FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 000-25219
LINCOLN BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-2055553
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
1121 East Main Street
Plainfield, Indiana 46168
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(317) 839-6539
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock,
Without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (N/A)
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 27, 2000 was $49,277,000.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 27, 2000, was 5,892,725 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1999, are incorporated into Part II. Portions of the Proxy Statement for the
2000 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page E-1
Page 1 of 39 Pages
<PAGE>
LINCOLN BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement....................................................
PART I
Item 1 Business.....................................................
Item 2. Properties...................................................
Item 3. Legal Proceedings............................................
Item 4. Submission of Matters to a Vote of Security Holders..........
Item 4.5. Executive Officers of the Registrant.........................
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................
Item 6. Selected Financial Data......................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................
Item 7A. Quantitative and Qualitative Disclosures about Market Risks..
Item 8. Financial Statements and Supplementary Data..................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................
PART III
Item 10. Directors and Executive Officers of Registrant...............
Item 11. Executive Compensation.......................................
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................
Item 13. Certain Relationships and Related Transactions...............
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..............................
SIGNATURES .........................................................
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), or
its directors or officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
Item 1. Business
General
Lincoln Bancorp (the "Holding Company" and together with the Bank, as
defined below, the "Company") is an Indiana corporation organized in September,
1998 to become a savings and loan holding company upon its acquisition of all
the issued and outstanding capital stock of Lincoln Federal Savings Bank
("Lincoln Federal" or the "Bank") in connection with the Bank's conversion from
mutual to stock form. The Holding Company became the Bank's holding company on
December 30, 1998. The principal asset of the Holding Company currently consists
of 100% of the issued and outstanding shares of capital stock, $.01 par value
per share, of the Bank. Lincoln Federal was originally organized in 1884 as
Ladoga Federal Savings and Loan Association, located in Ladoga, Indiana. In 1979
Ladoga Federal merged with Plainfield First Federal Savings and Loan
Association, a federal savings and loan association located in Plainfield,
Indiana which was originally organized in 1896. Following the merger, the Bank
changed its name to Lincoln Federal Savings and Loan Association and, in 1984,
adopted its current name, Lincoln Federal Savings Bank. Lincoln Federal
currently conducts its business from six full-service offices located in
Hendricks, Montgomery, Clinton and Morgan Counties, Indiana, with its main
office located in Plainfield. Lincoln Federal opened its newest offices in Avon,
Indiana in January, 1999 and Mooresville, Indiana in April, 1999. The Bank's
principal business consists of attracting deposits from the general public and
originating fixed-rate and adjustable-rate loans secured primarily by first
mortgage liens on one- to four-family residential real estate. Lincoln Federal's
deposit accounts are insured up to applicable limits by the SAIF of the FDIC.
Lincoln Federal offers a number of financial services, including: (i)
one- to four-family residential real estate loans; (ii) commercial real estate
loans; (iii) real estate construction loans; (iv) land loans; (v) multi-family
residential loans; (vi) consumer loans, including home equity loans and
automobile loans; (vii) commercial loans; (viii) money market demand accounts
("MMDAs"); (ix) savings accounts; (x) checking accounts; (xi) NOW accounts; and
(xii) certificates of deposit.
Lending Activities
The Bank has historically concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
Lincoln Federal's loan origination activities, representing 72.2% of its total
loan portfolio at December 31, 1999. Lincoln Federal also offers commercial real
estate loans, real estate construction loans and consumer loans. To a limited
extent, Lincoln Federal also offers multi-family loans, land loans and
commercial loans. Commercial real estate loans totaled approximately 6.6% of the
Bank's total loan portfolio, and real estate construction loans totaled
approximately 7.5% of Lincoln Federal's total loans as of December 31, 1999.
Consumer loans, which consist primarily of home equity and second mortgage
loans, have increased significantly in the past two years from $20.6 million, or
8.1% of Lincoln Federal's loan portfolio at December 31, 1997, to $28.6 million,
or 11.8% of its loan portfolio at December 31, 1999.
Loan Portfolio Data. The following table sets forth the composition of
Lincoln Federal's loan portfolio (including loans held for sale) by loan type
and security type as of the dates indicated, including a reconciliation of gross
loans receivable after consideration of the allowance for loan losses, deferred
loan fees and loans in process.
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997 1996 1995
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN Real estate mortgage loans:
One-to-four-family
residential (1)........... $175,095 72.18% $152,893 76.19% $205,976 81.03% $269,618 84.84% $248,947 84.48%
Multi-family................... 1,029 .42 1,022 .51 1,133 .45 1,111 .35% 1,012 .34
Commercial real estate......... 16,073 6.63 14,548 7.25 14,914 5.87 14,830 4.66% 15,727 5.34
Construction................... 18,127 7.47 7,411 3.69 9,912 3.90 13,159 4.14% 7,838 2.66
Land........................... 3,609 1.49 2,664 1.33 1,455 .57 2,725 .86% 9,877 3.35
Commercial........................ 91 .04 122 .06 242 .10 --- --- --- ---
Consumer loans:
Home equity and
second mortgages............. 24,272 10.01 18,482 9.21 17,218 6.77 13,239 4.17 7,858 2.67
Other.......................... 4,282 1.76 3,532 1.76 3,340 1.31 3,124 .98 3,409 1.16
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable....... $242,578 100.00% $200,674 100.00% $254,190 100.00% $317,806 100.00% $294,668 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
One-to-four-family
residential real estate (1).. $209,379 86.31% $177,837 88.62% $232,966 91.65% $290,956 91.55% $264,142 89.64%
Multi-family real estate....... 1,029 .43 1,022 .51 1,133 .45 1,111 .35 1,012 .34
Commercial real estate......... 24,188 9.97 15,498 7.72 15,054 5.92 19,890 6.26 16,229 5.51
Land........................... 3,609 1.49 2,664 1.33 1,455 .57 2,725 .86 9,877 3.35
Deposits....................... 675 .28 962 .48 1,106 .44 1,155 .37 995 .34
Auto........................... 3,006 1.24 2,127 1.06 2,041 .80 1,502 .47 1,690 .57
Other security................. 491 .20 475 .24 426 .17 356 .11 611 .21
Unsecured ..................... 201 .08 89 .04 9 -- 111 .03 113 .04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable....... 242,578 100.00 200,674 100.00 254,190 100.00 317,806 100.00 294,668 100.00
Deduct:
Allowance for loan losses......... 1,761 .73 1,512 .75 1,361 .54 1,241 .39 1,121 .38
Deferred loan fees (1)............ 822 .34 893 .45 1,690 .66 2,707 .85 2,854 .97
Loans in process.................. 6,995 2.88 2,348 1.17 2,504 .99 8,086 2.55 5,347 1.81
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable........... $233,000 96.05% $195,921 97.63% $248,635 97.81% $305,772 96.21% $285,346 96.84%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage Loans:
Adjustable-rate................ $ 68,452 28.74% $56,014 28.43% $95,106 37.95% $117,062 37.20% $112,193 38.52%
Fixed-rate..................... 169,753 71.26 141,006 71.57 155,502 62.05 197,620 62.80 179,066 61.48
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total........................ $238,205 100.00% $197,020 100.00% $250,608 100.00% $314,682 100.00% $291,259 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
(1) Net loans held for sale included in the above categories amounted to
$24,201,000 and $15,534,000 at December 31, 1996 and 1995. There were no
loans held for sale at December 31, 1999, 1998 and 1997.
<PAGE>
The following table sets forth certain information at December 31, 1999,
regarding the dollar amount of loans maturing in Lincoln Federal's loan
portfolio based on the contractual terms to maturity. Demand loans having no
stated schedule of repayments and no stated maturity and overdrafts are reported
as due in one year or less. This schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses. Management expects
prepayments will cause actual maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due During Years Ended December 31,
Outstanding at 2003 2005 2010 2015
December 31, to to to and
1999 2000 2001 2002 2004 2009 2014 following
-------- ------- ------ ------ ------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
One- to four-family
residential loans................ $175,095 $ 36 $ 361 $ 536 $ 1,133 $16,312 $43,648 $113,069
Multi-family loans................. 1,029 --- --- 111 333 49 47 489
Commercial real estate loans....... 16,073 1,872 963 1,176 3,924 2,931 1,341 3,866
Construction loans................. 18,127 15,975 --- 1,000 1,152 --- --- ---
Land loans......................... 3,609 1,574 56 131 1,655 97 96 ---
Commercial......................... 91 5 10 37 39 --- --- ---
Consumer loans:
Installment loans................. 3,607 263 342 610 1,999 374 19 ---
Loans secured by deposits.......... 675 412 126 49 88 --- --- ---
Home equity loans and
and second mortgages............. 24,272 1,298 97 322 2,358 17,915 2,282 ---
-------- ------- ------ ------ ------- ------- ------- --------
Total consumer loans............. 28,554 1,973 565 981 4,445 18,289 2,301 ---
-------- ------- ------ ------ ------- ------- ------- --------
Total........................ $242,578 $21,435 $1,955 $3,972 $12,681 $37,678 $47,433 $117,424
======== ======= ====== ====== ======= ======= ======= ========
</TABLE>
The following table sets forth, as of December 31, 1999, the dollar amount
of all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 2000
-------------------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
<S> <C> <C> <C>
Real estate mortgage loans:
One- to four-family residential loans...... $138,723 $36,336 $175,059
Multi-family loans......................... 461 568 1,029
Commercial real estate loans............... 8,308 5,893 14,201
Construction loans......................... 1,152 1,000 2,152
Land loans................................. 2,035 --- 2,035
Commercial.................................... 86 --- 86
Installment loans............................. 3,344 --- 3,344
Loans secured by deposits..................... 263 --- 263
Home equity loans and second mortgages........ 8,097 14,877 22,974
-------- ------- --------
Total...................................... $162,469 $58,674 $221,143
======== ======= ========
</TABLE>
One- to Four-Family Residential Loans. Lincoln Federal's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in its primary market area. Lincoln Federal
generally does not originate one- to four-family residential mortgage loans if
the ratio of the loan amount to the lesser of the current cost or appraised
value of the property (the "Loan-to-Value Ratio") exceeds 95%. Lincoln Federal
requires private mortgage insurance on loans with a Loan-to-Value Ratio in
excess of 80%. The cost of such insurance is factored into the annual percentage
rate on such loans.
In the past, Lincoln Federal's underwriting criteria for one- to
four-family residential loans focused heavily on the value of the collateral
securing the loan and placed less emphasis on the borrower's debt servicing
capacity and other credit factors. Lincoln Federal recently revised its lending
policies to emphasize factors other than the value of the underlying collateral,
such as the income, debt-to-income ratio, stability of earnings and past credit
history of a potential borrower, in making credit decisions. These revised
underwriting criteria are based upon FHLMC lending guidelines. The Bank
originates fixed-rate loans which provide for the payment of principal and
interest over a period of up to 30 years.
Lincoln Federal also offers adjustable-rate mortgage ("ARM") loans
pegged to the one-year U.S. Treasury securities yield adjusted to a constant
maturity. Lincoln Federal no longer offers adjustable rate loans with interest
rates pegged to the 11th District Cost of Funds Index ("COFI") because that
index adjusts less rapidly to changes in interest rates compared to other
indices. Lincoln Federal may offer discounted initial interest rates on ARM
loans, but requires that the borrower qualify for the loan at the fully-indexed
rate (the index rate plus the margin). A substantial portion of the ARM loans in
the Bank's portfolio at December 31, 1999 provide for maximum rate adjustments
per year and over the life of the loan of 2% and 6%, respectively. Lincoln
Federal's residential ARMs are amortized for terms up to 30 years.
In two separate transactions in August, 1997 and April, 1998, Lincoln
Federal securitized approximately $41.1 million of the COFI loans in its
portfolio and sold the resulting mortgage-backed securities on the secondary
market. In June, 1998 Lincoln Federal sold in a direct, whole-loan sale to a
private investor an additional $19.3 million of COFI loans. Following the
closing of this whole-loan sale, the amount of COFI loans in Lincoln Federal's
portfolio was reduced to $4.8 million. Lincoln Federal also pooled $75.0 million
of fixed-rate one- to four-family residential loans into FHLMC mortgage-backed
securities. Lincoln Federal sold on the secondary market $34.3 million of these
securities which were backed by lower-yielding, fixed-rate loans. At December
31, 1999, Lincoln Federal continued to hold in its investment portfolio
approximately $23.0 million of these securities that are backed by
higher-yielding, fixed-rate mortgage loans that it originated.
With the exception of the loans that were securitized during 1997 and
1998 and in the whole-loan sale in 1998, Lincoln Federal determines when it
originates a one- to four-family residential loan whether it intends to hold the
loan until maturity or sell it in the secondary market. Lincoln Federal
generally sells on the secondary market all of the fixed-rate loans that it
originates with terms of more than 20 years that are written to FHLMC standards,
and retains in its loan portfolio any loans that it originates that are not
written to FHLMC standards. Lincoln Federal retains the servicing rights on the
loans that it sells.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because, as interest rates
increase, the underlying payments by the borrower also increase, thus increasing
the potential for default by the borrower. At the same time, the marketability
of the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At December 31, 1999, approximately
20.8% of Lincoln Federal's one- to four-family residential loans had adjustable
rates of interest.
All of the one- to four-family residential mortgage loans that Lincoln
Federal originates include "due-on-sale" clauses, which give Lincoln Federal the
right to declare a loan immediately due and payable in the event that, among
other things, the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. However, Lincoln Federal
occasionally permits assumptions of existing residential mortgage loans on a
case-by-case basis.
At December 31, 1999, approximately $175.1 million, or 72.2% of Lincoln
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $727,000, or .4% of total residential loans, were included
in non-performing assets as of that date.
Commercial Real Estate and Multi-Family Loans. Lincoln Federal's
commercial real estate loans are secured by churches, warehouses, office
buildings, hotels and other commercial properties. Lincoln Federal generally
originates commercial real estate loans as five-year balloon loans amortized
over a 10- or 15-year period, with an adjustable interest rate indexed primarily
to the prime rate. At December 31, 1999 Lincoln Federal had $4.6 million in
outstanding balloon loans secured by commercial and multi-family real estate.
Lincoln Federal generally requires a Loan-to-Value Ratio of at least 75% on
commercial real estate loans, although it may make loans with a Loan-to-Value
Ratio of up to 80% on loans secured by owner-occupied commercial real estate or
by multi-family residential properties.
Commercial real estate loans generally are larger than one- to
four-family residential loans and involve a greater degree of risk. Commercial
real estate loans often involve large loan balances to single borrowers or
groups of related borrowers. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate. In addition, balloon loans may involve a
greater degree of risk to the extent the borrower is unable to obtain financing
or cannot repay the loan when the loan matures and the balloon payment is due.
At December 31, 1999 Lincoln Federal's largest commercial real estate
borrower had loans outstanding in the aggregate amount of $2.4 million which
were secured by motels located throughout Central Indiana. Also as of that date,
Lincoln Federal's largest commercial real estate loan had an outstanding balance
of $1.2 million and was secured by a church located in Plainfield, Indiana. At
December 31, 1999, approximately $16.1 million, or 6.6% of Lincoln Federal's
total loan portfolio, consisted of commercial real estate loans. On the same
date, there were no commercial real estate loans included in non-performing
assets.
At December 31, 1999, approximately $1.0 million, or .4% of Lincoln
Federal's total loan portfolio, consisted of mortgage loans secured by
multi-family dwellings (those consisting of more than four units). Lincoln
Federal writes multi-family loans on terms and conditions similar to its
commercial real estate loans. The largest multi-family loan as of December 31,
1999 was $336,000 and was secured by an apartment building in Clayton, Indiana.
On the same date, there were no multi-family loans included in non-performing
assets.
Multi-family loans, like commercial real estate loans, involve greater
risk than do residential loans. Also, the loans-to-one-borrower limitation
limits Lincoln Federal's ability to make loans to developers of apartment
complexes and other multi-family units.
Construction Loans. Lincoln Federal offers construction loans to
developers for the acquisition and development of residential and nonresidential
real estate and to builders of one- to four-family residential properties. A
significant portion of these loans are made on a speculative basis (i.e., before
the builder/developer obtains a commitment from a buyer). At December 31, 1999,
approximately $18.1 million, or 7.5% of Lincoln Federal's total loan portfolio,
consisted of construction loans. Of these loans, approximately $3.2 million were
for the acquisition and development of residential housing developments, $6.8
million financed the construction of one- to four-family residential properties
and $8.1 million financed the construction of commercial real estate. As of
December 31, 1999, Lincoln Federal's largest construction loan relationship and
largest construction loan had a balance of $2.1 million and was secured by a
church located in Plainfield, Indiana. As of December 31, 1999, this loan was
peforming according to its terms. Also on that date, construction loans in the
amount of $301,000 were included in non-performing assets.
Construction loans on residential properties where the borrower has
entered into a verifiable sales contract to a non-related party to purchase the
completed home may be made with a maximum Loan-to-Value Ratio of the lesser of
90% of the price stipulated in the sales contract or 80% of the appraised value
of the property. With respect to residential properties constructed on a
speculative basis, Lincoln Federal generally requires a Loan-to-Value Ratio of
75% of the "as completed" appraised value of the property. Although speculative
loans make up a significant percentage of Lincoln Federal's construction loan
portfolio, Lincoln Federal generally will finance only one speculative
construction project per builder. Residential construction loans are generally
written with a fixed rate of interest and for an initial term of six months.
Lincoln Federal generally offers construction loans on commercial land
development projects with a maximum Loan-to-Value Ratio of 75% of the appraised
value of the property or 80% of the property's cost plus 80% of the cost of
verifiable improvements to the property. Construction loans on commercial real
estate properties are generally written for a term not to exceed 30 months.
While providing a comparable, and in some cases higher, yield than a
conventional mortgage loan, construction loans involve a higher level of risk.
For example, if a project is not completed and the borrower defaults, Lincoln
Federal may have to hire another contractor to complete the project at a higher
cost. Also, a project may be completed, but may not be salable, resulting in the
borrower defaulting and requiring that Lincoln Federal take title to the
project.
Land Loans. At December 31, 1999, approximately $3.6 million, or 1.5%
of Lincoln Federal's total loan portfolio, consisted of mortgage loans secured
by undeveloped real estate. Lincoln Federal imposes a maximum Loan-to-Value
Ratio of 65% of the appraised value of the land or 90% of the cost of the
undeveloped land for pre-development land acquisition loans. Lincoln Federal
writes these loans for a maximum term of 12 months. At December 31, 1999, the
Bank's largest land loan totaled $468,000 and was secured by bare land located
in Plainfield, Indiana.
Land loans present greater risk than conventional loans since land
development borrowers who are over budget may divert the loan funds to cover
cost-overruns rather than direct them toward the purpose for which such loans
were made. In addition, land loans are more difficult to monitor than
conventional mortgage loans. As such, a defaulting borrower could cause Lincoln
Federal to take title to partially improved land that is unmarketable without
further capital investment.
Consumer Loans. Lincoln Federal's consumer loans consist of variable-
and fixed-rate home equity loans and lines of credit, automobile, recreational
vehicle, boat and motorcycle loans and loans secured by deposits. Lincoln
Federal does not make indirect consumer loans. Consumer loans tend to have
shorter terms and higher yields than permanent residential mortgage loans. At
December 31, 1999, Lincoln Federal's consumer loans aggregated approximately
$28.6 million, or 11.8% of Lincoln Federal's total loan portfolio. Included in
consumer loans at December 31, 1999 were $15.4 million of variable-rate home
equity lines of credit. These variable-rate loans improve Lincoln Federal's
exposure to interest rate risk.
Lincoln Federal's home equity lines of credit and fixed-term loans are
generally written for up to 95% of the available equity (the appraised value of
the property less any first mortgage amount) if Lincoln Federal holds the first
mortgage, and up to 90% of the available equity if Lincoln Federal does not hold
the first mortgage. Lincoln Federal's home equity and second mortgage loans
increased significantly from $13.2 million at December 31, 1996 to $24.3 million
at December 31, 1999, primarily as the result of a marketing campaign directed
at its existing customers. Lincoln Federal generally will write automobile loans
for up to 100% of the acquisition price for a new automobile and up to the NADA
retail value for a used automobile. New car loans are written for terms of up to
60 months and used car loans are written for terms up to 48 months, depending on
the age of the car. Loans for recreational vehicles and boats are written for no
more than 80% of the purchase price or "verified value," whichever is less, for
a maximum term of 120 months and 84 months, respectively. Motorcycles loans are
written for no more than 75% of the purchase price or "verified value" with a
term not to exceed 48 months. All of Lincoln Federal's consumer loans have a
fixed rate of interest except for home equity lines of credit, which are offered
at a variable rate. At December 31, 1999, consumer loans in the amount of
$77,000 were included in non-performing assets.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or are secured by
rapidly depreciable assets, such as automobiles. Further, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance. In addition, consumer loan
collections depend on the borrower's continuing financial stability, and thus
are more likely to be affected by adverse personal circumstances. Furthermore,
the application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Commercial Loans. Lincoln Federal offers commercial loans, which
consist primarily of loans to businesses that are secured by assets other than
real estate. As of December 31, 1999, commercial loans amounted to $91,000.
Commercial loans tend to bear somewhat greater risk than residential mortgage
loans, depending on the ability of the underlying enterprise to repay the loan.
Although commercial loans have not historically comprised a large portion of
Lincoln Federal's loan portfolio, Lincoln Federal intends to increase the amount
of loans it makes to small businesses in the future in order to increase its
rate of return and diversify its portfolio. As of December 31, 1999, none of
Lincoln Federal's commercial loans were included in nonperforming assets.
Origination, Purchase and Sale of Loans. Historically, Lincoln Federal
has confined its loan origination activities primarily to Hendricks, Montgomery,
Clinton and Morgan Counties. At December 31, 1999, Lincoln Federal did not have
any mortgage loans secured by property located outside of Indiana. Lincoln
Federal's loan originations are generated from referrals from existing
customers, real estate brokers, and newspaper and periodical advertising. Loan
applications are underwritten and processed at Lincoln Federal's main office in
Plainfield.
Lincoln Federal's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the adequacy
of the value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors.
Lincoln Federal generally requires appraisals on all real property
securing its first-mortgage loans and requires an attorney's opinion and a valid
lien on the mortgaged real estate. Appraisals for all real property securing
first-mortgage loans are performed by independent appraisers who are
state-licensed. Lincoln Federal requires fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan and also requires
flood insurance to protect the property securing its interest if the property is
in a flood plain. Lincoln Federal also generally requires private mortgage
insurance for all residential mortgage loans with Loan-to-Value Ratios of
greater than 80%. Lincoln Federal generally requires escrow accounts for
insurance premiums and taxes for residential mortgage loans that it originates.
Lincoln Federal's underwriting standards for consumer loans are intended
to protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
Lincoln Federal occasionally purchases participation interests in loans
originated by other financial institutions in order to diversify its portfolio,
supplement local loan demand and to obtain more favorable yields. The
participations that Lincoln Federal purchases normally represent a portion of
residential or commercial real estate loans originated by other Indiana
financial institutions, most of which are secured by property located in
Indiana. As of December 31, 1999, Lincoln Federal had $5.8 million loan
participations in its asset portfolio.
The following table shows loan origination and repayment activity for
Lincoln Federal during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable at
beginning of period............................. $200,674 $254,190 $317,806
-------- -------- --------
Loans Originated:
Real estate mortgage loans:
One-to-four family loans (1)................ 58,215 59,556 44,472
Multi-family loans.......................... 282 --- 68
Commercial real estate loans................ 4,746 5,271 6,608
Construction loans.......................... 13,469 7,584 10,411
Land loans.................................. 3,435 2,042 3,053
Commercial loans.............................. 43 10 242
Consumer loans................................ 17,484 14,924 12,432
-------- -------- --------
Total originations........................ 97,674 89,387 77,286
-------- -------- --------
Purchases (sales) of participation loans, net...... 6,157 (67,369) (78,887)
Reductions:
Repayments and other deductions............... 61,709 75,169 61,904
Transfers from loans to real estate owned..... 218 365 111
-------- -------- --------
Total reductions............................ 61,927 75,534 62,015
-------- -------- --------
Total gross loans receivable at
end of period........................... $242,578 $200,674 $254,190
======== ======== ========
</TABLE>
(1) Includes certain home equity loans.
Lincoln Federal's total loan originations during the year ended December
31, 1999 totaled $97.7 million, compared to $89.4 million during the year ended
December 31, 1998 and $77.3 million for the year ended December 31, 1997.
Origination and Other Fees. Lincoln Federal realizes income from late
charges, checking account service charges, loan servicing fees and fees for
other miscellaneous services. Late charges are generally assessed if a loan
payment is not received within a specified number of days after it is due. The
grace period depends on the individual loan documents. The Bank also receives a
loan servicing fee of 1/4% on fixed-rate loans and 3/8% on ARM loans that it
services for others.
Non-Performing and Problem Assets
After a mortgage loan becomes 10 days past due, Lincoln Federal delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Lincoln Federal sends additional delinquency notices and makes personal contact
by telephone with the borrower to establish acceptable repayment schedules. When
loans become 60 days in default, Lincoln Federal again contacts the borrower,
this time in person, to establish acceptable repayment schedules. When a
mortgage loan is 90 days delinquent, Lincoln Federal will have either entered
into a workout plan with the borrower or referred the matter to its attorney for
collection. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.
Lincoln Federal reviews mortgage loans on a regular basis and places one-
to four-family residential loans on a non-accrual status when they become 120
days delinquent. Other loans are placed on a non-accrual status when they become
90 days delinquent. Generally, when loans are placed on a non-accrual status,
unpaid accrued interest is written off.
Non-performing Assets. At December 31, 1999, $1,147,000, or .3% of Lincoln
Federal's total assets, were non-performing (non-performing loans and
non-accruing loans) compared to $1,395,000, or .4%, of its total assets at
December 31, 1998. At December 31, 1999, residential loans accounted for
$727,000 of Lincoln Federal's non-performing assets, construction loans
accounted for $301,000 of its non-performing assets, and consumer loans
accounted for $77,000 of non-performing assets. Lincoln Federal had real estate
owned ("REO") properties in the amount of $42,000 as of December 31, 1999.
The table below sets forth the amounts and categories of Lincoln Federal's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Lincoln Federal's policy
that earned but uncollected interest on all loans be reviewed monthly to
determine if any portion thereof should be classified as uncollectible for any
loan past due in excess of 90 days. Lincoln Federal deems any delinquent loan
that is 90 days or more past due to be a non-performing asset.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-performing loans..........................$1,105 $1,292 $ 3,257 $ 2,397 $1,797
Troubled debt restructurings.................. --- --- 367 46 598
------ ------ ------- ------ ------
Total non-performing loans..................$1,105 1,292 3,624 2,443 2,395
Foreclosed real estate........................ 42 103 45 75 ---
------ ------ ------- ------ ------
Total non-performing assets.................$1,147 $1,395 $ 3,669 $2,518 $2,395
====== ====== ======= ====== ======
Non-performing loans to total loans.............. .47% .65% 1.45% .80% .83%
Non-performing assets to total assets............ .28% .38% 1.14% .73% .75%
</TABLE>
Interest income of $45,000 for the year ended December 31, 1999, was
recognized on the non-performing loans summarized above. Interest income of
$83,000 for the year ended December 31, 1999, respectively, would have been
recognized under the original loan terms of these loans.
At December 31, 1999, Lincoln Federal held loans delinquent from 30 to 89
days totalling $4.1 million. As of that date, Lincoln Federal was not aware of
any other loans in which borrowers were experiencing financial difficulties and
was not aware of any assets that would need to be disclosed as non-performing
assets.
Delinquent Loans. The following table sets forth certain information at
December 31, 1999, 1998, and 1997, relating to delinquencies in Lincoln
Federal's portfolio. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998 At December 31, 1997
-------------------------------------- ---------------------------------- ----------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More
------------------- ----------------- ------------------ ---------------- ---------------- ----------------
Principal Principal Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loansof Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
--------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
mortgage loans..... 88 $3,912 16 $722 99 $4,254 18 $ 775 140 $6,040 26 $1,228
Commercial
real estate loans.. --- --- --- --- 3 335 1 103 1 100 1 367
Multi-family
mortgage loans..... --- --- --- --- --- --- --- --- --- ---
Construction loans.... 1 112 2 301 2 300 --- --- 3 1,214
Land loans............ --- --- --- --- --- --- --- --- --- ---
Consumer loans........ 17 80 5 55 15 158 3 114 29 379 20 448
--- ------ -- ------ --- ------ -- ------ --- ------ -- ------
Total.............. 106 $4,104 22 $1,078 117 $4,747 24 $1,292 170 $6,519 50 $3,257
=== ====== == ====== === ====== == ====== === ====== == ======
Delinquent loans to
total loans........ 2.21% 3.06% 3.91%
==== ==== ====
</TABLE>
Classified assets. Federal regulations and Lincoln Federal's Asset
Classification Policy provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser quality
as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
Lincoln Federal regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations.
Lincoln Federal's classified assets are made up entirely of non-performing
assets.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The allowance for loan losses is
determined in conjunction with Lincoln Federal's review and evaluation of
current economic conditions (including those of its lending area), changes in
the character and size of the loan portfolio, loan delinquencies (current status
as well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, Lincoln Federal's allowance for loan losses is adequate to absorb
probable losses inherent in the loan portfolio at December 31, 1999. However,
there can be no assurance that regulators, when reviewing the Bank's loan
portfolio in the future, will not require increases in its allowances for loan
losses or that changes in economic conditions will not adversely affect its loan
portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past five fiscal years ended December 31, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ --------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period...................$1,512 $1,361 $ 1,241 $ 1,121 $1,047
Charge-offs:
One- to four-family
residential mortgage loans.................. (79) (31) --- --- (15)
Commercial real estate mortgage loans......... --- (178) --- ---
Construction loans............................ --- (301) --- --- (12)
Consumer loans................................ (62) (25) --- --- (2)
------ ------ --------- ------- ------
Total charge-offs........................... (141) (357) (178) --- (29)
------ ------ --------- ------- ------
Recoveries:
One- to four-family
residential mortgage loans.................. --- 15 --- --- 3
Commercial real estate mortgage loans......... 4 1 --- --- ---
Construction loans............................ --- 301 --- --- ---
Consumer loans................................ 2 18 --- --- ---
------ ------ --------- ------- ------
Total recoveries............................ 6 335 --- --- 3
------ ------ --------- ------- ------
Net charge-offs.................................. (135) (22) (178) --- (26)
------ ------ --------- ------- ------
Provision for losses on loans.................... 384 173 298 120 100
------ ------ --------- ------- ------
Balance end of period............................$1,761 $1,512 $ 1,361 $ 1,241 $1,121
====== ====== ========= ======= ======
Allowance for loan losses as a percent of
total loans outstanding.......................... .75% 0.77% 0.54% 0.40% 0.39%
Ratio of net charge-offs to average
loans outstanding................................ .06% .01% .06% --- .01%
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Lincoln Federal's allowance for loan losses at the
dates indicated. The information for 1995 is not included because Lincoln
Federal did not make the computation.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------- -------------------- --------------------- --------------------
Percent Percent Percent Percent
of loans of loans of loans of loans
in each in each in each in each
category category category category
to total total to total to total
Amount loans Amount loans Amount loans Amount loans
------ -------- ------- -------- ------ --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to:
Real estate mortgage loans:
One- to four-family
residential............. $718 72.18% $600 76.19% $401 81.03% $206 84.84%
Multi-family.............. 10 .42 10 .51 11 .45 --- .35
Commercial................ 241 6.63 218 7.25 221 5.87 468 4.66
Construction loans........ 230 7.47 113 3.69 249 3.90 367 4.14
Land loans................ 54 1.49 40 1.33 15 .57 --- .86
Commercial loans............ 1 .04 2 .06 11 .10 --- ---
Consumer loans.............. 436 11.77 349 10.97 268 8.08 98 5.15
Unallocated................. 70 --- 180 --- 185 --- 102 ---
------ ------ ------ ------ ------ ------ ------ ------
Total....................... $1,761 100.00 %$1,512 100.00 %$1,361 100.00 %$1,241 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Investments
Investments. During the third quarter of 1997, the Bank adopted a revised
investment policy that authorizes investments in U.S. Treasury securities,
securities guaranteed by the Government National Mortgage Association ("GNMA"),
securities issued by agencies of the U.S. Government, mortgage-backed securities
issued by the FHLMC or the Federal National Mortgage Association ("FNMA") and in
highly-rated mortgage-backed securities, collateralized mortgage obligations and
investment-grade corporate debt securities. This revised policy permits the
Bank's management to react quickly to market conditions. Most of the securities
in its portfolio are considered available-for-sale. At December 31, 1999,
Lincoln Federal's investment portfolio consisted of investments in
mortgage-backed securities, corporate securities, federal agency securities,
FHLB stock, an investment in Pedcor Investments - 1987 - I, L.P., an investment
in Bloomington Housing Associates, L.P., and an investment in an insurance
company. See "-Investments in Multi-Family, Low- and Moderate-Income Housing
Projects" and "Service Corporation Subsidiary." At December 31, 1999,
approximately $162.9 million, or 39.7%, of Lincoln Federal's total assets
consisted of such investments. The Bank also had $8.2 million in
interest-earning deposits with the FHLB-Indianapolis as of that date. As of that
date, Lincoln Federal also had pledged to the FHLB-Indianapolis as collateral,
investment securities with a carrying value of $119.0 million, including $81.6
million in mortgage-backed securities and $37.4 million in other securities.
Investment Securities. The following table sets forth the amortized cost
and the market value of Lincoln Federal's investment portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1999 1998 1997
------------------ ------------------- ------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------- ------- ------- ------- ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available for sale:
Federal agencies......................... $45,992 $41,606 $ 15,598 $ 15,670 $ --- $ ---
Mortgage-backed securities............... 85,016 81,596 89,658 90,609 28,495 29,399
Corporate debt obligations............... 23,256 22,673 23,544 22,997 --- ---
Federated liquid cash fund............... --- --- --- --- --- ---
FHLMC stock.............................. --- --- --- --- -- ---
------- ------- ------- ------- ------ ------
Total investment securities
available for sale................... 154,264 145,875 128,800 129,276 28,495 29,399
Investment securities held to maturity--
Federal agency securities.............. 500 498 1,250 1,264 9,635 9,615
------- ------- ------- ------- ------ ------
Total investment securities.............. 154,764 146,373 130,050 130,540 38,130 39,014
Investment in limited partnerships....... 2,064 (1) 2,387 (1) 2,706 (1)
Investment in insurance company.......... 650 (1) 650 (1) --- ---
FHLB stock (2)........................... 5,447 5,447 5,447 5,447 5,447 5,447
-------- -------- -------
Total investments........................ $162,925 $138,534 $46,283
======== ======== =======
</TABLE>
(1) Market values are not available
(2) Market value is based on the price at which the stock may be resold to the
FHLB of Indianapolis.
The following table sets forth the amount of investment securities
excluding mortgage-backed securities which mature during each of the periods
indicated and the weighted average yields for each range of maturities at
December 31, 1999.
<TABLE>
<CAPTION>
Amount at December 31, 1999 which matures in
---------------------------------------------------------------------------
One Year Five to After
to Five Years Ten Years Ten Years
---------------------- --------------------- ----------------------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency securities - available for sale...$ --- ---% $25,650 6.38% $20,342 6.81%
Corporates securities -- available for sale...... 8,003 7.45 --- --- 15,253 7.02
Federal agency securities -- held to maturity.... 500 6.11 --- --- --- ---
------ ---- ------- ---- ------- ----
$8,503 7.37% $25,650 6.38% $35,595 6.90%
====== ==== ======= ==== ======= ====
</TABLE>
At December 31, 1999, Lincoln Federal had no corporate investments the
aggregate book value of which exceeded 10% of its equity capital.
Mortgage-backed Securities. The following table sets forth the composition
of Lincoln Federal's mortgage-backed securities portfolio at December 31, 1999
and 1998.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------------------ --------------------------------------------
Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value
--------- -------- ------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $23,003 27.1% $22,802 $31,939 35.6% $32,909
Federal National
Mortgage Association 4,593 5.4 4,551 6,013 6.7 6,065
Government National
Mortgage Association 9,417 11.1 8,872 --- --- ---
Collateralized mortgage
obligations 48,003 56.4 45,371 51,706 57.7 51,635
------- ----- ------- ------- ----- -------
Total mortgage-backed
securities $85,016 100.0% $81,596 $89,658 100.0% $90,609
======= ===== ======= ======= ===== =======
</TABLE>
At December 31, 1999, mortgage-backed securities having an amortized cost
of $2,404,000 mature in five to ten years and have a weighted average yield of
6.68% and mortgage-backed securities having an amortized cost of $82,612,000
mature after ten years and have a weighted average yield of 6.73%.
All mortgage-backed securities outstanding at December 31, 1998 mature
after ten years and have a weighted average yield of 6.74%.
The following table sets forth the changes in Lincoln Federal's
mortgage-backed securities portfolio for the years ended December 31, 1999, 1998
and 1997.
For the Year Ended December 31,
-----------------------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
Beginning balance $90,609 $29,399 $ ---
Securitization of loans --- 39,728 76,455
Purchases 14,772 52,406 7,574
Monthly repayments (19,435) (9,999) (1,237)
Proceeds from sales --- (21,089) (54,415)
Net accretion --- 4 ---
Gains on sales 20 113 118
Change in unrealized gain on
securities available for sale (4,370) 47 904
------- ------- -------
Ending balance $81,596 $90,609 $29,399
======= ======= =======
Investments in Multi-Family, Low- and Moderate-Income Housing Projects.
Lincoln Federal has an investment in Pedcor Investments - 1987 - I, L.P.
("Pedcor"), an Indiana limited partnership that was organized to construct, own
and operate a 208-unit apartment complex in Indianapolis, Indiana (the "Pedcor
Project"). The Pedcor Project, which is operated as a multi-family, low- and
moderate-income housing project, has been completed and is performing as
planned. At the inception of the Pedcor Project in August, 1988, Lincoln Federal
committed to invest $2.7 million in Pedcor. In January, 1998, the Bank made its
final payment pursuant to this commitment and is no longer liable to contribute
additional funds for the Pedcor Project.
Lincoln Federal holds a separate investment in a multi-family, low- and
moderate-income housing project through its wholly-owned subsidiary, LF Service
Corp. ("LF"). LF has invested in Bloomington Housing Associates, L.P. ("BHA"),
which is an Indiana limited partnership that was organized to construct, own and
operate a 130-unit apartment complex in Bloomington, Indiana (the "BHA
Project"). Development of the BHA Project has been completed and the project is
performing as planned. LF committed to invest approximately $4.9 million in BHA
at the inception of the Bloomington Project in August, 1992. Through December
31, 1999, LF had invested cash of approximately $3.2 million in BHA with four
additional annual capital contributions remaining to be paid in January of each
year through January, 2003, totaling $1.7 million.
A low- and moderate-income housing project qualifies for certain
federal income tax credits if (i) it is a residential rental property, (ii) the
units are used on a nontransient basis, and (iii) 20% or more of the units in
the project are occupied by tenants whose incomes are 50% or less of the area
median gross income, adjusted for family size, or alternatively, at least 40% of
the units in the project are occupied by tenants whose incomes are 60% or less
of the area median gross income. Qualified low income housing projects generally
must comply with these and other rules for fifteen years, beginning with the
first year the project qualified for the tax credit, or some or all of the tax
credit together with interest may be recaptured. The tax credit is subject to
the limitations on the use of general business credit, but no basis reduction is
required for any portion of the tax credit claimed. As of December 31, 1999,
92.0% of the units in the Pedcor Project and 73.9% of the units in the
Bloomington Project were occupied and each project complied with the low income
occupancy requirements described above.
Lincoln Federal has received tax credits of $18,000 from the operation
of the Pedcor Project and $355,000 from the operation of the Bloomington Project
for the year ended December 31, 1999. The tax credits from the Pedcor Project
were completed during 1999; however, the tax credits from the BHA project will
be available through 2012. Although Lincoln Federal has reduced income tax
expense by the full amount of the tax credit available each year, it has not
been able to fully utilize available tax credits to reduce income taxes payable
because it may not use tax credits that would reduce its regular corporate tax
liability below its alternative minimum tax liability. Lincoln Federal may carry
forward unused tax credits for a period of fifteen years and management believes
that the Bank will be able to utilize available tax credits during the
carry-forward period. Additionally, Pedcor and BHA have incurred operating
losses in the early years of their operations primarily due to accelerated
depreciation of assets. Lincoln Federal has accounted for its investment in
Pedcor, and LF has accounted for Lincoln Federal's investment in BHA, on the
equity method. Accordingly, Lincoln Federal and LF have each recorded their
share of these losses as reductions to their investments in Pedcor and BHA,
respectively. At December 31, 1999, Lincoln Federal had no remaining investment
on the books for Pedcor, and LF's investment in BHA was $2.1 million.
The following summarizes Lincoln Federal's equity in Pedcor's losses
and tax credits and LF's equity in BHA's losses and tax credits recognized in
Lincoln Federal's consolidated financial statements.
Year Ended December 31,
-----------------------------
1999 1998 1997
------ ------ ------
(In Thousands)
Investment in Pedcor......................... $--- $ --- $ 76
==== ======== =======
Equity in losses, net
of income tax effect...................... $--- $(164) $(167)
Tax credit................................... 18 242 300
--- ------- -----
Increase in after-tax net income from
Pedcor investment......................... $18 $ 78 $ 133
=== ======= =====
Year Ended December 31,
-----------------------------
1999 1998 1997
------ ------ ------
(In Thousands)
Investment in BHA.......................... $2,064 $2,387 $2,630
====== ====== ======
Equity in losses, net
of income tax effect.................... $ (195) $ (147) $ (244)
Tax credit................................. 355 355 355
------ ------ ------
Increase in after-tax net income from
BHA investment.......................... $ 160 $ 208 $ 111
====== ====== ======
Sources of Funds
General. Deposits have traditionally been Lincoln Federal's primary source
of funds for use in lending and investment activities. In addition to deposits,
Lincoln Federal derives funds from scheduled loan payments, investment
maturities, loan prepayments, retained earnings, income on earning assets and
borrowings. While scheduled loan payments and income on earning assets are
relatively stable sources of funds, deposit inflows and outflows can vary widely
and are influenced by prevailing interest rates, market conditions and levels of
competition. Borrowings from the FHLB of Indianapolis have been used in the
short-term to compensate for reductions in deposits or deposit inflows at less
than projected levels.
Deposits. Lincoln Federal attracts deposits principally from within
Hendricks, Montgomery, Clinton and Morgan Counties through the offering of a
broad selection of deposit instruments, including fixed-rate passbook accounts,
NOW accounts, variable rate money market accounts, fixed-term certificates of
deposit, individual retirement accounts and savings accounts. Lincoln Federal
does not actively solicit or advertise for deposits outside of Hendricks,
Montgomery, Clinton and Morgan Counties, and substantially all of Lincoln
Federal's depositors are residents of those counties. Deposit account terms
vary, with the principal differences being the minimum balance required, the
amount of time the funds remain on deposit and the interest rate. Lincoln
Federal does not accept brokered deposits. Although the Bank sometimes may bid
for public deposits, it held only $1.4 million of such funds, or .7% of its
total deposits, at December 31, 1999. Lincoln Federal periodically runs specials
on certificates of deposit with specific maturities.
Lincoln Federal establishes the interest rates paid, maturity terms,
service fees and withdrawal penalties on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and applicable regulations. Lincoln
Federal relies, in part, on customer service and long-standing relationships
with customers to attract and retain its deposits. The Bank also closely prices
its deposits to the rates offered by its competitors.
Approximately 64.7% of Lincoln Federal's deposits consist of
certificates of deposit, which generally have higher interest rates than other
deposit products that it offers. Certificates of deposit have decreased 10.1%
during the year ended December 31, 1999. Money market savings accounts represent
20.4% of Lincoln Federal's deposits and have grown 26.7% during the year ended
December 31, 1999. Lincoln Federal offers special rates on certificates of
deposit with maturities that fit its asset and liability strategies.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that Lincoln Federal offers has
allowed it to compete effectively in obtaining funds and to respond with
flexibility to changes in consumer demand. Lincoln Federal has become more
susceptible to short-term fluctuations in deposit flows as customers have become
more interest rate conscious. Lincoln Federal manages the pricing of its
deposits in keeping with its asset/liability management and profitability
objectives. Based on its experience, management believes that Lincoln Federal's
savings accounts, NOW and MMDAs are relatively stable sources of deposits.
However, the ability to attract and maintain certificates of deposit, and the
rates Lincoln Federal pays on these deposits, have been and will continue to be
significantly affected by market conditions.
An analysis of Lincoln Federal's deposit accounts by type and maturity at
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at
Opening December 31, % of
Type of Account Balance 1999 Deposits
- ---------------- ------------ ------------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
Withdrawable:
Savings accounts........................... $ 25 $16,505 8.05%
Money market............................... 1,000 41,745 20.37
NOW accounts............................... 200 10,729 5.23
Non-interest bearing demand accounts....... 200 3,396 1.66
-------- ------
Total withdrawable....................... 72,375 35.31
-------- ------
Certificates (original terms):
3 months or less........................... 1,000 230 .11
6 months................................... 1,000 3,150 1.54
12 months.................................. 1,000 20,980 10.24
18 months.................................. 1,000 18,717 9.13
24 months.................................. 1,000 35,598 17.37
30 months.................................. 1,000 25,179 12.28
36 months ................................. 1,000 18,312 8.93
60 months.................................. 1,000 9,007 4.39
Public fund certificates...................... 1,434 .70
-------- ------
Total certificates............................ 132,607 64.69
-------- ------
Total deposits................................ $204,982 100.00%
======== ======
</TABLE>
The following table sets forth by various interest rate categories the
composition of Lincoln Federal's time deposits at the dates indicated:
At December 31,
-----------------------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
3.00 to 3.99%...... $ 228 $ 191 $ ---
4.00 to 4.99%...... 54,803 24,274 15,926
5.00 to 5.99%...... 62,883 81,030 81,199
6.00 to 6.99%...... 14,693 41,966 48,872
-------- -------- --------
Total........... $132,607 $147,461 $145,997
======== ======== ========
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1999. Matured certificates, which have not been renewed as of
December 31, 1999, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 1999 Maturing In
-----------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
3.00 to 3.99%.... $ 228 $ --- $ --- $ ---
4.00 to 4.99%.... 37,766 15,049 1,109 879
5.00 to 5.99%.... 35,316 18,885 7,616 1,066
6.00 to 6.99%.... 1,632 4,350 8,611 100
------- ------- ------- ------
Total......... $74,942 $38,284 $17,336 $2,045
======= ======= ======= ======
The following table indicates the amount of Lincoln Federal's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1999.
At December 31, 1999
--------------------
Maturity Period (In thousands)
Three months or less.................................... $ 2,474
Greater than three months through six months............ 1,006
Greater than six months through twelve months........... 3,969
Over twelve months...................................... 8,322
-------
Total.............................................. $15,771
=======
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
--------------------------------------------------------------------------------------------
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
1999 Deposits 1998 1998 Deposits 1997 1997 Deposits
-------- ------ ------ -------- ------ ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts................... $16,505 8.05% (4,077) $20,582 9.71% $(1,385) $21,967 10.78%
Money market accounts.............. 41,745 20.37 8,803 32,942 15.54 6,940 26,002 12.75
NOW accounts....................... 10,729 5.23 2,188 8,541 4.03 976 7,565 3.71
Noninterest-bearing
demand accounts.................. 3,396 1.66 912 2,484 1.17 163 2,321 1.14
-------- ------ ------ -------- ------ ------ -------- ------
Total withdrawable............... 72,375 35.31 7,826 64,549 30.45 6,694 57,855 28.38
-------- ------ ------ -------- ------ ------ -------- ------
Certificates (original terms):
91 days............................ 230 .11 (376) 606 .29 284 322 0.16
6 months........................... 3,150 1.54 (625) 3,775 1.78 (787) 4,562 2.24
12 months.......................... 20,980 10.24 (11,190) 32,170 15.17 2,457 29,713 14.58
18 months.......................... 18,717 9.13 9,473 9,244 4.36 (8,642) 17,886 8.77
24 months.......................... 35,598 17.37 14,027 21,571 10.18 20,298 1,273 0.62
30 months.......................... 25,179 12.28 (32,984) 58,163 27.43 (7,527) 65,690 32.22
36 months ......................... 18,312 8.93 9,380 8,932 4.21 (2,318) 11,250 5.52
60 months.......................... 9,007 4.39 (1,654) 10,661 5.03 (3,510) 14,171 6.95
Public fund certificates.............. 1,434 .70 (905) 2,339 1.10 1,209 1,130 0.56
-------- ------ ------ -------- ------ ------ -------- ------
Total certificates.................... 132,607 64.69 (14,854) 147,461 69.55 1,464 145,997 71.62
-------- ------ ------ -------- ------ ------ -------- ------
Total deposits........................ $204,982 100.00% (7,028) $212,010 100.00% $8,158 $203,852 100.00%
======== ====== ====== ======== ====== ====== ======== ======
</TABLE>
Total deposits at December 31, 1999 were approximately $205.0 million,
compared to approximately $203.9 million at December 31, 1997. Lincoln Federal's
deposit base depends somewhat upon the manufacturing sector of Hendricks,
Montgomery, Clinton and Morgan Counties. Although the manufacturing sector in
these counties is relatively diversified and does not significantly depend upon
any industry, a loss of a material portion of the manufacturing workforce could
adversely affect Lincoln Federal's ability to attract deposits due to the loss
of personal income attributable to the lost manufacturing jobs and the attendant
loss in service industry jobs.
In the unlikely event of the Bank's liquidation, all claims of creditors
(including those of deposit account holders, to the extent of their deposit
balances) would be paid first followed by distribution of the liquidation
account to certain deposit account holders, with any assets remaining thereafter
distributed to the Holding Company as the sole shareholder of Lincoln Federal.
Borrowings. Lincoln Federal focuses on generating high quality loans and
then seeking the best source of funding from deposits, investments or
borrowings. At December 31, 1999, Lincoln Federal had borrowings in the amount
of $103.9 million from the FHLB of Indianapolis which bear fixed and variable
interest rates and which are due at various dates through 2009. Lincoln Federal
is required to maintain eligible loans and investment securities, including
mortgage-backed securities, in its portfolio of at least 160% of outstanding
advances as collateral for advances from the FHLB of Indianapolis. As an
additional funding source, Lincoln Federal has also sold securities under
repurchase agreements. Lincoln Federal had outstanding securities sold under
repurchase agreement in the amount of $4.6 million at December 31, 1999. Lincoln
Federal does not anticipate any difficulty in obtaining advances and other
borrowings appropriate to meet its requirements in the future.
The following table presents certain information relating to Lincoln
Federal's borrowings at or for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
-----------------------------------------------------
1999 1998 1997
-------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Outstanding at end of period
Securities sold under repurchase agreements............ $ 4,600 $ --- $ ---
FHLB advances.......................................... 103,938 33,263 70,136
Average balance outstanding for period
Securities sold under repurchase agreements............ 3,680 --- ---
FHLB advances.......................................... 78,874 49,773 92,121
Maximum amount outstanding at any
month-end during the period
Securities sold under repurchase agreements............ 4,600 --- ---
FHLB advances.......................................... 104,188 35,136 106,932
Weighted average interest rate
during the period
Securities sold under repurchase agreements............ 5.16% ---% ---%
FHLB advances.......................................... 5.30 5.74 5.70
Weighted average interest rate
at end of period
Securities sold under repurchase agreements............ 5.09 --- ---
FHLB advances.......................................... 4.94 5.50 5.71
Note payable to Bloomington................................. $1,714 $ 2,203 $ 2,691
</TABLE>
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
Lincoln Federal currently owns one subsidiary, LF, whose assets consist
of an investment in Family Financial Life Insurance Company ("Family Financial")
and in BHA. See "- Investments in Low- and Moderate-Income Housing Projects." LF
received regulatory approval in February, 1998 to invest in Family Financial, an
Indiana stock insurance company. In May, 1998, LF acquired a 16.7% interest in
Family Financial for $650,000. The remaining interests are held in equal amounts
by service corporations of five other financial institutions, four of which are
located in Indiana and one in South Carolina. Fifty percent of the common stock
of Family Financial is held by Consortium Partners, a Louisiana general
partnership in which the six participating service corporations own equal
interests. The service corporations directly own, in equal amounts, the
remaining 50% of the common stock of Family Financial.
Family Financial primarily engages in retail sales of mortgage and
credit insurance products in connection with loans originated by Lincoln
Federal's constituent shareholder financial institutions. Products offered by
Family Financial include group and individual term mortgage life insurance,
group mortgage disability insurance, group accidental death insurance, group
credit life insurance, and group credit accident and disability insurance
policies. Family Financial also markets a variety of tax-deferred annuity
contracts which are wholly reinsured by other insurance companies. LF expects to
receive (1) dividends paid on Family Financial shares owned directly by it, (2)
a pro rata allocation of dividends received on shares held by Consortium
Partners, which are divided among the partners based on the actuarially
determined value of Family Financial's various lines of insurance generated by
customers of these partners, and (3) commissions on sales of insurance products
made to customers. For the period ended December 31, 1999, Lincoln Federal
received dividends of $37,000 from Family Financial.
Employees
As of December 31, 1999, Lincoln Federal employed 84 persons on a
full-time basis and five on a part-time basis. None of Lincoln Federal's
employees are represented by a collective bargaining group and management
considers employee relations to be good.
Employee benefits for Lincoln Federal's full-time employees include, among
other things, an employee stock ownership plan, a Pentegra Group (formerly known
as Financial Institutions Retirement Fund) defined benefit pension plan, which
is a noncontributory, multiple-employer comprehensive pension plan (the"Pension
Plan"), and hospitalization/major medical insurance, long-term disability
insurance, life insurance, and participation in the Lincoln Federal 401(k) Plan,
which is administered by Pentegra Group.
Lincoln Federal considers its employee benefits to be competitive with
those offered by other financial institutions and major employers in its area.
See "Executive Compensation and Related Transactions of Lincoln Federal."
COMPETITION
Lincoln Federal originates most of its loans to and accepts most of its
deposits from residents of Hendricks, Montgomery, Clinton and Morgan Counties,
Indiana. Lincoln Federal is subject to competition from various financial
institutions, including state and national banks, state and federal savings
associations, credit unions, and certain nonbanking consumer lenders that
provide similar services in those counties with significantly larger resources
than are available to Lincoln Federal. Lincoln Federal also competes with money
market funds with respect to deposit accounts and with insurance companies with
respect to individual retirement accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Lincoln Federal competes for
loan originations primarily through the efficiency and quality of the services
that it provides borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that management cannot readily predict.
REGULATION
General
As a federally chartered, SAIF-insured savings association, Lincoln
Federal is subject to extensive regulation by the OTS and the FDIC. For example,
Lincoln Federal must obtain OTS approval before it may engage in certain
activities and must file reports with the OTS regarding its activities and
financial condition. The OTS periodically examines Lincoln Federal's books and
records and, in conjunction with the FDIC in certain situations, has examination
and enforcement powers. This supervision and regulation are intended primarily
for the protection of depositors and federal deposit insurance funds. A savings
association must pay a semi-annual assessment to the OTS based upon a marginal
assessment rate that decreases as the asset size of the savings association
increases, and which includes a fixed-cost component that is assessed on all
savings associations. The assessment rate that applies to a savings association
depends upon the institution's size, condition, and the complexity of its
operations. Lincoln Federal's semi-annual assessment is $42,000.
Lincoln Federal is also subject to federal and state regulation as to
such matters as loans to officers, directors, or principal shareholders,
required reserves, limitations as to the nature and amount of its loans and
investments, regulatory approval of any merger or consolidation, issuances or
retirements of Lincoln Federal's securities, and limitations upon other aspects
of banking operations. In addition, Lincoln Federal's activities and operations
are subject to a number of additional detailed, complex and sometimes
overlapping federal and state laws and regulations. These include state usury
and consumer credit laws, state laws relating to fiduciaries, the Federal
Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act
and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act,
anti-redlining legislation and antitrust laws.
Savings and Loan Holding Company Regulation
The Holding Company is regulated as a "non-diversified savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
(the "HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, the Holding Company is registered with the OTS and is thereby subject to
OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, Lincoln Federal is subject to
certain restrictions in its dealings with the Holding Company and with other
companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company,
without obtaining the prior approval of the Director of the OTS, from acquiring
control of another savings association or savings and loan holding company or
retaining more than 5% of the voting shares of a savings association or of
another holding company which is not a subsidiary. The HOLA also restricts the
ability of a director or officer of the Holding Company, or any person who owns
more than 25% of the Holding Company's stock, from acquiring control of another
savings association or savings and loan holding company without obtaining the
prior approval of the Director of the OTS.
The Holding Company currently operates as a unitary savings and loan
holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB
Act") on November 12, 1999, there were no restrictions on the permissible
business activities of a unitary savings and loan holding company. The GLB Act
included a provision that prohibits any new unitary savings and loan holding
company, defined as a company that acquires a thrift after May 4, 1999, from
engaging in commercial activities. This provision also includes a grandfather
clause, however, that permits a company that was a savings and loan holding
company as of May 4, 1999, or had an application to become a savings and loan
holding company on file with the OTS as of that date, to acquire and continue to
control a thrift and to continue to engage in commercial activities. Because the
Holding Company qualifies under this grandfather provision, the GLB Act did not
affect the Holding Company's authority to engage in diversified business
activities.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would be deemed to be a bank
holding company subject to all of the provisions of the Bank Holding Company Act
of 1956 and other statutes applicable to bank holding companies, to the same
extent as if the Holding Company were a bank holding company and Lincoln Federal
were a bank. See "-Qualified Thrift Lender." At December 31, 1999, Lincoln
Federal's asset composition was in excess of that required to qualify as a
Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with
Lincoln Federal, the Holding Company would thereupon become a multiple savings
and loan holding company. Except where such acquisition is pursuant to the
authority to approve emergency thrift acquisitions and where each subsidiary
savings association meets the QTL test, the activities of the Holding Company
and any of Lincoln Federal's subsidiaries (other than Lincoln Federal or other
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings association, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings association, (iv) holding or managing
properties used or occupied by a subsidiary savings association, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the Federal
Reserve Board (the "FRB") as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS before a multiple holding
company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
Lincoln Federal is a member of the FHLB of Indianapolis, which is one
of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. The FHLB is funded primarily from funds
deposited by banks and savings associations and proceeds derived from the sale
of consolidated obligations of the FHLB system. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB. All FHLB advances must be fully secured by sufficient
collateral as determined by the FHLB. The Federal Housing Finance Board
("FHFB"), an independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
Prior to the enactment of the GLB Act, a federal savings association
was required to become a member of the FHLB for the district in which the thrift
is located. The GLB Act abolished this requirement, effective six months
following the enactment of the statute. At that time, membership with the FHLB
will become voluntary. Any savings association that chooses to become (or
remain) a member of the FHLB following the expiration of this six-month period
will have to qualify for membership under the criteria that existed prior to the
enactment of the GLB Act. Lincoln Federal currently intends to remain a member
of the FHLB of Indianapolis.
As a member of the FHLB, Lincoln Federal is required to purchase and
maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts, or
similar obligations at the beginning of each year. At December 31, 1999, Lincoln
Federal's investment in stock of the FHLB of Indianapolis was $5.4 million. The
FHLB imposes various limitations on advances such as limiting the amount of
certain types of real estate-related collateral to 30% of a member's capital and
limiting total advances to a member. Interest rates charged for advances vary
depending upon maturity, the cost of funds to the FHLB of Indianapolis and the
purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. For the fiscal year ended
December 31, 1999, dividends paid by the FHLB of Indianapolis to Lincoln Federal
totaled approximately $436,000, for an annual rate of 8.0%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the SAIF for savings associations such as Lincoln
Federal and banks that have acquired deposits from savings associations. The
FDIC is required to maintain designated levels of reserves in each fund. During
1996, the reserves of the SAIF were below the level required by law, primarily
because a significant portion of the assessments paid into the SAIF had been
used to pay the cost of prior thrift failures, while the reserves of the BIF met
the level required by law. In 1996, however, legislation was enacted to
recapitalize the SAIF and eliminate the premium disparity between the BIF and
SAIF. See "- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
In 1996, legislation was enacted that included provisions designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Under the new law, Lincoln Federal was charged a one-time
special assessment equal to $.657 per $100 in assessable deposits at March 31,
1995. Lincoln Federal recognized this one-time assessment as a non-recurring
operating expense of approximately $1.3 million ($785,000 after tax) during the
three-month period ending September 30, 1996, and paid this assessment during
the fourth quarter of 1996. The assessment was fully deductible for both federal
and state income tax purposes. Beginning January 1, 1997, Lincoln Federal's
annual deposit insurance premium was reduced from .23% to .0644% of total
assessable deposits. BIF institutions pay lower assessments than comparable SAIF
institutions because BIF institutions pay only 20% of the rate paid by SAIF
institutions on their deposits with respect to obligations issued by the
federally-chartered corporation which provided some of the financing to resolve
the thrift crisis in the 1980's ("FICO"). Although Congress has considered
merging the SAIF and the BIF, until then, savings associations with SAIF
deposits may not transfer deposits into the BIF system without paying various
exit and entrance fees, and SAIF institutions will continue to pay higher FICO
assessments. Such exit and entrance fees need not be paid if a SAIF institution
converts to a bank charter or merges with a bank, as long as the resulting bank
continues to pay applicable insurance assessments to the SAIF, and as long as
certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
The OTS recently amended this requirement to require a core capital level of 3%
of total adjusted assets for savings associations that receive the highest
rating for safety and soundness, and 4% to 5% for all other savings
associations. This amendment became effective April 1, 1999. Under the tangible
capital requirement, a savings association must maintain tangible capital (core
capital less all intangible assets except purchased mortgage servicing rights
which may be included after making the above-noted adjustment in an amount up to
100% of tangible capital) of at least 1.5% of total assets. Under the risk-based
capital requirements, a minimum amount of capital must be maintained by a
savings association to account for the relative risks inherent in the type and
amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt, less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%). A credit risk-free asset, such as cash, requires no risk-based
capital, while an asset with a significant credit risk, such as a non-accrual
loan, requires a risk factor of 100%. Moreover, a savings association must
deduct from capital, for purposes of meeting the core capital, tangible capital
and risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At December 31, 1999, Lincoln Federal was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. Even though the OTS has delayed implementing this
rule, Lincoln Federal nevertheless measures its interest rate risk in conformity
with the OTS regulation and, as of December 31, 1999, would have been required
to deduct $6.5 million from its total capital available to calculate its
risk-based capital requirement. The OTS recently updated its standards regarding
the management of interest rate risk to include summary guidelines to assist
savings associations in determining their exposures to interest rate risk.
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operating activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
1999, Lincoln Federal was categorized as "well capitalized," meaning that its
total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
The OTS adopted a regulation, which became effective on April 1, 1999,
that revised the restrictions that apply to "capital distributions" by savings
associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The amended regulation exempts certain savings associations from the
requirement under the prior version of the regulation that all savings
associations file either a notice or an application with the OTS before making
any capital distribution. As revised, the regulation requires a savings
association to file an application for approval of a proposed capital
distribution with the OTS if the association is not eligible for expedited
treatment under OTS's application processing rules, or the total amount of all
capital distributions, including the proposed capital distribution, for the
applicable calendar year would exceed an amount equal to the savings
association's net income for that year to date plus the savings association's
retained net income for the preceding two years (the "retained net income
standard"). At December 31, 1999, Lincoln Federal's retained net income standard
was approximately $6.1 million. A savings association must also file an
application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because
Lincoln Federal is a subsidiary of a savings and loan holding company, this
latter provision requires, at a minimum, that Lincoln Federal file a notice with
the OTS 30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, Lincoln Federal's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires Lincoln
Federal to establish and maintain a liquidation account for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders and prohibits
Lincoln Federal from making capital distributions to the Holding Company if its
net worth would be reduced below the amount required for the liquidation
account.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place
limitations on the ability of insured depository institutions to accept, renew
or roll over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other
insured depository institutions having the same type of charter in the
institution's normal market area. Under these regulations, "well-capitalized"
depository institutions may accept, renew or roll such deposits over without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll such deposits over with a waiver from the FDIC (subject to certain
restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The regulations
contemplate that the definitions of "well-capitalized," "adequately-capitalized"
and "undercapitalized" will be the same as the definition adopted by the
agencies to implement the corrective action provisions of FedICIA. Management
does not believe that these regulations will have a materially adverse effect on
Lincoln Federal's current operations.
Safety and Soundness Standards
In 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. During 1996, the federal banking agencies added asset quality and
earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and be
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, Lincoln Federal may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. Additional amounts may be lent, not in excess of
10% of unimpaired capital and surplus, if such loans or extensions of credit are
fully secured by readily marketable collateral, including certain debt and
equity securities but not including real estate. In some cases, a savings
association may lend up to 30% of unimpaired capital and surplus to one borrower
for purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. Lincoln Federal has
established an "in-house" lending limit of $3 million to a single or related
group of borrowers, which is significantly lower than the regulatory lending
limit described above. Any loan that exceeds this "in-house" lending limit up to
the regulatory lending limit must first be approved by Lincoln Federal's board
of directors. At December 31, 1999, Lincoln Federal had no loan relationships
that exceeded its "in-house" lending limit. Also on that date, Lincoln Federal
did not have any loans or extensions of credit to a single or related group of
borrowers in excess of its regulatory lending limits. Management does not
believe that the loans-to-one-borrower limits will have a significant impact on
Lincoln Federal's business operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test that requires the association
to maintain an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise to qualify as a QTL. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of December 31, 1999, Lincoln Federal was in compliance
with its QTL requirement, with approximately 86.6% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to the SAIF) or be subject to the following penalties: (i) it
may not enter into any new activity except for those permissible for a national
bank and for a savings association; (ii) its branching activities shall be
limited to those of a national bank; (iii) it shall be bound by regulations
applicable to national banks respecting payment of dividends. Three years after
failing the QTL test the association must dispose of any investment or activity
not permissible for a national bank and a savings association. If such a savings
association is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations applicable
to bank holding companies (including restrictions as to the scope of permissible
business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss. 7701(a)(19) of the Code or the asset
composition test of ss. 7701(c) of the Code. Branching that would result in th
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana enacted legislation establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law, which became effective in 1996, authorizes Indiana banks
to branch interstate by merger or de novo expansion, provided that such
transactions are not permitted to out-of-state banks unless the laws of their
home states permit Indiana banks to merge or establish de novo banks on a
reciprocial basis.
Transactions with Affiliates
Lincoln Federal is subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
their directors, executive officers and affiliated companies. The statute limits
credit transactions between a bank or savings association and its executive
officers and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company have been registered
with the SEC under the 1934 Act and, as a result, the Holding Company is subject
to the information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following Lincoln Federal's conversion to stock form, if the Holding
Company has fewer than 300 shareholders, it may deregister its shares under the
1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the
Holding Company may not be resold without registration unless sold in accordance
with the resale restrictions of Rule 144 under the 1933 Act. If the Holding
Company meets the current public information requirements under Rule 144, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate's sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated Lincoln Federal's record of meeting community
credit needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as Lincoln Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using the experience method. As a result of the repeal of the
percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
associations meeting a residential mortgage loan origination test. Lincoln
Federal does not have any reserves taken after 1987 that must be recaptured. In
addition, the pre-1988 reserve, for which no deferred taxes have been recorded,
need not be recaptured into income unless (i) the savings association no longer
qualifies as a bank under the Code, or (ii) the savings association pays out
excess dividends or distributions. Although Lincoln Federal does have some
reserves from before 1988, Lincoln Federal is not required to recapture these
reserves.
Depending on the composition of its items of income and expense, a savings
association may be subject to the alternative minimum tax. A savings association
must pay an alternative minimum tax on the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid can be credited against
regular tax due in later years.
For federal income tax purposes, Lincoln Federal has been reporting its
income and expenses on the accrual method of accounting. Lincoln Federal's
federal income tax returns have not been audited in recent years.
State Taxation
Lincoln Federal is subject to Indiana's Financial Institutions Tax
("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income."
"Adjusted gross income," for purposes of FIT, begins with taxable income as
defined by Section 63 of the Code and, thus, incorporates federal tax law to the
extent that it affects the computation of taxable income. Federal taxable income
is then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
Lincoln Federal's state income tax returns have not been audited in recent
years.
Item 2. Properties.
The following table provides certain information with respect to
Lincoln Federal's offices as of December 31, 1999:
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures Footage
(Dollars in Thousands)
1121 East Main Street Owned 1970 $86,309 $1,307 9,925
Plainfield, IN 46168
134 South Washington Street Owned 1962 47,021 389 9,340
Crawfordsville, IN 47933
1900 East Wabash Street Owned 1974 31,664 288 2,670
Frankfort, IN 46041
975 East Main Street Owned 1981 28,609 286 2,890
Brownsburg, IN 46112
7648 East U.S. Highway 36 Owned 1999 7,375 1,071 2,800
Avon, IN
590 S. State Road 67 Leased 1999 4,004 332 1,500
Mooresville, IN 46158
Lincoln Federal owns computer and data processing equipment which it uses
for transaction processing, loan origination, and accounting. The net book value
of Lincoln Federal's electronic data processing equipment was approximately
$417,000 at December 31, 1999.
Lincoln Federal currently operates five automatic teller machines
("ATMs"), with one ATM located at its main office and each of its branch
offices. Lincoln Federal's ATMs participate in the Cirrus(R) and MAC(R)
networks.
Lincoln Federal has also contracted for the data processing and reporting
services of On-Line Financial Services, Inc. in Oak Brook, Illinois. The cost of
these data processing services is approximately $46,000 per month.
Lincoln Federal has also executed a Correspondent Services Agreement with
the FHLB of Indianapolis under which it receives item processing and other
services for a fee of approximately $6,700 per month.
Item 3. Legal Proceedings.
Although the Holding Company and Lincoln Federal are involved, from
time to time, in various legal proceedings in the normal course of business,
there are no material legal proceedings to which they presently are a party or
to which any of the Holding Company's or Lincoln Federal's property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 1999.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
---- -----------------------------
T. Tim Unger Chairman of the Board, President
and Chief Executive Officer
John M. Baer Secretary and Treasurer
T. Tim Unger (age 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. Mr. Unger has served the banking industry since 1966.
John M. Baer (age 51) has served as Lincoln Federal's Chief Financial
Officer since June, 1997 and as Lincoln Federal's Secretary and Treasurer since
January, 1998. Before working for Lincoln Federal, Mr. Baer served as Vice
President and Chief Financial Officer of the Community Bank Group of Bank One in
Indianapolis, Indiana from June, 1996 through June, 1997. From October, 1989
through June, 1996 he served as Senior Vice President and Chief Financial
Officer of Bank One, Merrillville, NA, in Merrillville, Indiana. Mr. Baer has
served the banking industry since 1978.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information required by this item is incorporated by reference to
the material under the heading "Shareholder Information" on page 47 of the
Holding Company's 1999 Shareholder Annual Report (the "Shareholder Annual
Report").
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Data of Lincoln
Bancorp and Subsidiary" on pages 3 and 4 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The information required by this item is incorporated by reference to
pages 4 through 19 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to
pages 16 through 19 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes
thereto contained on pages 20 through 45 in the Shareholder Annual Report are
incorporated herein by reference. The Company's unaudited quarterly results of
operations contained on page 16 in the Shareholder Annual Report are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 3 through 5 and page 11 of the Holding
Company's Proxy Statement for its 2000 Annual Shareholder Meeting (the "2000
Proxy Statement"). Information concerning the Holding Company's executive
officers is included in Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
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
$366,888, respectively. Awards paid on the restricted shares are
payable to the grantee as the shares are vested and are not included in
the table.
<PAGE>
Stock Options
The following table sets forth information related to options granted
during fiscal year 1999 to the Named Executive Officers.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
% of Total Annual Rates of Stock
Options Granted Exercise or Price Appreciation
Options to Employees Base Price Expiration for Option Term
Name Granted(#) In Fiscal Year ($/Share)(3) Date 5% ($) 10% ($)
---- ---------- -------------- ------------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T. Tim Unger 175,231 (1) 47.25% $12.50 7/5/2009 $3,567,910 $5,681,301
John M. Baer 60,092 (2) 16.21% $12.50 7/5/2009 $1,223,544 $1,948,289
</TABLE>
(1) These are options to acquire shares of the Holding Company's Common Stock.
They are exercisable at the rate of 20% per year over a 5-year period
commencing July 6, 1999. Subject to earlier vesting under certain
circumstances.
(2) These are options to acquire shares of the Holding Company's Common Stock.
These options become exercisable as to 8,000 shares on July 6, 2000, as to
8,000 shares on July 6, 2001, as to 8,000 shares the first days of years
2002 - 2006, and as to 4,092 shares on January 1, 2007, subject to earlier
vesting under certain circumstances.
(3) The option exercise price may be paid in cash or with the approval of the
Stock Compensation Committee beginning on December 30, 2001, in shares of
Holding Company Common Stock or a combination thereof. The option exercise
price equaled the market value of a share of the Holding Company Common
Stock on the date of grant.
The following table includes the number of shares covered by
exercisable and unexercisable stock options held by the Named Executive Officers
as of December 31, 1999. Also reported are the values for "in-the-money" options
(options whose exercise price is lower than the market value of the shares at
fiscal year end) which represent the spread between the exercise price of any
such existing stock options and the fiscal year-end market price of the stock.
Outstanding Stock Option Grants and Value Realized as of 12/31/99
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End (#) Fiscal Year End ($) (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>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 1 through 3 of the 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
page 8 of the 2000 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents included in the financial statements filed
as part of the report:
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report......................................... See Shareholder Annual Report
Page 20
Consolidated Balance Sheet at December 31, 1999, and 1998............ See Shareholder Annual Report
Page 21
Consolidated Statement of Income for the Years Ended
December 31, 1999, 1998, and 1997.................................... See Shareholder Annual Report
Page 22
Consolidatd Statement of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997......................... See Shareholder Annual Report
Page 23
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1999, 1998, and 1997............... See Shareholder Annual Report
Page 24
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997.................................... See Shareholder Annual Report
Page 25
Notes to Consolidated Financial Statements........................... See Shareholder Annual Report
Page 26
</TABLE>
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1999.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits is
an executive compensation plan and arrangement which is identified as
Exhibit 10(5).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
LINCOLN BANCORP
Date: March 30, 2000 By: /s/ T. Tim Unger
------------------------------
T. Tim Unger, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 30th day of March, 2000.
Signatures Title Date
(1) Principal Executive Officer:
/s/ T. Tim Unger )
------------------------ )
T. Tim Unger President and )
Chief Executive Officer )
)
)
(2) Principal Financial )
and Accounting Officer: )
)
)
/s/ John M. Baer Treasurer )
------------------------ )
John M. Baer )
)
) March 30, 2000
)
(3) The Board of Directors: )
)
)
/s/ Lester N. Bergum Director )
------------------------ )
Lester N. Bergum )
)
)
/s/ Dennis W. Dawes Director )
------------------------ )
Dennis W. Dawes )
)
)
/s/ W. Thomas Harmon Director )
------------------------ )
W. Thomas Harmon )
)
)
/s/ Jerry R. Holifield Director )
------------------------ )
Jerry R. Holifield )
)
)
<PAGE>
/s/ Wayne E. Kessler Director )
------------------------ )
Wayne E. Kessler )
)
)
/s/ David E. Mansfield Director )
------------------------ )
David E. Mansfield )
)
) March 30, 2000
Director )
------------------------ )
John C. Milholland )
)
)
/s/ T. Tim Unger Director )
------------------------ )
T. Tim Unger )
)
)
/s/ John L. Wyatt Director )
------------------------ )
John L. Wyatt )
)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3(1) Registrant's Articles of Incorporation are incorporated by
reference to to Exhibit 3(1) to the Registration Statement
(2) Registrant's Code of By-Laws is incorporated by reference to to
Exhibit 3(2) to the Registration Statement
10 (5) Employment Agreement between Lincoln Federal Savings Bank and
T. Tim Unger is incorporated by reference to to Exhibit 10(5) to
the Registration Statement
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule (filed electronically)
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
SUBSIDIARIES OF LINCOLN BANCORP
Subsidiaries of Lincoln Bancorp:
Name Jurisdiction of Incorporation
Lincoln Federal Savings Bank Federal
LF Service Corp. Indiana
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference to the Registration Statement on
Form S-8 of Lincoln Bancorp (the "Company"), File Number 000-25219, of our
report dated February 8, 2000 on the consolidated financial statements of the
Company which report is incorporated by reference in the Company's Annual Report
on Form 10-K for the three years ended December 31, 1999 filed pursuant to the
Securities and Exchange Act of 1934.
/s/ Olive LLP
Olive LLP
Indianapolis, Indiana
March 28, 2000
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