SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
LINCOLN BANCORP
(Name Of Registrant As Specified In Its Charter)
LINCOLN BANCORP
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction
applies: N/A
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing. N/A
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
Lincoln Bancorp
P.O. Box 510
1121 East Main Street
Plainfield, Indiana 46168
(317) 839-6539
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
To Be Held On April 18, 2000
Notice is hereby given that the Annual Meeting of Shareholders of Lincoln
Bancorp (the "Holding Company") will be held at the Plainfield United Methodist
Church, 600 Simmons Street, Plainfield, Indiana, on Tuesday, April 18, 2000, at
12:00 p.m., Eastern Standard Time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of two directors of the Holding
Company to serve three-year terms expiring in 2003.
2. Other Business. Such other matters as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on February 21, 2000, are
entitled to vote at the meeting or any adjournment thereof.
We urge you to read the enclosed Proxy Statement carefully so that you may
be informed about the business to come before the meeting, or any adjournment
thereof. At your earliest convenience, please sign and return the accompanying
proxy in the postage-paid envelope furnished for that purpose. Lunch will be
provided at the Annual Meeting of Shareholders. Accordingly, please R.S.V.P. to
Susie Riggen at (317) 839-6539 if you plan to attend the meeting and enjoy
lunch.
A copy of our Annual Report for the fiscal year ended December 31, 1999, is
enclosed. The Annual Report is not a part of the proxy soliciting material
enclosed with this letter.
By Order of the Board of Directors
/s/ T. Tim Unger
T. Tim Unger,
Chairman, President and
Chief Executive Officer
Plainfield, Indiana
March 15, 2000
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
Lincoln Bancorp
P.O. Box 510
1121 East Main Street
Plainfield, Indiana 46168
(317) 839-6539
---------------
PROXY STATEMENT
---------------
FOR
ANNUAL MEETING OF SHAREHOLDERS
April 18, 2000
This Proxy Statement is being furnished to the holders of common stock,
without par value (the "Common Stock"), of Lincoln Bancorp (the "Holding
Company"), an Indiana corporation, in connection with the solicitation of
proxies by the Board of Directors of the Holding Company to be voted at the
Annual Meeting of Shareholders to be held at 12:00 p.m., Eastern Standard Time,
on April 18, 2000, at the Plainfield United Methodist Church, 600 Simmons
Street, Plainfield, Indiana, and at any adjournment of such meeting. The
principal asset of the Holding Company consists of 100% of the issued and
outstanding shares of common stock, $.01 par value per share, of Lincoln Federal
Savings Bank (the "Bank"). This Proxy Statement is expected to be mailed to the
shareholders of the Holding Company on or about March 15, 2000.
The proxy solicited hereby, if properly signed and returned to the Holding
Company and not revoked prior to its use, will be voted in accordance with the
instructions contained therein. If no contrary instructions are given, each
proxy received will be voted for each of the matters described below and, upon
the transaction of such other business as may properly come before the meeting,
in accordance with the best judgment of the persons appointed as proxies.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Holding Company
written notice thereof (John M. Baer, P.O. Box 510, 1121 East Main Street,
Plainfield, Indiana 46168), (ii) submitting a duly executed proxy bearing a
later date, or (iii) by appearing at the Annual Meeting and giving the Secretary
notice of his or her intention to vote in person. Proxies solicited hereby may
be exercised only at the Annual Meeting and any adjournment thereof and will not
be used for any other meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on February 21, 2000
("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 5,952,725 shares of the Common Stock issued and
outstanding, and the Holding Company had no other class of equity securities
outstanding. Each share of Common Stock is entitled to one vote at the Annual
Meeting on all matters properly presented at the Annual Meeting. The holders of
over 50% of the outstanding shares of Common Stock as of the Voting Record Date
must be present in person or by proxy at the Annual Meeting to constitute a
quorum. In determining whether a quorum is present, shareholders who abstain,
cast broker non-votes, or withhold authority to vote on one or more director
nominees will be deemed present at the Annual Meeting.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 21, 2000, by each person who is
known by the Holding Company to own beneficially 5% or more of the Common Stock.
Unless otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares.
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner(1) Beneficially Owned of Class
---------------------- ------------------ --------
Home Federal Savings Bank, as Trustee
501 Washington Street
Columbus, Indiana 47201 560,740 (2) 9.4%
(1) The information in this chart is based on a Schedule 13G Report filed
by the above-listed person with the Securities and Exchange Commission
(the "SEC") containing information concerning shares held by it. It
does not reflect any changes in those shareholdings which may have
occurred since the date of such filing.
(2) These shares are held by the Trustee of the Lincoln Bancorp Employee
Stock Ownership Plan and Trust (the "ESOP"). The Employees
participating in that Plan are entitled to instruct the Trustee how to
vote shares held in their accounts under the Plan. Unallocated shares
held in a suspense account under the Plan are required under the Plan
terms to be voted by the Trustee in the same proportion as allocated
shares are voted. Prior to the initial allocation of shares, the ESOP
shares will be voted by the ESOP committee.
PROPOSAL I -- ELECTION OF DIRECTORS
Following the Annual Meeting of Shareholders, the Board of Directors will
consist of eight members. The By-Laws provide that the Board of Directors is to
be divided into three classes as nearly equal in number as possible. The members
of each class are to be elected for a term of three years and until their
successors are elected and qualified. One class of directors is to be elected
annually. Directors must have their primary domicile in Clinton, Hendricks or
Montgomery Counties, Indiana, must have had a loan or deposit relationship with
the Bank for a continuous period of nine months prior to their nomination to the
Board (or in the case of directors in office on September 10, 1998, prior to
that date), and non-employee directors must have served as a member of a civic
or community organization based in Clinton, Hendricks or Montgomery Counties,
Indiana for at least a continuous period of 12 months during the five years
prior to their nomination to the Board. The nominees for director this year are
Lester N. Bergum, Jr. and Dennis W. Dawes, each of whom is a current director of
the Holding Company. If elected by the shareholders at the Annual Meeting, the
terms of Messrs. Bergum and Dawes will expire in 2003. Wayne E. Kessler,
currently a director of the Holding Company, will retire from the Board at the
conclusion of the meeting.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed below. If any
person named as a nominee should be unable or unwilling to stand for election at
the time of the Annual Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board of Directors. At this time, the
Board of Directors knows of no reason why the nominees listed below may not be
able to serve as directors if elected.
The following table sets forth certain information regarding the nominees
for the position of director of the Holding Company, including the number and
percent of shares of Common Stock beneficially owned by such persons as of the
Voting Record Date. Unless otherwise indicated, each nominee has sole investment
and/or voting power with respect to the shares shown as beneficially owned by
him. No nominee for director is related to any other nominee for director or
executive officer of the Holding Company by blood, marriage, or adoption, and
there are no arrangements or understandings between any nominee and any other
person pursuant to which such nominee was selected. The table also sets forth
the number of shares of Holding Company Common Stock beneficially owned by John
M. Baer, the Holding Company's Secretary, Treasurer, and Chief Financial
Officer, and by all directors and executive officers of the Holding Company as a
group.
<TABLE>
<CAPTION>
Director Common Stock
Expiration of Director of the of the Beneficially
Term as Holding Bank Owned as of Percentage
Name Director Company Since Since February 21, 2000 of Class(1)
- ---------------------- ---------- ------------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Director Nominees
- -----------------
Dennis W. Dawes 2003 1999 1999 1,000 (2) .01%
Lester N. Bergum, Jr. 2003 1998 1996 30,513 (3) .51%
Directors
- ---------
W. Thomas Harmon 2001 1998 1982 60,513 (4) .10%
Jerry R. Holifield 2001 1998 1992 30,645 (4) .51%
Wayne E. Kessler 2000 1998 1976 20,513 (5) .34%
David E. Mansfield 2002 1998 1997 20,513 (4) .34%
John C. Milholland 2001 1998 1988 57,475 (4) .97%
T. Tim Unger 2002 1998 1996 106,074 (6) 1.78%
John L. Wyatt 2002 1998 1992 40,513 (7) .68%
Executive Officer
John M. Baer
Secretary, Treasurer
and Chief Financial Officer 74,837 (8) 1.26%
All directors and
executive officers
as a group (10 persons) 442,596 (9) 7.44%
</TABLE>
(1) Based upon information furnished by the respective director nominees. Under
applicable regulations, shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic power
with respect to the shares. Includes shares beneficially owned by members
of the immediate families of the directors residing in their homes. Does
not include any shares allocated to accounts of officers under the ESOP.
(2) Does not include options for 15,000 shares granted to Mr. Dawes under the
Lincoln Bancorp Stock Option Plan (the "Option Plan") which are not
exercisable within 60 days of the Voting Record Date.
(3) Includes 7,610 shares held jointly by Mr. Bergum and his spouse and 10,513
shares held under the Lincoln Federal Savings Bank Recognition and
Retention Plan and Trust (the "RRP"). Does not include options for 26,284
shares granted to Mr. Bergum under the Option Plan which are not
exercisable within 60 days of the Voting Record Date.
(4) Includes 10,513 shares held under the RRP. Does not include options for
26,284 shares granted under the Option Plan which are not exercisable
within 60 days of the Voting Record Date.
(5) Includes 10,000 shares held jointly by Mr. Kessler and his spouse and
10,513 shares held under the RRP. Does not include options for 26,284
shares granted under the Option Plan which are not exercisable within 60
days of the Voting Record Date.
(6) Includes 56,074 shares held under the RRP. Does not include options for
106,074 shares granted under the 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 and 10,513
shares held under the RRP. Does not include options for 26,284 shares
granted under the Option Plan which are not exercisable within 60 days of
the Voting Record Date.
(8) Includes 10,891 shares held jointly by Mr. Baer and his spouse and 35,046
shares held under the RRP. Does not include 60,092 shares granted under the
Option Plan which are not exercisable within 60 days of the Voting Record
Date.
(9) Includes 164,711 shares held under the RRP. Does not include options for
434,311 shares granted under the Option Plan which are not exercisable
within 60 days of the Voting Record Date.
Presented below is certain information concerning the director nominees
of the Holding Company:
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 58) 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.
Wayne E. Kessler (age 69) has been a self-employed farmer in
Crawfordsville, Indiana since 1949. Mr. Kessler is currently semi-retired. He
will retire from the Board at the conclusion of the Annual Meeting of
Shareholders.
David E. Mansfield (age 57) is an Administrative Supervisor for
Marathon Oil Company where he has worked since 1973.
John C. Milholland (age 63) 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 the Holding Company 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.
The Bank also has a director emeritus program pursuant to which our
former directors may continue to serve as advisors to the Board of Directors
upon their retirement or resignation from the Board. Currently, Edward E. Whalen
serves as a director emeritus of the Bank.
THE DIRECTORS SHALL BE ELECTED UPON RECEIPT OF A PLURALITY OF VOTES
CAST AT THE ANNUAL SHAREHOLDERS MEETING. PLURALITY MEANS THAT INDIVIDUALS WHO
RECEIVE THE LARGEST NUMBER OF VOTES CAST ARE ELECTED UP TO THE MAXIMUM NUMBER OF
DIRECTORS TO BE CHOSEN AT THE MEETING. ABSTENTIONS, BROKER NON-VOTES, AND
INSTRUCTIONS ON THE ACCOMPANYING PROXY TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR
MORE OF THE NOMINEES WILL RESULT IN THE RESPECTIVE NOMINEE RECEIVING FEWER
VOTES. HOWEVER, THE NUMBER OF VOTES OTHERWISE RECEIVED BY THE NOMINEE WILL NOT
BE REDUCED BY SUCH ACTION.
The Board of Directors and its Committees
During the fiscal year ended December 31, 1999, the Board of Directors
of the Holding Company met or acted by written consent 13 times. No director
attended fewer than 75% of the aggregate total number of meetings during the
last fiscal year of the Board of Directors of the Holding Company held while he
served as director and of meetings of committees which he served during that
fiscal year. The Board of Directors of the Holding Company has an Audit
Committee and a Stock Compensation Committee, among its other Board Committees.
All committee members are appointed by the Board of Directors.
The Audit Committee, the members of which are W. Thomas Harmon, Wayne
E. Kessler and Jerry R. Holifield, recommends the appointment of the Holding
Company's independent accountants, and meets with them to outline the scope and
review the results of such audit. The Audit Committee met four times during the
fiscal year ended December 31, 1999.
The Stock Compensation Committee administers the Option Plan and the
RRP. The members of that Committee are Messrs. Harmon, Holifield, Mansfield and
Milholland. It met or acted by written consent two times during fiscal 1999.
The Board of Directors of the Holding Company nominated the slate of
directors set forth in the Proxy Statement. Although the Board of Directors of
the Holding Company will consider nominees recommended by shareholders, it has
not actively solicited recommendations for nominees from shareholders nor has it
established procedures for this purpose. Directors must satisfy certain
qualification requirements set forth in the Holding Company's By-Laws. Article
III, Section 12 of the Holding Company's By-Laws provides that shareholders
entitled to vote for the election of directors may name nominees for election to
the Board of Directors but there are certain requirements that must be satisfied
in order to do so. Among other things, written notice of a proposed nomination
must be received by the Secretary of the Holding Company not less than 120 days
prior to the Annual Meeting; provided, however, that in the event that less than
130 days' notice or public disclosure of the date of the meeting is given or
made to shareholders (which notice or public disclosure includes the date of the
Annual Meeting specified in the Holding Company's By-Laws if the Annual Meeting
is held on such date), notice must be received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made.
Management Remuneration and Related Transactions
Remuneration of Named Executive Officer
During the fiscal year ended December 31, 1999, no cash compensation was
paid directly by the Holding Company to any of its executive officers. Each of
such officers was compensated by the Bank.
The following tables set forth information as to annual, long term and
other compensation for services in all capacities to the President and Chief
Executive Officer of the Holding Company for the last three fiscal years and the
Chief Financial Officer, Secretary and Treasurer of the Holding Company for the
last two fiscal years (the "Named Executive Officers"). There were no other
executive officers of the Holding Company who earned over $100,000 in salary and
bonuses during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Long Term Compensation
Annual Compensation Awards
Other All
Annual Restricted Securities Other
Name and Fiscal Compen- Stock Underlying Compen-
Principal Position Year Salary ($)(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 Internal Revenue Code of
1986, as amended (the "Code") under the Bank'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 the 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 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
$366,888, respectively. Awards paid on the restricted shares are
payable to the grantee as the shares are vested and are not included in
the table.
Stock Options
The following table sets forth information related to options granted
during fiscal year 1999 to the Named Executive Officers.
Option Grants - Last Fiscal Year
Individual Grants
% of Total
Options Granted Exercise or
Options to Employees Base Price Expiration
Name Granted(#) In Fiscal Year ($/Share)(3) Date
---- ---------- -------------- ------------ ----
T. Tim Unger 175,231 (1) 47.25% $12.50 7/5/2009
John M. Baer 60,092 (2) 16.21% $12.50 7/5/2009
(1) These are options to acquire shares of the Holding Company's Common Stock.
They are exercisable at the rate of 20% per year over a 5-year period
commencing July 6, 1999. Subject to earlier vesting under certain
circumstances.
(2) These are options to acquire shares of the Holding Company's Common Stock.
These options become exercisable as to 8,000 shares on July 6, 2000, as to
8,000 shares on July 6, 2001, as to 8,000 shares the first days of years
2002 - 2006, and as to 4,092 shares on January 1, 2007, subject to earlier
vesting under certain circumstances.
(3) The option exercise price may be paid in cash or with the approval of the
Stock Compensation Committee beginning on December 30, 2001, in shares of
Holding Company Common Stock or a combination thereof. The option exercise
price equaled the market value of a share of the Holding Company Common
Stock on the date of grant.
The following table includes the number of shares covered by
exercisable and unexercisable stock options held by the Named Executive Officers
as of December 31, 1999. Also reported are the values for "in-the-money" options
(options whose exercise price is lower than the market value of the shares at
fiscal year end) which represent the spread between the exercise price of any
such existing stock options and the fiscal year-end market price of the stock.
Outstanding Stock Option Grants and Value Realized as of 12/31/99
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End (#) Fiscal Year End ($) (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
The Bank entered into a three-year employment contract with Mr. Unger. The
contract with Mr. Unger extends annually for an additional one-year term to
maintain its three-year term if the Bank's Board of Directors determines to so
extend it, unless notice not to extend is properly given by either party to the
contract. Mr. Unger receives a salary under the contract equal to his current
salary with the Bank, subject to increases approved by the Board of Directors.
The contract also provides, among other things, for participation in other
fringe benefits and benefit plans available to the Bank's employees. Mr. Unger
may terminate his employment upon 60 days' written notice to the Bank. The Bank
may discharge Mr. Unger for cause (as defined in the contract) at any time or in
certain specified events. If the Bank terminates Mr. Unger's employment for
other than cause or if Mr. Unger terminates his own employment for cause (as
defined in the contract), Mr. Unger will receive his base compensation under the
contract for an additional three years if the termination follows a change of
control in the Holding Company, and for the balance of the contract if the
termination does not follow a change in control. In addition, during such
period, Mr. Unger will continue to participate in the Bank's group insurance
plans and retirement plans, or receive comparable benefits. Moreover, within a
period of three months after such termination following a change of control, Mr.
Unger will have the right to cause the Bank to purchase any stock options he
holds for a price equal to the fair market value (as defined in the contract) of
the shares subject to such options minus their option price. If the payments
provided for in the contract, together with any other payments made to Mr. Unger
by the Bank, are deemed to be payments in violation of the "golden parachute"
rules of the Code, such payments will be reduced to the largest amount which
would not cause the Bank to lose a tax deduction for such payments under those
rules. As of the date hereof, the cash compensation which would be paid under
the contract to Mr. Unger if the contract were terminated after a change of
control of the Holding Company, without cause by the Bank, or for cause by Mr.
Unger, would be $525,000. For purposes of this employment contract, a change of
control of the Holding Company is generally an acquisition of control, as
defined in regulations issued under the Change in Bank Control Act and the
Savings and Loan Holding Company Act.
The employment contract protects the Bank's confidential business
information and protects the Bank from competition by Mr. Unger should he
voluntarily terminate his employment without cause or be terminated by the Bank
for cause.
Compensation of Directors
The Bank pays its non-employee directors a monthly retainer of $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. The Bank's
directors emeritus receive a $1,000 annual retainer. Directors also typically
receive a year-end bonus depending on the Bank's performance during the year.
Total fees paid to Bank directors and directors emeritus for the year ended
December 31, 1999 were approximately $154,100.
The Bank's directors and directors emeritus may, pursuant to a deferred
compensation agreement, defer payment of some or all of their directors fees,
bonuses or other compensation into a retirement account. Under this agreement,
deferred directors fees are to be distributed either in a lump-sum payment or in
equal annual or monthly installments over any period of from five to ten years.
The lump sum or first installment is payable to the director, at the director's
discretion, on the first day of the calendar year immediately following the year
in which he ceases to be a director, or in the year in which the director
attains that age specified by the retirement income test of the Social Security
Act. Any additional installments will be paid on the first day of each
succeeding year thereafter. At present, the following directors participate in
the deferred compensation plan: Lester N. Bergum, Jr., W. Thomas Harmon, and
Wayne E. Kessler.
Directors of the Holding Company and the Bank are not currently paid
directors' fees. The Holding Company may, if it believes it is necessary to
attract qualified directors or is otherwise beneficial to the Holding Company,
adopt a policy of paying directors' fees.
The Bank has also adopted a Deferred Director Supplemental Retirement Plan
(the "Supplemental Plan") which provides for the continuation of directors fees
to a director upon the later of a director's attainment of age 70 or the date on
which he ceases to be a director. A director's interest in the Supplemental Plan
will vest gradually over a five-year period commencing upon the director's
completion of five years of service on our board. Upon completing nine years of
service, the director's interest in the Supplemental Plan will be fully vested.
The interests of directors who, as of December 1, 1997, had served at least one
year on the Board vested immediately upon the adoption of the Supplemental Plan.
The benefits payable to a director under the Supplemental Plan are calculated by
multiplying the director's vested percentage times the rate of directors fees
paid to the director immediately prior to his attainment of age 70 or, if
earlier, the date his status as a director terminated. In the event that a
director's death occurs prior to the commencement of payments under the
Supplemental Plan, the director's designated beneficiary shall receive a monthly
payment calculated by multiplying the director's vested percentage times the
rate of directors fees in effect immediately prior to the director's death or,
if earlier, the date on which his status as a director terminated. Payments
under the Supplemental Plan will continue for 120 months.
Pension Plan
The Bank's full-time employees are included in the Pension Plan. Separate
actuarial valuations are not made for individual employer members of the Pension
Plan. The Bank's employees are eligible to participate in the plan once they
have attained the age of 21 and completed one year of service for the Bank and
provided that the employee is expected to complete a 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 Pension Plan provides for monthly or lump sum retirement benefits
determined as a percentage of the employee's average salary (for the employee's
highest five consecutive years of salary) times his years of service. Salary
includes base annual salary as of each January 1, exclusive of overtime,
bonuses, fees and other special payments. Early retirement, disability, and
death benefits are also payable under the Pension Plan, depending upon the
participant's age and years of service. The Bank recorded no expense for the
Pension Plan during the fiscal year ended December 31, 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).
Years of Service
Highest 5-Year
Average
Compensation 15 20 25 30 35 40 45
- ------------------------------------------------------------------------------
$ 60,000 13,500 18,000 22,500 27,000 31,500 36,000 40,500
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
Benefits are currently subject to maximum Code limitations of $135,000 per
year. The years of service credited to Mr. Unger under the Pension Plan as of
December 31, 1999 were four, and to Mr. Baer under the Pension Plan as of
December 31, 1999 were three.
Transactions With Certain Related Persons
The Bank follows a policy of offering to its directors, officers, and
employees real estate mortgage loans secured by their principal residence as
well as other loans. Current law authorizes the Bank to make loans or extensions
of credit to 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, the Bank offers loans to its executive officers,
directors, principal shareholders and employees with an interest rate that is
.5% lower than the rate generally available to the public, but otherwise are
offered with substantially the same terms as those prevailing for comparable
transactions. All loans to directors and executive officers must be approved in
advance by a majority of the disinterested members of the Board of Directors.
Loans to directors, executive officers and their associates totaled
approximately $1.261 million, or 1.4% 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 the Holding Company is a
partner, serves as counsel to the Bank in connection with loan delinquencies,
title searches, and related matters in Frankfort, Clinton County, Indiana. The
Bank expects to continue using the services of the law firm for such matters in
the current fiscal year.
Joint Report of the Compensation Committee and the Stock Compensation Committee
The Compensation Committee of the Board of Directors was comprised
during fiscal 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
the Holding Company'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 the Holding Company's long-term success;
(2) reward executive officers based upon their ability to achieve
short-term and long-term strategic goals and objectives and to
enhance shareholder value; and
(3) align the interests of the executive officers with the
long-term interests of shareholders by granting stock options
which will become more valuable to the executives as the value
of the Holding Company's shares increases.
At present, the Holding Company's executive compensation program is
comprised of base salary and annual incentive bonuses. The Option Plan and the
RRP provide long-term incentive bonuses in the form of stock options and awards
of 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 the Holding Company's
performance in the areas of growth, profit, quality, and productivity as they
relate to earnings per share and return on equity for the current fiscal year,
and it is expected that stock options will have a direct relation to the
long-term enhancement of shareholder value. In years in which the performance
goals of the Holding Company are met or exceeded, executive compensation tends
to be higher than in years in which performance is below expectations.
Base Salary. Base salary levels of the Holding Company's executive
officers are intended to be comparable to those offered by similar financial
institutions in the Midwest. In determining base salaries, the Compensation
Committee also takes into account individual experience and performance.
Mr. Unger was the Holding Company's Chief Executive Officer throughout
fiscal 1999. Mr. Unger received a base salary of $135,000 in 1998 and $165,000
in 1999.
Annual Incentive Bonuses. Under the Holding Company's Annual Incentive
Plan, all employees of the Holding Company receive a cash bonus for any fiscal
year in which the Holding Company achieves certain goals, as established by the
Board of Directors, in the areas of growth, profit, quality and productivity as
they relate to earnings per share and return on equity. Individual bonuses are
equal to a percentage of the employee's base salary, which percentage varies
with the extent to which the Holding Company exceeds these goals for the fiscal
year.
The Holding Company believes that this program provides an excellent
link between the value created for shareholders and the incentives paid to
executives, since executives receive no bonuses unless the above-mentioned goals
are achieved and since the level of those bonuses will increase with greater
achievement of those goals.
Mr. Unger's bonus for fiscal 1999 was $25,000 compared to $30,000 for
fiscal 1998.
Stock Options. The Option Plan is intended to align executive and
shareholder long-term interests by creating a strong and direct link between
executive pay and shareholder return, and enable executives to acquire a
significant ownership position in the Holding Company's Common Stock. 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 the
Holding Company.
RRP. The RRP is intended to provide directors and officers with an
ownership interest in the Holding Company in a manner designed to encourage them
to continue their service with the Holding Company. Last fiscal year, the Bank
contributed funds to the RRP to enable the RRP to acquire 280,370 shares of
Common Stock. Of these shares, 233,724 were awarded to the Holding Company'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 the Holding Company. This gradual vesting of a
director's or officer's interest in the shares awarded under the RRP is intended
to create a long-term incentive for the director or officer to continue his
service with the Holding Company.
Finally, the Committee notes that Section 162(m) of the 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 five 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 the Holding
Company's shareholders. As performance goals are met or exceeded, most probably
resulting in increased value to shareholders, executives are rewarded
commensurately. The Committee believes that compensation levels during fiscal
1999 for executives and for the chief executive officer adequately reflect the
Holding Company's compensation goals and policies.
Compensation Committee Members Stock Compensation Committee Members
- ------------------------------ ------------------------------------
W. Thomas Harmon W. Thomas Harmon
Jerry R. Holifield Jerry R. Holifield
David E. Mansfield David E. Mansfield
John C. Milholland John C. Milholland
Performance Graph
The following graph shows the performance of the Holding Company'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>
ACCOUNTANTS
Olive, LLP has served as auditors for the Bank since November 30, 1975, and
for the Holding Company since its formation in 1998. The Holding Company
believes that a representative of Olive, LLP will be present at the Annual
Meeting with the opportunity to make a statement if he or she so desires. He or
she will also be available to respond to any appropriate questions shareholders
may have. The Board of Directors of the Holding Company has not yet completed
the process of selecting an independent public accounting firm to audit its
books, records and accounts for the fiscal year ended December 31, 2000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires that the Holding Company's officers
and directors and persons who own more than 10% of the Holding Company's Common
Stock file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Holding Company with
copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Holding Company believes that during the
fiscal year ended December 31, 1999, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the next
Annual Meeting of the Holding Company and included in the Proxy Statement and
form of proxy relating to that meeting must be received at the main office of
the Holding Company for inclusion in the proxy statement no later than 120 days
in advance of March 15, 2001. Any such proposal should be sent to the attention
of the Secretary of the Holding Company at P.O. Box 510, 1121 East Main Street,
Plainfield, Indiana 46168. A shareholder proposal being submitted outside the
processes of Rule 14a-8 promulgated under the 1934 Act, will be considered
untimely if it is received by the Holding Company later than 45 days in advance
of March 15, 2001.
OTHER MATTERS
Management is not aware of any business to come before the Annual Meeting
other than those matters described in the Proxy Statement. However, if any other
matters should properly come before the Annual Meeting, it is intended that the
proxies solicited hereby will be voted with respect to those other matters in
accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Holding Company.
The Holding Company will reimburse brokerage firms and other custodians,
nominees and fiduciaries for reasonable expenses incurred by them in sending
proxy material to the beneficial owners of the Common Stock. In addition to
solicitation by mail, directors, officers, and employees of the Holding Company
may solicit proxies personally or by telephone without additional compensation.
Each shareholder is urged to complete, date and sign the proxy and return
it promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ T.Tim Unger
T. Tim Unger
March 15, 2000
<PAGE>
REVOCABLE PROXY LINCOLN BANCORP
Annual Meeting of Shareholders
April 18, 2000
The undersigned hereby appoints John M. Baer and Maxwell D. Magee, with
full powers of substitution, to act as attorneys and proxies for the undersigned
to vote all shares of common stock of Lincoln Bancorp which the undersigned is
entitled to vote at the Annual Meeting of Shareholders to be held at the
Plainfield United Methodist Church, 600 Simmons Street, Plainfield, Indiana, on
Tuesday, April 18, 2000, at 12:00 p.m., and at any and all adjournments thereof,
as follows:
1. The election as directors of all nominees listed below, except as marked to
the contrary [ ] FOR [ ] VOTE WITHHELD
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name on the list below:
Lester N. Bergum, Jr. Dennis W. Dawes
(for a three-year term)
In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" the listed proposition.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
<PAGE>
This Proxy may be revoked at any time prior to the voting thereof.
The undersigned acknowledges receipt from Lincoln Bancorp, prior to the
execution of this Proxy, of a Notice of the Meeting, a Proxy Statement and an
Annual Report to Shareholders.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY
IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
___________________, 2000
-------------------------- -------------------------
Print Name of Shareholder Print Name of Shareholder
-------------------------- -------------------------
Signature of Shareholder Signature of Shareholder
Please sign as your name appears on the envelope in
which this card was mailed. When signing as attorney,
executor, administrator, trustee or guardian, please
give your full title. If shares are held jointly, each
holder should sign.
Message to Shareholders.................................................... 2
Selected Consolidated Financial Data....................................... 3
Management's Discussion and Analysis....................................... 4
Report of Independent Auditor.............................................. 20
Consolidated Balance Sheet................................................. 21
Consolidated Statement of Income........................................... 22
Consolidated Statement of Comprehensive Income............................. 23
Consolidated Statement of Shareholders' Equity............................. 24
Consolidated Statement of Cash Flows....................................... 25
Notes to Consolidated Financial Statements................................. 26
Directors and Executive Officers........................................... 46
Shareholder Information.................................................... 47
Officers and Branch Locations of Lincoln Federal Savings Bank.............. 48
Lincoln Bancorp (the "Holding Company" and together with the Bank, as
defined below, the "Company") is an Indiana corporation organized in September,
1998 to become a savings and loan holding company upon its acquisition of all
the issued and outstanding capital stock of Lincoln Federal Savings Bank
("Lincoln Federal" or the "Bank") in connection with the Bank's conversion from
mutual to stock form. The Holding Company became the Bank's holding company on
December 30, 1998. The principal asset of the Holding Company currently consists
of 100% of the issued and outstanding shares of capital stock, $.01 par value
per share, of the Bank. Lincoln Federal was originally organized in 1884 as
Ladoga Federal Savings and Loan Association, located in Ladoga, Indiana. In
1979, Ladoga Federal merged with Plainfield First Federal Savings and Loan
Association, a federal savings and loan association located in Plainfield,
Indiana which was originally organized in 1896. Following the merger, the Bank
changed its name to Lincoln Federal Savings and Loan Association and, in 1984,
adopted its current name, Lincoln Federal Savings Bank. At December 31, 1999,
Lincoln Federal conducted 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 in Mooresville, Indiana in April, 1999. The Bank's
principal business consists of attracting deposits from the general public and
originating fixed-rate and adjustable-rate loans secured primarily by first
mortgage liens on one- to four-family residential real estate. Lincoln Federal's
deposit accounts are insured up to applicable limits by the SAIF of the FDIC.
Lincoln Federal offers a number of financial services, including: (i)
one- to four-family residential real estate loans; (ii) commercial real estate
loans; (iii) real estate construction loans; (iv) land loans; (v) multi-family
residential loans; (vi) consumer loans, including home equity loans and
automobile loans; (vii) commercial loans; (viii) money market demand accounts
("MMDAs"); (ix) savings accounts; (x) checking accounts; (xi) NOW accounts; and
(xii) certificates of deposit.
<PAGE>
To our shareholders and friends,
Lincoln Bancorp celebrated its first year as a publicly traded company in 1999
with great success. Our original earnings estimate was $.63 per share and we
finished the year at $.71 per share. Our first stock repurchase program resulted
in the repurchase of 10% of the total shares outstanding, or 700,925 shares.
Dividends were paid each quarter and increased by 33 1/3% in the third quarter.
Our accomplishments and our commitment to positioning the bank for the future
are the results of an excellent staff, who make our bank a special place to work
and do business.
Lincoln Federal Savings Bank's significant accomplishments during the past year
included new facilities, products, technology, and staff. Our new offices in
Avon and Mooresville have exceeded our expectations while increasing our
customer base. Several new products, with new technology and a new deposit
operations department, were developed during the year to allow us to compete on
a direct level with even our largest competitors. New key staff additions
included a Human Resource Director, Retail Sales Manager and Residential Lending
Manager.
Our team looks forward to the year ahead and we intend to increase our market
share by enhancing our existing products and services, developing our commercial
lending capabilities and expanding our mortgage lending products. We also plan
to reach out into new markets surrounding Indianapolis and continue developing a
presence on the Internet at www.lincolnfederal.com.
As always, there will be a strong community commitment in all Lincoln Federal
markets. The Lincoln Federal Charitable Foundation will continue to provide
grants to help support community programs.
We are dedicated to increasing the long-term value of our company by expanding
through acquisition and/or branching, and are equally committed to providing
excellent service to our customers. We hope you share the pride of our directors
and employees in our first year as a publicly traded company and we appreciate
your continued support and confidence.
Very truly yours,
/s/ Tim Unger
Tim Unger
President and CEO
<PAGE>
The following selected consolidated financial data of the Company is
qualified in its entirety by, and should be read in conjunction with, the
consolidated financial statements, including notes thereto, included elsewhere
in this Shareholder Annual Report.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
Summary of Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets............................................ $410,828 $366,448 $321,391 $345,552 $319,777
Cash and interest bearing deposits in other banks (1)... 10,819 22,907 18,958 10,394 8,882
Investment securities available for sale................ 145,875 129,276 29,399 118 116
Investment securities held to maturity.................. 500 1,250 9,635 15,185 11,600
Mortgage loans held for sale............................ --- --- --- 24,200 15,534
Loans................................................... 234,761 197,433 249,996 282,813 270,933
Allowance for loan losses............................... (1,761) (1,512) (1,361) (1,241) (1,121)
Net loans............................................... 233,000 195,921 248,635 281,572 269,812
Investment in limited partnerships...................... 2,064 2,387 2,706 3,187 3,583
Deposits................................................ 204,982 212,010 203,852 210,823 196,117
Borrowings.............................................. 110,252 35,466 72,827 94,412 85,604
Shareholders' equity.................................... 91,743 106,108 41,978 37,919 34,930
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
Summary of Operating Data:
Total interest income................................... $27,742 $ 22,999 $ 25,297 $ 24,453 $ 22,065
Total interest expense.................................. 13,947 13,827 15,652 15,119 14,486
------- ------- ------- ------- -------
Net interest income.................................. 13,795 9,127 9,645 9,334 7,579
Provision for loan losses............................... 384 173 298 120 100
------- ------- ------- ------- -------
Net interest income after provision for loan losses . 13,411 8,999 9,347 9,214 7,479
------- ------- ------- ------- -------
Other income (losses):
Net realized-and unrealized-gain (loss)
on loans held for sale............................. 11 (61) 299 (160) 1,463
Net realized- and unrealized-gains on securities
available for sale................................. (4) 113 118 --- ---
Equity in losses of limited partnerships............. (323) (514) (681) (596) (1,595)
Other................................................ 930 833 674 503 473
------- ------- ------- ------- -------
Total other income (loss).......................... 614 371 410 (253) 341
------- ------- ------- ------- -------
Other expenses:
Salaries and employee benefits....................... 3,859 2,724 2,247 1,719 1,529
Net occupancy expenses............................... 357 249 272 236 272
Equipment expenses................................... 541 626 526 361 176
Deposit insurance expense............................ 150 188 194 1,725 438
Data processing expense.............................. 736 658 581 313 228
Professional fees.................................... 209 201 238 69 48
Director and committe fees........................... 224 319 227 110 102
Mortgage servicing rights amortization............... 124 280 67 12 9
Charitable contributions............................. 22 2,023 32 18 37
Other................................................ 1,109 842 701 540 405
------- ------- ------- ------- -------
Total other expenses.............................. 7,331 8,110 5,085 5,103 3,244
------- ------- ------- ------- -------
Income before income taxes and extraordinary item.... 6,694 1,260 4,672 3,858 4,576
Income taxes (benefit)............................... 2,346 (7) 1,159 870 1,193
------- ------- ------- ------- -------
Income before extraordinary item........................ 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......................................... $4,348 $ 1,117 $ 3,513 $ 2,988 $ 3,383
======= ======= ======= ======= =======
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
Supplemental Data:
<S> <C> <C> <C> <C> <C>
Basic earnings per share................................ $.71 --- --- --- ---
Diluted earnings per share.............................. .71 --- --- --- ---
Divendends per share.................................... .28 --- --- --- ---
Dividend payout ratio................................... 39.44% --- --- --- ---
Return on assets (2).................................... 1.09 .35% 1.02% .90% 1.09%
Return on equity (3).................................... 4.29 2.58 8.71 8.08 9.92
Equity to assets (4).................................... 22.33 28.96 13.06 10.97 10.92
Interest rate spread during period (5).................. 2.32 2.24 2.41 2.36 1.99
Net yield on interest-earning assets (6)................ 3.57 3.02 2.92 2.91 2.55
Efficiency ratio (7).................................... 50.88 84.98 50.57 56.19 40.96
Other expenses to average assets (8).................... 1.84 2.55 1.47 1.54 1.05
Average interest-earning assets to average
interest-bearing liabilities......................... 134.83 117.02 110.88 111.80 111.31
Non-performing assets to total assets (4)............... .28 .38 1.14 .73 .75
Allowance for loan losses to total
loans outstanding (4) (9)............................ .75 .77 .54 .40 .39
Allowance for loan losses to non-performing loans (4)... 159.37 117.03 37.56 50.80 46.81
Net charge-offs to average total loans outstanding ..... .06 .01 .06 --- .01
Number of full service offices (4)...................... 6 4 4 4 4
</TABLE>
(1) Includes certificates of deposit in other financial institutions.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) At end of period.
(5) Interest rate spread is calculated by substracting combined average
interest cost from combined average interest rate earned for the period
indicated.
(6) Net interest income divided by average interest-earning assets.
(7) Other expenses (excluding income tax expense) divided by the sum of net
interest income and noninterest income. Excluding the effect of the $2.0
million contribution to the charitable foundation, the efficiency ratio
would have been 64.03% for the year ended December 31, 1998. Excluding the
effect of the one-time SAIF assessment, the efficiency ratio would have
been 42.28% for the year ended December 31, 1996.
(8) Other expenses divided by average total assets.
(9) Total loans include loans held for sale.
Management's Discussion and Analysis of Financial Condition
and Results of Operation
General
The Holding Company was incorporated for the purpose of owning all of
the outstanding shares of Lincoln Federal. The following discussion and analysis
of the Holding Company's financial condition as of December 31, 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. The Holding Company's operations and actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the nation
and the Holding Company's general market area. The forward-looking statements
contained herein include, but are not limited to, those with respect to the
following matters:
1. Management's determination of the amount of loan loss allowance;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums; and
4. Proposed legislation that would eliminate the federal thrift
charter and the separate federal regulation of thrifts.
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 Federal'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
The Company's results of operations have been determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
general and administrative expenses. Net interest income is determined by the
interest rate spread between the yields earned on interest-earning assets and
the rates paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest
rate that the Company earned on its loan and investment portfolios, the weighted
average effective cost of its deposits and advances, its interest rate spread
and the net yield on weighted average interest-earning assets for the periods
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
the Company's interest income and expense during the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in rate (changes in rate
multiplied by old volume) and (2) changes in volume (changes in volume
multiplied by old rate). Changes attributable to both rate and volume which
cannot be segregated have been allocated proportionally to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
---------------------------------------------------
Total
Due to Due to Net
Rate Volume Change
---- ------ ------
(In thousands)
Year ended December 31, 1999 compared
to year ended December 31, 1998
Interest-earning assets:
<S> <C> <C> <C>
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>
<PAGE>
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 the
Company'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, the Company 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. The Company has obtained approval from the OTS to purchase an
additional 10% of its shares and is currently in the process of repurchasing
these shares.
Financial Condition at December 31, 1998 Compared to Financial Condition at
December 31, 1997
Total assets increased $45.1 million, or 14.0%, at December 31, 1998,
compared to December 31, 1997. The primary increases were in investment
securities available for sale and held to maturity which increased $91.5 million
and cash and interest-bearing deposits in other banks which increased $3.9
million. These increases were primarily due to net proceeds from the conversion
and the loan securitization and sales. Net proceeds of the Holding Company's
stock issuance, after costs and excluding the shares issued for the ESOP, were
$61.3 million. These increases were in part offset by a $52.7 million decrease
in net loans. The decrease was primarily due to the securitization of
approximately $39.9 million of one- to four- family residential loans and the
subsequent sale of approximately $21.1 million of these mortgage-backed
securities. In addition, $19.6 million of portfolio loans were transferred to
loans held for sale during 1998 and $17.2 million were subsequently sold.
Loans, Loans Held for Sale and Allowance for Loan Losses. The decrease
in net loans including loans held for sale of $52.7 million, or 21.2%, from
December 31, 1997 to December 31, 1998 was due primarily to the securitization
of $39.9 million of loans in the second quarter of 1998 and the sale of $17.2
million of loans in the third quarter of 1998. The loans securitized were one-
to four- family residential loans. The strategy behind the securitization and
sale of mortgage-backed securities was to change the mix of assets on the
balance sheet to reduce interest rate risk and to improve liquidity. Lincoln
Federal has no plans to securitize or sell additional portfolio loans and will
continue to service all loans sold and securitized. The allowance for loan
losses as a percentage of total loans increased to .77% from .54%. The allowance
for loan losses as a percentage of non-performing loans was 117.0% and 37.6% at
December 31, 1998 and December 31, 1997, respectively. Non-performing loans were
$1.3 million and $3.6 million at each date, respectively. The decline in
non-performing loans was a result of a combination of factors including improved
collection efforts on one- to four- family residential and consumer loans,
payoffs of non-performing loans totaling $1.1 million and receipt of additional
collateral on loans totaling $218,000 allowing these loans to be removed from
non-accrual status. Included in non-performing loans at December 31, 1998 were
impaired loans of approximately $300,000. Impaired loans at December 31, 1998
consisted of two loans to one borrower collateralized by residential acquisition
and development real estate.
Deposits. Deposits increased $8.2 million, or 4.0%, at December 31,
1998, compared to December 31, 1997. Certificates of deposit increased $1.5
million, or 1.0%, while other deposits increased $6.7 million, or 11.6%. The
increase in deposits was primarily due to an increase in money market accounts
of $6.9 million, or 26.7%.
Borrowed Funds. FHLB advances decreased $36.9 million, or 52.6%, at
December 31, 1998 compared to December 31, 1997. Proceeds from the sales of
mortgage-backed securities available for sale and loans were used to repay a
portion of FHLB advances.
Shareholders' Equity. Shareholders' equity increased $64.1 million from
$42.0 million at December 31, 1997 to $106.1 million at December 31, 1998. The
increase was due to net proceeds of the Holding Company's stock issuance after
costs and excluding the shares issued for the ESOP, of $61.3 million, stock
contributed to the charitable foundation of $2.0 and net income for 1998 of $1.1
million. These increases were offset by a decrease in the unrealized gains on
securities available for sale of $258,000.
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 year 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 the Company in connection with the ESOP and the
RRP. Also, the Company'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 year ended December 31, 1998 and 1997 was .35% and 1.02%,
respectively. Return on average equity was 2.58% for the year ended December 31,
1998 and 8.71% for the year ended December 31, 1997.
Interest Income. Total interest income was $23.0 million for 1998
compared to $25.3 million for 1997. The decrease in interest income was due
primarily to a decrease in average 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 asset as a percentage of interest-bearing
liabilities increased from 110.9% for 1997 to 117.0% for 1998.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1998 was $173,000 as compared to $298,000 for 1997. During
the year ended December 31, 1998, net charge-offs were $22,000 as compared to
net charge-offs of $178,000 for 1997. The 1998 provision and the allowance for
loan losses were considered adequate based on size, condition and components of
the loan portfolio, past history of loan losses and peer comparisons. While
management estimates loan losses using the best available information, no
assurance can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding problem loans, identification of
additional problem loans and other factors, both within and outside of
management's control.
Net realized and unrealized gain (loss) on loans held for sale. Net
realized and unrealized losses on loans held for sale of $61,000 were recorded
during the year ended December 31, 1998 as compared to net realized and
unrealized gains of $299,000 recorded during 1997. The primary reason for the
change was due to the recovery during 1997 of an unrealized loss of $266,000
recorded during 1996.
Net realized and unrealized gains on securities available for sale.
Proceeds from sales of securities available for sale during the years ended
December 31, 1998 and 1997 amounted to $21.1 million and $54.5 million,
respectively. Net gains of $113,000 and $118,000 were realized on those sales
during the years ended December 31, 1998 and 1997, respectively.
Equity in losses of limited partnerships. Equity in losses of limited
partnerships decreased $167,000, or 24.5%, from $681,000 for the year ended
December 31, 1997 to $514,000 for 1998 due to the operating results of the
limited partnership investments.
Other Income. Other income increased $159,000, or 23.6%, from $674,000
for the year ended December 31, 1997 to $833,000 for 1998. This increase was due
to increases in a variety of other income categories and was not attributable to
any one item.
Salaries and Employee Benefits. Salaries and employee benefits were
$2.7 million for the year ended December 31, 1998 compared to $2.2 million for
1997, an increase of approximately 22.0%. These increases were primarily a
result of additional personnel. Lincoln Federal had 76 full time equivalent
employees at December 31, 1998 compared to 72 full time equivalent employees at
December 31, 1997. Lincoln Federal increased its number of employees and added
personnel with the specialized skills to more effectively service existing
customers and to position itself for future customer and product growth.
Net Occupancy and Equipment Expenses. Occupancy expenses decreased
$23,000, or 8.5%, and equipment expenses increased $100,000, or 19.0%, from the
year ended December 31, 1997 compared to 1998. The increases in equipment
expenses were primarily attributable to increased deprecation and amortization
on computers, software and other equipment and fees associated with computer
equipment maintenance.
Deposit Insurance Expense. Deposit insurance expense decreased $6,000,
or 3.1%, from $194,000 in 1997 to $188,000 in 1998.
Data Processing Expense. Data processing expense increased $77,000, or
13.3%, from the year ended December 31, 1997 to the same period in 1998. This
increase was primarily due to additional costs associated with Year 2000
compliance and testing.
Professional Fees. Professional fees decreased $37,000, or 15.5%, from
the year ended December 31, 1997 to the same period in 1998. This decrease was
due to a variety of decreased expenses and was not attributable to any one item.
Director and Committee fees. Director and committee fees increased
$92,000, or 40.5%, from the year ended December 31, 1997 to 1998. This increase
was due to the addition of one director in 1998, an increase in the fee paid per
meeting and additional meetings held during 1998 in connection with the stock
conversion.
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 45.7%.
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.
The Company's primary assets and liabilities are monetary in nature. As
a result, interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest rates,
however, do not necessarily move in the same direction or with the same
magnitude as the price of goods and services, since such prices are affected by
inflation. In a period of rapidly rising interest rates, the liquidity and
maturities structures of the Company's assets and liabilities are critical to
the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that Lincoln Federal has made. Lincoln Federal is unable to
determine the extent, if any, to which properties securing its loans have
appreciated in dollar value due to inflation.
Quarterly Results of Operations
The following table sets forth certain quarterly results for the years
ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Net Provision Basic Diluted
Quarter Interest Interest Interest For Loan Net Earnings Earnings Dividends
Ended Income Expense Income Losses Income Per Share Per Share Per Share
- -------------------------------------------------------------------------------------------------------------
1999:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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. The Bank's board of directors has delegated
responsibility for the day-to-day management of interest rate risk to the
Asset/Liability ("ALCO") Committee, which consists of its President, T. Tim
Unger, Chief Financial Officer John M. Baer, Vice President-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. The Bank's principal strategy to reduce
exposure to fluctuating market interest rates is to manage the interest-rate
sensitivity of its interest-earning assets and interest-bearing liabilities. In
early 1997, the Bank's new management concluded that its asset portfolio exposed
the Bank to significant risks in the event of a material and prolonged increase
or decrease in interest rates. To address this problem, in 1997 the Bank
securitized and sold certain one- to four-family residential loans in its
portfolio in order to reduce its exposure to interest rate risk. The Bank
presented to FHLMC pools of one- to four-family residential mortgage loans with
either fixed interest rates or variable interest rates pegged to the 11th
District Cost of Funds Index ("COFI"). COFI loans increase the Bank's exposure
to interest rate risk because the COFI index does not follow, and usually lags
behind, the U.S. Treasury yield curve, which is the index the Bank uses to
establish the interest rates for its deposits. In addition, many of the COFI
loans did not adjust quickly enough to changes in market interest rates as the
result of annual rate adjustment limitations in the loan agreements.
Many of the loans the Bank securitized did not include all of the
documentation required by FHLMC. The Bank was able to securitize these loans by
representing to FHLMC that, other than the loans with the missing documentation
specifically identified in the FHLMC Master Commitment, the loans that the Bank
securitized did not otherwise vary from FHLMC's standard underwriting and
mortgage eligibility requirements.
After grouping these loans into pools with similar loans that it
originated, the Bank assigned the notes and mortgages to FHLMC in consideration
for several mortgage-backed securities representing the different loan pools. In
August, 1997, the Bank securitized approximately $76.2 million of one- to
four-family residential mortgage loans in this manner, consisting of $26.9
million in COFI loans and $49.3 million in fixed-rate loans. The Bank
immediately sold on the secondary market all of the mortgage-backed securities
representing the COFI loans and $27.4 million of the securities backed by
lower-yielding fixed-rate loans for a gain of $118,000. The Bank retained in its
investment portfolios mortgage-backed securities representing $21.9 million of
higher-yielding fixed-rate loans.
In April, 1998, the Bank securitized an additional $39.9 million of its
one- to four-family residential mortgage loans, consisting of $14.2 million of
COFI loans and $25.7 million of fixed-rate loans for a gain of $105,000. The
Bank sold on the secondary market the mortgage-backed security representing the
COFI loans and $6.9 million of lower-yielding fixed-rate loans. The Bank
retained in its investment portfolio mortgage-backed securities representing
$18.8 million of higher-yielding fixed-rate loans.
The Bank continues to service all of the loans that it originated that
have been securitized by FHLMC in consideration of a fee of .25% and .375% of
the outstanding loan balance for fixed-rated and variable-rate loans,
respectively. Investors who purchased the mortgage-backed securities are repaid
from the regular principal and interest payments made by the borrowers on the
underlying loans, which "pass through" to the investors. FHLMC acts as a
guarantor with respect to these regular payments to the investors in
consideration of a fee that varies up to .375% of the outstanding balance on
loans in the different loan pools.
Although the loans that the Bank securitized were sold without
recourse, the Bank agreed to indemnify FHLMC pursuant to the Master Commitment
in the event that FHLMC makes a payment to an investor pursuant to its guarantee
on certain loans noted in the Master Commitment as lacking the documentation
required by FHLMC's underwriting standards. The Bank's indemnification to FHLMC
pursuant to this provision is limited, however, solely to losses that arise as a
result of the documentation exception or discrepancy noted in the Master
Commitment. FHLMC may also require the Bank to repurchase a loan upon a
borrower's default if the due diligence information contained in the loan data
report that the Bank provided to FHLMC was not accurate, true or complete, if
the Bank fails to provide additional information or documentation to FHLMC upon
request, or if the Bank breaches any representation or warranty in the Master
Commitment. The Bank has not experienced any significant losses on these loans
in the past and do not anticipate any significant losses as a result of this
indemnification.
In June, 1998, the Bank sold an additional $19.3 million of its
adjustable-rate COFI loans in a whole-loan sale to a private investor that
closed in July, 1998. The Bank recognized a loss of $218,000 from this
transaction. The securitization of certain of the Bank's loans and the whole
loan sale reduced the heavy concentration of fixed-rate and adjustable-rate COFI
mortgages in its portfolio while converting those assets to more liquid and
marketable mortgage-backed securities. In the aggregate, the Bank has sold $75.4
million of the securities generated from the securitization and have retained
securities with a face value of $40.7 million in its available-for-sale
securities portfolio. The Bank used the proceeds from these sales of
mortgage-backed securities to repay outstanding FHLB advances from a balance of
$106.9 million at June 30, 1997 to $45.7 million at June 30, 1998. The Bank also
used some of the proceeds from these sales to purchase interest rate-sensitive
securities. The Bank also restructured its remaining FHLB debt by prepaying
advances with higher interest rates and extending the repayment terms of other
debt, thereby reducing the Bank's exposure to interest rate risk and reducing
its cost of funds.
Because of the lack of customer demand for adjustable rate loans in its
market area, Lincoln Federal primarily originates fixed-rate real estate loans,
which accounted for approximately 77.3% 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, the Company initiated a leverage
strategy that involved buying approximately $53 million of marketable securities
and loans funded by an increase in securities sold under repurchase agreements
and Federal Home Loan Bank advances. The purpose of this strategy was to utilize
the high equity position of the Company 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.
The Bank 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, 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.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+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 55bp
-200 bp 89,343 5,350 6 23.38 90bp
-300 bp 92,108 8,116 10 23.83 135bp
</TABLE>
* 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.
<PAGE>
INDEPENDENT AUDITORS REPORT
Board of Directors
Lincoln Bancorp
Plainfield, Indiana
We have audited the accompanying consolidated balance sheet of Lincoln Bancorp
and subsidiary as of December 31, 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
Indianapolis, Indiana
February 8, 2000
<PAGE>
<TABLE>
<CAPTION>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
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>
LINCOLN BANCORP AND SUBSIDIARY
Plainfield, Indiana
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 $3.98
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 18 -- 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>
Board of Directors
T. Tim Unger
Chairman of the Board
President and Chief Executive Officer
Lester N. Bergum, Jr.
Attorney
Dennis W. Dawes
President/Chief Executive Officer
Hendricks Community Hospital
W. Thomas Harmon
Co-owner, Crawfordsville
Town and Country
Homecenter, Inc.
Jerry Holifield
Superintendent, Plainfield
Community School Corporation
Wayne E. Kessler
Farmer (Retired)
David E. Mansfield
Administrative Supervisor,
Marthon Oil Company
John C. Milholland
Principal, Frankfort Senior
High School
John L. Wyatt
District Agent, Northwestern
Mutal Life Insurance Company
Edward E. Whalen
Emeritus
Executive Officers of Lincoln Bancorp
T. Tim Unger John M. Baer
Chairman of the Board, Secretary and Treasurer
President and Chief Executive Officer
Executive Officers of Lincoln Federal Savings Bank
T. Tim Unger Jerry R. Holifield John M. Baer
President and Chief Chairman of the Board Chief Financial Officer,
Executive Officer Secretary and Treasurer
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 been President and Chief Executive Officer
of Hendricks Community Hospital since 1974.
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 58) has been the Superintendent of the Plainfield
Community School Corporation since 1991.
Wayne E. Kessler (age 69) has been a self-employed farmer in
Crawfordsville, Indiana since 1949. Mr. Kessler is currently semi-retired.
David E. Mansfield (age 57) is an Administrative Supervisor for
Marathon Oil Company where he has worked since 1973.
John C. Milholland (age 63) has been Principal of Frankfort Senior High
School in Frankfort, Indiana since 1989.
T. Tim Unger (age 59) has been President and Chief Executive Officer of
Lincoln Federal since January, 1996. Before then, Mr. Unger served as President
and Chief Executive Officer of Summit Bank of Clinton County from 1989 through
1995.
John L. Wyatt (age 63) is a District Agent for Northwestern Mutual Life
Insurance Company where he has been employed since 1960.
The Holding Company's common stock, without par value ("Common Stock"),
is listed on the NASDAQ National Market System under the symbol "LNCB." The
Holding Company shares began to trade on December 30, 1998. The high and low bid
prices for the period January 1, 1999 to December 31, 1999, were $13 5/8 and $9
11/16, respectively. On February 21, 2000, there were 1,044 shareholders of
record.
Under current federal income tax law, dividend distributions to the
Holding Company, to the extent that such dividends paid are from the current or
accumulated earnings and profits of Lincoln Federal (as calculated for federal
income tax purposes), will be taxable as ordinary income to the Holding Company
and will not be deductible by Lincoln Federal. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from Lincoln Federal's accumulated
bad debt reserves, which could result in increased federal income tax liability
for Lincoln Federal.
Since the Holding Company has no independent operation or other
subsidiaries to generate income, its ability to accumulate earnings for the
payment of cash dividends to shareholders directly depends upon the ability of
Lincoln Federal to pay dividends to the Holding Company and upon the earnings on
Lincoln Federal's investment securities. Applicable law restricts the amount of
dividends Lincoln Federal may pay to the Holding Company without obtaining the
prior approval of the OTS to an amount that does not exceed Lincoln Federal's
year-to-date net income plus its retained net income for the preceding two
years. Moreover, Lincoln Federal may not pay dividends to the Holding Company if
such dividends would result in the impairment of the liquidation account
established in connection with the Conversion. 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 the Holding Company unless there is a determination by the Director
of the OTS that there is reasonable cause to believe that the payment of
dividends constitutes a serious risk to the financial safety, soundness or
stability of Lincoln Federal. Indiana law, however, would prohibit the Holding
Company from paying a dividend if, after giving effect to the payment of that
dividend, the Holding Company would not be able to pay its debts as they become
due in the usual course of business or the Holding Company's total assets would
be less than the sum of its total liabilities plus preferential rights of
holders of preferred stock, if any.
Stock Price Dividends
Month Ended High Low Per Share
January 31, 1999 11 7/16 10 3/4
February 28, 1999 11 1/8 10 3/16
March 31, 1999 10 3/4 10 3/8 .06
April 30, 1999 11 9 11/16
May 31, 1999 12 10 13/16
June 30, 1999 12 1/2 11 9/16 .06
July 31, 1999 13 5/8 12 1/4
August 31, 1999 12 7/8 12 1/8
September 30, 1999 12 3/8 11 5/8 .08
October 31, 1999 12 1/4 10 3/8
November 30, 1999 12 1/8 10 7/8
December 31, 1999 11 3/4 9 7/8 .08
Transfer Agent and Registrar
The Fifth Third Bank
Corporate Trust Operations
38 Fountain Square Plaza, MD - 1090F5
Cincinnati, Ohio 45202
(513) 579-5320 or (800) 837-2755
GENERAL COUNSEL
Barnes & Thornburg
11 South Meridian Street
Indianapolis, Indiana 46204
INDEPENDENT AUDITOR
Olive LLP
201 N. Illinois Street, Suite 700S
Indianapolis, Indiana 46204
SHAREHOLDERS AND GENERAL INQUIRIES
The Company filed an Annual Report on Form 10-K for its fiscal year ended
December 31, 1999 with the Securities and Exchange Commission. Copies of this
annual report may be obtained without charge upon written request to:
T. Tim Unger
President and Chief Executive Officer
Lincoln Bancorp
1121 East Main Street
P.O. Box 510
Plainfield, Indiana 46168-0510
<PAGE>
The following officers were elected/re-elected at the January 18, 2000,
Board of Directors Meeting:
President/Chief Executive Officer..................T. Tim Unger
Chief Financial Officer/Secretary/Treasurer........John M. Baer
Retail Sales Manager...............................Rebecca Morgan
Residential Lending Manager........................Steve Schilling
Vice President/Secondary Marketing.................Maxwell O. Magee
Technology Manager.................................Roger S. Chalkley
Vice President.....................................James W. Hiatt
Vice President/Crawfordsville Branch...............Donald A. Peterson
Vice President.....................................Jay H. Oxley
Assistant Vice President/Mooresville Branch........Rebecca S. Henderson
Assistant Vice President/Commercial Lender.........M. Steve Johnson
Human Resource Officer.............................Ronald Love
Compliance Officer.................................Sidnye Georgette
Plainfield Branch Manager..........................Sonja White
Marketing Director.................................Angela S. Coleman
Frankfort Branch Manager...........................Deborah L. Graves
Loan Servicing Manager.............................Patti A. Wilcher
Collections Manager................................Tonda L. Mucho
Financial Analyst..................................Andrew J. LoCascio
Accounting Manager.................................Helen Pipkin
Deposit Operations Manager.........................Donna Coulson
Avon Branch Manager................................Melissa Yetter
Brownsburg Branch Manager..........................Paul Ross
Loan Operations Manager............................Sara Vermillion
Avon
7648 E. US Highway 36
Avon, IN 46123
317-272-0467
Fax 317-272-7838
Crawfordsville
134 S. Washington
Crawfordsville, IN 47933
765-362-0200
Fax 765-392-9216
Brownsburg
975 E. Main Street
Brownsburg, IN 46112
317-852-3134
Fax 317-852-9472
Frankfort
1900 E. Wabash Street
Frankfort, IN 46041
765-654-8742
Fax 765-654-9885
Main Office
1121 E. Main Street
Plainfield, IN 46168
317-839-6539
Fax 317-839-6775
Mooresville
590 S. State Rd. 67
Mooresville, IN 46158
317-834-4100
Fax 317-834-4114
Lincoln Online
www.lincolnfederal.com
newest banking location!
TELEBANK
1-888-655-LFSB
(5372)
24 hours a day
