
NPV as % of
Present Value
Change Net Portfolio Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
--------------------------------------------------------------------------------
(Dollars in thousands)
+ 200 bp* $11,973 $(1,183) (8.99)% 20.53% (115) bp
0 bp 13,156 --- --- 21.68% --- bp
- 200 bp 13,215 59 0.45% 21.28% (40) bp
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets................. 21.68%
Exposure Measure: Post-Shock NPV Ratio........................ 20.53%
Sensitivity Measure: Change in NPV Ratio...................... 115 bp
Change in NPV as % of PV of Assets............................ 5.3%
June 30, 1998
Net Portfolio Value Summary Performance
NPV as % of
Present Value
Change Net Portfolio Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
--------------------------------------------------------------------------------
(Dollars in thousands)
+ 200 bp* $10,725 $(1,158) (9.79)% 20.03% (151) bp
0 bp 11,883 --- --- 21.54% --- bp
- 200 bp 12,251 368 3.10% 21.86% 32 bp
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets.............. 21.54%
Exposure Measure: Post-Shock NPV Ratio..................... 20.03%
Sensitivity Measure: Change in NPV Ratio................... 151 bp
Change in NPV as % of PV of Assets......................... 7.0%
* Basis points
Financial Condition and Results of Operations at March 31, 2000
Total assets increased to $63.5 million at March 31, 2000, compared to
$59.5 million at June 30, 1999. Cash increased $163,000 to $607,000 at March 31,
2000, from $444,000 at June 30, 1999, while interest bearing-deposits,
consisting primarily of overnight deposits at the FHLB of Indianapolis and
certificates of deposit at other FDIC insured financial institutions, increased
to $2.4 million at March 31, 2000, from $1.6 million at June 30, 1999. Net loans
receivable increased $2.9 million to $56.0 million at March 31, 2000, from $53.1
million at June 30, 1999. The increase in loans and interest-bearing deposits
was funded by an increase in borrowings during the period. Borrowings at the
FHLB increased $4.0 million to $11.0 million as of March 31, 2000, from $7.0
million at June 30, 1999. This was offset by a decrease in deposits of $0.7
million to $36.3 million at March 31, 2000, from $37.0 million at June 30, 1999.
Shareholders' equity increased $438,000 during the nine months ended
March 31, 2000. This was primarily a result of the profit of $609,000 for the
period, which increased shareholders' equity, less the cost of Citizens
Bancorp's repurchase of $79,000 of its common stock (6,353 shares) at various
times and market prices during the period. Citizens Bancorp declared a dividend
of $.07 per share of common stock held as of March 31, 2000, payable on April
14, 2000. Shareholders' equity decreased by $62,000 as a result of the
declaration of the dividend.
Comparison of operating results for the three-month periods ended March 31, 2000
and 1999.
Citizens Bancorp had a decrease in net income of $10,000 to $217,000
for the three months ended March 31, 2000, compared to a net income of $227,000
for the three-month period ended March 31, 1999. The decrease was primarily due
to an increase of $49,000 in non-interest expense during the three-month period
ended March 31, 2000, offset by an increase of $25,000 in net interest income
during the same period.
Net interest income increased $25,000 to $653,000 for the quarter ended
March 31, 2000, compared to $628,000 for the same period in 1999. The increase
resulted primarily from an increase in earning assets during the 2000 period,
offset by a decrease in net interest margin to 4.46% for the quarter ended March
31, 2000, from 4.52% for the same period in 1999.
The provision for loan losses was $15,000 for the three-month periods
ended March 31, 2000 and March 31, 1999. At March 31, 2000, the allowance for
loan loss was 0.61% of total loans, which was unchanged from June 30, 1999.
Total non-interest income increased $4,000 to $51,000 for the quarter
ended March 31, 2000, compared to $47,000 during the same period in 1999. The
increase is primarily the result of a $5,000 increase in other income during the
quarter ended March 31, 2000 due to the receipt of a $5,000 Federal Income Tax
refund related to the 1996 CLSC federal tax return.
Total non-interest expense increased $49,000 to $350,000 for the
quarter ended March 31, 2000, compared to $301,000 for the same quarter in 1999.
The increase was primarily due to an increase of $25,000 in salaries and
benefits to $182,000 for the three months ended March 31, 2000, compared to
$157,000 for the same period in 1999. Legal and professional fees increased
$5,000 to $12,000 for the three months ended March 31, 2000, compared to $7,000
for the same period in 1999. Office occupancy, equipment and data processing
expenses increased by $5,000 during the period ended March 31, 2000, offset by a
$4,000 decrease in deposit insurance premiums during the 2000 period. Other
expenses increased $18,000 during the three months ended March 31, 2000, due
primarily to an initial payment of $15,000 under an agreement with Trident
Securities to deliver a fairness opinion and to negotiate and arrange the Merger
Agreement and Plan of Reorganization between Citizens Bancorp and Lincoln
Bancorp of Plainfield, IN.
Income tax expense decreased by $10,000 to $122,000 for the three
months ended March 31, 2000, compared to $132,000 for the three months ended
March 31, 1999.
Comparison of operating results for the nine-month periods ended March 31, 2000
and 1999.
Citizens Bancorp had an increase in net income of $1,000 to $609,000
for the nine months ended March 31, 2000, compared to a net income of $608,000
for the nine months ended March 31, 1999. The increase was primarily due to an
increase of $29,000 in net interest income and a decrease in income tax expense
of $12,000 during the nine months ended March 31, 2000, offset by an increase of
$48,000 in non-interest expense during the same period.
Net interest income increased $29,000 to $1,911,000 for the nine months
ended March 31, 2000, compared to $1,882,000 for the same period in 1999. The
increase resulted primarily from an increase in earning assets during the 2000
period, offset by a decrease in net interest margin to 4.43% for the nine months
ended March 31, 2000, from 4.57% for the same period in 1999.
The provision for loan losses was $45,000 for the nine months ended
March 31, 2000, compared to $50,000 for the same period in 1999. At March 31,
2000, the allowance for loan loss was 0.61% of total loans, which was unchanged
from June 30, 1999.
Total non-interest income increased $3,000 to $161,000 for the nine
months ended March 31, 2000, compared to $158,000 for the nine months ended
March 31, 1999.
Total non-interest expense increased $48,000 to $1,023,000 for the nine
months ended March 31, 2000, compared to $975,000 for the same period in 1999.
Salaries and benefits increased $49,000 during the 2000 period, due primarily to
expenses related to the early vesting of the RRP shares of Advisory Director
Ralph C. Hinshaw. This increase was offset by a decrease in legal and
professional fees of $16,000 to $49,000 for the nine months ended March 31,
2000, compared to $65,000 for the same period in 1999. Office occupancy,
equipment, data processing and deposit insurance expenses decreased $4,000
during the 2000 period. Other expenses increased $19,000 during the nine months
ended March 31, 2000, due primarily to an initial payment of $15,000 under an
agreement with Trident Securities to deliver a fairness opinion and to negotiate
and arrange the Merger Agreement and Plan of Reorganization between Citizens
Bancorp and Lincoln Bancorp.
Income tax expense decreased by $12,000 to $395,000 for the nine months
ended March 31, 2000, compared to $407,000 for the nine months ended March 31,
1999.
Asset Quality
The allowance for loan losses was $340,000 at March 31, 2000, compared
to $326,000 at June 30, 1999. Management considered the allowance for loan
losses at March 31, 2000 to be adequate to cover estimated losses inherent in
the loan portfolio at that date, taking into consideration probable losses that
could be reasonably estimated. Such belief is based upon an analysis of loans
currently outstanding, past loss experience, current economic conditions and
other factors and estimates which are subject to change over time. The following
table sets forth the changes affecting the allowance for loan losses for the
nine months ended March 31, 2000.
Balance, July 1, 1999 $326,249
Provision for loan losses 45,000
Recoveries 2,033
Charge-offs (32,799)
-------
Balance, March 31, 2000 $340,483
========
Non-performing loans totaled $523,000 or .93% of total loans at March 31,2000,
compared to $197,000 or .37% of total loans at June 30, 1999.
Liquidity and Capital Resources
Citizens Bancorp's most liquid assets are cash and interest-bearing
deposits. The levels of these assets are dependent on Citizens Bancorp's
operating, financing, and investing activities. At March 31, 2000 and June 30,
1999, cash and interest-bearing deposits totaled $3.0 million and $2.1 million,
respectively.
Citizens Bancorp's primary sources of funds are deposits, borrowings
and the proceeds from principal and interest payments on loans. While maturities
and scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
If Citizens Bancorp requires funds beyond its ability to generate them
internally, it has the ability to borrow funds from the FHLB of Indianapolis.
Federal law limits an institution's borrowings from the FHLB to 20 times the
amount paid for capital stock in the FHLB, subject to regulatory capital
requirements. As a policy matter, however, the FHLB of Indianapolis typically
limits the amount of borrowings from the FHLB to 50% of adjusted assets (total
assets less borrowings). At March 31, 2000, borrowings from the FHLB totaled
$11.0 million.
Quantitative and Qualitative Disclosures About Market Risk
Presented below, as of March 31, 2000 and 1999, is an analysis
performed by the OTS of Citizens Bancorp's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve up and down 200 basis points. The decline in the net portfolio value at
March 31, 2000 compared to March 31, 1999 and June 30, 1999, is primarily
attributable to a greater decline in the value of fixed-rate mortgages as a
result of an increase in the amount of these mortgages and a rising rate
environment.
<TABLE>
<CAPTION>
March 31, 2000
Net Portfolio Value Summary Performance
NPV as % of
Present Value
Change Net Portfolio Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 200 bp* $11,816 $(1,830) (13.41)% 19.37% (199) bp
0 bp 13,646 --- --- 21.36% --- bp
- 200 bp 14,339 693 5.08% 21.79% 44 bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets............... 21.36%
Exposure Measure: Post-Shock NPV Ratio...................... 19.37%
Sensitivity Measure: Change in NPV Ratio.................... 199 bp
Change in NPV as % of PV of Assets.......................... 9.3%
March 31, 1999
Net Portfolio Value Summary Performance
<TABLE>
<CAPTION>
NPV as % of
Present Value
Change Net Portfolio Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 200 bp* $11,523 $(831) (6.72)% 20.01% (68) bp
0 bp 12,354 --- --- 20.69% --- bp
- 200 bp 12,247 (107) (.87)% 20.06% (64) bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets............. 20.69%
Exposure Measure: Post-Shock NPV Ratio.................... 20.01%
Sensitivity Measure: Change in NPV Ratio.................. 68 bp
Change in NPV as % of PV of Assets........................ 3.3%
* Basis points
BUSINESS OF LINCOLN BANCORP
General
Lincoln Bancorp 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 in connection with
Lincoln Federal's conversion from mutual to stock form. Lincoln Bancorp became
Lincoln Federal's holding company on December 30, 1998. The principal asset of
Lincoln Bancorp currently consists of 100% of the issued and outstanding shares
of capital stock, $.01 par value per share, of Lincoln Federal. 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 institution changed its name to Lincoln Federal Savings and Loan
Association and, in 1984, adopted its current name, Lincoln Federal. Lincoln
Federal currently conducts its business from six full-service offices located in
Hendricks, Montgomery, Clinton and Morgan Counties, Indiana, with its main
office located in Plainfield. Lincoln Federal opened its newest offices in Avon,
Indiana in January, 1999 and Mooresville, Indiana in April, 1999, and has
received regulatory approval to open a new branch in Greenwood, Indiana in
September 2000. Lincoln Federal'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
Lincoln Federal 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 72.2% of its total
loan portfolio at December 31, 1999.
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 6.6% of Lincoln Federal's total loan
portfolio, and real estate construction loans totaled approximately 7.5% of
Lincoln Federal's total loans as of December 31, 1999. Consumer loans, which
consist primarily of home equity and second mortgage loans, have increased
significantly in the past two years from $20.6 million, or 8.1% of Lincoln
Federal's loan portfolio at December 31, 1997, to $28.6 million, or 11.8% of its
loan portfolio at December 31, 1999.
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,
1999 1998 1997 1996 1995
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
TYPE OF LOAN
Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four-family
residential (1)............. $175,095 72.18% $152,893 76.19% $205,976 81.03% $269,618 84.84% $248,947 84.48%
Multi-family................... 1,029 .42 1,022 .51 1,133 .45 1,111 .35% 1,012 .34
Commercial real estate......... 16,073 6.63 14,548 7.25 14,914 5.87 14,830 4.66% 15,727 5.34
Construction................... 18,127 7.47 7,411 3.69 9,912 3.90 13,159 4.14% 7,838 2.66
Land........................... 3,609 1.49 2,664 1.33 1,455 .57 2,725 .86% 9,877 3.35
Commercial........................ 91 .04 122 .06 242 .10 --- --- --- ---
Consumer loans:
Home equity and
second mortgages............. 24,272 10.01 18,482 9.21 17,218 6.77 13,239 4.17 7,858 2.67
Other.......................... 4,282 1.76 3,532 1.76 3,340 1.31 3,124 .98 3,409 1.16
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable....... $242,578 100.00% $200,674 100.00% $254,190 100.00% $317,806 100.00% $294,668 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
One-to-four-family
residential real estate (1).. $209,379 86.31% $177,837 88.62% $232,966 91.65% $290,956 91.55% $264,142 89.64%
Multi-family real estate....... 1,029 .43 1,022 .51 1,133 .45 1,111 .35 1,012 .34
Commercial real estate......... 24,188 9.97 15,498 7.72 15,054 5.92 19,890 6.26 16,229 5.51
Land........................... 3,609 1.49 2,664 1.33 1,455 .57 2,725 .86 9,877 3.35
Deposits....................... 675 .28 962 .48 1,106 .44 1,155 .37 995 .34
Auto........................... 3,006 1.24 2,127 1.06 2,041 .80 1,502 .47 1,690 .57
Other security................. 491 .20 475 .24 426 .17 356 .11 611 .21
Unsecured ..................... 201 .08 89 .04 9 -- 111 .03 113 .04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable....... $242,578 100.00% $200,674 100.00% $254,190 100.00% $317,806 100.00% $294,668 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Deduct:
Allowance for loan losses......... 1,761 .73 1,512 .75 1,361 .54 1,241 .39 1,121 .38
Deferred loan fees (1)............ 822 .34 893 .45 1,690 .66 2,707 .85 2,854 .97
Loans in process.................. 6,995 2.88 2,348 1.17 2,504 .99 8,086 2.55 5,347 1.81
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable........... $233,000 96.05% $195,921 97.63% $248,635 97.81% $305,772 96.21% $285,346 96.84%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage Loans:
Adjustable-rate................$ 68,452 28.74% $56,014 28.43% $95,106 37.95% $117,062 37.20% $112,193 38.52%
Fixed-rate..................... 169,753 71.26 141,006 71.57 155,502 62.05 197,620 62.80 179,066 61.48
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total........................ $238,205 100.00% $197,020 100.00% $250,608 100.00% $314,682 100.00% $291,259 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
(1) Net loans held for sale included in the above categories amounted to
$24,201,000 and $15,534,000 at December 31, 1996 and 1995. There were
no loans held for sale at December 31, 1999, 1998 and 1997.
The following table sets forth certain information at December 31,
1999, 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 2003 2005 2010 2015
December 31, to to to and
1999 2000 2001 2002 2004 2009 2014 following
-------- ------- ------ ------ ------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
One- to four-family
residential loans................ $175,095 $ 36 $ 361 $ 536 $ 1,133 $16,312 $43,648 $113,069
Multi-family loans.................... 1,029 --- --- 111 333 49 47 489
Commercial real estate loans....... 16,073 1,872 963 1,176 3,924 2,931 1,341 3,866
Construction loans................. 18,127 15,975 --- 1,000 1,152 --- --- ---
Land loans......................... 3,609 1,574 56 131 1,655 97 96 ---
Commercial......................... 91 5 10 37 39 --- --- ---
Consumer loans:
Installment loans................. 3,607 263 342 610 1,999 374 19 ---
Loans secured by deposits.......... 675 412 126 49 88 --- --- ---
Home equity loans and
and second mortgages............. 24,272 1,298 97 322 2,358 17,915 2,282 ---
-------- ------- ------ ------ ------- ------- ------- --------
Total consumer loans............. 28,554 1,973 565 981 4,445 18,289 2,301 ---
-------- ------- ------ ------ ------- ------- ------- --------
Total........................ $242,578 $21,435 $1,955 $3,972 $12,681 $37,678 $47,433 $117,424
======== ======= ====== ====== ======= ======= ======= ========
</TABLE>
The following table sets forth, as of December 31, 1999, 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, 2000
-------------------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C>
One- to four-family residential loans.. $138,723 $36,336 $175,059
Multi-family loans..................... 461 568 1,029
Commercial real estate loans........... 8,308 5,893 14,201
Construction loans..................... 1,152 1,000 2,152
Land loans............................. 2,035 --- 2,035
Commercial................................ 86 --- 86
Installment loans......................... 3,344 --- 3,344
Loans secured by deposits................. 263 --- 263
Home equity loans and second mortgages.... 8,097 14,877 22,974
-------- ------- --------
Total.................................. $162,469 $58,674 $221,143
======== ======= ========
</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 Federal Home Loan Mortgage Corporation
("FHLMC") lending guidelines. Lincoln Federal originates fixed-rate loans which
provide for the payment of principal and interest over a period of up to 30
years.
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
Lincoln Federal's portfolio at December 31, 1999 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.
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 $17.2 million of COFI loans. 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. At December 31, 1999, Lincoln Federal continued to hold in its
investment portfolio approximately $23.0 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, 1999, approximately
20.8% 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, 1999, approximately $175.1 million, or 72.2% of Lincoln
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $727,000, or .4% 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, 1999 Lincoln Federal had $4.6 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.
At December 31, 1999 Lincoln Federal's largest commercial real estate
borrower had loans outstanding in the aggregate amount of $2.4 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, 1999, approximately $16.1 million, or 6.6% of Lincoln Federal's
total loan portfolio, consisted of commercial real estate loans. On the same
date, there were no commercial real estate loans included in non-performing
assets.
At December 31, 1999, approximately $1.0 million, or .4% 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,
1999 was $336,000 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, 1999,
approximately $18.1 million, or 7.5% of Lincoln Federal's total loan portfolio,
consisted of construction loans. Of these loans, approximately $3.2 million were
for the acquisition and development of residential housing developments, $6.8
million financed the construction of one- to four-family residential properties
and $8.1 million financed the construction of commercial real estate. As of
December 31, 1999, Lincoln Federal's largest construction loan relationship and
largest construction loan had a balance of $2.1 million and was secured by a
church located in Plainfield, Indiana. As of December 31, 1999, this loan was
performing according to its terms. Also on that date, construction loans in the
amount of $301,000 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, 1999, approximately $3.6 million, or 1.5%
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, 1999,
Lincoln Federal'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.
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, 1999, Lincoln Federal's consumer loans aggregated approximately
$28.6 million, or 11.8% of Lincoln Federal's total loan portfolio. Included in
consumer loans at December 31, 1999 were $15.4 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 $24.3 million
at December 31, 1999, 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. Motorcycle 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, 1999, consumer loans in the amount of
$77,000 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, 1999, commercial loans amounted to $91,000.
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, 1999, 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,
Clinton and Morgan Counties. At December 31, 1999, 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, Lincoln Federal 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.
Lincoln Federal occasionally purchases whole loans or 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, 1999, Lincoln Federal had $5.8 million
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,
-------------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable at
beginning of period............................. $200,674 $254,190 $317,806
-------- -------- --------
Loans Originated:
Real estate mortgage loans:
One-to-four family loans (1)................ 58,215 59,556 44,472
Multi-family loans.......................... 282 --- 68
Commercial real estate loans................ 4,746 5,271 6,608
Construction loans.......................... 13,469 7,584 10,411
Land loans.................................. 3,435 2,042 3,053
Commercial loans.............................. 43 10 242
Consumer loans................................ 17,484 14,924 12,432
-------- -------- --------
Total originations........................ 97,674 89,387 77,286
-------- -------- --------
Purchases (sales) of participation loans, net...... 6,157 (67,369) (78,887)
Reductions:
Repayments and other deductions............... 61,709 75,169 61,904
Transfers from loans to real estate owned..... 218 365 111
-------- -------- --------
Total reductions............................ 61,927 75,534 62,015
-------- -------- --------
Total gross loans receivable at
end of period........................... $242,578 $200,674 $254,190
======== ======== ========
</TABLE>
(1) Includes certain home equity loans.
Lincoln Federal's total loan originations during the year ended December
31, 1999 totaled $97.7 million, compared to $89.4 million during the year ended
December 31, 1998 and $77.3 million for the year ended December 31, 1997.
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. Lincoln Federal 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, 1999, $1,147,000, or .3% of Lincoln
Federal's total assets, were non-performing (non-performing loans and
non-accruing loans) compared to $1,395,000, or .4%, of its total assets at
December 31, 1998. At December 31, 1999, residential loans accounted for
$727,000 of Lincoln Federal's non-performing assets, construction loans
accounted for $301,000 of its non-performing assets, and consumer loans
accounted for $77,000 of non-performing assets. Lincoln Federal had real estate
owned ("REO") properties in the amount of $42,000 as of December 31, 1999.
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,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-performing loans..................... $1,105 $1,292 $ 3,257 $ 2,397 $1,797
Troubled debt restructurings............. --- --- 367 46 598
------ ------ ------- ------ ------
Total non-performing loans............. $1,105 1,292 3,624 2,443 2,395
Foreclosed real estate................... 42 103 45 75 ---
------ ------ ------- ------ ------
Total non-performing assets............ $1,147 $1,395 $ 3,669 $2,518 $2,395
====== ====== ======= ====== ======
Non-performing loans to total loans......... .47% .65% 1.45% .80% .83%
Non-performing assets to total assets....... .28% .38% 1.14% .73% .75%
</TABLE>
Interest income of $45,000 for the year ended December 31, 1999, was
recognized on the non-performing loans summarized above. Interest income of
$83,000 for the year ended December 31, 1999, respectively, would have been
recognized under the original loan terms of these loans.
At December 31, 1999, Lincoln Federal held loans delinquent from 30 to 89
days totalling $4.1 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, 1999, 1998, and 1997, 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, 1999 At December 31, 1998 At December 31, 1997
-------------------------------------- ---------------------------------- ----------------------------------
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 Loansof 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..... 88 $3,912 16 $722 99 $4,254 18 $ 775 140 $6,040 26 $1,228
Commercial
real estate loans.. --- --- --- --- 3 335 1 103 1 100 1 367
Multi-family
mortgage loans..... --- --- --- --- --- --- --- --- --- ---
Construction loans.... 1 112 2 301 2 300 --- --- 3 1,214
Land loans............ --- --- --- --- --- --- --- --- --- ---
Consumer loans........ 17 80 5 55 15 158 3 114 29 379 20 448
--- ------ -- ------ --- ------ -- ------ --- ------ -- ------
Total.............. 106 $4,104 22 $1,078 117 $4,747 24 $1,292 170 $6,519 50 $3,257
=== ====== == ====== === ====== == ====== === ====== == ======
Delinquent loans to
total loans........ 2.21% 3.06% 3.91%
==== ==== ====
</TABLE>
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, 1999. However,
there can be no assurance that regulators, when reviewing Lincoln Federal'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.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past five fiscal years ended December 31, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period...................$1,512 $1,361 $ 1,241 $ 1,121 $1,047
------ ------ ------- -------- ------
Charge-offs:
One- to four-family
residential mortgage loans.................. (79) (31) --- --- (15)
Commercial real estate mortgage loans......... --- --- (178) --- ---
Construction loans............................ --- (301) --- --- (12)
Consumer loans................................ (62) (25) --- --- (2)
------ ------ --------- ------- ------
Total charge-offs........................... (141) (357) (178) --- (29)
------ ------ --------- ------- ------
Recoveries:
One- to four-family
residential mortgage loans.................. --- 15 --- --- 3
Commercial real estate mortgage loans......... 4 1 --- --- ---
Construction loans............................ --- 301 --- --- ---
Consumer loans................................ 2 18 --- --- ---
------ ------ --------- ------- ------
Total recoveries............................ 6 335 --- --- 3
------ ------ --------- ------- ------
Net charge-offs.................................. (135) (22) (178) --- (26)
------ ------ --------- ------- ------
Provision for losses on loans.................... 384 173 298 120 100
------ ------ --------- ------- ------
Balance end of period............................$1,761 $1,512 $ 1,361 $ 1,241 $1,121
====== ====== ========= ======= ======
Allowance for loan losses as a percent of
total loans outstanding.......................... .75% 0.77% 0.54% 0.40% 0.39%
Ratio of net charge-offs to average
loans outstanding................................ .06% .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 1995 is not included because Lincoln
Federal did not make the computation in 1995.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- --------------------- -------------------- ---------------------
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............. $718 72.18% $600 76.19% $401 81.03% $206 84.84%
Multi-family.............. 10 .42 10 .51 11 .45 --- .35
Commercial................ 241 6.63 218 7.25 221 5.87 468 4.66
Construction loans........ 230 7.47 113 3.69 249 3.90 367 4.14
Land loans................ 54 1.49 40 1.33 15 .57 --- .86
Commercial loans............ 1 .04 2 .06 11 .10 --- ---
Consumer loans.............. 436 11.77 349 10.97 268 8.08 98 5.15
Unallocated................. 70 --- 180 --- 185 --- 102 ---
------ ------ ------ ------ ------ ------ ------ ------
Total....................... $1,761 100.00% $1,512 100.00% $1,361 100.00% $1,241 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Investments
Investments. During the third quarter of 1997, Lincoln Federal 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 Lincoln Federal's management to react
quickly to market conditions. Most of the securities in its portfolio are
considered available-for-sale. At December 31, 1999, 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, 1999, approximately $162.9 million, or
39.7%, of Lincoln Federal's total assets consisted of such investments. Lincoln
Bancorp also had $8.2 million in interest-earning deposits with the FHLB of
Indianapolis as of that date. As of that date, Lincoln Federal also had pledged
to the FHLB of Indianapolis as collateral, investment securities with a carrying
value of $119.0 million, including $81.6 million in mortgage-backed securities
and $37.4 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,
----------------------------------------------------------------
1999 1998 1997
---- ---- ----
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
Investment securities available for sale:
<S> <C> <C> <C> <C> <C> <C>
Federal agencies............................. $45,992 $41,606 $ 15,598 $ 15,670 $ --- $ ---
Mortgage-backed securities................... 85,016 81,596 89,658 90,609 28,495 29,399
Corporate debt obligations................... 23,256 22,673 23,544 22,997 --- ---
Federated liquid cash fund................... --- --- --- --- --- ---
FHLMC stock.................................. --- --- --- --- -- ---
------- ------- ------- ------- ------ ------
Total investment securities
available for sale....................... 154,264 145,875 128,800 129,276 28,495 29,399
Investment securities held to maturity--
Federal agency securities.................. 500 498 1,250 1,264 9,635 9,615
------- ------- ------- ------- ------ ------
Total investment securities.................. 154,764 146,373 130,050 130,540 38,130 39,014
Investment in limited partnerships........... 2,064 (1) 2,387 (1) 2,706 (1)
Investment in insurance company.............. 650 (1) 650 (1) --- ---
FHLB stock (2)............................... 5,447 5,447 5,447 5,447 5,447 5,447
-------- -------- -------
Total investments............................ $162,925 $138,534 $46,283
======== ======== =======
</TABLE>
(1) Market values are not available
(2) Market value is based on the price at which the stock may be resold to the
FHLB of Indianapolis.
The following table sets forth the amount of investment securities
excluding mortgage-backed securities which mature during each of the periods
indicated and the weighted average yields for each range of maturities at
December 31, 1999.
<TABLE>
<CAPTION>
Amount at December 31, 1999 which matures in
-------------------------------------------------------------------------------
One Year Five to After
to Five Years Ten Years Ten Years
------------- --------- ---------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency securities - available for sale...$ --- ---% $25,650 6.38% $20,342 6.81%
Corporate securities -- available for sale....... 8,003 7.45 --- --- 15,253 7.02
Federal agency securities -- held to maturity.... 500 6.11 --- --- --- ---
------ ---- ------- ---- ------- ----
$8,503 7.37% $25,650 6.38% $35,595 6.90%
====== ==== ======= ==== ======= ====
</TABLE>
At December 31, 1999, 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, 1999 and 1998.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------------------- --------------------------------------------
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 $23,003 27.1% $22,802 $31,939 35.6% $32,909
Federal National
Mortgage Association 4,593 5.4 4,551 6,013 6.7 6,065
Government National
Mortgage Association 9,417 11.1 8,872 --- --- ---
Collateralized mortgage
obligations 48,003 56.4 45,371 51,706 57.7 51,635
------- ----- ------- ------- ----- -------
Total mortgage-backed
securities $85,016 100.0% $81,596 $89,658 100.0% $90,609
======= ===== ======= ======= ===== =======
</TABLE>
At December 31, 1999, mortgage-backed securities having an amortized
cost of $2,404,000 mature in five to ten years and have a weighted average yield
of 6.68% and mortgage-backed securities having an amortized cost of $82,612,000
mature after ten years and have a weighted average yield of 6.73%.
All mortgage-backed securities outstanding at December 31, 1998 mature
after ten years and have a weighted average yield of 6.74%.
The following table sets forth the changes in Lincoln Federal's
mortgage-backed securities portfolio for the years ended December 31, 1999, 1998
and 1997.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $90,609 $29,399 $ ---
Securitization of loans --- 39,728 76,455
Purchases 14,772 52,406 7,574
Monthly repayments (19,435) (9,999) (1,237)
Proceeds from sales --- (21,089) (54,415)
Net accretion --- 4 ---
Gains on sales 20 113 118
Change in unrealized gain on
securities available for sale (4,370) 47 904
------- ------- -------
Ending balance $81,596 $90,609 $29,399
======= ======= =======
</TABLE>
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, Lincoln Federal
made its final payment pursuant to this commitment and is no longer obligated 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, 1999, LF had invested cash of approximately $3.2 million in BHA with four
additional annual capital contributions remaining to be paid in January of each
year through January, 2003, totaling $1.7 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
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, 1999,
92.0% of the units in the Pedcor Project and 73.9% 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 $18,000 from the operation
of the Pedcor Project and $355,000 from the operation of the Bloomington Project
for the year ended December 31, 1999. The tax credits from the Pedcor Project
were completed during 1999; however, 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 Lincoln Federal 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, 1999, Lincoln Federal had no remaining investment
on the books for Pedcor, and LF's investment in BHA was $2.1 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.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Investment in Pedcor........................ $--- $ --- $ 76
==== ======== =======
Equity in losses, net
of income tax effect..................... $--- $(164) $(167)
Tax credit.................................. 18 242 300
------ ------ -------
Increase in after-tax net income from
Pedcor investment........................ $18 $ 78 $ 133
==== ======== =======
Year Ended December 31,
-------------------------------
1999 1998 1997
------ ------ -------
(In Thousands)
Investment in BHA........................... $2,064 $2,387 $2,630
====== ====== =======
Equity in losses, net
of income tax effect..................... $ (195) $ (147) $ (244)
Tax credit.................................. 355 355 355
Increase in after-tax net income from
------ ------ -------
BHA investment........................... $ 160 $ 208 $ 111
====== ====== =======
</TABLE>
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, Clinton and Morgan Counties through the offering of a
broad 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, Clinton and Morgan Counties, and most 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 Lincoln Federal sometimes may bid for public
deposits, it held only $1.4 million of such funds, or .7% of its total deposits,
at December 31, 1999. 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. Lincoln Federal also closely
prices its deposits to the rates offered by its competitors.
Approximately 64.7% 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 decreased 10.1%
during the year ended December 31, 1999. Money market savings accounts represent
20.4% of Lincoln Federal's deposits and have grown 26.7% during the year ended
December 31, 1999. 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 Money Demand Accounts Market ("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, 1999, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at
Opening December 31, % of
Type of Account Balance 1999 Deposits
-------------------------------------------------------------------------------------------
(Unaudited)
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C>
Savings accounts........................ $ 25 $16,505 8.05%
Money market............................ 1,000 41,745 20.37
NOW accounts............................ 200 10,729 5.23
Non-interest bearing demand accounts.... 200 3,396 1.66
-------- ------
Total withdrawable......................... 72,375 35.31
-------- ------
Certificates (original terms):
3 months or less........................ 1,000 230 .11
6 months................................ 1,000 3,150 1.54
12 months............................... 1,000 20,980 10.24
18 months............................... 1,000 18,717 9.13
24 months............................... 1,000 35,598 17.37
30 months............................... 1,000 25,179 12.28
36 months .............................. 1,000 18,312 8.93
60 months............................... 1,000 9,007 4.39
Public fund certificates................... 1,434 .70
-------- ------
Total certificates......................... 132,607 64.69
-------- ------
Total deposits............................. $204,982 100.00%
======== ======
</TABLE>
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,
------------------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
3.00 to 3.99%................ $ 228 $ 191 $ ---
4.00 to 4.99%................ 54,803 24,274 15,926
5.00 to 5.99%................ 62,883 81,030 81,199
6.00 to 6.99%................ 14,693 41,966 48,872
-------- -------- --------
Total..................... $132,607 $147,461 $145,997
======== ======== ========
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1999. Matured certificates, which have not been renewed as of
December 31, 1999, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 1999 Maturing In
---------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
3.00 to 3.99%...... $ 228 $ --- $ --- $ ---
4.00 to 4.99%...... 37,766 15,049 1,109 879
5.00 to 5.99%...... 35,316 18,885 7,616 1,066
6.00 to 6.99%...... 1,632 4,350 8,611 100
------- ------- ------- ------
Total........... $74,942 $38,284 $17,336 $2,045
======= ======= ======= ======
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, 1999.
At December 31, 1999
--------------------
Maturity Period (In thousands)
Three months or less.................................. $ 2,474
Greater than three months through six months.......... 1,006
Greater than six months through twelve months......... 3,969
Over twelve months.................................... 8,322
-------
Total............................................ $15,771
=======
<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
1999 Deposits 1998 1998 Deposits 1997 1997 Deposits
-------- ------ ------ -------- ------ ------ -------- ------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts................. $16,505 8.05% (4,077) $20,582 9.71% $(1,385) $21,967 10.78%
Money market accounts............ 41,745 20.37 8,803 32,942 15.54 6,940 26,002 12.75
NOW accounts..................... 10,729 5.23 2,188 8,541 4.03 976 7,565 3.71
Noninterest-bearing
demand accounts................ 3,396 1.66 912 2,484 1.17 163 2,321 1.14
-------- ------ ------ -------- ------ ------ -------- ------
Total withdrawable............. 72,375 35.31 7,826 64,549 30.45 6,694 57,855 28.38
-------- ------ ------ -------- ------ ------ -------- ------
Certificates (original terms):
91 days.......................... 230 .11 (376) 606 .29 284 322 0.16
6 months......................... 3,150 1.54 (625) 3,775 1.78 (787) 4,562 2.24
12 months........................ 20,980 10.24 (11,190) 32,170 15.17 2,457 29,713 14.58
18 months........................ 18,717 9.13 9,473 9,244 4.36 (8,642) 17,886 8.77
24 months........................ 35,598 17.37 14,027 21,571 10.18 20,298 1,273 0.62
30 months........................ 25,179 12.28 (32,984) 58,163 27.43 (7,527) 65,690 32.22
36 months ....................... 18,312 8.93 9,380 8,932 4.21 (2,318) 11,250 5.52
60 months........................ 9,007 4.39 (1,654) 10,661 5.03 (3,510) 14,171 6.95
Public fund certificates............ 1,434 .70 (905) 2,339 1.10 1,209 1,130 0.56
-------- ------ ------ -------- ------ ------ -------- ------
Total certificates.................. 132,607 64.69 (14,854) 147,461 69.55 1,464 145,997 71.62
-------- ------ ------ -------- ------ ------ -------- ------
Total deposits...................... $204,982 100.00% (7,028) $212,010 100.00% $8,158 $203,852 100.00%
======== ====== ====== ======== ====== ====== ======== ======
</TABLE>
Total deposits at December 31, 1999 were approximately $205.0 million,
compared to approximately $203.9 million at December 31, 1997. Lincoln Federal's
deposit base depends somewhat upon the manufacturing sector of Hendricks,
Montgomery, Clinton and Morgan 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 Lincoln Federal'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 Lincoln Bancorp 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, 1999, Lincoln Federal had borrowings in the amount
of $103.9 million from the FHLB of Indianapolis which bear fixed and variable
interest rates and which are due at various dates through 2009. 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. As an
additional funding source, Lincoln Federal has also sold securities under
repurchase agreements. Lincoln Federal had outstanding securities sold under
repurchase agreement in the amount of $4.6 million at December 31, 1999. Lincoln
Federal does not anticipate any difficulty in obtaining advances and other
borrowings appropriate to meet its requirements in the future.
The following table presents certain information relating to Lincoln
Federal's borrowings at or for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
1999 1998 1997
---------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Outstanding at end of period
Securities sold under repurchase agreements............ $ 4,600 $ --- $ ---
FHLB advances.......................................... 103,938 33,263 70,136
Average balance outstanding for period
Securities sold under repurchase agreements............ 3,680 --- ---
FHLB advances.......................................... 78,874 49,773 92,121
Maximum amount outstanding at any
month-end during the period
Securities sold under repurchase agreements............ 4,600 --- ---
FHLB advances.......................................... 103,938 57,136 106,932
Weighted average interest rate
during the period
Securities sold under repurchase agreements............ 5.16% ---% ---%
FHLB advances.......................................... 5.30 5.74 5.70
Weighted average interest rate
at end of period
Securities sold under repurchase agreements............ 5.09 --- ---
FHLB advances.......................................... 4.94 5.50 5.71
Note payable to Bloomington................................. $1,714 $ 2,203 $ 2,691
</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, 1999, Lincoln Federal
received dividends of $37,000 from Family Financial.
Employees
As of December 31, 1999, Lincoln Federal employed 84 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, 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.
Properties
Lincoln Bancorp. The following table provides certain information with
respect to Lincoln Federal's offices as of March 31, 2000:
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures Footage
(Dollars in Thousands)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1121 East Main Street Owned 1970 $84,931 $1,309 9,925
Plainfield, IN 46168
134 South Washington Street Owned 1962 58,360 387 9,340
Crawfordsville, IN 47933
1900 East Wabash Street Owned 1974 34,017 287 2,670
Frankfort, IN 46041
975 East Main Street Owned 1981 29,361 285 2,890
Brownsburg, IN 46112
7648 East U.S. Highway 36 Owned 1999 8,221 1,056 2,800
Avon, IN
590 S. State Road 67 Leased 1999 4,460 319 1,500
Mooresville, IN 46158
</TABLE>
Lincoln Federal has also purchased land and a building located at 648
Treybourne Drive in Greenwood, Indiana where it has received regulatory approval
to open a new branch in September, 2000.
Lincoln Federal currently operates seven automatic teller machines
("ATMs"), with one ATM located at its main office and each of its branch offices
and one remote ATM. 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 $46,000 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 $6,700 per month.
Legal Proceedings
Although Lincoln Bancorp 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 their properties are subject.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Lincoln Bancorp had no such changes or disagreements during the
preceding two most recent fiscal years or during the interim period ended March
31, 2000.
BUSINESS OF CITIZENS BANCORP
General
Citizens Bancorp was organized in June, 1997. On September 18, 1997,
Citizens Bancorp acquired the common stock of Citizens Savings Bank upon the
conversion of Citizens Savings Bank from a federal mutual savings bank to a
federal stock savings bank.
Citizens Savings Bank was organized as a state-chartered building and
loan association in 1916 and currently conducts its business from one
full-service office located in Frankfort, Indiana. Citizens Savings 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. Citizens Savings
Bank's deposit accounts are insured up to applicable limits by the SAIF of the
FDIC. Citizens Savings Bank offers a number of consumer and commercial financial
services. These services include: (i) residential real estate loans; (ii)
multi-family loans; (iii) construction loans; (iv) nonresidential real estate
loans; (v) home equity loans; (vi) single-pay loans; (vii) installment loans;
(viii) automobile loans; (ix) NOW accounts; (x) money market demand accounts
("MMDAs"); (xi) passbook savings accounts; (xii) certificates of deposit; and
(xiii) individual retirement accounts.
Loan Portfolio Data. The following table sets forth the composition of
Citizens Savings Bank' loan portfolio 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 and loans in process.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------
1999 1998 1997
------------------ --------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential...................... $41,663 78.45% $35,928 76.54% $29,888 77.77%
Non-residential.................. 1,631 3.07 1,770 3.77 824 2.14
Multi-family..................... 1,711 3.22 1,887 4.02 1,551 4.04
Construction loans:................. 1,384 2.61 611 1.30 1,420 3.69
Consumer loans:
Single pay....................... 3,538 6.66 2,815 6.00 1,854 4.82
Installment ..................... 2,329 4.39 2,219 4.73 1,696 4.41
Share ........................... --- --- --- --- 15 .04
Home equity...................... 2,043 3.85 2,176 4.64 2,095 5.45
Home improvement................. 3 .01 5 .01 8 .02
------- ------ ------- ------ ------- ------
Gross loans receivable....... $54,302 102.26% $47,411 101.01% $39,351 102.38%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential real estate ............ $47,516 89.48% $40,612 86.53% $35,153 91.45%
Non-residential real estate......... 2,041 3.84 2,143 4.57 1,037 2.70
Multi-family real estate............ 2,033 3.83 2,267 4.83 1,551 4.04
Deposits............................ 149 .28 150 .32 193 .50
Auto ............................. 1,575 2.97 1,415 3.01 1,176 3.06
Other security...................... 583 1.10 405 .86 111 .29
Unsecured .......................... 405 .76 419 .89 130 .34
------- ------ ------- ------ ------- ------
Gross loans receivable......... 54,302 102.26 47,411 101.01 39,351 102.38
Deduct:
Deferred loan fees.................. 126 .24 110 .23 101 .26
Allowance for loan losses........... 326 .61 269 .57 212 .55
Loans in process.................... 746 1.41 96 .21 603 1.57
------- ------ ------- ------ ------- ------
Net loans receivable............. $53,104 100.00% $46,936 100.00% $38,435 100.00%
======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate.................. $10,427 23.17% $11,502 29.06% $ 9,595 29.74%
Fixed-rate....................... 34,578 76.83 28,083 70.94 22,668 70.26
------- ------ ------- ------ ------- ------
Total.......................... $45,005 100.00% $39,585 100.00% $32,263 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information at June 30, 1999,
regarding the dollar amount of loans maturing in Citizens Savings Bank'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 June 30,
Outstanding at 2003 2005 2010 2015
June 30, to to to and
1999 2000 2001 2002 2004 2009 2014 following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential loans.................. $41,663 $21 $24 $51 $343 $4,071 $18,304 $18,849
Multi-family loans................. 1,711 --- --- --- 236 46 1,429 ---
Non-residential loans.............. 1,631 3 61 --- 9 75 470 1,013
Construction loans.................... 1,384 1,384 --- --- --- --- --- ---
Installment loans.................... 2,329 82 321 515 1,170 203 19 19
Single pay loans...................... 3,538 3,537 --- --- 1 --- --- ---
Home equity loans..................... 2,043 --- --- --- --- --- --- 2,043
Home improvement loans................ 3 --- 3 --- --- --- --- ---
------- ------ ---- ---- ------ ------ ------- -------
Total............................ $54,302 $5,027 $409 $566 $1,759 $4,395 $20,222 $21,924
======= ====== ==== ==== ====== ====== ======= =======
</TABLE>
The following table sets forth, as of June 30, 1999, 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 June 30, 2000
-------------------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C>
Residential loans.............. $34,522 $ 7,120 $41,642
Multi-family loans............. --- 1,711 1,711
Non-residential loans.......... 35 1,593 1,628
Construction loans................ --- --- ---
Installment loans................. 2,247 --- 2,247
Single pay loans.................. 1 --- 1
Share loans....................... --- --- ---
Home equity loans................. --- 2,043 2,043
Home improvement loans............ 3 --- 3
------- ------- -------
Total.......................... $36,808 $12,467 $49,275
======= ======= =======
</TABLE>
One- to Four-Family Residential Loans. Citizens Savings Bank's primary
lending activity consists of originating one- to four-family residential
mortgage loans secured by property located in its primary market area. Citizens
Savings Bank generally originates one- to four-family residential mortgage loans
in amounts up to 95% of the lesser of the appraised value or purchase price,
with private mortgage insurance required 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. Citizens Savings Bank originates and retains fixed rate
loans which provide for the payment of principal and interest over a 15- or
20-year period, or balloon loans having terms of up to 20 years with principal
and interest payments calculated using a 30-year amortization period.
Citizens Savings Bank also offers ARM loans. The interest rate on ARM
loans is indexed to the one-year U.S. Treasury securities yield adjusted to a
constant maturity. Citizens Savings Bank may offer discounted initial interest
rates on ARM loans, but requires that the borrower qualify for the ARM loan at
the fully-indexed rate (the index rate plus the margin). A substantial portion
of the ARM loans in Citizens Savings Bank's portfolio at June 30, 1999 provide
for maximum rate adjustments per year and over the life of the loan of 1% and
6%, respectively. Citizens Savings Bank's residential ARMs are amortized for
terms up to 25 years.
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 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 June 30, 1999, approximately 17% of
Citizens Savings Bank's one- to four-family residential loans had adjustable
rates of interest.
All of the one- to four-family residential mortgage loans that Citizens
Savings Bank originates include "due-on-sale" clauses, which give Citizens
Savings Bank 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,
Citizens Savings Bank occasionally permits assumptions of existing residential
mortgage loans on a case-by-case basis.
At June 30, 1999, approximately $41.7 million, or 78.5% of Citizens
Savings Bank's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $98,000, or .24% of total residential loans, were included
in non-performing assets as of that date. See "-- Non-Performing and Problem
Assets."
Multi-Family Loans. At June 30, 1999, approximately $1.7 million, or
3.2% of Citizens Savings Bank's total loan portfolio, consisted of mortgage
loans secured by multi-family dwellings (those consisting of more than four
units). Citizens Savings Bank's multi-family loans are generally written as
one-year adjustable rate loans indexed to the one-year U.S. Treasury rate or to
its internal loan rate which is established from time-to-time. Citizens Savings
Bank writes multi-family loans with maximum Loan-to-Value ratios of 80%.
Citizens Savings Bank's largest multi-family loan as of June 30, 1999 was $1.3
million and was secured by an apartment complex in Frankfort. On the same date,
there were no multi-family loans included in non-performing assets.
Multi-family loans, like nonresidential real estate loans, involve a
greater risk than do residential loans. See "-- Nonresidential Real Estate
Loans" below.
Construction Loans. Citizens Savings Bank offers construction loans with
respect to residential and nonresidential real estate and, in certain cases, to
builders or developers constructing such properties on a speculative basis
(i.e., before the builder/developer obtains a commitment from a buyer). At June
30, 1999, approximately $1.4 million, or 2.6% of Citizens Savings Bank's total
loan portfolio, consisted of construction loans. The largest construction loan
at June 30, 1999, totaling $250,000, was secured by a single-family residence
near Frankfort. Citizens Savings Bank had no construction loans included in
non-performing assets on that date.
Construction loans are generally written as six-month, fixed-rate loans
with interest calculated on the amount disbursed under the loan and payable
monthly. Citizens Savings Bank generally requires an 80% Loan-to-Value Ratio for
its construction loans. Inspections are made prior to any disbursement under a
construction loan, and Citizens Savings Bank does not normally charge commitment
fees for construction loans.
While providing Citizens Savings Bank with 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, Citizens Savings Bank 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 Citizens Savings Bank
taking title to the project.
Nonresidential Real Estate Loans. Citizens Savings Bank's nonresidential
real estate loans are secured by churches, office buildings, and other
commercial properties. Citizens Savings Bank generally originates
non-residential real estate loans as one-year adjustable rate loans indexed to
the one-year U.S. Treasury securities yield adjusted to a constant maturity, and
which are written for maximum terms of 20 years with maximum Loan-to-Value
ratios of 75%. At June 30, 1999, Citizens Savings Bank's largest nonresidential
loan was $966,000 and was secured by an extended stay motel in Columbus,
Indiana. At June 30, 1999, approximately $1.6 million, or 3.1% of Citizens
Savings Bank's total loan portfolio, consisted of nonresidential real estate
loans. On the same date, approximately $35,000 in nonresidential real estate
loans were included in non-performing assets.
Loans secured by nonresidential real estate generally are larger than one-
to four-family residential loans and involve a greater degree of risk.
Nonresidential 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.
Consumer Loans. Citizens Savings Bank's consumer loans, consisting
primarily of home equity loans, personal installment loans and "single pay"
loans aggregated approximately $7.9 million at June 30, 1999, or 14.9% of its
total loan portfolio. Citizens Savings Bank consistently originates consumer
loans to meet the needs of its customers and to assist in meeting its
asset/liability management goals. All of Citizens Savings Bank's consumer loans,
except loans secured by deposits and home equity loans, are fixed-rate loans
with terms that vary from six months (for unsecured installment loans) to 60
months (for home improvement loans and loans secured by new automobiles). At
June 30, 1999, 94.9% of Citizens Savings Bank's consumer loans were secured by
collateral. Citizens Savings Bank's loans secured by deposits are made up to 90%
of the original account balance and, at June 30, 1999, accrued at a rate of
8.0%. This rate may change but will always be at least 1% over the underlying
passbook or certificate of deposit rate. Interest on loans secured by deposits
is paid semi-annually.
Citizens Savings Bank also offers home equity lines of credit and home
improvement loans secured by real estate. The interest rate on a home equity
line of credit is ordinarily tied to the prime rate with a margin of positive
2.0% and a maximum interest rate of 18%. Citizens Savings Bank does not always
hold a first mortgage on its home equity lines of credit, although it does hold
a first mortgage with respect to approximately 90% of such loans in its
portfolio. Citizens Savings Bank ordinarily offers fixed-rate home improvement
loans secured by real estate with a term not to exceed five years. Citizens
Savings Bank restricts the amount that a customer may borrow under an equity
line of credit to $100,000, subject to the general restriction applicable to all
second mortgage loans that limits the amount it may loan to a borrower to an
amount that, when added to any existing mortgage loans, does not exceed 80% of
the appraised value of the collateral property.
At June 30, 1999, Citizens Savings Bank had outstanding approximately $2.0
million of home equity loans, with unused lines of credit totaling approximately
$2.96 million. Home equity loans in the amount of $38,000 were included in
non-performing assets on that date.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which 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. At
June 30, 1999, consumer loans amounting to $64,000 were included in
non-performing assets. See "-- Non-Performing and Problem Assets."
Single-Pay Loans. Citizens Savings Bank offers single-pay loans, which are
short-term loans secured by real estate, automobiles or other types of
collateral that are payable with a single payment rather than by installment.
Typically, single-pay loans secured by real estate are written with terms of one
year or less, while single-pay loans secured by other types of collateral are
written for terms of 90 days to six months. Of the approximately $3.5 million of
single-pay loans in Citizens Savings Bank's portfolio as of June 30, 1999,
approximately $1.8 million were secured by residential mortgages and $392,000
were secured by land. The remaining approximately $1.3 million of loans in this
category were consumer loans, typically secured by automobiles or subordinate
liens on real estate. At June 30, 1999, Citizens Savings Bank had no delinquent
single-pay loans in its portfolio.
Origination, Purchase and Sale of Loans. Citizens Savings Bank
historically has originated its mortgage loans pursuant to its own underwriting
standards which do not conform with the standard criteria of the Federal Home
Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association
("FNMA") because Citizens Savings Bank does not require current property surveys
in most cases. Citizens Savings Bank may begin originating fixed-rate
residential mortgage loans for sale to the FHLMC on a servicing-retained basis
in the future. In the event that Citizens Savings Bank originates loans for sale
to the FHLMC in the secondary market, such loans will be originated in
accordance with the guidelines established by the FHLMC and will be sold
promptly after they are originated.
Citizens Savings Bank confines its loan origination activities primarily
to Clinton County. At June 30, 1999, Citizens Savings Bank had loans totaling
approximately $487,000 in the aggregate secured by property located outside of
Indiana. Citizens Savings Bank' loan originations are generated from referrals
from existing customers, real estate brokers, and newspaper and periodical
advertising. Loan applications are underwritten and processed at Citizens
Savings Bank's office.
Citizens Savings Bank'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, Citizens Savings Bank studies the employment and credit
history and information on the historical and projected income and expenses of
its mortgagors. All mortgage loans are approved by Citizens Savings Bank's Loan
Committee. Consumer loans up to $15,000 may be approved by a Loan Officer.
Consumer loans for more than $15,000 must be approved by the senior loan officer
or the President.
Citizens Savings Bank generally requires appraisals on all real property
securing its loans and requires an attorney's opinion and a valid lien on the
mortgaged real estate. Appraisals for all real property securing mortgage loans
are performed by independent appraisers who are state-licensed. Citizens Savings
Bank 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. Citizens
Savings Bank also generally requires private mortgage insurance for all
residential mortgage loans with Loan-to-Value Ratios of greater than 80%.
Citizens Savings Bank requires escrow accounts for insurance premiums and taxes
for loans that require private mortgage insurance.
Citizens Savings Bank'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.
The following table shows Citizens Savings Bank's loan origination and
repayment activity during the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
1999 1998 1997
--------- --------- --------
(In thousands)
Loans Originated:
Real estate mortgage loans:
<S> <C> <C> <C>
Residential loans.................................. $17,405 $14,353 $ 9,253
Nonresidential loans............................... 57 122 202
Multi-family loans................................. --- 1,563 102
Construction loans................................... 2,199 2,385 2,503
Installment loans.................................... 1,716 1,993 1,434
Single pay loans..................................... 7,183 4,082 2,818
Share loans.......................................... --- --- 5
Home equity loans.................................... 1,167 1,265 1,156
Home improvement loans............................... --- --- ---
--------- --------- --------
Total originations............................... 29,727 25,763 17,473
Loans purchased...................................... 61 2,494 ---
Reductions:
Principal loan repayments............................ (23,578) (19,696) (13,251)
Loans sold........................................... --- --- (91)
Transfers from loans to real estate owned............ --- --- ---
--------- --------- --------
Total reductions................................. (23,578) (19,696) (13,342)
Decrease in other items (1).......................... (42) (60) (88)
--------- --------- --------
Net increase (decrease) ............................. $ 6,168 $ 8,501 $ 4,043
========= ========= ========
</TABLE>
(1) Other items consist of amortization of deferred loan origination costs
and the provision for losses on loans.
Citizens Savings Bank's residential loan originations during the year
ended June 30, 1999 totaled $17.4 million, compared to $14.4 million and $9.3
million in the years ended June 30, 1998 and 1997, respectively.
Origination and Other Fees. Citizens Savings Bank realizes income from
late charges, checking account service charges, and fees for other miscellaneous
services. Citizens Savings Bank currently charges origination fees on its
mortgage loans of 1% of the loan amount, up to $100,000, and .5% of the amount
of the loan that exceeds $100,000. Citizens Savings Bank also may charge points
on a mortgage loan as consideration for a lower interest rate, although it does
so infrequently. Late charges are generally assessed if payment is not received
within a specified number of days after it is due. The grace period depends on
the individual loan documents.
Non-Performing and Problem Assets
After a mortgage loan becomes 15 days past due, Citizens Savings Bank
delivers a delinquency notice to the borrower. When loans are 30 to 60 days in
default, Citizens Savings Bank 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, Citizens Savings Bank
again contacts the borrower, this time in person, to establish acceptable
repayment schedules. When a mortgage loan is 90 days delinquent, Citizens
Savings Bank 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.
Citizens Savings Bank reviews mortgage loans on a regular basis and
places such loans 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, and further income is recognized only to the extent
received.
Non-performing Assets. At June 30, 1999, $197,000, or .33% of total
assets, were non-performing (restructured and non-accruing loans) compared to
$170,000, or .32% of total assets at June 30, 1998. At June 30, 1999,
residential loans and consumer loans accounted for $98,000 and $2,000,
respectively, of non-accruing loans. Citizens Savings Bank had no REO properties
as of June 30, 1999.
The table below sets forth the amounts and categories of Citizens
Savings Bank's non-performing assets (non-accruing loans, foreclosed real estate
and troubled debt restructurings) for the last three years. It is Citizens
Savings Bank's policy that all 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. Delinquent loans that
are 90 days or more past due are considered non-performing assets.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Non-performing assets:
<S> <C> <C> <C>
Non-accruing loans.................................. $100 $83 $213
Loans 90 days or more past due and accruing......... 62 48 90
Troubled debt restructurings........................ 35 39 41
---- ---- ----
Total non-performing loans........................ 197 170 344
Foreclosed real estate.............................. --- --- ---
---- ---- ----
Total non-performing assets....................... $197 $170 $344
==== ==== ====
Non-performing loans to total loans.................... 0.37% 0.36% 0.89%
Non-performing assets to total assets.................. 0.33% 0.32% 0.74%
</TABLE>
Interest on loans was $6,000, $4,000, and $8,000 less than would have
been reported for the years ended June 30, 1999, 1998 and 1997, respectively, if
the non-performing loans summarized above had been current in accordance with
their original terms. Citizens Savings Bank received $3,000 in interest on
non-performing loans during the year ended June 30, 1999.
At June 30, 1999, Citizens Savings Bank held loans delinquent from 30
to 59 days totaling approximately $665,000. Other than these loans and the other
delinquent loans disclosed elsewhere in this section, Citizens Savings Bank was
not aware of any other loans, the borrowers of which were experiencing financial
difficulties.
<PAGE>
Delinquent Loans. The following table sets forth certain information at
June 30, 1999, 1998, and 1997, relating to delinquencies in Citizens Savings
Bank's portfolio. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
<TABLE>
<CAPTION>
At June 30, 1999 At June 30, 1998
---------------------------------------------- ---------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------- ----------------------- -------------------- -----------------------
Principal Principal Principal Principal
Number Balance of Number Balance of Number Balance of Number Balance of
of Loans Loans of Loans Loans of Loans Loans of Loans Loans
-------- ---------- -------- ---------- -------- ---------- -------- -----------
(Dollars in thousands)
Residential
<S> <C> <C> <C> <C> <C> <C> <C> <C>
mortgage loans.......... 8 $196 3 $98 8 $244 6 $84
Nonresidential
mortgage loans.......... --- --- --- --- --- --- --- ---
Installment loans.......... 7 41 8 26 7 35 8 40
Single pay loans........... --- --- --- --- --- --- 1 2
Home equity loans.......... --- --- 3 38 3 40 1 5
Home improvement loans..... --- --- --- --- --- --- --- ---
---- ---- ---- ---- ---- ---- ---- ----
Total................... 15 $237 14 $162 18 $319 16 $131
===== ==== ==== ==== ==== ==== ==== ====
Delinquent loans to
total loans............. .75% .96%
=== ===
</TABLE>
At June 30, 1997
----------------------------------------------
60-89 Days 90 Days or More
------------------- -----------------------
Principal Principal
Number Balance of Number Balance of
of Loans Loans of Loans Loans
-------- ----- -------- -----
Residential
mortgage loans.......... 1 $10 5 $130
Nonresidential
mortgage loans.......... 1 24 --- ---
Installment loans.......... 2 16 6 37
Single pay loans........... --- --- 1 84
Home equity loans.......... --- --- 5 52
Home improvement loans..... --- --- --- ---
---- ---- ---- ----
Total................... 4 $50 17 $303
===== ==== ==== ====
Delinquent loans to
total loans............. .92%
====
Classified assets. Federal regulations and Citizens Savings Bank'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.
At June 30, 1999, the aggregate amount of Citizens Savings Bank's
classified assets, and of its general and specific loss allowances were as
follows:
At June 30, 1999
----------------
(In thousands)
Substandard assets.......................................... $129
Doubtful assets............................................. ---
Loss assets................................................. ---
----
Total classified assets................................. $129
====
General loss allowances..................................... $326
Specific loss allowances.................................... ---
----
Total allowances........................................ $326
====
Citizens Savings Bank regularly reviews its loan portfolio to determine
whether any loans require classification in accordance with applicable
regulations.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings. The provision for loan losses is
determined in conjunction with Citizens Savings Bank'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 the opinion of
management, Citizens Savings Bank's allowance for loan losses is adequate to
absorb probable losses inherent in the loan portfolio at June 30, 1999. However,
there can be no assurance that regulators, when reviewing Citizens Savings
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.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past three fiscal years ended June 30, 1999.
Year Ended June 30,
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Balance at beginning of period.............. $269 $212 $138
Charge-offs:
Residential mortgage loans............... --- --- ---
Nonresidential mortgage loans............ --- --- ---
Multi-family loans....................... --- --- ---
Construction loans....................... --- --- ---
Installment loans........................ (12) (12) (11)
Single pay loans......................... (1) (5) ---
Share loans.............................. --- --- ---
Home equity loans........................ --- --- ---
Home improvement loans................... --- --- ---
---- ---- ----
Total charge-offs...................... (13) (17) (11)
---- ---- ----
Recoveries:
Residential mortgage..................... --- --- ---
Single pay............................... --- --- 2
Installment.............................. 5 2 ---
---- ---- ----
Total recoveries....................... 5 2 2
---- ---- ----
Net (charge-offs) recoveries................ (8) (15) (9)
Provision for losses on loans............... 65 72 83
---- ---- ----
Balance at end of period.................... $326 $269 $212
==== ==== ====
Allowance for loan losses as a percent of
total loans outstanding..................... 0.61% 0.57% 0.55%
Ratio of net (charge-offs) recoveries
to average loans outstanding................ (.02) (.03) (.03)
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Citizens Savings Bank's allowance for loan losses
at the dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future loss in any particular category and does not
restrict Citizens Savings Bank's use of the allowance to absorb losses in other
categories.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- ---------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total to total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
Real estate mortgage loans:
Residential...................... $119 76.73% $105 75.78% $81 75.96%
Nonresidential................... 5 3.00 4 3.73 3 2.09
Multi-family..................... 5 3.15 6 3.98 4 3.94
Construction loans................. 28 2.55 14 1.29 27 3.61
Installment loans.................. 86 4.29 66 4.68 53 4.31
Share loans........................ --- --- --- --- --- .04
Home equity loans.................. 10 3.76 9 4.59 8 5.32
Home improvement loans............. --- .01 --- .01 --- .02
Single pay loans................... 73 6.51 65 5.94 36 4.71
---- ------ ---- ------ ---- ------
Total.............................. $326 100.00% $269 100.00% $212 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments
Investments. Citizens Bancorp's investment portfolio consists of equity
securities and FHLB stock. At June 30, 1999, approximately $807,000, or 1.4%, of
Citizens Bancorp's total assets consisted of such investments. Citizens Savings
Bank also had $1.6 million in interest-earning deposits as of that date.
The following table sets forth the amortized cost and the market value
of Citizens Bancorp's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for Sale:
Equity securities................ $419 $388 $309 $315 $161 $161
FHLB stock.......................... 419 419 352 352 332 332
---- ---- ---- ---- ---- ----
Total investments.............. $838 $807 $661 $667 $493 $493
==== ==== ==== ==== ==== ====
</TABLE>
Sources of Funds
General. Deposits have traditionally been Citizens Savings Bank's primary
source of funds for use in lending and investment activities. In addition to
deposits, Citizens Savings Bank 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. The deposits shown below include approximately $2.7
million in public funds deposited by various state, county and local governments
which may fluctuate depending upon prevailing interest rates and the rates
offered by Citizens Savings Bank's competitors. Borrowings from the FHLB of
Indianapolis may be used in the short-term to compensate for reductions in
deposits or deposit inflows at less than projected levels.
Deposits. Citizens Savings Bank attracts deposits principally from within
Clinton County, Indiana through the offering of a broad 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. Citizens Savings Bank does not actively solicit
or advertise for deposits outside of Clinton County, and substantially all of
its depositors are residents of that county. 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. Citizens Savings Bank does
not pay broker fees for any deposits it receives.
Citizens Savings Bank 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. Citizens
Savings Bank relies, in part, on customer service and long-standing
relationships with customers to attract and retain its deposits. Citizens
Savings Bank also closely prices its deposits to the rates offered by its
competitors.
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 Citizens Savings Bank offers
has allowed it to be competitive in obtaining funds and to respond with
flexibility to changes in consumer demand. Citizens Savings Bank has become more
susceptible to short-term fluctuations in deposit flows as customers have become
more interest rate conscious. Citizens Savings Bank manages the pricing of its
deposits in keeping with its asset/liability management and profitability
objectives. Based on its experience, management believes that Citizens Savings
Bank's passbook, NOW and MMDAs are relatively stable sources of deposits.
However, the ability to attract and maintain certificates of deposit, and the
rates Citizens Savings Bank pays on these deposits, have been and will continue
to be significantly affected by market conditions.
An analysis of Citizens Savings Bank's deposit accounts by type, maturity,
and rate at June 30, 1999, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1999 Deposits Rate
-------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Fixed rate, passbook accounts.... $ 50 $6,473 17.51% 3.03%
Variable rate, money market...... 2,500 2,885 7.80 3.04
NOW accounts..................... 50 4,610 12.47 1.47
------- ------ ----
Total withdrawable............. 13,968 37.78 2.52
------- ------ ----
Certificates (original terms):
3 months or less................. 1,000 2,481 6.71 4.89
6 months......................... 1,000 1,806 4.88 4.26
12 months........................ 1.000 1,602 4.33 4.32
13 months........................ 5,000 422 1.14 5.39
18 months........................ 1,000 461 1.25 4.72
23 months........................ 5,000 6,344 17.16 5.23
30 months ....................... 1,000 790 2.14 4.90
36 months........................ 1,000 889 2.40 5.02
Other certificates............... 1,000 4,693 12.69 6.12
------- ------ ----
Total certificates.................. 19,488 52.70 5.20
------- ------ ----
IRA's:
Variable rate, money market...... 50 108 0.29 3.18
6 months......................... 1,000 47 0.13 4.10
12 months........................ 1.000 97 0.26 4.29
18 months........................ 1,000 17 0.05 4.88
23 months........................ 1,000 2,331 6.30 5.28
36 months........................ 1,000 706 1.91 4.99
Other certificates............... 1,000 214 0.58 5.72
------- ------ ----
Total IRA's......................... 3,520 9.52 5.12
------- ------ ----
Total deposits...................... $36,976 100.00% 4.18
======= ====== ====
</TABLE>
The following table sets forth by various interest rate categories the
composition of Citizens Savings Bank's time deposits at the dates indicated:
At June 30,
------------------------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
4.00 to 4.99%....... $10,037 $ 2,483 $ 3,593
5.00 to 5.99%....... 9,304 13,961 15,702
6.00 to 6.99%....... 3,449 3,440 2,604
7.00 to 7.99%....... 105 105 120
8.00 to 8.99%....... 5 5 5
------- ------- -------
Total.......... $22,900 $19,994 $22,024
======= ======= =======
The average amount of, and average interest rate paid on, the following
deposits categories which were in excess of ten percent of average total
deposits are as follows:
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------------------------------------
1999 1998 1997
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $6,283 3.05% $6,687 3.23% $6,679 3.24%
NOW accounts 4,732 1.78 4,433 2.17 4,081 2.12
Money market accounts 3,070 3.12 3,217 3.30 3,303 3.30
Time deposit accounts 22,488 5.44 21,799 5.58 22,374 5.49
</TABLE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following June
30, 1999. Matured certificates, which have not been renewed as of June 30, 1999,
have been allocated based upon certain rollover assumptions.
Amounts at June 30, 1999
----------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ------ ------ ------
(In thousands)
4.00 to 4.99%..... $6,336 $3,041 $660 $ ---
5.00 to 5.99%..... 4,860 3,435 300 709
6.00 to 6.99%..... 288 840 1,933 388
7.00 to 7.99%..... 5 100 --- ---
8.00 to 8.99%..... --- --- --- 5
------- ------ ------ ------
Total.......... $11,489 $7,416 $2,893 $1,102
======= ====== ====== ======
The following table indicates the amount of Citizens Savings Bank's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of June 30, 1999.
At June 30, 1999
----------------
Maturity Period (In thousands)
Three months or less................................. $2,995
Greater than three months through six months......... 354
Greater than six months through twelve months........ 100
Over twelve months................................... 1,524
------
Total........................................... $4,973
======
The following table sets forth the dollar amount of savings deposits in
the various types of deposits that Citizens Savings Bank offers at the dates
indicated, and the amount of increase or decrease in such deposits as compared
to the previous period.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
Balance Increase Balance Increase
at (Decrease) at (Decrease)
June 30, % of from June 30, % of from
1999 Deposits 1998 1998 Deposits 1997
------- ------ ------ ------- ------ -------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C>
Fixed rate, passbook accounts........ $6,473 17.51% $52 $6,421 18.85% $(484)
Variable rate, money market.......... 2,885 7.80 (34) 2,919 8.57 (251)
NOW accounts......................... 4,610 12.47 40 4,570 13.41 498
------- ------ ------ ------- ------ -------
Total withdrawable................. 13,968 37.78 58 13,910 40.83 (237)
------- ------ ------ ------- ------ -------
Certificates (original terms):
3 months............................. 2,481 6.71 1,783 698 2.05 (376)
6 months............................. 1,806 4.88 72 1,734 5.09 (2,400)
12 months............................ 1,602 4.33 1,026 576 1.69 (390)
13 months............................ 422 1.14 (2,095) 2,517 7.39 147
18 months............................ 461 1.25 44 417 1.22 (170)
23 months............................ 6,344 17.16 1,922 4,422 12.98 268
30 months ........................... 790 2.14 (86) 876 2.57 (270)
36 months............................ 889 2.40 (35) 924 2.71 (23)
Other certificates................... 4,693 12.69 (18) 4,711 13.83 1,145
------- ------ ------ ------- ------ -------
Total certificates...................... 19,488 52.70 2,613 16,875 49.53 (2,069)
------- ------ ------ ------- ------ -------
IRA's
Variable rate, money market.......... 108 0.29 (55) 163 0.48 (21)
6 months............................. 47 0.13 17 30 0.09 (4)
12 months............................ 97 0.26 (24) 121 0.36 (30)
18 months............................ 17 0.05 1 16 0.05 (3)
23 months............................ 2,331 6.30 413 1,918 5.63 340
36 months ........................... 706 1.91 (181) 887 2.60 (270)
Other certificates................... 214 0.58 67 147 0.43 6
------- ------ ------ ------- ------ -------
Total IRA's.......................... 3,520 9.52 238 3,282 9.64 18
------- ------ ------ ------- ------ -------
Total deposits.......................... $36,976 100.00% $2,909 $34,067 100.00% $(2,288)
======= ====== ====== ======= ====== =======
</TABLE>
Total deposits at June 30, 1999 were approximately $37.0 million, compared
to approximately $34.1 million at June 30, 1998. Citizens Savings Bank's deposit
base depends somewhat upon the manufacturing sector of Clinton County's economy.
Although Clinton County's manufacturing sector is relatively diversified and not
significantly dependent upon any industry, a loss of a material portion of the
manufacturing workforce could adversely affect Citizens Savings Bank'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 Citizens Savings Bank's liquidation after the
Conversion, 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 Citizens Bancorp as the sole
shareholder of Citizens Savings Bank.
Borrowings. Citizens Savings Bank's focuses on generating high quality
loans and then seeking the best source of funding from deposits, investments or
borrowings. At June 30, 1999, Citizens Savings Bank had borrowings in the amount
of $7.0 million from the FHLB of Indianapolis which bear fixed and variable
interest rates and are due at various dates through October, 2008. Citizens
Savings Bank is required to maintain eligible loans in its portfolio of at least
170% of outstanding advances as collateral for advances from the FHLB of
Indianapolis. Citizens Savings Bank does not anticipate any difficulty in
obtaining advances appropriate to meet its requirements in the future.
The following table presents certain information relating to Citizens
Savings Bank's borrowings at or for the years ended June 30, 1999, 1998 and
1997.
At or for the Year
Ended June 30,
----------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
FHLB Advances:
Outstanding at end of period.............. $7,000 $3,500 $4,000
Average balance outstanding for period.... 5,808 1,731 3,212
Maximum amount outstanding at any
month-end during the period............. 7,000 3,500 5,000
Weighted average interest rate
during the period....................... 5.68% 4.96% 5.41%
Weighted average interest rate
at end of period........................ 5.63 6.21 6.51
Selected Ratios
The following table presents certain selected ratios for the years ended
June 30, 1999, 1998 and 1997.
Year Ended June 30,
--------------------------------
1999 1998 1997
---- ---- ----
Return on assets..................... 1.43% 1.69% .82%
Return on equity..................... 5.53 6.67 6.81
Dividend payout ratio................ 26.44 --- ---
Average equity to average assets..... 25.80 25.38 11.98
Service Corporation Subsidiaries
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).
Citizens Savings Bank currently owns one subsidiary, Citizens Savings Bank
Loan and Service Corporation ("CLSC"), which primarily engages in the purchase
and development of tracts of undeveloped land. Because CLSC engages in
activities that are not permissible for a national bank, OTS regulations
prohibit Citizens Savings Bank from including its investment in CLSC in its
calculation of regulatory capital. CLSC purchases undeveloped land, constructs
improvements and infrastructure on the land, and then sells lots to builders,
who construct homes for sale to home buyers. CLSC ordinarily receives payment
when title is transferred.
CLSC owns a 104-acre tract of contiguous land on which it is presently
developing 59 acres. CLSC intends to complete the development of the remainder
of the property in approximately ten years. The 59 acres that are presently
being developed will include 64 building lots known as the Southridge Addition,
and 89 building lots known as the Meadow Brook Addition. Both of these Additions
have been annexed into the Town of Frankfort. Citizens Savings Bank purchased
this land in 1989 intending to develop these housing additions. However,
following enactment of the Financial Institutions Reform Recovery and
Enforcement Act of 1989, the FDIC directed Citizens Savings Bank to transfer its
interest in these developments to CLSC, which Citizens Savings Bank did,
effective June 30, 1994. Phase I of the development includes 33 completed lots
in the Southridge Addition, of which 23 lots have been sold and on which 23
houses have been completed, and 26 lots in the Meadow Brook Addition, of which 8
lots have been sold and on which 8 houses have been completed. The Southridge
lots have been priced generally at $19,000 to $22,000 each, with completed homes
selling generally for $90,000 to $120,000, and the Meadow Brook lots have been
priced generally at $23,000 to $26,000 with completed homes expected to sell
generally for $100,000 to $150,000. CLSC intends to develop the remaining 31
lots in the Southridge Addition beginning in 2000. Phase II and Phase III of the
Meadow Brook development, consisting of approximately 63 lots, are still in the
design stage. CLSC also intends to develop a 25-acre tract located in Frankfort,
with homes generally selling for $175,000 to $300,000. This project is in the
early stages of development.
CLSC intends ultimately to develop the remaining 20-acre parcel of land,
known as the Mann tract, that it presently owns. The development of this land,
which is part of the 104-acre tract discussed above, likely will not be
completed for approximately 10 years. The Mann tract is presently being leased
for farming purposes. CLSC has no present intentions to acquire additional land
for development purposes.
CLSC incurred a loss of $300 for the year ended June 30, 1999. CLSC earned
a profit of $164,000 for the year ended June 30, 1998 and $11,000 for the year
ended June 30, 1997. At June 30, 1999, Citizens Savings Bank had an investment
in CLSC of $633,000 and loans outstanding to CLSC of approximately $281,000 with
an interest rate set at the prime rate. Citizens Bancorp's consolidated
statements of income included elsewhere herein include the operations of CLSC.
All intercompany balances and transactions have been eliminated in the
consolidation.
Employees
As of June 30, 1999, Citizens Savings Bank employed 13 persons on a
full-time basis and 3 persons on a part-time basis. None of Citizens Savings
Bank's employees is represented by a collective bargaining group and management
considers its employee relations to be good.
Citizens Savings Bank's employee benefits for full-time employees include,
among other things, a Pentegra Group (formerly known as Financial Institutions
Retirement Fund) defined benefit pension plan, a noncontributory,
multiple-employer comprehensive pension plan, and hospitalization/major medical,
long-term disability insurance and life insurance.
Management considers its employee benefits to be competitive with those
offered by other financial institutions and major employers in its area.
Properties
The following table provides certain information with respect to the
office of Citizens Savings Bank as of March 31, 2000:
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures Footage
----------- ------ ------ -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
60 South Main Street Owned 1977 $36,323 $560 13,924
Frankfort, IN 46041
</TABLE>
Citizens operates one ATM, which is located in the vestibule of its
office. Citizens' ATM participates in the Cirrus(R) and MagicLine(R) networks.
Citizens has also contracted for the data processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $11,500 per month.
Citizens has contracted with the FHLB of Indianapolis for item
processing for a fee of approximately $3,000 per month.
Legal Proceedings
Although Citizens Bancorp and Citizens Savings Bank 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 their properties are subject.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
On March 22, 1999, Citizens Bancorp engaged the accounting firm of
Olive LLP to examine its consolidated financial statements for the fiscal year
ended June 30, 1999. Citizens Bancorp's Audit Committee, which is composed of
its entire Board of Directors, recommended and approved the change in auditors
on March 9, 1999. Ernst & Young LLP, which had acted as the independent public
accountant for Citizens Bancorp since its formation in 1997 and audited its
consolidated financial statements for the years ended June 30, 1998 and 1997,
was notified of Citizens Bancorp's decision. When Ernst & Young LLP was informed
by Citizens Bancorp that Citizens Bancorp was seeking proposals for auditing
services for the year ended June 30, 1999, Ernst & Young LLP declined to stand
for reappointment.
The audit reports issued by Ernst & Young LLP with respect to Citizens
Bancorp's consolidated financial statements for 1998 and 1997 did not contain an
adverse opinion or disclaimer of opinion, and were not qualified as to
uncertainty, audit scope or accounting principles. During 1997 and 1998 (and any
subsequent interim period), there were no disagreements between Citizens Bancorp
and Ernst & Young LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would
have caused it to make a reference to the subject matter of the disagreement in
connection with its audit report. Moreover, none of the events listed in Item
304(a)(1)(v) of Regulation S-K of the Securities and Exchange Commission
occurred during 1997 or 1998 or any subsequent interim period. Prior to engaging
Olive LLP to examine its consolidated financial statements, Citizens Bancorp did
not consult with Olive LLP as to the application of accounting principles to a
specific completed or contemplated transaction or the type of audit opinion that
might be rendered on Citizens Bancorp's financial statements. Pursuant to Item
304 of Regulation S-K, Citizens Bancorp provided to Ernst & Young LLP a copy of
the Current Report on Form 8-K that it filed with the Securities and Exchange
Commission disclosing this change in Citizens Bancorp's independent public
accountants. Ernst & Young LLP executed a letter addressed to the Securities and
Exchange Commission which was filed as part of the Form 8-K filed by Citizens
Bancorp indicating that Ernst & Young LLP agreed with the statements made by
Citizens Bancorp therein.
COMPETITION
Lincoln Federal originates most of its loans and accepts most of its
deposits from residents of Hendricks, Montgomery, Clinton and Morgan Counties in
Indiana, Citizens originates most of its loans to and accepts most of its
deposits from residents of Clinton County, Indiana. Both Lincoln Federal and
Citizens are 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 these counties, many of which have significantly larger resources
than are available to Citizens or Lincoln Federal. Both Lincoln Federal and
Citizens also compete 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 and Citizens
compete for loan originations primarily through the efficiency and quality of
the services that they provide 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 neither Lincoln Federal nor
Citizens can readily predict.
TAXATION
Federal Taxation
Historically, savings associations, such as Lincoln Federal and Citizens
Savings Bank, 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, while Citizens Savings Bank will recapture approximately $3,000 with
each tax return filed through the June 30, 2002 federal tax return. 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.
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, both Lincoln Bancorp and Citizens Bancorp
have been reporting their respective income and expenses on the accrual method
of accounting. Neither Lincoln Bancorp's nor Citizens Bancorp's federal income
tax returns have been audited in recent years.
State Taxation
Lincoln Bancorp and Citizens Bancorp are 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. A recent
revision to the Indiana Code permits financial institutions incorporated in
Indiana to apportion income in the same manner as financial institutions
incorporated in other states. This revision to the statute was made retroactive
to January 1, 1999. Lincoln Bancorp will benefit from this state tax law
revision due to the asset mix of its balance sheet, and has extended its 1999
tax return in order to determine how this revision will affect its financial
statements. Due to the asset mix of Citizen Bancorp's balance sheet, this tax
law change will have little effect on its Indiana tax liability. Other
applicable state taxes include generally applicable sales and use taxes plus
real and personal property taxes.
Neither Lincoln Bancorp's nor Citizens Bancorp's state income tax returns
have been audited in recent years.
REGULATION
General
As federally chartered, SAIF-insured savings associations, both Lincoln
Federal and Citizens Savings Bank are subject to extensive regulation by the OTS
and the FDIC. For example, Lincoln Federal and Citizens Savings Bank must obtain
OTS approval before they may engage in certain activities and must file reports
with the OTS regarding their activities and financial condition. The OTS
periodically examines Lincoln Federal's and Citizens Savings Bank'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. A savings
association must pay a semi-annual assessment to the OTS based upon a marginal
assessment rate that decreases as the asset size of the savings association
increases, and which 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 approximately $42,000,
and Citizens Savings Bank's semi-annual assessment is approximately $10,000.
Lincoln Federal and Citizens Savings Bank each are 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, issuances or retirements of Lincoln Federal's or Citizens Savings
Bank's securities, and limitations upon other aspects of banking operations. In
addition, Lincoln Federal's and Citizens Savings Bank'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.
Savings and Loan Holding Company Regulation
Lincoln Bancorp and Citizens Bancorp are each 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, Lincoln Bancorp and Citizens
Bancorp are each registered with the OTS and are thereby subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, Lincoln Federal and Citizens
Savings Bank are subject to certain restrictions in their dealings with the
their respective holding company parents and with other companies affiliated
with the Lincoln Bancorp and Citizens Bancorp.
In general, the HOLA prohibits a savings and loan holding company,
without obtaining the 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 Lincoln Bancorp or Citizens Bancorp, or
any person who owns more than 25% of the common stock of Lincoln Bancorp or
Citizens Bancorp, from acquiring control of another savings association or
savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
Both Lincoln Bancorp and Citizens Bancorp currently operate as unitary
savings and loan holding companies. Prior to the enactment of the
Gramm-Leach-Bliley Act (the "GLB Act") on November 12, 1999, there were no
restrictions on the permissible business activities of a unitary savings and
loan holding company. The GLB Act included a provision that prohibits any new
unitary savings and loan holding company, defined as a company that acquires a
thrift after May 4, 1999, from engaging in commercial activities. This provision
also includes a grandfather clause, however, that permits a company that was a
savings and loan holding company as of May 4, 1999, or had an application to
become a savings and loan holding company on file with the OTS as of that date,
to acquire and continue to control a thrift and to continue to engage in
commercial activities. Because both Lincoln Bancorp and Citizens Bancorp qualify
under this grandfather provision, the GLB Act did not affect either company's
authority to engage in diversified business activities.
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 be deemed to be a bank
holding company subject to all of the provisions of the Bank Holding Company Act
of 1956 and other statutes applicable to bank holding companies, to the same
extent as if the holding company were a bank holding company and its subsidiary
savings association were a bank. See "-Qualified Thrift Lender." At December 31,
1999, both Lincoln Federal's and Citizens Savings Bank's asset composition
exceeded that required to qualify the respective institutions as Qualified
Thrift Lenders.
If, subsequent to the effective time of the merger with Citizens
Bancorp, Lincoln Bancorp were to acquire control of another savings association
other than through a merger or other business combination with Lincoln Federal,
Lincoln Bancorp 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 Lincoln Bancorp 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.
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 its 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 and Citizens Savings Bank are each members of the FHLB
of Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a
reserve or central bank for its members within its assigned region. The FHLB is
funded primarily from funds deposited by banks and 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.
Prior to the enactment of the GLB Act, a federal savings association
was required to become a member of the FHLB for the district in which the thrift
is located. The GLB Act abolished this requirement, effective six months
following the enactment of the statute. At that time, membership with the FHLB
became voluntary. Any savings association that chooses to become (or remain) a
member of the FHLB following the expiration of this six-month period must
qualify for membership under the criteria that existed prior to the enactment of
the GLB Act. Lincoln Federal currently intends to remain a member of the FHLB of
Indianapolis.
As a member of the FHLB, 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, 1999, Lincoln
Federal's investment in stock of the FHLB of Indianapolis was $5.4 million, and
at June 30, 1999, Citizens Savings Bank's investment in such stock was $419,000.
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, 1999, dividends paid by the FHLB of Indianapolis to Lincoln Federal
totaled approximately $436,000, for an annual rate of 8.0%. For the fiscal year
ended June 30, 1999, dividends paid by the FHLB of Indianapolis to Citizens
Savings Bank totaled approximately $29,000, 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 Citizens Savings Banks, and for banks that have acquired deposits
from savings associations. The FDIC is required to maintain designated levels of
reserves in each fund. During 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 1996,
however, legislation was enacted to recapitalize the SAIF and eliminate the
premium disparity between the BIF and SAIF. 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 its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
In 1996, legislation was enacted that included provisions designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Under the new law, Lincoln Federal and Citizens Savings
Bank each were 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), and Citizens Savings Bank recognized the assessment as a
non-recurring operating expenses of approximately $211,000 ($127,000 after tax),
during the three-month period ending September 30, 1996. Both Lincoln Federal
and Citizens Savings Bank paid this assessment during the fourth quarter of
1996. The assessment was fully deductible for both federal and state income tax
purposes. Beginning January 1, 1997, Lincoln Federal's and Citizens Savings
Bank'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"). Although Congress has considered
merging the SAIF and the BIF, until such a merger occurs, 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 became 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 March 31, 2000, both Lincoln Federal and Citizens Savings Bank
were 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, both Lincoln Federal and Citizens Savings Bank nevertheless measure their
interest rate risk in conformity with the OTS regulation. As of December 31,
1999, Lincoln Federal would have been required to deduct $6.5 million from its
total capital available to calculate its risk-based capital requirement. At June
30, 1999, Citizens Savings Bank's interest rate risk was slightly outside the
parameters set forth in this regulation. 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.
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: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
1999, Lincoln Federal was categorized as "well capitalized," as was Citizens
Savings Bank at June 30, 1999. This categorization indicates that the respective
institutions' total risk-based capital ratios exceeded 10%, their respective
Tier I risk-based capital ratios exceeded 6%, their respective leverage ratios
exceeded 5%, and they were 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 adopted a regulation, which became effective on April 1, 1999,
that revised the 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
requirement under the prior version of the regulation 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, 1999, Lincoln Federal's retained net income standard
was approximately $6.1 million, and at June 30, 1999, Citizen Savings Bank's
retained net income standard was approximately $2.0 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 and Citizens Savings Bank both are subsidiaries of savings and
loan holding companies, this latter provision requires, at a minimum, that each
savings association file a notice with the OTS 30 days before making any capital
distributions to the their respective holding companies.
In addition to these regulatory restrictions, the Plans of Conversion
of Lincoln Federal and Citizens Savings Bank impose additional limitations on
the amount of capital distributions they each may make to their respective
holding companies. The respective Plans of Conversion require Lincoln Federal
and Citizens Savings Bank to establish and maintain a liquidation account for
the benefit of their respective Eligible Account Holders and Supplemental
Eligible Account Holders (as defined in the respective Plans) and prohibit
Lincoln Federal and Citizens Savings Bank from making capital distributions if
their net worth would be reduced below the amount required for their liquidation
accounts.
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
the current operations of Lincoln Federal or Citizens Savings Bank or of Lincoln
Federal following the consummation of the merger.
Safety and Soundness Standards
In 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. During 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 be
appropriate to the size of the association and the nature and scope of its
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 its 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 its 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, 1999, Lincoln Federal had two loan relationships
that exceeded its "in-house" lending limit and and did not have any loans or
extensions of credit to a single or related group of borrowers in excess of its
regulatory lending limits. At June 30, 1999, Citizens Savings Bank did not have
any loans or extensions of credit to a single or related group of borrowers in
excess of its 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 following the effective time or the merger.
Qualified Thrift Lender
Savings associations must meet a QTL test that requires the association
to maintain an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise to qualify as a QTL. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its 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, 1999, Lincoln Federal was in compliance
with its QTL requirement, with approximately 87% of its assets invested in QTIs.
At June 30, 1999, Citizens Savings Bank was in compliance with its QTL
requirement, with approximately 92% of its assets invested in QTIs.
A savings association which fails to meet the QTL test must either
convert to a bank (but its 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) its branching activities shall be
limited to those of a national bank; (iii) it shall be bound by regulations
applicable to national banks respecting payment of dividends. Three years after
failing the QTL test the association must dispose of any investment or activity
not permissible for a national bank and a savings association. 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
formation 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, which became effective in 1996, 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
reciprocal basis.
Transactions with Affiliates
Lincoln Federal and Citizens Savings Bank each are subject to Sections
22(h), 23A and 23B of the Federal Reserve Act, which restrict financial
transactions between banks and their directors, executive officers and
affiliated companies. The statute limits credit transactions between a bank or
savings association and its executive officers and its 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 Lincoln Bancorp and Citizens Bancorp have
been registered with the SEC under the 1934 Act and, as a result, Lincoln
Bancorp and Citizens Bancorp are 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 or
Citizens Savings Bank's conversion to stock form, if Lincoln Bancorp or Citizens
Bancorp, as the case may be, 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
Lincoln Bancorp or Citizens Bancorp may not be resold without registration
unless sold in accordance with the resale restrictions of Rule 144 under the
1933 Act. If Lincoln Bancorp and Citizens Bancorp meet the current public
information requirements under Rule 144, each affiliate of the respective
entities 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 Lincoln Bancorp 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 its 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 its record of lending to first-time home
buyers. The OTS has designated Lincoln Federal's record of meeting community
credit needs as satisfactory and has designated Citizens Savings record as
outstanding.
DIVIDENDS ON COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Transfer Agent.
The transfer agent and registrar for Lincoln Bancorp and Citizens
Bancorp is: The Fifth Third Bank Corporate Trust Operations 38 Fountain Square
Plaza, MD - 1090F5 Cincinnati, Ohio 45202 (513) 579-5320 or (800) 837-2755.
Restrictions on the Payment of Dividends.
Under current federal income tax law, dividend distributions to Lincoln
Bancorp or to Citizens Bancorp by their respective savings association
subsidiaries, to the extent that such dividends paid are from the current or
accumulated earnings and profits of Lincoln Federal or Citizens Savings Bank,
respectively, (as calculated for federal income tax purposes), will be taxable
as ordinary income to Lincoln Bancorp or Citizens Bancorp, as the case may be,
and will not be deductible by Lincoln Federal or Citizens Savings Bank. Any
dividend distributions in excess of current or accumulated earnings and profits
will be treated for federal income tax purposes as a distribution from the
accumulated bad debt reserves of Lincoln Federal or Citizens Savings Bank, which
could result in increased federal income tax liability for the respective
savings associations.
Since neither Lincoln Bancorp nor Citizens Bancorp has any independent
operations or other subsidiaries to generate income, their ability to accumulate
earnings for the payment of cash dividends to shareholders directly depends upon
the ability of Lincoln Federal or Citizens Savings Bank to pay dividends to
Lincoln Bancorp or Citizens Bancorp, respectively, and upon the earnings on
Lincoln Federal's or Citizens Savings Bank's investment securities. Applicable
law restricts the amount of dividends Lincoln Federal or Citizens Savings Bank
may pay to their respective holding companies without obtaining the prior
approval of the OTS to an amount that does not exceed Lincoln Federal's or
Citizens Savings Bank's year-to-date net income plus their respective retained
net income for the preceding two years. Moreover, neither Lincoln Federal nor
Citizens Savings Bank may pay dividends to their respective parent holding
companies if such dividends would result in the impairment of the liquidation
account established in connection with Lincoln Federal's and Citizens Savings
Bank's conversion from the mutual to the stock form of organization. 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.
Generally, there is no OTS regulatory restriction on the payment of
dividends by Lincoln Bancorp or Citizens Bancorp 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 or Citizens Savings Bank,
respectively. Indiana law, however, would prohibit Lincoln Bancorp or Citizens
Bancorp from paying a dividend if, after giving effect to the payment of that
dividend, Lincoln Bancorp or Citizens Bancorp would not be able to pay their
respective debts as they become due in the usual course of business or the total
assets of Lincoln Bancorp or Citizens Bancorp, respectively, would be less than
the sum of their respective total liabilities plus preferential rights of
holders of preferred stock, if any.
DESCRIPTION OF LINCOLN BANCORP COMMON STOCK
AND CITIZENS BANCORP COMMON STOCK
In the merger, Citizens Bancorp shareholders will exchange their shares
of Citizens Bancorp common stock for a combination of shares of Lincoln Bancorp
common stock and cash. Both Lincoln Bancorp and Citizens Bancorp are organized
under the laws of the State of Indiana. On consummation of the merger, Citizens
Bancorp shareholders will become Lincoln Bancorp shareholders, and the articles
of incorporation and by-laws of Lincoln Bancorp, will govern their rights as
Lincoln Bancorp shareholders.
Set forth below is a summary of the material features of the Lincoln
Bancorp common stock and Citizens Bancorp common stock. This summary is not a
complete discussion of the charter documents and other instruments of Lincoln
Bancorp and Citizens Bancorp that create the rights of the security holders.
Lincoln Bancorp is authorized to issue 20,000,000 shares of common
stock, without par value, all of which have identical rights and preferences,
and 2,000,000 shares of preferred stock, without par value. As of the date of
this proxy statement/prospectus, Lincoln Bancorp had outstanding 5,677,493
shares of its common stock and no shares of preferred stock. Each of the
outstanding shares of Lincoln Bancorp common stock has been validly issued,
fully paid, and is not liable for further call or assessment.
Citizens Bancorp is authorized to issue 5,000,000 shares of common
stock, without par value, all of which have identical rights and preferences,
and 2,000,000 shares of preferred stock, without par value. As of the date of
this proxy statement/prospectus, Citizens Bancorp has outstanding 959,401 shares
of its common stock and no shares of preferred stock. Each of the outstanding
shares of Citizens Bancorp common stock has been validly issued, fully paid, and
is not liable for further call or assessment.
Shareholders of Lincoln Bancorp and Citizens Bancorp do not have any
preemptive rights to acquire additional shares of common stock which may be
subsequently issued. The shares of common stock of both Lincoln Bancorp and
Citizens Bancorp represent nonwithdrawable capital, are not of an insurable type
and are not federally insured by the FDIC or any government entity.
Under Indiana law, the holders of Lincoln Bancorp and Citizens Bancorp
common stock possess exclusive voting power in the respective corporations,
unless preferred stock is issued and voting rights are granted to the holders
thereof. Each shareholder is entitled to one vote for each share held on all
matters voted upon by shareholders, subject to the limitations discussed under
the caption "Restrictions on Acquisition of Lincoln Bancorp." Shareholders of
Citizens Bancorp or Lincoln Bancorp may not cumulate their votes in the election
of the Board of Directors of the respective corporations. Holders of common
stock are entitled to payment of dividends as may be declared from time to time
by the respective corporations' Board of Directors.
In the unlikely event of the liquidation or dissolution of Citizens
Bancorp prior to the effective time of the merger, or of Lincoln Bancorp, the
holders of the common stock of the respective corporations will be entitled to
receive after payment or provision for payment of all of the respective
corporations' debts and liabilities, all of the assets of the corporation
available for distribution, in cash or in kind. If Lincoln Bancorp issues
preferred stock in the future, the holders thereof may have a priority over the
holders of Lincoln Bancorp's common stock in the event of liquidation or
dissolution.
The Agreement and Plan of Reorganization prohibits the Board of
Directors of Citizens Bancorp from issuing preferred stock prior to the
effective time of the merger. The Board of Directors of Lincoln Bancorp is
authorized to issue preferred stock in series and to fix and state the voting
powers, designations, preferences and relative, participating, optional or other
special rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. Lincoln Bancorp's preferred stock may rank
prior to its common stock as to dividend rights, liquidation preferences, or
both, and may have full or limited voting rights. The holders of preferred stock
will be entitled to vote as a separate class or series under certain
circumstances, regardless of any other voting rights which such holders may
have.
Except in connection with the proposed merger with Citizens Bancorp and
as otherwise provided herein, Lincoln Bancorp has no specific plans for the
issuance of the additional authorized shares of common stock or for the issuance
of any shares of preferred stock. In the future, the authorized but unissued and
unreserved shares of Lincoln Bancorp's common stock will be available for
general corporate purposes including, but not limited to, possible issuance as
stock dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, or in future underwritten or
other public or private offerings. The authorized but unissued shares of Lincoln
Bancorp preferred stock will similarly be available for issuance in future
mergers or acquisitions, in future underwritten public offerings or private
placements or for other general corporate purposes. Except as described above or
as otherwise required to approve the transaction in which the additional
authorized shares of Lincoln Bancorp common stock or authorized shares of
preferred stock would be issued, no shareholder approval will be required for
the issuance of these shares. Accordingly, Lincoln Bancorp's Board of Directors
without shareholder approval can issue preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Lincoln Bancorp common stock.
RESTRICTIONS ON ACQUISITION OF LINCOLN BANCORP AND CITIZENS BANCORP
General
The Articles of Incorporation of Lincoln Bancorp (the "Lincoln
Articles") and Citizens Bancorp (the "Citizens Articles") include several
provisions that are intended to protect the interests of the respective
companies and their shareholders from unsolicited changes in the control. These
provisions separately authorize the respective Boards of Directors of Lincoln
Bancorp and Citizens Bancorp to respond to such unsolicited offers to effect a
change in control in a manner the Boards conclude will best protect the
interests of their respective companies and of the respective savings
association subsidiaries thereof. Although the Boards of Directors of Lincoln
Bancorp and Citizens Bancorp believe that the restrictions on acquisition
described below are beneficial to their respective shareholders, the provisions
may have the effect of rendering Lincoln Bancorp or Citizens Bancorp less
attractive to potential acquirors, thereby discouraging future takeover attempts
which would not be approved by the Board of Directors of Lincoln Bancorp or
Citizens Bancorp, as appropriate, but which certain shareholders might deem to
be in their best interest or pursuant to which shareholders might receive a
substantial premium for their shares over then current market prices. These
provisions will also render the removal of the incumbent Boards of Directors and
of management more difficult. Lincoln Bancorp's and Citizens Bancorp's Board of
Directors have, however, concluded that the potential benefits of these
restrictive provisions outweigh the possible disadvantages.
The following general discussion contains a summary of the material
provisions of the Lincoln Articles, Lincoln Bancorp's Code of By-Laws (the
"Lincoln By-Laws"), the Citizens Articles and Citizens Bancorp's Code of By-Laws
(the "Citizens By-Laws"), and certain other regulatory provisions that may be
deemed to have an effect of delaying, deferring or preventing a change in the
control of Lincoln Bancorp or Citizens Bancorp, respectively. The relevant
provisions of the Lincoln Articles and the Lincoln By-Laws, and the Citizens
Articles and the Citizens By-Laws discussed below are substantially identical.
The following description of certain of these provisions is general and not
necessarily complete, and with respect to provisions contained in the Lincoln
Articles and Lincoln By-Laws and the Citizens Articles and Citizens By-Laws,
reference should be made in each case to the document in question, each of which
has previously been filed with the Securities and Exchange Commission by Lincoln
Bancorp or Citizens Bancorp, as the case may be. See "Where You Can Find More
Information."
Provisions of the Lincoln Articles and Lincoln By-Laws and the Citizens Articles
and Citizens By-Laws
Directors. Certain provisions in the Lincoln Articles and the Lincoln
By-Laws and the Citizens Articles and Citizens By-Laws will impede changes in
majority control of the Boards of Directors of the respective companies. The
Lincoln Articles and the Citizens Articles each provide that the respective
Boards of Directors will be divided into three classes, with directors in each
class elected for three-year staggered terms. Therefore, it would take two
annual elections to replace a majority of Lincoln Bancorp's or Citizens
Bancorp's Board. Moreover, the Lincoln By-laws provide that directors of Lincoln
Bancorp must be residents of Hendricks, Clinton or Montgomery County, Indiana,
must have had a loan or deposit relationship with Lincoln Federal which they
have maintained for nine (9) months prior to their nomination to the Board, and,
if nonemployee directors, must have served as a member of a civic or community
organization based in Hendricks, Clinton or Montgomery County, Indiana for at
least twelve (12) months during the five years prior to their nomination to the
Board. Likewise, the Citizens By-Laws provide that directors of Citizens Bancorp
must be residents of Clinton County, Indiana, must have had a loan or deposit
relationship with Citizens Savings Bank which they have maintained for nine (9)
months prior to their nomination to the Board, and, if nonemployee directors,
must have served as a member of a civic or community organization based in
Clinton County, Indiana for at least twelve (12) months during the five years
prior to their nomination to the Board. Either Board of Directors may waive one
or more of these requirements for new members appointed to the Board in
connection with the acquisition of another financial institution by Lincoln
Bancorp or Citizens Bancorp, as the case may be, or the acquisition or opening
of a new branch by Lincoln Federal or Citizens Savings Bank. Therefore, the
ability of a shareholder to attract qualified nominees to oppose persons
nominated by the respective Boards of Directors of Lincoln Bancorp or Citizens
Bancorp may be limited.
The Lincoln Articles and Citizens Articles also each provide that the
size of the respective Boards of Directors shall range between five and fifteen
directors, with the exact number of directors to be fixed from time to time
exclusively by the respective Boards of Directors pursuant to a resolution
adopted by a majority of the total number of the applicable company's directors.
The Lincoln Articles and Citizens Articles further provide that any
vacancy occurring in the respective Boards of Directors, including a vacancy
created by an increase in the number of directors, shall be filled for the
remainder of the unexpired term only by a majority vote of the directors of the
company then in office. Finally, the Lincoln By-Laws and Citizens By-Laws each
impose certain notice and information requirements in connection with the
nomination by shareholders of candidates for election to the respective Boards
of Directors or the proposal by shareholders of business to be acted upon at an
annual meeting of shareholders.
The Lincoln Articles and Citizens Articles each provide that a director
or the entire Board of Directors may be removed only for cause and only by the
affirmative vote of at least 80% of the shares eligible to vote generally in the
election of directors. Removal for "cause" is limited to the grounds for
termination in the OTS regulation relating to employment contracts of
federally-insured savings associations.
Restrictions on Call of Special Meetings. The Lincoln Articles and
Citizens Articles each provide that a special meeting of shareholders may be
called only by the respective Chairmen of the Boards of Lincoln Bancorp or
Citizens Bancorp, or pursuant to a resolution adopted by a majority of the total
number of directors of Lincoln Bancorp or Citizens Bancorp, as the case may be.
Shareholders are not authorized to call a special meeting.
No Cumulative Voting. The Lincoln Articles and the Citizens Articles
each provide that there shall be no cumulative voting rights in the election of
directors.
Authorization of Preferred Stock. The Lincoln Articles and the Citizens
Articles authorize the respective companies to issue 2,000,000 shares of
preferred stock, without par value. Lincoln Bancorp and Citizens Bancorp each is
authorized to issue preferred stock from time to time in one or more series
subject to applicable provisions of law, and the Boards of Directors of the
respective companies are authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (if any and which could be as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of Lincoln Bancorp or Citizens Bancorp not approved by
the respective Board of Directors, it might be possible for the Board of
Directors of Lincoln Bancorp or Citizens Bancorp, as the case may be, to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede the completion of such a transaction. An effect of
the possible issuance of preferred stock, therefore, may be to deter a future
takeover attempt. The Boards of Directors have no present plans or
understandings for the issuance of any preferred stock and do not intend to
issue any preferred stock except on terms which the respective Boards deem to be
in the best interests of Lincoln Bancorp and its shareholders or of Citizens
Bancorp and its shareholders, as the case may be.
Limitations on 10% Shareholders. The Lincoln Articles and the Citizens
Articles each provide that: (i) no person shall directly or indirectly offer to
acquire or acquire the beneficial ownership of more than 10% of any class of
equity security of Lincoln Bancorp or of Citizens Bancorp (provided that such
limitation shall not apply to the acquisition of equity securities by any one or
more tax-qualified employee stock benefit plans maintained by Lincoln Bancorp or
Citizens Bancorp, if the plan or plans beneficially own no more than 25% of any
class of such equity security of Lincoln Bancorp or Citizens Bancorp); and that
(ii) shares beneficially owned in violation of the stock ownership restriction
described above shall not be entitled to vote and shall not be voted by any
person or counted as voting stock in connection with any matter submitted to a
vote of shareholders. For these purposes, a person (including management) who
has obtained the right to vote shares of Lincoln Bancorp common stock or
Citizens Bancorp common stock pursuant to revocable proxies shall not be deemed
to be the "beneficial owner" of those shares if that person is not otherwise
deemed to be a beneficial owner of those shares.
Evaluation of Offers. The Lincoln Articles and the Citizens Articles
each provide that the respective Boards of Directors, when determining to take
or refrain from taking corporate action on any matter, including making or
declining to make any recommendation to Lincoln Bancorp's shareholders or
Citizens Bancorp's shareholders, as the case may be, may, in connection with the
exercise of its judgment in determining what is in the best interest of Lincoln
Bancorp, Lincoln Federal and the shareholders of Lincoln Bancorp, or of Citizens
Bancorp, Citizens Savings Bank and the shareholders of Citizens Bancorp, give
due consideration to all relevant factors, including, without limitation, the
social and economic effects of acceptance of such offer on Lincoln Bancorp's or
Citizens Bancorp's customers and Lincoln Federal Savings Bank's or Citizens
Savings Bank's present and future account holders, borrowers, employees and
suppliers; the effect on the communities in which Lincoln Bancorp and Lincoln
Federal, or in which Citizens Bancorp and Citizens Savings Bank operate or are
located; and the effect on the ability of Lincoln Bancorp or Citizens Bancorp to
fulfill the objectives of a holding company and of Lincoln Federal or Citizens
Savings Bank, or future financial institution subsidiaries, to fulfill the
objectives of a financial institution under applicable statutes and regulations.
The Lincoln Articles and Citizens Articles also authorize the respective Boards
of Directors to take certain actions to encourage a person to negotiate for a
change of control of Lincoln Bancorp or Citizens Bancorp or to oppose such a
transaction deemed undesirable by the respective Boards of Directors including
the adoption of so-called shareholder rights plans. By having these standards
and provisions in the Lincoln Articles and the Citizens Articles, the respective
Boards of Directors may be in a stronger position to oppose such a transaction
if either Board concludes that the transaction would not be in the best interest
of Lincoln Bancorp or Citizens Bancorp, as the case may be, even if the price
offered is significantly greater than the then market price of any equity
security of Lincoln Bancorp or Citizens Bancorp.
Procedures for Certain Business Combinations. The Lincoln Articles and
Citizens Articles each require that certain business combinations between
Lincoln Bancorp or Citizens Bancorp (or any majority-owned subsidiary of the
respective companies) and a 10% or greater shareholder of the respective
companies either be approved (i) by at least 80% of the total number of
outstanding voting shares of Lincoln Bancorp or Citizens Bancorp, as
appropriate, or (ii) by a majority of certain directors unaffiliated with such
10% or greater shareholder or involve consideration per share generally equal to
the higher of (A) the highest amount paid by such 10% shareholder or its
affiliates in acquiring any shares of the common stock or (B) the "Fair Market
Value" (generally, the highest closing bid paid for the Lincoln Bancorp common
stock or Citizens Bancorp common stock, as appropriate, during the thirty days
preceding the date of the announcement of the proposed business combination or
on the date the 10% or greater shareholder became such, whichever is higher).
Amendments to Articles and Bylaws. Amendments to the Lincoln Articles
or to the Citizens Articles must be approved by a majority vote of Lincoln
Bancorp's Board of Directors or Citizens Bancorp's Board of Directors, as
appropriate, and also by a majority of the outstanding shares of Lincoln
Bancorp's or Citizens Bancorp's voting shares; provided, however, that approval
by at least 80% of the outstanding voting shares is required for certain
provisions (i.e., provisions relating to number, classification, and removal of
directors; provisions relating to the manner of amending the By-Laws; call of
special shareholder meetings; criteria for evaluating certain offers; certain
business combinations; and amendments to provisions relating to the foregoing).
The provisions concerning limitations on the acquisition of shares may be
amended only by an 80% vote of Lincoln Bancorp's or Citizens Bancorp's
outstanding shares unless at least two-thirds of Lincoln Bancorp's Continuing
Directors (directors of Lincoln Bancorp on September 10, 1998, or directors
recommended for appointment or election by a majority of such directors) or
Citizens Bancorp's Continuing Directors (directors of Citizens Bancorp on June
10, 1997, or directors recommended for appointment or election by a majority of
such directors) approve such amendments in advance of their submission to a vote
of shareholders (in which case only a majority vote of shareholders is
required).
The Lincoln By-Laws and the Citizens By-Laws may be amended only by a
majority vote of the total number of directors of Lincoln Bancorp or Citizens
Bancorp, as appropriate.
Purpose and Effects of the Anti-Takeover Provisions of the Lincoln Bancorp
Articles and By-Laws and the Citizens Bancorp Articles and By-Laws
The Boards of Directors of Lincoln Bancorp and Citizens Bancorp each
believe that the provisions described above are prudent and will reduce the
vulnerability of the respective companies to takeover attempts and certain other
transactions which have not been negotiated with and approved by their
respective Boards of Directors. The Boards of Directors believe these provisions
are in the best interests of their respective companies and their shareholders.
In the judgment of Lincoln Bancorp's and Citizens Bancorp's Boards of Directors,
the respective Boards of Directors will be in the best position to determine the
true value of Lincoln Bancorp or Citizens Bancorp, as appropriate, and to
negotiate more effectively for what may be in the best interests of Lincoln
Bancorp or Citizens Bancorp and their respective shareholders. The Boards of
Directors believe that these provisions will encourage potential acquirers to
negotiate directly with the respective Boards of Directors and discourage
hostile takeover attempts. It is also the view of the Boards of Directors that
these provisions should not discourage persons from proposing a merger or other
transaction at prices reflecting the true value of Lincoln Bancorp or Citizens
Bancorp and which is in the best interests of their respective shareholders.
Attempts to take over financial institutions and their holding
companies have recently increased. Takeover attempts that have not been
negotiated with and approved by the Board of Directors present to shareholders
the risk of a takeover on terms that may be less favorable than might otherwise
be available. A transaction that is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time to obtain maximum value for Lincoln Bancorp or Citizens Bancorp
and their respective shareholders, with due consideration given to matters such
as the management and business of the acquiring corporation and maximum
strategic development of Lincoln Bancorp's or Citizens Bancorp's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to undertake defensive measures at a
great expense. Although a tender offer or other takeover attempt may be made at
a price substantially above then current market prices, such offers are
sometimes made for less than all of the outstanding shares of a target company.
As a result, shareholders may be presented with the alternative of partially
liquidating their investment at a time that may be disadvantageous, or retaining
their investment in an enterprise which is under different management and whose
objective may not be similar to that of the remaining shareholders. The
concentration of control, which could result from a tender offer or other
takeover attempt, could also deprive Lincoln Bancorp's or Citizens Bancorp's
remaining shareholders of the benefits of certain protective provisions of the
1934 Act if the number of beneficial owners becomes less than 300 and Lincoln
Bancorp or Citizens Bancorp terminates its registration under the 1934 Act.
Despite the belief of Lincoln Bancorp's and Citizens Bancorp's Boards
of Directors in the benefits to the shareholders of the respective companies of
the foregoing provisions, the provisions may also have the effect of
discouraging future takeover attempts which would not be approved by the
respective Boards of Directors, but which certain shareholders might deem to be
in their best interest or pursuant to which shareholders might receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. These provisions will also render the removal
of the incumbent Boards of Directors and of management more difficult. The
Boards of Directors have, however, each concluded that the potential benefits of
these restrictive provisions outweigh the possible disadvantages.
Other Restrictions on Acquisition of Lincoln Bancorp and Lincoln Federal or of
Citizens Bancorp and Citizens Savings Bank
State Law. Several provisions of the Indiana Business Corporation Law,
as amended (the "IBCL"), could affect the acquisition of shares of Lincoln
Bancorp common stock or Citizens Bancorp common stock or otherwise affect the
control of Lincoln Bancorp or of Citizens Bancorp. Chapter 43 of the IBCL
prohibits certain business combinations, including mergers, sales of assets,
recapitalizations, and reverse stock splits, between corporations such as
Lincoln Bancorp or Citizens Bancorp (assuming that either company has over 100
shareholders) and an interested shareholder, defined as the beneficial owner of
10% or more of the voting power of the outstanding voting shares, for five years
following the date on which the shareholder obtained 10% ownership unless the
acquisition was approved in advance of that date by the Board of Directors of
the respective companies. If prior approval is not obtained, several price and
procedural requirements must be met before the business combination can be
completed. These requirements are similar to those contained in the Lincoln
Articles and Citizens Articles and described in " - Provisions of the Lincoln
Articles and Lincoln By-Laws and Citizens Articles and Citizens By-Laws -
Procedures for Certain Business Combinations." In general, the price
requirements contained in the IBCL may be more stringent than those imposed in
the Lincoln Articles or Citizens Articles. However, the procedural restraints
imposed by the Lincoln Articles and Citizens Articles are somewhat broader than
those imposed by the IBCL. Also, the provisions of the IBCL may change at some
future date, but the relevant provisions of the Lincoln Articles or the Citizens
Articles may only be amended by an 80% vote of the shareholders of the
respective companies.
In addition, the IBCL contains provisions designed to assure that
minority shareholders have some say in their future relationship with Indiana
corporations in the event that a person made a tender offer for, or otherwise
acquired, shares giving that person more than 20%, 33 1/3%, and 50% of the
outstanding voting securities of corporations having 100 or more shareholders
(the "Control Share Acquisitions Statute"). Under the Control Share Acquisitions
Statute, if an acquiror purchases those shares at a time that the corporation is
subject to the Control Share Acquisitions Statute, then until each class or
series of shares entitled to vote separately on the proposal, by a majority of
all votes entitled to be cast by that group (excluding shares held by officers
of the corporation, by employees of the corporation who are directors thereof
and by the acquiror), approves in a special or annual meeting the rights of the
acquiror to vote the shares which take the acquiror over each level of ownership
as stated in the statute, the acquiror cannot vote these shares. An Indiana
corporation otherwise subject to the Control Share Acquisitions Statute may
elect not to be covered by the statute by so providing in its articles of
incorporation or by-laws. Both Lincoln Bancorp and Citizens Bancorp, however,
have elected to remain subject to this statute because of the desire of the
respective companies to discourage non-negotiated hostile takeovers by third
parties.
The IBCL specifically authorizes Indiana corporations to issue options,
warrants or rights for the purchase of shares or other securities of the
corporation or any successor in interest of the corporation. These options,
warrants or rights may, but need not be, issued to shareholders on a pro rata
basis.
The IBCL specifically authorizes directors, in considering the best
interest of a corporation, to consider the effects of any action on
shareholders, employees, suppliers, and customers of the corporation, and
communities in which offices or other facilities of the corporation are located,
and any other factors the directors consider pertinent. As described above, the
Lincoln Articles and Citizens Articles each contain a provision having a similar
effect. Under the IBCL, directors are not required to approve a proposed
business combination or other corporate action if the directors determine in
good faith that such approval is not in the best interest of the corporation. In
addition, the IBCL states that directors are not required to redeem any rights
under or render inapplicable a shareholder rights plan or to take or decline to
take any other action solely because of the effect such action might have on a
proposed change of control of the corporation or the amounts to be paid to
shareholders upon such a change of control. The IBCL explicitly provides that
the different or higher degree of scrutiny imposed in Delaware and certain other
jurisdictions upon director actions taken in response to potential changes in
control will not apply. The Delaware Supreme Court has held that defensive
measures in response to a potential takeover must be "reasonable in relation to
the threat posed."
In taking or declining to take any action or in making any
recommendation to a corporation's shareholders with respect to any matter,
directors are authorized under the IBCL to consider both the short-term and
long-term interests of the corporation as well as interests of other
constituencies and other relevant factors. Any determination made with respect
to the foregoing by a majority of the disinterested directors shall conclusively
be presumed to be valid unless it can be demonstrated that such determination
was not made in good faith.
Because of the foregoing provisions of the IBCL, the Boards of
Directors of Lincoln Bancorp and of Citizens Bancorp each have the flexibility
in responding to unsolicited proposals to acquire Lincoln Bancorp or Citizens
Bancorp, as the case may be, and accordingly it may be more difficult for an
acquiror to gain control of Lincoln Bancorp or of Citizens Bancorp in a
transaction not approved by the respective Boards of Directors.
Federal Limitations. For three years following the conversion of
Lincoln Federal from the mutual to the stock form of ownership in December,
1998, and from the conversion of Citizens Savings Bank in September, 1997, OTS
regulations prohibit any person (including entities), without the prior approval
of the OTS, from offering to acquire or acquiring more than 10% of any class of
equity security, directly or indirectly, of a converted savings association or
its holding company. This restriction does not apply to the acquisition by any
one or more tax-qualified employee stock benefit plans maintained by Lincoln
Savings Bank or Lincoln Bancorp, or of Citizens Savings Bank or Citizens
Bancorp, provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security of Lincoln Bancorp or
Citizens Bancorp. For these purposes, a person (including management) who has
obtained the right to vote shares of the Lincoln Bancorp common stock or
Citizens Bancorp common stock pursuant to revocable proxies shall not be deemed
to be the "beneficial owner" of those shares if that person is not otherwise
deemed to be a beneficial owner of those shares.
The Change in Bank Control Act provides that no "person," acting
directly or indirectly, or through or in concert with one or more persons, other
than a company, may acquire control of a savings association or a savings and
loan holding company unless at least 60 days prior written notice is given to
the OTS and the OTS has not objected to the proposed acquisition.
The Savings and Loan Holding Company Act also prohibits any "company,"
directly or indirectly or acting in concert with one or more other persons, or
through one or more subsidiaries or transactions, from acquiring control of an
insured savings institution without the prior approval of the OTS. In addition,
any company that acquires such control becomes a "savings and loan holding
company" subject to registration, examination and regulation as a savings and
loan holding company by the OTS.
The term "control" for purposes of the Change in Bank Control Act and
the Savings and Loan Holding Company Act includes the power, directly or
indirectly, to vote more than 25% of any class of voting stock of the savings
association or to control, in any manner, the election of a majority of the
directors of the savings association. It also includes a determination by the
OTS that such company or person has the power, directly or indirectly, to
exercise a controlling influence over or to direct the management or policies of
the savings association.
OTS regulations also set forth certain "rebuttable control
determinations" which arise (i) upon an acquisition of more than 10% of any
class of voting stock of a savings association; or (ii) upon an acquisition of
more than 25% of any class of voting or nonvoting stock of a savings
association; provided that, in either case, the acquiror is subject to any of
eight enumerated "control factors," which are: (1) the acquiror would be one of
the two largest holders of any class of voting stock of the association; (2) the
acquiror would hold more than 25% of the total shareholders' equity of the
association; (3) the acquiror would hold more than 35% of the combined debt
securities and shareholders' equity of the savings association; (4) the acquiror
is a party to any agreement pursuant to which the acquiror possesses a material
economic stake in the savings association or which enables the acquiror to
influence a material aspect of the management or policies of the association;
(5) the acquiror would have the ability, other than through the holding of
revocable proxies, to direct the votes of more than 25% of a class of the voting
stock or to vote in the future more than 25% of such voting stock upon the
occurrence of a future event; (6) the acquiror would have the power to direct
the disposition of more than 25% of the association's voting stock in a manner
other than a widely dispersed or public offering; (7) the acquiror and/or his
representative would constitute more than one member of the association's Board
of Directors; or (8) the acquiror would serve as an executive officer or in a
similar policy-making position with the association. For purposes of determining
percentage share ownership, a person is presumed to be acting in concert with
certain specified persons and entities, including members of the person's
immediate family, whether or not those family members share the same household
with the person.
The regulations also specify the criteria which the OTS uses to
evaluate control applications. The OTS is empowered to disapprove an acquisition
of control if it finds, among other things, that (i) the acquisition would
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the institution or its depositors, or (iii) the
competency, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors, the institution, or the public
to permit the acquisition of control by such person.
EXPERTS
The audited consolidated financial statements of Lincoln Bancorp as of
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, and the accompanying report of independent auditor prepared
by Olive LLP, independent certified public accountants, are included herein in
reliance upon the authority of Olive LLP as experts in giving said report.
The audited consolidated financial statements of Citizens Bancorp as
of June 30, 1999 and for the fiscal year then ended and the accompanying report
of independent auditor prepared by Olive LLP, independent certified public
accountants, are included herein in reliance upon the authority of Olive LLP as
experts in giving said report.
The consolidated financial statements of Citizens Bancorp at June 30,
1998, and for each of the two years in the period ended June 30, 1998, included
in the Proxy Statement of Citizens Bancorp, which is referred to and made a part
of this Prospectus and Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
A representative of Olive LLP is expected to be present at the
Citizens Bancorp special meeting. The representative will have the opportunity
to make a statement if the representative desires to do so and is expected to be
available to respond to appropriate questions.
LEGAL MATTERS
The validity of the shares of Lincoln Bancorp common stock to be issued
pursuant to the terms of the Agreement and Plan of Reorganization will be passed
upon for Lincoln Bancorp by Bose McKinney & Evans LLP Indianapolis, Indiana. The
material federal income tax consequences of the merger will be passed upon for
Lincoln Bancorp by Bose McKinney & Evans LLP, and for Citizens Bancorp by Barnes
& Thornburg, Indianapolis, Indiana.
WHERE YOU CAN FIND MORE INFORMATION
Lincoln Bancorp and Citizens Bancorp file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
that the companies file at the Securities and Exchange Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Lincoln Bancorp and Citizens Bancorp
public filings are also available to the public from commercial document
retrieval services and at the Internet World Wide Web site maintained by the
Securities and Exchange Commission at "http://www.sec.gov."
Lincoln Bancorp has filed the Registration Statement to register with
the Securities and Exchange Commission the shares of Lincoln Bancorp common
stock to be issued to Citizens Bancorp shareholders in the merger. This document
is a part of the Registration Statement and constitutes a prospectus of Lincoln
Bancorp and a proxy statement of Citizens Bancorp for its shareholders meeting.
Lincoln Bancorp has supplied all information contained in this
document relating to Lincoln Bancorp, and Citizens Bancorp has supplied all
information relating to Citizens Bancorp.
You should rely only on the information contained in this document to
vote your shares at the Citizens Bancorp special meeting. Lincoln Bancorp and
Citizens Bancorp have not authorized anyone to provide you with information that
is different from what is contained in this document. This document is dated
July 27, 2000. You should not assume that the information contained in this
document is accurate as of any date other than that date, and neither the
mailing of this document to shareholders nor the issuance of Lincoln Bancorp
common stock in the merger creates any implication to the contrary.
<PAGE>
Lincoln Bancorp and Subsidiary
Plainfield, Indiana
Table of Contents
Independent auditor's report ............................................... 159
Consolidated balance sheet as of December 31, 1999 and 1998................. 160
Consolidated statement of income for the years ended
December 31, 1999, 1998 and 1997................................... 161
Consolidated statement of comprehensive income for the years ended
December 31, 1999, 1998 and 1997................................... 162
Consolidated statement of shareholders' equity for the years ended
December 31, 1999, 1998 and 1997................................... 163
Consolidated statement of cash flows for the years ended
December 31, 1999, 1998 and 1997................................... 164
Notes to consolidated financial statements.................................. 165
Consolidated condensed balance sheet as of March 31, 2000 and
December 31, 1999 (unaudited)...................................... 185
Consolidated condensed statement of income for the three months ended
March 31, 2000 and 1999 (unaudited)................................ 186
Consolidated condensed statement of comprehensive
income for the three months ended
March 31, 2000 and 1999 (unaudited)................................ 187
Consolidated condensed statement of shareholders' equity
for the three months ended
March 31, 2000 (unaudited)......................................... 188
Consolidated condensed statement of cash flows for the three months ended
March 31, 2000 and 1999 (unaudited)................................ 189
Notes to unaudited consolidated condensed financial statements.............. 190
<PAGE>
Report of Independent Auditor
Board of Directors
Lincoln Bancorp
Plainfield, Indiana
We have audited the accompanying consolidated balance sheet of Lincoln Bancorp
and subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of income, comprehensive income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Olive LLP
/s/ Olive LLP
Indianapolis, Indiana
February 8, 2000
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31 1999 1998
------------ ------------
Assets
<S> <C> <C>
Cash and due from banks $ 2,576,080 $ 4,245,128
Interest-bearing demand deposits in other banks 8,242,552 18,662,229
------------ ------------
Cash and cash equivalents 10,818,632 22,907,357
Investment securities
Available for sale 145,875,328 129,275,575
Held to maturity (market value $497,813 and $1,264,375) 500,000 1,250,000
------------ ------------
Total investment securities 146,375,328 130,525,575
Loans, net of allowance for loan losses of
$1,760,706 and $1,512,205 233,000,179 195,920,792
Premises and equipment 3,672,650 3,379,460
Investments in limited partnerships 2,063,661 2,386,994
Federal Home Loan Bank stock 5,446,700 5,446,700
Interest receivable
Loans 930,963 745,584
Mortgage-backed securities 469,904 446,786
Other investment securities and interest-bearing deposits 846,003 580,693
Deferred income tax 5,026,690 2,034,327
Other assets 2,177,333 2,073,836
------------ ------------
Total assets $410,828,043 $366,448,104
============ ============
Liabilities
Deposits
Noninterest bearing $ 3,395,618 $ 2,484,444
Interest bearing 201,586,609 209,525,347
------------ ------------
Total deposits 204,982,227 212,009,791
Securities sold under repurchase agreements 4,600,000
Federal Home Loan Bank advances 103,937,608 33,263,455
Note payable 1,714,001 2,202,501
Due to broker 10,025,000
Interest payable 1,096,519 1,108,514
Other liabilities 2,754,552 1,731,061
------------ ------------
Total liabilities 319,084,907 260,340,322
------------ ------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, without par value
Authorized and unissued--2,000,000 shares
Common stock, without par value
Authorized--20,000,000 shares
Issued and outstanding--6,308,325 and 7,009,250 shares 61,853,916 68,879,373
Retained earnings 43,575,208 42,548,260
Accumulated other comprehensive income (loss) (5,065,649) 287,549
Unearned recognition and retention plan (RRP) shares (3,407,119)
Unearned employee stock ownership plan (ESOP) shares (5,213,220) (5,607,400)
------------ ------------
Total shareholders' equity 91,743,136 106,107,782
------------ ------------
Total liabilities and shareholders' equity $410,828,043 $366,448,104
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------
Interest and Dividend Income
<S> <C> <C> <C>
Loans receivable, including fees $16,865,580 $17,024,353 $22,369,033
Investment securities
Mortgage-backed securities 5,903,252 2,961,611 1,086,165
Other investment securities 4,273,404 1,033,105 773,033
Deposits with financial institutions 263,459 1,543,391 652,814
Dividend income 435,736 436,148 415,502
------------ ------------ ------------
Total interest and dividend income 27,741,431 22,998,608 25,296,547
------------ ------------ ------------
Interest Expense
Deposits 9,578,692 10,971,993 10,403,452
Short-term borrowings 189,914
Federal Home Loan Bank advances 4,178,146 2,854,876 5,248,400
------------ ------------ ------------
Total interest expense 13,946,752 13,826,869 15,651,852
------------ ------------ ------------
Net Interest Income 13,794,679 9,171,739 9,644,695
Provision for loan losses 383,902 172,757 297,555
------------ ------------ ------------
Net Interest Income After Provision for Loan Losses 13,410,777 8,998,982 9,347,140
------------ ------------ ------------
Other Income
Net realized and unrealized gains (losses) on loans 10,539 (61,074) 299,020
Net realized gains (losses) on sales of available-for-sale securities (3,904) 112,554 118,283
Equity in losses of limited partnerships (323,333) (514,003) (681,426)
Other income 930,667 833,400 674,139
------------ ------------ ------------
Total other income 613,969 370,877 410,016
------------ ------------ ------------
Other Expenses
Salaries and employee benefits 3,859,409 2,724,332 2,247,436
Net occupancy expenses 357,135 248,935 272,101
Equipment expenses 541,007 625,653 525,734
Deposit insurance expense 150,433 187,775 193,672
Data processing fees 735,771 657,991 581,087
Professional fees 209,387 200,796 237,819
Director and committee fees 223,634 319,404 226,538
Mortgage servicing rights amortization 124,340 280,214 66,784
Charitable contributions 21,537 2,022,567 31,912
Other expenses 1,108,454 842,197 702,305
------------ ------------ ------------
Total other expenses 7,331,107 8,109,864 5,085,388
------------ ------------ ------------
Income Before Income Tax and Extraordinary Item 6,693,639 1,259,995 4,671,768
Income tax expense (benefit) 2,346,116 (6,894) 1,158,560
------------ ------------ ------------
Income Before Extraordinary Item 4,347,523 1,266,889 3,513,208
Extraordinary item--early extinguishment of debt,
net of income taxes of $98,583 (150,303)
------------ ------------ ------------
Net Income $ 4,347,523 $ 1,116,586 $ 3,513,208
============ ============ ============
Basic Earnings per Share $ .71
============
Diluted Earnings per Share .71
============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Year Ended December 31 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $4,347,523 $1,116,586 $3,513,208
----------- ----------- ----------
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 $(3,512,727),
$(124,935) and $404,318 (5,355,556) (190,478) 616,429
Less: Reclassification adjustment for gains (losses)
included in net income, net of tax expense (benefit)
of $(1,546), $44,583 and $46,852 (2,358) 67,971 71,431
----------- ----------- ----------
(5,353,198) (258,449) 544,998
----------- ----------- ----------
Comprehensive income $(1,005,675) $ 858,137 $4,058,206
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Comprehensive Unearned
Shares Retained Income Unearned ESOP
Outstanding Amount Earnings (Loss) Compensation Shares Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 $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
Net income 4,347,523 4,347,523
Unrealized gains on securities, net of
reclassification adjustment (5,353,198) (5,353,198)
Purchase of common stock (700,925) (7,009,250) (1,663,342) (8,672,592)
ESOP shares earned 53,904 394,180 448,084
Contribution for unearned RRP shares $(3,716,977) (3,716,977)
Amortization of unearned
compensation expense (17,702) 309,858 292,156
Additional conversion costs (16,207) (16,207)
Cash dividends ($.28 per share) (1,693,435) (1,693,435)
--------------------------------------------------------------------------------------------
Balances, December 31, 1999 6,308,325 $61,853,916 $43,575,208 $(5,065,649) $(3,407,119) $(5,213,220) $91,743,136
============================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
Year Ended December 31 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 4,347,523 $ 1,116,586 $ 3,513,208
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 383,902 172,757 297,555
Common stock contributed to Lincoln Federal Charitable Foundation 2,000,000
Gain on sale of foreclosed real estate (2,498) (10,550) (17,297)
Loss on disposal of premises and equipment 4,219 13,190
Investment securities accretion, net (393,358) (43,449) (173)
Investment securities (gains) losses 3,904 (112,554) (118,283)
Equity in losses of limited partnerships 323,333 514,003 681,426
Amortization of net loan origination fees (321,642) (417,831) (318,087)
Depreciation and amortization 476,818 478,784 441,824
Deferred income tax benefit 518,817 (890,363) (48,394)
Amortization of unearned compensation expense 292,156
ESOP shares earned 448,084
Change in
Loans held for sale 19,502,357 1,353,983
Interest receivable (473,807) (240,098) 358,839
Interest payable (11,995) (45,003) 669,785
Other liabilities 210,274 313,544 242,329
Other assets (309,970) 98,626 143,797
Income taxes receivable/payable 356,049 98,386 (604,950)
----------- ----------- -----------
Net cash provided by operating activities 5,851,809 22,548,385 6,595,562
----------- ----------- -----------
Investing Activities
Net change in interest-bearing deposits 595,000
Purchases of securities available for sale (64,794,311) (81,482,573) (7,798,838)
Proceeds from sales of securities available for sale 10,259,375 21,088,545 54,532,285
Proceeds from maturities of securities available for sale 19,435,259 9,998,768 1,236,765
Proceeds from maturities of securities held to maturity 750,000 8,385,000 5,550,000
Purchase of loans (6,768,743) (999,737)
Other net changes in loans (30,533,720) (6,920,309) (20,033,888)
Purchase of premises and equipment (774,227) (1,046,344) (677,841)
Purchase of FHLB of Indianapolis stock (650,000)
Proceeds from sale of foreclosed real estate 224,378 318,017 157,901
Improvements to foreclosed real estate (151)
Contribution to limited partnership (195,000) (200,000)
Other investing activities (650,000) (378,759)
----------- ----------- -----------
Net cash provided (used) by investing activities (72,201,989) (50,503,896) 31,332,737
----------- ----------- -----------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand,
money market and savings deposits 7,825,832 6,694,106 4,449,683
Certificates of deposit (14,853,396) 1,463,861 (11,421,208)
Short-term borrowings 4,600,000
Proceeds from FHLB advances 105,634,899 15,000,000 73,400,000
Repayment of FHLB advances (34,960,746) (51,872,693) (94,496,337)
Payment on note payable to limited partnership (488,500) (488,500) (488,500)
Net change in advances by borrowers for taxes and insurance 142,770 (163,560) (213,140)
Cash dividends (1,233,628)
Contribution of unearned compensation (3,716,977)
Purchase of common stock (8,672,592)
Additional conversion costs (16,207)
Proceeds from sale of common stock, net of costs 61,271,973
----------- ----------- -----------
Net cash provided (used) by financing activities 54,261,455 31,905,187 (28,769,502)
----------- ----------- -----------
Net Change in Cash and Cash Equivalents (12,088,725) 3,949,676 9,158,797
Cash and Cash Equivalents, Beginning of Year 22,907,357 18,957,681 9,798,884
----------- ----------- -----------
Cash and Cash Equivalents, End of Year $10,818,632 $22,907,357 $18,957,681
=========== =========== ===========
Additional Cash Flows and Supplementary Information
Interest paid $13,958,747 $13,871,872 $14,982,067
Income tax paid 1,471,250 686,500 1,814,998
Loan balances transferred to foreclosed real estate 218,416 365,108 110,767
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.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield Indiana
(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.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(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, 1999, 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.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(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 have been computed based upon the weighted average common
shares outstanding during the year. Unearned ESOP shares have been excluded from
the computation of average shares outstanding. For the year ended December 31,
1999, basic and diluted earnings per share were $.71 based on shares outstanding
of 6,115,522 for both basic and diluted earnings per share. Options to purchase
596,095 shares of common stock at prices ranging from $11.47 to $12.50 per share
were outstanding at December 31, 1999, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the average
market price of the common shares. Net income per share for the periods before
the conversion to a stock savings bank on December 30, 1998, is not meaningful.
Reclassifications of certain amounts in the 1998 and 1997 consolidated financial
statements have been made to conform to the 1999 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. (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.
Note 3 -- Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 1999, was
$223,000.
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Note 4 -- Investment Securities
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $ 45,992 $4,386 $ 41,606
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 23,003 $112 313 22,802
Federal National Mortgage Association 4,593 42 4,551
Government National Mortgage Association 9,417 545 8,872
Collateralized mortgage obligations 48,003 2,632 45,371
Corporate obligations 23,256 32 615 22,673
---------------------------------------------------------------
Total available for sale 154,264 144 8,533 145,875
Held to maturity
Federal agencies 500 2 498
---------------------------------------------------------------
Total investment securities $154,764 $144 $8,535 $146,373
===============================================================
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------
<S> <C> <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 investment securities $130,050 $1,170 $680 $130,540
===============================================================
</TABLE>
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities at December 31, 1999, 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>
1999
-----------------------------------------------------------
Available for Sale Held to Maturity
-----------------------------------------------------------
Amortized Fair Amortized Fair
December 31 Cost Value Cost Value
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One to five years $ 8,003 $ 7,834 $500 $498
Five to ten years 25,650 23,818
Over ten years 35,595 32,627
-----------------------------------------------------------
69,248 64,279 500 498
Mortgage-backed securities 85,016 81,596
-----------------------------------------------------------
Totals $154,264 $145,875 $500 $498
===========================================================
</TABLE>
Securities with a carrying value of $4,700,000 were pledged at December 31, 1999
to secure securities sold under agreements to repurchase. Securities with a
carrying value of $119,002,000 and $97,503,000 were pledged at December 31, 1999
and 1998 to secure FHLB advances.
Proceeds from sales of securities available for sale during the years ended
December 31, 1999 and 1998 were $10,259,000, $21,089,000 and $54,500,000. Gross
gains of $77,000, $113,000 and $208,000 and gross losses of $81,000, $0 and
$90,000 for the years ended December 31, 1999, 1998 and 1997 were realized on
those sales.
Note 5 -- Loans and Allowance
December 31 1999 1998
--------------------------------------------------------------------------------
Real estate mortgage loans
One-to-four family $175,095 $152,893
Multi-family 1,029 1,022
Real estate construction loans 18,127 7,411
Commercial, industrial and agricultural loans 19,773 17,334
Consumer loans 28,554 22,014
-------- --------
242,578 200,674
Less
Undisbursed portion of loans 6,995 2,348
Deferred loan fees 822 893
Allowance for loan losses 1,761 1,512
-------- --------
Total loans $233,000 $195,921
======== ========
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Year Ended December 31 1999 1998 1997
--------------------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $1,512 $1,361 $1,241
Provision for losses 384 173 298
Recoveries on loans 6 335
Loans charged off (141) (357) (178)
-----------------------------------------
Balances, December 31 $1,761 $1,512 $1,361
=========================================
Information on impaired loans is summarized below.
December 31 1999 1998
--------------------------------------------------------------------------------
Impaired loans for which the discounted cash flows or
collateral value exceeds the carrying value of the loan $300 $300
==== ====
Year Ended December 31 1999 1998 1997
--------------------------------------------------------------------------------
Average balance of impaired loans $300 $951 $1,933
Interest income recognized on impaired loans 9 64
Cash-basis interest included above 9 64
Note 6 -- Premises and Equipment
December 31 1999 1998
--------------------------------------------------------------------------------
Land $ 881 $ 881
Buildings and land improvements 3,572 2,720
Furniture and equipment 2,177 1,778
Construction in progress 10 495
------ ------
Total cost 6,640 5,874
Accumulated depreciation (2,967) (2,495)
------ ------
Net $3,673 $3,379
====== ======
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Note 7 -- Investments In Limited Partnerships
The Company's investments in limited partnership of $2,064,000 and $2,387,000 at
December 31, 1999 and 1998 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 $373,000, $597,000 and $655,000 for the years ended December 31,
1999, 1998 and 1997. Condensed combined financial statements of the partnerships
are as follows:
December 31 1999 1998
--------------------------------------------------------------------------------
Assets
Cash $ 115 $ 202
Note receivable--limited partner 1,714 2,203
Land and property 9,219 9,339
Other assets 1,118 1,347
------- -------
Total assets $12,166 $13,091
------- -------
Liabilities
Notes payable $ 8,771 $ 9,041
Other liabilities 710 706
------- -------
Total liabilities 9,481 9,747
Partners' equity 2,685 3,344
------- -------
Total liabilities and partners' equity $12,166 $13,091
======= =======
Year Ended December 31 1999 1998 1997
--------------------------------------------------------------------------------
Condensed statement of operations
Total revenue $1,601 $1,575 $1,677
Total expenses (2,261) (2,644) (2,633)
------- ------- -------
Net loss $ (660) $(1,069) $ (956)
======= ======= =======
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Note 8 -- Deposits
December 31 1999 1998
--------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 3,396 $ 2,484
Interest-bearing demand 10,729 8,541
Money market savings deposits 41,745 32,942
Savings deposits 16,505 20,582
Certificates and other time
deposits of $100,000 or more 15,771 16,333
Other certificates and time deposits 116,836 131,128
-------- --------
Total deposits $204,982 $212,010
======== ========
Certificates and other time deposits
maturing in years ending December 31
2000 $ 74,942
2001 38,284
2002 17,336
2003 1,056
2004 989
--------
$132,607
========
Note 9 -- Securities Sold Under Repurchase Agreements
Securities sold under agreements to repurchase were $4,600,000 at December 31,
1999 and consist of obligations of the Company to other parties. The obligations
are secured by federal agencies and such collateral is held by a financial
services company. The maximum amount of outstanding agreements at any month-end
during 1999 totaled $4,6000,000, and the daily average of such agreements
totaled $3,680,000. The agreements at December 31, 1999, mature March 15, 2000.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Note 10 -- Federal Home Loan Bank Advances
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------
Weighted- Weighted-
Average Average
December 31 Amount Rate Amount Rate
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturities in years ending December 31
1999 $ 7,000 5.21%
2000 $ 23,250 4.05%
2002 10,000 5.67 10,000 5.67
2003 688 5.36 1,263 5.36
2008 15,000 5.53 15,000 5.53
2009 55,000 5.02
-------- -------
$103,938 4.94% $33,263 5.50%
======== =======
</TABLE>
The FHLB advances are secured by first mortgage loans and investment securities
totaling $289,949,000 and $245,344,000 at December 31, 1999 and 1998. 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 11 -- 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
--------------------------------------------------------------------------------
2000 $ 489
2001 489
2002 489
2003 247
------
$1,714
======
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Note 12 -- 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 1999 1998 1997
--------------------------------------------------------------------------------
Mortgage loan portfolio serviced for
FHLMC $71,991 $82,815 $84,879
Other investors 11,541 15,346 84
------- ------- -------
$83,532 $98,161 $84,963
======= ======= =======
The aggregate fair value of capitalized mortgage servicing rights at December
31, 1999 and 1998 totaled $487,000 and $605,000. 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 1999 1998 1997
--------------------------------------------------------------------------------
Mortgage Servicing Rights
Balances, January 1 $605 $530 $ 85
Servicing rights capitalized 6 355 512
Amortization of servicing rights (124) (280) (67)
---- ---- ----
Balances, December 31 $487 $605 $530
==== ==== ====
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Note 13 -- Income Tax
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit)
Currently payable
Federal $1,196 $532 $ 841
State 631 351 366
Deferred
Federal 552 (881) (58)
State (33) (9) 10
------ ------ ------
Total income tax expense (benefit) $2,346 $ (7) $1,159
====== ====== ======
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $2,276 $428 $1,588
Effect of state income taxes 395 226 248
Tax credits (373) (597) (655)
Other 48 (64) (22)
------ ------ ------
Actual tax expense (benefit) $2,346 $ (7) $1,159
====== ====== ======
Effective tax rate 35.1% (.5)% 24.8%
</TABLE>
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
The components of the deferred tax asset are as follows at:
December 31 1999 1998
--------------------------------------------------------------------------------
Assets
Depreciation $ 45 $ 38
Allowance for loan losses 748 643
Loan fees 19 58
Deferred director fees 414 375
Loss on limited partnerships 259 377
Business tax credits 95 549
Charitable contributions 374 591
Employee benefits 173
Securities available for sale 3,323
------ ------
Total assets 5,450 2,631
------ ------
Liabilities
State income tax (91) (79)
FHLB stock dividends (78) (79)
Mortgage servicing rights (203) (250)
Securities available for sale (189)
Other (32)
------ ------
Total liabilities (404) (597)
------ ------
5,046 2,034
Valuation Allowance (19)
------ ------
$5,027 $2,034
====== ======
The valuation allowance of December 31, 1999 is $19,000, all of which arose
during the current year.
At December 31, 1999, the Company had an unused business income tax credit
carryforward of $95,000 expiring in 2013 and a charitable contribution carryover
of $1,101,000 expiring in 2003.
Income tax expense (benefit) attributable to securities gains (losses) was
$(1,500), $45,000 and $47,000 for the years ended December 31, 1999, 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, 1999 was approximately $2,348,000.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Note 14 -- 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 1999 1998
--------------------------------------------------------------------------------
Loan commitments $23,397 $21,293
Standby letters of credit 86 366
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.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Note 15 -- Dividend and Capital Restrictions
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding retained net income for the current year plus those
for the previous two years. The Bank normally restricts dividends to a lesser
amount because of the need to maintain an adequate capital structure.
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
shareholders. 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, 1999, the shareholder's equity of the Bank was $72,503,000, of
which approximately $6,129,000 was available for the payment of dividends to the
Company.
Note 16 -- 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, 1999 and 1998,
the Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since December 31, 1999 that
management believes have changed the Bank's classification.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------
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) $79,330 35.4% $17,931 8.0% $22,414 10.0%
Tier I capital 1 (to risk-weighted assets) 77,569 34.6% 8,966 4.0% 13,448 6.0%
Core capital 1 (to adjusted total assets) 77,569 18.5% 16,771 4.0% 20,964 5.0%
Core capital 1 (to adjusted tangible assets) 77,569 18.5% 8,385 2.0% N/A
Tangible capital 1 (to adjusted total assets) 77,569 18.5% 6,289 1.5% N/A
1 As defined by regulatory agencies
December 31, 1998
------------------------------------------------------------------
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------------------
Total risk-based capital 1
(to risk-weighted assets) $78,815 41.4% $15,222 8.0% $19,027 10.0%
Tier I capital 1 (to risk-weighted assets) 77,303 40.6% 7,611 4.0% 11,416 6.0%
Core capital 1 (to adjusted total assets) 77,303 21.1% 14,624 4.0% 18,279 5.0%
Core capital 1 (to adjusted tangible assets) 77,303 21.1% 7,312 2.0% N/A
Tangible capital 1 (to adjusted total assets) 77,303 21.1% 5,484 1.5% N/A
</TABLE>
1 As defined by regulatory agencies
Note 17 -- 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, 1999 and 1998. Pension
benefit was $26,000 for the year ended December 31, 1997. 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 6 percent of W-2 earnings contributed by
participants. The Bank's expense for the plan was $47,000, $29,000 and $19,000
for the years ended December 31, 1999, 1998 and 1997.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(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 shareholders' equity. Unearned
ESOP shares totaled 521,322 and 560,740 at December 31, 1999 and 1998 and had a
fair value of $5,474,000 and $6,098,000 at December 31, 1999 and 1998. 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 are 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. ESOP expense
for the year ended December 31, 1999 was $448,000. There was no expense under
the ESOP for the year ended December 31, 1998. At December 31, 1999, the ESOP
had 39,418 allocated shares, 521,322 suspense shares and no committed-to-be
released shares. 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 Recognition
and Retention Plan (RRP). The Bank contributed $3,717,000 to the RRP for the
purchase of 280,370 shares of Company common stock, and effective July 6, 1999,
awards of grants for 233,724 of these shares were issued to various directors,
officers and employees of the Bank. The awards generally are to vest and be
earned by the recipient at a rate of 20 percent per year, commencing July 6,
2000. The unearned portion of these stock awards is presented as a reduction of
shareholders' equity. RRP expense for the year ended December 31, 1999 was
$292,000. There was no RRP expense for the year ended December 31, 1998.
Note 18 -- Stock Option Plan
Under the Company's incentive stock option plan, which is accounted for in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and related interpretations, the Company grants
selected executives and other key employees stock option awards which generally
vest at a rate of 20 percent a year. During 1999, the Company authorized the
grant of options for up to 700,925 shares of the Company's common stock. The
exercise price of each option, which has a 10-year life, was equal to the market
price of the Company's stock on the date of grant; therefore, no compensation
expense was recognized.
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
1999
--------------------------------------------------------------------------------
Risk-free interest rates 6.0 and 6.4%
Dividend yields 2.5%
Volatility factors of expected market price of common stock 11.5%
Weighted-average expected life of the options 8 years
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
1999
--------------------------------------------------------------------------------
Net income As reported $4,348
Pro forma 4,085
Basic earnings per share As reported .71
Pro forma .67
Diluted earnings per share As reported .71
Pro forma .67
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended December 31, 1999.
Year Ended December 31 1999
--------------------------------------------------------------------------------
Weighted-
Average
Options Shares Exercise Price
--------------------------------------------------------------------------------
Outstanding, beginning of year
Granted 596,095 $12.47
-------
Outstanding, end of year 596,095 12.47
=======
Options exercisable at year end 0
Weighted-average fair value of
options granted during the year $2.84
As of December 31, 1999, the 596,095 options outstanding have exercise prices
ranging from $11.47 to $12.50 and a weighted-average remaining contractual life
of 9.5 years.
Note 19 -- 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--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.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
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.
Securities Sold Under Repurchase Agreements--Securities sold under repurchase
agreements are short-term borrowing arrangements. The rates at December 31,
1999, approximate market rates, thus the fair value approximates carrying value.
FHLB Advances--The fair value of these borrowings is estimated using a
discounted cash flow calculation, based on current rates for similar debt.
Note Payable--Limited Partnership--The fair value of the borrowing is estimated
using a discounted cash flow calculation based on the prime interest rate.
Advance Payments by Borrowers for Taxes and Insurance--The fair value
approximates carrying value.
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage and consumer loans and standby letters of credit and are generally of a
short-term nature. The fair value of such commitments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing. The
carrying amounts of these commitments, which are immaterial, are reasonable
estimates of the fair value of these financial instruments.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $10,819 $10,819 $22,907 $22,907
Securities available for sale 145,875 145,875 129,276 129,276
Securities held to maturity 500 498 1,250 1,264
Loans, net 233,000 226,939 195,921 198,972
Stock in FHLB 5,447 5,447 5,447 5,447
Interest receivable 2,247 2,247 1,773 1,773
Liabilities
Deposits 204,982 203,819 212,010 212,903
Borrowings
Securities sold under repurchase agreements 4,600 4,600
FHLB advances 103,938 101,529 33,263 33,409
Note payable--limited partnership 1,714 1,456 2,203 1,872
Interest payable 1,097 1,097 1,109 1,109
Advances by borrowers for taxes and insurance 703 703 560 560
</TABLE>
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Note 20 -- 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 1999 1998
--------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 4
Short-term interest-bearing deposit with subsidiary 19,426 $ 27,900
-------- --------
Total cash and cash equivalents 19,430 27,900
Investment in common stock of subsidiary 72,503 77,590
Other assets 506 717
-------- --------
Total assets $ 92,439 $106,207
======== ========
Liabilities--other $ 696 $ 99
Shareholders' Equity 91,743 106,108
-------- --------
Total liabilities and shareholders' equity $ 92,439 $106,207
======== ========
Condensed Statement of Income
Year Ended December 31 1999 1998
--------------------------------------------------------------------------------
Income
Interest income on short-term interest-bearing
deposit with subsidiary $1,105 $ 215
Other income 267
------- --------
1,372 215
------- --------
Expenses
Interest expense 206
Charitable contribution 2,000
Other expenses 261
------- --------
Total expenses 261 2,206
------- --------
Income (loss) before income tax benefit and equity
in undistributed income of subsidiary 1,111 (1,991)
Income tax expense (benefit) 461 (677)
------- --------
Income (loss) before equity in
undistributed income of subsidiary 650 (1,314)
Equity in undistributed income of subsidiary 3,698 2,431
------- --------
Net Income $4,348 $1,117
====== ======
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 4,348 $ 1,117
Adjustments to reconcile net income to net cash
provided by operating activities
Charitable contribution of Company's common stock 2,000
Other (2,895) (3,049)
------- -------
Net cash provided by operating activities 1,453 68
------- -------
Investing Activity--capital contribution to subsidiary (33,440)
------- -------
Financing Activities
Proceeds from sale of common stock, net of costs 61,272
Repurchase of common stock (8,673)
Cash dividend (1,234)
Conversion costs (16)
------- -------
Net cash provided (used) by financing activities (9,923) 61,272
------- -------
Net Change in Cash and Cash Equivalents (8,470) 27,900
Cash and Cash Equivalents at Beginning of Year 27,900
------- -------
Cash and Cash Equivalents at End of Year $19,430 $27,900
======= =======
Additional Cash Flow and Supplementary Information
Common stock issued to ESOP leveraged with an employer loan $5,607
</TABLE>
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
Assets
<S> <C> <C>
Cash and due from banks $ 892,147 $ 2,576,080
Interest-bearing demand deposits in other banks 13,057,772 8,242,552
------------ ------------
Cash and cash equivalents 13,949,919 10,818,632
Investment securities
Available for sale 142,587,441 145,875,328
Held to maturity 500,000 500,000
------------ ------------
Total investment securities 143,087,441 146,375,328
Loans 242,053,043 234,760,885
Allowance for loan losses 1,813,577 1,760,706
------------ ------------
Net loans 240,239,466 233,000,179
Premises and equipment 3,643,095 3,672,650
Investments in limited partnerships 1,961,030 2,063,661
Federal Home Loan Bank stock 5,446,900 5,446,700
Interest receivable 2,293,301 2,246,870
Other assets 7,260,701 7,204,023
------------ ------------
Total assets $417,881,853 $410,828,043
============ ============
Liabilities
Deposits
Noninterest-bearing $ 3,824,423 $ 3,395,618
Interest-bearing 215,525,700 201,586,609
------------ ------------
Total deposits 219,350,123 204,982,227
Securities sold under repurchase agreements 4,600,000 4,600,000
Federal Home Loan Bank advances 100,937,608 103,937,608
Note payable 1,225,501 1,714,001
Interest payable 1,171,751 1,096,519
Other liabilities 3,346,977 2,754,552
------------ ------------
Total liabilities 330,631,960 319,084,907
------------ ------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, without par value
Authorized and unissued - 2,000,000 shares
Common stock, without par value
Authorized - 20,000,000 shares
Issued and outstanding - 5,872,725 and 6,308,325 shares 57,497,916 61,853,916
Retained earnings 43,840,190 43,575,208
Accumulated other comprehensive loss (5,721,347) (5,065,649)
Unearned recognition and retention plan ("RRP") shares (3,252,191) (3,407,119)
Unearned employee stock ownership plan ("ESOP") shares (5,114,675) (5,213,220)
------------ ------------
Total shareholders' equity 87,249,893 91,743,136
------------ ------------
Total liabilities and shareholders' equity $417,881,853 $410,828,043
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, December 31,
2000 1999
---------- ----------
Interest Income
<S> <C> <C>
Loans, including fees $4,568,457 $3,985,924
Investment securities 2,532,712 2,273,162
Deposits with financial institutions 129,007 107,206
Dividend income 108,341 107,442
---------- ----------
Total interest and dividend income 7,338,517 6,473,734
---------- ----------
Interest Expense
Deposits 2,447,219 2,460,864
Short term borrowings 61,922 11,056
Federal Home Loan Bank advances 1,463,348 655,802
---------- ----------
Total interest expense 3,972,489 3,127,722
---------- ----------
Net Interest Income 3,366,028 3,346,012
Provision (adjustment) for loan losses (21,872) 31,050
---------- ----------
Net Interest Income After Provision (Adjustment) for loan losses 3,387,900 3,314,962
---------- ----------
Other Income
Net realized and unrealized gains on loans 2,835
Net realized losses on sales of available-for-sale securities (3,904)
Equity in losses of limited partnerships (102,630) (82,471)
Other income 211,862 232,923
---------- ----------
Total other income 109,232 149,383
---------- ----------
Other Expenses
Salaries and employee benefits 1,167,103 803,358
Net occupancy expenses 99,257 73,313
Equipment expenses 137,537 143,783
Deposit insurance expense 11,968 47,671
Data processing fees 205,022 164,277
Professional fees 94,681 33,063
Director and committee fees 47,925 37,948
Mortgage servicing rights amortization 42,918 (17,084)
Other expenses 331,019 233,289
---------- ----------
Total other expenses 2,137,430 1,519,618
---------- ----------
Income Before Income Tax 1,359,702 1,944,727
Income tax expense 429,349 700,459
---------- ----------
Net Income $ 930,353 $1,244,268
========== ==========
Basic earnings per share $.17 $.19
========== ==========
Diluted earnings per share .17 .19
========== ==========
Dividends per share .08 .06
========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, December 31,
2000 1999
-------- -----------
<S> <C> <C>
Net Income $930,353 $1,244,268
-------- -----------
Other comprehensive income, net of tax
Unrealized losses on securities available for sale
Unrealized holding losses arising during the period, net of tax
benefit of $430,074 and $335,316 (655,698) (511,228)
Less: Reclassification adjustment for losses included in net
income, net of tax benefit of $1,546 (2,358)
-------- -----------
(655,698) (508,870)
-------- -----------
Comprehensive income $274,655 $ 735,398
======== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Three Months Ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Accumulated
---------------------------- Other Unearned
Shares Retained Comprehensive Unearned ESOP
Outstanding Amount Earnings Loss Compensation Shares Total
-------------- ------------- -------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1999 6,308,325 $ 61,853,916 $ 43,575,208 $ (5,065,649) $ (3,407,119) $(5,213,220) $ 91,743,136
Net income for the period 930,353 930,353
Unrealized losses on
securities, net of
reclassification
adjustment (655,698) (655,698)
Purchase of common stock (435,600) (4,356,000) (290,091) (4,646,091)
ESOP shares earned 6,504 98,545 105,049
Amortization of unearned
compensation expense (8,851) 154,928 146,077
Cash dividends
($.08 per share) (372,933) (372,933)
-------------- ------------- -------------- -------------- --------------- ------------- -------------
Balances, March 31, 2000 5,872,725 $ 57,497,916 $ 43,840,190 $ (5,721,347) $ (3,252,191) $(5,114,675) $ 87,249,893
============== ============= ============== ============== =============== ============= =============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------- -------------------
2000 1999
-------------------- -------------------
<S> <C> <C>
Operating Activities
Net income $ 930,353 $ 1,244,268
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Provision(adjustment) for loan losses (21,872) 31,050
Gain on sale of foreclosed real estate (6,902) (9,449)
Loss on disposal of premises and equipment 4,219
Investment securities accretion, net (87,086) (63,604)
Investment securities (gains) losses 3,904
Equity in losses of limited partnerships 102,630 82,471
Amortization of net loan origination fees (51,843) (97,066)
Depreciation and amortization 108,840 107,488
Deferred income tax benefit (9,337) 461,773
Amortization of unearned compensation expense 146,077
ESOP shares earned 105,049 108,399
Net change in:
Interest receivable (46,431) (423,730)
Interest payable 75,232 (55,029)
Other assets 416,649 (221,183)
Other liabilities (125,883) 23,572
Income taxes receivable/payable 242,987 529,017
-------------------- -------------------
Net cash provided by operating activities 1,778,463 1,726,100
-------------------- -------------------
Investing Activities
Purchases of securities available for sale (1,167,754) (64,794,311)
Proceeds from sales of securities available for sale 10,259,375
Proceeds from maturities of securities available for sale 3,456,954 6,312,166
Proceeds from maturities of securities held to maturity 500,000
Net change in loans (6,708,488) (10,978,307)
Purchases of loans (547,401) (3,993,635)
Purchase of FHLB of Indianapolis stock (200)
Purchases of property and equipment (79,285) (400,240)
Proceeds from sale of foreclosed real estate 63,304 54,907
-------------------- -------------------
Net cash used by investing activities (4,982,870) (63,040,045)
-------------------- -------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand,
money market and savings deposits 2,375,775 3,511,779
Certificates of deposit 11,992,121 (9,038,159)
Short-term borrowings 4,600,000
Proceeds from FHLB advances 45,000,000 55,000,000
Repayment of FHLB advances (48,000,000) (7,000,000)
Payment on note payable to limited partnership (488,500) (488,500)
Dividends paid (459,807)
Purchase of common stock (4,646,091)
Additional conversion costs (13,706)
Net change in advances by borrowers for taxes and insurance 562,196 561,007
-------------------- -------------------
Net cash provided by financing activities 6,335,694 47,132,421
-------------------- -------------------
Net Change in Cash and Cash Equivalents 3,131,287 (14,181,524)
Cash and Cash Equivalents, Beginning of Period 10,818,632 22,907,357
-------------------- -------------------
Cash and Cash Equivalents, End of Period $ 13,949,919 $ 8,725,833
==================== ===================
Additional Cash Flows and Supplementary Information
Interest paid $ 3,897,257 $ 3,182,751
Income tax paid 197,500 ---
Loan balances transferred to foreclosed real estate 90,317 ---
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
LINCOLN BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Lincoln Bancorp
(the "Company"), its wholly owned subsidiary, Lincoln Federal Savings Bank, a
federally chartered savings bank ("Lincoln Federal"), and Lincoln Federal's
wholly owned subsidiary, L-F Service Corporation ("L-F Service"). A summary of
significant accounting policies is set forth in Note 1 of Notes to Financial
Statements included in the December 31, 1999 Annual Report to Shareholders. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at March 31, 2000, and for the
three months ended March 31, 2000 and 1999, have not been audited by independent
accountants, but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows for such periods.
Note 2: Earnings Per Share
Earnings per share have been computed based upon the weighted average common
shares outstanding. Unearned Employee Stock Ownership Plan shares have been
excluded from the computation of average common shares outstanding.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Income available
to common shareholders $903,353 5,329,771 $.17 $1,244,268 6,453,437 $.19
===== =====
Effect of dilutive RRP
awards and stock options ---------------------- -----------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $903,353 5,329,771 $.17 $1,244,268 6,453,437 $.19
=========================================================================
</TABLE>
Note 3: Business Combinations
On March 21, 2000, the Company signed a definitive agreement to acquire Citizens
Bancorp, Frankfort, Indiana. The acquistion will be accounted for under the
purchase method of accounting. Under the terms of the agreements, the Company
will exchange .9375 shares of the Company's common stock and $9.375 in cash for
each share of Citizens' common stock. The transaction is subject to approval by
shareholders of Citizens Bancorp and appropriate regulatory agencies. As of
March 31, 2000, Citizens Bancorp had total assets and shareholders' equity of
$63,484,000 and $15,078,000, respectively.
<PAGE>
Citizens Bancorp and Subsidiaries
Frankfort, Indiana
Table of Contents
Independent auditor's report - Olive LLP.................................... 192
Independent auditor's report - Ernst & Young LLP............................ 193
Consolidated balance sheet as of June 30, 1999 and 1998..................... 194
Consolidated statement of income for the years ended
June 30, 1999, 1998 and 1997....................................... 195
Consolidated statement of shareholders' equity for the years ended
June 30, 1999, 1998 and 1997....................................... 196
Consolidated statement of cash flows for the years ended
June 30, 1999, 1998 and 1997....................................... 197
Notes to consolidated financial statements.................................. 198
Consolidated condensed statement of income as of March 31, 2000 and
June 30, 1999 (unaudited).......................................... 214
Consolidated condensed statement of income for the three months ended
March 31, 2000 and 1999 (unaudited)................................ 215
Consolidated condensed statement of income for the nine months ended
March 31, 2000 and 1999 (unaudited)................................ 216
Consolidated condensed statement of shareholders' equity
for the nine months ended
March 31, 2000 (unaudited)......................................... 217
Consolidated condensed statement of cash flows
for the nine months ended
March 31, 2000 and 1999 (unaudited)................................ 218
Notes to unaudited consolidated condensed financial statements.............. 219
<PAGE>
Independent Auditors' Report
To the Shareholders and
Board of Directors
Citizens Bancorp
We have audited the consolidated balance sheet of Citizens Bancorp and
subsidiaries as of June 30, 1999, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended. 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 audit. The financial statements as of June 30,
1998, and for the years ended June 30, 1998 and 1997, were audited by other
auditors whose report dated August 19, 1998, expressed an unqualified opinion on
those statements.
We conducted our audit 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 audit provides 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
Citizens Bancorp and subsidiaries as of June 30, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Olive LLP
Olive LLP
Indianapolis, Indiana
July 23, 1999
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders
Citizens Bancorp
We have audited the accompanying consolidated balance sheet of Citizens Bancorp
and subsidiaries as of June 30, 1998, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the two
years in the period ended June 30, 1998, These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citizens Bancorp
and subsidiaries at June 30, 1998, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
June 30, 1998, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
Indianapolis, Indiana
August 19, 1998
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 1999 1998
-----------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 443,757 $ 305,908
Interest-bearing demand deposits 152,289 443,673
------------ ------------
Cash and cash equivalents 596,046 749,581
Interest-bearing time deposits 1,485,972 1,782,985
Investment securities--available for sale 388,362 315,041
Loans, net of allowance for loan losses of $326,249 and $268,837 53,103,518 46,936,403
Land held for development 912,542 964,582
Cash surrender value of life insurance contracts 1,161,519 1,118,883
Premises and equipment 567,486 564,638
Federal Home Loan Bank stock 419,100 351,600
Other assets 835,264 657,956
------------ ------------
Total assets $ 59,469,809 $ 53,441,669
============ ============
Liabilities
Interest bearing deposits $ 36,976,322 $ 34,067,481
Federal Home Loan Bank advances 7,000,000 3,500,000
Other liabilities 604,632 706,162
------------ ------------
Total liabilities 44,580,954 38,273,643
------------ ------------
Equity Received From Contributions to the ESOP 248,891 122,440
------------ ------------
Shareholders' Equity
Preferred stock, no par value
Authorized and unissued--2,000,000 shares
Common stock, no par value
Authorized--5,000,000 shares
Issued and outstanding--881,114 and 973,360 shares 8,293,509 9,215,969
Unearned Recognition and Retention Plan ("RRP") (537,762) (641,117)
Retained earnings 6,902,537 6,467,337
Accumulated other comprehensive income (18,320) 3,397
------------ ------------
Total shareholders' equity 14,639,964 15,045,586
------------ ------------
Total liabilities and shareholders' equity $ 59,469,809 $ 53,441,669
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
Interest Income
<S> <C> <C> <C>
Loans receivable $ 4,228,607 $ 3,723,529 $ 3,210,018
Investment securities 42,868 36,918 119,730
Deposits with financial institutions 168,158 291,674 179,640
----------- ----------- -----------
Total interest income 4,439,633 4,052,121 3,509,388
----------- ----------- -----------
Interest Expense
Deposits 1,589,279 1,652,668 1,640,868
Borrowings 329,982 85,921 173,668
----------- ----------- -----------
Total interest expense 1,919,261 1,738,589 1,814,536
----------- ----------- -----------
Net Interest Income 2,520,372 2,313,532 1,694,852
Provision for loan losses 65,000 72,000 83,000
----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 2,455,372 2,241,532 1,611,852
----------- ----------- -----------
Other Income
Service charges on deposit accounts and other 135,542 141,983 138,342
Net realized losses on sales of available-for-sale securities (60,243)
Gain on sales of land held for development 15,747 180,174 17,307
Other income 58,498 62,443 63,426
----------- ----------- -----------
Total other income 209,787 384,600 158,832
----------- ----------- -----------
Other Expenses
Salaries and employee benefits 668,818 557,509 478,566
Net occupancy expenses 70,780 66,509 65,112
Equipment expenses 93,951 82,305 81,512
Data processing fees 140,865 122,584 107,764
Deposit insurance expense 23,685 23,115 258,685
Legal and professional fees 73,751 95,839 32,197
Other expenses 240,347 224,214 192,681
----------- ----------- -----------
Total other expenses 1,312,197 1,172,075 1,216,517
----------- ----------- -----------
Income Before Income Tax 1,352,962 1,454,057 554,167
Income tax expense 520,704 580,179 183,225
----------- ----------- -----------
Net Income $ 832,258 $ 873,878 $ 370,942
=========== =========== ===========
Basic Earnings per Share $ .87
===========
Diluted Earnings per Share $ .87
===========
Weighted Average Shares Outstanding 957,389
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned Accumulated
Common Stock Recognition Other
Shares Comprehensive Retained and Comprehensive
Outstanding Amount Income Earnings Retention Plan Income Total
----------- ------ ------ -------- -------------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1996 $5,319,852 $(50,853)$ 5,268,999
Comprehensive income
Net income $370,942 370,942 370,942
Other comprehensive income, net of tax
Unrealized gains on securities 50,853 50,853 50,853
---------
Comprehensive income $421,795
=========
------- -------- -------- --------- -------- ----------
Balances, June 30, 1997 5,690,794 5,690,794
Comprehensive income
Net income $873,878 873,878 873,878
Other comprehensive income, net of tax
Unrealized gains on securities 3,397 3,397 3,397
---------
Comprehensive income $877,275
=========
Sale of common stock 973,360 $9,215,969 9,215,969
Cash dividends ($.10 per share) (97,335) (97,335)
Purchase of shares for RRP $(666,957) (666,957)
RRP shares earned 25,840 25,840
------- -------- -------- --------- ----------
Balances, June 30, 1998 973,360 9,215,969 6,467,337 (641,117) 3,397 15,045,586
Comprehensive income
Net income $832,258 832,258 832,258
Other comprehensive income, net of tax
Unrealized losses on securities (21,717) (21,717) (21,717)
---------
Comprehensive income $810,541
=========
Cash dividends ($.23 per share) (215,140) (215,140)
RRP shares earned 103,355 103,355
Purchase of stock (92,246) (922,460) (181,918) (1,104,378)
------- -------- -------- --------- -------- ----------
Balances, June 30, 1999 881,114 $8,293,509 $6,902,537 $(537,762) $(18,320) $14,639,964
======= ========== ========== ========= ======== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 832,258 $ 873,878 $ 370,942
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 65,000 72,000 83,000
Depreciation and amortization 51,762 30,519 45,587
Deferred income tax (63,588) (101,594) (76,326)
Investment securities losses 60,243
ESOP and RRP shares earned 229,806 148,280
Net change in
Other assets and cash surrender value (142,110) 63,236 (158,418)
Other liabilities (106,575) 435,290 (58,854)
------------ ------------ ------------
Net cash provided by operating activities 866,553 1,521,609 266,174
------------ ------------ ------------
Investing Activities
Net change in interest-bearing deposits 297,013 693,015 (695,000)
Purchases of securities available for sale (109,284) (148,420) (65,481)
Proceeds from sales of securities available for sale 2,931,693
Net change in loans (6,232,115) (8,655,543) (4,222,435)
Proceeds from sale of loans 91,455
Purchases of premises and equipment (54,610) (29,833) (16,498)
Net change in land held for development 52,040 31,326 76,892
Purchase of FHLB stock (67,500) (20,000)
------------ ------------ ------------
Net cash used by investing activities (6,114,456) (8,129,455) (1,899,374)
------------ ------------ ------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits 3,308 (257,971) 304,545
Certificates of deposit 2,905,533 (2,029,761) 450,528
Proceeds from borrowings 7,000,000 3,500,000 14,500,000
Repayment of borrowings (3,500,000) (4,000,000) (13,500,000)
Cash dividends (210,095) (52,900)
Purchase of stock (1,104,378)
Sale of stock 9,215,969
Purchase of RRP shares (666,957)
------------ ------------ ------------
Net cash provided by financing activities 5,094,368 5,708,380 1,755,073
------------ ------------ ------------
Net Change in Cash and Cash Equivalents (153,535) (899,466) 121,873
Cash and Cash Equivalents, Beginning of Year 749,581 1,649,047 1,527,174
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 596,046 $ 749,581 $ 1,649,047
============ ============ ============
Additional Cash Flows Information
Interest paid $ 1,891,000 $ 1,781,000 $ 1,784,000
Income tax paid 910,097 262,538 431,009
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Citizens Bancorp ("Company"), its
wholly owned subsidiary, Citizens Savings Bank of Frankfort ("Bank") and the
Bank's wholly owned subsidiary, Citizens Loan and Service Corporation ("Service
Corp"), 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 revenue 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. As a federally chartered thrift, the
Bank is subject to regulation by the Office of Thrift Supervision, and the
Federal Deposit Insurance Corporation.
The Bank generates commercial mortgage, residential mortgage and consumer loans
and receives deposits from customers located primarily in Clinton County,
Indiana and surrounding counties. The Bank's loans are generally secured by
specific items of collateral including real property and consumer assets.
The Service Corp develops land for residential housing.
The Company was formed in June 1997 and purchased all of the stock of the Bank
with the proceeds of a subscription stock offering completed in September 1997.
Simultaneous to the stock offering, the Bank converted from a federally
chartered mutual savings bank to a federally chartered capital stock savings
bank. Prior to June 1997, the Company had no assets or liabilities. All
financial information prior to fiscal year 1998 relate to the Bank and Service
Corp only.
The Company issued 1,058,000 shares of common stock following the subscription
stock offering. Net proceeds to the Company were $9,215,969 of which $5,031,185
was paid to the Bank in exchange for all of the common stock of the Bank.
Expenses related to the offering totaled $517,631, and $846,400 was loaned by
the Company to the Employee Stock Ownership Plan ("ESOP").
Consolidation--The consolidated financial statements include the accounts of the
Company and subsidiaries after elimination of all material intercompany
transactions.
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 or included in the trading account
and marketable equity securities 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.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Bank will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Loans where payments have insignificant
delays not exceeding 90 days outstanding are not considered impaired. Certain
nonaccrual and substantially delinquent loans may be considered to be impaired.
The Bank 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. Mortgage loans are placed on nonaccrual
status when they become 90 days delinquent. 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 June
30, 1999 the allowance for loan losses is adequate based on information
currently available. A worsening or protracted economic decline in the areas
within which the Bank 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 principally computed using both the straight-line method and the
declining balance method based on the estimated useful lives of the assets.
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 ("FHLB") stock is a required investment for institutions
that are members of the Federal Home Loan Bank system. The required investment
in the common stock is based on a predetermined formula.
Stock options are granted for a fixed number of shares with an exercise price
equal to the fair value of the shares at the date of grant. The Company accounts
for and will continue to account for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
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.
Earnings per share have been computed based upon the weighted average common
shares outstanding during the year ended June 30, 1999. Unearned ESOP shares
have been excluded from the computation of average common shares outstanding.
Historical earnings per share information is not presented on the 1998 and 1997
consolidated statements of income because it is not meaningful due to the stock
offering occurring in September 1997.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications of certain amounts in the 1998 and 1997 consolidated financial
statements have been made to conform to the 1999 presentation.
Note 2 -- Investment Securities Available for Sale
Investment securities available for sale at June 30, 1999 and 1998 consist of
marketable equity securities. At June 30, 1999 and 1998, the securities have a
fair value of $388,362 and $315,041, and an amortized cost of $418,699 and
$309,416, respectively. The gross unrealized gain (loss) was $(30,337) and
$5,625 at June 30, 1999 and 1998, respectively.
Note 3 -- Loans and Allowance
June 30 1999 1998
--------------------------------------------------------------------------------
Commercial real estate $ 3,341,351 $ 3,656,862
Real estate loans 41,663,334 35,928,334
Construction loans 1,383,500 611,000
Individuals' loans for household
and other personal expenditures 7,764,172 7,064,802
Other loans 149,313 149,973
------------ ------------
54,301,670 47,410,971
Allowance for loan losses (326,249) (268,837)
Deferred loan fees and costs, net (125,608) (109,376)
Undisbursed portion of loans (746,295) (96,355)
------------ ------------
Total loans $ 53,103,518 $ 46,936,403
============ ============
Year Ended June 30 1999 1998 1997
--------------------------------------------------------------------------------
Allowance for loan losses
Balances, beginning of year $ 268,837 $ 211,635 $ 138,606
Provision for losses 65,000 72,000 83,000
Recoveries on loans 4,910 1,645 1,626
Loans charged off (12,498) (16,443) (11,597)
--------- --------- ---------
Balances, end of year $ 326,249 $ 268,837 $ 211,635
========= ========= =========
Note 4 -- Land Held for Development
The Company, through the Service Corp, has been developing approximately 59
acres of land for a three phase residential housing addition in Frankfort,
Indiana. In January 1992, the Bank received regulatory approval of a plan to
develop this land. During the years ended June 30, 1999, 1998 and 1997,
approximately $30,600, $34,000 and $68,000, respectively, were expended to
create the infrastructure for the development, to provide further improvements
to the first and second phase of the project, and to capitalize interest. During
the years ended June 30, 1999, 1998 and 1997, approximately $98,000, $69,000,
and $166,000, respectively, was received from the sale of lots in the
development resulting in gains from sale of these lots of approximately $16,000,
$9,000, and $17,000, for each year, respectively. The Service Corp owns an
additional 45 acres of land for future development.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1998, land not included in the above development
was sold for proceeds equaling $177,000 resulting in a gain from the sale of
$172,000.
Note 5 -- Premises and Equipment
June 30 1999 1998
--------------------------------------------------------------------------------
Land $ 137,307 $ 137,307
Buildings 647,154 647,154
Equipment 329,406 274,796
----------- -----------
Total cost 1,113,867 1,059,257
Accumulated depreciation (546,381) (494,619)
----------- -----------
Net $ 567,486 $ 564,638
=========== ===========
Note 6 -- Deposits
June 30 1999 1998
--------------------------------------------------------------------------------
Demand deposits $ 4,714,398 $ 4,569,764
Savings deposits 9,361,971 9,503,297
Certificates of $100,000 or more 4,973,049 2,314,074
Other certificates 17,926,904 17,680,346
----------- -----------
Total deposits $36,976,322 $34,067,481
=========== ===========
Certificates maturing in years ending June 30
2000 $11,489,597
2001 7,415,908
2002 2,892,761
2003 262,288
2004 352,339
Thereafter 487,060
-----------
$22,899,953
===========
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 -- Borrowings
June 30 1999 1998
--------------------------------------------------------------------------------
Federal Home Loan Bank advances, at fixed
and variable rates ranging
from 4.90% to 6.06%, due at various
dates through October 7, 2008 $7,000,000 $3,500,000
========== ==========
The Federal Home Loan Bank advances are secured by first-mortgage loans totaling
$42,274,000. The Company is required to maintain eligible loans in its portfolio
of at least 170% of outstanding advances as collateral for advances from the
FHLB. Advances are subject to restrictions or penalties in the event of
prepayment.
Maturities in years ending June 30
--------------------------------------------------------------------------------
2000 $1,000,000
2008 6,000,000
----------
$7,000,000
==========
<TABLE>
<CAPTION>
Note 8 -- Income Tax
Year Ended June 30 1999 1998 1997
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $ 460,153 $ 550,558 $ 204,275
State 124,139 131,215 55,276
Deferred
Federal (52,331) (80,259) (62,054)
State (11,257) (21,335) (14,272)
--------- --------- ---------
Total income tax expense $ 520,704 $ 580,179 $ 183,225
========= ========= =========
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 460,007 $ 494,379 $ 188,417
Effect of state income taxes 74,502 72,521 27,063
Other (13,805) 13,279 (32,255)
--------- --------- ---------
Actual tax expense $ 520,704 $ 580,179 $ 183,225
========= ========= =========
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
June 30 1999 1998
--------------------------------------------------------------------------------
Assets
Allowance for loan losses $107,796 $114,256
Loan fees 151,136 137,596
Pensions and employee benefits 193,807 151,592
Other 16,103 24,336
Capital loss carryover 25,604 25,604
-------- --------
Total assets 494,446 453,384
-------- --------
Liabilities
Loan costs 97,753 91,112
FHLB stock dividend 27,132 27,132
Other 28,184 29,189
-------- --------
Total liabilities 153,069 147,433
-------- --------
$341,377 $305,951
======== ========
Retained earnings include approximately $1,349,000 for which no deferred income
tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of June 30, 1988 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses
including redemption of bank stock or excess dividends, or loss of "bank"
status, 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 was approximately $459,000.
Note 9 -- Other Comprehensive Income
<TABLE>
<CAPTION>
1999
---------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during the year $(35,961) $14,244 $(21,717)
======== ======= ========
1998
---------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Expense Amount
----------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $5,625 $(2,228) $3,397
====== ======= ======
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Year Ended June 30 Amount Benefit Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gains arising during the year $23,964 $ (9,492) $14,472
Less: reclassification adjustment for losses
realized in net income (60,243) 23,862 (36,381)
------- -------- -------
Net unrealized gains $84,207 $(33,354) $50,853
======= ======== =======
</TABLE>
Note 10 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying financial statements. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit is represented by the contractual
or notional amount of those instruments. The Bank uses the same credit policies
in making such commitments as it does for instruments that are included in the
consolidated balance sheet.
Financial instruments whose contract amount represents credit risk consist
solely of commitments to extend credit, and these commitments totalled
$3,565,000 and $2,959,000 as of June 30, 1999 and 1998, respectively.
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 Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
The Company and subsidiaries 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 resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.
Note 11 -- Year 2000
Like all entities, the Company and subsidiaries 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 and is continuing its efforts
to identify and remediate 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 subsidiaries do business. If remediation efforts of the Company
or third parties with which the Company and subsidiaries 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.
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 -- Dividend and Capital Restrictions
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding net profits (as defined) for the current calendar year
to date plus those for the previous two years which amounts to $1,994,000. The
Bank normally restricts dividends to a lessor amount because of the need to
maintain an adequate capital structure.
At the time of conversion, a liquidation account was established in an amount
equal to the Bank's 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 Bank 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
shareholders. 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 approximately
$5,691,000. At June 30, 1999, total shareholder's equity of the Bank was
$11,300,845.
Note 13 -- Stock Transactions
During the year ended June 30, 1999, the Company's Board of Directors approved
the repurchase of 52,900 of the Company's shares of common stock outstanding.
The Company repurchased 52,900 shares under this plan during the year ended June
30, 1999. Additionally, the Company's Board of Directors approved the repurchase
of an additional 50,255 shares of the Company's outstanding shares of common
stock. These purchases will be made subject to market conditions in the open
market or block transactions. At June 30, 1999, the Company has repurchased
39,346 shares under this plan.
Note 14 -- 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 ratios that are calculated according
to the regulations. 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 June 30, 1999 and 1998, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 1999 that
management believes have changed the Bank's classification.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
------------------- -------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999
Total risk-based capital 1
(to risk-weighted assets) $10,714,000 29.0% $2,957,000 8.0% $3,696,000 10.0%
Tier 1 risk-based capital 1
(to risk-weighted assets) 10,388,000 28.1% 2,957,000 8.0% 3,696,000 10.0%
Core capital 1
(to adjusted tangible assets) 10,388,000 17.8% 1,751,000 3.0% 3,502,000 6.0%
Core capital 1
(to adjusted total assets) 10,388,000 17.8% 1,751,000 3.0% 2,919,000 5.0%
As of June 30, 1998
Total risk-based capital 1
(to risk-weighted assets) $9,554,000 29.2% $2,614,000 8.0% $3,267,000 10.0%
Tier 1 risk-based capital 1
(to risk-weighted assets) 9,285,000 28.4% 2,614,000 8.0% 3,267,000 10.0%
Core capital 1
(to adjusted tangible assets) 9,285,000 17.7% 1,574,000 3.0% 3,149,000 6.0%
Core capital 1
(to adjusted total assets) 9,285,000 17.7% 1,574,000 3.0% 2,624,000 5.0%
</TABLE>
1 As defined by regulatory agencies
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 -- Employee Benefit Plans
The Bank provides pension benefits for substantially all of the Bank's employees
and is a participant in a pension fund known as the Pentegra Group. The plan is
accounted for as a multi-employer plan. Pension expense was $1,708; $1,649; and
$20,556 for 1999, 1998 and 1997.
The Bank has purchased keyman life insurance on certain officers, which
insurance had a cash value of $1,161,519 and $1,118,883 at June 30, 1999 and
1998. The Bank has also approved arrangements that provide additional retirement
benefits to certain officers covered by the keyman policies. The benefits to be
paid will be funded primarily by the keyman policies and are being accrued over
the period of active service to eligibility dates. The accrual of benefits
totaled $7,079, $16,700, and $74,300 for 1999, 1998 and 1997.
The Bank has a Recognition and Retention Plan ("RRP"). Effective on March 24,
1998, awards of grants for 32,798 shares were issued to various directors and
officers of the Bank. These awards generally are to vest and be earned by the
recipient at a rate of 20 percent per year, commencing March 24, 1999. The
expense under the RRP was $103,355 and $26,000 for the years ended June 30, 1999
and 1998.
An ESOP covers substantially all employees of the Bank. The ESOP acquired 84,640
shares at $10.00 per share in the conversion with funds provided by a loan from
the Company. The ESOP provides for the Company to issue a put option ("option")
to any participant who receives a distribution of Company stock. The option
permits the participant to sell the stock to the Company at any time during two
option periods, as defined in the plan, at the fair market value of the stock.
Accordingly, the $846,400 of stock acquired by the ESOP was reflected as a
reduction to the ESOP equity accounts. Unearned ESOP shares totaled 66,192 and
76,506 at June 30, 1999 and 1998 and had a fair value of $835,674 at June 30,
1999 and $1,099,774 at June 30, 1998. Shares are released to participants
proportionately as the loan is repaid. Dividends on allocated shares are
recorded as dividends and charged to retained earnings. Cash dividends on
unallocated shares will be applied to principal and interest due on the loan.
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 Bank, are made to the ESOP. The expense under the ESOP was $126,451 and
$122,440 for the years ended June 30, 1999 and 1998. At June 30, 1999 and 1998,
the ESOP had 13,414 and 2,855 allocated shares and 71,226 and 81,785 suspense
shares.
Below are the transactions affecting the ESOP equity accounts:
Additional Unearned
Common Paid-in ESOP
Stock Capital Shares Total
-------- ------- --------- --------
Common stock acquired by ESOP $846,400 $(846,400)
ESOP shares earned $41,100 81,340 $122,440
-------- ------- --------- --------
Balance, June 30, 1998 846,400 41,100 (765,060) 122,440
ESOP shares earned 23,311 103,140 126,451
-------- ------- --------- --------
Balance, June 30, 1999 $846,400 $64,411 $(661,920) $248,891
======== ======= ========= ========
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 -- Related Party Transactions
The Bank has entered into transactions with certain directors, executive
officers, significant shareholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The aggregate
amount of loans, as defined, to such related parties were as follows:
--------------------------------------------------------------------------------
Balances, July 1, 1998 $ 2,766,000
New loans, including renewals 710,000
Payments, etc., including renewals (382,000)
-----------
Balances, June 30, 1999 $ 3,094,000
===========
Note 17 -- Stock Option Plan
Under the Company's stock option plan approved in 1998, which is accounted for
in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, and related interpretations, the Company grants
key employees and directors stock option awards which vest and become fully
exercisable at the end of five years of continued employment. During the year
ended June 30, 1998, the Company authorized the grant of options for up to
105,800 shares of the Company's common stock. The exercise price of each option,
which has a ten-year life, must be equal to the market price of the Company's
stock on the date of grant; therefore, no compensation expense is recognized.
Although the Company has elected to follow APB No. 25, Statement of Financial
Accounting Standards (SFAS) No. 123 requires pro forma disclosures of net income
and earnings per share as if the Company had accounted for its employee stock
options under that Statement. The fair value of each option grant in 1998 was
estimated on the grant date using an option-pricing model with the following
assumptions:
1998
-------------------------------------------------------------------------------
Risk-free interest rates 5.38%
Dividend yields 1.31%
Volatility factors of expected market price of common stock 19.9%
Weighted-average expected life of the options 8 years
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
1999 1998
--------------------------------------------------------------------------------
Net income As reported $832,258 $873,878
Pro forma 764,779 860,909
Basic earnings per share As reported .87
Pro forma .80
Diluted earnings per share As reported .87
Pro forma .80
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998
--------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Options Shares Exercise Price Shares Exercise Price
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 81,995 $15.25
Granted 81,995 $15.25
------- -------
Outstanding, end of year 81,995 $15.25 81,995 $15.25
======= =======
Options exercisable at year end 16,399
Weighted-average fair value of
options granted during the year $4.86
</TABLE>
As of June 30, 1999, the options outstanding have an exercise price of $15.25
and a weighted-average remaining contractual life of nine years.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1999
----------------------------------------------------------
Weighted-
Net Average Per-Share
Income Shares Amount
-----------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
<S> <C> <C> <C>
Income available to common shareholders $832,258 957,389 $.87
Effect of Dilutive Securities
Stock options ---
------------------------------
Diluted Earnings Per Share
Income available to common shareholders
and assumed conversions $832,258 957,389 $.87
======== ======= =====
</TABLE>
Options to purchase 81,995 shares of common stock at $15.25 per share were
outstanding at June 30, 1999, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
Note 19 -- 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.
Interest-bearing Time Deposits--The fair value of interest-bearing time deposits
approximates carrying value.
Securities--Fair values are based on quoted market prices.
Loans--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other 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.
Cash Surrender Value Of Life Insurance Contracts--The fair value of cash
surrender value of life insurance contracts approximates carrying value.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposits--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. Fair values for fixed-rate 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.
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
-------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and due from banks $443,757 $443,757 $305,908 $305,908
Interest-bearing demand deposits 152,289 152,289 443,673 443,673
Interest-bearing time deposits 1,485,972 1,482,703 1,782,985 1,782,985
Investment securities available for sale 388,362 388,362 315,041 315,041
Loans 53,103,518 53,256,987 46,936,403 49,410,000
Cash surrender value of life insurance 1,161,519 1,161,519 1,118,883 1,118,883
Stock in FHLB 419,100 419,100 351,600 351,600
Liabilities
Deposits 36,976,322 36,891,592 34,067,481 34,219,000
FHLB advances 7,000,000 6,633,200 3,500,000 3,500,000
</TABLE>
Note 20 -- Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------
First Second Third Fourth
June 30 Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $1,081,463 $1,142,129 $1,100,223 $1,115,818
Interest expense 456,555 513,181 472,086 477,439
Net interest income 624,908 628,948 628,137 638,379
Provision for loan losses 15,000 20,000 15,000 15,000
Net income 186,190 194,103 227,273 224,692
Basic earnings per share 0.19 0.20 0.24 0.24
Diluted earnings per share 0.19 0.20 0.24 0.24
1998
--------------------------------------------------------------------------
First Second Third Fourth
June 30 Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------------------------------------------
Interest income $ 940,672 $1,016,436 $1,030,593 $1,064,419
Interest expense 466,234 412,866 422,213 437,276
Net interest income 474,438 603,570 608,380 627,143
Provision for loan losses 12,000 28,000 17,000 15,000
Net income 266,888 197,795 217,512 191,683
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21 -- 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
<TABLE>
<CAPTION>
June 30 1999 1998
------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 2,648,829 $ 4,014,235
Investment securities available for sale 209,706 145,000
ESOP loan receivable 740,600 825,240
Investment in common stock of subsidiaries 11,300,845 10,237,433
Other assets 57,321 43,248
------------ ------------
Total assets $ 14,957,301 $ 15,265,156
============ ============
Liabilities $ 68,446 $ 97,130
Equity Received from ESOP 248,891 122,440
Shareholders' Equity 14,639,964 15,045,586
------------ ------------
Total liabilities and shareholders' equity $ 14,957,301 $ 15,265,156
============ ============
Condensed Statement of Income
Year Ended June 30 1999 1998
------------------------------------------------------------------------------------------------
Income--interest and dividends $ 107,342 $ 109,164
Expenses 108,692 115,814
------------ ------------
Loss before income tax and equity in undistributed
income of subsidiaries (1,350) (6,650)
Income tax expense -- --
------------ ------------
Loss before equity in undistributed income of subsidiaries (1,350) (6,650)
Equity in undistributed income of subsidiaries 833,608 880,528
------------ ------------
Net Income $ 832,258 $ 873,878
============ ============
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 832,258 $ 873,878
Adjustments to reconcile net income to net cash provided
by operating activities (862,117) (873,312)
------------ ------------
Net cash provided (used) by operating activities (29,859) 566
------------ ------------
Investing Activities
Purchase of securities available for sale (100,669) (139,375)
Loan to ESOP (846,400)
ESOP loan repayment 84,640 21,160
------------ ------------
Net cash used by investing activities (16,029) (964,615)
------------ ------------
Financing Activities
Cash dividends (215,140) (52,900)
Sale of stock 10,062,369
Purchase of stock (1,104,378)
Acquisition of subsidiary stock (5,031,185)
------------ ------------
Net cash provided (used) by financing activities (1,319,518) 4,978,284
------------ ------------
Net Change in Cash and Cash Equivalents (1,365,406) 4,014,235
Cash and Cash Equivalents at Beginning of Year 4,014,235
------------ ------------
Cash and Cash Equivalents at End of Year $ 2,648,829 $ 4,014,235
============ ============
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---- ----
(Unaudited) (Note A)
Assets
<S> <C> <C>
Cash and due from banks $ 607 $ 444
Interest-bearing demand deposits 867 152
------- -------
Cash and cash equivalents 1,474 596
Interest-bearing time deposits 1,486 1,486
Investment securities - available for sale 391 388
Loans receivable, net of allowance for loan
losses of $340,000 and $326,000 55,969 53,104
Land held for development 868 913
Cash surrender value of life insurance contracts 1,194 1,162
Premises and equipment 560 567
Federal Home Loan Bank stock 625 419
Other assets 917 835
------- -------
Total assets $63,484 $59,470
======= =======
Liabilities
Deposits $36,323 $36,976
Federal Home Loan Bank advances 11,000 7,000
Other liabilities 740 605
------- -------
Total liabilities 48,063 44,581
------- -------
Equity Received From Contributions to the ESOP 343 249
------- -------
Shareholders' Equity
Preferred stock , no par value
Authorized and unissued - 2,000,000 shares -- --
Common Stock , no par value
Authorized - 5,000,000 shares
Issued and outstanding - 874,761 and 881,114 shares 8,230 8,293
Unearned Recognition and Retention Plan ("RRP") (440) (538)
Retained Earnings 7,309 6,903
Accumulated other comprehensive income (loss) (21) (18)
------- -------
Total shareholders' equity 15,078 14,640
------- -------
Total liabilities and shareholders' equity $63,484 $59,470
======= =======
</TABLE>
See notes to consolidated unaudited financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
-------- --------
(Unaudited)
Interest income:
<S> <C> <C>
Loans receivable $ 1,134 $ 1,056
Investment securities 16 10
Deposits with financial institutions 34 34
-------- --------
Total interest income 1,184 1,100
-------- --------
Interest expense:
Interest on deposits 368 381
Interest on borrowings 163 91
-------- --------
Total interest expense 531 472
-------- --------
Net interest income 653 628
Provision for loan losses 15 15
-------- --------
Net interest income after provision for loan losses 638 613
-------- --------
Other income:
Service charges on deposit accounts and other 32 31
Gain on sales of land held for development --- 2
Other income 19 14
-------- --------
Total other income 51 47
-------- --------
Other expenses:
Salaries and employee benefits 182 157
Net occupancy expenses 17 17
Equipment expenses 27 24
Data processing fees 35 33
Deposit insurance expense 2 6
Legal and professional fees 12 7
Other expenses 75 57
-------- --------
Total other expenses 350 301
-------- --------
Income before income tax 339 359
Income tax expense 122 132
-------- --------
Net income $ 217 $ 227
======== ========
Basic earnings per share $ .24 $ .24
Diluted earnings per share $ .24 $ .24
Weighted average shares outstanding 899,441 949,507
</TABLE>
See notes to consolidated unaudited financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended March 31,
2000 1999
-------- --------
(Unaudited)
Interest income:
<S> <C> <C>
Loans receivable $ 3,327 $ 3,153
Investment securities 44 30
Deposits with financial institutions 88 141
-------- --------
Total interest income 3,459 3,324
-------- --------
Interest expense:
Interest on deposits 1,126 1,204
Interest on borrowings 422 238
-------- --------
Total interest expense 1,548 1,442
-------- --------
Net interest income 1,911 1,882
Provision for loan losses 45 50
-------- --------
Net interest income after provision for loan losses 1,866 1,832
-------- --------
Other income:
Service charges on deposit accounts and other 101 102
Gain on sales of land held for development 10 13
Other income 50 43
-------- --------
Total other income 161 158
-------- --------
Other expenses:
Salaries and employee benefits 539 490
Net occupancy expenses 49 52
Equipment expenses 72 66
Data processing fees 100 103
Deposit insurance expense 14 18
Legal and professional fees 49 65
Other expenses 200 181
-------- --------
Total other expenses 1,023 975
-------- --------
Income before income tax 1,004 1,015
Income tax expense 395 407
-------- --------
Net income $ 609 $ 608
======== ========
Basic earnings per share $ .68 $ .63
Diluted earnings per share $ .68 $ .63
Weighted average shares outstanding 900,214 967,852
</TABLE>
See notes to consolidated unaudited financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Unearned Accumulated
Common Stock Recognition Other Total
Shares Comprehensive Retained and Comprehensive Shareholders'
Outstanding Amount Income Earnings Retention Plan Income (Loss) Equity
----------- ------ ------ -------- -------------- --------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1999 881,114 $ 8,293 $ 6,903 $(538) $ (18) $ 14,640
Comprehensive
income
Net income $609 609 609
Unrealized gains (losses)
on securities, net of tax (3) (3) (3)
-------
Comprehensive income $606
=======
Cash dividends (187) (187)
($0.21 per share)
Purchase of stock (6,353) (63) (16) (79)
RRP shares earned 98 98
------------------------- -------------------------------------------------------
Balance, March 31, 2000 874,761 $ 8,230 $ 7,309 $(440) $ (21) $ 15,078
========================= =======================================================
</TABLE>
See notes to consolidated unaudited financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended March 31,
2000 1999
------ ------
(Unaudited)
Operating activities:
<S> <C> <C>
Net income $ 609 $ 608
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 45 50
Depreciation and amortization 42 34
Deferred federal income tax credit --- 3
ESOP/RRP shares earned 192 173
Net change in
Other assets and cash surrender value (114) (125)
Other liabilities 127 (338)
------ ------
Net cash provided by operating activities 901 405
------ ------
Investing activities:
Net change in interest-bearing deposits --- 297
Purchases of securities available for sale (7) (107)
Net change in loans (2,910) (4,381)
Purchases of premises and equipment (35 (37)
Net change in land held for development 45 42
Purchase of FHLB stock (206) ---
------ ------
Net cash used by investing activities (3,113) (4,186)
------ ------
Financing activities:
Net change in
Demand and savings deposits 82 32
Certificates of deposit (735) 2,545
Proceeds from borrowings 6,500 6,500
Repayment of borrowings (2,500) (4,000)
Purchase of stock (79) (482)
Cash dividends (178) (154)
------ ------
Net cash provided by financing activities 3,090 4,441
------ ------
Net change in cash and cash equivalents 878 660
Cash and cash equivalents at beginning of period 596 750
------ ------
Cash and cash equivalents at end of period $1,474 $1,410
====== ======
</TABLE>
See notes to consolidated unaudited financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE A: Basis of Presentation
The unaudited interim consolidated financial statements include the accounts of
Citizens Bancorp ("Company") and its wholly-owned subsidiary, Citizens Savings
Bank of Frankfort ("Citizens").
The unaudited interim consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and disclosures required by generally accepted accounting principles
for complete financial statements. The significant accounting policies followed
by the Company and Citizens for interim financial reporting are consistent with
the accounting policies followed for annual financial reporting. All
adjustments, consisting of normal recurring adjustments, which in the opinion of
management are necessary for a fair presentation of the results for the periods
reported, have been included in the accompanying consolidated financial
statements. The results of operations for the three- and nine-month periods
ended March 31, 2000 are not necessarily indicative of those expected for the
remainder of the year.
The balance sheet at June 30, 1999, has been derived from the audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
NOTE B: Conversion to Federal Stock Savings Bank
In April, 1997, the Board of Directors adopted a Plan of Conversion ("Plan") to
convert Citizens from a federal-chartered mutual savings bank to a
federal-chartered stock savings bank (the "Conversion"). The Plan provided for
the sale of Citizens' capital stock to the Company, which was formed in
connection with the Conversion.
On September 18, 1997, Citizens completed the Conversion and the formation of
the Company as the holding company of Citizens. As part of the Conversion, the
Company issued 1,058,000 shares of common stock at $10 per share of which 84,640
shares were issued to an Employee Stock Ownership Plan (the "ESOP"). Net
proceeds of the Company's stock issuance, after costs, were approximately
$9,216,000 of which $5,031,000 was used to acquire 100% of the stock and
ownership of Citizens. Costs associated with the Conversion were deducted from
the proceeds of stock sold by the Company. The transaction was accounted for in
a manner similar to a pooling of interests.
At the date of the Conversion, Citizens established a liquidation account of
$5,691,000 which equaled Citizens' retained earnings as of the most recent
financial statements, June 30, 1997, contained in the final Conversion
prospectus. The liquidation account was established to provide a limited
priority claim to the assets of Citizens to qualifying depositors who continue
to maintain deposits with Citizens after the Conversion. In the unlikely event
of a complete liquidation of Citizens, and only in such event, qualifying
depositors would receive a liquidation distribution based on their proportionate
share of the then total remaining qualifying deposits.
The Company, subject to certain supervisory policies of the Office of Thrift
Supervision, may pay dividends to its shareholders if its assets exceed its
liabilities and it is able to pay its debts as they come due. Current
regulations allow Citizens, after filing a notice with the OTS, to pay dividends
on its stock if its regulatory capital would not be reduced below the amount
then required for the liquidation account. In addition, without prior approval,
current regulations allow Citizens to pay dividends to the Company not exceeding
net profits (as defined) for the current calendar year to date plus Citizens
retained net income for the preceding two years.
NOTE C: Employee Benefit Plans
Citizens has a Recognition and Retention Plan ("RRP"). Effective on March 24,
1998, awards of grants for 32,798 shares were issued to various directors and
officers of Citizens. These awards generally are to vest and be earned by the
recipient at a rate of 20 percent per year, commencing March 24, 1999.
An ESOP covers substantially all employees of Citizens. The ESOP acquired 84,640
shares at $10.00 per share in the Conversion with funds provided by a loan from
the Company. The ESOP provides for the Company to issue a put option ("option")
to any participant who receives a distribution of Company stock. The option
permits the participant to sell the stock to the Company at any time during two
option periods, as defined in the plan, at the fair market value of the stock.
Accordingly, the $846,400 of stock acquired by the ESOP was reflected as a
reduction to the ESOP equity accounts. Unearned ESOP shares totaled 58,763 and
66,192 at March 31, 2000 and June 30, 1999 and had a fair value of $1,002,644 at
March 31, 2000 and $835,674 at June 30, 1999. Shares are released to
participants proportionately as the loan is repaid. Dividends on allocated
shares are recorded as dividends and charged to retained earnings. Cash
dividends on unallocated shares will be applied to principal and interest due on
the loan. 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 Citizens, are made to the ESOP.
Below are the transactions affecting the ESOP equity accounts (dollars in
thousands):
Additional Unearned
Common Paid-in ESOP
Stock Capital Shares Total
----- ------- ------ -----
Balance, July 1, 1999 $847 $64 $(662) $249
ESOP shares earned 20 74 94
-- -- --
Balance, March 31, 2000 $847 $84 $(588) $343
---- --- ------ ----
NOTE D: Earnings Per Share
The Company had $.24 earnings per share for the three months ended March 31,
2000, which was the same as its earnings per share for the three months ended
March 31, 1999. Earnings per share for the nine months ended March 31, 2000 was
$.68, compared to earnings per share of $.63 for the nine months ended March 31,
1999. Earnings per share have been computed based upon the weighted average
common shares outstanding during the period. Unearned ESOP shares have been
excluded from the computation of average common shares outstanding.
NOTE E: Merger
On March 21, 2000, the Company entered into an agreement with Lincoln Bancorp
("Lincoln") pursuant to which the Company will be merged with and into Lincoln.
The agreement is subject to regulatory and shareholder approval. The agreement
provides that upon the effective date of the merger, which is yet to be
determined, each shareholder of the Company will receive .9375 shares of
Lincoln's common stock and $9.375 in cash for each share of the Company's common
stock owned by such shareholder. The transaction will be recorded under the
purchase method of accounting.
<PAGE>
Annex A
AGREEMENT AND PLAN OF
REORGANIZATION
between
CITIZENS BANCORP
and
LINCOLN BANCORP
March 21, 2000
<PAGE>
TABLE OF CONTENTS
Article I Certain Definitions; Interpretation..................... 1
1.01 Certain Definitions.......................... 1
1.02 Interpretation............................... 7
Article II The Merger ............................................. 7
2.01 The Merger................................... 7
2.02 Reservation of Right to Revise Structure..... 8
2.03 Effective Time............................... 8
2.04 Integration.................................. 9
2.05 Accounting Treatment......................... 9
Article III Consideration........................................... 9
3.01 Consideration................................ 9
3.02 Rights as Shareholders; Stock Transfers......11
3.03 Fractional Shares............................11
3.04 Exchange Procedures..........................12
3.05 Anti-Dilution Adjustments....................13
Article IV Actions Pending the Merger..............................13
4.01 Forbearances of Citizens.....................13
4.02 Forbearances of Lincoln......................16
Article V Representations and Warranties..........................17
5.01 Disclosure Schedules.........................17
5.02 Standard.....................................17
5.03 Representations and Warranties of Citizens...17
5.04 Representations and Warranties of Lincoln....28
Article VI Covenants .............................................32
6.01 Reasonable Best Efforts......................32
6.02 Shareholder Approval.........................33
6.03 Registration Statement.......................33
6.04 Press Releases...............................34
6.05 Access; Information..........................34
6.06 Acquisition Proposals........................35
6.07 Affiliate Agreements.........................36
6.08 NASDAQ Listing...............................36
6.09 Regulatory Applications......................36
6.10 D & O Insurance..............................36
6.11 Accountants' Letters.........................37
6.12 Notification of Certain Matters..............37
6.13 Advisory Directors...........................37
6.14 Stock Option Plan............................38
6.15 Recognition and Retention Plan...............38
6.16 ESOP.........................................39
6.17 Defined Benefit Pension Plan.................39
6.18 Executive Supplemental Retirement
Income Agreements.....................40
6.19 Employee Matters.............................40
Article VII Conditions to Consummation of the Merger................42
7.01 Conditions to Each Party's Obligation to
Effect the Merger.....................42
7.02 Conditions to Obligation of Citizens.........44
7.03 Conditions to Obligation of Lincoln..........45
Article VIII Termination.............................................46
8.01 Termination..................................46
8.02 Effect of Termination and Abandonment........47
8.03 Termination Fee..............................47
Article IX Miscellaneous...........................................48
9.01 Survival.....................................48
9.02 Waiver; Amendment............................48
9.03 Counterparts.................................48
9.04 Governing Law................................48
9.05 Expenses.....................................48
9.06 Notices......................................48
9.07 Entire Understanding; No Third
Party Beneficiaries...................49
List of Exhibit...............................................................52
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is dated as
of March 21, 2000, by and between CITIZENS BANCORP, an Indiana corporation with
its headquarters in Frankfort, Indiana ("Citizens") and LINCOLN BANCORP, an
Indiana corporation with its principal place of business in Plainfield, Indiana
("Lincoln").
W I T N E S S E T H :
A. Each of the parties desire to effect a merger of Citizens with and into
Lincoln, with Lincoln being the surviving entity in the merger (the "Merger").
B. Citizens owns all of the issued and outstanding capital stock of
Citizens Savings Bank of Frankfort, a federal savings bank with its headquarters
in Frankfort, Indiana ("Citizens Savings Bank"). Lincoln owns all of the issued
and outstanding capital stock of Lincoln Federal Savings Bank, a federal savings
bank with its headquarters in Plainfield, Indiana ("Lincoln Savings Bank"). In
addition to the Merger of Citizens and Lincoln, the parties desire to effect a
merger of Citizens Savings Bank with and into Lincoln Savings Bank, with Lincoln
Savings Bank being the surviving entity in the merger (the "Subsidiary Merger").
C. The Boards of Directors of Citizens and Lincoln, respectively, each have
determined that it is in the best interests of their respective corporations and
shareholders to effect the Merger and the Subsidiary Merger.
D. It is the intention of the parties to this Agreement that the business
combinations contemplated hereby each be treated as a "reorganization" under
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises, and of the mutual
covenants, representations, warranties and agreements contained herein, the
parties agree as follows:
I
Certain Definitions; Interpretation
1.01 Certain Definitions. The following terms are used in this Agreement with
the meanings assigned below:
(a) "Acquisition Proposal" has the meaning assigned in Section
6.06.
(b) "Agreement" means this Agreement, as amended or modified from
time to time in accordance with Section 9.02.
(c) "Ancillary Documents" means, when executed and delivered, the
Articles of Merger attached hereto as Exhibit A, the
Subsidiary Merger Articles of Consolidation attached hereto as
Exhibit B, the Merger Agreement for Subsidiary Merger attached
hereto as Exhibit C, the Affiliate Agreement attached hereto
as Exhibit D, the Consulting Agreement attached hereto as
Exhibit E, the Opinion of Lincoln's Counsel, Bose McKinney &
Evans LLP, attached hereto as Exhibit F, and the Opinion of
Citizens' Counsel, Barnes & Thornburg, attached hereto as
Exhibit G.
(d) "Change of Control" has the meaning assigned in Section
6.10(c).
(e) "Citizens" has the meaning assigned in the preamble to this
Agreement.
(f) "Citizens Affiliate" has the meaning assigned in Section 6.07.
(g) "Citizens Articles" means the Articles of Incorporation of
Citizens.
(h) "Citizens Board" means the Board of Directors of Citizens.
(i) "Citizens By-Laws" means the By-laws of Citizens, as and if
amended.
(j) "Citizens Common Stock" means the common stock, without par
value per share, of Citizens.
(k) "Citizens ESOP" has the meaning assigned in Section 6.16.
(l) "Citizens Preferred Stock" means the preferred stock, without
par value per share, of Citizens.
(m) "Citizens Reports" has the meaning assigned in Section
5.03(i).
(n) "Citizens Savings Bank" has the meaning assigned in the
recitals to this Agreement.
(o) "Citizens Stock Option" means each option to purchase shares
of Citizens Common Stock which is outstanding under the
Citizen Stock Plan on the date as of which this Agreement is
made.
(p) "Citizens Stock Plan" means the Citizens Bancorp Stock Option
Plan.
(q) "Citizens' SEC Documents" has the meaning assigned in Section
5.03(g).
(r) "Closing Date" has the meaning assigned in Section 2.03.
(s) "Code" has the meaning assigned in the recitals to this
Agreement.
(t) "Compensation Plans" has the meaning assigned in Section
5.03(l).
(u) "Consideration" has the meaning assigned in Section 3.01(a).
(v) "Consideration Ratio" has the meaning assigned in Section
3.01(c).
(w) "Contract" means, with respect to any person, any agreement,
indenture, undertaking, debt instrument, contract, lease or
other commitment to which such person or any of its
Subsidiaries is a party or by which any of them is bound or to
which any of their properties is subject.
(x) "Disclosure Schedule" has the meaning assigned in Section
5.01.
(y) "DOL" means the United States Department of Labor.
(z) "Effective Date" means the date on which the Effective Time
occurs.
(aa) "Effective Time" means the date and time at which the Merger
becomes effective.
(bb) "Environmental Laws" means any federal, state or local law,
regulation, order, decree, permit, authorization, common law
or agency requirement with force of law relating to: (1) the
protection or restoration of the environment, health or safety
(in each case as relating to the environment) or natural
resources; or (2) the handling, use, presence, disposal,
release or threatened release of any Hazardous Substance.
(cc) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
(dd) "ERISA Affiliate" has, with respect to any person, the meaning
assigned in Section 5.03(l).
(ee) "ERISA Affiliate Plan" has the meaning assigned in Section
5.03(l).
(ff) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
(gg) "Exchange Agent" means the entity selected by Lincoln to
effect the payment of the Consideration pursuant to Section
3.01.
(hh) "Exchange Fund" has the meaning assigned in Section 3.04(a).
(ii) "Exchange Ratio" has the meaning assigned in Section 3.01(a).
(jj) "Fee" has the meaning assigned in Section 8.03.
(kk) "Governmental Authority" means any court, administrative
agency or commission or other federal, state or local
governmental authority or instrumentality.
(ll) "Hazardous Substance" means any substance in any concentration
that is: (1) listed, classified or regulated pursuant to any
Environmental Law; (2) any petroleum product or by- product,
asbestos-containing material, lead-containing paint or
plumbing, polychlorinated biphenyls, radioactive materials or
radon; or (3) any other substance which is or may be the
subject of regulatory action by any Governmental Authority
pursuant to any Environmental Law.
(mm) "Indemnified Person" has the meaning assigned in Section
5.03(l).
(nn) "IBCL" means the Indiana Business Corporation Law, I.C.
23-1-17-1 et seq.
(oo) "Insurance Amount" has the meaning assigned in Section
6.10(a).
(pp) "Insurance Policies" has the meaning assigned in Section
5.03(r).
(qq) "IRS" means the United States Internal Revenue Service.
(rr) "KBW" means Keefe, Bruyette & Woods, Inc.
(ss) "Liens" means any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
(tt) "Lincoln" has the meaning assigned in the preamble to this
Agreement.
(uu) "Lincoln Articles" means the Articles of Incorporation of
Lincoln.
(vv) "Lincoln Board" means the Lincoln Board of Directors.
(ww) "Lincoln By-Laws" means the By-Laws of Lincoln.
(xx) "Lincoln Common Stock" means the common stock, no par value,
of Lincoln.
(yy) "Lincoln Preferred Stock" means the preferred stock, no par
value, of Lincoln.
(zz) "Lincoln Savings Bank" has the meaning assigned in the
recitals to this Agreement.
(aaa) "Lincoln's SEC Documents" has the meaning assigned in Section
5.04(g).
(bbb) "Loans" means loans, leases, extensions of credit, commitments
to extend credit and other assets.
(ccc) "Market Value" has the meaning, in respect of Lincoln Common
Stock and the Effective Date, assigned in Section 3.01(c).
(ddd) "Material Adverse Effect" means, with respect to Lincoln or
Citizens, any effect that (1) is both material and adverse to
the financial position, results of operations or business of
Lincoln and its Subsidiaries taken as a whole, or Citizens and
its Subsidiaries taken as a whole, respectively, other than
(A) the effects of any change attributable to or resulting
from changes in economic conditions, laws, regulations or
accounting guidelines (generally accepted accounting
principles or otherwise) applicable to depository institutions
generally, or in general levels of interest rates, and (B)
payments associated with the Merger as contemplated by this
Agreement; or (2) would materially impair the ability of
either Lincoln or Citizens to perform its obligations under
this Agreement or otherwise materially threaten or materially
impede the consummation of the Merger and the other
transactions contemplated by this Agreement.
(eee) "Merger" has the meaning assigned in the preamble to this
Agreement.
(fff) "Multiemployer Plan" means, with respect to any person, a
multiemployer plan within the meaning of Section 3(37) of
ERISA.
(ggg) "NASDAQ" means The NASDAQ Stock Market.
(hhh) "New Certificates" has the meaning assigned in Section
3.04(a).
(iii) Non-Vested Citizens Stock Option means each Citizens Stock
Option which, as of the Effective Date, has not yet become
exercisable.
(jjj) "Old Certificates" has the meaning assigned in Section
3.04(b).
(kkk) "OTS" means the Office of Thrift Supervision.
(lll) "PBGC" means the Pension Benefit Guaranty Corporation.
(mmm) "Pension Plan" has the meaning assigned in Section 5.03(l).
(nnn) "Per Share Cash Consideration" has the meaning assigned in
Section 3.01(a).
(ooo) "Per Share Stock Consideration" has the meaning assigned in
Section 3.01(a).
(ppp) "Person" means any individual, bank, savings bank,
corporation, partnership, association, joint-stock company,
business trust or unincorporated organization.
(qqq) "Previously Disclosed" means, with respect to Citizens or
Lincoln, information set forth in such party's Disclosure
Schedule.
(rrr) "Proxy Statement" has the meaning assigned in Section 6.03.
(sss) "Registration Statement" has the meaning assigned in Section
6.03.
(ttt) "Representatives" means, with respect to any person, such
person's directors, officers, employees, legal or financial
advisors or any representatives of such legal or financial
advisors.
(uuu) "Rights" means, with respect to any person, securities or
obligations convertible into or exercisable or exchangeable
for, or giving any person any right to subscribe for or
acquire, or any options, calls or commitments relating to, or
any stock appreciation right or other instrument the value of
which is determined in whole or in part by reference to the
market price or value of, shares of capital stock of such
person.
(vvv) "SEC" means the Securities and Exchange Commission.
(www) "Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations thereunder.
(xxx) "Subsidiary" and "Significant Subsidiary" have the meanings
assigned to them in Rule 1-02 of Regulation S-X of the SEC.
(yyy) "Subsidiary Merger" has the meaning assigned in the recitals
to this Agreement.
(zzz) "Superior Proposal" means an Acquisition Proposal made by a
third party after the date hereof which, in the good faith
judgment of the Board of Directors of the corporation
receiving the Acquisition Proposal, taking into account the
various legal, financial and regulatory aspects of the
proposal and the person making such proposal, (1) if accepted,
is significantly more likely than not to be consummated, and
(2) if consummated, is reasonably likely to result in a
materially more favorable transaction than the Merger for the
applicable corporation and its shareholders and other relevant
constituencies.
(aaaa) "Surviving Corporation" has the meaning assigned in Section
2.01.
(bbbb) "Taxes" means all taxes, charges, fees, levies or other
assessments, however denominated, including, without
limitation, all net income, gross income, gross receipts,
sales, use, ad valorem, goods and services, capital, transfer,
franchise, profits, license, withholding, payroll, employment,
employer health, excise, estimated, severance, stamp,
occupation, property or other taxes, custom duties, fees,
assessments or charges of any kind whatsoever, together with
any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority whether arising
before, on or after the Effective Date.
(cccc) "Tax Returns" has the meaning assigned in Section 5.03(o).
(dddd) "TRA" has the meaning assigned in Section 5.03(l).
(eeee) "Trident" means Trident Securities, a division of McDonald
Investments, Inc.
(ffff) Vested Citizens Stock Option means each Citizens Stock Option
which is or would have been but for its cancellation pursuant
to Section 3.01(b) exercisable as of the Effective Date.
1.02 Interpretation. When a reference is made in this Agreement to Sections,
Exhibits or Schedules, such reference shall be to a Section of, or Exhibit or
Schedule to, this Agreement unless otherwise indicated. The table of contents
and headings contained in this Agreement are for reference purposes only and are
not part of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." No rule of construction against the draftsperson
shall be applied in connection with the interpretation or enforcement of this
Agreement. Whenever this Agreement shall require a party to take an action, such
requirement shall be deemed to constitute an undertaking by such party to cause
its Subsidiaries, and to use its reasonable best efforts to cause its other
affiliates, to take appropriate action in connection therewith. References
herein to "transaction contemplated by this Agreement" shall be deemed to
include a reference to the Subsidiary Merger and the transactions contemplated
by the Ancillary Documents.
Article II
The Merger
2.01 The Merger. At the Effective Time, the business combination
contemplated by this Agreement shall occur and in furtherance thereof:
(a) Structure and Effects of the Merger. Citizens shall merge with
and into Lincoln, and the separate corporate existence of
Citizens shall thereupon cease. Lincoln shall be the surviving
corporation in the Merger (sometimes hereinafter referred to
as the "Surviving Corporation") and shall continue to be
governed by the laws of the State of Indiana, and the separate
corporate existence of Lincoln with all its rights,
privileges, immunities, powers and franchises shall continue
unaffected by the Merger. The Merger shall have the effects
specified in the IBCL.
(b) Articles of Incorporation. The Lincoln Articles as in effect
immediately prior to the Effective Time shall continue to be
the articles of incorporation of the Surviving Corporation
following the Merger, until duly amended in accordance with
the terms thereof and the IBCL.
(c) By-Laws. The Lincoln By-laws as in effect immediately prior to
the Effective Time shall continue to be the by-laws of the
Surviving Corporation following the Merger, until duly amended
in accordance with the terms thereof and the Lincoln Articles.
(d) Directors. The directors of Lincoln immediately prior to the
Effective Time shall continue to hold such positions following
the Merger, and such directors shall hold office until such
time as their successors shall be duly elected and qualified;
provided, however, that Fred Carter (or in the event he is not
able to serve, another director of Citizens, selected in the
sole discretion of the Citizens Board prior to the Effective
Time) shall be appointed to the Board of Directors of Lincoln
and Lincoln Savings Bank for a two year term ending in 2002
effective as of the Effective Time. Following his service as a
director of Lincoln and Lincoln Savings Bank, Fred Carter
shall be appointed as a director emeritus of the Board of
Directors of Lincoln Savings Bank to serve for at least one
additional year in such position.
(e) Officers. The officers of Lincoln holding such positions
immediately prior to the Effective Time shall continue to be
the officers of the Surviving Corporation following the
Merger.
2.02 Reservation of Right to Revise Structure. At Lincoln's election, the Merger
may alternatively be structured so that (a) Citizens is merged with and into any
other direct or indirect wholly owned subsidiary of Lincoln or (b) any direct or
indirect wholly owned subsidiary of Lincoln is merged with and into Citizens;
provided, however, that no such change shall (x) alter or change the amount or
kind of the Consideration or the treatment of the holders of Citizens Common
Stock or Citizens Stock Options, (y) prevent the parties from obtaining the
opinions of Bose McKinney & Evans LLP and Barnes & Thornburg referred to in
Sections 7.02(d) and 7.03(d), respectively, or (z) materially impede or delay
consummation of the transactions contemplated by this Agreement. In the event of
such an election, the parties agree to execute an appropriate amendment to this
Agreement in order to reflect such election.
2.03 Effective Time. The Merger shall become effective upon the filing, in the
office of the Secretary of State of the State of Indiana, of Articles of Merger
in accordance with IBCL Section 23-1-40-5, or at such later date and time as may
be set forth in such articles, which articles shall be in substantially the same
form as that attached hereto as Exhibit A. Subject to the terms of this
Agreement, the parties shall cause the Merger to become effective (a) on the
date that is the fifth full NASDAQ trading day (the "Closing Date") to occur
after the last of the conditions set forth in Article VII (other than conditions
relating solely to the delivery of documents dated the Effective Date) shall
have been satisfied or waived in accordance with the terms of this Agreement, or
(b) on such date as the parties may agree in writing.
2.04 Integration. At the Effective Time, the parties hereto currently intend to
effectuate, or cause to be effectuated, the Subsidiary Merger, pursuant to
Articles of Merger substantially in the form attached hereto as Exhibit B and a
merger agreement substantially in the form attached hereto as Exhibit C. The
parties agree to cooperate and to take all reasonable actions prior to or
following the Effective Time, including executing all requisite documentation,
as may be reasonably necessary to effect the Subsidiary Merger. Citizens also
agrees to cooperate with Lincoln and to take all reasonable restructuring steps
for regulatory purposes, as may be reasonably requested by Lincoln to merge or
otherwise consolidate such legal entities to the extent desirable for regulatory
or other reasons.
2.05 Accounting Treatment. The combination of Lincoln and Citizens effected
by the Merger will be accounted for under the purchase method of
accounting.
Article III
Consideration
3.01 Consideration.
(a) Subject to the terms and conditions of this Agreement, at the
Effective Time:
(1) Each share of Citizens Common Stock issued and
outstanding immediately prior to the Effective Time
(other than shares held as treasury stock of Citizens
and shares held directly or indirectly by Lincoln,
except shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted, if any)
shall become and be converted into the right to
receive, subject to adjustment as set forth in
Section 3.05:
(A) .9375 shares (the "Exchange Ratio") of
Lincoln Common Stock (the "Per Share Stock
Consideration"), and
(B) $9.375 in cash (such sum, the "Per Share
Cash Consideration" and together with the
Per Share Stock Consideration, the
"Consideration"); and
(2) Each share of Citizens Common Stock that, immediately
prior to the Effective Time, is held as treasury
stock of Citizens or held directly or indirectly by
Lincoln, other than shares held in a fiduciary
capacity or in satisfaction of a debt previously
contracted, shall by virtue of the Merger be canceled
and retired and shall cease to exist, and no exchange
or payment shall be made therefor.
(3) Notwithstanding the foregoing, if any holders of
Citizens Common Stock dissent from the Merger and
demand dissenters' rights under the IBCL, any issued
and outstanding shares of Citizens Common Stock held
by such dissenting holders shall not be converted as
described in this Section 3.01(a) but shall from and
after the Effective Time represent only the right to
receive such consideration as may be determined to be
due to such dissenting holders pursuant to IBCL;
provided, however, that each share of Citizens Common
Stock outstanding immediately prior to the Effective
Time and held by a dissenting holder who shall, after
the Effective Time, withdraw his or her demand for
dissenters' rights or lose his or her right to
exercise dissenters' rights shall have only such
rights as are provided under the IBCL.
(b) At the Effective Time, Citizens and Lincoln shall take all
action necessary to cause each Vested Citizens Stock Option,
without any action on the part of the holder thereof, to be
converted into the right to receive from Citizens, at the
Effective Time, an amount in cash equal to the excess of
$18.75 over the per share exercise price for the share of
Citizens Common Stock subject to such Vested Citizens Stock
Option; provided however, that the payer shall withhold from
such cash payment any taxes required to be withheld by
applicable law. Each Vested Citizens Stock Option to which
this paragraph applies will be canceled and shall cease to
exist by virtue of such payment.
(c) At the Effective Time, each Non-Vested Citizens Stock Option
shall be converted into an option (a "Replacement Option") to
acquire, on the same terms and conditions as were applicable
under such Citizens Stock Option, a specified number of shares
of Lincoln Common Stock, at a specified exercise price per
share. In respect of each option under a single grant
agreement outstanding to the same holder, such number shall be
determined by multiplying the number of shares of Citizens
Common Stock subject to such options granted under the same
grant agreement by the Consideration Ratio and rounding such
product to the nearest whole number, and such exercise price
per share shall be determined by dividing the per share
exercise price under such Citizens Stock Option or set of
identical Citizens Stock Options by the Consideration Ratio
and rounding such quotient to the nearest whole cent. As used
herein, the Consideration Ratio means (ab+c)/b, where "a"
equals the Exchange Ratio, "b" equals the per share Market
Value (as hereinafter defined) of Lincoln Common Stock on the
Effective Date, and "c" equals the Per Share Cash
Consideration. For example, if the per share Market Value of
Lincoln Common Stock on the Effective Date is $10.00
(indicating a Consideration Ratio of 1.875), a Non-Vested
Citizens Stock Option to purchase 200 shares of Citizens
Common Stock at an exercise price of $15.25 per share would be
converted into an option to purchase 375 shares of Lincoln
Common Stock at an exercise price of $8.13 per share. As used
herein, "Market Value" means, with reference to a share of
Lincoln Common Stock and the Effective Date, the average of
the high bid and low asked price per share (the "average
price") of Lincoln Common Stock on such date, or, if no such
average price can be determined for such date, the most recent
reported sale price per share within the preceding ten
business days, or, if no such sale shall have occurred, the
average price on the most recent day within such preceding ten
business days for which the average price can be determined,
or, if no such average price can be determined, the per share
fair market value of Lincoln Common Stock on such date as
determined in good faith by the Lincoln Board. Notwithstanding
the foregoing, each Non-Vested Citizens Stock Option which is
intended to be an "incentive stock option" (as defined in
Section 422 of the Code) shall be adjusted in accordance with
the requirements of Section 424 of the Code. Accordingly, with
respect to "incentive stock options," fractional shares will
be rounded down to the nearest whole number of shares and
where necessary the per share exercise price will be rounded
up to the nearest cent. At or prior to the Effective Time,
Citizens and its Subsidiaries may modify any or all
outstanding Non-Vested Citizens Stock Options held by
employees of Citizens and its Subsidiaries who become
employees of Lincoln or its Subsidiaries on the Effective Date
to provide that they shall become exercisable, subject to any
applicable bank regulatory requirements, in full in the event
the optionee's qualifying service with Lincoln and its
Subsidiaries is terminated by Lincoln or its Subsidiaries
without cause or by the optionee for good reason, in which
case the Replacement Option shall reflect the terms and
conditions of the Non-Vested Citizens Stock Option as so
modified. At the Effective Time, Lincoln shall assume the
Citizens Stock Plan; provided, however, that such assumption
shall be only in respect of the Replacement Options and that
Lincoln shall have no obligation with respect to any awards
under the Citizens Stock Plan other than the Replacement
Options and shall have no obligation to make any additional
grants or awards under such assumed Citizens Stock Plan;
provided further, that service as an advisory director of
Lincoln Savings Bank provided for in Section 6.13 below,
service as a member of the Lincoln Board, and service as a
member or member emeritus of the Board of Directors of Lincoln
Savings Bank all shall constitute "service as a director or
director emeritus of the Holding Company or its Subsidiaries"
for purposes of determining when a Replacement Option
terminates. At all times after the Effective Time, Lincoln
shall reserve for issuance such number of shares of Lincoln
Common Stock as are needed to permit the Replacement Options
to be exercised in the manner contemplated by this Agreement
and the instruments pursuant to which such options were
granted. Lincoln shall file with the SEC a registration
statement on an appropriate form under the Securities Act
(which may simply consist of a post-effective amendment to the
Registration Statement) with respect to the shares of Lincoln
Common Stock subject to the Replacement Options and shall use
its reasonable best efforts to maintain the current status of
the prospectus contained therein, as well as comply with any
applicable state securities or "blue sky" laws, for so long as
such options remain outstanding.
3.02 Rights as Shareholders; Stock Transfers. At the Effective Time, (a) holders
of Citizens Common Stock shall cease to be, and shall have no rights as,
shareholders of Citizens, other than the right to receive (1) any dividend or
other distribution with respect to such Citizens Common Stock with a record date
occurring prior to the Effective Time and (2) the consideration provided under
this Article III, and (b) holders of Citizens Stock Options shall have no
further or continuing right to receive Citizens Common Stock, Lincoln Common
Stock or any form of consideration other than the consideration provided under
this Article III. After the Effective Time, there shall be no transfers on the
stock transfer books of Citizens or the Surviving Corporation of shares of
Citizens Common Stock, and no attempted or purported exercise of Citizens Stock
Options shall be effective.
3.03 Fractional Shares. Notwithstanding any other provision in this Agreement,
no fractional shares of Lincoln Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the Merger;
instead, Lincoln shall pay to each holder of Citizens Common Stock who otherwise
would be entitled to a fractional share of Lincoln Common Stock an amount in
cash (without interest) determined by multiplying such fraction by $18.75.
3.04 Exchange Procedures.
(a) At or prior to the Effective Time, Lincoln shall deposit, or
shall cause to be deposited, with the Exchange Agent,
certificates representing the shares of Lincoln Common Stock
("New Certificates") and an estimated amount of cash to be
issued as Consideration (such cash and New Certificates,
together with any dividends or distributions with a record
date occurring after the Effective Date with respect thereto
(without any interest on any such cash, dividends or
distributions), being hereinafter referred to as the "Exchange
Fund").
(b) The Surviving Corporation shall cause the New Certificates
into which shares of a shareholder's Citizens Common Stock are
converted on the Effective Date and/or any check in respect of
any Per Share Cash Consideration, fractional share interests
or dividends or distributions which such person shall be
entitled to receive to be delivered to such shareholder upon
delivery (if not previously delivered) to the Exchange Agent
of certificates representing such shares of Citizens Common
Stock ("Old Certificates") (or indemnity satisfactory to the
Surviving Corporation and the Exchange Agent, if any of such
certificates are lost, stolen or destroyed) owned by such
shareholder. No interest will be paid on any Consideration
that any such person shall be entitled to receive pursuant to
this Article III upon such delivery.
(c) As soon as reasonably practicable but in no event more than
ten calendar days after the Effective Time, the Exchange Agent
shall mail to each record holder of any certificate or
certificates whose shares of Citizens Common Stock were
converted into the right to receive the Consideration, a
letter of transmittal (which shall specify that delivery shall
be effected, and risk of loss and title to the Old
Certificates shall pass, only upon proper delivery of the Old
Certificates to the Exchange Agent and shall be in such form
and have such other provisions as Citizens may reasonably
specify) and instructions for use in effecting the surrender
of the Old Certificates in exchange for the Consideration.
(d) Notwithstanding the foregoing, neither the Exchange Agent nor
any party hereto shall be liable to any former holder of
Citizens Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property,
escheat or similar laws.
(e) No dividends or other distributions on Lincoln Common Stock
with a record date occurring after the Effective Time shall be
paid to the holder of any unsurrendered Old Certificate
representing shares of Citizens Common Stock converted in the
Merger into the right to receive shares of such Lincoln Common
Stock until the holder thereof shall be entitled to receive
New Certificates in exchange therefor in accordance with this
Article III. After becoming so entitled in accordance with
this Article III, the record holder thereof also shall be
entitled to receive any such dividends or other distributions,
without any interest thereon, which theretofore had become
payable with respect to shares of Lincoln Common Stock such
holder had the right to receive upon surrender of the Old
Certificate.
(f) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of Citizens for six months after the Effective
Time shall be returned to Lincoln. Any shareholders of
Citizens who have not theretofore complied with this Article
III shall thereafter look only to Lincoln for payment of Per
Share Stock Consideration, Per Share Cash Consideration, cash
in lieu of any fractional shares and unpaid dividends and
distributions on Lincoln Common Stock deliverable in respect
of each share of Citizens Common Stock such shareholder holds
as determined pursuant to this Agreement, in each case,
without any interest thereon.
3.05 Anti-Dilution Adjustments. Should Lincoln change (or establish a record
date for changing) the number of shares of Lincoln Common Stock issued and
outstanding prior to the Effective Date by way of a stock split, stock dividend,
recapitalization or similar transaction with respect to the outstanding Lincoln
Common Stock, and the record date therefor shall be prior to the Effective Date,
the Exchange Ratio shall be proportionately adjusted.
Article IV
Actions Pending the Merger
4.01 Forbearances of Citizens. From the date hereof until the earlier of the
termination of this Agreement or the Effective Time, except as expressly
contemplated by this Agreement or the Disclosure Schedule, without the prior
written consent of Lincoln, Citizens will not, and will cause each of its
Subsidiaries not to:
(a) Ordinary Course. Conduct the business of Citizens and its
Subsidiaries other than in the ordinary and usual course or,
to the extent consistent therewith, fail to use reasonable
efforts to preserve intact their business organizations and
assets and maintain their rights, franchises and existing
relations with customers, suppliers, employees and business
associates.
(b) Capital Stock. Other than pursuant to Rights Previously
Disclosed and outstanding on the date hereof, (1) issue, sell
or otherwise permit to become outstanding, or authorize the
creation of, any additional shares of Citizens Common Stock or
any Rights with respect to Citizens Common Stock, (2) permit
any additional shares of Citizens Common Stock to become
subject to new grants of employee or director stock options,
other Rights or similar stock-based employee rights, (3)
repurchase, redeem or otherwise acquire, directly or
indirectly, any shares of Citizens Common Stock, (4) effect
any recapitalization, reclassification, stock split or like
change in capitalization, or (5) enter into, or take any
action to cause any holders of Citizens Common Stock to enter
into, any agreement, understanding or commitment relating to
the right of holders of Citizens Common Stock to vote any
shares of Citizens Common Stock, or cooperate in any formation
of any voting trust relating to such shares.
(c) Dividends, Etc. Make, declare, pay or set aside for payment
any dividend, other than (1) regular quarterly cash dividends
on Citizens Common Stock in an amount not to exceed $0.07 per
share paid with record and payment dates consistent with past
practice and (2) dividends from wholly owned Subsidiaries to
Citizens or another wholly owned Subsidiary of Citizens, as
applicable (in each case consistent with past practice), on or
in respect of, any shares of its capital stock, or declare or
make any other distribution on any shares of its capital
stock, or split, combine, redeem, reclassify, purchase or
otherwise acquire any shares of its capital stock.
(d) Compensation; Employment Contracts; Etc. Enter into, amend,
modify, renew or terminate any employment, consulting,
severance or similar Contracts with any directors, officers or
employees of, or independent contractors with respect to,
Citizens or its Subsidiaries, or grant any salary, wage or
other increase or increase any employee benefit (including
incentive or bonus payments), except (1) for normal general
increases in salary to individual employees in the ordinary
course of business consistent with past practice, (2) for
other changes that are required by applicable law, (3) to
satisfy Previously Disclosed Contracts existing on the date
hereof, (4) for benefit increases contemplated in Section
3.01(c) above or Sections 6.15, 6.16, 6.17 and 6.18 below, or
(5) to provide, if the Effective Time occurs prior to December
31, 2000, that Fred W. Carter's base compensation for the
portion of calendar year 2000 prior to the Effective Time
shall be $155,000 (which base compensation shall be paid by
Citizens prior to the Effective Time).
(e) Benefit Plans. Enter into, establish, adopt, amend, modify or
terminate any pension, retirement, stock option, stock
purchase, savings, profit sharing, employee stock ownership,
deferred compensation, consulting, bonus, group insurance or
other employee or director benefit, incentive or welfare
Contract, plan or arrangement, or any trust agreement (or
similar arrangement) related thereto, or make any new or
increase any outstanding grants or awards under any such
Contract, plan or arrangement, in respect of any current or
former directors, officers or employees of, or independent
contractors with respect to, Citizens or its Subsidiaries (or
any dependent or beneficiary of any of the foregoing persons),
including taking any action that accelerates the vesting or
exercisability of or the payment or distribution with respect
to, stock options, restricted stock or other compensation or
benefits payable thereunder, except, in each such case, (1) as
may be required by applicable law or to satisfy Previously
Disclosed Contracts existing on the date hereof or (2) as are
provided for in Section 3.01(b) or 3.01(c) above or Section
6.15, 6.16, 6.17 or 6.18 below.
(f) Dispositions. Except as Previously Disclosed, sell, transfer,
mortgage, lease, encumber or otherwise dispose of or
discontinue any material portion of its assets, business or
properties.
(g) Acquisitions. Except (1) pursuant to Previously Disclosed
Contracts existing on the date hereof, (2) for short-term
investments for cash management purposes, (3) pursuant to bona
fide hedging transactions, or (4) by way of foreclosures or
otherwise in satisfaction of debts previously contracted in
good faith, in each case in the ordinary and usual course of
business consistent with past practice, neither Citizens nor
any of its Subsidiaries will acquire any assets, properties or
deposits of another person in any one transaction or a series
of related transactions which otherwise would not be permitted
by this Section 4.01.
(h) Governing Documents. Amend the Citizens Articles, Citizens
By-laws or the articles of incorporation or by-laws (or
similar governing documents) of any of Citizens' Subsidiaries.
(i) Accounting Methods. Implement or adopt any change in the
accounting principles, practices or methods used by Citizens
and its Subsidiaries, other than as may be required by
generally accepted accounting principles, as concurred with by
Citizens' independent auditors.
(j) Contracts. Except in the ordinary course of business
consistent with past practice, enter into or terminate any
material Contract or amend or modify in any material respect
any of its existing material Contracts.
(k) Claims. Settle any claim, action or proceeding, except for any
claim, action or proceeding involving solely money damages in
an amount, individually or in the aggregate, that is not
material to Citizens and its Subsidiaries, taken as a whole.
(l) Risk Management. Except as required by applicable law or
regulation: (1) implement or adopt any material change in its
interest rate risk management and hedging policies, procedures
or practices; (2) fail to follow its existing policies or
practices with respect to managing its exposure to interest
rate risk; or (3) fail to use commercially reasonable means to
avoid any material increase in its aggregate exposure to
interest rate risk.
(m) Indebtedness. Other than in the ordinary course of business
(including creation of deposit liabilities, entry into
repurchase agreements, purchases or sales of federal funds,
Federal Home Loan Bank advances, and sales of certificates of
deposit) consistent with past practice, (1) incur any
indebtedness for borrowed money, (2) assume, guarantee,
endorse or otherwise as an accommodation become responsible
for the obligations of any other Person or (3) cancel,
release, assign or modify any material amount of indebtedness
of any other Person.
(n) Loans. Make any loan or advance (1) other than in the ordinary
course of business consistent with lending policies as in
effect on the date hereof or (2) without prior consultation
with Lincoln, other than residential mortgage loans, in excess
of $250,000; provided that in the case of clause (1) Citizens
or any of its Subsidiaries may make any such loan in the event
(A) Citizens or any of its Subsidiaries has delivered to
Lincoln or its designated representative a notice of its
intention to make such loan and such additional information as
Lincoln or its designated representative may reasonably
require and (B) Lincoln or its designated representative shall
not have reasonably objected to such loan by giving notice of
such objection within three business days following the
delivery to Lincoln of the applicable notice of intention.
(o) Adverse Actions. (1) Take any action reasonably likely to
prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368 of the Code;
or (2) take any action that is intended or is reasonably
likely to result in (A) any of its representations and
warranties set forth in this Agreement being or becoming
untrue in any material respect at any time at or prior to the
Effective Time, (B) any of the conditions to the Merger set
forth in Article VII not being satisfied or (C) a material
breach of any provision of this Agreement; except, in each
case, as may be required by applicable law.
(p) Commitments. Agree or commit to do, or enter into any Contract
regarding, anything that would be precluded by clauses (a)
through (o) without first obtaining Lincoln's consent.
4.02 Forbearances of Lincoln. From the date hereof until the Effective Time,
except as expressly contemplated by this Agreement, without the prior written
consent of Citizens, Lincoln will not, and will cause each of its Subsidiaries
not to:
(a) Ordinary Course. Conduct the business of Lincoln and its
Subsidiaries other than in the ordinary and usual course or,
to the extent consistent herewith, fail to use reasonable
efforts to preserve intact their business organizations and
assets and maintain their rights, franchises and existing
relations with customers, suppliers, employees and business
associates.
(b) Adverse Actions. (1) Take any action reasonably likely to
prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368 of the Code;
or (2) take any action that is intended or is reasonably
likely to result in (A) any of its representations and
warranties set forth in this Agreement being or becoming
untrue in any material respect at any time at or prior to the
Effective Time, (B) any of the conditions to the Merger set
forth in Article VII not being satisfied or (C) a material
breach of any provision of this Agreement; except, in each
case, as may be required by applicable law.
(c) Governing Documents. Amend the Lincoln Articles or the Lincoln
By-Laws in a manner that would be materially adverse to the
holders of Lincoln Common Stock.
(d) Commitments. Agree or commit to do, or enter into any Contract
regarding, anything that would be precluded by clauses (a)
through (c) without first obtaining Citizens' consent.
Article V
Representations and Warranties
5.01 Disclosure Schedules. On or prior to the date hereof, Citizens has
delivered to Lincoln and Lincoln has delivered to Citizens a schedule
(respectively, each party's "Disclosure Schedule") setting forth, among other
things, items the disclosure of which is necessary or appropriate either (1) in
response to an express disclosure requirement contained in a provision hereof or
(2) as an exception to one or more representations or warranties contained in
Section 5.03 or 5.04, respectively, or to one or more of its covenants contained
in Article IV.
5.02 Standard. No representation or warranty of Citizens or Lincoln contained in
Section 5.03 or 5.04 shall be deemed untrue or incorrect, and no party hereto
shall be deemed to have breached a representation or warranty, as a consequence
of the existence of any fact, event or circumstance unless such fact, event or
circumstance is not Previously Disclosed.
5.03 Representations and Warranties of Citizens. Except as Previously Disclosed,
Citizens hereby represents and warrants to Lincoln:
(a) Organization, Standing and Authority. Citizens is duly
organized, validly existing and in good standing under the
laws of the State of Indiana, and is duly qualified to do
business and is in good standing in all the jurisdictions
where its ownership or leasing of property or assets or the
conduct of its business requires it to be so qualified.
(b) Citizens Stock. As of the date hereof, the authorized capital
stock of Citizens consists solely of 5,000,000 shares of
Citizens Common Stock, of which 959,401 shares are outstanding
as of the date hereof, and 2,000,000 shares of Citizens
Preferred Stock, of which no shares are outstanding on the
date hereof. As of the date hereof, no shares of Citizens
Common Stock are held in treasury by Citizens. The outstanding
shares of Citizens Common Stock have been duly authorized and
are validly issued, fully paid and nonassessable, and subject
to no preemptive rights (and were not issued in violation of
any preemptive rights). As of the date hereof, there are no
shares of Citizens Common Stock or Preferred Stock authorized
and reserved for issuance, Citizens does not have any Rights
issued or outstanding with respect to Citizens Common Stock or
Preferred Stock, and Citizens does not have any commitment to
authorize, issue or sell any Citizens Common Stock, Preferred
Stock or Rights, except pursuant to this Agreement. The
Disclosure Schedule sets forth the number of shares of
Citizens Common Stock and Preferred Stock which are issuable
and reserved for issuance upon exercise of Citizens Stock
Options as of the date hereof and the exercise price of such
Citizens Stock Options.
(c) Subsidiaries.
(1) (A) The Disclosure Schedule sets forth all of
Citizens' Subsidiaries together with the jurisdiction
of organization of each such Subsidiary, (B) Citizens
owns, directly or indirectly, all the issued and
outstanding equity securities of each of its
Subsidiaries, (C) no equity securities of any of
Citizens' Subsidiaries are or may become required to
be issued (other than to it or its Subsidiaries) by
reason of any Rights, (D) there are no contracts,
commitments, understandings or arrangements by which
any of such Subsidiaries is or may be bound to sell
or otherwise transfer any equity securities of any
such Subsidiaries (other than to it or its
Subsidiaries), (E) there are no contracts,
commitments, understandings, or arrangements relating
to Citizens' rights to vote or to dispose of such
securities (other than to Citizens or its
Subsidiaries), and (F) all the equity securities of
each such Subsidiary held by Citizens or its
Subsidiaries are fully paid and nonassessable and are
owned by Citizens or its Subsidiaries free and clear
of any Liens.
(2) The Disclosure Schedule describes all equity
securities and interests in a partnership or joint
venture of any kind in which Citizens owns, directly
or indirectly, a beneficial interest, and Citizens
has provided to Lincoln all material information or
agreements pertaining to such interests.
(3) Each of Citizens' Subsidiaries has been duly
organized and is validly existing and in good
standing under the laws of the jurisdiction of its
organization, and is duly qualified to do business
and in good standing in all the jurisdictions where
its ownership or leasing of property or assets or the
conduct of its business requires it to be so
qualified.
(d) Corporate Power. Citizens and each of its Subsidiaries has the
requisite power and authority to carry on its business as it
is now being conducted and to own all its properties and
assets; Citizens has the corporate power and authority to
execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated
hereby; and Citizens Savings Bank has the requisite power and
authority to execute, deliver and perform its obligations as
set forth in the form of Subsidiary Merger Agreement attached
hereto as Exhibit C and to consummate the transactions
contemplated thereby.
(e) Corporate Authority and Action.
(1) Citizens has the requisite corporate power and
authority, and has taken all corporate action
necessary, in order (A) to authorize the execution
and delivery of, and performance of its obligations
under, this Agreement, and (B) subject only to
receipt of the approval of the plan of merger
contained in this Agreement by the holders of a
majority of the outstanding shares of Citizens Common
Stock, to consummate the Merger. This Agreement and
the Ancillary Documents to which Citizens is a party
each constitute and/or will constitute the valid and
legally binding obligation of Citizens, enforceable
in accordance with its terms (except as
enforceability may be limited by applicable
bankruptcy, insolvency, reorganization and similar
laws of general applicability relating to or
affecting creditors' rights or by general equity
principles).
(2) Citizens has received the opinion of Trident, dated
the date of this Agreement, to the effect that, as of
the date of this Agreement, the Consideration to be
received in the Merger by the shareholders of
Citizens is fair to the shareholders of Citizens from
a financial point of view.
(f) Regulatory Filings; No Defaults.
(1) No consents or approvals of, or filings or
registrations with, any Governmental Authority or
with any third party are required to be made or
obtained by Citizens or any of its Subsidiaries in
connection with the execution, delivery or
performance by Citizens of this Agreement, or to
consummate the Merger and the other transactions
contemplated hereby, except for (A) the filing with,
and declaration of effectiveness by, the SEC of the
Registration Statement, (B) the filing of
applications with and receipt of approval thereof
from the OTS with respect to the Merger and the
Subsidiary Merger, (C) the filing of articles of
merger with the Secretary of State of the State of
Indiana pursuant to the IBCL and the filing of
articles of combination with the OTS with respect to
the Subsidiary Merger, (D) the filing of a notice
with the NASDAQ with respect to the listing for
trading of the shares of Lincoln Common Stock to be
issued in the Merger on the National Market System,
and (E) such other filings, approvals, consents or
waivers as are required under applicable law in
connection with the transactions contemplated by this
Agreement. As of the date hereof, Citizens is not
aware of any reason why the approvals of all
Governmental Authorities necessary to permit
consummation of the transactions contemplated by this
Agreement will not be received without the imposition
of a condition or requirement described in Section
7.01(b).
(2) Subject to receipt of the regulatory approvals and
expiration of the waiting periods referred to in the
preceding paragraph and the making of required
filings under federal and state securities laws, the
execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated
hereby do not and will not (A) constitute a breach or
violation of, or a default under, or give rise to any
Lien, any acceleration of remedies or any right of
termination under, any law, rule or regulation or any
judgment, decree, order, governmental permit or
license, or material Contract of Citizens or of any
of its Subsidiaries or to which Citizens or any of
its Subsidiaries or properties is subject or bound,
(B) constitute a breach or violation of, or a default
under, the Citizens Articles or the Citizens By-laws,
or (C) require any consent or approval under any such
law, rule, regulation, judgment, decree, order,
governmental permit or license or Contract.
(g) SEC Documents; Financial Statements.
(1) Citizens' Annual Reports on Form 10-K and proxy
statements on Form 14-A for the fiscal years ended
June 30,1997, 1998 and 1999, quarterly reports on
Form 10-Q for the fiscal years ended June 30, 1998
and 1999, and all other reports, registration
statements, definitive proxy statements or
information statements filed or to be filed by
Citizens or any of its Subsidiaries subsequent to
June 30, 1999 under the Securities Act, or under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act, in the form filed or to be filed (collectively,
the "Citizens' SEC Documents") with the SEC, as of
the date filed, (A) complied or will comply with the
applicable requirements under the Securities Act or
the Exchange Act, as the case may be, and (B) did not
(or if amended or superseded by a filing prior to the
date of this Agreement, then as of the date of such
filing) and will not contain any untrue statement of
a material fact or omit to state a material fact
required to be stated therein or necessary to make
the statements therein, in the light of the
circumstances under which they were made, not
misleading; and each of the balance sheets contained
in or incorporated by reference into any such
Citizens' SEC Document (including the related notes
and schedules thereto) fairly presents, or will
fairly present, the financial position of Citizens
and its Subsidiaries as of its date, and each of the
statements of income and changes in shareholders'
equity and cash flows or equivalent statements in
such of Citizens' SEC Documents (including any
related notes and schedules thereto) fairly presents,
or will fairly present, the results of operations,
changes in shareholders' equity and changes in cash
flows, as the case may be, of Citizens and its
Subsidiaries for the periods to which they relate, in
each case in accordance with generally accepted
accounting principles consistently applied during the
periods involved, except in each case as may be noted
therein, subject to normal year-end audit adjustments
in the case of unaudited statements.
(2) Since June 30, 1999 on a consolidated basis Citizens
and its Subsidiaries have not incurred any material
liability other than in the ordinary course of
business consistent with past practice.
(3) Since June 30, 1999 (A) Citizens and its Subsidiaries
have conducted their respective businesses in the
ordinary and usual course consistent with past
practice and (B) no event has occurred or
circumstance arisen that, individually or taken
together with all other facts, events and
circumstances (described in any paragraph of Section
5.03 or otherwise), has had or is reasonably likely
to have a Material Adverse Effect with respect to
Citizens.
(h) Litigation. Except as disclosed in Citizens' SEC Documents
filed before the date hereof, no litigation, claim or other
proceeding before any court, arbitrator or Governmental
Authority is pending against Citizens or any of its
Subsidiaries and, to Citizens' knowledge, no such litigation,
claim or other proceeding has been threatened, which would
have a Material Adverse Effect with respect to Citizens.
(i) Compliance with Laws. Citizens and each of its Subsidiaries:
(1) conducts its business in compliance in all material
respects with all applicable federal, state, local
and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders or decrees applicable
thereto or to the employees conducting such
businesses, including, without limitation, the Equal
Credit Opportunity Act, the Fair Housing Act, the
Home Mortgage Disclosure Act and all other applicable
fair lending laws and other laws relating to
discriminatory business practices;
(2) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications
and registrations with, all Governmental Authorities
required in order to permit them to own or lease
their properties and to conduct their businesses as
presently conducted; all such permits, licenses,
certificates of authority, orders and approvals are
in full force and effect and, to Citizens' knowledge,
no suspension or cancellation of any of them is
threatened;
(3) has received, since December 31, 1997, no
notification or communication from any Governmental
Authority (A) asserting that Citizens or any of its
Subsidiaries is not in compliance with any of the
statutes, regulations, or ordinances that such
Governmental Authority enforces or (B) threatening to
revoke any license, franchise, permit, or
governmental authorization (nor, to Citizens'
knowledge, do grounds for any of the foregoing
exist), or (C) restricting or disqualifying their
activities (except for restrictions generally imposed
by rule, regulation or administrative policy on
banking organizations generally);
(4) is not aware of any pending or threatened
investigation, review or disciplinary proceedings by
any Governmental Authority against Citizens, any of
its Subsidiaries or any officer, director or employee
thereof;
(5) is not subject to any order or decree issued by, or a
party to any agreement or memorandum of understanding
with, or a party to any commitment letter or similar
undertaking to, or subject to any order or directive
by, a recipient of any supervisory letter from or has
adopted any board resolutions at the request of any
Governmental Authority, or been advised by any
Governmental Authority that it is considering issuing
or requesting any such agreement or other action or
have knowledge of any pending or threatened
regulatory investigation; and
(6) since December 31, 1996, has timely filed all
reports, registrations and statements, together with
any amendments required to be made with respect
thereto, that were required to be filed under any
applicable law, regulation or rule, with any
applicable Governmental Authority (collectively, the
"Citizens Reports"). As of their respective dates,
Citizens Reports complied in all material respects
with the applicable statutes, rules, regulations and
orders enforced or promulgated by the regulatory
authority with which they were filed.
(j) Material Contracts; Defaults. The Disclosure Schedule sets
forth a complete and accurate list of the following categories
of material Contracts to which Citizens or any of its
Subsidiaries is a party:
(1) any Contract that (A) is not terminable at will both
without cost or other liability to Citizens or any of
its Subsidiaries and upon notice of ninety (90) days
or less and (B) which provides for fees or other
payments in excess of $30,000 per annum or in excess
of $50,000 for the remaining term of the Contract;
(2) any Contract with a term beyond the Effective Time
under which Citizens or any of its Subsidiaries
created, incurred, assumed, or guaranteed (or may
create, incur, assume, or guarantee) indebtedness for
borrowed money (including capitalized lease
obligations) in an amount in excess of $30,000;
(3) any Contract restricting the conduct of business by
Citizens or any of its Subsidiaries;
(4) any Contract to which Citizens or any of its
Subsidiaries is a party, on the one hand, and under
which any affiliate, officer, director, employee, or
any person who owns more than 10% of the outstanding
Citizens Common Stock or any of its Subsidiaries, on
the other hand, is a party or beneficiary;
(5) any Contract with respect to the employment of, or
payment to, any present or former directors,
officers, employees or consultants relating to their
services as such with Citizens or any Subsidiary; and
(6) any Contract involving the purchase or sale of assets
with a book value greater than $50,000 entered into
since December 31, 1998.
Neither Citizens nor any of its Subsidiaries nor, to Citizens' knowledge, any
other party thereto is in default under any such Contract and there has not
occurred any event that, with the lapse of time or the giving of notice or both,
would constitute such a default.
(k) Properties. Except as disclosed in the financial statements
filed in its SEC Documents on or before the date hereof,
Citizens and its Subsidiaries have good and marketable title,
free and clear of all Liens (other than Liens for current
taxes not yet delinquent, or Liens held by Citizens or its
Subsidiaries) to all of the material properties and assets,
tangible or intangible, reflected in such financial statements
as being owned by Citizens and its Subsidiaries as of the
dates thereof. All buildings and all fixtures, equipment, and
other property and assets which are material to its business
and are held under leases or subleases by any of Citizens and
its Subsidiaries are held under valid leases or subleases
enforceable in accordance with their respective terms (except
as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally and to general equity principles).
(l) Employee Benefit Plans.
(1) Citizens' Disclosure Schedule contains a complete
list of all bonus, vacation, deferred compensation,
commission-based compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock
ownership, stock bonus, stock purchase, restricted
stock, stock appreciation and stock option plans, all
employment or severance contracts, all medical,
dental, disability, severance, health and life
insurance plans, all other employee benefit and
fringe benefit plans, contracts or arrangements and
any "change of control" or similar provisions in any
plan, contract or arrangement maintained or
contributed to by Citizens or any of its Subsidiaries
for the benefit of current or former officers,
employees or directors or the beneficiaries or
dependents of any of the foregoing (collectively,
"Compensation Plans").
(2) With respect to each Compensation Plan, if
applicable, Citizens has provided or made available
to Lincoln, true and complete copies of existing: (A)
Compensation Plan documents and amendments thereto;
(B) trust instruments and insurance contracts; (C)
the most recent Form 5500 filed with the IRS; (D) the
most recent actuarial report and financial statement;
(E) the most recent summary plan description; (F)
forms filed with the PBGC (other than for premium
payments); (G) the most recent determination letter
issued by the IRS; (H) any Form 5310 or Form 5330
filed with the IRS; and (I) documentation relating to
loans made to Citizens' employee stock ownership plan
and schedules supporting all allocations made under
such plan and compliance under Sections 404 and 415
of the Code. Each Form 5500, actuarial report and
financial statement referred to in the preceding
sentence accurately reflects the contributions,
liabilities and funding levels of the applicable
Compensation Plan.
(3) Each of the Compensation Plans has been administered
and operated in all material respects in accordance
with the terms thereof and with applicable law,
including ERISA, the Code and the Securities Act.
Neither Citizens, any of its Subsidiaries nor any
other person for whom indemnification by Citizens or
any of its Subsidiaries could apply ("Indemnified
Person") has incurred or is likely to incur fiduciary
liability under Part 4 of Title I of ERISA with
respect to any Compensation Plan. Each of the
Compensation Plans which is an "employee pension
benefit plan" within the meaning of Section 3(2) of
ERISA ("Pension Plan") and which is intended to be
qualified under Section 401(a) of the Code has
received a favorable determination letter from the
IRS with respect to "TRA" (as defined in Section 1 of
IRS Revenue Procedure 93-39), and, except as
Previously Disclosed, Citizens is not aware of any
circumstances that would likely result in the
revocation or denial of any such favorable
determination letter. None of Citizens, any of its
Subsidiaries or an Indemnified Person has engaged in
any transaction or taken any action with respect to
any Compensation Plan that has subjected, or could,
to Citizens' knowledge, subject Citizens or any of
its Subsidiaries or any Indemnified Person to a tax
or penalty imposed by either Section 4975 of the Code
or Section 502 of ERISA. There is no pending or, to
Citizens' knowledge, threatened litigation or
governmental audit, examination or investigation
relating to Citizens' Compensation Plans.
(4) No liability under Title IV of ERISA (other than
premiums to the PBGC) has been or is reasonably
expected to be incurred by Citizens or any of its
Subsidiaries with respect to any "single-employer
plan" (within the meaning of Section 4001(a)(15) of
ERISA) or Multiemployer Plan currently or formerly
maintained or contributed to by any of them, or the
single-employer plan or Multiemployer Plan of any
entity (an "ERISA Affiliate") which is considered one
employer with Citizens under Section 4001(a)(14) of
ERISA or Section 414(b) or (c) of the Code (an "ERISA
Affiliate Plan"). No notice of a "reportable event,"
within the meaning of Section 4043 of ERISA for which
the 30-day reporting requirement has not been waived,
has been required to be filed for any Pension Plan or
any ERISA Affiliate within the 12-month period ending
on the date hereof. The PBGC has not instituted
proceedings to terminate any Pension Plan or ERISA
Affiliate Plan and, to Citizens' knowledge, no
condition exists that presents a material risk that
such proceedings will be instituted. To the knowledge
of Citizens, there is no pending investigation or
enforcement action by the PBGC, the DOL or IRS or any
other governmental agency with respect to any
Compensation Plan.
(5) All contributions, premiums and payments required to
have been made under the terms of any of the
Compensation Plans or applicable law have been timely
made or reflected in Citizens' SEC Documents. Neither
any of the Pension Plans nor ERISA Affiliate Plans
has an "accumulated funding deficiency" (whether or
not waived) within the meaning of Section 412 of the
Code or Section 302 of ERISA. None of Citizens, any
of its Subsidiaries or any ERISA Affiliate has
provided, or is required to provide, security to, nor
are there any circumstances requiring, or which can
reasonably be expected to result in, the imposition
of any lien on the assets of Citizens or any of its
Subsidiaries with respect to, any Pension Plan or any
ERISA Affiliate Plan pursuant to Section 401(a)(29)
or Section 412(n) of the Code or pursuant to ERISA.
(6) To Citizens' knowledge, under each Pension Plan, as
of the last day of the most recent plan year ended
prior to the date hereof, the actuarially determined
present value of all "benefit liabilities"
attributable to the participation therein of Citizens
and its Subsidiaries did not exceed the then current
value of the assets of such plan attributable to the
participation therein of Citizens and its
Subsidiaries. For this purpose, "benefit liabilities"
shall be determined in accordance with Section
4001(a)(16) of ERISA on the basis of the actuarial
assumptions contained in the Plan's most recent
actuarial valuation.
(7) No Compensation Plan provides benefits, including
death or medical benefits, with respect to any
employees or former employees of Citizens or any of
its Subsidiaries (or their spouses, beneficiaries, or
dependents) beyond the retirement or other
termination of service of any such employee other
than (A) coverage mandated by Part 6 of Title I of
ERISA or Section 4980B of the Code, (B) retirement or
death benefits under any Pension Plan, (C) disability
benefits under any Compensation Plan which is an
employee welfare benefit plan (as defined under
Section 3(1) of ERISA) that have been fully provided
for by insurance or otherwise, or (D) benefits in the
nature of severance pay under any Compensation Plan.
Citizens and its Subsidiaries may amend or terminate
any Compensation Plan which provides post-retirement
or termination of employment benefits at any time
without incurring any liability thereunder. There has
been no communication to employees, former employees
or their spouses, beneficiaries or dependents by
Citizens or any of its Subsidiaries that promised or
guaranteed such employees retiree health or life
insurance or other retiree death benefits on a
permanent basis or promised or guaranteed that any
such benefits could not be modified, eliminated or
terminated.
(8) Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated
hereby including, without limitation, as a result of
any termination of employment prior to, at or
following the Effective Time, will (A) result in any
increase in compensation or any payment (including,
without limitation, severance, golden parachute or
otherwise) becoming due to any current or former
director, officer or employee of Citizens or any of
its Subsidiaries under any Compensation Plan or
otherwise from Citizens or any of its Subsidiaries,
(B) increase any benefits otherwise payable under any
Compensation Plan, or (C) result in any acceleration
of the time of payment, funding or vesting of any
such benefit.
(9) Neither Citizens nor any of its Subsidiaries
maintains any compensation plans, programs or
arrangements the payments under which are not or
would not reasonably be expected to be deductible as
a result of the limitations under Section 162(m) of
the Code and the regulations issued thereunder. None
of Citizens, the Surviving Corporation or any of
their respective Subsidiaries will be obligated to
make a payment as a result, directly or indirectly,
of the transactions contemplated by this Agreement
that would not reasonably be expected to be
deductible as a result of the limitations under
Section 162(m) of the Code and the regulations issued
thereunder.
(10) As a result, directly or indirectly, of the
transactions contemplated by this Agreement
(including, without limitation, as a result of any
termination of employment prior to, at or following
the Effective Time), none of Lincoln, Citizens the
Surviving Corporation, or any of their respective
Subsidiaries will be obligated to make a payment that
would be characterized as an "excess parachute
payment" to an individual who is a "disqualified
individual" (as such terms are defined in Section
280G of the Code), without regard to whether such
payment is reasonable compensation for personal
services performed or to be performed in the future.
(m) Labor Matters. Neither Citizens nor any of its Subsidiaries is
a party to or is bound by any collective bargaining Contract
or understanding with a labor union or labor organization, nor
is Citizens or any of its Subsidiaries the subject of a
proceeding asserting that it or any such Subsidiary has
committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel Citizens or
any such Subsidiary to bargain with any labor organization as
to wages or conditions of employment, nor is there any strike
or other labor dispute involving it or any of its Subsidiaries
pending or, to Citizens' knowledge, threatened, nor is
Citizens aware of any activity involving it or any of its
Subsidiaries' employees seeking to certify a collective
bargaining unit or engaging in other organizational activity.
(n) Environmental Matters. (1) To Citizens' knowledge, Citizens
and each of its Subsidiaries has complied in all material
respects at all times with applicable Environmental Laws; (2)
to Citizens' knowledge, no property (including buildings and
any other structures) currently or formerly owned or operated
by Citizens or any of its Subsidiaries has been contaminated
with, or has had any release of, any Hazardous Substance
except as Previously Disclosed; (3) to Citizens' knowledge,
neither Citizens nor any of its Subsidiaries would reasonably
be expected to be ruled to be the owner or operator under any
Environmental Law of any property in which it has currently or
formerly held a Lien; (4) to Citizens' knowledge, neither
Citizens nor any of its Subsidiaries is subject to liability
for any Hazardous Substance disposal or contamination on any
other third-party property; (5) neither Citizens nor any of
its Subsidiaries has received any notice, demand letter, claim
or request for information alleging any violation of, or
liability under, any Environmental Law; (6) neither Citizens
nor any of its Subsidiaries is subject to any order, decree,
injunction or other agreement with any Governmental Authority
or any third party relating to any Environmental Law; (7) to
Citizens' knowledge, there are no circumstances or conditions
involving Citizens or any of its Subsidiaries or any currently
or formerly owned or operated property (including the presence
of asbestos, underground storage tanks, lead products,
polychlorinated biphenyls or gas station sites) that could
result in any claims, liability or investigations or result in
any restrictions on the ownership, use, or transfer of any
property pursuant to any Environmental Law; and (8) Citizens
has delivered to Lincoln copies of all environmental reports,
studies, sampling data, correspondence, filings and other
environmental information in its possession or reasonably
available to it relating to Citizens, any of its Subsidiaries,
any currently or formerly owned or operated property or any
property in which Citizens or any of its Subsidiaries has held
a Lien.
(o) Tax Matters. (1) All returns, declarations, reports,
estimates, information returns and statements required to be
filed on or before the Effective Date under federal, state,
local or any foreign tax laws ("Tax Returns") with respect to
Citizens or any of its Subsidiaries, have been or will be
timely filed, or requests for extensions have been timely
filed and have not expired; (2) all Tax Returns filed by
Citizens and its Subsidiaries are complete and accurate in all
material respects; (3) all Taxes shown to be due and payable
(without regard to whether such Taxes have been assessed) on
such Tax Returns (or, with respect to Tax Returns for which an
extension has been timely filed, will be required to be shown
as due and payable when such Tax Returns are filed) have been
paid or adequate reserves have been established for the
payment of such Taxes; (4) no audit or examination or refund
litigation with respect to any such Tax Return is pending or,
to Citizens' knowledge, has been threatened; (5) all
deficiencies asserted or assessments made as a result of any
examination of a Tax Return of Citizens or any of its
Subsidiaries have been paid in full; (6) no waivers of
statutes of limitation have been given by or requested with
respect to any Taxes of Citizens or its Subsidiaries; (7)
Citizens and its Subsidiaries have never been a member of an
affiliated, combined, consolidated or unitary Tax group for
purposes of filing any Tax Return (other than a consolidated
group of which Citizens was the common parent); (8) no closing
agreements, private letter rulings, technical advice memoranda
or similar agreement or rulings have been entered into or
issued by any taxing authority with respect to Citizens or any
of its Subsidiaries; (9) no tax is required to be withheld
pursuant to Section 1445 of the Code as a result of the
transfer contemplated by this Agreement; (10) Citizens and its
Subsidiaries are not bound by any tax indemnity, tax sharing
or tax allocation agreement or arrangement; and (11) Citizens
and its Subsidiaries have withheld and paid all Taxes that
they are required to withhold from compensation income of
their employees.
(p) Risk Management. All swaps, caps, floors, option agreements,
futures and forward contracts and other similar risk
management arrangements, whether entered into for Citizens'
own account, or for the account of one or more of Citizens'
Subsidiaries or their customers, were entered into (1) in
accordance with prudent business practices and all applicable
laws, rules, regulations and regulatory policies and (2) with
counterparties believed to be financially responsible at the
time; and each of them constitutes the valid and legally
binding obligation of Citizens or one of its Subsidiaries,
enforceable in accordance with its terms (except as
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer
and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles),
and are in full force and effect. Neither Citizens nor its
Subsidiaries, nor to Citizens' knowledge any other party
thereto, is in breach of any of its material obligations under
any such agreement or arrangement.
(q) Books and Records. The books and records of Citizens and its
Subsidiaries have been fully, properly and accurately
maintained in all material respects, and there are no material
inaccuracies or discrepancies of any kind contained or
reflected therein, and they fairly present the financial
position of Citizens and its Subsidiaries.
(r) Insurance. Citizens' Disclosure Schedule sets forth all of the
insurance policies, binders, or bonds maintained by Citizens
or its Subsidiaries ("Insurance Policies"). Citizens and its
Subsidiaries are insured with reputable insurers against such
risks and in such amounts as is prudent in accordance with
industry practices. All of the Insurance Policies are in full
force and effect; Citizens and its Subsidiaries are not in
material default thereunder; and all claims thereunder have
been filed in due and timely fashion.
(s) No Brokers. No action has been taken by Citizens that would
give rise to any valid claim against any party hereto for a
brokerage commission, finder's fee or other like payment with
respect to the transactions contemplated by this Agreement,
excluding a fee to be paid by Citizens to Trident in an amount
and on terms Previously Disclosed.
(t) Disclosure. The information Previously Disclosed or otherwise
provided to Lincoln in connection with this Agreement does not
contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the
statements contained therein, in the light of the
circumstances in which they are being made, not misleading.
The copies of all documents furnished to Lincoln hereunder are
true and complete.
5.04 Representations and Warranties of Lincoln. Except as Previously Disclosed
in a paragraph of its Disclosure Schedule corresponding to the relevant
paragraph below, Lincoln hereby represents and warrants to Citizens as follows:
(a) Organization, Standing and Authority. Lincoln is duly
organized, validly existing and in good standing under the
laws of the State of Indiana, and is duly qualified to do
business and is in good standing in the jurisdictions where
its ownership or leasing of property or assets or the conduct
of its business requires it to be so qualified.
(b) Lincoln Stock.
(1) As of the date hereof, the authorized capital stock
of Lincoln consists solely of 20,000,000 shares of
Lincoln Common Stock, of which 5,892,725 shares are
outstanding, and 2,000,000 shares of Lincoln
Preferred Stock, of which no shares are outstanding
as of the date hereof. As of the date hereof, except
as Previously Disclosed, there are no shares of
Lincoln Common Stock authorized and reserved for
issuance, Lincoln does not have any Rights issued or
outstanding with respect to Lincoln Common Stock, and
Lincoln does not have any commitment to authorize,
issue or sell any Lincoln Common Stock or Rights,
except pursuant to this Agreement. The number of
shares of Lincoln Common Stock which are issuable and
reserved for issuance upon exercise of Lincoln Stock
Options as of the date hereof and the exercise price
of such Lincoln Stock Options are Previously
Disclosed.
(2) The shares of Lincoln Common Stock to be issued as
Consideration, when issued in accordance with the
terms of this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free
of preemptive rights, with no personal liability
attaching to the ownership thereof.
(c) Subsidiaries. Each of Lincoln's Subsidiaries has been duly
organized and is validly existing and in good standing under
the laws of the jurisdiction of its organization, and is duly
qualified to do business and in good standing in the
jurisdictions where its ownership or leasing of property or
the conduct of its business requires it to be so qualified.
(d) Corporate Power. Lincoln and each of its Subsidiaries has the
requisite power and authority to carry on its business as it
is now being conducted and to own all its properties and
assets; Lincoln has the corporate power and authority to
execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated
hereby; and Lincoln Savings Bank has the requisite power and
authority to execute, deliver and perform its obligations as
set forth in the form of Subsidiary Merger Agreement attached
hereto as Exhibit C and to consummate the transactions
contemplated thereby.
(e) Corporate Authority and Action.
(1) Lincoln has the requisite corporate power and
authority, and has taken all corporate action
necessary, in order (A) to authorize the execution
and delivery of, and performance of its obligations
under, this Agreement, and (B) subject only to the
registration and issuance of the Lincoln Common Stock
to be provided as part of the Consideration, to
consummate the Merger. This Agreement and the
Ancillary Documents to which Lincoln is a party each
constitute and/or will constitute the valid and
legally binding obligation of Lincoln, enforceable in
accordance with its terms (except as enforceability
may be limited by applicable bankruptcy, insolvency,
reorganization and similar laws of general
applicability relating to or affecting creditors'
rights or by general equity principles).
(2) Lincoln has received the opinion of KBW, dated the
date of this Agreement, to the effect that, as of the
date of this Agreement, the Consideration to be
received in the Merger by the shareholders of Lincoln
is fair to the shareholders of Lincoln from a
financial view point.
(f) Regulatory Approvals; No Defaults.
(1) No consents or approvals of, or filings or
registrations with, any Governmental Authority or
with any third party are required to be made or
obtained by Lincoln or any of its Subsidiaries in
connection with the execution, delivery or
performance by Lincoln of this Agreement, or to
consummate the Merger and the other transactions
contemplated hereby, except for (A) the filing with,
and declaration of effectiveness by, the SEC of the
Registration Statement, (B) the filing of
applications with and receipt of approval thereof
from the OTS, with respect to the Merger and the
Subsidiary Merger, (C) the filing of articles of
merger with the Secretary of State of the State of
Indiana pursuant to the IBCL and the filing of
articles of combination with the OTS with respect to
the Subsidiary Merger, (D) the filing of a notice
with the NASDAQ with respect to the listing for
trading of the shares of Lincoln Common Stock to be
issued in the Merger on the National Market System,
and (E) such other filings, approvals, consents or
waivers as are required under applicable law in
connection with the transactions contemplated by this
Agreement. As of the date hereof, Lincoln is not
aware of any reason why the approvals of all
Governmental Authorities necessary to permit
consummation of the transactions contemplated by this
Agreement will not be received without the imposition
of a condition or requirement described in Section
7.01(b).
(2) Subject to receipt of the regulatory approvals and
expiration of the waiting periods referred to in the
preceding paragraph and the making of required
filings under federal and state securities laws, the
execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated
hereby do not and will not (A) constitute a breach or
violation of, or a default under, or give rise to any
Lien, any acceleration of remedies or any right of
termination under, any law, rule or regulation or any
judgment, decree, order, governmental permit or
license, or Contract of Lincoln or of any of its
Subsidiaries or to which Lincoln or any of its
Subsidiaries or properties is subject or bound, (B)
constitute a breach or violation of, or a default
under, the Lincoln Articles or the Lincoln By-laws,
or (C) require any consent or approval under any such
law, rule, regulation, judgment, decree, order,
governmental permit or license or Contract.
(g) SEC Documents; Financial Statements.
(1) Lincoln's Annual Reports on Form 10-K and proxy
statements on Form 14-A for the fiscal years ended
December 31, 1998 and1999, quarterly reports on Form
10-Q filed during the fiscal year ended December 31,
1999, and all other reports, registration statements,
definitive proxy statements or information statements
filed or to be filed by Lincoln or any of its
Subsidiaries subsequent to December 31, 1999 under
the Securities Act, or under Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act, in the form filed or
to be filed (collectively, the "Lincoln's SEC
Documents") with the SEC, as of the date filed, (A)
complied or will comply with the applicable
requirements under the Securities Act or the Exchange
Act, as the case may be, and (B) did not (or if
amended or superseded by a filing prior to the date
of this Agreement, then as of the date of such
filing) and will not contain any untrue statement of
a material fact or omit to state a material fact
required to be stated therein or necessary to make
the statements therein, in the light of the
circumstances under which they were made, not
misleading; and each of the balance sheets contained
in or incorporated by reference into any such Lincoln
SEC Document (including the related notes and
schedules thereto) fairly presents, or will fairly
present, the financial position of Lincoln and its
Subsidiaries as of its date, and each of the
statements of income and changes in shareholders'
equity and cash flows or equivalent statements in
such of Lincoln's SEC Documents (including any
related notes and schedules thereto) fairly presents,
or will fairly present, the results of operations,
changes in shareholders' equity and changes in cash
flows, as the case may be, of Lincoln and its
Subsidiaries for the periods to which they relate, in
each case in accordance with generally accepted
accounting principles consistently applied during the
periods involved, except in each case as may be noted
therein, subject to normal year-end audit adjustments
in the case of unaudited statements.
(2) Since December 31, 1999 on a consolidated basis
Lincoln and its Subsidiaries have not incurred any
liability other than in the ordinary course of
business consistent with past practice.
(3) Since December 31, 1999 (A) Lincoln and its
Subsidiaries have conducted their respective
businesses in the ordinary and usual course
consistent with past practice and (B) no event has
occurred or circumstance arisen that, individually or
taken together with all other facts, events and
circumstances (described in any paragraph of Section
5.04 or otherwise), has had or is reasonably likely
to have a Material Adverse Effect with respect to
Lincoln.
(h) Litigation. Except as disclosed in Lincoln's SEC Documents
filed before the date hereof, no litigation, claim or other
proceeding before any court, arbitrator or Governmental
Authority is pending against Lincoln or any of its
Subsidiaries and, to Lincoln's knowledge, no such litigation,
claim or other proceeding has been threatened.
(i) Compliance with Laws. Lincoln and each of its Subsidiaries:
(1) conducts its business in compliance with all
applicable federal, state, local and foreign
statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees applicable thereto or to
the employees conducting such businesses, including,
without limitation, the Equal Credit Opportunity Act,
the Fair Housing Act, the Community Reinvestment Act,
the Home Mortgage Disclosure Act and all other
applicable fair lending laws and other laws relating
to discriminatory business practices;
(2) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications
and registrations with, all Governmental Authorities
that are required in order to permit them to conduct
their businesses substantially as presently
conducted; all such permits, licenses, certificates
of authority, orders and approvals are in full force
and effect and, to the best of its knowledge, no
suspension or cancellation of any of them is
threatened;
(3) has received, since December 31, 1997 no notification
or communication from any Governmental Authority (A)
asserting that Lincoln or any of its Subsidiaries is
not in compliance with any of the statutes,
regulations or ordinances that such Governmental
Authority enforces; (B) threatening to revoke any
license, franchise, permit or governmental
authorization (nor, to Lincoln's knowledge, do any
grounds for any of the foregoing exist) or (C)
restricting or disqualifying their activities (except
for restrictions generally imposed by rule,
regulation or administrative policy on banking
organizations generally); and
(4) is not subject to any order or decree issued by, or a
party to any agreement or memorandum of understanding
with, or a party to any commitment letter or similar
undertaking to, or subject to any order or directive
by, a recipient of any supervisory letter from or has
adopted any board resolutions at the request of any
Governmental Authority, or been advised by any
Governmental Authority that it is considering issuing
or requesting any such agreement or other action or
have knowledge of any pending or threatened
regulatory investigation.
(j) No Brokers. No action has been taken by Lincoln that would
give rise to any valid claim against any party hereto for a
brokerage commission, finder's fee or other like payment with
respect to the transactions contemplated by this Agreement,
excluding a fee to be paid by Lincoln to KBW.
(k) Disclosure. The information Previously Disclosed or otherwise
provided to Citizens in connection with this Agreement does
not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the
statements contained therein, in the light of the
circumstances in which they are being made, not misleading.
The copies of all documents furnished to Citizens hereunder
are true and complete.
Article VI
Covenants
6.01 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, each of Citizens and Lincoln agrees to use its reasonable best
efforts in good faith to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or desirable, or advisable under
applicable laws, so as to permit consummation of the Merger as promptly as
practicable and otherwise to enable consummation of the transactions
contemplated hereby and shall cooperate fully with the other party hereto to
that end.
6.02 Shareholder Approval.
(a) Citizens agrees to take, in accordance with applicable law,
applicable rules of NASDAQ, and its articles of incorporation
and by-laws, all action necessary to convene an appropriate
meeting of its shareholders to consider and vote upon the
approval and adoption of this Agreement and the consummation
of the actions and transactions contemplated hereby, and to
solicit shareholder approval and adoption, as promptly as
practicable after the Registration Statement is declared
effective. The Citizens Board is recommending and, unless the
board of directors, after having consulted with and considered
the advice of outside counsel and Trident, has determined in
good faith that to do so would result in a failure by the
directors to discharge properly their fiduciary duties in
accordance with Indiana law, the Citizens Board will continue
to recommend to the shareholders of Citizens, that it approves
this Agreement and take any other action required to permit
consummation of the transactions contemplated hereby.
(b) Each of Citizens and Lincoln agree to take all action
necessary in their respective capacities as sole shareholder
of Citizens Savings Bank and Lincoln Savings Bank to approve
and adopt the Merger Agreement for Subsidiary Merger and the
transactions contemplated thereby.
6.03 Registration Statement.
(a) Lincoln agrees to prepare a registration statement on Form S-4
(the "Registration Statement"), to be filed by Lincoln with
the SEC in connection with the issuance of Lincoln Common
Stock in the Merger (including the proxy statement and
prospectus and other proxy solicitation materials of Citizens
constituting a part thereof (the "Proxy Statement") and all
related documents). Citizens agrees to cooperate, and to cause
its Subsidiaries to cooperate, with Lincoln, its counsel and
its accountants, in preparation of the Registration Statement
and the Proxy Statement; and, provided that Citizens and its
Subsidiaries have cooperated as required above, Lincoln agrees
to file the Registration Statement with the SEC as promptly as
reasonably practicable after the date hereof. Each of Citizens
and Lincoln agrees to use its reasonable best efforts to cause
the Registration Statement to be declared effective under the
Securities Act as promptly as reasonably practicable after
filing thereof. Lincoln also agrees to use all reasonable best
efforts to obtain all necessary state securities law or "Blue
Sky" permits and approvals required to carry out the
transactions contemplated by this Agreement. Citizens agrees
to furnish to Lincoln all information concerning Citizens, its
Subsidiaries, officers, directors and shareholders as may be
reasonably requested in connection with the foregoing.
(b) Each of Citizens and Lincoln agrees, as to itself and its
Subsidiaries, that none of the information supplied or to be
supplied by it for inclusion or incorporation by reference in
(1) the Registration Statement will, at the time the
Registration Statement and each amendment or supplement
thereto, if any, becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and
(2) the Proxy Statements and any amendment or supplement
thereto will, at the date of mailing to shareholders and at
the time of the shareholders meetings for the respective
corporations, contain any untrue statement which, at the time
and in the light of the circumstances under which such
statement is made, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in
order to make the statements therein not false or misleading
or necessary to correct any statement in any earlier statement
in the Proxy Statement or any amendment or supplement thereto.
Each of Citizens and Lincoln further agrees that if it shall
become aware prior to the Effective Date of any information
furnished by it that would cause any of the statements in the
Proxy Statement to be false or misleading with respect to any
material fact, or to omit to state any material fact necessary
to make the statements therein not false or misleading, to
promptly inform the other party thereof and to take the
necessary steps to correct the Proxy Statements.
(c) Lincoln agrees to advise Citizens, promptly after Lincoln
receives notice thereof, of the time when the Registration
Statement has become effective or any supplement or amendment
has been filed, of the issuance of any stop order or the
suspension of the qualification of Lincoln Common Stock for
offering or sale in any jurisdiction, of the initiation or
threat of any proceeding for any such purpose, or of any
request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
6.04 Press Releases. Each of Citizens and Lincoln agrees that it will not,
without the prior approval of the other party, issue any press release or
written statement for general circulation relating to the transactions
contemplated hereby (except for any release or statement that, in the written
opinion of outside counsel to Citizens, is required by law or regulation and as
to which Citizens has used its best efforts to discuss with Lincoln in advance,
provided that such release or statement has not been caused by, or is not the
result of, a previous disclosure by or at the direction of Citizens or any of
its representatives that was not permitted by this Agreement).
6.05 Access; Information.
(a) Each of Citizens and Lincoln agrees that upon reasonable
notice and subject to applicable laws relating to the exchange
of information, it shall afford the other party and the other
party's officers, employees, counsel, accountants and other
authorized representatives, such access during normal business
hours throughout the period prior to the Effective Time to the
books, records (including, without limitation, tax returns and
work papers of independent auditors), properties, personnel
and to such other information as any party may reasonably
request and, during such period, it shall furnish promptly to
such other party (1) a copy of each material report, schedule
and other document filed by it pursuant to the requirements of
federal or state securities or banking laws, and (2) all other
information concerning the business, properties and personnel
of it as the other may reasonably request.
(b) Each of Citizens and Lincoln agrees that it will not, and will
cause its representatives not to, use any information obtained
pursuant to this Section 6.05 for any purpose unrelated to the
consummation of the transactions contemplated by this
Agreement. Subject to the requirements of law, each party will
keep confidential, and will cause its representatives to keep
confidential, all information and documents obtained pursuant
to this Section 6.05 unless such information (1) was already
known to such party, (2) becomes available to such party from
other sources not known by such party to be bound by a
confidentiality obligation, (3) is disclosed with the prior
written approval of the party to which such information
pertains or (4) is or becomes readily ascertainable from
published information or trade sources. In the event that this
Agreement is terminated or the transactions contemplated by
this Agreement shall otherwise fail to be consummated, each
party shall promptly cause all copies of documents or extracts
thereof containing information and data as to another party
hereto to be returned to the party which furnished the same.
(c) No investigation by either party of the business and affairs
of the other shall affect or be deemed to modify or waive any
representation, warranty, covenant or agreement in this
Agreement, or the conditions to either party's obligation to
consummate the transactions contemplated by this Agreement.
6.06 Acquisition Proposals. Citizens agrees that it shall not, and shall cause
its Subsidiaries and its and its Subsidiaries' officers, directors, agents,
advisors and affiliates not to, solicit or encourage inquiries or proposals with
respect to, or engage in any negotiations concerning, or provide any
confidential information to, or have any discussions with, any person relating
to, any tender or exchange offer, proposal for a merger, consolidation or other
business combination involving Citizens or any of its Subsidiaries or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets or deposits of, Citizens or any of its
Subsidiaries, other than the transactions contemplated by this Agreement (any of
the foregoing, an "Acquisition Proposal"); provided however, that if Citizens is
not otherwise in violation of this Section 6.06, the Citizens Board may provide
information to, and may engage in such negotiations or discussions with, a
person with respect to an Acquisition Proposal, directly or through
representatives, if the Citizens Board, after consultation with its outside
counsel and Trident, determines in good faith that its failure to engage in any
such negotiations or discussions would constitute a failure to discharge
properly the fiduciary duties of such directors in accordance with Indiana law.
Citizens shall promptly (within 24 hours) advise Lincoln following the receipt
by it of any Acquisition Proposal and the substance thereof (including the
identity of the person making such Acquisition Proposal and a copy of such
Acquisition Proposal), and advise Lincoln of any developments with respect to
such Acquisition Proposal immediately upon the occurrence thereof.
6.07 Affiliate Agreements. Not later than the 15th day prior to the mailing of
the Proxy Statements, Citizens shall deliver to Lincoln a schedule of each
person that, to Citizens' knowledge, is or is reasonably likely to be, as of the
date of Citizens shareholders' meeting, deemed to be an "affiliate" of it (each,
a "Citizens Affiliate") as that term is used in Rule 145 under the Securities
Act. Citizens agrees to use its reasonable best efforts to cause each person who
may be deemed to be a Citizens Affiliate to execute and deliver to Citizens and
Lincoln on or before the date of mailing of the Proxy Statement an agreement in
the form attached hereto as Exhibit D.
6.08 NASDAQ Listing. Lincoln agrees to use its reasonable best efforts to list,
prior to the Effective Date, on the National Market System of NASDAQ, subject to
official notice of issuance, the shares of Lincoln Common Stock to be issued to
the holders of Citizens Common Stock in the Merger.
6.09 Regulatory Applications.
(a) Lincoln and Citizens and their respective Subsidiaries shall
cooperate and use their respective reasonable best efforts to
prepare all documentation, to effect all filings and to obtain
all permits, consents, approvals and authorizations of all
third parties and Governmental Authorities necessary to
consummate the transactions contemplated by this Agreement.
Each of Lincoln and Citizens agrees that it will consult with
the other party hereto with respect to the obtaining of all
material permits, consents, approvals and authorizations of
all third parties and Governmental Authorities necessary or
advisable to consummate the transactions contemplated by this
Agreement and each party will keep the other party appraised
of the status of material matters relating to completion of
the transactions contemplated hereby. Copies of applications
and correspondence with such Governmental Authorities promptly
shall be provided to the other party.
(b) Each of Lincoln and Citizens agrees, upon request, to furnish
the other party with all information concerning itself, its
Subsidiaries, directors, officers and shareholders and such
other matters as may be reasonably necessary or advisable in
connection with any filing, notice or application made by or
on behalf of such other party or any of its Subsidiaries to
any third party or Governmental Authority.
6.10 D & O Insurance.
(a) For a period of two years from the Effective Time, Lincoln
shall use its reasonable best efforts to obtain an endorsement
to its director's and officer's liability insurance policy to
cover the present and former officers and directors of
Citizens or any of its Subsidiaries (determined as of the
Effective Time) with respect to claims against such directors
and officers arising from facts or events which occurred
before the Effective Time, which insurance shall contain at
least the same coverage and amounts, and contain terms and
conditions no less advantageous, as that coverage currently
provided by Citizens; provided however, that if Lincoln is
unable to obtain such endorsement, then Citizens may purchase
tail coverage under its existing director and officer
liability insurance policy for such claims; provided further
that in no event shall Lincoln be required to expend each year
during such two-year period more than twice the current annual
amount spent by Citizens (the "Insurance Amount") to maintain
or procure its current directors' and officers' insurance
coverage; provided further, that if Lincoln is unable to
maintain or obtain the insurance called for by this Section
6.10(a), Lincoln shall use its reasonable best efforts to
obtain as much comparable insurance as is available for the
Insurance Amount; provided, further, that officers and
directors of Citizens or any Subsidiary may be required to
make application and provide customary representations and
warranties to Lincoln's insurance carrier for the purpose of
obtaining such insurance.
(b) For six years after the Effective Time, the Surviving
Corporation shall indemnify, defend and hold harmless the
present and former officers and directors of Citizens and its
Subsidiaries against all losses, expenses (including
attorneys' fees), claims, damages or liabilities arising out
of actions or omissions occurring on or prior to the Effective
Time (including, without limitation, the transactions
contemplated by this Agreement) to the full extent then
permitted under the IBCL and by Lincoln's Articles of
Incorporation as in effect on the date hereof, including
provisions relating to advances of expenses incurred in the
defense of any action or suit.
(c) If Lincoln shall consolidate with or merge into any other
entity and shall not be the continuing or surviving entity of
such consolidation or merger or shall transfer all or
substantially all of its assets to any entity (a "Change of
Control"), then and in each case, proper provision shall be
made so that the successors and assigns of Lincoln shall
assume the obligations set forth in this Section 6.10 and in
Sections 2.01(d), 6.13 and 6.20 below.
6.11 Accountants' Letters. Each of Citizens and Lincoln shall use its reasonable
best efforts to cause to be delivered to the other party, and such other party's
directors and officers who sign the Registration Statement, letters of Olive
LLP, independent auditors, dated (1) the date on which the Registration
Statement shall become effective and (2) a date shortly prior to the Effective
Date, and addressed to such other party, and such directors and officers, in
form and substance customary for "comfort" letters delivered by independent
accountants in accordance with Statement of Accounting Standards No. 72.
6.12 Notification of Certain Matters. Each of Citizens and Lincoln shall give
prompt notice to the other of any fact, event or circumstance known to it that
(1) is reasonably likely, individually or taken together with all other facts,
events and circumstances known to it, to result in any Material Adverse Effect
with respect to it or (2) would cause or constitute a material breach of any of
its representations, warranties, covenants or agreements contained herein.
6.13 Advisory Directors. As of the Effective Time, Lincoln agrees to cause
Lincoln Savings Bank to appoint each person, other than Fred W. Carter, who
immediately prior to the Effective Time was a director or director emeritus of
Citizens or Citizens Savings Bank, as an advisory director of Lincoln Savings
Bank. Such advisory directors and advisory directors emeritus shall meet
semi-annually and shall advise Lincoln on facilitating a smooth transition of
Citizens' business into Lincoln's following the Merger. Subject to applicable
regulatory requirements, unless Cause exists for their removal, they shall be
re-appointed annually to serve in such capacities through March 31, 2003 and
shall receive annual fees of $1,000 for such service. For purposes of this
Section 6.13, "Cause" means a conviction of a felony or any crime involving an
element of moral turpitude.
6.14 Stock Option Plan. Within 45 days of the date as of which this Agreement is
dated, Citizens will obtain written consents from each holder to whom a Citizens
Stock Option is outstanding (i) consenting to the disposition of such option in
accordance with the provisions of Section 3.01(b) or 3.01(c) above, (ii)
agreeing not to exercise such option on or before the Effective Date unless (A)
this Agreement is terminated and the Merger is abandoned pursuant to Article
VIII or (B) such exercise is made not more than one week before the date on
which the option otherwise would cease to be exercisable.
6.15 Recognition and Retention Plan. At the Effective Time, Lincoln Savings Bank
will assume the Citizens Savings Bank Recognition and Retention Plan and Trust
(the "RRP Plan"). Prior to the Effective Time, Citizens Savings Bank will take
the necessary steps to (i) cause any shares of Citizens Common Stock held in the
Plan Share Reserve of the RRP Plan to be returned to Citizens and canceled and
(ii) amend the RRP Plan, effective as of the Effective Time, (A) to define
"Bank" to refer to Lincoln Savings Bank instead of to Citizens Savings Bank, (B)
to define "Holding Company" to refer to Lincoln instead of to Citizens, (C) to
define "Committee" to refer to the Compensation Committee of the Lincoln Board
instead of to the Stock Compensation Committee of the Citizens Board, (D) to
define "Common Stock" to refer to Lincoln Common Stock instead of to Citizens
Common Stock, (E) to delete Sections 3.07, 5.01 and 5.02, (F) to provide in
Section 5.03 that no further contributions may be made to the Trust, that shares
of Lincoln Common Stock received as Per Share Stock Consideration for Citizens
Common Stock shall be retained and held subject to the same Award to which such
Citizens Common Stock was subject, and that cash received as Per Share Cash
Consideration for Citizens Common Stock shall be applied to the purchase of
shares of Lincoln Common Stock on the open market, which shares shall be
retained and held subject to the same Award to which such Citizens Common Stock
was subject, (G) to provide in Section 7.01 that service as an advisory director
of Lincoln Savings Bank provided for in Section 6.13 above, service as a
director or director emeritus of Lincoln Savings Bank, and service as a director
of Lincoln shall each constitute "service as a Director or Director Emeritus"
for purposes of determining the extent to which Plan Share Awards are earned,
and (H) to provide in Section 9.02 that the power to amend or terminate shall
not include the right to cancel outstanding Plan Share Awards or to require
shares of Lincoln Common Stock or other assets subject to any outstanding Award
to be released from the trust under the RRP Plan while the Award remains
outstanding. In addition, prior to the Effective Time, Citizens Savings Bank may
modify any or all outstanding RRP Plan Awards held by employees of Citizens and
its Subsidiaries who became employees of Lincoln or its Subsidiaries on the
Effective Date to provide that the Award shall become fully vested, subject to
any applicable bank regulatory requirements, in the event the grantee's
qualifying service with Lincoln and its Subsidiaries (or their successors) is
terminated by Lincoln and its Subsidiaries (or their successors) without cause
or by the grantee for good reason. The trustee of the trust under the RRP Plan
shall not be obligated to purchase shares of Lincoln Common Stock on the open
market as provided in (F) above at any time Lincoln is engaged in an open market
stock repurchase program. For purposes of this Section 6.15 only, to the extent
the capitalized terms in this Section 6.15 are defined and capitalized in the
governing documents and outstanding grant agreements of the RRP Plan as in
effect on the date hereof and are not otherwise specially defined or dealt with
in this Agreement, such capitalized terms shall have the meanings assigned to
them in such governing documents and outstanding agreements.
6.16 ESOP. As of the Effective Date, the Citizens Employee Stock Ownership Plan
(the "Citizens ESOP") shall be terminated, all shares of Citizens Common Stock
held by the Citizens ESOP shall be converted into rights to receive the Merger
Consideration in respect thereof, all outstanding indebtedness of the Citizens
ESOP shall be repaid, any assets remaining in the suspense fund under the
Citizens ESOP shall be allocated to Participants' Company Contribution Accounts
under the Citizens ESOP either pursuant to Sections 4.2 and 8.7(h) of the
Citizens ESOP in the case of amounts attributable to Company Contributions made
prior to the Effective Date for the Plan Year which includes the Effective Date
or pursuant to Section 8.7(j) of the Citizens ESOP in the case of any other
amounts, and the net assets of the Citizens ESOP shall be distributed to
Participants under the Citizens ESOP and their Beneficiaries, subject to the
receipt of a favorable determination letter from the IRS and except as otherwise
required by applicable law. Citizens shall file the notifications or
applications with the IRS necessary to comply with the provisions of this
Section 6.16. If for any reason the IRS will not permit the Citizens ESOP to be
terminated or distributions be made to employees of Citizens and its
Subsidiaries as provided above unless the Citizens ESOP is amended, Citizens may
make such required amendment; provided, however, that (i) no such amendment
shall require or have the effect of requiring Lincoln or its Subsidiaries to
make any contributions to the Citizens ESOP at or after the Effective Time, (ii)
no such amendment shall require or have the effect of requiring Citizens or its
Subsidiaries to make any contributions to the Citizens ESOP at or prior to the
Effective Time in addition to any contributions that otherwise would be
required, (iii) any such amendment shall be conditioned upon its not having an
adverse effect upon the qualified status of the Citizens ESOP under Section
401(a) of the Code, and (iv) no such amendment shall require or have the effect
of requiring the continuation of the Citizens ESOP after the Effective Date
except to the extent and for so long as the Citizens ESOP may be so continued
without having an adverse effect on the qualified status under Section 401(a) of
the Code of any other employee pension benefit plan of Lincoln or a Subsidiary
of Lincoln that is intended to be so qualified. Citizens and its Subsidiaries
shall make no contributions to the Citizens ESOP between the date hereof and the
Effective Date other than such as may be required to maintain the tax-qualified
status of the Citizens ESOP or to enable the Citizens ESOP to make required
payments on the loans currently outstanding to it.
6.17 Defined Benefit Pension Plan. Citizens Savings Bank and Lincoln Savings
Bank both maintain qualified defined benefit pension programs through
participation in the Financial Institutions Retirement Fund ("FIRF"). Citizens
Savings Bank shall make contributions to the Citizens Savings Bank FIRF between
the date hereof and the Effective Date only to the extent required to maintain
the Plan's tax-qualified status and avoid any federal income taxes or penalties
attributable to the Plan's funding status. At or prior to the Effective Time,
Citizens Savings Bank may amend its FIRF Plan to take into account, for purposes
of determining a participant's rate of base compensation for the calendar year
2000 and subsequent calendar years, increases in such rate occurring during the
applicable year. At the Effective Time, subject to applicable law and the
requirements of the FIRF Plan, Lincoln Savings Bank shall assume the FIRF Plan
of Citizens Savings Bank, merge such Plan into its own FIRF Plan, and amend as
necessary the participation agreement of such merged FIRF Plan so that, (i) from
and after the Effective Time, employees of Citizens Savings Bank who become
employees of Lincoln Savings Bank will accrue benefits pursuant to the FIRF Plan
as adopted by Lincoln Savings Bank resulting from the merger of the Citizens
Savings Bank FIRF Plan with the Lincoln Savings Bank FIRF Plan, and (ii) from
and afer the merger of those Plans, former Citizens employees participating in
the merged Plan shall receive credit for eligibility, vesting, and benefit
accrual purposes, for the service of such employees with Citizens and its
Subsidiaries prior to the Effective Time as if such service were with Lincoln
and its Subsidiaries; provided, however, that the accrued benefit of any such
former Citizens employee in respect of service prior to the Effective Time shall
be determined under the benefit formulae under the Citizens Savings Bank FIRF
Plan as in effect from time to time prior to the Effective Time; provided
further, that for benefit accrual purposes, service prior to the Effective Time
that was not taken into account for such purposes under the Citizens Savings
Bank FIRF Plan shall not be taken into account under the Lincoln Savings Bank
FIRF Plan. Nothing herein shall be deemed to preclude Lincoln and its
Subsidiaries from amending or terminating the Lincoln Savings Bank FIRF Plan
after the Effective Time.
6.18 Executive Supplemental Retirement Income Agreements. From and after the
Effective Date, Lincoln Savings Bank will assume the rights and obligations of
Citizens Savings Bank under its executive supplemental retirement income
agreements with Fred W. Carter, Stephen D. Davis and Cindy S. Chambers and
director deferred compensation agreement with Fred W. Carter, all as in effect
on the date hereof and amended as herein provided. Prior to the Effective Date,
Citizens Savings Bank may amend such agreements (i) to provide that they cannot
be amended at or after the Effective Time without the consent of the affected
employee (or former employee) or director (or former director) or his or her
successor or beneficiary and (ii) to provide, in the event of a Change of
Control of Lincoln, for the immediate payment to the affected employee (or
former employee) or director (or former director), or his or her successor or
beneficiary, in one lump sum, of the entire remaining nonforfeitable accrued
benefit thereunder, such payment to be in an amount equal to the actuarial
equivalent of such remaining benefit as the same then would be determined under
the FIRF Plan.
6.19 Employee Matters.
(a) Lincoln agrees that those employees of Citizens or its
Subsidiaries who become employees of Lincoln or its
Subsidiaries on the Effective Date ("Former Citizens
Employees"), while they remain employees of Lincoln or its
Subsidiaries after the Effective Date will be provided with
benefits under employee benefit plans during their period of
employment which are no less favorable in the aggregate than
those provided by Lincoln to similarly situated employees of
Lincoln and its Subsidiaries. At the Effective Time, except as
otherwise provided in Section 6.17 above, Lincoln will amend
or cause to be amended each employee benefit plan of Lincoln
and its Subsidiaries in which Former Citizens Employees are
eligible to participate, to the extent necessary, so that as
of the Effective Time (i) such plans take into account for
purposes of eligibility, vesting, and benefit accrual, the
service of such employees with Citizens and its Subsidiaries
as if such service were with Lincoln and its Subsidiaries, to
the same extent that such service was credited under a
comparable plan of Citizens and its Subsidiaries, (ii) Former
Citizens Employees are not subject to any waiting periods or
pre-existing condition limitations under the medical, dental
and health plans of Lincoln or its Subsidiaries in which they
are eligible to participate and may commence participation in
such plans on the Effective Date, (iii) Former Citizens
Employees will retain credit for unused sick leave and
vacation pay which has been accrued as of the Effective Time,
(iv) for purposes of determining the entitlement of Former
Citizens Employees to sick leave and vacation pay following
the Effective Time, the service of such employees with
Citizens and its Subsidiaries shall be treated as if such
service were with Lincoln and its Subsidiaries, and (v) Former
Citizens Employees shall become eligible to participate in the
Lincoln Federal Savings Bank 401(k) plan on the first plan
entry date following their satisfaction of the eligibility
requirements of such plan. Notwithstanding the foregoing,
Lincoln is not required to cover until January 1, 2002, under
its own employee stock ownership plan those former employees
of Citizens and its Subsidiaries who participated in the
Citizens ESOP.
(b) Citizens and its Subsidiaries will comply with applicable law
and the terms of the relevant Compensation Plan with respect
to the voting of any Citizens Common Stock held by any such
plan.
(c) Fred W. Carter is retiring and will cease to be an employee of
Citizens or Citizens Savings Bank or their respective
successors as of the Effective Time. Prior to the Effective
Time, Mr. Carter will continue to be paid the compensation
provided for in his employment agreement with Citizens Savings
Bank and will continue participating in the employee benefit,
retirement, and compensation plans and other perquisites
provided for in such agreement. Any benefits payable under
insurance, health, retirement and bonus plans through the
Effective Date will be paid when due under those plans.
Citizens shall pay to Mr. Carter (or his estate in the event
of his death prior to the Effective Time) a cash sum (the
"Cash Sum") equal to the sum of (i) $412,000, less (ii) any
excess of his base compensation from Citizens and its
Subsidiaries for the portion of calendar year 2000 preceding
the Effective Time over the amount of base compensation to
which he would have been entitled for such period had his base
compensation been payable ratably during such calendar year at
the annual rate of $155,000. Of this amount $150,000 shall be
paid to Mr. Carter on January 2, 2001, and the balance shall
be paid to him at the Effective Time; provided, however, that
all of such amount shall be paid to Mr. Carter at the
Effective Time if it shall be determined by Olive LLP (or
another independent accounting firm mutually agreeable to
Lincoln and Mr. Carter) that this is necessary in order for
such amount to be accrued as an expense of Citizens and it
Subsidiaries for the accounting period which includes the
Effective Date. Citizens Savings Bank will use its best
efforts to obtain from Mr. Carter, within 30 days after the
date as of which this Agreement is dated, (i) an
acknowledgment that his employment is terminating otherwise
than pursuant to subsections 7(A), 7(B), 7(C), 7(D) or 7(E) of
his employment agreement and (ii) a binding written
commitment, in the event the Merger is consummated, to accept
the amounts payable under this Section 6.19(c) in lieu of any
amounts that otherwise would be payable under section 8 of his
employment agreement. The amounts payable under this Section
6.19(c) shall be paid whether or not Mr. Carter is required to
terminate his employment with Citizens Savings Bank prior to
the Effective Date for any reason, including, without
limitation, his disability.
(d) Lincoln Savings Bank wants to retain the services of Fred W.
Carter as a consultant pursuant to the terms of the Consulting
Agreement attached hereto as Exhibit E. Lincoln Savings Bank
will use its best efforts to negotiate and enter into with Mr.
Carter, within 45 days from the date as of which this
Agreement is dated, an agreement retaining Mr. Carter as a
consultant, to become effective as of the Effective Time,
either on the terms set forth in Exhibit E or on such
alternative terms as Mr. Carter and Lincoln Savings Bank
mutually may agree.
(e) With the exception of Fred W. Carter, Lincoln intends to
retain Citizens employees for at least six months following
the Effective Date in positions comparable to those they
currently hold with Citizens or its Subsidiaries.
6.20 Severance. With the exception of Fred W. Carter, those employees of
Citizens or its Subsidiaries as of the Effective Time (i) who are not employed
by Lincoln or its Subsidiaries after the Effective Time or are terminated or
voluntarily resign as of a date within six months after the Effective Date after
being notified that, as a condition of employment, such employee must work at a
location more than 30 miles from such employee's former location of employment
or that such employee's salary will be materially decreased and (ii) who sign
and deliver a termination and release agreement in the form attached hereto as
Exhibit H, shall be entitled to severance pay equal to one week of pay, at their
rate of pay in effect at the Effective Time, for each full year of continuous
service with Citizens or its Subsidiaries or their successors not in excess of
26 years completed prior to the Effective Time or, in the case of employees who
continue as employees of Lincoln or its Subsidiaries after the Effective Time,
prior to their termination or resignation as such. Nothing in this Section 6.20
shall be deemed to limit or modify Lincoln's at will employment policy.
Article VII
Conditions to Consummation of the Merger
7.01 Conditions to Each Party's Obligation to Effect the Merger. The respective
obligation of each of Lincoln and Citizens to consummate the Merger is subject
to the fulfillment or written waiver by Lincoln and Citizens prior to the
Effective Time of each of the following conditions:
(a) Shareholder Approval. This Agreement and the actions and
transactions contemplated hereby shall have been duly adopted
by the affirmative vote of the holders of the requisite number
of the outstanding shares of Citizens Common Stock entitled to
vote thereon in accordance with applicable law, the Citizens
Articles and the Citizens By-laws, and the actions and
transactions contemplated in the Merger Agreement for
Subsidiary Merger shall have been duly adopted by Citizens and
Lincoln, acting in their respective capacities as sole
shareholder of Citizens Savings Bank and Lincoln Savings Bank.
(b) Governmental and Regulatory Consents. All approvals and
authorizations of, filings and registrations with, and
notifications to, all Governmental Authorities required for
the consummation of the Merger and the Subsidiary Merger, and
for the prevention of any termination of any material right,
privilege, license or agreement of either Lincoln or Citizens
or their respective Subsidiaries, shall have been obtained or
made and shall be in full force and effect and all waiting
periods required by law shall have expired; provided, however,
that none of the preceding shall be deemed obtained or made if
it shall be subject to any condition or restriction the effect
of which would have been such that Lincoln would not
reasonably have entered into this Agreement had such condition
or restriction been known as of the date hereof.
(c) Third Party Consents. All consents or approvals of all
persons, other than Governmental Authorities, required for or
in connection with the execution, delivery and performance of
this Agreement and the consummation of the Merger shall have
been obtained and shall be in full force and effect, unless
the failure to obtain any such consent or approval is not
reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on the Surviving Corporation.
(d) No Injunction. No Governmental Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced
or entered any statute, rule, regulation, judgment, decree,
injunction or other order (whether temporary, preliminary or
permanent) which is in effect and prohibits consummation of
the transactions contemplated by this Agreement.
(e) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and no stop order
suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose
shall have been initiated or threatened by the SEC.
(f) Blue Sky Approvals. All permits and other authorizations under
the federal and state securities laws (other than that
referred to in Section 7.01(e)) and other authorizations
necessary to consummate the transactions contemplated hereby
and to issue the shares of Lincoln Common Stock to be issued
in the Merger shall have been received and be in full force
and effect.
(g) Listing. The shares of Lincoln Common Stock to be issued in
the Merger shall have been approved for listing on the
National Market System of NASDAQ, subject to official notice
of issuance.
7.02 Conditions to Obligation of Citizens. The obligation of Citizens to
consummate the Merger is also subject to the fulfillment or written waiver by
Citizens prior to the Effective Time of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Lincoln set forth in this Agreement shall be
true and correct as of the date of this Agreement and as of
the Effective Date as though made on and as of the Effective
Date (except that representations and warranties that by their
terms speak as of the date of this Agreement or some other
date shall be true and correct only as of such date), and
Citizens shall have received a certificate, dated the
Effective Date, signed on behalf of Lincoln by a senior
officer of Lincoln to such effect.
(b) Employee Matters. Either (1) Lincoln Savings Bank and Fred W.
Carter shall have entered into a mutually acceptable
Consulting Agreement as provided in Section 6.19(d) above or
(2) Lincoln Savings Bank shall have offered to enter into the
Consulting Agreement attached hereto as Exhibit E and Mr.
Carter shall not have accepted such offer. Lincoln and its
Subsidiaries shall have amended their FIRF Plan and other
employee benefit plans, if and to the extent such amendments
are required by, and subject to the conditions provided in,
Sections 6.17 and 6.19(a) above.
(c) Performance of Obligations of Lincoln. Lincoln shall have
performed in all material respects all obligations required to
be performed by it under this Agreement at or prior to the
Effective Time, and Citizens shall have received a
certificate, dated the Effective Date, signed on behalf of
Lincoln by the Chief Executive Officer and the Chief Financial
Officer of Lincoln to such effect.
(d) Opinion of Counsel. Citizens shall have received an opinion,
dated the Effective Date, of Bose McKinney & Evans LLP,
counsel to Lincoln, in substantially the same form as that
attached hereto as Exhibit F.
(e) Tax Opinion of Citizens' Counsel. Citizens shall have received
an opinion of Barnes & Thornburg, counsel to Citizens, to the
effect that (1) the Merger constitutes a "reorganization"
within the meaning of Section 368 of the Code and (2) no gain
or loss will be recognized by shareholders of Citizens to the
extent they receive shares of Lincoln Common Stock as
Consideration in exchange for shares of Citizens Common Stock.
(f) Accountants' Letters. Citizens shall have received the letters
referred to in Section 6.14 from Olive LLP, Lincoln's
independent auditors.
(g) Trident Fairness Opinion. Citizens shall have received the
opinion of Trident, dated the date of the Proxy Statement
(which shall be appended as an exhibit thereto), and an
updated opinion of Trident as of the Effective Date, that the
Consideration to be received in the Merger by the shareholders
of Citizens is fair to the shareholders of Citizens from a
financial point of view.
7.03 Conditions to Obligation of Lincoln. The obligation of Lincoln to
consummate the Merger is also subject to the fulfillment or written waiver by
Lincoln prior to the Effective Time of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Citizens set forth in this Agreement shall be
true and correct as of the date of this Agreement and as of
the Effective Date as though made on and as of the Effective
Date (except that representations and warranties that by their
terms speak as of the date of this Agreement or some other
date shall be true and correct only as of such date) and
Lincoln shall have received a certificate, dated the Effective
Date, signed on behalf of Citizens by the Chief Executive
Officer and the person acting as the chief financial officer
of Citizens to such effect.
(b) Employee Matters. Fred W. Carter shall have made the
acknowledgment and binding commitment provided for in Section
6.19(c) above, in form and substance satisfactory to Lincoln,
so that the obligations assumed by Lincoln Savings Bank in
respect of Mr. Carter's employment agreement with Citizens
Savings Bank are limited to those set forth in Section 6.19(c)
above.
(c) Performance of Obligations of Citizens. Citizens shall have
performed in all material respects all obligations required to
be performed by it under this Agreement at or prior to the
Effective Time, and Lincoln shall have received a certificate,
dated the Effective Date, signed on behalf of Citizens by the
Chief Executive Officer and the Chief Financial Officer of
Citizens to such effect.
(d) Opinion of Counsel. Lincoln shall have received an opinion,
dated the Effective Date, of Barnes & Thornburg, Counsel to
Citizens, in substantially the same form as that attached
hereto as Exhibit G.
(e) Tax Opinion of Lincoln's Counsel. Lincoln shall have received
an opinion of Bose McKinney & Evans LLP, counsel to Lincoln,
dated the Effective Date, to the effect that the Merger
constitutes a "reorganization" within the meaning of Section
368 of the Code.
(f) Accountants' Letters. Lincoln and its directors and officers
who sign the Registration Statement shall have received the
letters referred to in Section 6.14 from Olive LLP, Citizens'
independent auditors.
Article VIII
Termination
8.01 Termination. This Agreement may be terminated and the Merger may be
abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by
the mutual consent of Lincoln and Citizens, if the Board of
Directors of each so determines by vote of a majority of the
members of its entire Board.
(b) Breach. At any time prior to the Effective Time, by Lincoln or
Citizens, in each case if its Board of Directors so determines
by vote of a majority of the members of its entire Board, in
the event of either: (1) a breach by the other party of any
representation or warranty contained herein, which breach
cannot be or has not been cured within 30 days after the
giving of written notice to the breaching party of such
breach; or (2) a breach by the other party of any of the
covenants or agreements contained herein, which breach cannot
be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach and which
breach would be reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the breaching
party.
(c) Delay. At any time prior to the Effective Time, by Lincoln or
Citizens, in each case if its Board of Directors so determines
by vote of a majority of the members of its entire Board, in
the event that the Merger is not consummated by December 31,
2000, except to the extent that the failure of the Merger then
to be consummated arises out of or results from the action or
inaction of the party seeking to terminate pursuant to this
Section 8.01(c).
(d) No Approval. By Citizens or Lincoln, in each case if its Board
of Directors so determines by a vote of a majority of the
members of its entire Board, in the event (1) the approval of
any Governmental Authority required for consummation of the
Merger and the other transactions contemplated by this
Agreement shall have been denied by final non-appealable
action of such Governmental Authority or (2) the shareholder
approval contemplated by Section 6.02 herein is not obtained.
(e) Failure to Recommend, Etc. By Lincoln, if (1) prior to the
effectiveness of the Registration Statement, the Board of
Directors of Citizens shall not have recommended adoption and
approval of this Agreement to its shareholders, or (2) at any
time prior to the receipt of the approval of Citizens'
shareholders contemplated by Section 7.01(a), Citizens' Board
of Directors shall have withdrawn such recommendation or
modified or changed such recommendation in a manner adverse to
the interests of Lincoln (whether in accordance with Section
6.02 or otherwise).
(f) Acceptance of Superior Proposal. By Citizens, if, without
breaching Section 6.06, Citizens shall contemporaneously enter
into a definitive agreement with a third party providing for
an Acquisition Proposal on terms determined in good faith by
the Citizens Board, after consulting with and considering the
advice of Citizens' outside counsel and financial advisors, to
constitute a Superior Proposal; provided, that the right to
terminate this Agreement under this Section 8.01(f) shall not
be available to Citizens unless it delivers to Lincoln (1)
written notice of Citizens' intention to terminate at least
five days prior to termination and (2) simultaneously with
such termination, the Fee referred to in Section 8.03.
8.02 Effect of Termination and Abandonment. In the event of termination of this
Agreement and the abandonment of the Merger pursuant to this Article VIII, no
party to this Agreement shall have any liability or further obligation to any
other party hereunder except (a) as set forth in Sections 8.03 and 9.01 and (b)
that termination will not relieve a breaching party from liability for any
willful breach of this Agreement giving rise to such termination.
8.03 Termination Fee. If (1) Lincoln terminates this Agreement pursuant to
Section 8.01(e) or (2) Citizens terminates this Agreement pursuant to Section
8.01(f), then, within five business days of such termination, Citizens shall pay
Lincoln by wire transfer in immediately available funds a fee of $500,000 (the
"Fee"). If Citizens terminates this Agreement for any reason other than pursuant
to Section 8.01(b) (at a time when Lincoln could not also terminate pursuant to
Section 8.01(b)), or if this Agreement is terminated solely by reason of the
failure of Citizens to receive shareholder approval of the Merger, and if,
within twelve months of the date of such termination by Citizens, a change in
control of Citizens is consummated, then Citizens shall pay the Fee to Lincoln
by wire transfer in immediately available funds. (For purposes of this Section
8.03, a "change in control" shall be deemed to have taken place if: (w) any
person or entity, including a "group" as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, other than Citizens itself, a Subsidiary
thereof, or any employee benefit plan of Citizens or any of its Subsidiaries, is
or becomes the beneficial owner, directly or indirectly, of securities
representing fifty percent (50%) or more of the then-issued and outstanding
common stock of Citizens or the combined voting power of the then-outstanding
securities of Citizens, whether through a tender offer or otherwise; (x) there
occurs any consolidation or merger in which Citizens is not the continuing or
surviving corporation (except for a merger in which the holders of Citizens'
common and/or other voting stock immediately prior to the merger have the same
proportionate ownership of common and/or other voting stock of the surviving
corporation immediately after the merger); (y) there occurs any consolidation or
merger in which Citizens is the surviving corporation but in which shares of its
common and/or other voting stock would be converted into cash or securities of
any other corporation or other property; (z) there occurs any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of Citizens.)
Notwithstanding the foregoing, no Fee shall be required to be paid if Lincoln or
Citizens terminates this Agreement solely because of Citizens to obtain the
shareholder approval of this Agreement and the actions and transactions
contemplated hereby.
Article IX
Miscellaneous
9.01 Survival. None of the representations, warranties, covenants and other
agreements in this Agreement or in any instrument delivered pursuant to this
Agreement, other than those contained in Sections 6.05(b), 8.02, and 8.03 and in
this Article IX, shall survive the termination of this Agreement if this
Agreement is terminated prior to the Effective Time. None of the
representations, warranties, covenants and other agreements in this Agreement or
in any instrument delivered pursuant to this Agreement, including any rights
arising out of any breach of such representations, warranties, covenants and
other agreements, shall survive the Effective Time, except for those covenants
and agreements contained in Sections 6.13 and 6.20 which by their terms apply or
are to be performed in whole or in part after the Effective Time and this
Article IX.
9.02 Waiver; Amendment. Prior to the Effective Time, any provision of this
Agreement may be (a) waived by the party benefitted by the provision, or (b)
amended or modified at any time, by an agreement in writing executed by both
parties, except that, after approval of the Merger by the shareholders of
Citizens, no amendment may be made which under applicable law requires further
approval of such shareholders without obtaining such required further approval.
9.03 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to constitute an original.
9.04 Governing Law. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of Indiana applicable to contracts made
and to be performed entirely within such State.
9.05 Expenses. Subject to Sections 8.03, each party hereto will bear all
expenses incurred by it in connection with this Agreement and the transactions
contemplated hereby, except that printing and postage expenses and SEC
registration fees shall be shared equally between Citizens and Lincoln.
9.06 Notices. All notices, requests and other communications hereunder to a
party shall be in writing and shall be deemed given (a) on the date of delivery,
if personally delivered or telecopied (with confirmation), (b) on the first
business day following the date of dispatch, if delivered by a recognized
next-day courier service, or (c) on the third business day following the date of
mailing, if mailed by registered or certified mail (return receipt requested),
in each case to such party at its address or telecopy number set forth below or
such other address or numbers as such party may specify by notice to the parties
hereto.
If to Citizens, to:
Fred W. Carter, President
Citizens Savings Bank of Frankfort
60 South Main Street
Frankfort, Indiana 46041
Facsimile: (765) 654-7313
With a copy to:
Claudia V. Swhier, Esq.
Barnes & Thornburg
11 South Meridian Street
Indianapolis, Indiana 46204
Facsimile: (317) 231-7433
If to Lincoln, to:
T. Tim Unger, President
Lincoln Federal Savings Bank
1121 East Main Street
Plainfield, Indiana 46168
Facsimile: (317) 839-6775
With a copy to:
David A. Butcher, Esq.
Bose McKinney & Evans LLP
2700 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, Indiana 46204
Facsimile: (317) 684-5173
9.07 Entire Understanding; No Third Party Beneficiaries. This Agreement
(together with the Disclosure Schedules and the Exhibits hereto) represents the
entire understanding of the parties hereto with reference to the transactions
contemplated hereby and this Agreement supersedes any and all other oral or
written agreements heretofore made. Except for Sections 2.01(d), 6.10, 6.13, and
6.20 hereof (which are intended to be for the benefit of those present and
former officers, directors, and employees of Citizens and its Subsidiaries
affected thereby and may be enforced by such persons), nothing in this
Agreement, expressed or implied, is intended to confer upon any person, other
than the parties hereto or their respective successors and permitted assigns,
any rights, remedies, obligations or liabilities under or by reason of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
CITIZENS BANCORP
("Citizens")
By: /s/ Fred W. Carter
-----------------------------
Printed: Fred W. Carter
Title: President
LINCOLN BANCORP
("Lincoln")
By: /s/ T. Tim Unger
-----------------------------
Printed: T. Tim Unger
Title: President
Each of the undersigned directors of Citizens hereby (a) agrees in his
capacity as a director to recommend to Citizens' shareholders the approval of
this Agreement and the Merger, except as otherwise provided in Sections 6.02 and
6.06 of this Agreement, and (b) agrees in his individual capacity to vote his
shares of Citizens common stock that are registered in his personal name (and
agrees to use his best efforts to cause all additional shares of Citizens Common
Stock owned jointly with any other person or by his spouse or over which he has
voting influence or control to be voted) in favor of this Agreement and the
Merger. In addition, each of the undersigned directors hereby agrees not to make
any transfers of shares of Citizens with the purpose of avoiding his agreements
set forth in the preceding sentence.
Dated this 21st day of March, 2000.
/s/ Robert F. Ayres
---------------------------
Robert F. Ayres
/s/ Fred W. Carter
---------------------------
Fred W. Carter
/s/ Perry W. Lewis
---------------------------
Perry W. Lewis
/s/ John J. Miller
---------------------------
John J. Miller
/s/ Billy J. Wray
---------------------------
Billy J. Wray
<PAGE>
List of Exhibits
Exhibit Title
A Form of Articles of Merger
B Form of Subsidiary Merger Articles of Combination
C Form of Merger Agreement for Subsidiary Merger
D Form of Affiliate Agreement
E Form of Consulting Agreement
F Form of Opinion of Lincoln's Counsel
G Form of Opinion of Citizens' Counsel
H Form of Termination and Release Agreement
<PAGE>
Annex B
[TRIDENT LETTERHEAD]
July 27, 2000
Board of Directors
Citizens Bancorp
60 South Main Street
Frankfort, Indiana 46041
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to the holders of the issued and outstanding shares of common
stock, no par value (the "Citizens Common Stock") of Citizens Bancorp
("Citizens"), of the consideration to be paid by Lincoln Bancorp ("Lincoln")
pursuant to the Agreement and Plan of Reorganization, dated as of March 21, 2000
(the "Agreement") by and among Citizens and Lincoln. Unless otherwise noted, all
terms used herein will have the same meaning as defined in the Agreement.
The Agreement provides for the merger (the "Merger") of Citizens with
and into Lincoln, pursuant to which, among other things, at the Effective Time
(as defined in the Agreement), each outstanding share of Citizens Common Stock,
other than any shares held in the treasury of Citizens, will be exchanged for
the right to receive 0.9375 shares of the common stock of Lincoln (the "Lincoln
Common Stock") and $9.375 in cash (together, the "Consideration"). The terms and
conditions of the Merger are more fully set forth in the Agreement.
Trident Securities ("Trident"), a division of McDonald Investments
Inc., as part of its investment banking business, is customarily engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
We have acted as Citizens' financial advisor in connection with, and
have participated in certain negotiations leading to, the Agreement. In
connection with rendering our opinion set forth herein, we have among other
things:
(i) Reviewed certain publicly available information concerning Citizens,
including the Annual Reports on Form 10-K of Citizens for each of the
years in the three year period ended June 30, 1999 and the Quarterly
Reports on Form 10-Q of Citizens for the quarters ended September 30,
1999, December 31, 1999 and March 31, 2000;
(ii) Reviewed certain publicly available information concerning Lincoln,
including the Annual Reports on Form 10-K of Lincoln for the years
ended December 31, 1999 and December 31, 1998 and the Quarterly
Reports on Form 10-Q of Lincoln for the quarter ended March 31, 2000;
(iii) Reviewed certain other internal information, primarily financial in
nature relating to the respective businesses, earnings, assets and
prospects of Citizens and Lincoln provided to us or publicly
available for purposes of our analysis;
(iv) Participated in meetings and telephone conferences with members of
senior management of Citizens and Lincoln concerning the financial
condition, business, assets, financial forecasts and prospects of the
respective companies, as well as other matters we believed relevant
to our inquiry;
(v) Reviewed certain stock market information for Citizens Common Stock
and Lincoln Common Stock, and compared it with similar information
for certain companies, the securities of which are publicly traded;
(vi) Compared the results of operations and financial condition of
Citizens and Lincoln with that of certain companies, which we deemed
to be relevant for purposes of this opinion;
(vii) Reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions, which we deemed to be relevant for
purposes of this opinion;
(viii) Reviewed the Agreement and certain related documents; and (ix) Performed
such other reviews and analyses as we have deemed appropriate.
<PAGE>
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information reviewed by us and have relied upon the accuracy and completeness of
the representations, warranties and covenants of Citizens and Lincoln contained
in the Agreement. We have not been engaged to undertake, and have not assumed
any responsibility for, nor have we conducted, an independent investigation or
verification of such matters. We have not been engaged to and we have not
conducted a physical inspection of any of the assets, properties or facilities
of either Citizens or Lincoln, nor have we made or obtained or been furnished
with any independent valuation or appraisal of any of such assets, properties or
facilities or any of the liabilities of either Citizens or Lincoln. With respect
to financial forecasts used in our analysis, we have assumed that such forecasts
have been reasonably prepared by management of Citizens and Lincoln, as the case
may be, on a basis reflecting the best currently available estimates and
judgments of the management of Citizens and Lincoln, as to the future
performance of Citizens, Lincoln, and Citizens and Lincoln combined, as the case
may be. We have not been engaged to and we have not assumed any responsibility
for, nor have we conducted any independent investigation or verification of such
matters, and we express no view as to such financial forecasts or the
assumptions on which they are based. We have also assumed that all of the
conditions to the consummation of the Merger, as set forth in the Agreement,
would be satisfied and that the Merger would be consummated on a timely basis in
the manner contemplated by the Agreement.
This opinion is based on economic and market conditions and other
circumstances existing on, and information made available as of, the date
hereof. In addition, our opinion is, in any event, limited to the fairness, as
of the date hereof, from a financial point of view, of the Consideration, to the
holders of Citizens Common Stock, and does not address the underlying business
decision by Citizens' Board of Directors to effect the Merger, does not compare
or discuss the relative merits of any competing proposal or any other terms of
the Merger, and does not constitute a recommendation to any Citizens'
shareholder as to how such shareholder should vote with respect to the Merger.
This opinion does not represent an opinion as to what the value of Citizens
Common Stock or Lincoln Common Stock may be at the Effective Time of the Merger
or as to the prospects of Citizens' business or Lincoln's business.
We have acted as financial advisor to Citizens in connection with the
Merger and will receive from Citizens a fee for our services, a significant
portion of which is contingent upon the consummation of the Merger, as well as
Citizens' agreement to indemnify us under certain circumstances. We will also
receive a fee for our services in rendering this opinion. In the past, we have
also provided certain other investment banking services for Citizens and have
received compensation for such services.
In the ordinary course of business, we may actively trade securities of
both Citizens and Lincoln for our own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
It is understood that this opinion was prepared solely for the
confidential use of the Board of Directors and senior management of Citizens and
may not be disclosed, summarized, excerpted from or otherwise publicly referred
to without our prior written consent. Our opinion does not constitute a
recommendation to any stockholder of Citizens as to how such stockholder should
vote at the stockholders' meeting held in connection with the Merger. This
opinion does not represent an opinion as to what the value of Citizens Common
Stock or Lincoln Common Stock may be at the Effective Time of the Merger or as
to the prospects of Citizen's business or Lincoln's business. Notwithstanding
the foregoing, this opinion may be included in the proxy statement to be mailed
to the holders of Citizens Common Stock in connection with the Merger, provided
that this opinion will be reproduced in such proxy statement in full, and any
description of or reference to us or our actions, or any summary of the opinion
in such proxy statement, will be in a form reasonably acceptable to us and our
counsel.
Based upon and subject to the foregoing and such other matters, as we
consider relevant, it is our opinion that as of the date hereof, the
Consideration is fair, from a financial point of view, to the stockholders of
Citizens.
Very truly yours,
TRIDENT SECURITIES,
a division of McDonald Investments Inc.
/s/ Trident Securities
<PAGE>
ANNEX C
INDIANA BUSINESS CORPORATION LAW
TITLE 23. BUSINESS AND OTHER ASSOCIATIONS
ARTICLE 1. BUSINESS CORPORATIONS - TYPES
CHAPTER 44. DISSENTERS' RIGHTS
ss. 23-1-44-1. "Corporation" defined.
As used in this chapter, "corporation" means the issuer of the
shares held by a dissenter before the corporate action, or the surviving or
acquiring corporation by merger or share exchange of that issuer.
ss. 23-1-44-2. "Dissenter" defined.
As used in this chapter, "dissenter" means a shareholder who is
entitled to dissent from corporate action under section 8 of this chapter and
who exercises that right when and in the manner required by sections 10 through
18 of this chapter.
ss. 23-1-44-3. "Fair value" defined.
As used in this chapter, "fair value", with respect to a dissenter's
shares, means the value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would be
inequitable.
ss. 23-1-44-4. "Interest" defined.
As used in this chapter, "interest" means interest from the effective
date of the corporate action until the date of payment, at the average rate
currently paid by the corporation on its principal bank loans or, if none, at a
rate that is fair and equitable under all the circumstances.
ss. 23-1-44-5. "Record shareholder" defined.
As used in this chapter, "record shareholder" means the person in whose
name shares are registered in the records of a corporation or the beneficial
owner of shares to the extent that treatment as a record shareholder is provided
under a recognition procedure or a disclosure procedure established under IC
23-1-30-4.
ss. 23-1-44-6. "Beneficial shareholder" defined.
As used in this chapter, "beneficial shareholder" means the person who
is a beneficial owner of shares held by a nominee as the record shareholder.
ss. 23-1-44-7. "Shareholder" defined.
As used in this chapter, "shareholder" means the record shareholder or
the beneficial shareholder.
ss. 23-1-44-8. Shareholder dissent.
(a) A shareholder is entitled to dissent from, and obtain payment of
the fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party if:
(A) shareholder approval is required for the merger by IC
23-1-40-3 or the articles of incorporation; and
(B) the shareholder is entitled to vote on the merger.
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan.
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
(1) year after the date of sale.
(4) The approval of a control share acquisition under IC 23-1-42.
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
(b) This section does not apply to the holders of shares of any class
or series if, on the date fixed to determine the shareholders entitled to
receive notice of and vote at the meeting of shareholders at which the merger,
plan of share exchange, or sale or exchange of property is to be acted on, the
shares of that class or series were:
(1) registered on a United States securities exchange registered under
the Exchange Act (as defined in IC 23-1-43-9); or
(2) traded on the National Association of Securities Dealers, Inc.
Automated Quotations System Over-the-Counter Markets _ National Market Issues or
a similar market.
(c) A shareholder:
(1) who is entitled to dissent and obtain payment for the shareholder's
shares under this chapter; or
(2) who would be so entitled to dissent and obtain payment but for the
provisions of subsection (b); may not challenge the corporate action creating
(or that, but for the provisions of subsection (b), would have created) the
shareholder's entitlement.
ss.23-1-44-9. Beneficial shareholder dissent.
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one (1) person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
shareholder dissents and the shareholder's other shares were registered in the
names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on the shareholder's behalf only if:
(1) the beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(2) the beneficial shareholder does so with respect to all the
beneficial shareholder's shares or those shares over which the beneficial
shareholder has power to direct the vote.
ss.23-1-44-10. Notice of dissenters' rights preceding shareholder vote.
(a) If proposed corporate action creating dissenters' rights under
section 8 of this chapter is submitted to a vote at a shareholders' meeting, the
meeting notice must state that shareholders are or may be entitled to assert
dissenters' rights under this chapter.
(b) If corporate action creating dissenters' rights under section 8 of
this chapter is taken without a vote of shareholders, the corporation shall
notify in writing all shareholders entitled to assert dissenters' rights that
the action was taken and send them the dissenters' notice described in section
12 of this chapter.
ss.23-1-44-11. Notice of intent to dissent.
(a) If proposed corporate action creating dissenters' rights under
section 8 of this chapter is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated; and
(2) Must not vote the shareholder's shares in favor of the proposed
action.
(b) A shareholder who does not satisfy the requirements of subsection
(a) is not entitled to payment for the shareholder's shares under this chapter.
ss.23-1-44-12. Notice of dissenters' rights following action creating rights.
(a) If proposed corporate action creating dissenters' rights under
section 8 of this chapter is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of section 11 of this chapter.
(b) The dissenters' notice must be sent no later than ten (10) days
after approval by the shareholders, or if corporate action is taken without
approval by the shareholders, then ten (10) days after the corporate action was
taken.
The dissenters' notice must:
(1) state where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date;
(4) set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30) nor more than sixty (60)
days after the date the subsection (a) notice is delivered; and
(5) be accompanied by a copy of this chapter.
ss.23-1-44-13. Demand for payment by dissenter.
(a) A shareholder sent a dissenters' notice described in IC 23-1-42-11
or in section 12 of this chapter must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date required
to be set forth in the dissenter's notice under section 12(b)(3) of this
chapter, and deposit the shareholder's certificates in accordance with the terms
of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
shares under subsection (a) retains all other rights of a shareholder until
these rights are cancelled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter and is considered, for purposes of this article, to have
voted the shareholder's shares in favor of the proposed corporate action.
ss.23-1-44-14. Transfer of shares restricted after demand for payment.
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under section 16 of this
chapter.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
ss. 23-1-44-15. Payment to dissenter.
(a) Except as provided in section 17 of this chapter, as soon as the
proposed corporate action is taken, or, if the transaction did not need
shareholder approval and has been completed, upon receipt of a payment demand,
the corporation shall pay each dissenter who complied with section 13 of this
chapter the amount the corporation estimates to be the fair value of the
dissenter's shares.
(b) The payment must be accompanied by:
(1) the corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(2) a statement of the corporation's estimate of the fair value of the
shares; and
(3) a statement of the dissenter's right to demand payment under
section 18 of this chapter.
ss.23-1-44-16. Return of shares and release of restrictions.
(a) If the corporation does not take the proposed action within sixty
(60) days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 12 of this chapter and repeat the payment
demand procedure.
ss.23-1-44-17. Offer of fair value for shares obtained after first announcement.
(a) A corporation may elect to withhold payment required by section 15
of this chapter from a dissenter unless the dissenter was the beneficial owner
of the shares before the date set forth in the dissenters' notice as the date of
the first announcement to news media or to shareholders of the terms of the
proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall estimate
the fair value of the shares and shall pay this amount to each dissenter who
agrees to accept it in full satisfaction of the dissenter's demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares and a statement of the dissenter's right to demand payment
under section 18 of this chapter.
ss.23-1-44-18. Dissenter demand for fair value under certain conditions.
(a) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and demand
payment of the dissenter's estimate (less any payment under section 15 of this
chapter), or reject the corporation's offer under section 17 of this chapter and
demand payment of the fair value of the dissenter's shares, if:
(1) the dissenter believes that the amount paid under section 15 of
this chapter or offered under section 17 of this chapter is less than the fair
value of the dissenter's shares;
(2) the corporation fails to make payment under section 15 of this
chapter within sixty (60) days after the date set for demanding payment; or
(3) the corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty (60) days after the date set for
demanding payment.
(b) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (a) within thirty (30) days after the corporation made
or offered payment for the dissenter's shares.
ss.23-1-44-19. Effect of failure to pay demand--Commencement of judicial
appraisal proceeding.
(a) If a demand for payment under IC 23-1-42-11 or under section 18 of
this chapter remains unsettled, the corporation shall commence a proceeding
within sixty (60) days after receiving the payment demand and petition the court
to determine the fair value of the shares. If the corporation does not commence
the proceeding within the sixty (60) day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit or
superior court of the county where a corporation's principal office (or, if none
in Indiana, its registered office) is located. If the corporation is a foreign
corporation without a registered office in Indiana, it shall commence the
proceeding in the county in Indiana where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign corporation
was located.
(c) The corporation shall make all dissenters (whether or not residents
of this state) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) for the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
(2) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under section 17 of this chapter.
ss.23-1-44-20. Judicial determination and assessment of costs.
(a) The court in an appraisal proceeding commenced under section 19 of
this chapter shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against such parties and in such amounts as the
court finds equitable.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(1) against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of sections 10 through 18 of this chapter; or
(2) against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
