SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by Registrant [ ]
Filed by a Party other than the Registrant [ X ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14A-11(c) or ss. 240.14a-12
Lincoln Financial Bancorp, Inc.
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(Name of Registrant as Specified In Its Charter)
Lincoln Financial Bancorp, Inc.
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(Name of Person(s) Filing Proxy Statement if other than Registrant)
<PAGE>
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock.
2) Aggregate number of securities to which transaction applies:
440,128.
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
Cash payment for securities totals $9,957,546.79.
4) Proposed maximum aggregate value of transaction:
$9,957,546.79.
5) Total fee paid: $1,991.51.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: __________________________.
2) Form, Schedule or Registration Statement No.: ___________________.
3) Filing Party: ___________________________________.
4) Date Filed: ____________________________________.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC.
111 West Main Street
Stanford, Kentucky 40484
(606) 365-2129
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on August __, 1996
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A Special Meeting of Stockholders (the "Meeting") of Lincoln Financial
Bancorp, Inc. (the "Corporation") will be held at the main office of Lincoln
Federal Savings Bank, 111 West Main Street, Stanford, Kentucky 40484, on August
__, 1996, at 4:00 p.m., local time.
The Meeting is for the following purposes, all of which are more
completely described in the accompanying Proxy Statement:
1. ACQUISITION PROPOSAL. A proposal to approve an Agreement and
Plan of Reorganization, as amended (the "Acquisition
Agreement") between the Corporation and First Southern
Bancorp, Inc. ("FSB"), a related Plan of Merger, as amended
(the "Plan of Merger") providing for the merger of a
wholly-owned subsidiary of FSB with and into the Corporation
(the "Merger"), and to authorize such further action by the
board of directors of the Corporation and any of its
executive and other proper officers as may be necessary or
appropriate to carry out the objects, intents, and purposes
of the Acquisition Agreement and the related Plan of Merger.
2. OTHER BUSINESS. The transaction of any other business that
may properly come before the Meeting or any adjournments
thereof. The Board of Directors is not currently aware of any
other business to come before the Meeting.
Any action may be taken on any one of the foregoing proposals at the
Meeting or any adjournments thereof. Stockholders of record at the close of
business on July __, 1996, are the stockholders entitled to vote at the Meeting
or any adjournment thereof.
You are requested to complete and sign the enclosed proxy, and mail it
promptly in the enclosed envelope. If you attend the Meeting in person, you will
have the opportunity to revoke your proxy and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS
Minor Teague
Secretary
Stanford, Kentucky
July __, 1996
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IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE CORPORATION THE
EXPENSE OF A FURTHER REQUEST FOR PROXIES IN ORDER TO INSURE A QUORUM.
A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE
IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
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<PAGE>
TABLE OF CONTENTS
SUMMARY
SELECTED FINANCIAL DATA
VOTING
PRINCIPAL STOCKHOLDERS
THE MERGER
Overview
Background and Reasons for the Merger
Opinion of Financial Advisor to Lincoln
Description of the Transaction; Merger Consideration
Financing Arrangements
Conditions for Consummation; Termination
Escrow Deposit
Regulatory Approvals
Interest of Certain Persons in the Merger
Effect on Lincoln Employee and Directors Benefit Plans
Option Agreement
Federal Income Tax Consequences
Accounting Treatment
Effective Time of the Merger
Distribution of Cash
STOCK MARKET AND DIVIDEND INFORMATION
LINCOLN FINANCIAL BANCORP, INC
General
Market Area
Lending Activities
Investment and Mortgage-Backed Securities
Deposit Activity and Other Sources of Funds
Borrowings
Subsidiary Activities
Employees
Competition
Regulation of the Bank
Regulation of the Corporation
Taxation
Properties
FIRST SOUTHERN BANCORP
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
INDEPENDENT AUDITORS
<PAGE>
STOCKHOLDER PROPOSALS
MISCELLANEOUS
APPENDICES
A. 1995 Annual Report to Stockholders
B. Quarterly Report on Form 10-Q for Quarterly Period Ended
March 31, 1996
C. Fairness Opinion of Professional Bank Services, Inc.
D. Amended Agreement and Plan of Reorganization
E. Restated Plan of Merger
F. Provisions of Delaware Law Concerning Appraisal Rights of
Dissenting Stockholders
<PAGE>
PROXY STATEMENT
OF
LINCOLN FINANCIAL BANCORP, INC.
111 West Main Street
Stanford, Kentucky 40484
(606) 365-2129
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SPECIAL MEETING OF STOCKHOLDERS
AUGUST __, 1996
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This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Lincoln Financial Bancorp, Inc.
("Lincoln" or the "Corporation") for a Special Meeting of Stockholders of the
Corporation (the "Meeting") to be held at the main office of Lincoln Federal
Savings Bank, 111 West Main Street, Stanford, Kentucky 40484, on August __,
1996, at 4:00 p.m. The accompanying Notice of Meeting and this Proxy Statement
are first being mailed to stockholders on or about July __, 1996.
SUMMARY
The Special Meeting and Required Stockholder Vote
A special meeting of stockholders will be held on August __, 1996, at
4:00 p.m., Lincoln Federal Savings Bank, 111 West Main Street, Stanford,
Kentucky 40484. Lincoln stockholders of record at the close of business on July
__, 1996, are entitled to vote at the Meeting. The purpose of the Meeting is to
consider a proposed Agreement and Plan of Reorganization dated as of March 23,
1996, as amended (the "Acquisition Agreement") between Lincoln and First
Southern Bancorp, Inc. ("FSB") and the related Plan of Merger, as amended (the
"Plan of Merger") between Lincoln and a wholly owned subsidiary of FSB. The
Acquisition Agreement and the Plan of Merger are being submitted as a single
proposal for approval of Lincoln's shareholders, which is referred to throughout
this Proxy Statement as the "Acquisition Proposal." The affirmative vote of a
majority of shares of Lincoln common stock, par value $.01 per share ("Common
Stock"), issued, outstanding, and entitled to vote is required to approve the
Acquisition Proposal. See "The Merger."
Lincoln Financial Bancorp, Inc.
Lincoln is a Delaware corporation and the unitary savings and loan
holding company for Lincoln Federal Savings Bank (the "Bank" or "Lincoln
Federal"), a federal stock savings bank. As of March 31, 1996, Lincoln had total
assets of more than $50.6 million. The Bank conducts its business through two
banking offices located in Stanford, Kentucky, one branch office located in
Liberty, Kentucky, and one loan production office located in Mt. Vernon,
Kentucky. The Bank's primary business is attracting savings deposits from the
general public and investing funds in mortgage loans on residential real estate
and in various types of consumer and other loans, investment securities, and
mortgage-backed securities.
See "Lincoln Financial Bancorp, Inc."
Lincoln's corporate headquarters are located at 111 West Main Street,
Stanford, Kentucky 40484, telephone (606) 365-2129.
<PAGE>
First Southern Bancorp
FSB is a Kentucky corporation and bank holding company, registered
under Bank Holding Company Act of 1956, as amended, ("BHCA"). Headquartered in
Stanford, Kentucky, FSB conducts a banking business through its five subsidiary
banks located in Lincoln, Garrard, Wayne, Jessamine, and Fayette counties. FSB's
subsidiary banks operate 13 banking offices in Stanford, Crab Orchard,
Hustonville, and five other Kentucky communities. As of March 31, 1996, on a
consolidated basis, FSB had total assets of more than $105 million, deposits of
$72 million, and net loans of $60 million. See "First Southern Bancorp".
FSB's corporate offices are located at 99 Lancaster Street, Stanford
Kentucky 40484, telephone (606) 365-3555.
The Proposed Merger and Purchase Price
The Acquisition Agreement and Plan of Merger provide that FSB
Acquisition Corporation ("Subsidiary"), a wholly owned subsidiary of FSB, will
merge into and with Lincoln (the "Merger") upon the approval of Lincoln's
stockholders and the fulfillment of other conditions contained in the
Acquisition Agreement.
Lincoln stockholders who do not dissent from the Merger will have the
right to receive $22.01 in cash for each share of Common Stock (the "Merger
Consideration"). In addition, each outstanding option to purchase Common Stock
will be cancelled at or prior to the closing of the Merger in exchange for a
cash payment by Lincoln equal to $9.51 for each share subject to an option. See
"Principal Stockholders and The Merger--Description of the Transaction; Merger
Consideration."
Recommendation
The Board of Directors of Lincoln has unanimously recommended that
Lincoln stockholders vote in favor of the Acquisition Proposal.
Vote Required to Approve the Acquisition Proposal
The Merger must be approved by at least a majority of the 440,128
shares of Common Stock issued and outstanding, all of which are entitled to vote
at the Meeting. Only holders of Common Stock of record at the close of business
on July ____, 1996 (the "Record Date") are entitled to notice of, and to vote
at, the Meeting. The presence, in person or by proxy, of one-third of the
outstanding shares of Common Stock is necessary to constitute a quorum at the
Meeting or any adjournments thereof. The members of the Board of Directors own a
total of 98,487 shares (22%) of the Common Stock and are expected to vote all of
those shares in favor of the Merger. See "Voting."
Regulatory Approvals
The Merger must be approved by the Office of Thrift Supervision ("OTS")
and the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). FSB filed applications for approval of the Merger with the OTS in
April 1996 and the Federal Reserve in May 1996. FSB and Lincoln expect to obtain
regulatory approval for the Merger during June or July 1996. See "The
Merger--Regulatory Approvals."
<PAGE>
Conditions to the Merger
The Acquisition Agreement permits termination of the Merger for various
reasons, including the mutual consent of the parties and any material breach of
a condition necessary to consummate the Merger. The Acquisition Agreement
provides that if it is terminated other than by Lincoln due to a breach of a
representation, warranty or covenant by FSB, and a "Purchase Event" has occurred
or occurs before December 31, 1996, then Lincoln must promptly pay $500,000 in
cash to FSB. FSB is not entitled to any other remedy for damages. See "The
Merger--Conditions for Consummation; Termination."
Opinion of Financial Advisor
Professional Bank Services, Inc. ("PBS"), a national bank consulting
firm headquartered in Louisville, Kentucky, was engaged, among other things, to
advise Lincoln as to the fairness of the proposed Merger Consideration. By a
letter dated March 22, 1996, PBS rendered its opinion that the Merger
Consideration, from a financial perspective, is fair and equitable to Lincoln
stockholders. See "The Merger--Opinion of Financial Advisor to Lincoln." A copy
of the opinion is attached as Appendix C.
Option Agreement
Lincoln and FSB have also entered into a separate agreement (the
"Option Agreement") granting FSB an exclusive option to purchase 118,075 shares
of Common Stock (or approximately 19.9% of Lincoln's outstanding shares) for
$22.01 per share upon the occurrence of certain "Initial Triggering Events" and
"Purchase Events," as defined in the Option Agreement. See "The Merger--Option
Agreement."
Tax Consequences
As a consequence of the Merger, stockholders will realize gain or loss
measured by the difference between the individual stockholder's adjusted basis
for shares of Common Stock owned and the cash received for such shares. See
"Federal Income Tax Consequences."
Rights of Dissenting Stockholders
If the Merger is approved and consummated, stockholders of Lincoln who
dissent from the Merger will have the right to be paid the "fair value" of their
shares in cash if they comply with the procedures set forth in Section 262 of
the DGCL. See "Appraisal Rights of Dissenting Stockholders." A copy of Section
262 is attached as Appendix F to this Proxy Statement.
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of June 30, 1995 and
1994 and each of the three years in the period ended June 30, 1995 are derived
from the financial statements included in Lincoln's 1995 Annual Report to
stockholders, attached as Appendix A hereto, and are qualified in their entirety
by, and should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" (MD&A) and the financial
statements and notes thereto included in the 1995 Annual Report. The selected
financial data presented below as of March 31, 1996 and the nine months ended
March 31, 1996 and 1995 are derived from financial statements included in
Lincoln's March 31, 1996 Quarterly Report on Form 10-Q, attached as Appendix B
hereto, and are qualified in their entirety by, and should be read in
conjunction with the MD&A and the financial statements and notes thereto
included in the March 31, 1996 10-Q.
<TABLE>
<CAPTION>
At June 30
--------------------------------------------------------------
At March
31, 1996 1995 1994 1993 1992 1991
-------- ------- ------- ------- ------- -------
(Dollars In thousands)
Financial Condition Data:
Total Amounts of:
<S> <C> <C> <C> <C> <C> <C>
Assets........................... $50,640 $48,218 $47,709 $46,933 $45,559 $45,181
Loans, net....................... 40,533 36,954 34,654 32,433 32,358 35,264
Cash and investment securities (1) 9,104 10,223 12,088 13,519 11,846 8,318
Mortgage-backed securities...... 65 77 99 119 451 689
Deposits (2)..................... 42,412 40,452 40,257 43,446 42,480 42,404
Stockholders' equity (3)......... 7,703 7,546 7,328 3,396 2,972 2,698
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
March 31 Year Ended June 30,
----------------- ---------------------------------------------------------------
Operating Data: 1996 1995 1995 1994 1993 1992 1991
---- ---- ----- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................... $2,845 $2,418 $3,283 $3,162 $3,383 $3,862 $4,209
Interest expense................... 1,571 1,209 1,694 1,682 1,943 2,518 2,968
Net interest income before provision
for loan losses..................... 1,274 1,209 1,589 1,480 1,440 1,344 1,241
Provision for loan losses.......... 11 3 3 88 10 86 99
Non-interest income................ 116 104 141 112 88 98 85
Non-interest expense............... 996 858 1,351 1,035 902 913 855
Income before income taxes......... 383 452 376 469 616 443 372
Federal income taxes............... 131 126 118 173 193 169 133
-------- -------- ---------- --------- ---------- --------- --------
Net income ........................ $ 252 $ 326 $ 258 $ 296 $ 423 $ 274 $ 239
======== ========= ========== ---------- ========== ========= ========
Net earnings per share(4).......... 0.61 0.77 0.64 N/A N/A N/A N/A
Book value per share (5)........... $19.24 $19.27 $ 18.99 $18.61 N/A N/A N/A
Number of:
Loans outstanding................ 1,726 1,584 1,761 1,628 1,572 1,558 1,664
Deposit accounts................. 6,671 6,352 6,460 6,207 5,942 5,957 6,071
Offices (6)...................... 4 3 4 3 3 3 3
</TABLE>
(1) Cash and investment securities consist of cash, interest-earning deposits,
certificates of deposit, and investment securities.
(2) Deposits include certificates of deposit, passbook club accounts, NOW
accounts and other deposit accounts.
(3) Represents retained earnings only prior to fiscal year 1994. For fiscal
year 1994, includes net proceeds of approximately $3.0 million from the
initial public offering of Lincoln as part of the mutual-to-stock
conversion of the Bank on June 28, 1994.
(4) Not applicable since Common Stock was not issued until June 28, 1994.
(5) Per share calculations are based upon the total number of shares outstand-
ing, less the unallocated shares held by the ESOP(25,789 shares at June 30,
1995, and 29,440 shares at June 30, 1994).
(6) All the Bank's offices are full-service offices except the Loan Production
Office located in Mt. Vernon, Kentucky.
<PAGE>
VOTING
There are 440,128 shares of Common Stock issued and outstanding, all of
which are entitled to vote at the Meeting. Only holders of Common Stock of
record at the close of business on the Record Date are entitled to notice of,
and to vote at, the Meeting. On matters that properly come before the Meeting or
any adjournments thereof, shareholders will be entitled to one vote in person or
by proxy for each share of Common Stock held of record on the Record Date.
The presence, in person or by proxy, of one-third of the outstanding
shares of Common Stock is necessary to constitute a quorum at the Meeting or any
adjournments thereof. Stockholders of record as of the close of business on July
__, 1996, are entitled to one vote for each share then held.
The affirmative vote of the holders of at least a majority of the
outstanding shares of Common Stock entitled to vote is required to approve the
Acquisition Proposal. The individual members of the Board of Directors have
agreed (unless inconsistent with their fiduciary duties) to vote their shares of
Common Stock in favor of the Acquisition Proposal. The members of the Board of
Directors own a total of 98,487 shares (22%) of Common Stock entitled to vote at
the Meeting. Abstentions and non-votes by brokers will have the same as a vote
against the Acquisition Proposal.
Stockholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by a properly executed proxy
will be voted at the Meeting and all adjournments thereof in accordance with the
directions given in the proxy and as determined by a majority of the Board of
Directors as to any other matters that properly come before the Meeting. Proxies
may be revoked by written notice to the Secretary of the Corporation (addressed
to: Lincoln Financial Bancorp, Inc., 111 West Main Street, Stanford, Kentucky
40484, Attention: Minor Teague, Secretary) or by filing a later dated proxy
before a vote on a particular proposal at the Meeting. A proxy will not be voted
if a stockholder attends the Meeting and votes in person. The presence of a
stockholder at the Meeting alone will not revoke such stockholder's previously
executed proxy. Proxies solicited by the Board of Directors will be voted in
accordance with the directions given therein. If no instructions are indicated,
proxies will be voted for the Merger.
PRINCIPAL STOCKHOLDERS
Persons and groups beneficially owning more than 5% of the Common Stock
are required to file certain reports regarding such ownership with the
Commission and the Corporation pursuant to the Securities Exchange Act of 1934
(the "Exchange Act"). The following table sets forth, as of June 30, 1996, the
shares of Common Stock beneficially owned by: (i) each person who was the
beneficial owner of more than 5% of the outstanding shares of Common Stock; (ii)
each director of the Corporation; and (iii) by all officers and directors as a
group, based on information provided to the Corporation and filings required by
the Exchange Act.
<PAGE>
<TABLE>
<CAPTION>
Name of Amount and Nature Percent of Shares of
Beneficial Owner Beneficial Ownership(1)(2) Common Stock Outstanding
- ---------------- -------------------------- ------------------------
<S> <C> <C>
Lincoln Financial Bancorp, Inc.
Employee Stock Ownership Plan
and Trust
111 West Main Street
Stanford, Kentucky 40484 29,440 6.69%
George L. Crawford
910 Lancaster Road
Crab Orchard, Kentucky 40419 25,340 5.76%
Billy H. Fox, Chairman of the Board 11,484 2.61%
Ben J. Gaines, Vice Chairman
of the Board 11,484 2.61%
Bruce Edgington, President, Chief
Executive Officer and Director 14,613 3.32%
Lee McAninch, Director 11,484 2.61%
Albert Daniel Jackson, Director 11,484 2.61%
William O. Payne, Jr., Director 11,484 2.61%
James W. Adams, Director 2,186 .50%
Jeffrey C. Ralston, Director 11,784 2.68%
Minor Teague, Director and Secretary 12,484 2.84%
All directors and executive officers
of the Corporation as a group (14 persons) 116,581 26.49%
</TABLE>
- -------------------------
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of the Common Stock if he or she has or shares voting or
investment power with respect to such security, or has a right to
acquire beneficial ownership at any time within 60 days from the Record
Date. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or
direct the disposition of shares. Except as otherwise noted, ownership
is direct and the named individuals and group exercise sole voting and
investment power over the shares of the Common Stock.
(2) It also includes certain shares of Common Stock owned by businesses in
which the executive officer or director is an executive officer or
major stockholder, or by spouses, by immediate family members or as a
custodian or trustee, or by spouses as a custodian or trustee, over
which shares such executive officer or director effectively exercises
sole or shared voting and/or investment power. Does not include shares
held by the trust for the Corporation's ESOP and Trust, for which
Directors Fox, Payne and Ralston serve as trustees.
<PAGE>
THE MERGER
Overview
Lincoln and FSB entered into the Acquisition Agreement on March 23,
1996. The Acquisition Agreement was amended as of June 6, 1996, to provide that
FSB Acquisition Corporation ("Subsidiary"), a newly formed Kentucky corporation
and wholly owned subsidiary of FSB, will be merged into and with Lincoln upon
the approval by Lincoln's stockholders and the fulfillment of all other
conditions contained in the Acquisition Agreement. Lincoln and Subsidiary have
entered into a Plan of Merger, which further defines the terms and conditions of
the Merger. As a result of the Merger, Lincoln will become a wholly owned
subsidiary of FSB.
In the Merger, Lincoln stockholders who do not dissent from the Merger
will have the right to receive the Merger Consideration of $22.01 in cash for
each share of Common Stock. In addition, each holder of an outstanding option to
purchase Common Stock pursuant to the Lincoln Financial Bancorp, Inc. 1994 Stock
Option and Incentive Plan (the "Option Plan") will be cancelled at or prior to
the closing of the Merger in exchange for a cash payment by Lincoln equal to
$9.51 for each share subject to an option.
FSB owns 100% of the outstanding stock of Subsidiary and has agreed to
cause Subsidiary to approve the Merger, subject to the terms and conditions of
the Acquisition Agreement.
The affirmative vote of a majority of shares of Common Stock issued,
outstanding, and entitled to vote is required to approve the Merger Proposal.
The Board of Directors recommends that stockholders vote "FOR" the Merger
Proposal.
The statements contained in this Proxy Statement with respect to the
terms and conditions of the Merger are subject to and qualified by the
provisions of the Acquisition Agreement and the Plan of Merger. Copies of the
Acquisition Agreement, as amended and restated, and the Plan of Merger, as
amended and restated, are attached as Appendices D and E to this Proxy Statement
and are incorporated herein by reference.
Background and Reasons for the Merger
Background. Changes in the financial service industry in recent years,
coupled with the passage of the Riegle Neal Interstate Bank and Branching
Efficiency Act of 1994, that provides for nationwide interstate banking, have
led to an increased consolidation of banks under large multi-bank holding
companies through mergers and acquisitions and an uncertain future for thrifts.
These large bank holding companies along with other financial institutions have
increased competition with thrifts for market share. The increased competition
has led to a decrease in earnings by thrifts and, ultimately, their ability to
compete with large bank holding companies and other financial institutions.
From time to time, the Board of Directors has considered various
strategic alternatives for Lincoln in light of, and in response to, these trends
in the financial service industry. For instance, the Bank converted from a
mutual to a stock institution in June 1994. These considerations have prompted
the Board of Directors to consider whether an acquisition of Lincoln by another
financial institution was in the long-term best interest of Lincoln
stockholders, employees, customers and the communities Lincoln serves.
<PAGE>
In December 1995, the Board of Directors began to explore Lincoln's
strategic alternatives, including the possible sale of Lincoln to a larger bank
holding company. On December 8, 1995, representatives of PBS met with the Board
of Directors to review the changing dynamics of community banking and, more
specifically, the current market value in Kentucky for thrifts. The Board of
Directors then authorized the signing of a agreement with PBS and Investment
Bank Services, Inc. ("IBS"), a registered broker/dealer subsidiary of PBS, dated
December 8, 1995, appointing PBS and IBS as financial advisors to Lincoln. The
agreement allowed PBS and IBS to assess Lincoln's business, value, and find a
potential acquirer for Lincoln.
At a special meeting held on January 9, 1996, representatives of PBS
met with the Board of Directors to review PBS' analysis of Lincoln's business
and estimated value. PBS also identified a number of potential acquirers of
Lincoln and analyzed the ability of the potential acquirers to consummate a
transaction with Lincoln. The Board of Directors authorized PBS to provide over
six eight potential acquirers, believed to have a high interest in a transaction
with Lincoln, with copies of a confidential package prepared by PBS describing
Lincoln and its business.
At a special meeting held on March 13, 1996, representatives of PBS,
along with a representative of Brown, Todd & Heyburn PLLC ("BTH"), newly hired
special counsel to Lincoln, reported that two of the potential acquirers, who
were provided with copies of PBS' confidential package, had submitted offers to
acquire Lincoln. After analyzing the terms of the two offers, including the
financial ability of the offerers to consummate the transaction on such terms,
the Board of Directors directed Mr. Edgington, PBS and BTH to continue
discussions with representatives of FSB and the other offerer and, if
appropriate, to facilitate due diligence investigations by the offerers. As
these discussions continued, FSB submitted a new proposal to Lincoln, enhancing
the financial terms of its proposal to substantially the terms contained in the
Acquisition Proposal.
The Board of Directors, at a special meeting held on March 19, 1996,
discussed the latest offers, noting that the financial terms of FSB's offer were
higher and concluded that the proposed transaction with FSB was in the long-term
best interest of Lincoln stockholders, employees, customers and the communities
Lincoln serves. The Board of Directors authorized Mr. Edgington, PBS, and BTH to
pursue negotiations of a definitive agreement with FSB.
The definitive Acquisition Agreement was presented to the full Board of
Directors at a special meeting held on March 23, 1996. At the meeting,
representatives of PBS presented an analysis of the financial terms of the
proposed Merger and delivered PBS's opinion that the Merger was fair to
Lincoln's shareholders from a financial point of view. Representatives of BTH
then presented an analysis of the terms and conditions of the Acquisition
Proposal. After further discussion and questions, the Board of Directors
unanimously approved the Acquisition Proposal. Lincoln issued a press release
dated March 25, 1996 to announce the proposed Merger between Lincoln and FSB.
Reasons for the Merger. The terms of the Acquisition Proposal were the
result of arm's-length negotiations between Lincoln and FSB and their respective
representatives. In reaching its decision to approve the Acquisition Proposal,
Lincoln's Board of Directors consulted with PBS and BTH and, without assigning
any relative or specific weights, considered a number of factors, including but
not limited to the following:
<PAGE>
(i) The financial terms of the Merger. In this regard, the
Board of Directors considered that the Merger Consideration is significantly
higher than prices at which Lincoln Common Stock has historically traded. A
comparison of the financial terms of recent thrift acquisitions indicated that
the financial terms of the Merger compared favorably with other recent
transactions.
(ii) The effect on shareholder value of Lincoln's remaining an
independent entity. The Board considered the relatively slow growth in Lincoln's
deposit base in recent years and the increased competition faced by community
banks in general from large bank holding companies and other financial
institutions. The Board believed these and other factors limited Lincoln's
prospects for significant growth in the future.
(iii) The opinion of PBS that the Merger is fair to Lincoln's
shareholders from a financial point of view.
(iv) Current trends in the banking industry. The Board of
Directors considered the probability of nationwide interstate banking, the
continued erosion of traditional geographic and industry lines, and the
likelihood of further consolidation among thrifts and bank holding companies.
(v) The likelihood of the Merger being approved by
appropriate regulatory authorities.
(vi) The competence, experience, and integrity of FSB and its
management.
Based on these factors, and such other matters as members of
the Board of Directors deemed relevant, the Board of Directors has unanimously
approved the Acquisition Proposal as being in the best interest of Lincoln, its
shareholders, employees, customers and the community served by Lincoln. The
Board of Directors unanimously recommends that the shareholders vote FOR the
Acquisition Proposals at the Meeting.
Opinion of Financial Advisor to Lincoln
PBS was engaged by Lincoln to advise the Board of Directors as to the
fairness of the Merger Consideration, from a financial perspective, to be paid
by FSB to Lincoln's shareholders. PBS is a bank consulting firm with offices in
Louisville, Nashville, Indianapolis, Washington, D.C., and Ocala, Florida. IBS
was retained to serve as Lincoln's investment banker in order to evaluate and
facilitate the possible sale of Lincoln. As part of its investment banking
business, PBS is regularly engaged in reviewing the fairness of financial
institution acquisition transactions from a financial perspective and in the
valuation of financial institutions and other businesses and their securities in
connection with mergers, acquisitions, estate settlements, and other
transactions. Neither PBS nor any of its affiliates has a material financial
interest in Lincoln or FSB. PBS and IBS were selected to advise the Board of
Directors based upon their familiarity with Kentucky financial institutions and
knowledge of the banking industry as a whole.
PBS performed certain analyses described herein and discussed the range
of values for Lincoln resulting from such analyses with the Board of Directors
in connection with PBS's advice as to the fairness of the consideration to be
paid by FSB.
<PAGE>
A Fairness Opinion of PBS was delivered to the Board of Directors on
March 23, 1996, at a special meeting of the Board of Directors. A copy of the
Fairness Opinion, which includes a summary of the assumptions made and
information analyzed in deriving the Fairness Opinion, is attached as Appendix C
to this Proxy Statement and should be read in its entirety.
In arriving at its Fairness Opinion, PBS reviewed certain publicly
available business and financial information relating to Lincoln and FSB. PBS
considered certain financial and stock market data of Lincoln and FSB, compared
that data with similar data for certain other publicly-held bank holding
companies and considered the financial terms of certain other comparable thrift
transactions that had recently been effected. PBS also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria that it deemed relevant. In connection with its
review, PBS did not independently verify the foregoing information and relied on
such information as being complete and accurate in all material respects.
Financial forecasts prepared by PBS were based on assumptions believed by PBS to
be reasonable and to reflect currently available information. PBS did not make
an independent evaluation or appraisal of the assets of Lincoln or FSB. PBS took
into account the contacts made by IBS with other financial institutions
concerning their interest in affiliation with Lincoln. PBS reviewed the
correspondence and information received from the financial institutions
contacted regarding an interest in a merger or acquisition of Lincoln. PBS
reviewed all offers received by Lincoln.
PBS reviewed and analyzed the historical performance of Lincoln and
the Bank, as set forth in: Lincoln's Annual Report as of June 30, 1995; reports
filed by Lincoln with the Securities and Exchange Commission on Form 10-K for
the year ended June 30, 1995 and on Form 10-Q for the quarters ending September
30 and December 31, 1995; December 31, 1995, September 30, 1995 and June 30,
1995 Thrift Financial Reports filed by the Bank with the OTS; June 30, 1995
Uniform Thrift Performance Report filed by the Bank with the OTS; September 25,
1995 proxy statement; historical common stock trading activity of Lincoln; and
the premises and other fixed assets of Lincoln. PBS reviewed and tab ulated
statistical data regarding the loan portfolio, securities portfolio and other
performance ratios and statistics. Financial projections were prepared and
analyzed as well as other financial studies, analyses and investigations as
deemed relevant for the purposes of this opinion. In review of the
aforementioned information, PBS took into account its assessment of general
market and financial conditions, experience in other transactions, and knowledge
of the banking industry generally.
In connection with rendering the Fairness Opinion and preparing its
various written and oral presentations to the Board of Directors, PBS performed
a variety of financial analyses, including those summarized herein. The summary
does not purport to be a complete description of the analyses performed by PBS
in this regard. The preparation of a Fairness Opinion involves various
assumptions as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors summarized below,
PBS believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its Fairness Opinion. In performing its analyses,
PBS made numerous assumptions with respect to industry performance, business and
economic conditions and other matters, many of which are beyond Lincoln's or
FSB's control. The analyses performed by PBS are not necessarily indicative of
actual values or future results, which may be significantly more or less
<PAGE>
favorable than suggested by such analyses. In addition, analyses relating to the
values of businesses do not purport to be appraisals or to reflect the process
by which businesses actually may be sold.
Acquisition Comparison Analysis. PBS reviewed thrift acquisition
transactions in Kentucky, Indiana, Ohio and Tennessee (the "Regional Area").
There were 83 thrift acquisition transactions in the Regional Area announced
since 1987 for which detailed financial information was available. The purpose
of the analysis was to obtain an evaluation range based on these Regional Area
acquisition transactions. Median multiples of earnings and book value implied by
the comparable transactions were utilized in obtaining a range for the
acquisition value of Lincoln. In addition to reviewing recent Regional Area
thrift transactions, PBS performed separate comparable analyses for acquisitions
of Regional Area thrifts which, like Lincoln, had an equity-to-asset ratio
greater than 10%, or deposits between $25.0 and $100.0 million, or a return on
equity of less than 10%, or were located in the state of Kentucky. Median values
for the 83 Regional Area acquisitions expressed as multiples of both book value
and earnings were 1.31 and 13.67, respectively. The median multiples of book
value and earnings for acquisitions of Regional Area thrifts with
equity-to-asset ratios greater than 10% were 1.33 and 16.96, respectively. For
acquisitions of Regional Area thrifts with deposits between $25.0 and $100.0
million the median multiples of book value and earnings were 1.33 and 16.06,
respectively. Median multiples for Regional Area thrifts with a return on equity
of less than 10% were 1.30 and 17.54, respectively. The median multiples of book
value and earnings for acquisitions of Regional Area thrifts located in the
state of Kentucky were 1.41 and 13.71, respectively. In the proposed
acquisition, Lincoln shareholders will receive an aggregate amount of
$9,957,546.79 in cash, for all Common Stock and options outstanding, or $22.01
per common share and $9.51 per option share. This represents a multiple of
December 31, 1995 adjusted book value and a multiple of 1996 projected earnings
of 1.25 and 19.5 respectively.
Adjusted Net Asset Value Analysis. PBS reviewed Lincoln's balance
sheet data to determine the amount of material adjustments required to the
stockholder's equity of Lincoln based on differences between the market value of
Lincoln's assets and their value reflected on Lincoln's financial statements.
PBS determined that three adjustments were warranted. Shareholders equity was
increased by $780,000 for the assumed exercise of options and the termination of
the Employee Stock Ownership Plan ("ESOP") and Management Recognition Plan
("MRP"). The investment securities portfolio had depreciation of $14,000 after
adjustment for income taxes. PBS also reflected a value of the non-interest
bearing demand deposits of $161,000. The adjusted net asset value was determined
to be $17.93 per share of Lincoln's common stock.
Discounted Earnings Analysis. A dividend discount analysis was
performed by PBS pursuant to which a range of stand-alone values of Lincoln was
determined by adding the present value of estimated future dividend streams that
Lincoln could generate over a five-year period beginning in 1996 and ending in
2000, and the present value of the "terminal value" of Lincoln's earnings at the
end of the year 2000. The "terminal value" of Lincoln's earnings at the end of
the five-year period was determined by applying a multiple of 1.41 times the
projected terminal year's equity. The 1.41 multiple represents the median price
paid as a multiple of book value for all Kentucky thrift transactions since
1987.
Dividend streams and terminal values were discounted to present values
using a discount rate of 12%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of Common Stock. The value of
Lincoln, determined by adding the present value of the total cash flows, was
<PAGE>
$19.20 per share. In addition, using the five-year projection as a base, a
twenty-year projection was prepared assuming an annual growth rate of 6% and
assuming return on assets reaches 1.10% by year three and remains constant
thereafter. Dividends also were assumed to be 50% of income for all years.
This long-term projection resulted in a value of $12.65 per share.
Specific Acquisition Analysis. PBS valued Lincoln based on an
acquisition analysis assuming a "break-even" earnings scenario to an acquiror
which factored in price, current interest rates and amortization of the premium
paid. Based on this analysis, and an assumed 1996 projected earnings level for
Lincoln, an acquiring institution would pay $21.19 per share of Common Stock,
assuming they were willing to accept no impact to their net income in the
initial year. If an overhead reduction of 10% is assumed an acquiring company
would pay $22.53 per Common Stock. This analysis was based on a funding cost of
6.5% adjusted for taxes, amortization of the acquisition premium over 15 years
and a projected earnings level for Lincoln of $543,000 in 1996.
The Fairness Opinion is directed only to the question of whether the
consideration to be received by Lincoln's shareholders under the Acquisition
Agreement is fair and equitable from a financial perspective and does not
constitute a recommendation to any Lincoln shareholder to vote in favor of the
Merger. No limitations were imposed on PBS regarding the scope of its
investigation or otherwise by Lincoln or any of its affiliates.
Based on the results of the various analyses described above, PBS
concluded that the consideration to be received by Lincoln's shareholders, under
the Acquisition Agreement, is fair and equitable from a financial perspective to
the shareholders of Lincoln.
PBS and IBS will receive a fee not to exceed $80,000, plus 3% of the
total consideration received by Company shareholders in excess of $9,500,000,
from Lincoln for all of their services performed in connection with the Merger,
including rendering the Fairness Opinion. In addition, Lincoln has agreed to
indemnify PBS and IBS and their directors, officers and employees, from
liability in connection with the Merger, and to hold PBS and IBS harmless from
any losses, actions, claims, damages, expenses or liabilities related to any of
PBS' or IBS' acts or decisions made in good faith and in the best interest of
Lincoln.
Description of the Transaction; Merger Consideration
Lincoln and Subsidiary will be merged in accordance with the
provisions of the Kentucky Business Corporation Act (the "KBCA") and Section 251
of the DGCL, and the Merger will become effective (the "Effective Time") on the
date and at the time that articles of merger are filed by the Secretary of State
of the Commonwealth of Kentucky as provided in the KBCA, and a certificate of
merger is filed by the Secretary of State of Delaware as provided in the DGCL,
unless the filed documents specify a later date and time as the Effective Time.
Lincoln will be the "Surviving Corporation" of the Merger and will continue to
be governed by the DGCL.
At the Effective Time, the separate existence of Subsidiary will
cease, and Lincoln will thereafter possess all the assets, liabilities, rights,
privileges, powers and franchises of Subsidiary. On and after the Effective
Time, the articles of incorporation and bylaws of Lincoln each as in effect at
the Effective Time, will govern the Surviving Corporation until amended or
repealed in accordance with applicable law. The directors and officers of the
Surviving Corporation will be the directors and officers of Subsidiary
immediately prior to the Effective Time.
<PAGE>
At the Effective Time, each share of Common Stock (other than any
shares held by Lincoln stockholders who dissent from the Merger or shares owned
by FSB at the Effective Time) will be converted into the Merger Consideration of
$22.01 in cash per share without any action on the part of the stockholder. The
3,671 shares of Common Stock held by the trust established under Lincoln's MRP
that have not been awarded and distributed to plan participants will be
cancelled as of the Effective Time. At the Effective Time, all outstanding
certificates representing Common Stock will thereafter represent, instead of
shares of Common Stock, the right to receive $22.01.
In addition, at or prior to the closing of the Merger, Lincoln will
cancel the options to purchase Common Stock issued under the Option Plan in
exchange for a cash payment by Lincoln equal to $9.51 per share subject to each
option then outstanding. The $9.51 amount represents the difference between the
Merger Consideration and exercise price per share subject to the options. As of
June 30, 1996, options to purchase 36,922 shares of Common Stock were
outstanding, and were held by Lincoln's directors and officers.
Financing Arrangements
FSB intends to utilize working capital, proceeds from a dividend, and
borrowing from available lines of credit to pay the Merger Consideration.
Conditions for Consummation; Termination
The obligations of Lincoln and FSB and Subsidiary to consummate the
Merger are subject to the satisfaction of the following conditions on or before
the Closing Date: (i) approval of the Merger Proposal by the requisite vote of
Lincoln stockholders; (ii) the absence of any action or proceeding instituted
before any court or governmental or other regulatory agency challenging or
seeking to prohibit the Merger; (iii) the receipt of all permits consents,
approvals, and authorizations from government agencies, and satisfaction of all
other requirements prescribed by law that are necessary to effect and carry out
the Merger; and (iv) the execution of an agreement by FSB and Bruce Edgington
providing for payment of certain severance benefits to Mr. Edgington if his
employment is terminated in certain circumstances during the twelve months after
the Effective Time. See "The Merger -- Interest of Certain Persons in the
Merger."
In addition to the mutual conditions listed in the preceding paragraph
above, the obligations of Lincoln to consummate the Merger are subject to the
following conditions on or before the Closing Date: (i) the truth of certain
representations and warranties made by FSB and Subsidiary in all material
respects; (ii) the performance by FSB and Subsidiary of all covenants in all
material respects; (iii) the receipt by Lincoln of an opinion of counsel to FSB
with respect to certain matters; and (iv) the receipt, confirmation and
nonwithdrawal of the opinion from PBS to the effect that the Merger is fair to
the Lincoln shareholders from a financial point of view.
In addition to the mutual conditions listed in the second preceding
paragraph, the obligations of FSB and Subsidiary to consummate the Merger are
subject to the satisfaction of the following conditions on or before the Closing
Date: (i) the truth of certain representations and warranties made by Lincoln in
all material respects; (ii) the performance by Lincoln of all covenants in all
material respects; (iii) the absence of any material adverse change in the
condition of Lincoln; and (iv) the receipt by FSB of an opinion of counsel to
Lincoln with respect to certain matters.
<PAGE>
The Acquisition Agreement provides that it may be terminated at any
time before the Effective Time: (i) by mutual agreement of both Lincoln and FSB;
(ii) by either Lincoln or FSB if the other party has breached in any material
respect any representation, warranty or covenant in the Agreement and such
breach is not cured within 30 days of the date the non-breaching party gives
notice of the breach to the breaching party; or (iii) by either Lincoln or FSB
if the Merger has not occurred on December 31, 1996.
The Acquisition Agreement provides that if it is terminated other than
by Lincoln due to a breach of a representation, warranty or covenant by FSB, and
a "Purchase Event" has occurred or occurs before December 31, 1996, then Lincoln
must promptly pay $500,000 in cash to FSB. The Acquisition Agree ment defines a
"Purchase Event" as (i) Lincoln having entered into an agreement with any person
(other than the FSB or any of its subsidiaries) pursuant to which such person
would: (A) merge or consolidate with, or enter into any similar transaction with
Lincoln or the Bank; (B) purchase, lease or otherwise acquire all or
substantially all of the assets of Lincoln or the Bank; or (C) purchase or
otherwise acquire (by merger, consolidation, share exchange or similar
transaction) securities representing 25% or more of the voting shares of Lincoln
or the Bank; or (ii) the acquisition (by purchase or otherwise) by any person
(other than the FSB or any of its subsidiaries) of beneficial ownership of
securities representing 25% or more of the voting shares of Lincoln or the Bank.
Escrow Deposit
The Acquisition Agreement provides that if it is terminated other than
by FSB due to a breach of a representation, warranty or covenant by Lincoln,
prior to the Closing Date, Lincoln shall be entitled to, and shall retain a
$250,000 escrow deposit for its benefit and the benefit of its shareholders.
Regulatory Approvals
The Merger is subject to the approval of the OTS and the Federal
Reserve and cannot be consummated prior to 15 days following the grant of such
approval. FSB filed applications for approval of the Merger with the OTS in
April 1996 and the Federal Reserve in May 1996. Lincoln and FSB expect to obtain
all regulatory approvals in July 1996. Although the parties do not anticipate
any objection by the OTS and the Federal Reserve, there can be no assurance that
the Merger will be approved. In addition, because Lincoln and FSB each have
offices in the Stanford market, the Merger is being reviewed for antitrust
compliance by the United States Department of Justice ("DOJ") as part of the OTS
application process. Although the parties do not anticipate any objection by
DOJ, there can be no assurance that DOJ will not object to the Merger.
Interest of Certain Persons in the Merger
Severance Agreement. The Acquisition Agreement provides that at the
Effective Time, Bruce Edgington, the Bank's President and Chief Executive
Officer, will enter into a new severance agreement with FSB (the "Severance
Agreement").
The proposed Severance Agreement provides that FSB is obliged to pay
certain termination benefits (the difference between (i) the product of 2.99
times his "base amount" and (ii) the sum of any other "parachute payments," as
each are defined by Section 280G of the Internal Revenue Code of 1986, as
amended ("IRC")), to Mr. Edgington if FSB terminates his employment without
"Just Cause" (as defined in the Severance Agreement) or if Mr. Edgington
terminates his employment due to specified changes in his position during the 12
months following the Effective Time. Mr. Edgington will be entitled to
<PAGE>
receive the termination benefits upon the occurrence, without his prior written
consent, of any of the following events: (i) the requirement that Mr. Edgington
move his personal residence, or perform his principal executive functions, more
than 35 miles from his primary office as of the Effective Time; (ii) a material
reduction in Mr. Edgington's base compensation as in effect on the Effective
Time; (iii) a reduction in Mr. Edgington's duties such that Mr. Edgington is no
longer part of the Bank's senior management team in Lincoln County, Kentucky, or
(iv) the failure by FSB to continue to provide Mr. Edgington with benefits
substantially similar provided to employees of FSB, from time to time, who hold
comparable executive positions with FSB.
Options. The Acquisition Agreement provides that each outstanding
option to purchase Common Stock will be cancelled at or prior to the closing of
the Merger in exchange for a cash payment by Lincoln equal to $9.51 for each
share subject to an option, an amount equal to the difference between the Merger
Consideration ($22.01) and the option exercise price of $12.50 per share.
As of June 30, 1996, options to purchase 36,922 shares of Common Stock
were outstanding and were held by Lincoln's directors and officers, as set forth
in the table below. Shares Subject Name Positions to Options
<TABLE>
<CAPTION>
Shares Subject
Name Position To Options
- ---- -------- ----------
<S> <C> <C>
Bruce Edgington President, Director and Chief
Executive Officer of the Bank
and the Corporation 10,156
Donna F. Delaney Chief Financial Officer of the Bank;
Treasurer of the Corporation 5,078
Marvenna Smith Vice President of Teller
Operations and Assistant
Secretary of the Bank; Vice
President of the Corporation 5,078
Renita Lewis Hampton Vice President of Compliance
and Treasurer of the Bank 5,078
Billy H. Fox Chairman of the Board of the
Bank and the Corporation 1,587
Ben Gaines, Sr. Vice Chairman of the Bank
and the Corporation 1,587
Minor Teague Secretary of the Bank
and the Corporation 1,587
Albert Jackson Director of the Bank
and the Corporation 1,587
Jeffrey Ralston Director of the Bank
and the Corporation 1,587
Lee McAninch Director of the Bank
and the Corporation 1,587
<PAGE>
Shares Subject
Name Position To Options
- ---- -------- ----------
William Payne, Jr. Director of the Bank
and the Corporation 1,587
James W. Adams Director of the Bank
and the Corporation 423
</TABLE>
Director Liability and Indemnification. FSB has agreed, for a period of
six years after the Effective Time, to use reasonable efforts to provide
director and officers' liability insurance coverage to directors and officers of
the Corporation that serves to reimburse the present and former directors and
officers of the Corporation and its subsidiaries with respect to claims against
such officers and directors arising from facts or events that occurred at or
before the Effective Time. In addition, FSB has agreed before or after the
Effective Time to indemnify the directors and officers of the Corporation
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative arising out of or pertaining to matters existing
or occurring at or prior to the Effective Time, to the fullest extent that the
Corporation or such subsidiary would have been permitted under applicable law
and the certificate of incorporation or charter or bylaws of the Corporation or
such subsidiary (whether asserted or arising before or after the Effective
Time).
Effect on Lincoln Employee and Directors Benefit Plans
Under the terms of the Agreement, officers and employees of Lincoln and
the Bank at the Effective Time will be eligible to participate in FSB's employee
benefit plans as well as other, similar programs offered by FSB to FSB
employees. FSB will credit employees and officers of Lincoln and the Bank for
years of service at Lincoln and the Bank prior to the Effective Time for
purposes of eligibility and benefits amounts or privileges paid or provided.
Employees and officers of Lincoln and the Bank will be fully credited for their
service with Lincoln and the Bank when calculating the vestiture of their
employee benefits.
The Acquisition Agreement provides that subject to applicable law and
the provisions of the Lincoln Financial Bancorp, Inc. Employee Stock Ownership
Plan (the "ESOP"), the ESOP will be terminated as of or as soon as reasonably
practicable after the Effective Time. The proceeds of the Merger (after
repayment of the ESOP's loan) will be allocated to the accounts of participants
in accordance with the terms of the ESOP and applicable law and all participants
shall be 100% vested in distributions from the ESOP. Distributions will be made
as soon as practicable, taking into account any Internal Revenue Service ("IRS")
filing, FSB, Lincoln or the Bank deem necessary or desirable in connection with
the termination. Employees of Lincoln and the Bank will have the option of
rolling their cash distribution from the ESOP into FSB's 401(k) plan or an IRA.
The MRP will be terminated under the terms of the Merger. Under the
Acquisition Agreement, the 13,257 shares originally held by a trust formed under
the MRP that have been awarded and distributed to participants or will have been
awarded and distributed at the Effective Time, will be exchanged for and
converted into, the right to receive the Merger Consideration. However, the
3,671 shares that have not been awarded will revert back to Lincoln, once all of
<PAGE>
the trust benefits have been distributed, and will be cancelled at the Effective
Time.
Under the Lincoln Federal Savings Bank Director Retirement Plan
("DRP"), directors of the Bank are entitled to the vested portion of two times
the fees actually paid them in the twelve month period preceding the date they
cease to be a director. Directors are 0% vested in the DRP until they have
completed six years of service as a director, at which time they become 50%
vested. Upon completion of ten years of service they become 100% vested. The DRP
also provides that the directors will become 100% vested upon termination of
service in connection with a change in control. Thus at the Effective Time all
directors who are not already 100% vested will automatically become 100% vested
upon consummation of the Merger and will be entitled to payment under the DRP.
Option Agreement
In connection with the Acquisition Agreement, Lincoln has granted FSB
an irrevocable option to purchase 118,075 shares of Common Stock. The Option
Agreement, if exercised, would allow FSB to acquire 118,075 shares or
approximately 19.9% of Common Stock outstanding after exercise. The purchase
price on the exercise of the options is $22.01 per share. The Option Agreement
may be exercised by FSB in whole (but not in part) to the extent permitted by
law at any time before the termination of the Acquisition Agreement only upon
and after the occurrence of both the "Initial Triggering Event" and the
"Purchase Event."
The Option Agreement defines a "Initial Triggering Event" to mean:
(i) Any person, other than FSB or its subsidiaries or affiliates, shall
have commenced a bona fide offer to purchase shares of Common Stock such that,
upon consummation of said offer, such person would own or control 10% or more of
the outstanding shares of Common Stock; or
(ii) Any person shall have entered into an agreement with Lincoln, or
shall have filed an application or notice with any federal or state regulatory
agency for clearance or approval to (a) merge or consolidate or enter into any
similar transaction, with Lincoln; (b) purchase, lease or otherwise acquire all
or substantially all of the assets of Lincoln; or (c) purchase or otherwise
acquire (including by way of merger, consolidation, share exchange or any
similar transaction) securities representing 10% or more of the voting power of
Lincoln; or
(iii) Any person, other than FSB or its subsidiaries or affiliates,
shall have acquired beneficial ownership or the right to acquire beneficial
ownership of 10% or more of the outstanding shares of Common Stock; or
(iv) Any person, other than FSB or its subsidiaries or affiliates,
shall have made a bona fide proposal to Lincoln after the date of the
Acquisition Agreement by public announcement or written communication that is
the subject of public disclosure or regulatory report for filing to (a) acquire
Lincoln by merger, consolidation, purchase of all or substantially all of its
assets or any other similar transaction, or (b) make an offer described in
clause (i) above; or
(v) Any person shall have solicited proxies in a proxy solicitation in
opposition to approval of the Acquisition Proposal by Lincoln's shareholders; or
<PAGE>
(vi) Lincoln shall have willfully breached any provision of the
Acquisition Agreement, which breach would entitle FSB to terminate the
Acquisition Agreement and such breach shall not have been cured pursuant to the
terms of the Acquisition Agreement.
The Option Agreement defines a "Purchase Event" to mean:
(i) Any person, other than FSB or its subsidiaries or affiliates,
acquires beneficial ownership of 50% or more of the then outstanding shares of
Common Stock; or
(ii) Lincoln enters into an agreement with another person, other than
FSB or its subsidiaries or affiliates, pursuant to which such person is entitled
to acquire 50% or more of the outstanding shares of Common Stock.
The Option Agreement terminates upon the earlier of (i) the Effective
Time; (ii) FSB or Lincoln, receiving written notice from the Federal Reserve or
the OTS, to the effect that the exercise of the Option pursuant to the terms of
this Option Agreement is not consistent with applicable law; (iii) termination
of the Acquisition Agreement by FSB, in accordance with the provisions of
Article 6 of the Acquisition Agreement if such termination occurs prior to the
occurrence of an Initial Triggering Event; (iv) the first business day after the
365th calendar day following termination of the Acquisition Agreement by FSB in
accordance with the provisions of Article 6 thereof, if such termination follows
the occurrence of an Initial Triggering Event, provided that the option shall in
all events expire not later than 18 months after such Initial Triggering Event;
(v) termination of the Acquisition Agreement by Lincoln in accordance with the
provisions of Article 6 thereof; or (vi) termination of the Acquisition
Agreement by mutual consent of FSB and Lincoln.
Federal Income Tax Consequences
For federal income tax purposes, stockholders of the Corporation will
realize and recognize gain or loss (subject to the limitation of Section 267 of
the IRC) in an amount equal to the difference between the amount of cash
received by a particular stockholder in exchange for his or her Common Stock,
and that stockholder's adjusted basis in such stock, as determined under IRC ss.
1011. Stockholders should consult with their own tax advisors with respect to
their individual tax situations and the state tax consequences of the Merger.
Accounting Treatment
FSB will account for the Merger using the purchase method of
accounting.
Effective Time of the Merger
The Agreement provides that the Merger will become effective on the
date and at the time that articles of merger have been filed by the Kentucky
Secretary of State and a certificate of merger has been filed by the Delaware
Secretary of State, unless a later date and time is specified as the Effective
Time in the documents at the time they are filed. It is anticipated that the
Effective Time will occur on or about August 31, 1996, although the Effective
Time might occur sooner or later.
Distribution of Cash
FSB, no later than five days prior to the date of the Closing of the
Merger, must mail or deliver to each holder of record of Common Stock, the form
<PAGE>
letter of transmittal and instructions for use in effecting the surrender of the
certificate(s) representing the Common Stock. After the Effective time and upon
the delivery of a duly completed and exercised letter of transmittal to FSB
together with stock certificates representing a shareholder's shares of Common
Stock, the shareholder will be entitled to receive the Merger Consideration for
his or her shares.
When payment for Common Stock is to be made in the name of someone
other than the record holder of the shares surrendered, payment is conditioned
on the proper endorsement or otherwise proper form for transfer of the shares in
accordance with instructions contained in the letter of transmittal. In
addition, the person requesting payment must either (i) pay any taxes required
by reason of the payment to a person other than the record holder of the shares
surrendered or (ii) establish to the satisfaction of FSB that such tax has been
paid or is not owed.
STOCK MARKET AND DIVIDEND INFORMATION
The Common Stock is listed over-the-counter through the National Daily
Quotation System "Pink Sheets" published by the National Quotation Bureau, Inc.
As of the Record Date, there were 440,128 shares of the Common Stock outstanding
and approximately 218 holders of record of the Common Stock (not including
shares held in "street name").
The following tables sets forth certain information as to the range of
the high and low bid prices for the Common Stock for the calendar quarters
indicated and since July 1, 1994.
<TABLE>
<CAPTION>
High Bid (1) Low Bid (1) Dividends Paid
------------ ----------- --------------
<S> <C> <C> <C>
Fiscal Year 1995:
First Quarter $13.44(2) $11.52(2) --
Second Quarter 12.96 10.56 0.08
Third Quarter 11.76 10.56 0.08
Fourth Quarter 14.25 11.76 0.08
Fiscal Year 1996:
First Quarter $14.63(2) $13.75(2) 0.10
Second Quarter 15.25 15.25 0.12
Third Quarter 18.00 18.00 0.12
Fourth Quarter
</TABLE>
- ----------------------
(1) Quotations reflect inter-dealer price, without retail mark-up, mark-down
or commissions, and may not represent actual transactions.
(2) This information has been furnished by the Chicago Corporation, 208
South LaSalle Street, Chicago, IL 60604.
The Board of Directors of the Corporation periodically reviews its
dividend policy in light of the performance of the Corporation and its
Subsidiary. Any change in the Corporation's dividend policy, as determined by
the Board of Directors, will depend on the Corporation's debt and equity
structure, earnings, regulatory capital requirements, and other factors,
including economic conditions, regulatory restrictions, and tax considerations.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC.
General
The Corporation. Lincoln was incorporated under the laws of the State
of Delaware to become a savings institution holding company with the Bank as its
subsidiary. Lincoln was incorporated at the direction of the Board of Directors
of the Bank in March 1994. On June 28, 1994, the Bank converted from mutual to
stock form as a wholly owned subsidiary of Lincoln. In conjunction with the
conversion, Lincoln issued 423,200 shares of its common stock to the public.
Lincoln is classified as a unitary savings and loan holding company
subject to regulation by the OTS. Prior to its acquisition of the Bank, Lincoln
had no assets and no liabilities and engaged in no business activities. Since
the acquisition, Lincoln has not engaged in any significant activity other than
holding the stock of the Bank and operating the business of a savings bank
through the Bank. Accordingly, the information set forth below, including
financial statements and related data, relates primarily to the Bank and its
subsidiary.
The Bank. Lincoln Federal was formed in 1926 as a Kentucky-chartered
mutual building and loan association. In 1936, the Bank converted to a federal
mutual savings and loan association obtained federal insurance of accounts and
became a member of the Federal Home Loan Bank ("FHLB") System. In 1989, the Bank
converted to a federally chartered mutual savings bank and adopted its present
name. The Bank operates through three full service offices, including its main
office, branch offices in Stanford and Liberty, Kentucky, and a loan production
office in Mt. Vernon, Kentucky, which opened in April 1995.
The Bank is principally engaged in the business of accepting deposits
from the general public through a variety of deposit programs and investing
these funds in loans secured by first mortgages on one- to four-family
residential properties located in its market area and in investment securities.
The Bank also originates consumer loans and loans secured by savings accounts,
and infrequently originates commercial loans. At March 31, 1996, the Bank had
total assets of $50.6 million, deposits of $42.4 million, net loans receivable
of $40.5 million and stockholder's equity of $7.7 million.
The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC") up to applicable limits for each depositor. The Bank is a
member of the FHLB of Cincinnati, which is one of the 12 district banks
comprising the FHLB System. The Bank is subject to comprehensive examination,
supervision and regulation by the OTS and the FDIC. Such regulation is intended
primarily for the protection of depositors.
Market Area
The Bank considers its primary market area to consist of Lincoln and
Casey Counties, Kentucky, as well as adjacent Kentucky counties. Management
believes that most of the Bank's depositors and borrowers are residents of
Lincoln and Casey Counties. Stanford is the county seat of Lincoln County, in
south central Kentucky, and is located 42 miles south of Lexington, Kentucky, 93
miles southeast of Louisville, Kentucky, 120 miles south of Cincinnati, Ohio and
144 miles northwest of Knoxville, Tennessee. Based upon the 1990 population
census, Stanford had a population of 2,686.
<PAGE>
The Bank's market area has a stable and diversified labor force and
economic base. The economy is primarily agriculture-based, with farms that
produce tobacco, apple orchards, beef, dairy, soybeans, and corn. In particular,
the economy in the Bank's market area is substantially dependent upon the
tobacco farming industry. The economy is also comprised of manufacturing
industries as well as service and wholesale/retail trade industries. Large local
employers in Lincoln and Casey counties include Brake Parts, Inc., Ceramichrome,
Inc., E.D. Bullard Company, Lincoln County Pallet Company, OshKosh, gate
manufacturing and logging/lumber operators as well as the county school systems
and the county medical facilities. The unemployment rate for Lincoln County at
June 30, 1995 was 4.3% and that of Casey County was 5.6%. Lincoln Federal now
has a Loan Production Office located in Rockcastle County, Kentucky. Large local
employers include Mt. Vernon Plastics (plastics manufacturer), First Image
(computer, data processing), Rockcastle Manufacturer (sewing factory), as well
as the county school systems and the county medical facilities.
Persons in Lincoln and Casey counties also work in Danville, a town
located 10 miles away in Boyle County, which has an industrial base that
includes American Greetings Corporation; Deerfield Plastics Co.; R. R. Donnelly
and Sons, Inc.; Phillips Lighting Co.; Davco Metal; Vicwest Steel; Mathews
Conveyer Co.; Matsushita Appliance Corporation; Dana Corporation, Penn
Ventilator, and Kay-Bee Toys.
Lending Activities
General. The principal lending activity of the Bank is the origination
of conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied one-to four-family residential proper ties in its primary market
area. At June 30, 1995, one- to four-family mortgage loans comprised 80.80% of
the Bank's gross loan portfolio. Such mortgage loans generally have adjustable
rates although a small amount of fixed rate mortgage loans are also originated.
The Bank also originates consumer loans primarily secured by deposits or
automobiles and occasionally originates loans secured by commercial and
nonresidential real estate. In addition, the Bank originates both fixed- and
adjustable-rate loans for the purpose of constructing one- to four-family
residences.
Prior to the 1980s, the Bank's residential lending activities consisted
primarily of originating fixed rate mortgage loans with maturities of up to 30
years for retention in the loan portfolio. Fundamental changes in the regulation
of savings institutions in the early 1980s and then prevailing economic
conditions combined to increase significantly both the level and volatility of
the Bank's cost of funds. Since the early 1980s, the Bank has sought to build a
more rate-sensitive loan portfolio by originating adjustable rate mortgages and
to a lesser extent, purchasing adjustable rate mortgage-backed securities in
addition to continuing to originate fixed rate, mortgage loans. The types of
adjustable rate mortgages offered have a one-year adjustment period with an
index based upon the one-year U.S. Treasury bill. In 1989, the Bank ceased
originating fixed rate residential mortgage loans and instead only originated
residential mortgage loans with variable rates. In June 1991, the Bank resumed
origination of fixed rate mortgage loans in response to consumer demand and as
part of its management of interest rate risk. At June 30, 1995, 85% of the
Bank's one- to four-family mortgage loans had adjustable rates and 15% fixed
rates. All adjustable rate and fixed rate mortgage loans are originated for the
Bank's loan portfolio rather than for sale in the secondary market.
<PAGE>
The Bank continued to originate fixed rate one- to four-family mortgage
loans during fiscal year 1995 in response to consumer demand generated by the
decline in market interest rates during the first half of fiscal year 1995. In
an environment of declining interest rates, borrowers tend to prefer long term,
fixed rate mortgage loans rather than adjustable rate mortgage loans with
short-term interest rate changes. However, Lincoln Federal has continued to
originate adjustable-rate mortgage loans, and such loans comprised 72.73% of its
gross loan portfolio at June 30, 1995. Because its loans are originated for
retention in its own portfolio rather than for sale in the secondary market, the
Bank's fixed rate loan originations depend upon the level of interest rate risk
that the Bank is willing to accept given its capital, profitability and other
factors. The Bank continues to emphasize pricing of its adjustable rate mortgage
loans to continue attracting this type of loan.
The Bank intends to continue actively monitoring the interest rate
environment, prepayment activity, interest rate risk and other factors in
developing its strategy with respect to the volume and pricing of its fixed rate
loans and in its lending activities generally.
Savings institutions generally are subject to the lending limits
applicable to national banks. With certain limited exceptions, the maximum
amount that a savings institution or a national bank may lend to any borrower
(including certain related entities of the borrower) at one time may not exceed
15% of the unimpaired capital and surplus of the institution, plus an additional
10% of unimpaired capital and surplus for loans fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 150% of unimpaired capital and
surplus. At June 30, 1995, the maximum amount that the Bank could have loaned to
any one borrower without prior OTS approval was $500,000. At such date, the
largest aggregate amount of loans that the Bank had outstanding to any one
borrower was $791,000, reflecting loans that were originated prior to, and are
excluded from, the current regulatory limitations.
Loan Portfolio Composition. The following table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan at
the dates indicated. At June 30, 1995, the Bank had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.
<PAGE>
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
Amount % Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans:
Construction............................... $ 607 1.61% $ 745 2.10% $ 521 1.58%
One- to four-family residential............ 30,421 80.80 29,049 82.06 28,045 84.79
Land....................................... 463 1.23 463 1.31 221 0.67
Commercial................................. 2,408 6.40 2,306 6.51 1,873 5.66
-------- ------ -------- ------ ------- ------
Subtotal................................. 33,899 90.04 32,563 91.98 30,660 92.70
-------- ------ -------- ------ ------- ------
Consumer loans:
Automobiles................................ 1,138 3.02 617 1.74 487 1.47
Mobile homes............................... 13 0.03 10 0.03 -- --
Other consumer loans....................... 819 2.18 583 1.65 473 1.43
-------- ------ -------- ------ ------- ------
Subtotal................................. 1,970 5.23 1,210 3.42 960 2.90
-------- ------ -------- ------ ------- ------
Commercial business loans.................... 317 0.84 255 0.72 211 0.64
Home equity loans............................ 1,074 2.85 930 2.63 838 2.53
Savings account loans........................ 390 1.04 442 1.25 408 1.23
-------- ------ -------- ------ ------- ------
Total loans............................. 37,650 100.00% 35,400 100.00% 33,077 100.00%
====== ====== ======
Less:
Loans in process........................... 380 417 389
Unearned discounts......................... 53 54 58
Loan loss.................................. 263 275 197
-------- -------- -------
Loans, net.............................. $ 36,954 $ 34,654 $32,433
======= ======= =======
</TABLE>
<PAGE>
Loan Maturity Schedule. The following table sets forth certain
information as of June 30, 1995 regarding the dollar amount of loans maturing in
the Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less.
<TABLE>
<CAPTION>
Due after
3 through
Due during the year ending 5 years after
June 30, June 30,
1996 1997 1998 1995
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Real estate mortgage........ $ 82 $ 153 $ 196 $ 538
Consumer loans.............. 707 219 653 779
Commercial loans............ 153 -- 99 65
------ ------ ------ --------
Total.................. $ 942 $ 372 $ 948 $ 1,382
====== ====== ====== ========
<CAPTION>
Due after Due after
5 through 10 through Due after
10 years 15 years 15 years
after after years after
June 30, June 30, June 30,
1995 1995 1995 Total
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Real estate mortgage........ $ 3,988 $ 9,138 $ 19,804 $ 33,899
Consumer loans.............. 48 847 181 3,434
Commercial loans............ -- -- -- 317
-------- -------- -------- --------
Total.................. $ 4,036 $ 9,985 $ 19,985 $ 37,650
======== ======== ======== ========
</TABLE>
The following table sets forth, as of June 30, 1995, the dollar amount
of the loans maturing after June 30, 1995, between those with fixed interest
rates and those with floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating
Rate Adjustable Rates
---- ----------------
<S> <C> <C>
Real estate mortgage........... $ 6,467 $ 27,350
Consumer....................... 2,727 --
Commercial..................... 164 --
--------- ---------
Total...................... $ 9,358 $ 27,350
</TABLE>
<PAGE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, "due-on-sale" clauses in mortgage loans generally give Lincoln Federal
the right to declare a loan due and payable in the event, among other things,
that a borrower sells the real property subject to the mortgage and the loan is
not repaid. Due-on-sale clauses are a means of increasing the rate on existing
mortgage loans during periods of rising interest rates and increasing the
turnover of mortgage loans in the Bank's portfolio. The average life of mortgage
loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and tends to decrease
when current mortgage loan market rates are substantially lower than rates on
existing mortgage loans.
One- to Four-Family Real Estate Lending. The primary emphasis of the
Bank's lending activity is the origination of loans secured by first mortgages
on owner-occupied, one- to four-family residential properties. At June 30, 1995,
$30.4 million or 80.80% of the Bank's gross loan portfolio consisted of loans
secured by one- to four-family residential real properties which were
owner-occupied, single-family residences primarily located in the Bank's market
area.
The Bank's residential mortgage loans generally have terms of five to
25 years, with most loans originated with 25-year terms, amortized on a monthly
basis, with principal and interest due each month. Residential real estate loans
often remain outstanding for significantly shorter periods than their
contractual terms. Borrowers may refinance or prepay loans at their option
without penalty.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 80% of the
lesser of the appraised value or purchase price. The maximum loan-to-value ratio
on mortgage loans secured by non-owner-occupied properties and/or used for
refinancing purposes is also 80%. The Bank does originate a limited amount of
loans with up to 90% loan-to-value ratios. The Bank also originates mortgage
loans in excess of the 90% loan to value ratio to finance the purchase of the
Bank's foreclosed real estate (i.e., real estate owned). Borrowers for loans
with up to 80% loan-to-value ratios are qualified at the loan's initial interest
rate, and for loans in excess of 80% loan-to-value ratios are qualified at 2%
above the loan's initial interest rate.
The Bank has historically originated fixed rate residential mortgage
loans for the purchase or construction of single-family owner-occupied homes.
Lincoln Federal began originating conventional residential mortgage loans with
adjustable rates in the early 1980's, in response to fluctuating interest rates.
Currently, the Bank principally offers adjustable-rate mortgage loans with rate
adjustments indexed to the one-year Treasury Bill rate. Lincoln Federal
originated $3.2 million in adjustable rate one-to-four family mortgage loans
during fiscal year 1995 or 32.1% of the total loans originated during the year,
and such loans amounted to $25.0 million or 66.4% of the Bank's gross loan
portfolio at June 30, 1995. All such loans are originated for the Bank's own
portfolio rather than originated for sale in the secondary market.
The retention of adjustable-rate mortgage loans in the Bank's portfolio
helps reduce the Bank's exposure to changes in interest rates. However, there
are unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage loans. It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
<PAGE>
interest cost to the borrower. Further, although adjustable-rate mortgage loans
allow the Bank to increase the sensitivity of its asset base to change in
interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limitations. Accordingly, there
can be no assurance that yields on the Bank's adjustable-rate mortgages will
adjust sufficiently to compensate for increases, if any, in the Bank's cost of
funds.
Lincoln Federal also originates fixed-rate mortgage loans on one-
to-four family residential properties with terms to maturity of up to 15 years.
Lincoln Federal originated approximately $2.1 million in fixed-rate one- to-four
family mortgage loans with a maximum term of 15 years during fiscal year 1995,
and such loans amounted to $6.1 million, or 16.2%, respectively, of the Bank's
loan portfolio at June 30, 1995. All such loans were held as long-term
investments, and none were held for sale.
Construction Lending. Lincoln Federal engages in construction lending
primarily for construction of one- to-four family residential properties located
in the Bank's market area. At June 30, 1995 the Bank's loan portfolio included
$607,000 of loans secured by properties under construction, all of which were
construction/permanent loans structured to become permanent loans upon the
completion of construction. All construction loans are secured by a first lien
on the property under construction. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. Construction/permanent loans
generally have adjustable or fixed interest rates and are underwritten in
accordance with the same terms and requirements as the Bank's permanent
mortgages, except the loans generally provide for disbursement in stages during
a construction period of up to six months, during which period the borrower is
required to make monthly payments of accrued interest on the outstanding loan
balance. Borrowers must satisfy all credit requirements which would apply to the
Bank's permanent mortgage loan financing for the subject property.
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment. The Bank has sought to minimize this risk by limiting
construction lending to qualified borrowers in the Bank's market area.
Commercial Real Estate Lending. Lincoln Federal has not actively
pursued commercial real estate lending because of its emphasis on originating
adjustable rate mortgage loans secured by one- to four-family residences. The
commercial real estate loans originated by the Bank have generally been made to
small businesses and have been primarily secured by first mortgages on
commercial real property as well as residential real estate. At June 30, 1995,
commercial real estate loans totalled approximately $2.4 million, or 6.4% of the
Bank's gross loan portfolio. The two largest loans in this category at June 30,
1995 were to an individual for $791,000 and to a church for $159,000, both loans
of which were performing according to their respective terms.
Loans secured by commercial real estate generally are larger and
involve greater risks than one-to-four family residential mortgage loans.
<PAGE>
Because payments on loans secured by such properties are often dependent on
successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks in a variety of
ways, including obtaining personal guarantees from the principals of the
borrower and reviewing the principal's financial condition, limiting the size of
such loans and strictly scrutinizing the financial condition of the borrower
through the review of financial statements, and establishing the quality of the
collateral and the effectiveness of the management of the property securing the
loan. The Bank also obtains independent appraisals on each property in
accordance with applicable regulations. If such loans later become delinquent,
the Bank contacts and works with the borrower to resolve the delinquency before
initiating foreclosure proceedings.
Consumer Lending. Lincoln Federal does not emphasize consumer lending
although it does originate such loans on a regular basis. The Bank's consumer
loans primarily consist of loans secured by deposit account balances or purchase
money liens on automobiles, boats and recreation vehicles. The Bank also
originates consumer loans on an unsecured basis and generally requires a
pre-existing relationship with the Bank. The Bank generally makes certificate of
deposit loans for up to 90% of the face amount of the certificate although loans
may be made for up to 100% of the available account balance. The interest rate
on these loans generally is two percent above the rate paid on the certificate,
and interest is billed on a monthly basis. These loans are payable on demand,
and the account must be assigned to the Bank as collateral for the loan. At June
30, 1995, such loans amounted to $390,000 or 1.04% of the Bank's gross loan
portfolio.
Automobile loans are secured by both new and used cars and are
generally limited to 80% of the purchase price or the loan value as published by
the National Automobile Dealers Association. Automobile loans are only made to
the borrower-owner directly by the Bank rather than through a dealer. New cars
are financed for a period of up to 60 months, while used cars are financed for
up to 48 months or less. Loans for the purchase of used automobiles older than
six years are made based upon underwriting criteria for unsecured consumer
loans. Insurance coverage is generally required on all automobile loans, with
the Bank listed as loss payee. At June 30, 1995, such loans amounted to
$1,138,000 or 3.02% of the Bank's gross loan portfolio.
Consumer loans generally involve more risk than first mortgage one- to
four-family residential real estate loans. Repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered. These loans may also give rise to claims and defenses by a borrower
against the Bank, and a borrower may be able to assert against the Bank claims
and defenses which it has against the seller of the underlying collateral. In
underwriting consumer loans, the Bank considers the borrower's credit history,
an analysis of the borrower's income, expenses and ability to repay the loan and
the value of the collateral. The Bank's risks associated with consumer loans are
further minimized by the modest amount of consumer loans made by the Bank.
Commercial Business Lending. Lincoln Federal originates commercial
business loans to small and medium sized businesses in its market area, but has
<PAGE>
not historically emphasized this lending area. At June 30, 1995, the Bank's
commercial business loans amounted to $317,000, or 0.84% of the Bank's gross
loan portfolio, and the largest loan balance was $38,000. Commercial business
loans are generally made to finance the purchase of new or used equipment,
including farm equipment, and for short term working capital. Such loans are
secured by first liens on equipment or other collateral.
Commercial business loans may involve greater risk than other types of
lending. Because payments on such loans are often dependent on successful
operation of the business involved, repayment of such loans may be subject to a
greater extent to adverse conditions in the economy. The Bank seeks to minimize
these risks through its underwriting guidelines, which require that the loan be
supported by adequate cash flow of the borrower, profitability of the business,
collateral and personal guarantees of the individuals in the business. In
addition, Lincoln Federal limits this type of lending to its market area and to
borrowers with which it has substantial experience or who are otherwise well
known to the Bank.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources. Residential mortgage loan originations primarily arise from
walk-in customers and referrals by realtors, depositors, borrowers and
shareholders. Consumer and other loan originations emanate from many of the same
sources as well as from consumer goods dealers. Real estate loans are originated
by Lincoln Federal's staff of salaried loan officers working in the Bank's three
offices and loan production office. Loan applications are taken in each of the
Bank's offices, and then submitted to the Bank's main office for approval. Loan
applications are underwritten and closed based solely upon the Bank's
internally-developed loan guidelines.
Upon receipt of a loan application from a prospective borrower, a
credit report is ordered and specific information relating to the loan
applicant's employment, income and credit standing is verified. An appraisal of
the real estate intended to secure the proposed loan is undertaken by an
independent appraiser approved by the Bank.
The Board of Directors of the Bank has the responsibility and authority
for general supervision over the loan policies of the Bank. The Board of
Directors has established written lending policies for the Bank and any three
directors have the authority to approve all mortgage loans. With respect to
consumer loans, any two lending officers may jointly approve a loan up to
$50,000, with loans above that amount referred to the Bank's Board of Directors
for approval by any three directors.
Loan applicants are promptly notified of the decision of the Bank.
Interest rates on approved loans are subject to change if the loan is not funded
within 60 days after approval for residential mortgage loans and 30 days for
consumer loans. If an approved loan is not funded within 60 days, the applicant
must re-apply. It has been management's experience that substantially all
approved loans are funded. Fire and casualty insurance are required for all
loans as appropriate, and a title opinion is required for loans secured by real
estate. The requirement of a title opinion rather than title insurance is a
standard practice in the Bank's market area because of the desire by financial
institutions to use attorneys familiar with the land recordation process and
also because such opinions are generally less costly than insurance. To minimize
its exposure from a faulty opinion, the Bank requires that attorneys providing
opinions maintain a minimum amount of malpractice insurance against deficiencies
in such opinions. The Bank has never experienced a loss arising from a deficient
title opinion.
<PAGE>
Originations, Purchases and Sales of Loans. The following table sets
forth certain information with respect to originations of loans during the
periods indicated. During such periods, no loans were purchased or sold.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1995 1994 1993
--------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Construction loans.......... $ 1,282 $ 1,348 $ 863
One- to four-family......... 5,326 6,625 5,169
Non-residential and other... 650 712 268
Consumer loans.............. 2,501 1,449 1,237
Commercial loans............ 195 453 70
--------- ---------- ----------
Total loans originated...... $ 9,954 $ 10,587 $ 7,607
========= ========== ==========
</TABLE>
Lincoln Federal has never purchased or sold any of its loans. The Bank
also does not service any loans for other lenders.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan rates reflect factors such as general interest rate
levels, the supply of money available to the savings industry and the demand for
such loans. These factors are in turn affected by general economic conditions,
the monetary policies of the Federal government, including the Federal Reserve,
the general supply of money in the economy, tax policies and governmental budget
matters.
In addition to the interest earned on loans, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments and fees for miscellaneous services related to its loans. The Bank
charges a processing fee for its adjustable rate mortgage loans and fixed rate
mortgage loans. All such fee income is recognized by the Bank in accordance with
guidelines established by Statement of Financial Accounting Standards ("SFAS")
No. 91. To the extent that loans are originated or acquired for the portfolio,
SFAS No. 91 limits immediate recognition of loan origination or acquisition fees
as revenues and requires that such income (net of certain loan origination or
acquisition costs) be recognized over the estimated life of such loans and
thereby reduces the amount of revenue recognized by Lincoln Federal at the time
such loans are originated or acquired. At June 30, 1995, the Bank had received
$53,000 of loan fees that had been deferred and were being recognized as income
over the estimated lives of the related loans.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
"loss", the insured institution must either establish specified allowances for
loan losses in the amount of 100% of the portion of the asset so classified, or,
in the alternative, charge off such amount. An asset which does not currently
<PAGE>
warrant classification but which possesses weaknesses or deficiencies deserving
close attention is required to be designated as "special mention." Currently,
general loss allowances established to cover possible losses related to assets
classified either "substandard" or "doubtful" may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as, and therefore may not be included in, regulatory
capital. OTS examiners may disagree with the insured institution's
classifications and amounts reserved. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS. The Bank has an asset classification committee, comprised of four employees
of the Bank, including President Bruce Edgington, which meets monthly to review
assets and determine whether those assets should be classified pursuant to OTS
regulations. Through the committee, the Bank has determined that at June 30,
1995 it had $1.1 million in assets classified as substandard, no assets
classified as doubtful, $10,000 in assets classified as loss, and $33,000 in
assets designated as "special mention." For additional information, See
"Non-Performing Loans and Other Problem Assets." See also "Commercial Real
Estate Lending."
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the bor rower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evalua tion of economic
conditions and regular reviews of delinquencies and loan portfolio quality. The
Bank increases its allowance for loan losses by charging provisions for possible
loan losses against the Bank's income.
General allowances are made pursuant to management's assessment of risk
in the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
General allowances are included in calculating the Bank's risk-based capital,
while specific allowances are not so included. Management continues to actively
monitor the Bank's asset quality and to charge off loans against the allowance
for loan losses when appropriate or to provide specific loss reserves when
necessary. Although management believes it uses the best information available
to make determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions differ substantially from
the economic conditions in the assumptions used in making the initial
determinations.
The Bank was examined by the OTS in June 1993 and its loan loss
allowance was considered by the OTS to be adequate as of that time. Nonetheless,
the Bank determined to increase its loan loss allowances by $10,000 per month
during fiscal year 1994, primarily due to concerns regarding a single large
non-performing commercial real estate loan in the Bank's loan portfolio. See
"Commercial Real Estate Lending." Management determined at that time that it
would be prudent, in view of these factors, to increase the Bank's loan loss
allowance to levels more closely approximating similar allowances established by
other savings institutions in the Bank's peer group. Management also reviews
individual loans for which full collectibility may not be reasonably assured and
considers, among other matters, the estimated net realizable value of the
underlying collateral. While the Bank believes it has established its existing
allowances for loan losses in accordance with generally accepted accounting
principles, there can be no assurance that regulators, in reviewing the Bank's
<PAGE>
loan portfolio during future examinations, will not request the Bank to
significantly increase its allowance for loan losses, thereby negatively
effecting the Bank's financial condition and earnings.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period.......... $ 275 $ 197 $ 192
Loans charged-off:
Real estate -- mortgage:
Residential........................... -- 4 9
Consumer.............................. 17 14 1
----- ----- ----
Total charge-offs....................... 17 18 10
----- ----- ----
Recoveries:
Real estate -- mortgage:
Consumer.............................. 3 8 5
----- ----- -----
Total recoveries........................ 3 8 5
----- ----- -----
Net loans charged-off................... 14 10 5
----- ----- -----
Provision for possible loan losses...... 2(5) 8(4) 10
----- ----- -----
Balance at end of period................ $ 263 $ 275 $ 197
======== ======== ========
Ratio of net charge-offs to average
loans outstanding during the period... 0.05% 0.03% 0.02%
======== ======== ========
Ratio of allowance for loan losses to
total loans (net of deferred fees and
loans in process)..................... 0.71 0.79 0.61
======== ====== =========
Ratio of allowance for loan losses to
non-performing loans.................. 313.09(3) 122.77(2) 82.08(1)
======== ======== ========
</TABLE>
(1) Reflects decrease in non-performing loans due primarily to a large
commercial loan of $888,000 becoming current.
<PAGE>
(2) Reflects increase in loan allowance that reflects both management's
desire to increase the Bank's allowance as the Bank's loan portfolio
increase, as well as heightened loan collection efforts that resulted
in fewer non-performing loans. See "Non-Perform- ing Loans and Other
Problem Assets."
(3) Reflects the decrease in non-performing loans of $140,000 to $84,000 at
June 30, 1995, as compared to $224,000 at June 30, 1994.
(4) The increase reflects management's desire to increase the Bank's
allowance as the Bank's loan portfolio increased offset by the decrease
in nonperforming loans resulting from heightened loan collection
efforts.
(5) The decrease reflects the continued low level of the Bank's
charge-offs, the Bank's existing level of its allowance for loan
losses, and a decrease in non-performing loans resulting from
heightened loan collection efforts.
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
June 30,
1995 1994 1993
------------------- ------------------ -----------------
Percent Percent Percent
of Loans of Loans of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential (1)...................... $ 170 84.88% $ 171 86.00% $ 177 87.99%
Commercial............................ 89 6.40 89 6.51 -- 5.66
Real estate - construction.............. -- 1.61 -- 2.10 -- 1.58
Consumer and savings account loans...... 4 6.27 15 4.67 20 4.13
Commercial business loans............... -- 0.84 -- .72 -- 0.64
------ ----- ------ ----- ------ -----
Total allowance for loan losses..... $ 263 100.00% $ 275 100.00% $ 197 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
(1) Includes home equity loans.
<PAGE>
Non-Performing Loans and Other Problem Assets. Management reviews the
Bank's loans on a regular basis. After residential mortgage loans become past
due more than 90 days, the Bank places them on nonaccrual status. The Bank has
had a favorable loan loss history, and had no charge offs in residential real
estate loans during fiscal year 1995. Consumer and commercial loans generally
are charged off, or a reserve is provided for any expected loss, after such
loans become more than 120 days past due.
The Bank's collection procedures provide that when a loan becomes past
due 10 days, the bor rower is contacted by mail, and payment is requested. If
payment is not promptly received, the borrower is contacted again, and efforts
are made to formulate an affirmative plan to cure the delinquency. After a loan
becomes past due 90 days, the Bank generally initiates legal proceedings. Loans
delinquent 90 days or greater are managed based on a workout plan developed by
the Bank and the borrower.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of the unpaid principal
balance or its fair market value. Any required write-down of the loan to its
appraised fair market value upon foreclosure is credited to the valuation
allowance for real estate owned and charged to the provision for losses on
non-interest bearing assets.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. The Bank did not have any accruing
loans contractually past due 90 days or more at June 30, 1995 or 1994. No loans
were recorded as restructured loans within the meaning of SFAS No. 15 at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------
1995 1994 1993
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a
non-accrual basis: (1)
Real estate:
Residential................... $ 79 $ 209 $ 188
Commercial.................... -- (3) -- (3) 21
Consumer...................... 5 14 31
-------- ------- -------
Total of nonaccrual loans..... $ 84 $ 223 $ 240
======== ======= =======
Percentage of net loans........... .23% .64% .74%
======== ======= =======
Other non-performing assets (2)... $ 68 $ -- $ 16
======== ======= =======
</TABLE>
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely. Payments
received on a non-accrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on
assessment of the collectibility of the loan.
<PAGE>
(2) Other non-performing assets represents property acquired by the Bank
through foreclosure or repossession or accounted for as a foreclosure
in-substance. This property is carried at the lower of its fair market
value or the principal balance of the related loan, whichever is lower.
(3) Decrease associated with a single commercial real estate loan that, at
June 30, 1995 and 1994, was no longer past due more than 90 days.
During the year ended June 30, 1995, interest income of $4,864 would
have been recorded on loans accounted for on a non-accrual basis if the loans
had been current throughout the year. Interest on such loans included in income
during such period amounted to approximately $3,479 and interest income not
recognized by the Bank on non-accrual loans was approximately $1,385.
At June 30, 1995, Lincoln Federal's management had identified
approximately $1.1 million of loans, or approximately 2.92% of the Bank's total
loans, which were not reflected in the preceding table but as to which known
information about possible credit problems of borrowers caused management to
have serious doubts as to the ability of the borrowers to comply with present
loan repayment terms, and all of such loans were classified as substandard,
doubtful or loss or designated as special mention.
Investment and Mortgage-Backed Securities
Lincoln Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of
Cincinnati, certificates of deposits in federally insured institutions, certain
bankers' acceptances and federal funds. The Bank may also invest, subject to
certain limitations, in commercial paper having one of the two highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Bank to maintain an investment in FHLB of Cincinnati stock and a
minimum amount of liquid assets which may be invested in cash and specified
securities. From time to time, the OTS adjusts the percentage of liquid assets
that savings institutions are required to all maintain. For additional
information, See "Regulation --Regulation of the Bank -- Liquidity
Requirements."
The Bank invests in investment securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. Such investments generally include
purchases of federal funds, federal government and agency securities and
qualified deposits in other financial institutions. Investment decisions
generally are made by the Investment Committee comprised of Directors Teague,
Ralston and Payne based upon recommendations of the Bank's President.
On July 1, 1994, the Corporation adopted SFAS No. 115, which requires
debt and equity securities to be classified into one of three categories: held
to maturity, available for sale or trading. Securities held to maturity are
reported at amortized cost, with amortization of premium and accretion of
discount computed on a method which approximates the interest method over the
term of the related security. Securities held for trading are reported at fair
value, and unrealized gains and losses are reflected in earnings. Securities
held as available for sale are also reported at fair value, but unrealized gains
and losses are reflected as a separate component of stockholders' equity rather
than in earnings. The Corporation did not have any securities held for trading
or held available for sale on July 1, 1994 and therefore the adoption of SFAS
No. 115 did not have any effect on the Corporation's earnings or stockholders'
equity. The Corporation considers its investments in U.S. Treasury bills with
<PAGE>
maturities of six months or less as investment securities available for sale. At
June 30, 1995, the Corporation had approximately $5.9 million in securities
classified as held to maturity and approximately $2.0 million in securities
classified as available for sale.
The following table sets forth the carrying value of the Corporation's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------
1995 1994 1993
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government securities (1)........ $ 1,992 $ 1,517 $ 3,961
U.S. government agency securities (2). 3,014 3,510 4,933
State and municipal obligations (3)... 2,883 3,347 2,537
Short-term money funds................ -- -- 12
-------- --------- ---------
Subtotal............................ 7,889 8,374 11,443
Mortgage-backed securities.............. 77 99 119
-------- --------- ---------
Total investments................... $ 7,966 $ 8,473 $ 11,562
======== ========= =========
</TABLE>
(1) U.S. Government Securities consists of Treasury Bills with maturities
of one year or less and Treasury Notes with maturities of over one
year. Treasury Bills with maturities of six months or less reflected a
market value of $1,992,200 and an amortized cost basis of $1,991,438 as
of June 30, 1995.
(2) U.S. Government Agency Securities consists of Federal National Mortgage
Association securities, FHLB notes and bonds and other bonds.
(3) State and municipal bonds consists of bonds that are rated A or above
and are purchased for investment purposes only. Also included is a
$249,000 investment at June 30, 1995 in a non-taxable Tennessee Valley
Authority bond which is callable with 30 days notice by the issuer.
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Corporation's investment
portfolio at June 30, 1995.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
------- ------- ------- ------- ------- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government
securities.............. $ 1,992 5.58% $ -- --% $ -- --% $ -- --%
U.S. government agency
securities.............. 570 4.48 2,244 5.13 200 6.28 -- --
State and municipal
obligation............. 1,267 3.81 1,616 4.37 -- -- -- --
-------- --------- --------- --------
Total investment
securities............ $ 3,829 4.83 $ 3,860 4.81 $ 200 6.28 $ -- --
======== ========= ========= ========
Mortgage-backed
securities................ -- -- -- -- 77 7.81 -- --
-------- --------- --------- --------
Total investment and
mortgage-backed
securities............ $ 3,829 4.83 $ 3,860 4.81 $ 277 6.66 $ -- --
======== ========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total Investment Portfolio
Carrying Market Average
Value Value Yield
------- ----- ------
(Dollars in thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government
securities.............. $ 1,992 $ 1,992 5.58%
U.S. government agency
securities.............. 3,014 2,961 5.08
State and municipal
obligation............. 2,883 2,857 4.12
------- -------
Total investment
securities............ $ 7,889 $ 7,810 4.86
======= =======
Mortgage-backed
securities................ 77 79 7.81
------- -------
Total investment and
mortgage-backed
securities............ $ 7,966 $ 7,889 4.89
======= =======
</TABLE>
<PAGE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, Lincoln Federal
derives funds from loan principal repayments, maturing investment securities,
and interest payments. Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. The Bank does
not borrow funds for operational purposes.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit ranging in
term from three months to five years. Deposit account terms vary, principally on
the basis of the minimum balance required, the time periods the funds must
remain on deposit and the interest rate. The Bank also offers individual
retirement accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from
local residents through its branch network rather than to solicit deposits from
areas outside its primary market. The Bank does not accept deposits from brokers
due to the volatility and rate sensitivity of such deposits. Interest rates
paid, maturity terms, service fees and withdrawal penalties are established by
the Bank on a periodic basis. Determination of rates and terms are predicated
upon funds acquisition and liquidity requirements, rates paid by competitors,
growth goals and federal regulations.
<PAGE>
Savings deposits in the Bank as of June 30, 1995 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Percentage of
Rate (1) Term Category Amount Balances Total Savings
- -------- ---- -------- ------ -------- -------------
<S> <C> <C> <C> <C> <C>
--% None Other Demand Accounts $ 25 $ 423 1.05%
1.83 None NOW accounts 25 1,586 3.92
3.25 None Passbook and Christmas Club 5 6,280 15.52
2.72 None Super NOW Accounts 25 2.152 5.32
<CAPTION>
Certificates of Deposit
-----------------------
<S> <C> <C> <C> <C> <C>
5.79 6 months 6-month money market 1,000 6,791 16.79
5.86 12-month Fixed-Term, Fixed-Rate 1,000 6,104 15.09
5.11 30-month Fixed-Term, Fixed-Rate 500 4,878 12.06
7.50 48-month Fixed-Term, Fixed-Rate 1,000 7 0.02
5.20 18-month 18-Month IRA Accounts 100 2,190 5.41
6.30 5 year Fixed-Term, Fixed-Rate (2) 500 2,775 6.86
7.25 6 year Fixed-Term, Fixed Rate 500 309 .76
6.25 None Certificates of $75,000 and over (2)(3) 75,000 6,957 17.20%
------- ------
$40,452 100.00%
======= ======
</TABLE>
(1) Represents weighted average interest rate currently paid.
(2) Includes "add-on" certificates of $2.5 million, which enable the
depositor to increase the certificate balance during the term of the
certificate and at the initial rate set forth in such certificate.
Approximately $476,000 will mature by June 30, 1996. The Bank has
discontinued offering this product. Of such amount, $1.2 million was in
5-year fixed term, fixed rate certificates and $1.3 million was in
certificates of $75,000 and over.
(3) The Bank generally negotiates rates it pays on such certificates. At
June 30, 1995, the Bank had approximately $4.1 million in certificates
of $100,000 or more and approximately $2.8 million in certificates
$75,000 to under $100,000.
<PAGE>
The following tables set forth, for the periods indicated, the average
balances and interest rates based on month-end balances for interest-bearing
demand deposits and time deposits.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------- -------------------------- --------------------------
Interest- Interest- Interest-
Bearing Bearing Bearing
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average balance.............. $11,525 $28,395 $12,646 $30,032 $11,574 $30,923
Average rate................. 2.47% 5.01% 2.56% 4.56% 2.91% 5.11%
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by the Bank between the dates
indicated.
Increase
Balance at (Decrease) Balance at
June 30, % of from June June 30, % of
1995 Deposits 30, 1994 1994 Deposits
--------- -------- --------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
NOW and other demand accounts ........... $ 2,009 4.97% $ 112 $ 1,897 4.71%
Certificate accounts
> $75,000 (1) ......................... 6,957 17.20 1,566 5,391 13.39
Super NOW checking accounts ............. 2,152 5.32 (440) 2,592 6.44
Passbook and regular savings ............ 6,280 15.52 (1,702) 7,982 19.83
Six month money market
certificates .......................... 6,791 16.79 (946) 7,737 19.22
30 and 48 month certificates ............ 4,885 12.08 327 4,558 11.32
12 month certificates ................... 6,104 15.09 1,333 4,771 11.85
5 year certificates ..................... 2,775 6.86 (490) 3,265 8.11
IRA accounts ............................ 2,190 5.41 138 2,052 5.10
Other ................................... 309 .76 297 12 .03
------- ------ ------- ------- ------
Total ............................... $40,452 100.00% $ 195 $40,257 100.00%
======= ====== ======= ======= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Increase
(Decrease) Balance at
from June June 30 % of
30, 1993 1993 Deposits
----------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
NOW and other demand accounts..... $ 443 $ 1,454 3.35%
Certificate accounts
> $75,000 (1)................... 954 4,437 10.21
Super NOW checking accounts....... 40 2,552 5.87
Passbook and regular savings...... (634) 8,616 19.83
Six month money market
certificates.................... (913) 8,650 19.91
30 and 48 month certificates...... (1,321) 5,879 13.53
12 month certificates............. (507) 5,278 12.15
5 year certificates............... (1,217) 4,482 10.32
IRA accounts...................... (25) 2,077 4.78
Other............................. (9) 21 .05
---------- ---------- ------
Total......................... $ (3,189) $ 43,446 100.00%
========== ========== ======
</TABLE>
(1) Certificates are accounts with original balances of $75,000 or more.
Due to the overall increase in interest rates and local competition,
certificates of deposit interest rates were raised accordingly. Customers were
then transferring money from their passbook accounts to the higher paying
certificates of deposits, or upon maturity of the lower paying CD's, they were
then renewing to higher paying certificates. These deposits have been used to
fund the increased demand in lending.
The following table sets forth the time deposits in the Corporation
classified by nominal rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------
1995 1994 1993
------- ------- -------
(In thousands)
<S> <C> <C> <C>
2.00 - 4.00% ............ $ 2,521 $17,869 $15,630
4.01 - 6.00% ............ 17,164 7,279 8,274
6.01 - 8.00% ............ 10,127 1,926 4,369
8.01 - 10.00% ............ 200 712 2,551
------- ------- -------
$30,012 $27,786 $30,824
======= ======= =======
</TABLE>
<PAGE>
The following table sets forth the amount and maturities of time
deposits at June 30, 1995.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 4.00% .................. $ 1,942 $ 579 $ -- $ -- $ 2,521
4.01 - 6.00% .................. 12,865 1,028 2,097 1,174 17,164
6.01 - 8.00% .................. 5,530 1,233 1,953 1,411 10,127
8.01 - 10.00% .................. 200 -- -- -- 200
------- ------- ------- ------- -------
$20,537 $ 2,840 $ 4,050 $ 2,585 $30,012
======= ======= ======= ======= =======
</TABLE>
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1995.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
<S> <C>
Three months or less ...................................... $ 700
Over three through six months ............................. 400
Over six through 12 months ................................ 827
Over 12 months ............................................ 2,200
------
Total ................................................. $4,127
======
</TABLE>
The following table sets forth the savings deposit activities of the
Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Deposits ............................................................... $ 51,585 $ 49,504 $ 39,330
Withdrawals ............................................................ 53,083 54,375 40,308
-------- -------- --------
Net increase (decrease) before interest credited .................... (1,498) (4,871) (978)
Interest credited ...................................................... 1,693 1,682 1,944
-------- -------- --------
Net increase (decrease) in savings deposits ......................... $ 195 $ (3,189) $ 966
======== ======== ========
</TABLE>
<PAGE>
The slight decrease in deposits before interest credited during fiscal
year 1995 is due primarily to management's decision to allow deposit run-off and
thereby reduce excess liquidity. Such run-off was accomplished by appropriate
pricing of deposit products. Deposit run-off has not continued to the extent
noted in prior years, given the relatively stable interest rate environment
during the latter half of fiscal year 1995 and the Bank's long-term deposit
relationships with many of its customers. Further, the Bank expects that a
significant amount of the certificates of deposit expiring within the twelve
months following June 30, 1995 will be renewed. Should such deposits not be
renewed, the Bank expects to rely upon borrowings from the FHLB of Cincinnati
and upon its investments held available for sale as short-term funding
alternatives, either of which could adversely impact the Bank's operating
results.
The Bank does not offer premiums for deposits, does not offer interest
rates on deposits which exceed the average rates offered by other financial
institutions in its market area, and usually does not institute promotional
programs that result in increased rates being paid on deposits. These strategies
are consistent with management's goals of keeping the Bank's cost of funds at
reduced levels and maintaining slow and measured growth for the Bank.
The Bank does not have any comprehensive plan to attract IRA funds. Due
to excess liquidity, there is no competitive strategy for attracting new
deposits in place and there is no plan for new product offerings in the next
twelve months.
Borrowings
Savings deposits historically have been the primary source of funds for
the Bank's lending and investment activities and for its general business
activities. The Bank is authorized, however, to use advances from the FHLB of
Cincinnati to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are secured by the Bank's stock
in the FHLB and a portion of the Bank's mortgage loans.
The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, Lincoln Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. At June 30, 1995, the Bank did not
have any advances outstanding from the FHLB of Cincinnati. See "Regulation --
Regulation of the Bank -- Federal Home Loan Bank System."
Subsidiary Activities
As a federally chartered savings bank, Lincoln Federal is permitted to
invest an amount equal to 2% of its assets in subsidiaries with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city, and community development purposes. Under such limitations, as of
June 30, 1995 Lincoln Federal was authorized to invest up to approximately
$964,000 in the stock of or loans to subsidiaries, including the additional 1%
investment for community inner-city and community development purposes.
Institutions meeting regulatory capital requirements, which Lincoln Federal
currently does, may invest up to 50% of their regulatory capital in conforming
first mortgage loans to subsidiaries in which they own 10% or more of the
capital stock.
<PAGE>
The Bank's only service corporation is Lincoln County Savings and Loan
Service Corporation in which its investment was $15,000 at June 30, 1995. The
primary purpose of the service corporation is to purchase and hold the required
amount of stock of Intrieve, Incorporated ("Intrieve") pursuant to the Bank's
agreement with Savings and Loan Data Corporation, predecessor to Intrieve, for
data processing services. Lincoln County Savings and Loan Service Corporation is
otherwise currently inactive.
FIRREA requires SAIF-insured savings institutions to give the FDIC and
the Director of the OTS 30 days' prior notice before establishing or acquiring a
new subsidiary, or commencing any new activity through an existing subsidiary.
Both the FDIC and the Director of the OTS have authority to order termination of
subsidiary activities determined to pose a risk to the safety or soundness of
the institution. In addition, capital requirements require savings institutions
to deduct the amount of their investments in and extensions of credit to
subsidiaries engaged in activities not permissible to national banks from
capital in determining regulatory capital compliance. The activities of Lincoln
County Savings and Loan Service Corporation are permissible for national banks.
See "Regulation -- Regulatory Capital Requirements."
Employees
As of June 30, 1996, Lincoln Federal had 21 full-time employees and one
part-time employee, none of whom was represented by a collective bargaining
agreement. Lincoln Federal believes that it enjoys good relations with its
personnel.
Competition
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans. Direct
competition for savings deposits comes from other savings institutions, a credit
union, a regional bank holding company and commercial banks located in its
primary market area. Significant competition for the Bank's other deposit
products and services comes from money market mutual funds, brokerage firms and
insurance companies. The primary factors in competing for loans are interest
rates and loan origination fees and the range of services offered by various
financial institutions. Competition for origination of real estate loans
normally comes from other savings institutions and commercial banks.
Lincoln Federal's primary competition comprises the commercial banks
near each of the Bank's branch offices and its loan production office. In
Lincoln County, where the Bank's main office and one of its two branch offices
are located, primary competition consists of one local bank and one regional
bank holding company. In Liberty, Kentucky where the Bank's other branch office
is located, the Bank's primary competition consists of two local banks and one
savings and loan association. The primary competition of the loan production
office, which is located in Mt. Vernon, Kentucky, is a state bank and a national
bank.
Management believes Lincoln Federal is able to compete effectively in
its primary market area by offering competitive interest rates and loan fees and
a wide variety of deposit products, and by emphasizing personal customer service
as a result of the Bank's commitment to competitive pricing, varied products and
personal service. The Bank has developed a solid base of core deposits and the
Bank's loan origination quality and volume are among the leaders in the Bank's
market area.
<PAGE>
Regulation of the Bank
General. As a savings association, Lincoln Federal is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements. The OTS will
periodically examine the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct examinations of SAIF
members. The Bank must file reports with OTS describing its activities and
financial condition. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.
Federal Home Loan Bank System. The Bank is a member of the FHLB System,
which consists of twelve district Federal Home Loan Banks subject to supervision
and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home
Loan Banks provide a central credit facility primarily for member institutions.
As a member of the FHLB of Cincinnati, the Bank is required to acquire and hold
shares of capital stock in the FHLB of Cincinnati in an amount at least equal to
1% of the aggregate unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB of Cincinnati, whichever is greater. The
Bank was in compliance with this requirement with investment in FHLB of
Cincinnati stock at June 30, 1995 of $334,300. The FHLB of Cincinnati serves as
a reserve or central bank for its member institutions within its assigned
district. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Cincinnati. Long-term advances may only be made for the
purpose of providing funds for residential housing finance.
See "Sources of Funds -- Borrowings."
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity and short-term ratios of the Bank for
the month ended June 30, 1995 were 20.48% and 7.08% respectively.
Qualified Thrift Lender Test. A savings association that does not meet
the Qualified Thrift Lender test ("QTL Test") must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the institution
ceases to be a Qualified Thrift Lender, it must cease any activity, and not
retain any investment not permissible for a national bank and immediately repay
any outstanding FHLB advances (subject to safety and soundness considerations).
<PAGE>
To meet the QTL Test, an institution's "Qualified Thrift Investments"
must total at least 65% of "portfolio assets". Under OTS implementing
regulations, portfolio assets are defined as total assets less intangibles, the
value of property used by a savings association in its business and liquidity
investments in an amount not exceeding 20% of assets. OTS regulations define
Qualified Thrift Investments to include, among other things, loans that were
made to purchase, refinance, construct, improve or repair domestic residential
housing, home equity loans, mortgage-backed securities, FHLB stock. Subject to
an aggregate 20% of portfolio assets limit, savings associations are able to
treat as Qualified Thrift Investments the following: (i) 200% of their
investments in loans to finance "starter homes," (ii) 200% of their investments
in loans for construction, development or improvement of housing and community
service facilities or for financing small businesses in "credit-needy" areas,
(iii) loans for the purchase, construction, development or improvement of
community service facilities other than those in credit-needy areas, (iv) loans
for personal family, household or education purposes, subject to a 10% of
portfolio assets limit, and (v) stock issued by the FHLMC and the FNMA.
Qualified Thrift Investments do not include any intangible assets.
In addition, a savings institution must maintain its status as a
Qualified Thrift Lender ("QTL") on a monthly basis in nine out of every 12
months. A savings institution that fails to maintain QTL status will be
permitted to requalify once, and if it fails the QTL test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired. Failure to qualify as a QTL results in a number of
sanctions, including the imposition of certain operating restrictions imposed on
national banks and a restriction on obtaining additional advances from the
Federal Home Loan Bank System. Upon failure to qualify as a QTL for two years, a
savings association must convert to a commercial bank. At June 30, 1995, the
Bank's QTL ratio was 96.54%.
Dividend Limitations. Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form. In addition, savings association subsidiaries of savings and loan
holding companies are required to give the OTS 30 days prior notice of any
proposed declaration of dividends to the holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Bank. Under these regulations, a savings association that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Association") is generally permitted without OTS
approval to make capital distributions during a calendar year in the amount
equal to the higher of (i) 75% of its net income over the most recent
four-quarter period or (ii) up to 100% of its net income to date during the
calendar year plus an amount that would reduce by one-half the amount by which
its total capital-to-assets ratio exceeded its fully phased-in capital
requirement at the beginning of the calendar year. A savings association with
total capital immediately prior to, or on a pro forma basis after giving effect
to a proposed capital distribution, equal to or in excess of current minimum
capital requirements but less than the fully phased-in requirements (a "Tier 2
Association") is permitted to make capital distributions without OTS approval of
up to 75% of its net income for the previous four quarters, less dividends
already paid for such period depending on the savings association's level of
risk-based capital. A savings association that fails to meet current minimum
<PAGE>
capital requirements (a "Tier 3 Association") is prohibited from making any
capital contributions without the prior approval of the OTS. Tier 1 Associations
that have been notified by the OTS that they are in need of more than normal
supervision will be treated as either a Tier 2 or Tier 3 Association. At June
30, 1995, the Bank was a Tier 1 Association.
The Bank is prohibited from making any capital distributions if after
making the distribution, it would be undercapitalized as defined in the OTS'
prompt corrective action regulations. See " -- Prompt Corrective Regulatory
Action." After consultation with the FDIC, the OTS may permit a savings
association to repurchase, redeem, retire or otherwise acquire shares or
ownership interests if the repurchase, redemption, retirement or other
acquisition: (i) is made in connection with the issuance of additional shares or
other obligations of the institution in at least an equivalent amount; and (ii)
will reduce the institution's financial obligations or otherwise improve the
institution's financial condition.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to Lincoln without payment of
taxes at the then current tax rate by the Bank on the amount of earnings removed
from the reserves for such distributions. See "Taxation." Lincoln intends to
make full use of this favorable tax treatment afforded to the Bank and the
Corporation and does not contemplate use of any earnings of the Bank in a manner
which would limit the Bank's bad debt deduction or create federal tax
liabilities.
Regulatory Capital Requirements. Under OTS regulations, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definitions as core capital. See "Prompt Corrective Regulatory
Action." Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill." Core capital is generally reduced by the amount of the
savings association's intangible assets for which no market exists. Tangible
capital is given the same definition as core capital but does not include
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationships.
Both core and tangible capital are further reduced by an amount equal
to savings association's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies. As of June
30, 1995, the Bank had no investments in or extensions of credit to subsidiaries
engaged in activities not permitted to national banks.
"Adjusted total assets" are a savings association's total assets as
determined under generally accepted accounting principles ("GAAP"), increased by
<PAGE>
certain goodwill amounts and by a pro-rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require the
savings association to net its debt and equity investments in such subsidiaries
against capital, as well as a pro-rated portion of the assets of other
subsidiaries for which netting is not fully required under phase-in rules.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the portion of savings association's investments in
subsidiaries that must be netted against capital under the capital rules and,
for purposes of the core capital requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital, provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and, after July 1, 1990, by an increasing percentage of
the savings association's high loan-to-value ratio land loans and
non-residential construction loans, and certain equity investments not otherwise
deducted from core and tangible capital.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
Single-family first mortgages not more than 90 days past due with loan-to-value
ratios under 80%, multi-family mortgages (maximum 36 dwelling units) with
loan-to-value ratios under 80% and certain qualifying loans for the construction
of one- to four-family residences pre-sold to home purchasers are assigned a
risk weight of 50%. Consumer loans, non-qualifying residential construction
loans and commercial real estate loans, repossessed assets and assets more than
90 days past due, as well as all other assets not specifically categorized, are
assigned a risk weight of 100%. The portion of equity investments not deducted
from core or supplementary capital is assigned a 100% risk-weight. OTS capital
regulations require savings institutions to maintain minimum total capital,
consisting of core capital plus supplemental capital, equal to 8.0% of
risk-weighted assets.
<PAGE>
The table below presents the Bank's capital position at June 30, 1995,
relative to its various minimum regulatory capital requirements.
<TABLE>
<CAPTION>
Percent
of
Amount Assets(1)
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital ............................. $5,930 12.60%
Tangible capital requirement ................. 704 1.50
------ -----
Excess (deficit) ........................... $5,226 11.10%
====== =====
Core capital ................................. $5,930 12.60%
Core capital requirement ..................... 1,409 3.00
------ -----
Excess (deficit) ........................... $4,521 9.60%
====== =====
Risk-based capital ........................... $6,184 24.50%
Risk-based capital requirement ............... 2,023 8.00
------ -----
Excess (deficit) ........................... $4,161 16.50%
====== =====
</TABLE>
(1) Based upon adjusted total assets of $46.9 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of
$25.3 million for purposes of the risk-based capital requirements.
The Director of OTS must restrict the asset growth of savings
associations not in regulatory capital compliance, subject to a limited
exception for growth not exceeding interest credited. In addition, savings
associations not in full compliance with capital standards then applicable would
be subject to a capital directive which may include such restrictions, including
restrictions on the payment of dividends and on compensation, as deemed
appropriate by the Director of OTS. Institutions not in capital compliance must,
within 60 days thereafter, submit a capital plan to the OTS District Director
for approval explaining in detail its proposed strategies for raising capital
and for accomplishing its overall objective, and the institution may
concurrently apply for an exemption from a capital directive. The Director of
OTS is directed to treat as an unsafe and unsound practice any material failure
by a savings association to comply with a capital plan or capital directive. The
sanctions and penalties that could be imposed range from restrictions on
branching or on the activities of the institution, to restrictions on the
ability to obtain FHLB advances, to termination of insurance of accounts
following appropriate proceedings, to the appointment of a conservator or
receiver. A savings association not in full compliance with the capital
standards could apply for a limited exemption from sanctions. If the exemption
is granted, the savings association would still remain subject to restrictions
on growth.
OTS staff policies specify that savings associations failing any one of
their minimum regulatory capital requirements may not increase their total
assets during any quarter in excess of an amount equal to net interest credited
during the quarter. Under these policies, associations that have submitted
capital plans that are rejected by the District Director or that have had
capital plans approved but do not meet the targets or requirements of the
<PAGE>
capital plan may not make any new loans or investments except with the prior
written approval of the District Director. Such approval will only be granted
when the proposed loan or investment is reasonable in the context of the
association's operations and does not significantly increase the risk profile of
the savings association.
In addition to requiring generally applicable capital standards for
savings associations, the Director of OTS may establish the minimum level of
capital for a savings association at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such association in light of the particular circumstances of the association.
The Director of OTS may treat the failure of any savings association to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings association which fails to maintain capital at
or above the minimum level required by the OTS to submit and adhere to a plan
for increasing capital. Such an order may be enforced in the same manner as an
order issued by the FDIC.
Under FIRREA, the capital standards applicable to savings associations
must be no less than those applicable to national banks. Effective December 31,
1990, of regulations implementing more stringent core capital requirements for
national banks. The OCC regulations establish a new minimum core capital ratio
of 3% for the most highly rated banks, with at least an additional 100 to 200
basis point "cushion" amount of additional capital required on a case-by-case
basis, considering the quality of risk management systems and the overall risk
in individual banks.
Savings institutions with more than a "normal" level of interest rate
risk to maintain additional total capital. A savings institution's interest rate
risk will be measured in terms of the sensitivity of its "net portfolio value"
to changes in interest rates. Net portfolio value is defined, generally, as the
present value of expected cash inflows from existing assets and off-balance
sheet contracts less the present value of expected cash outflows from existing
liabilities. A savings institution will be considered to have a "normal" level
of interest rate risk exposure if the decline in its net portfolio value after
an immediate 200 basis point increase or decrease in market interest rates
(whichever results in the greater decline) is less than two percent of the
current estimated economic value of its assets. A savings institution with a
greater than normal interest rate risk will be required to deduct from total
capital, for purposes of calculating its risk-based capital requirement, an
amount (the "interest rate risk component") equal to one-half the difference
between the institution's measured interest rate risk and the normal level of
interest rate risk, multiplied by the economic value of its total assets.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital will be based on
the institution's Thrift Financial Report filed two quarters earlier.
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
<PAGE>
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval of the OTS. In their discretion, the federal
banking regulators may also impose the foregoing sanctions on an
undercapitalized institution if the regulators determine that such actions are
necessary to carry out the purposes of the prompt corrective action provisions.
If an institution's ratio of tangible capital to total assets falls below a
"critical capital level," the institution will be subject to conservatorship or
receivership within 90 days unless periodic determinations are made that
forbearance from such action would better protect the deposit insurance fund.
Unless appropriate findings and certifications are made by the appropriate
federal bank regulatory agencies, a critically undercapitalized institution must
be placed in receivership if it remains critically undercapitalized on average
during the calendar quarter beginning 270 days after the date it became
critically undercapitalized.
Federal banking regulators, including the OTS, have adopted regulations
implementing the prompt corrective action provisions of FDICIA. Under these
regulations, the federal banking regulators will measure a depository
institution's capital adequacy on the basis of the institution's total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). Under the regulations, a savings association that is not
subject to an order or written directive to meet or maintain a specific capital
level will be deemed "well capitalized" if it also has: (i) a total risk-based
capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0%
or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings association is a savings association that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings
association has a composite 1 CAMEL rating). An "undercapitalized institution"
is a savings association that has (i) a total risk-based capital ratio less than
8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0% (or 3.0% if the association has a composite 1
CAMEL rating). A "significantly undercapitalized" institution is defined as a
savings association that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%. A "critically undercapitalized" savings
<PAGE>
association is defined as a savings association that has a ratio of "tangible
equity" to total assets of less than 2.0%. Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related surplus) less all
intangibles other than qualifying supervisory goodwill and certain purchased
mortgage servicing rights. The OTS may reclassify a well capitalized savings
association as adequately capitalized and may require an adequately capitalized
or undercapitalized association to comply with the supervisory actions
applicable to associations in the next lower capital category if the OTS
determines, after notice and an opportunity for a hearing, that the savings
association is in an unsafe or unsound condition or that the association has
received and not corrected a less-than-satisfactory rating for any CAMEL rating
category. At June 30, 1995, the Bank was "well capitalized" under OTS
Regulations.
The table below presents the Bank's capital position at June 30, 1995,
relative to its various minimum regulatory capital requirements under the prompt
corrective regulations.
<TABLE>
<CAPTION>
Percent
of
Amount Assets(1)
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible equity ................................ $5,930 12.60%
Tangible equity requirement .................... 704 1.50
------ -----
Excess ....................................... $5,226 11.10%
====== =====
Tier 1 or leverage capital ..................... $5,930 12.60%
Tier 1 or leverage capital requirement ......... 1,876 4.00
------ -----
Excess ....................................... $4,054 8.60%
====== =====
Tier 1 Risk-based capital ...................... $5,930 23.50%
Tier 1 Risk-based capital requirement .......... 1,011 4.00
------ -----
Excess ....................................... $4,919 19.50%
====== =====
Risk-based capital ............................. $6,184 24.50%
Risk-based capital requirement ................. 2,023 8.00
------ -----
Excess ....................................... $4,161 16.50%
====== =====
</TABLE>
(1) Based upon adjusted total assets for purposes of the tangible equity
and Tier 1 or leverage capital requirements, and risk-weighted assets
for purposes of the Tier 1 risk-based and risk-based capital
requirements.
Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
<PAGE>
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines become effective on August
9, 1995. The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business. The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory sanctions. Management believes that the
Bank already meets substantially all the standards adopted in the interagency
guidelines, and therefore does not believe that implementation of these
regulatory standards will materially affect the Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the Federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July 10,
1995, the Federal banking agencies, including the OTS, issued proposed
guidelines relating to asset quality and earnings. Under the proposed
guidelines, a savings institution
should maintain systems, commensurate with its size and the nature and scope of
its operations, to identify problem assets and prevent deterioration in those
assets as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. Management believes that
the asset quality and earnings standards, in the form proposed by the banking
agencies, would not have a material effect on the Bank's operations.
Deposit Insurance. The Bank is required to pay assessments based on a
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions to maintain the designated
reserve ratio of the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
Under the risk-based deposit insurance assessment system adopted by the
FDIC, the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations.
Based on the data reported to regulators for the date closest to the last day
of the seventh month preceding the semi-annual assessment period, institutions
are assigned to one of three capital groups -- well capitalized, adequately
capitalized or undercapitalized -- using the same percentage criteria as under
the prompt corrective action regulations. See " -- Prompt Corrective Regulatory
Action." Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
<PAGE>
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken. The assessment rate for SAIF-insured institutions ranges from
0.23% of deposits for well capitalized institutions in Subgroup A to 0.31% of
deposits for undercapitalized institutions in Subgroup C.
The FDIC has recently amended the risk-based assessment schedule to
significantly lower the deposit insurance assessment rate for most commercial
banks and other depository institutions with deposits insured by the Bank
Insurance Fund ("BIF") effective during the semi-annual period after the BIF
achieves its designated reserve ratio of 1.25% of BIF-insured deposits. Under
the new BIF assessment schedule, the assessment rates of BIF-insured
institutions will range from 0.31% of insured deposits for undercapitalized
BIF-institutions in supervisory Subgroup C to 0.04% of deposits for
well-capitalized institutions in supervisory Subgroup A which constitute over
90% of BIF-insured institutions. The FDIC has indicated that it believes that
the BIF achieved the designated reserve ratio during the quarter ended June 30,
1995 and will refund any excess premiums paid by BIF-insured institutions as
soon as the reserve ratio is confirmed. The FDIC does not anticipate that the
assessment rate for SAIF-insured institutions in even the lowest risk-based
premium category will fall below the current 0.23% of insured deposits before
the year 2002 absent a recapitalization of the SAIF. The new BIF assessment
schedule would result in a substantial disparity in the deposit insurance
premiums paid by BIF and SAIF members and could place SAIF-insured savings
associations such as the Bank at a significant competitive disadvantage to
BIF-insured institutions.
SAIF members are generally prohibited from converting to the status of
BIF members, or merging with or transferring assets to a BIF member before the
date on which the SAIF first meets or exceeds the designated reserve ratio. The
FDIC, however, may approve such a transaction in the case of a SAIF member in
default or if the transaction involves an insubstantial portion of the deposits
of each participant. In addition, mergers, transfers of assets and assumptions
of liabilities may be approved by the appropriate bank regulator so long as
deposit insurance premiums continue to be paid to the SAIF for deposits
attributable to the SAIF members plus an adjustment for the annual rate of
growth of deposits in the surviving bank without regard to subsequent
acquisitions. Each depository institution participating in a SAIF-to-BIF
conversion transaction is required to pay an exit fee to SAIF and an entrance
fee to BIF. A savings association that adopts a commercial bank or savings bank
charter prior to the date on which the SAIF first meets or exceeds the
designated reserve ratio must remain a SAIF member.
A number of proposals are being considered to recapitalize the SAIF in
order to eliminate the premium disparity. Proposed legislation recently approved
by the U.S. House of Representatives Banking Committee provides for a one time
assessment currently estimated to be up to 0.90% (i.e., 90 basis points) of
insured deposits that would fully capitalize the SAIF. Under this proposal, the
BIF and SAIF would be merged into one fund on January 1, 1998. It is unknown
whether this legislation will be enacted or whether premiums for either BIF or
SAIF members will be adjusted in the future by the FDIC or by legislative
action. If a special assessment as described above were to be required, it would
result in a one-time charge to the Bank of up to $359,000 before taxes, assuming
the special assessment is based on deposits held at March 31, 1995, as is
currently proposed. If such a special assessment were required and the SAIF as a
result was fully recapitalized, it could have the effect of reducing the Bank's
future deposit insurance premiums to the SAIF, thereby increasing net income in
future periods.
<PAGE>
The bill also would require federal savings banks to convert their
charters to that of commercial banks or state savings associations or savings
banks within two years. Under current tax laws, a savings bank converting to a
commercial bank charter must recapture into taxable income the amount of its tax
bad debt reserve that would not have been allowed if the savings bank had
operated as a commercial bank. The tax associated with the recapture of all or
part of its tax bad debt reserve would immediately reduce the capital of the
savings bank even though such tax would actually be paid out over the succeeding
years. At June 30, 1995, retained earnings included $692,000 for which no
provisions for federal income tax has been provided. The Bank cannot predict at
this time if this bill ultimately will be enacted in its current form or, if
enacted, whether such bill would remedy some or all of the related adverse
financial and tax effects.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings associations,
the FDIC will take into account whether the savings association is meeting with
the Tier 1 capital requirement for state non-member banks of 4% of total assets
for all but the most highly rated state non-member banks.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $54.0 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of June 30, 1995, the Bank met its reserve
requirements.
Transactions with Affiliates. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association (such as the Corporation) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
<PAGE>
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer or
greater than 10% stockholder of a savings association and certain affiliated
interests of such persons, may not exceed, together with all other outstanding
loans to such person and affiliated interests, the association's loans to one
borrower limit (generally equal to 15% of the institution's unimpaired capital
and surplus) and all loans to such persons may not exceed the institution's
unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans,
above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of a savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person), as
to which such prior board of director approval is required, as being the greater
of $25,000 or 5% of capital and surplus (up to $500,000). Further, Section 22(h)
requires that loans to directors, executive officers and principal stockholders
be made on terms substantially the same as offered in comparable transactions to
other persons. Section 22(h) also prohibits a depository institution from paying
the overdrafts of any of its executive officers or directors.
Savings associations are further subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to executive
officers and the restrictions of 12 U.S.C. ss. 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires that loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, and imposes reporting requirements for and additional restrictions on
the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Regulation of the Corporation
General. The Corporation is a unitary savings and loan holding company
within the meaning of the Home Owners' Loan Act. As such, the Corporation is
registered with the OTS and subject to OTS regulations, examinations,
supervision and reporting requirements.
<PAGE>
Activities Restrictions. The Board of Directors of the Corporation
presently intends to operate the Corporation as a unitary savings and loan
holding company. There are generally no restrictions on the activities of a
unitary savings and loan holding company. However, if the director of OTS
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of an activity constitutes a serious risk to
the financial safety, soundness, or stability of its subsidiary savings
association, the Director of OTS may impose such restrictions as deemed
necessary to address such risk including limiting (i) payment of dividends by
the savings association, (ii) transactions between the savings association and
its affiliates, and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. 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 QTL Test, then such unitary holding company shall also presently
become subject to the activities restrictions applicable to multiple holding
companies and unless the savings association requalifies as a Qualified Thrift
Lender within one year thereafter, register as, and become subject to, the
restrictions applicable to a bank holding company.
If the Corporation were to acquire control of another savings
association, other than through merger or other business combination with the
Bank, the Corporation 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 Corporation and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. The Home Owners' Loan Act,
as amended by FIRREA, 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, upon prior notice to, and no objection by the OTS, 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 institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the Federal Savings and Loan
Insurance Corporation 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 as permissible for bank holding companies, unless the Director of
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 OTS prior to being engaged in by a multiple holding
company.
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings association or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Under certain circumstances, a registered savings and loan holding company is
permitted to acquire, with the approval of the Director of OTS, up to 15% of the
voting shares of an under-capitalized savings association pursuant to a
"qualified stock issuance" without that savings association being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
<PAGE>
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings association and transactions between the savings association and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings association, other
than a subsidiary savings association, or of any other savings and loan holding
company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions 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 institutions).
The OTS has recently amended its regulations to permit federal
associations to branch in any state or states of the United States and its
territories. Except in supervisory cases or when interstate branching is
otherwise permitted by state law or other statutory provision, a federal
association may not establish an out-of-state branch unless (i) the federal
association qualifies as a "domestic building and loan association" under
ss.7701(a)(19) of the Internal Revenue Code and the total assets attributable to
all branches of the association in the state would qualify such branches taken
as a whole for treatment as a domestic building and loan association and (ii)
such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings association subsidiaries of
banking holding companies. Federal associations generally may not establish new
branches unless the association meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.
The Bank Holding Company Act of 1956 authorizes the Federal Reserve
Board to approve an application by a bank holding company to acquire control of
any savings association. Pursuant to rules promulgated by the Federal Reserve
Board, owning, controlling or operating a savings association is a permissible
activity for bank holding companies if the savings association engages only in
deposit-taking activities and lending and other activities that are permissible
for bank holding companies. In approving such an application, the Federal
Reserve Board may not impose any restriction on transactions between the savings
association and its holding company affiliates except as required by Sections
23A and 23B of the Federal Reserve Act.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
<PAGE>
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual deposit growth
increment. In addition, the transaction must comply with the restrictions on
interstate acquisitions of commercial banks under the Bank Holding Company Act.
Taxation
General. The Corporation and the Bank file a consolidated tax return
for federal income tax purposes. Consolidated returns have the effect of
eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
Federal Income Taxation. Thrift institutions are subject to the
provisions of the Internal Revenue Code of 1986, as amended (the "Code") in the
same general manner as other corporations. However, institutions such as Lincoln
Federal which meet certain definitional tests and other conditions prescribed by
the Code may benefit from certain favorable provisions regarding their
deductions from taxable income for annual additions to their bad debt reserve.
For purposes of the bad debt reserve deduction, loans are separated into
"qualifying real property loans," which generally are loans secured by interests
in certain real property, and nonqualifying loans, which are all other loans.
The bad debt reserve deduction with respect to nonqualifying loans must be based
on actual loss experience. The amount of the bad debt reserve deduction with
respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method").
Lincoln Federal historically elected to use the percentage of taxable
income method. Under the percentage of taxable income method, the bad debt
reserve deduction for qualifying real property loans is computed as a
percentage, which Congress has reduced from as much as 60% in prior years to 8%
of taxable income, with certain adjustments, effective for taxable years
beginning after 1986. The allowable deduction under the percentage of taxable
income method (the "percentage bad debt deduction") for taxable years beginning
before 1987 was scaled downward in the event that less than 82% of the total
dollar amount of the assets of an association were within certain designated
categories. When the percentage method bad debt deduction was lowered to 8%, the
82% qualifying assets requirement was lowered to 60%. For all taxable years,
there is no deduction in the event that less than 60% of the total dollar amount
of the assets of an association falls within such categories. Moreover, in such
case, Lincoln Federal could be required to recapture, generally over a period of
up to four years, their existing bad debt reserve. As of June 30, 1995, more
than the required amount of the Bank's total assets fell within such category.
The bad debt deduction under the percentage of taxable income method is
subject to certain limitations. First, the amount added to the reserve for
losses on qualifying real property loans may not exceed the amount necessary to
increase the balance of such reserve at the close of the taxable year to 6% of
such loans outstanding at the end of the taxable year. Further, the addition to
the reserve for losses on qualifying real property loans cannot exceed the
amount which, when added to that year's addition to the bad debt reserve for
losses on nonqualifying loans, equals the amount by which 12% of total deposits
or withdrawable accounts of depositors at year-end exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year. Finally, the
percentage bad debt deduction under the percentage of taxable income method is
reduced by the deduction for losses on nonqualifying loans.
<PAGE>
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction are not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount is included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
State Income Taxation. The Commonwealth of Kentucky imposes no income
or franchise taxes on savings institutions. Lincoln Federal is subject to an
annual Kentucky ad valorem tax. This tax is 0.1% of the Bank's savings accounts,
common stock, capital and retained income with certain deductions allowed for
amounts borrowed by depositors and for securities guaranteed by the U.S.
Government or certain of its agencies. For the fiscal year ended June 30, 1995,
the amount of such expense for the Bank was $42,766.52.
<PAGE>
Properties
The following table sets forth the location and certain additional
information regarding the Bank's offices at June 30, 1995.
<TABLE>
<CAPTION>
Year Owned or Square
Opened Leased Footage Deposits Net Book Value
------ ------ ------- -------- --------------
<S> <C> <C> <C> <C> <C>
Main Office:
111 West Main Street
Stanford, Kentucky ........................ 1926 Owned 5,000 $ 28,417 $ 54,473
Branch Offices:
Hustonville Street ........................ 1974 Owned 1,800 6,460 144,365
Liberty, Kentucky
614 East Main Street
Stanford, Kentucky ........................ 1985 Owned 1,800 5,575 118,542
Loan Production Office:
45 East Main Street
Mt. Vernon, Kentucky ...................... 1995 Leased 1,000 -- 1,159
-------- --------
Total .................................. $ 40,452 $318,539
======== ========
</TABLE>
Intrieve, Incorporated, Cincinnati, Ohio, performs data processing and
record keeping services for Lincoln Federal.
<PAGE>
FIRST SOUTHERN BANCORP
FSB is a Kentucky corporation and bank holding company, registered
under BHCA. Headquartered in Stanford, Kentucky, FSB conducts a banking business
through its five subsidiary banks. FSB's subsidiary banks operate 13 banking
offices in Stanford, Crab Orchard, Hustonville and five other Kentucky
communities. As of March 31, 1996, on a consolidated basis, FSB had total assets
of more than $105 million, deposits of $72 million, and net loans receivables of
$60 million. FSB is primarily engaged in the business of attracting savings
deposits from the general public and investing such funds in mortgage loans on
residential real estate and various types of consumer and other loans,
investment securities, and mortgage-backed securities.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Record holders of Common Stock are entitled to appraisal rights under
Section 262 of the DGCL. A person having a beneficial interest in shares of
Common Stock held of record in the name of another person, such as a broker or
nominee, must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect whatever appraisal
rights the beneficial owner may have. Except as set forth herein, stockholders
of Lincoln will not be entitled to appraisal rights in connection with the
Merger.
The following discussion is not a complete statement of the law
pertaining to appraisal rights under the DGCL and is qualified in its entirety
by the full text of Section 262 which is reprinted in its entirety as Appendix F
to this Proxy Statement.
Under the DGCL, record holders of shares of Common Stock who follow the
procedures set forth in Section 262 will be entitled to have their shares
appraised by the Delaware Court of Chancery ("Chancery Court") and to receive
payment of the "fair value" of those shares, exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, if any, as determined by the Chancery Court. Lincoln
stockholders are entitled to appraisal rights in the Merger because the Merger
Consideration will be paid exclusively in cash.
Under Section 262, when a Merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Meeting, Lincoln must notify each
of the holders of its stock, not less than 20 days prior to the Meeting, that
appraisal rights are available and must include a copy of Section 262 in each
such notice. This Proxy Statement constitutes the notice required by Section
262. Any stockholder who wishes to exercise appraisal rights should review the
following discussion and Appendix F carefully because failure to comply with the
specified procedures in a timely manner will cause the stockholder to forfeit
the appraisal rights available under the DGCL.
A holder of Common Stock wishing to exercise appraisal rights must
deliver to the Secretary of Lincoln a written demand for appraisal of those
shares before the vote on the Acquisition Proposal at the Meeting. In addition,
the stockholder must be the record holder of those shares on the date the
written demand for appraisal is made and must hold the shares continuously
through the Effective Time and must not vote in favor of the Acquisition
Proposal. Failure to vote against the Acquisition Proposal will not constitute a
waiver of the stockholder's dissenters' rights if all other statutory
requirements are satisfied; a vote against the Acquisition Proposal will not
itself satisfy the notice requirements of Section 262.
<PAGE>
Only a holder of record of shares of Common Stock is entitled to assert
appraisal rights for the shares of Common Stock registered in that holder's
name. A demand for appraisal should be executed by or on behalf of the holder of
record fully and correctly, as the holder's name appears on the holder's stock
certificates. If the shares of Common Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian, or custodian, execution of the demand
should be made in that capacity, and if the shares of Common Stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common, the
demand should be executed by or on behalf of all joint owners. An authorized
agent, including one or more joint owners, may execute a demand for appraisal on
behalf of a holder of record; however, the agent must identify the record owner
or owners and, in executing the demand, must expressly disclose that the agent
is agent for such owner or owners. A record holder, such as a broker, who holds
shares of Common Stock as nominee for several beneficial owners may exercise
appraisal rights with respect to the shares of Common Stock held for one or more
beneficial owners while not exer cising such rights with respect to the shares
of Common Stock held for other beneficial owners; in such a case, the written
demand should set forth the number of shares of Common Stock for which appraisal
is sought and, when no number is expressly mentioned, the demand will be
presumed to cover all shares of Common Stock held in the name of the record
owner. Stockholders who hold their shares in brokerage accounts or other nominee
forms and who wish to exercise appraisal rights must take all necessary steps in
order that a demand for appraisal is made by the record holder of such shares.
Such stockholders are urged to consult with their brokers to determine the
appropriate procedures for making a demand for appraisal by the record holder.
All written demands for appraisal should be sent or delivered to
Lincoln Financial Bancorp, Inc., 111 West Main Street, Stanford, Kentucky 40484,
Attention: Minor Teague, Secretary, so as to be received prior to the vote of
stockholders on the Acquisition Proposal at the Meeting.
Within ten days after the Effective Time of the Merger, Lincoln, as the
surviving corporation in the Merger, must send a notice as to the effectiveness
of the Merger to each person who has satisfied the appropriate provisions of
Section 262 and is entitled to appraisal rights under Section 262. Within 120
days after the Effective Time, but not thereafter, Lincoln, or any holder of
Common Stock who has complied with the foregoing procedures and is entitled to
appraisal rights under Section 262, may file a petition in the Chancery Court
demanding a determination of the fair value of the shares. Lincoln is under no
obligation and has no present intention to file a petition with respect to the
appraisal of the fair value of the shares of Common Stock. Accordingly, it is
the obligation of the stockholders to initiate all necessary action to perfect
their appraisal rights within the time prescribed in Section 262. A holder of
Common Stock will fail to perfect, or effectively lose, the right to appraisal
if no petition for appraisal of shares of Common Stock is filed within 120 days
after the Effective Time.
Within 120 days after the Effective Time, any holder of Common Stock
who has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from Lincoln a statement setting
forth the aggregate number of shares of Common Stock with respect to which
demands for appraisal have been received and the aggregate number of holders of
such shares. These statements must be mailed within ten days after a written
request therefor has been received by Lincoln, as the case may be.
If a petition for an appraisal is timely filed, after a hearing on the
petition, the Chancery Court will determine the holders of Common Stock entitled
to appraisal rights and will appraise the "fair value" of the shares of Common
Stock, exclusive of any element of value arising from the accomplishment or
<PAGE>
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. Stockholders considering
seeking appraisal should be aware that the fair value of their shares of Common
Stock, as determined under Section 262, could be more than, the same as, or less
than the value of the consideration they would receive pursuant to the Agreement
if they did not seek appraisal of their shares. The Delaware Supreme Court has
stated that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in the appraisal proceedings. In addition, Delaware
courts have decided that the statutory appraisal remedy, depending on factual
circumstances, may or may not be a dissenter's exclusive remedy. The Chancery
Court will also determine the amount of interest, if any, to be paid upon the
amounts to be received by persons whose shares have been appraised. The costs of
the action may be determined by the Chancery Court and taxed upon the parties as
the Chancery Court deems equitable. The Chancery Court may also order that all
or a portion of the expenses incurred by any holder of Common Stock in
connection with an appraisal, including, without limitation, reasonable
attorneys' fees and the fees and expenses of experts used in the appraisal
proceeding, be charged pro rata against the value of all of the shares of Common
Stock entitled to appraisal.
Any holder of Common Stock who has duly demanded an appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote those shares for any purpose or be entitled to the payment of dividends or
other distributions on those shares (except dividends or other distributions
payable to holders of record of shares of Common Stock as of a date before the
Effective Time).
If any holder of Common Stock who demands appraisal of shares under
Section 262 fails to per fect, or effectively withdraws or loses the right to
appraisal, as provided in the DGCL, the stockholder's shares will be converted
into the Merger Consideration in accordance with the Agreement. A holder may
withdraw a demand for appraisal by delivering to Lincoln a written withdrawal of
the demand for appraisal and acceptance of the Merger, except that any attempt
to withdraw made more than 60 days after the Effective Time will require the
written approval of Lincoln.
Failure to follow the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of those rights.
INDEPENDENT AUDITORS
Potter & Company, LLP, independent public accountants, have served as
the Corporation's auditors for the 1995 fiscal year. A representative of Potter
& Company, LLP is expected to be present at the Meeting. This representative
will have the opportunity to make a statement if he desires to do so and will be
available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
As a result of the proposed Merger, it is not currently anticipated
that Lincoln will hold an annual meeting following the end of its fiscal year
ended June 30, 1996. Were such an annual meeting to be held, in order to be
eligible for inclusion in the Corporation's proxy materials for the Meeting, any
stockholder proposal to take action at such Meeting must have been received at
the Corporation's executive offices at 111 West Main Street, Stanford, Kentucky
40484, no later than August __, 1996. Any such proposal is subject to the
<PAGE>
requirements of the proxy rules adopted under the Exchange Act.
MISCELLANEOUS
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matters should properly come before the Meeting, the
persons named in the accompanying proxy will vote the shares represented by such
proxies or such matter as determined by a majority of the Board of Directors.
The cost of solicitation of proxies will be borne by the Corporation. The
Corporation will reimburse brokerage firms and other custodians, nominees, and
fiduciaries for reasonable expenses incurred by them in sending proxy material
to the beneficial owners of Common Stock. In addition to solicitations by mail,
directors, officers, and regular employees of the Corporation may solicit
proxies personally, by telegraph, or telephone without additional compensation.
BY ORDER OF THE BOARD OF DIRECTORS
Minor Teague
Secretary
Stanford, Kentucky
July __, 1996
<PAGE>
APPENDIX A
1995 ANNUAL REPORT TO STOCKHOLDERS
September 25, 1995
To Our Stockholders:
It gives me great pleasure to give you our progress and profitability
report for Lincoln Financial Bancorp, Inc., and its principal subsidiary,
Lincoln Federal Savings Bank for the fiscal year ended June 30, 1995.
Total consolidated net income for the year ended June 30, 1995, was
$257,604. Consolidated stockholder's equity was $7,545,705 at June 30, 1995,
which represents 15.65% of total assets. For the year ended June 30, 1995,
return on average equity was 3.42% and return on average assets was 0.54%.
We look forward to our second full year as a stock company. Your board
of directors and the management team are committed to protecting and building
the value of your investment. We believe that this can best be accomplished by
delivering high quality services to our customers and community. We appreciate
the support of our customers, employees and stockholders.
Sincerely,
/s/ Bruce Edgington
Bruce Edgington
President and
Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For the Year Ended
June 30, Change
---------------------- ---------------------
1995 1994 Amount Percent
------ ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Results of Operations:
Interest income..................................... $ 3,283 $ 3,162 $ 121 3.83
Interest expense................................. 1,694 1,682 12 .71
Net interest income............................... 1,589 1,480 109 7.36
Provision for loan losses......................... 3 88 (85) (96.59)
Net interest income after provision
for loan losses................................. 1,586 1,392 194 13.94
Non-interest income............................... 141 112 29 25.89
Non-interest expense.............................. 1,351 1,035 316 30.53
Income taxes...................................... 118 173 (55) (31.79)
Net earnings...................................... 258 296 (38) (12.84)
<CAPTION>
At June 30, Change
---------------------- ---------------------
1995 1994 Amount Percent
------ ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Position:
Total assets......................................... $ 48,218 $ 47,709 $ 509 1.07
Loans receivable and mortgage-backed securities 37,031 34,753 2,278 6.55
Deposits............................................. 40,452 40,257 195 .48
Stockholders' equity................................. 7,546 7,328 218 2.97
Number of shares outstanding......................... 423,200 423,200 -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Selected Financial and Other Data:
At June 30,
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total Amount of:
Assets..................................... $ 48,218 $ 47,709 $ 46,933 $ 45,559 $ 45,181
Loans, net................................. 36,954 34,654 32,433 32,358 35,264
Cash and investment securities (1)......... 10,223 12,088 13,519 11,846 8,318
Mortgage-backed securities................. 77 99 119 451 689
Deposits (2)............................... 40,452 40,257 43,446 42,480 42,404
Stockholders' equity (3)................... 7,546 7,328 3,396 2,972 2,698
<CAPTION>
Operating Data:
Year Ended June 30,
--------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 3,283 $ 3,162 $ 3,383 $ 3,862 $ 4,209
Interest expense............................ 1,694 1,682 1,943 2,518 2,968
Net interest income before provision
for loan losses........................... 1,589 1,480 1,440 1,344 1,241
Provision for loan losses................... 3 88 10 86 99
Non-interest income......................... 141 112 88 98 85
Non-interest expense........................ 1,351 1,035 902 913 855
Income before income taxes.................. 376 469 616 443 372
Federal income taxes........................ 118 173 193 169 133
---------- ---------- ---------- ---------- -----------
Net income.................................. $ 258 $ 296 $ 423 $ 274 $ 239
========== ========== ========== ========== ===========
Net earnings per share (4).................. 0.64 N/A N/A N/A N/A
Book value per share (5).................... $ 18.99 $ 18.61 N/A N/A N/A
Number of:
Loans outstanding......................... 1,761 1,628 1,572 1,558 1,664
Deposit accounts.......................... 6,460 6,207 5,942 5,957 6,071
Offices (6)............................... 4 3 3 3 3
</TABLE>
- --------------------
<PAGE>
(1) Cash and investment securities consist of cash, interest-earning deposits,
certificates of deposit, and investment securities.
(2) Deposits include certificates of deposit, passbook club accounts, NOW
accounts and other deposit accounts.
(3) Represents retained earnings only prior to fiscal year 1994. For fiscal
year 1994, includes net proceeds of approximately $3.0 million from the
initial public offering of Lincoln Financial Bancorp, Inc. (the "Company")
as part of the mutual-to-stock conversion of Lincoln Federal Savings Bank
(the "Bank") on June 28, 1994.
(4) Not meaningful since the Company's common stock (the "Common Stock") was
not issued until June 28, 1994.
(5) Per share calculations are based upon the total number of shares out-
standing, less the unallocated shares held by the Employee Stock Ownershi
Plan (25,789 shares at June 30, 1995, and 29,440 shares at June 30, 1994).
(6) All the Bank's offices are full-service offices except the Loan Productio
Office located in Mt. Vernon, Kentucky.
<PAGE>
Key Operating Ratios:
<TABLE>
<CAPTION>
For the Year Ended June 30,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (net income divided
by average total assets ........................ 0.54% 0.63% 0.91%(1) 0.61% 0.55%
Return on equity (net income divided
by average equity) ............................. 3.42(2) 8.35 13.17 9.40 8.85
Equity-to-assets ratio (average ................ 15.89(3) 7.52
equity divided by average total ................ 6.93 6.45 6.18
assets)
Interest rate spread (combined weighted
average interest rate earned less .............. 2.71 2.89 2.83 2.69 2.50
combined weighted average interest
rate cost) (4)
Ratio of non-interest expense to ............. 2.85 2.20 1.95 2.02 1.96
average total assets
Average daily liquidity ratio (4) .............. 20.48(5) 28.84 31.50 28.94 19.96
Asset Quality Ratios:
Nonperforming assets to total assets ........... 0.17 0.47 0.55 3.89 1.66
at end of period
Allowance for loan losses ................. 313.09(6) 122.77(7) 82.08(7) 11.36 15.45
to nonperforming loans (4)
Allowance for loan losses to total ............. 0.71 0.79 0.61 0.59 0.33
loanreceivable, net (4)
Allowance for loan losses to ................... 0.73 0.82 0.61 0.57 0.32
average loans (4)
Net charge-offs to average loans(4) ............ 0.05 0.03 0.02 0.03 0.21
Capital Ratios:
Retained earnings to total assets at 7.99 7.74 7.24 6.52 5.97
end of period...................................
Average retained earnings to 8.19(8) 7.52 6.93 6.45 6.18
average assets..................................
</TABLE>
<PAGE>
(1) Reflects increase in the Bank's net interest income due to declining
interest rate environment, in which the costs of the Bank's deposits
declined at a more rapid pace than the yield on its interest-earning
assets.
(2) Reflects slight decrease in net income, plus a significant infusion of
capital due to the Company's initial public offering which occurred at
the end of Fiscal Year 1994.
(3) Reflects additional equity influx due to conversion as of June 28,
1994.
(4) Reflects results solely of the Bank, which is the sole Business of the
Company.
(5) Reflects liquidation of investments and subsequent reinvestment in
loans.
(6) Reflects the decrease in non-performing loans of $140,000 to $84,000 at
June 30, 1995 as compared to $224,000 at June 30, 1994.
(7) Reflects increase in loan allowance in response to regulatory comment
as well as heightened loan collection effort that resulted in fewer
non-performing loans.
(8) Reflects continued increase in retained earnings due to profitable
operations while maintaining a relatively constant level of average
assets.
<PAGE>
BUSINESS OF THE COMPANY AND THE BANK
Lincoln Financial Bancorp, Inc.
The Company was organized at the direction of the Board of Directors of
the Bank for the purpose of becoming a holding company to own all of the
outstanding capital stock of the Bank. Upon consummation of the conversion of
the Bank from mutual to stock form on June 28, 1994, the Bank became a wholly
owned subsidiary of the Company. The primary assets of the Company are the stock
of the Bank, a note receivable from the Company's Employee Stock Ownership Plan,
and investments in U.S. Treasury Obligations. At June 30, 1995, the Company had,
on a consolidated basis, approximately $ 48.2 million in assets, $ 40.4 million
in deposits and $ 7.5 million in stockholders' equity.
Lincoln Federal Savings Bank
The Bank was incorporated as a state-chartered building and loan
association in 1926, converted to a federal mutual savings and loan association
in 1936 and to a federal mutual savings bank in 1989. The Bank obtained federal
deposit insurance and became a member of the Federal Home Loan Bank of
Cincinnati in 1936. On June 28, 1994, the Bank converted from mutual to stock
form and simultaneously became a wholly owned subsidiary of the Company. The
Bank operates a main office in Stanford, Kentucky and two full service branch
offices, located in Stanford and Liberty, Kentucky and a Loan Production Office,
located in Mt. Vernon, Kentucky, opened in April 1995.
The Bank derives its income principally from interest earned on loans
and, to a lesser extent, investment securities. The Bank's principal expenses
are interest expense on deposits and noninterest expenses such as salary and
employee benefits, occupancy and equipment, and other expenses such as insurance
deposit premiums, depreciation and advertising. Funds for these activities are
provided by deposits, repayments of outstanding loans, maturing investments and
mortgage-backed securities and operating revenues.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
On June 28, 1994, the Bank converted from mutual to stock form and
became a wholly owned subsidiary of an already formed holding company, Lincoln
Financial Bancorp, Inc. The Company's sole operations consist of those of the
Bank and the Bank's subsidiary, Lincoln County Savings and Loan Service
Corporation. Historically, the Bank has functioned as a financial intermediary,
attracting deposits from the general public and using such deposits to make
mortgage loans and, to a lesser extent, consumer loans and to purchase
investment securities. As such, its earnings have depended primarily on its net
interest income, or "spread," which is the difference between the amount it
receives from interest earned on loans and investments ("interest-earning
assets") and the amount it pays in interest on its deposits ("interest-bearing
liabilities"). In addition, the Bank's provision for possible losses
significantly affects net income from year to year. Results of operations are
also dependent upon the level of the Bank's non-interest income, including fee
income and service charges, and by the level of its non-interest expenses, the
most significant component of which is salaries and employee benefits.
<PAGE>
The operations of the Bank are significantly affected by prevailing
economic conditions and the monetary, fiscal and regulatory policies of
governmental agencies. Lending activities are influenced by the demand for and
supply of housing, competition among lenders, the absolute level of interest
rates and the availability of funds. Deposit flows and costs of funds are
likewise heavily influenced by prevailing market rates of interest on competing
investment alternatives, account maturities and the levels of personal income
and savings in the Bank's market areas.
The Bank's interest-earning assets have historically concentrated in
real estate-collateralized instruments, principally single-family loans and
mortgage-backed securities and, to a lesser extent, in consumer-related loans
such as home equity lines of credit and loans secured by liens on automobiles,
savings accounts and farm equipment. Since fiscal year 1992, the Bank has also
invested a significant portion of its assets in investment securities consisting
primarily of U.S. government securities. Its source of funding for these
investments has principally been deposits placed with the Bank by consumers in
the market areas it serves.
Asset/Liability Management
Key components of a successful asset/liability strategy are the
monitoring and managing of interest rate sensitivity of both the
interest-earning asset and interest-bearing liability portfolios. The Bank has
employed various strategies intended to minimize the adverse affect of interest
rate risk on future operations by providing a better match between the interest
rate sensitivity between its assets and liabilities. In particular, the Bank's
strategies are intended to stabilize net interest income for the long-term by
protecting its interest rate spread against increases in interest rates. Such
strategies include the origination for portfolio of adjustable-rate mortgage
loans secured by one- to four-family residential real estate and the origination
of consumer and other loans with greater interest rate sensitivities than
long-term, fixed-rate residential mortgage loans. Although customers typically
prefer fixed-rate mortgage loans in a decreasing interest rate environment,
Lincoln Federal has been successful in originating adjustable-rate loans in
recent years. In addition, the Bank has used excess funds to invest in various
short-term investments as well as U.S. Government Treasury and agency securities
and obligations of municipalities with maturities with terms of five years or
less.
Asset/liability management in the form of structuring cash instruments
provide greater flexibility to adjust exposure to interest rates. During periods
of high interest rates, management believes it is prudent to offer competitive
rates on short-term deposits and less competitive rates for long-term
liabilities. This posture allows the Bank to benefit quickly from declines in
interest rates. Likewise, offering more competitive rates on long-term deposits
during the low interest rate periods allows the Bank to extend the repricing
and/or maturity of its liabilities thus reducing its exposure to rising interest
rates.
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
<PAGE>
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income, while conversely during a
period of falling interest rates, a negative gap would result in an increase in
net interest income and a positive gap would negatively affect net interest
income. The Bank had a positive one-year gap of 5.14% at June 30, 1995 so that,
during such period, its net interest income would be positively affected during
periods of rising interest rates and adversely affected during periods of
falling interest rates.
<PAGE>
The following table represents the Bank's interest sensitivity gap between
interest-bearing assets and interest-bearing liabilities at June 30, 1995.
<TABLE>
<CAPTION>
Over One
0-3 4-12 Through Over Five
Months Months Five Years Years Total
------ ------ ---------- ----- -----
(Dollars in thousand)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities ....................... $ 1,052 $ 1,532 $ 4,060 $ -- $ 6,644
Fixed-rate 1-4 dwelling units ............... 6,465 20,175 1,428 5,831 33,899
Mortgage-backed securities .................. -- -- -- 77 77
Other loans ................................. 1,497 431 1,800 23 3,751
Other interest bearing assets ............... 1,882 -- 270 -- 2,152
----- ----- ----- ----- -----
Total .................................. 10,896 22,138 7,558 5,931 46,523
Interest-bearing liabilities:
Passbook savings ............................ 6,280 -- -- -- 6,280
Now, super now checking ..................... 3,738 -- -- -- 3,738
Certificates of deposits .................... 7,738 12,799 9,475 -- 30,012
Borrowings .................................. -- -- -- -- --
----- ----- ----- ----- -----
Total .................................. 17,756 12,799 9,475 -- 40,030
Interest sensitivity gap ......................... $ (6,860) $ 9,339 $ (1,917) $ 5,931 $ 6,493
========= ======== ========= ========= ========
Cumulative interest sensitivity gap .............. $ (6,860) $ 2,479 $ 562 $ 6,493 $ 6,493
========= ======== ========= ========= ========
Ratio of interest-earning assets to
interest-bearing liabilities ................ 61.36% 172.97% 79.77% N/A 116.22%
Ratio of cumulative gap to total assets .......... (14.23)% 5.14% 1.17% 13.47% 13.47%
</TABLE>
<PAGE>
The preceding table was prepared based upon the assumption that loans
will not be repaid before their respective contractual maturity. Further, it is
assumed that fixed maturity deposits are not withdrawn prior to maturity and
that other deposits are withdrawn or repriced within one year. It is also
assumed that regular passbook savings and now accounts are subject to immediate
withdrawal and are presented as repricing within the earliest period presented.
Management of Lincoln Federal does not believe that these assumptions will be
materially different from the Bank's actual experience. However, the actual
interest rate sensitivity of the Bank's asset and liabilities could vary
significantly from the information set forth in the table due to market and
other factors.
Certain shortcomings are inherent in the method of analysis presented
in the table above. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. 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 of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a short
term basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table.
Net Portfolio Value. Historically, the Bank measured its interest rate
sensitivity by computing the "gap" between the assets and liabilities which were
expected to mature or reprice within certain periods, based on assumptions
regarding loan repayment and deposit decay rates formerly provided by the OTS.
However, the OTS now requires the Bank to measure its interest rate risk by
computing estimated changes in its net interest income over a four-quarter
period ("NII") and the net present value of its cash flows from assets,
liabilities and off-balance sheet items ("NPV") in the event of a range of
assumed changes in market interest rates. These computations estimate the effect
on the Bank's NII and NPV of sudden and sustained 1% to 4% increases and
decreases in market interest rates. The Bank's Board of Directors has adopted an
interest rate risk policy which establishes maximum decreases in the Bank's NII
of 20%, 30%, 50% and 75% and maximum decreases in the Bank's estimated NPV of
10%, 15%, 25%, and 50% in the event of 1%, 2%, 3%, and 4% increases and
decreases in market interest rates. The Bank is currently in compliance with
this policy.
The following table sets forth the interest rate sensitivity of the
Bank's net portfolio value as of June 30, 1995 in the event of 1%, 2%, 3%, and
4% instantaneous and permanent increases and decreases in market interest rates,
respectively. These changes are set forth below as basis points, where 100 basis
points equals one percentage point.
<PAGE>
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of Portfolio Value of Assets
in Rates $ Amount $ Change % Change NPV Ratio Basis Point Change
-------- -------- -------- -------- --------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $5,584 ($1,000) (15)% 12.21% (160) bp
+300 bp 6,033 (551) (8)% 13.01% (81) bp
+200 bp 6,361 (224) (3)% 13.55% (26) bp
+100 bp 6,539 (46) (1)% 13.81% (1) bp
0 6,585 13.87% 6 bp
-100 bp 6,583 (2) 0% 13.73% (8) bp
-200 bp 6,707 122 2% 13.87% 6 bp
-300 bp 6,938 353 5% 14.20% 39 bp
-400 bp 7,240 655 10% 14.65% 83 bp
</TABLE>
The OTS adopted a final rule in August of 1993 incorporating an
interest rate risk ("IRR") component into the risk-based capital rules. The new
rule became effective January 1, 1994, with institutions first required to meet
the new standards at July 1, 1994. The IRR component is a dollar amount that
will be deducted from total capital for the purpose of calculating an
institution's risk-based capital requirement and is measured in terms of the
sensitivity of its NPV to changes in interest rates. An institution's IRR is
measured as the change to its NPV as a result of a hypothetical 200 basis point
change in market interest rates. A resulting change in NPV of more than 2% of
the estimated market value of its assets will require the institution to deduct
from its capital 50% of that excess change. The rule provides that the OTS will
calculate the IRR component quarterly for each institution starting in 1994 with
information as of December 31, 1993.
<PAGE>
The following table sets forth the interest rate risk capital component
for the Bank at June 30, 1995 (the most recent date for which such information
is available to the Bank from the OTS) given a hypothetical 200 basis point rate
change in market interest rates.
June 30, 1995
-------------
Pre-shock NPV Ratio: NPV as % of Portfolio of Assets . . . 13.82%
Exposure Measure: Post-Shock NPV Ratio. . . . . . . . . . . 13.55%
Sensitivity Measure: Change in NPV Ratio. . . . . . . . . . (26 bp)
Change in NPV as % of Portfolio Value of Assets. . . . . . . (0.47)% (1)
Interest Rate Risk Capital Component ($000) . . . . . . . . . -0-
(1) Reflects decline in NPV that results from a 200 basis point (i.e.
2%) change in market interest rates (approximately $224,000, per the preceding
table), divided by the estimated economic value of assets as determined by the
OTS given a 200 basis point change (approximately $47.0 million at June 30, 1995
per the OTS interest rate risk exposure report for the Bank).
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit run-offs, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the Bank may undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented
in both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or period to repricing, they may react
in differing degrees to changes in market interest rates. 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, which represent the Bank's primary loan product, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In addition, the proportion of adjustable rate loans in the Bank's
portfolios could decrease in future periods if market interest rates remain at
or decrease below current levels due to refinance activity. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of an interest rate increase. Comparison of Financial Condition at
June 30, 1995 and 1994
The Company's total assets increased by approximately $500,000, or
1.05% from $47.7 million at June 30, 1994 to $48.2 million at June 30, 1995. The
increase in assets in the fiscal year ended June 30, 1995 was due primarily to
an increase in loans, offset in part by a decline in investment securities and
cash and cash equivalents.
<PAGE>
Cash decreased by $1.7 million, or 46%, to $1.9 million at June 30,
1995 from $3.7 million at June 30, 1994 primarily to fund the increase in loans.
The Bank's loan portfolio increased approximately $2.3 million, or 6.65%, to
$36.9 million at June 30, 1995 from $34.6 million at June 30, 1994. The increase
in loan activity during the year ended June 30, 1995 reflected consumer demand
as a result of the continued decline in interest rates during most of the fiscal
year. The increase is also due in part to the Bank's opening of a loan
production office in Mt. Vernon, Kentucky, which is located in an adjacent
county not previously served by the Bank. During fiscal year 1995, the loan
production office generated $848,000 in loans.
The Bank's investment portfolio decreased $484,000, or 5.78%, from $8.4
million at June 30, 1994 to $7.9 million at June 30, 1995. Also during fiscal
year 1995, the Bank reclassified its investment securities into three categories
- -- "trading," "available for sale," and "held to maturity" -- as required by its
adoption on July 1, 1994 of Statement of Financial Accounting Standards No. 115,
"Accounting for Investments in Debt and Equity Securities." For further
information, see "Impact of New Accounting Standards -- Accounting for
Investments" below. The overall decrease in the total investment portfolio
reflects the Bank's use of available funds to support loan activity, which
generates a higher rate of return. The composition of the investment portfolio
for both securities available for sale and securities held to maturity consisted
primarily of U.S. Government securities.
The Bank's liabilities increased by approximately $300,000, or .74%,
from $40.4 million at June 30, 1994 to $40.7 million at June 30, 1995, primarily
as a result of the adoption of two benefit plans in connection with the Bank's
mutual-to-stock conversion. The Bank adopted a director retirement plan and a
management recognition plan ("MRP"), each of which became effective upon receipt
of stockholder approval on October 28, 1994. Neither plan could be implemented
until OTS approval was received for the MRP in May 1995 and the director
retirement plan in July 1995. Accordingly, the Bank was unable to determine
whether a liability with respect to each plan had been incurred until each such
OTS approval was actually received. Total deposits increased $200,000, or .50%,
to $40.5 million at June 30, 1995, as compared to $40.3 million at June 30,
1994. The increase reflected the Bank's pricing of its deposits to reflect the
range of those rates offered in its market area.
Comparison of Operating Results for the Years Ended June 30, 1995 and 1994
Net Income. Net income decreased by $38,000, or 12.84%, to $258,000 for
the year ended June 30, 1995 from $296,000 for the year ended June 30, 1994. The
decrease reflected an increase of approximately $316,000 in non-interest
expenses, offset in part by a $194,000 increase in net interest income after
provision for loan losses and a $29,000 increase in non-interest income.
Net Interest Income. Net interest income increased by $109,000, or
7.27%, to $1.6 million during fiscal year 1995 as compared to $1.5 million for
fiscal year 1994. This increase was due primarily to the steady increase in net
interest income earned by the Bank on its adjustable rate mortgage loans and
investment securities that exceeded the increase in the average interest rates
paid on its deposits. The Bank's net interest income was aided by an improvement
in the ratio of the Bank's average interest-earning assets to average
interest-bearing liabilities to 119.23% in fiscal year 1995 from 108.46% in
fiscal year 1994. The improvement in this ratio primarily reflects an increase
in stockholder's equity.
<PAGE>
Interest Income. Total interest income increased $ 121,000, or 3.90%,
to $3.2 million during fiscal year 1995, as compared to $3.1 million for fiscal
year 1994. The increase in interest income resulted primarily from a 0.21 basis
point increase in the average yield on interest-bearing assets, from 6.83%
during fiscal year 1994 to 7.04% during fiscal year 1995. The increase in
average yield reflects the higher interest rate environment during fiscal year
1995.
Interest Expense. Total interest expense increased from $1.68 million
during fiscal year 1994 to $1.69 million during fiscal year 1995. The small
amount of the increase reflects the slight increase in the deposit rates paid in
order to maintain deposit accounts and to be more competitive with other banks
in the area. This reflected a 0.39 basis point increase in the average cost of
deposits from 3.94% for the year ended June 30, 1994 to 4.33% for fiscal 1995.
Provision for Loan Losses. The Bank's provision for loan losses was
$2,700 for fiscal year 1995, a decrease of $85,300, or 96.9%, as compared to
$88,000 for the year ended June 30, 1994. The reduced amount of the provision
during fiscal year 1995 reflects both the continued low level of the Bank's
charge-offs and the Bank's existing level of its allowance for loan losses.
Charge-offs during fiscal year 1995 totaled $17,000 as compared to $18,000
during fiscal year 1994. Further, the Bank's total allowance for loan losses was
$263,000 at June 30, 1995 and equaled .71% of the Bank's total loans. Classified
assets as of June 30, 1995 declined to $1,134,000 a decrease of $169,000, as
compared to $1,303,000 at June 30, 1994. In determining its provision for loan
losses, management considers various factors, including among others, identified
problem loans and the overall composition of its loan portfolio.
Non-Interest Income. Non-interest income increased $30,000, or 26.79%,
from fiscal year 1994 to fiscal year 1995, due primarily to increased service
charges arising from increased loan originations. Service charges increased
$28,000, or 31.82% in fiscal year 1995 from $88,000 in fiscal year 1994. The
increase was due to a $14,000 increase in NOW account fees, and a $14,000
increase in fees earned from premature redemption of certificates of deposit by
customers seeking alternative investments with higher yields.
Non-Interest Expense. Non-interest expense increased by $316,000, or
30.53%, from fiscal year 1994 to fiscal year 1995 primarily as a result of
increases in compensation-related items. Salaries and employee benefits
increased by $122,000 due to the hiring of two (2) additional employees in
connection with the opening of the Bank's loan production office, a general
increase in salaries during the year and the adoption during fiscal year 1995 of
the MRP. The adoption of the MRP and the director retirement plan during fiscal
year 1995, both of which became effective as of October 26, 1994 following
stockholder approval on such date, resulted in immediate changes to income based
upon the total expected cost of each such plan. The actual cost is subject to
adjustment each year that the respective plan remains in effect. For further
information regarding these plans, see Note 24 of the Notes to the Financial
Statements. Non-interest expense also increased $54,000 due to the annual
expense associated with the Company's Employee Stock Ownership Plan. For further
information see Note 22 and 26 of the Notes to the Financial Statements.
Regulatory insurance premiums increased by $15,000 over the 1994 amount
due to a general increase in the deposit base upon which the premiums are
calculated. Other non-interest expenses reflect the rising costs of office
supplies, phone services, postage and other overhead that occurred due to the
opening of the Loan Production Office in Mt. Vernon, Kentucky.
<PAGE>
Income Tax Expense. Income tax expense decreased $55,000, or 31.79%, to
$118,000 during fiscal year 1995 from $173,000 during fiscal year 1994. The
decrease reflects the decline in income during fiscal year 1995, as well as the
tax effect on the benefit plans that were effective October 26, 1994.
Comparison of Operating Results for the Years Ended June 30, 1994 and 1993
Net Income. Net earnings decreased by $127,000, or 30.02%, to $296,000
for the year ended June 30, 1994 from $423,000 for the year ended June 30, 1993.
The decrease is a direct result of a $78,000 increase in the provision for loan
losses combined with a general increase of 15% in non-interest expenses.
Offsetting these increases was a $40,000 increase in net interest income and a
$24,000 increase in non-interest income.
Net Interest Income. Net interest income increased by $40,000 for
fiscal year 1994 to $1.5 million primarily as a result of a .07% improvement in
the interest rate spread between interest-earning assets and interest-bearing
liabilities.
Interest Income. Total interest income decreased from $3.4 million to
$3.1 million, a $0.3 million, or a 7%, decline. Most of the decrease was
attributable to declining long-term interest rates which averaged approximately
7.49% throughout the last quarter of fiscal year 1993, and declined further
throughout most of fiscal year 1994, ending the year at 7.28%. Borrowers tended
to refinance higher-costing debts incurred in prior years with new, lower-rate
loans during fiscal year 1994. The decrease was also due to the sale of several
short-term U.S. Treasury Bills to fund increased lending and principal
repayments on investments in Government National Mortgage Association
instruments. The decrease in interest income was partially offset by a shift in
the investment portfolio mix from short-term securities to higher yielding
long-term investments.
Interest Expense. Total interest expense decreased from $1.9 million to
$1.7 million, a $0.2 million, or a 13%, decline. The key contributor to this
decline was the reduction in the average cost of all interest-bearing
liabilities by .64%, which resulted from the decline in the market interest
rates.
Provision for Loan Losses. The Bank's provision for loan losses was
$88,000 for fiscal year 1994, an increase of $78,000, or 780%. The increase
reflects management's intent to increase the Bank's loan loss allowance as the
Bank's loan portfolio increased. The allowance for loan losses increased to
$275,000 at June 30, 1994, from $198,000 at June 30, 1993. Classified assets as
of June 30, 1994 declined to $1,303,000 as compared to $1,837,000 at June 30,
1993. The allowances represented .79% and .61% of total loans at June 30, 1994
and 1993, respectively.
Non-Interest Income. Non-interest income increased $24,000, or 27%,
from 1993 to 1994, as a result of increased service charges stemming from the
increased loan demand.
Non-Interest Expense. Non-interest expense increased by $133,000, or
15%, from 1993 to 1994. The increase reflects a combination of several factors.
Salaries and employee benefits increased by $58,000 due to the hiring of one
additional employee and a general increase in salaries during the year.
Likewise, directors, fees increased approximately $9,000 due to the addition of
one director and an increase of $150 from $400 to $550 per month for fees paid
to directors. Regulatory insurance premiums increased by $28,000 over the 1993
amount due to the depletion of FDIC credits and a general increase in the
<PAGE>
deposit base upon which the premiums are calculated. Other non-interest expenses
reflect the rising costs of office supplies, phone services, postage and other
overhead.
Income Tax Expense. Income tax expense decreased from $193,000, or
31.3% of income before income taxes, in 1993 to $173,000, or 36.9% of income
before income taxes, in 1994. The decrease reflects the decline in income during
fiscal 1994.
Average Balances, Interest and Average Yields
Net interest income of the Bank is affected by (i) the difference
("interest rate spread") between rates of interest earned on the Bank's
interest-earning assets and rates of interest paid on the Bank's
interest-bearing liabilities and (ii) the relative amounts of such
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. Savings institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest-earning assets" which is net interest income divided by average
interest-earning assets. The following table sets forth certain information
relating to the Bank's average interest-earning assets and interest-bearing
liabilities and reflects the Bank's average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, nonaccruing loans are included in the net loan category. Average
balances are derived from month-end average balances. Management does not
believe that the use of month-end average balances instead of average daily
balances has caused any material difference in the information presented.
<PAGE>
<TABLE>
<CAPTION>
Month Ended For the Year Ended June 30,
-------------------- --------------------------------------------------------------------
June 30, 1995 1995 1994
-------------------- ------------------------------- -----------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.............. $36,733 7.92% $35,950 $ 2,772 7.71% $33,629 $ 2,638 7.84%
Investment securities......... 5,602 4.67 6,474 301 4.65 6,035 253 4.19
Mortgage-backed securities.... 78 7.81 86 7 8.14 109 9 8.26
Short-term investments and other
interest-earning assets (2) 4,887 4.62 4,101 203 4.95 6,513 262 4.02
----- ----- --- ----- ---
Total interest-earning assets 47,300 7.19 46,611 3,283 7.04 46,286 3,162 6.83
------ ----- -----
Non-interest-earning assets..... 804 804 752
--- --- ---
Total assets................ $48,104 $47,415 $47,038
====== ====== ======
Interest-bearing liabilities:
Passbook Savings.............. $ 6,219 3.25 6,773 206 3.04 $ 8,571 $ 236 2.75
Now & Super Now Checking..... 3,735 2.34 3,733 99 2.65 3,917 102 2.60
Certificates of Deposit....... 29,745 5.70 28,586 1,389 4.86 30,188 1,344 4.45
------ ------ ----- ------ -----
Total interest-bearing liabilities 39,699 4.95 39,092 1,694 4.33 42,676 1,682 3.94
Non-interest-bearing liabilities 913 787 827
--- --- ---
Total liabilities........... 40,612 39,879 43,503
Stockholders' equity (1)........ 7,492 7,536 3,535
----- ----- -----
Total liabilities and stockholders'
equity.................... $48,104 $47,415 $47,038
======= ======= =======
Net interest income (3)......... $ 1,589 $ 1,480
======= =======
Interest rate spread............ 2.24 2.71% 2.89%
==== ==== =====
Net yield on interest-earning assets (4) 3.26% 3.41% 3.20%
==== ==== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 119.15% 119.23% 108.46%
====== ====== ======
</TABLE>
<PAGE>
(Continued from preceding table)
<TABLE>
<CAPTION>
For the Year Ended June 30,
1993
-------------------------------
Average
Average Yield/
Balance Interest Cost
-------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable.............. $ 32,365 $ 2,845 8.79%
Investment securities......... 2,898 177 6.11
Mortgage-backed securities.... 133 10 7.52
Short-term investments and other
interest-earning assets (2) 10,296 351 3.41
------ ---
Total interest-earning assets 45,692 3,383 7.40
-----
Non-interest-earning assets..... 673
---
Total assets................ $ 46,365
========
Interest-bearing liabilities:
Passbook Savings.............. $ 7,836 $ 246 3.14
Now & Super Now Checking..... 3,676 109 2.96
Certificates of Deposit....... 30,981 1,588 5.13
------ -----
Total interest-bearing liabilities 42,493 1,943 4.57
Non-interest-bearing liabilities 659
---
Total liabilities........... 43,152
Stockholders' equity (1)........ 3,213
-----
Total liabilities and stockholders'
equity.................... $ 46,365
=========
Net interest income (3)......... $ 1,440
=======
Interest rate spread............ 2.83%
Net yield on interest-earning assets (4) 3.15%
======
Ratio of average interest-earning assets
average interest-bearing liabilities 107.53%
======
</TABLE>
(1) Stockholders' equity contains only retained earnings prior to fiscal year
1994.
(2) Short-term investments consist of investments maturing in one (1) year or
less.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rate (changes in
rate multiplied by old volume); and (iii) changes in rate-volume (changes in
rate multiplied by changes in volume). Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of average daily balances has caused any material difference in
the information presented.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------------------
1995 vs. 1994 1994 vs. 1993
-------------------------------------------- ---------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------------- ---------------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loan portfolio........... $ 182 $ (44) $ (3) $ 135 $ 111 $ (307) $ (12) $ (208)
Mortgage-backed securities (2) (1) (1) (4) (2) 1 -- (1)
Investment securities.... 18 28 2 48 192 (55) (60) 77
Other interest-earning assets (97) 60 (22) (59) (129) 63 (23) (89)
Total interest-earning assets 101 43 (24) 120 172 (298) (95) (221)
--- -- ---- --- --- ---- --- ----
Interest expense:
Savings deposits......... (165) 195 (1) 11 8 (268) (1) (261)
----- --- ---- -- -- ----- --- -----
Total interest-bearing liabilities (165) 195 (19) 11 8 (268) (1) (261)
----- --- ---- -- -- ---- -- -----
Change in net interest income $ 266 $ (152) $ (5) $ 109 $ 164 $ (30) $ (94) $ 40
======= ======= ======= ======= ====== ======= ====== ========
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
1993 vs. 1992
-------------------------------------------
Increase (Decrease)
Due to
-------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loan portfolio........................... $ (127) $ (327) $ 13 $ (441)
Mortgage-backed securities .............. (2) (1) (1) (4)
Investment securities.................... (24) (3) -- (27)
Other interest-earning assets............ 141 (107) (42) (8)
Total interest-earning assets.......... (12) (438) (30) (480)
--- ---- --- ----
Interest expense:
Savings deposits......................... 52 (615) (13) (576)
-- ----- ---- -----
Total interest-bearing liabilities..... 52 (615) (13) (576)
Change in net interest income.............. $ (64) $ 177 (17) $ 96
======= ======= ======= =======
</TABLE>
<PAGE>
Liquidity and Capital Requirements
The Company's primary sources of liquidity are dividends paid by the
Bank and cash held, which was $355,000 at June 30, 1995. The Bank as a stock
savings institution is subject to certain regulatory limitations with respect to
the payment of dividends to the Company. See "Market Information."
The Bank's capital ratios are substantially in excess of current
regulatory capital requirements. At June 30, 1995, the Bank's tangible and core
capital amounted to 12.6% of adjusted total assets, or 11.1% and 9.6%,
respectively, in excess of the Bank's current 1.5% tangible and 3.0% core
capital requirements. Additionally, the Bank's risk-weighted assets ratio was
24.5% at June 30, 1995, or 16.5% in excess of the Bank's 8.0% risk-based capital
requirement.
Beginning July 1, 1994, certain institutions were required to reflect
an interest rate risk component in their risk-based capital requirements using
financial data as of December 31, 1993. Savings institutions with less than $300
million in assets and a risk-based capital ratio of 12% or more are not subject
to the interest rate risk requirement. The Bank is not subject to this
requirement. If the above requirement would have been effective as of June 30,
1995, the Bank would not have been subject to the interest rate risk rule.
The Bank's principal sources of funds for operations are deposits from
its primary market area, principal and interest payments on loans and
mortgage-backed securities and proceeds from maturing investment securities. In
addition, as a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, the
Bank is eligible to borrow funds from the FHLB of Cincinnati in the form of
advances. At June 30, 1995, the Bank did not have any outstanding borrowings
from the FHLB of Cincinnati.
Under OTS regulations, the Bank must maintain minimum levels of
specified liquid assets, which are currently equal to 5% of deposits and
borrowings. Such investments serve as a source of liquid funds which the Bank
may use to meet deposit withdrawals and other short-term needs. The Bank's most
liquid assets are cash and cash equivalents, which are short-term, highly liquid
investments with original maturities of three months or less, that are readily
convertible to known amounts of cash. The levels of such assets are dependent
upon the Bank's operating, financing and investment activities at any given
time. In recent years, the Bank has maintained higher levels of liquid assets
than required by regulation. Management believes that the liquidity levels
maintained are fully adequate to meet potential deposit outflows, loan demand
and normal operations. Lincoln Federal's liquidity ratio at June 30, 1995 was
approximately 20.48%.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements, and Notes thereto, presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
<PAGE>
Impact of New Accounting Standards
Accounting for Income Taxes. In February 1992, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Statement 109 requires a change
from the deferred method of accounting for income taxes of Accounting Principles
Board ("APB") Opinion 11 to the asset and liability method of accounting for
income taxes. It also supersedes the guidance of APB Opinion 23 on the tax
treatment of savings institution bad debt reserves. Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes that enactment date. Effective July 1, 1993,
the Bank adopted SFAS 109. There was no effect on the financial statement of
this change.
Pursuant to the deferred method under APB Opinion 11, which was applied
in 1992 and prior years, deferred income taxes are recognized for income and
expense items that are reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable for the year of
the calculation. Under the deferred method, deferred taxes are not adjusted for
subsequent changes in tax rates.
Disclosures of Fair Value of Financial Instruments. In December 1991,
the FASB issued SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." SFAS No. 107 requires all entities to disclose the fair value of
financial instruments (both assets and liabilities recognized and not recognized
in the statements of financial position) for which it is practicable to estimate
the fair value, except those financial instruments specifically excluded. The
disclosure shall be either in the body of the financial statements or in the
accompanying notes and shall include the methods and significant assumptions
used to estimate the fair value of a financial instrument or a class of
financial instruments as well as the reasons why it is not practicable to
estimate fair value. SFAS 107 is effective for fiscal years ending after
December 15, 1992 for companies with assets of greater than $150 million. For
companies with assets of less than $150 million, SFAS 107 is effective for
fiscal years ending after December 15, 1995.
The Bank currently intends to adopt the disclosure requirements of SFAS
No. 107 for the fiscal year ending June 30, 1996, if required, which would
result in the disclosure of the fair value of financial instruments in a
footnote disclosure.
Accounting for Impaired Loans. In June 1993, the FASB issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," which amended SFAS No.
5, "Accounting for Contingencies," and SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." SFAS No. 114, as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosure," requires the use of the discounted cash flow method for
measuring impairment of loans when it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. If expedient, the creditor may use a loan's observable market price
or the fair value of any collateral. The Bank has adopted SFAS No. 114 on a
prospective basis as of July 1, 1995 for the fiscal year ending June 30, 1996.
<PAGE>
The adoption of SFAS No. 114 did not have a material effect on the Company's
financial position or results of operations.
Accounting for Investments. In May 1993, the FASB issued SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires debt and equity securities to be classified into one of three
categories: held to maturity, available for sale or trading. Securities held to
maturity are limited to debt securities that the holder has the positive intent
and the ability to hold to maturity; these securities are reported at amortized
cost. Securities held for trading are limited to debt and equity securities that
are held principally to be sold in the near term; these securities are reported
at fair value, and unrealized gains and losses are reflected in earnings.
Securities held as available for sale consist of all other securities; these
securities are reported at fair value, and unrealized gains and losses are not
reflected in earnings but are reflected as a separate component of stockholders'
equity. Under SFAS No. 115, securities that could be sold in the future because
of changes in interest rates or other factors may not be classified as held to
maturity. SFAS No. 115 is effective for years beginning after December 15, 1993.
At June 30, 1995, there were $2.0 million securities that would be classified as
available for sale.
Accounting for ESOP. In November 1993, the AICPA approved SOP 93-6 on
"Employers' Accounting for Employee Stock Ownership Plans," which is effective
for fiscal years beginning after December 15, 1993 and which applies to shares
of capital stock of sponsoring employers acquired by Employee Stock Ownership
Plans ("ESOPs") after December 31, 1992 that have not been committed to be
released as of the beginning of the year in which the SOP is adopted. The SOP
will, among other things, change the measure of compensation recorded by
employers from the cost of ESOP shares to the fair value of ESOP shares. To the
extent that the fair value of the Company's ESOP shares, committed to be
released directly to compensate employees, differs from the cost of such shares,
compensation expenses and a related charge or credit to additional paid-in
capital will be affected in the Company's consolidated financial statements. The
Company's implementation of SOP 93-6 has not had a material financial effect on
the Company. The materiality of the impact of the continued application of SOP
93-6 in future periods will depend upon the fair value of the Company's capital
stock committed to be released at that time.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Robinson, Hughes & Christopher, P.S.C., was the Bank's independent
auditors for the 1993 fiscal year. On July 19, 1994, Robinson, Hughes &
Christopher, P.S.C., resigned as the independent auditors of the Company and the
Bank. In connection with their audit of the fiscal year ended June 30, 1993,
there have been no disagreements with Robinson, Hughes & Christopher, P.S.C., on
any matter of accounting principle or practice, financial statement disclosure,
or auditing scope or procedure which, if not resolved to the satisfaction of
Robinson, Hughes & Christopher, P.S.C., would have caused them to make reference
to the subject of such disagreement in connection with their reports. In
addition, during this period there was no adverse opinion or disclaimer of
opinion or any opinion qualified or modified as to uncertainty, audit scope or
accounting principles. The Robinson, Hughes & Christopher, P.S.C., report on the
financial statements of the Bank for the fiscal year ended June 30, 1993 was
unqualified. The resignation of Robinson, Hughes & Christopher, P.S.C., was
accepted by the Company's and the Bank's Board of Directors. On August 4, 1994,
the Company engaged Potter & Company, LLP, as the Company's independent
auditors.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Lincoln Financial Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Lincoln Financial Bancorp, Inc. and Subsidiaries as of June 30, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The 1993 consolidated financial
statements were audited by other auditors, whose report, dated July 29, 1993,
expressed an unqualified opinion on those financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 referred to above present
fairly, in all material respects, the financial position of Lincoln Financial
Bancorp, Inc. and Subsidiaries at June 30, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investment securities in the fiscal year
ending June 30, 1995.
/s/POTTER & COMPANY, LLP
POTTER & COMPANY, LLP
Lexington, Kentucky
August 18, 1995
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
----------- -----------
<S> <C> <C>
Cash and cash equivalents (Note 3) ..................... $ 1,973,427 $ 3,714,425
Interest-bearing certificates of deposit with banks .... 360,000 0
Investment securities (Notes 4 and 19):
Securities available for sale, at market value ...... 1,992,200 0
Securities held to maturity (estimated market values
of $5,818,215 and $8,170,523 at June 30, 1995
and 1994, respectively) ........................... 5,897,420 8,374,002
Mortgage-backed securities (Note 5) (estimated market
values of $78,559 and $97,270 at June 30, 1995 and
1994, respectively) .................................. 77,253 99,328
Loans receivable, net (Notes 6, 7, and 9) .............. 36,953,576 34,653,953
Premises and equipment, net (Note 10) .................. 362,394 344,110
Foreclosed real estate, net (Note 8) ................... 67,500 0
Federal Home Loan Bank Stock, at cost (Note 11) ........ 334,300 313,900
Accrued interest receivable (Note 12) .................. 140,142 154,427
Income tax refund receivable (Note 14) ................. 33,168 26,923
Prepaid expenses and other assets ...................... 27,109 27,722
------------ ------------
Total assets .................................... $ 48,218,489 $ 47,708,790
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 13) .................................. $ 40,452,274 $ 40,256,500
Deferred federal income taxes (Notes 14 and 15) ..... 12,735 36,000
Liability for Directors Retirement Plan (Note 24) ... 92,400 0
Liability for Management Recognition Plan (Note 24) . 32,420 0
Accrued expenses and other liabilities .............. 82,955 88,034
------------ ------------
Total liabilities ............................... $ 40,672,784 $ 40,380,534
Commitments and contingencies (Notes 19 and 25)
Stockholders' equity (Notes 2 and 20):
Preferred stock of $0.01 par value, 100,000 shares
authorized, none issued or outstanding ............ 0 0
Common stock of $0.01 par value, 1,900,000 shares
authorized, 423,200 shares issued and outstanding . 4,232 4,232
Additional paid-in capital .......................... 3,944,426 3,927,086
Retained earnings, substantially restricted (Note 15) 3,854,439 3,691,338
Less unearned Employee Stock Ownership Plan shares
(Note 22) ......................................... (257,895) (294,400)
Unrealized gain on securities available for sale, net
of applicable deferred income taxes (Note 4) ...... 503 0
------------ ------------
Total stockholders' equity ...................... 7,545,705 7,328,256
------------ ------------
Total liabilities and stockholders' equity ...... $ 48,218,489 $ 47,708,790
============ ============
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest on loans (Note 6) $ 2,772,025 $ 2,637,927 $ 2,845,125
Interest from securities available for sale 58,729 0 0
Interest from securities held to maturity 443,175 515,559 526,140
Interest from mortgage-backed securities 6,946 8,545 11,883
Interest - other 1,783 0 0
------------ ------------- -------------
Total interest income 3,282,658 3,162,031 3,383,148
Interest expense:
Deposits (Note 13) 1,693,811 1,682,489 1,943,641
------------ ------------- -------------
Net interest income 1,588,847 1,479,542 1,439,507
Provision for loan losses (Note 7) 2,711 88,094 10,000
------------ ------------- -------------
Net interest income after provision for
loan losses 1,586,136 1,391,448 1,429,507
------------ ------------- -------------
Non-interest income:
Gain on sale of investment securities (Note 4) 0 1,717 0
Loss on sale of fixed assets 0 0 (593)
Commissions 23,569 21,222 17,463
Service charges and other 116,990 88,803 71,261
------------ ------------- -------------
Total non-interest income 140,559 111,742 88,131
------------ ------------- -------------
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME(CONTINUED)
Years ended June 30, 1995, 1994 and 1993
<CAPTION>
<S> <C> <C> <C>
Non-interest expense:
Salaries and employee benefits
(Notes 16, 22 and 24) 590,461 468,443 409,813
Net occupancy and equipment 83,132 83,862 88,815
(Gain) loss on real estate owned,
including provision for loss (Note 8) 1,947 (1,296) (3,196)
Advertising 16,045 17,827 18,891
Directors fees 58,300 56,650 48,000
Directors Retirement Plan expense (Note 24) 92,400 0 0
Regulatory and other insurance premiums 129,714 114,606 86,875
Office supplies, postage and telephone 73,869 68,070 56,992
Data processing 71,568 72,824 68,357
Other 233,806 153,822 127,142
----------- ----------- ------------
Total non-interest expense 1,351,242 1,034,808 901,689
----------- ----------- ------------
Income before federal income taxes 375,453 468,382 615,949
----------- ----------- ------------
Federal income taxes (Notes 14 and 15)
Current 141,373 162,588 195,648
Deferred (23,524) 10,192 (2,989)
----------- ----------- ------------
Total federal income taxes 117,849 172,780 192,659
----------- ----------- ------------
Net income $ 257,604 $ 295,602 $ 423,290
============ =========== ============
Primary earnings per share (Note 23) $ 0.64 N/A N/A
============ =========== ============
Fully diluted earnings per common share (Note 23) $ 0.64 N/A N/A
============ ========== ============
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Unearned
Employee Unrealized
Retained Stock Gain on
Additional Earnings- Ownership Securities
Common Stock Paid-In Substantially Plan Available
Shares Amount Capital Restricted Shares for Sale Total
------- ------ --------- ------------ ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1992 0 $ 0 $ 0 $ 2,972,446 $ 0 $ 0 2,972,446
Net income 423,290 423,290
------- ------ --------- ----------- ---------- ------- -----------
Balances at June 30, 1993 0 0 0 3,395,736 0 0 3,395,736
Net income 295,602 295,602
Proceeds from issuance of common
stock, net of conversion expense
of $300,682 (Note 2) 423,200 4,232 3,927,086 3,931,318
Employee stock ownership plan
obligation (Note 22) (294,400) (294,400)
------- ------ --------- ------------ ----------- ------- -----------
Balances at June 30, 1994 423,200 4,232 3,927,086 3,691,338 (294,400) 0 7,328,256
Net income 257,604 257,604
Dividends paid (94,503) (94,503)
ESOP shares earned and committed
to be released (Note 22) 17,340 36,505 53,845
Change in unrealized gain on
securities available for sale, net
of applicable tax effect (Note 4) 503 503
------- ------ --------- ---------- --------- ------- ---------
Balances at June 30, 1995 423,200 $4,232 $3,944,426 $ 3,854,439 $ (257,895) $ 503 $7,545,705
======= ====== ========== =========== =========== ====== ==========
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 257,604 $ 295,602 $ 423,290
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 49,070 46,334 55,556
Amortization of securities premiums 13,015 13,010 11,302
Amortization of organizational expense 500 42 0
Amortization of deferred loan origination fees 11,144 14,363 12,141
Accretion of investment discounts (63,267) 0 0
Provision for loan losses 2,711 88,094 10,000
Provision for losses on real estate owned 806 0 0
Gain on sale of other real estate 0 (4,536) (3,423)
Gain on sale of investment securities 0 (1,717) 0
Loss on disposal of fixed assets 0 0 593
Compensation expense for ESOP shares
earned and committed to be released 17,340 0 0
Deferred income taxes (23,524) 27,703 (2,989)
FHLB Stock dividends (20,400) (14,600) (13,600)
Changes in:
Accrued interest receivable 14,285 (6,353) (39,663)
Prepaid expenses and other assets 113 (2,632) 3,112
Income tax refund receivable (6,245) (26,923) 0
Accrued federal income taxes 0 (14,648) (23,248)
Liability for Management Recognition Plan 32,420 0 0
Liability for Directors Retirement Plan 92,400 0 0
Accrued expenses and other liabilities (5,079) 20,279 9,735
----------- ---------- -----------
Net cash provided by operating activities 372,893 434,018 442,806
----------- ---------- -----------
Cash flows from investing activities:
Purchase of certificates of deposit (360,000) 0 0
Redemption of certificates of deposits 0 90,000 0
Purchase of securities available for sale (3,682,709) 0 0
Purchase of securities held to maturity (242,422) (10,502,525) (10,254,251)
Proceeds from sale of securities held to maturity 0 1,983,451 0
Proceeds from maturity/redemption of securities
available for sale 1,750,000 0 0
Proceeds from maturity/redemption of securities
held to maturity 2,710,527 11,589,763 3,033,871
Maturities/redemptions of mortgage-backed
securities 22,075 19,899 332,072
Net increase in loans (2,381,784) (2,382,099) (97,116)
Proceeds from redemption of Federal Home
Loan Bank stock 0 0 13,000
Purchase of premises and equipment (67,354) (14,629) (4,864)
Proceeds from sale of other real estate 0 63,366 17,942
----------- ----------- ------------
Net cash provided by (used in) investing activities (2,251,667) 847,226 (6,959,346)
----------- ---------- ------------
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended June 30, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in demand
deposit accounts $ (327,750) $ 482,811 $ 74,084
Net increase (decrease) in savings accounts (1,702,474) (634,398) 2,042,591
Net increase (decrease) in other deposits 2,225,998 (3,038,408) (1,149,781)
Net proceeds from issuance of common stock
(net of stock issue costs of $300,682) 0 3,931,318 0
Loan to Employee Stock Ownership Plan 0 (294,400) 0
Principal collected on loan to Employee
Stock Ownership Plan 36,505 0 0
Dividends paid (94,503) 0 0
------------ ------------ -------------
Net cash provided by financing activities 137,776 446,923 966,894
------------- ------------ -------------
Net increase (decrease) in cash and cash
equivalents (1,740,998) 1,728,167 (5,549,646)
Cash and cash equivalents at beginning of year 3,714,425 1,986,258 7,535,904
-------------- ------------ --------------
Cash and cash equivalents at end of year $ 1,973,427 $ 3,714,425 $ 1,986,258
============== ============ ==============
Supplemental disclosures of cash flow information:
Cash payments made during the year for:
Income taxes $ 147,619 $ 186,648 $ 218,896
============== ============ ==============
Interest $ 1,693,910 $ 1,682,094 $ 1,944,741
============== ============ ==============
Supplemental disclosure of noncash activities:
Additions to real estate acquired in settlement of
loans or through foreclosures $ 68,306 $ 58,830 $ 0
============== ============ ==============
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of Lincoln Financial
Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Lincoln Federal
Savings Bank (the Bank), and the Bank's wholly-owned subsidiary, Lincoln County
Savings and Loan Service Corporation. All significant intercompany balances and
transactions are eliminated in consolidation.
Lincoln Federal Savings Bank is a Bank chartered by the Office of Thrift
Supervision (OTS). The consolidated financial statements of the Bank have been
prepared in accordance with generally accepted accounting principles and conform
with general practices within the savings and loan industry. The following is a
description of the more significant of those policies.
Real Estate Owned:
Real estate acquired through foreclosure or in-substance foreclosure is reported
at the lower of cost or fair value at acquisition (or in-substance foreclosure)
date, and subsequently at the lower of its new cost or fair value minus
estimated selling costs.
Premises and Equipment:
The Company uses the straight-line method of computing depreciation for assets
over their expected useful lives of 15 to 40 years for building and improvements
and 5 to 7 years for furniture and equipment. Items capitalized as part of
premises and equipment are valued at cost. Maintenance and repairs are expensed
as incurred. When premises and equipment are sold, or otherwise disposed of, the
asset cost and related accumulated depreciation are removed from the respective
accounts and the gain or loss realized on disposition is reflected in earnings.
Income Taxes:
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of non-taxable income such as interest on state
and municipal securities) and deferred income taxes on temporary differences
arising from differences between the amount of taxable income and pretax
financial income and between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed in FASB
Statement No. 109, "Accounting for Income Taxes". As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provisions for income taxes in the period of enactment.
Loans Receivable:
Loans receivable are carried at their principal balance outstanding less the
allowance for loan losses, and net deferred loan origination fees and discounts.
The Bank does not accrue interest on loans ninety days or more past due.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Valuation Allowances:
Valuation allowances are provided for estimated losses on loans and real estate
when any probable and reasonably estimated decline in value occurs. In
estimating possible losses, consideration is given to delinquencies, value of
collateral, estimated sale price, cost of disposal, cost of holding the real
estate, and other factors which, in management's opinion, should be considered
in estimating possible losses.
Loan Fees:
Loan fees are accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 91. SFAS No. 91 requires loan origination fees and
certain related direct loan origination costs be offset and the resulting net
amount be deferred and amortized over the contractual life of the related loans
using the interest method as an adjustment to the yield of such loans.
Cash Flows:
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with original maturities when purchased of three months
or less to be cash equivalents.
Employee Stock Ownership Plan Transactions:
Compensation related to the release of shares held by the Employee Stock
Ownership Plan (ESOP) in the Loan Suspense Account is measured based on the fair
values of committed-to-be-released shares. ESOP shares that have been committed
to be released are considered outstanding. ESOP shares that have not been
committed to be released are not considered outstanding.
Effect of Changes in Accounting Principles:
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", during 1995.
This statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair market values and for all
investments in debt securities. Under Statement No. 115, debt and equity
securities are classified as either 1) held to maturity securities, 2) trading
securities, or 3) available for sale securities. Those securities that are
classified as trading securities or securities available for sale are recorded
at their current fair market value.
Investment securities held to maturity are carried at cost adjusted for
amortization of premium and accretion of discount computed on the level yield
method. Gains and losses on sale of securities are recognized in income upon
realization using the identified security method for securities held to maturity
and available for sale. Unrealized gains and losses on trading securities are
recognized in income currently.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effect of Changes in Accounting Principles (Continued):
Unrealized gains and losses on securities available for sale are excluded from
earnings and reported as a separate component of stockholders' equity. There
were no investment securities available for sale at June 30, 1994, accordingly,
there was no effect on retained earnings of initially applying this Statement
when it was adopted by the Company on July 1, 1994.
NOTE 2 - CONVERSION TO STOCK SAVINGS BANK, FORMATION OF HOLDING COMPANY
AND SALE
On June 28, 1994, the Bank converted from a mutual savings bank to a capital
stock savings bank. The Bank issued all of its outstanding capital stock to the
Company, which simultaneously consummated its public offering of 423,200 shares
of common stock that generated net proceeds of $3,931,318 after conversion costs
totaling $300,682. The Bank received 50% of the net proceeds in exchange for the
stock it issued to the Company.
This conversion transaction has been accounted for in a manner similar to a
pooling of interests. All shares offered by the Company in the public offering
were acquired by the depositors, officers, and directors of the Bank, as well as
the Employee Stock Ownership Plan discussed in Note 22. The 1994 and 1993
financial statements of the Bank have been presented for comparative purposes.
No prior year financial statements exist for the Company because it had no
operations or assets prior to June 28, 1994.
The Bank may not declare or pay a cash dividend on or repurchase any of its
stock if the effect would be to reduce retained earnings of the Bank below the
capital requirements of the OTS or the amount then required for the liquidation
account that was established by the Bank at the time of the mutual-to-stock
conversion for the benefit of certain depositors at that time. Federal
regulations adopted by the OTS impose certain limitations on the payment of
dividends and other capital distributions, including stock repurchases by the
Bank. OTS regulations utilize a tiered approach which permits various levels of
distributions based primarily upon an institution's capital level and net
income. Based upon current OTS regulations and its capital structure at June 30,
1995, the Bank may make capital distributions during a calendar year up to the
greater of (1) 100% of its net earnings to date during the calendar year plus an
amount equal to one-half of the amount by which its total capital-to-assets
ratio exceeded its fully phased-in capital-to-assets ratio at the beginning of
the calendar year or (2) 75% of its net income during the most recent four
quarter period. At June 30, 1995, approximately $2,160,000 was available for
payment of dividends from the Bank to the Company under the above mentioned OTS
restrictions. Capital distributions by the Bank are further subject to a 30-day
advance written notice to the OTS.
The Company's charter authorizes 100,000 shares of preferred stock of the
Company, of $0.01 par value. The consideration for the issuance of the shares
shall be paid in full before their issuance and shall not be less than the par
value. Neither promissory notes nor future services shall constitute payment or
part payment for the issuance of shares of the Company.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 2 - CONVERSION TO STOCK SAVINGS BANK, FORMATION OF HOLDING COMPANY
AND SALE (CONTINUED)
The consideration for the shares shall be cash, tangible or intangible property
(to the extent direct investment in such property would be permitted), labor or
services actually performed for the Company, or any combination of the
foregoing. The preferred stock, and any series of preferred stock, may be
redeemable or convertible. Prior to the issuance of any preferred stock, and any
series of preferred stock, as established by the Board of Directors, the Company
shall file articles of amendment to the Company charter with the Delaware
Secretary of State establishing and designating the series and fixing and
determining the relative rights and preferences thereof. The Company's charter
expressly vests in the Board of Directors authority to issue the preferred stock
in one or more series and to determine, to the extent permitted by law prior to
the issuance of the preferred stock (or any series of the preferred stock), the
relative rights, limitations, and preferences of the preferred stock or any such
series.
NOTE 3 - RESTRICTED CASH
Pursuant to regulations of the Federal Reserve Board, the Bank must maintain
average daily reserves equal to 3% of its transaction accounts. This restricted
cash must be maintained in the form of vault cash or in a non-interest bearing
account at a Federal Reserve Bank. As of June 30, 1995, the Bank met its average
daily reserve requirement of approximately $37,000.
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and estimated market value of securities available for sale
at June 30, 1995, are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 1,991,438 $ 762 $ 0 $ 1,992,200
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of investment securities held to
maturity at June 30, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Obligations of U.S.
Government and federal
agencies $ 3,014,515 $ 945 $(54,173) $ 2,961,287
Obligations of states and
political subdivisions 2,882,905 3,736 (29,713) 2,856,928
========= ===== ======= =========
Total $ 5,897,420 $4,681 $(83,886) $ 5,818,215
</TABLE>
The amortized cost and estimated market value of securities at June 30, 1995, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Amounts maturing in:
One year or less $ 1,991,438 $ 1,992,200 $ 1,837,094 $ 1,826,113
After one year through
five years 0 0 3,860,326 3,803,602
After five years through
ten years 0 0 200,000 188,500
After ten years 0 0 0 0
=========== =========== =========== ===========
Total $ 1,991,438 $ 1,992,200 $ 5,897,420 $ 5,818,215
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of investment securities held to
maturity at June 30, 1994, are summarized as follows:
<TABLE>
<CAPTION>
Estimated Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses
----- ---- ----- ------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government and federal
agencies $ 5,027,024 $ 6,858 $ (138,315) $ 4,895,567
Obligations of states and
political subdivisions 3,346,978 2,200 (74,222) 3,274,956
=========== ======= ========== ===========
Total $ 8,374,002 $ 9,058 $ (212,537) $ 8,170,523
As of June 30, 1994, there were no investment securities classified as "held for
sale" or "held for trading purposes".
Realized gains and losses on sales of investments were as follows:
Year ended June 30,
1995 1994 1993
---- ---- ----
Gross realized gains $ 0 $1,717 $ 0
Gross realized losses 0 0 0
Net gain $ 0 $1,717 0
Proceeds from sales
investments $ 0 $1,983,451 $ 0
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
Taxable and nontaxable interest income from investments was as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Taxable $ 375,308 $ 398,167 $484,689
Nontaxable 133,542 125,937 53,334
======= ======= ======
Total interest income on
investment securities $ 508,850 $ 524,104 538,023
</TABLE>
NOTE 5 - MORTGAGE-BACKED SECURITIES
All mortgage-backed securities are considered to be held to maturity. The book
and estimated market values, including the components of unrealized gains/losses
on mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
June 30, 1995
GNMA $ 77,253 $ 1,306 $ 0 $ 78,559
June 30, 1994
GNMA $ 99,328 $ 0 $ (2,058) $ 97,270
</TABLE>
There were no realized gains or losses on sale of mortgage-backed securities for
the years ended June 30, 1995, 1994 and 1993.
The amortized cost and fair value of mortgage-backed securities at June 30,
1995, by final maturity, are shown below. Expected maturities will differ from
final maturities because of amortized paydowns and/or borrowers may have the
right to call or prepay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
June 30, 1995
Amortized Market
Cost Value
---- -----
<S> <C> <C>
Amounts maturing in:
One year or less $ 0 $ 0
After one year through
five years 0 0
After five years through
ten years 77,253 78,559
After ten years 0 0
Total $ 77,253 $ 78,559
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 6 - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30,
1995 1994
---- ----
<S> <C> <C>
First mortgage loans $ 33,898,695 $ 32,562,693
Consumer loans 1,970,434 1,210,346
Commercial business loans 317,103 254,942
Home equity loans 1,073,715 930,128
Loans secured by savings accounts 390,068 442,069
37,650,015 35,400,178
Less:
Unearned discount and fees (52,790) (53,932)
Loans in process (380,488) (417,642)
Allowance for loan losses (263,161) (274,651)
Loans receivable, net $ 36,953,576 $ 34,653,953
</TABLE>
Non-accrual loans totaled approximately $78,707 and $223,863 at June 30, 1995
and 1994, respectively. Interest income not recognized by the Bank on
non-accrual loans approximated $1,385 and $4,223 at June 30, 1995 and 1994,
respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 274,651 $ 197,549 $ 192,200
Provision for losses 2,711 88,094 10,000
Loans charged-off (17,733) (18,343) (9,906)
Recoveries 3,532 7,351 5,255
Balance at end of year $ 263,161 $ 274,651 $ 197,549
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 8 - FORECLOSED REAL ESTATE
A summary of foreclosed real estate is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994
---- ----
<S> <C> <C>
Acquired in settlement of loans $ 68,306 $ 0
Less allowance for losses on
foreclosed real estate (806) 0
---------- ----
$ 67,500 $ 0
========== ====
</TABLE>
An analysis of the allowance for losses on real estate owned is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 0 $ 0 $ 13,200
Provision for losses 806 0 0
Charge-offs 0 0 (13,200)
Recoveries 0 0 0
Balance at end of year $ 806 $ 0 $ 0
</TABLE>
NOTE 9 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers were indebted to the Bank in the
aggregate amount of $217,833 and $216,877 at June 30, 1995 and 1994,
respectively. Such indebtedness was incurred in the ordinary course of business
on substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than normal risk of
collectibility or present other unfavorable features.
An analysis of such loans is listed below:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994
<S> <C> <C>
Balance at beginning of year $ 216,877 $ 214,079
New loans 38,149 253,172
Repayments (37,193) (250,374)
Balance at end of year $ 217,833 $ 216,877
</TABLE>
In the normal course of business, certain directors also perform legal services
for the Bank. The total of these services, including amounts borne by loan
customers, was $33,481, $41,019 and $36,668 for the years ended June 30, 1995,
1994 and 1993, respectively.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 10 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994
---- ----
<S> <C> <C>
Land and land improvements $ 108,000 $ 79,500
Office buildings 637,475 636,484
Furniture, fixtures and equipment 427,931 390,068
1,173,406 1,106,052
Less accumulated depreciation (811,012) (761,942)
Total $ 362,394 $ 344,110
</TABLE>
NOTE 11 - FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank system. As a member, the Bank
is required to acquire and hold shares of capital stock in the Federal Home Loan
Bank of Cincinnati in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans and similar obligations at the beginning of
each year. The Bank was in compliance with this requirement with an investment
of $334,300 at June 30, 1995. During 1995 and 1994, the Bank did not receive any
advances from the Federal Home Loan Bank.
NOTE 12 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994
---- ----
<S> <C> <C>
Investment securities $ 76,435 $ 119,611
Mortgage-backed securities 0 0
Loans 55,530 28,090
Other 8,177 6,726
Total $ 140,142 $ 154,427
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 13 - DEPOSITS
Deposits and their weighted average interest rates are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
June 30, Interest June 30, Interest
1995 Rate 1994 Rate
---- ---- ---- ----
<S> <C> <C> <C> <C>
Demand deposit accounts $ 422,546 0.00% $ 1,007,703 0.00%
NOW and Super NOW accounts 3,738,036 2.34 3,480,629 2.32
Passbook and Christmas savings 6,279,628 3.25 7,982,102 2.75
Certificate accounts:
2.00% to 4.00% 2,521,346 3.88 17,869,137 3.40
4.01% to 6.00% 17,164,222 5.39 7,278,458 5.04
6.01% to 8.00% 10,126,496 6.64 1,926,254 7.34
8.01% to 10.00% 200,000 8.63 712,217 8.38
==== ===== ============= ==== =========== ====
Total $ 40,452,274 4.95% $ 40,256,500 3.59%
Jumbo certificates of deposit
(Minimum denomination of
$100,000) $ 4,127,256 $ 3,237,742
</TABLE>
Interest expense on deposits is
summarized as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
NOW, Super NOW and savings $ 304,832 $ 338,480 $ 355,450
Certificates of deposits and IRAs 1,388,979 1,344,009 1,588,191
$ 1,693,811 $ 1,682,489 $ 1,943,641
</TABLE>
At June 30, 1995, scheduled maturities of certificates of deposit (including
IRAs) were as follows:
Year ending
<TABLE>
<CAPTION>
June 30, 2.00% to 4.00% 4.01% to 6.00% 6.01% to 8.00% 8.01% to 10.00%
-------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
1996 $ 1,942,111 $ 12,865,133 $ 5,529,772 $ 200,000
1997 579,235 1,027,823 1,232,742 0
1998 0 2,097,348 1,952,636 0
1999 0 949,262 1,134,427 0
2000 0 224,656 276,919 0
============== ============== ============ ============
Total $ 2,521,346 $ 17,164,222 $ 10,126,496 $ 200,000
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 13 - DEPOSITS (CONTINUED)
At June 30, 1994, scheduled maturities of certificates of deposit (including
IRAs) were as follows:
Year Ending
<TABLE>
<CAPTION>
June 30, 2.00% to 4.00% 4.01% to 6.00% 6.01% to 8.00% 8.01% to 10.00%
-------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
1995 $ 14,898,107 $ 2,245,586 $ 618,853 $ 512,217
1996 2,165,670 1,452,282 784,352 200,000
1997 805,342 297,988 289,049 0
1998 0 2,093,100 234,000 0
1999 18 1,189,502 0 0
Total $ 17,869,137 $ 7,278,458 1,926,254 $ 712,217
</TABLE>
NOTE 14 - INCOME TAXES
The Company and Bank have entered into a tax sharing agreement whereby a
consolidated federal income tax return is filed and the Bank pays to the Company
the amount of tax which the Bank would have paid to the Internal Revenue Service
on a separate return basis. If certain conditions are met in determining taxable
income, the Bank is allowed a special bad-debt deduction based on a percentage
of taxable income (presently 8 percent) or on specified experience formulas. The
Bank used the percentage-of-taxable-income method in 1995, 1994, and 1993.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", was adopted by the Bank in July 1993. Because the rate at which deferred
taxes have been provided in prior years was the same as the expected rate at
which the timing differences are expected to be recovered, there was no effect
from this change in accounting principle. Prior year's financial statements have
not been restated.
The provision for income taxes differed from the federal income tax rate of 34
percent for the years ended June 30, 1995, 1994 and 1993 as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Provision at federal tax rate 34.0% 34.0% 34.0%
Bad debt deduction (1.8) 3.4 (2.4)
Other (0.8) (0.5) (0.3)
Net provision for income taxes 31.4% 36.9% 31.3%
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 14 - INCOME TAXES (CONTINUED)
Deferred federal income taxes result from the impact of timing differences in
the recognition of income and expenses for tax and financial statement purposes.
The sources of these differences and the tax effect of each were as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Difference between depreciation expense for
financial statements and federal income tax
reporting $ 2,373 $ 4,311 $ 2,989)
Non-taxable Federal Home Loan Bank stock
dividends 6,936 5,881 0
Non-taxable accretion on investment securities 11,232 0 0
Non-deductible expense related to Employee
Stock Ownership Plan (see Note 22) (4,386) 0 0
Non-deductible expense related to Management
Recognition Plan (see Note 24) (8,263) 0 0
Non-deductible expense related to Directors
Retirement Plan (see Note 24) (31,416) 0 0
== ========== ======== ===========
Total $ (23,524) $ 10,192 $ (2,989)
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Employee Stock Ownership Plan $ 4,386 $ 0 $ 0
Management Recognition Plan 8,263 0 0
Directors Retirement Plan 31,416 0 0
Total deferred tax assets 44,065 0 0
Deferred tax liabilities:
Accumulated depreciation 14,981 12,608 8,297
Federal Home Loan Bank Stock Dividends 30,328 23,392 0
Investment accretion 11,232 0 0
Investment securities available for sale 259 0 0
Total deferred tax liabilities 56,800 36,000 8,297
========= =========== =========
Net deferred tax liability $ 12,735 $ 36,000 $ 8,297
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 15 - FEDERAL INCOME TAXES AND RETAINED EARNINGS
As discussed in Note 14, the Bank is allowed a special bad debt deduction
limited generally in the current year to eight percent of otherwise taxable
income and subject to certain limitations based on aggregate loans and savings
account balances at the end of the year. If the amounts which qualified as
deductions for federal income tax purposes are later used for purposes other
than to absorb bad debt losses, they will be subject to federal income tax at
the then current corporate rate. Retained earnings include approximately
$692,179 and $638,904 for which federal income tax has not been provided as of
June 30, 1995 and 1994, respectively. The unrecorded deferred federal income tax
liability on the above amounts was approximately $235,000 and $217,000 at June
30, 1995 and 1994, respectively.
NOTE 16 - PENSION PLAN
The Bank has adopted a SEP retirement plan which covers substantially all
employees. The plan is a defined contribution plan, with the Bank voluntarily
funding for eligible employees on an monthly basis. Pension expense was $16,713,
$15,119 and $13,654 for the years ended June 30, 1995, 1994 and 1993,
respectively.
NOTE 17 - RECONCILIATION WITH OFFICE OF THRIFT SUPERVISION REPORTS AS FILED BY
THE SUBSIDIARY, LINCOLN FEDERAL SAVINGS BANK
Net income and retained earnings reported in these audited financial statements
differ in certain respects from reports filed with the Office of Thrift
Supervision. The following is a reconciliation of these differences:
<TABLE>
<CAPTION>
Year ended Year ended
June 30, 1995 June 30, 1994
Net Retained Net Retained
Income Earnings Income Earnings
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C> <C>
Amounts reported to the OTS $ 297 $ 3,988 $ 302 $ 3,691
Reverse prior year's audit adjustments
recorded on books in current year (6) 0
Total per financial statements $ 297 $ 3,988 $ 296 $ 3,691
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 17 - RECONCILIATION WITH OFFICE OF THRIFT SUPERVISION REPORTS AS FILED BY
THE SUBSIDIARY, LINCOLN FEDERAL SAVINGS BANK (CONTINUED)
<TABLE>
<CAPTION>
Year ended
June 30, 1993
Net Retained
Income Earnings
(in thousands)
--------------
<S> <C> <C>
Amounts reported to the OTS $ 394 $ 3,389
Rounding 0 1
Total per books 394 3,390
Reverse prior year's audit adjustments
recorded on books in current year 23 0
Increase in bonus accrual (8) (8)
Decrease in income tax provision 14 14
======= ========
Total per financial statements $ 423 $ 3,396
</TABLE>
NOTE 18 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The majority of the Bank's business activity is with customers located in the
central Kentucky area. The Bank makes agribusiness, commercial, consumer, and
residential loans to customers primarily in central Kentucky. A substantial
portion of the Bank's debtors' ability to honor their contracts is dependent
upon the agribusiness economic sector. Generally, the loans are collateralized
by assets including real estate, marketable securities, tangible property, and
personal guarantees. The loans are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrower.
NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
During the normal course of business, the Bank is a party to financial
instruments with off-balance sheet risk to meet the needs of customers. These
financial instruments include commitments to extend credit and contain, to
varying degrees, elements of credit and market risk in excess of the amounts
recognized in the balance sheets. The Bank's credit risk relates to the
possibility that a loss may occur from the failure of another party to perform
according to the terms of a contract. The market risk relates to the possibility
that future changes in market prices may make a financial instrument less
valuable.
Commitments to extend credit are legally binding agreements to lend to a
customer. Commitments generally have variable rates, fixed expiration dates, and
may require payment of a fee. The variable rates are tied to the lenders' index
rate, limiting the Bank's market risk.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The total mortgage commitments of $469,970 and $888,100 at June 30, 1995 and
1994, respectively, and unused home equity lines of credit to customers of
$748,841 and $723,336 at June 30, 1995 and 1994, respectively, do not
necessarily represent actual future cash requirements since some of the
commitments may expire without being drawn upon. The Bank evaluates each
customer's credit worthiness on a case-by-case basis and collateral is obtained
if deemed necessary.
<TABLE>
<CAPTION>
June 30,
1995 1994
---- ----
<S> <C> <C>
Investment pledged to
collateralize public funds $ 195,000 $ 200,000
</TABLE>
NOTE 20 - CAPITAL REQUIREMENTS
Federal regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5% of adjusted total assets, a minimum 3% core/leverage
capital ratio, and a minimum 8% total risk- based capital ratio to be considered
"adequately capitalized." An institution is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of 2% or less.
The following table sets out the Bank's various regulatory capital categories.
The figures reflected below do not include the capital of the holding company.
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1994
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C> <C> <C>
Tangible capital $ 5,930 12.6% $ 5,633 11.8%
Core/leverage capital $ 5,930 12.6% $ 5,633 11.8%
Total risk-based capital $ 6,184 24.5% $ 5,896 24.4%
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 20 - CAPITAL REQUIREMENTS (CONTINUED)
The following is a reconciliation of generally accepted accounting principles
(GAAP) capital to regulatory capital for the Bank. The reconciliation also
compares the capital requirements as computed to the minimum capital
requirements for the Bank.
<TABLE>
<CAPTION>
Tangible Risk-Based
At June 30, 1995 Core Capital % Capital % Capital %
- ---------------- ------------ - ------- - ------- -
<S> <C> <C> <C> <C> <C> <C>
GAAP capital
(bank only)
$ 5,930,049 $ 5,930,049 $ 5,930,049
General loss
reserves N/A N/A 253,961
Regulatory
capital 5,930,049 12.6% 5,930,049 12.6% 6,184,010 24.5%
Required
capital 1,409,000 3.0% 704,000 1.5% 2,023,000 8.0%
Excess
capital $ 4,521,049 9.6% $ 5,226,049 11.1% $ 4,161,010 16.5%
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 20 - CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
Tangible Risk-Based
At June 30, 1994 Core Capital % Capital % Capital %
- ---------------- ------------ - ------- - ------- -
<S> <C> <C> <C> <C> <C> <C>
GAAP capital
(bank only) $ 5,633,396 $ 5,633,396 $ 5,633,396
General loss
reserves N/A 262,151
Regulatory
capital 5,633,396 11.8% 5,633,396 11.8% 5,895,24.4%
Required
capital 1,431,000 3.0% 716,000 1.5% 1,930,000 8.0%
Excess
capital $ 4,202,396 8.8% $ 4,917,396 10.3% $ 3,965,547 16.4%
</TABLE>
NOTE 21 - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Lincoln Financial Bancorp, Inc. was formed June 28, 1994. Information as to the
financial position, results of operations, and cash flows of Lincoln Financial
Bancorp, Inc. as of and for the year ended June 30, 1995, and the period ended
June 30, 1994, is summarized below:
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 21 - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets:
Cash $ 354,641 $ 1,907,316
Investment in net assets of subsidiary,
Lincoln Federal Savings Bank 2,238,539 1,942,016
Investment securities available for sale 1,245,125 0
Income tax refund receivable 16,869 0
Organization costs (net of accumulated amortization) 1,958 2,458
=========== ===========
Total assets $ 3,857,132 $ 3,851,790
Liabilities:
Payable to Bank $ 0 $ 184,700
Accounts payable 0 30,214
Deferred income taxes payable 2,938 0
=========== ===========
Total liabilities 2,938 214,914
Stockholders' equity:
Common stock 4,232 4,232
Additional paid-in capital 3,944,426 3,927,086
Retained earnings 163,059 (42)
Unrealized gain on securities
available for sale, net of deferred taxes 372 0
Unearned Employee Stock Ownership Plan shares (257,895) (294,400)
Total stockholders' equity 3,854,194 3,636,876
Total liabilities and stockholders' equity $ 3,857,132 $ 3,851,790
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 21 - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)(CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Income:
Equity in earnings of subsidiary $ 296,523 $ 0
Accretion on investments 38,479 0
Total income 335,002 0
Expenses:
Legal fees 61,300 0
Office expenses 12,412 0
Tax and Licenses 5,661 0
Other expenses 12,147 42
Total expenses 91,520 42
Income (loss) before taxes 243,482 (42)
Federal income tax benefit 14,122 0
Net income 257,604 (42)
Retained earnings at beginning of period (42) 0
Dividends paid (94,503) 0
Retained earnings at end of period $ 163,059 (42)
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 257,604 $ (42)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiary (296,523) 0
Accretion of discount on investment securities (38,479) 0
Amortization of organizational costs 500 42
Deferred income taxes 2,747 0
ESOP compensation expense 17,340 0
Increase in tax refund receivable (16,869) 0
Increase (decrease) in accounts payable (30,215) 30,214
Net cash provided by (used in) operating activities (103,895) 30,214
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 21 - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from investing activities:
Investment in subsidiary Bank $ 0 $ (1,942,016)
Purchase of investment securities (2,206,082) 0
Maturities of investment securities 1,000,000 0
Increase in organizational costs 0 (2,500)
Principal collections on loan to
Employee Stock Ownership Plan 36,505 0
Net advances from (repayments to)
subsidiary Bank (184,700) 184,700
Net cash used in by financing activities (1,354,277) (1,759,816)
Cash flows from financing activities:
Loan to Employee Stock Ownership Plan 0 (294,400)
Dividends paid (94,503) 0
Proceeds from issuance of common stock 0 3,931,318
Net cash provided by (used in) financing
activities (94,503) 3,636,918
Increase (decrease) in cash (1,552,675) 1,907,316
Cash at beginning of period 1,907,316 0
Cash at end of period $ 354,641 $ 1,907,316
</TABLE>
NOTE 22 - EMPLOYEE STOCK OWNERSHIP PLAN
In conjunction with converting to a stock ownership form, the Company and the
Bank established an Employee Stock Ownership Plan (ESOP), under which the Bank
makes annual contributions to the ESOP trust for the benefit of eligible
employees. To be eligible, an employee must have completed at least one year of
service. The contributions may be in the form of cash or qualifying employer
securities. The amount of the annual contribution is at the discretion of the
Board of Directors of the Bank.
Initially, the ESOP acquired 29,440 shares of the Company's common stock for a
total purchase price of $294,400 financed by a $294,400 loan from the Company.
The issuance of the shares to the ESOP has been reported in equity on the
accompanying balance sheet together with a charge to unearned ESOP shares, a
contra-equity account. The Board of Directors intends to contribute to the plan
an amount equal to the required principal and interest payments related to the
ESOP loan. The loan to the ESOP is repayable to the Company in annual principal
payments of $29,440 plus interest at the prime rate plus one percent through
December 31, 2003. The interest rate in effect for the year ended June 30, 1995
was 8.25%. The interest rate in effect for the year ended June 30, 1996 will be
10.0%. The principal balance of the ESOP loan was $257,895 at June 30, 1995.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 22 - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
The loan to the ESOP is secured by the contributions made by the Bank and the
stock owned by the ESOP which has not been allocated to individual participant
accounts. The plan is noncontributory and there is no past service liability.
The Bank recorded compensation expense related to the ESOP of $53,845 for the
year ended June 30, 1995 based on the fair value of the 3,651 shares
committed-to-be-released. There was no compensation expense related to the ESOP
for the years ended June 30, 1994 or 1993. Shares are committed-to-be-released
from the Loan Suspense Account based solely on the ratio that the payments of
principal for each plan year bear to the original ESOP loan amount of $294,400.
In the event a terminated ESOP participant desires to sell his or her shares of
the Company's stock, or for certain employees who elect to diversify their
account balances, the Company may be required to purchase the shares from the
participant at their fair market value. Dividends on allocated shares will be
charged to retained earnings while dividends on unallocated shares are not
considered dividends for financial reporting purposes.
As of June 30, 1995, no ESOP shares have been allocated to participants, however
3,651 shares are committed-to-be-released. There are 25,789 ESOP shares held in
the Loan Suspense Account at June 30, 1995, with a total fair market value of
$380,388.
Future minimum principal payments on the loan to the Employee Stock Ownership
Plan are as follows:
Year ending June 30,
1996 $ 29,440
1997 29,440
1998 29,440
1999 29,440
2000 29,440
Thereafter 110,695
=========
$ 257,895
NOTE 23 - EARNINGS PER SHARE
The conversion from a mutual savings bank to a stock savings bank and the
issuance by the Company of its common stock was not completed until June 28,
1994 (see Note 2). Historical earnings per share for 1994 and 1993 are not
applicable for the mutual savings bank prior to its conversion to a stock
institution because it had no stock outstanding.
Earnings per common share and common share equivalent were computed by dividing
net income by the weighted-average number of common shares and common share
equivalents outstanding during the year. The stock options described in Note 24
are considered to be common stock equivalents. Employee Stock Ownership Plan
(see Note 22) shares that have not been committed to be released are not
considered outstanding for purpose of computing earnings per share. The weighted
average number of shares outstanding was 399,683 in 1995.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 24 - BENEFIT PLANS AND AGREEMENTS
1994 Stock Option and Incentive Plan:
The shareholders approved the creation of the 1994 Stock Option and Incentive
Plan at their annual meeting in October 1994. Under the terms of the plan, a
number of shares up to 10% (42,320 shares) of the common stock issued in the
conversion are reserved for future issuance by the Company upon exercise of
stock options granted to directors and key employees. The plan provides for a
term of ten years, after which no awards may be made.
Stock options for 38,509 shares of stock were granted in October 1994 to
directors and key employees of the Bank. The options vest 20% per year over a
5-year period of service beginning as of the date of grant and may be exercised
at a price of $12.50 per share. Because the market value of the shares at the
grant date and the option price are the same, no compensation expense has been
recorded in the accompanying financial statements. No options have been
exercised as of June 30, 1995.
Management Recognition Plan (MRP):
The shareholders approved the creation of a Management Recognition Plan (MRP) at
their annual meeting in October 1994. Under the provisions of the Plan, the Bank
will contribute sufficient funds to a MRP Trust so that the MRP Trust can
purchase up to an aggregate of 4% (16,928 shares) of the common stock issued in
the conversion (see Note 2).
In October 1994, the Company awarded 12,357 shares to directors and key
employees of the Bank which vest 20% per year over a 5-year period beginning as
of the date of grant. All plan shares held by a participant whose service with
the Bank terminates due to the participant's death or disability shall become
100% vested as of the participant's last day of service with the Bank. As of
June 30, 1995, the Bank had not contributed funds to the MRP Trust which,
accordingly, had acquired no shares. Under the provisions of the Plan, the Trust
is expected to acquire the first 20% of vested shares prior to the vesting of
such shares in October 1995. New shares may be issued by the Company directly to
the Trust if it is unable to purchase the needed shares on the open market. The
Bank has recorded $32,420 as compensation expense for the year ended June 30,
1995 related to this Plan.
Directors Retirement Plan:
The shareholders approved the creation of a Directors Retirement Plan at their
annual meeting in October 1994. The Plan provisions call for a lump sum payment
immediately upon separation from service equal to the product of the
participants vested percentage and two times the participant's fees for service
on the board during the preceding 12-month period. A director is 50% vested in
the Plan after six full years of service and 100% vested after ten full years of
service. For the year ended June 30, 1995, the Bank has recorded $92,400 in
expense relating to this Plan.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 24 - BENEFIT PLANS AND AGREEMENTS (CONTINUED)
Incentive Compensation Plans:
The Board of Directors has approved a Deferred Compensation Plan for the Board
of Directors and certain officers. Under the terms of the Plan, directors may
elect to defer the receipt of all or part of their future fees, and eligible
officers may elect to defer receipt of up to 25% of their future compensation.
As of June 30, 1995 there were no participants in the Plan.
Employee Severance Agreements:
Effective on the date of conversion, the Company entered into severance
agreements with four employees. In the event of a covered employee's involuntary
termination of employment in connection with any "change in control" (as defined
in the Severance Agreements) of the Company occurring within three years of the
date of conversion, the employee would be paid the amount specified in the
Agreement. The President and Chief Executive Officer would receive 2.99 times
his average annual compensation for the preceding five years. The other three
management employees would receive 1.99 times their average annual compensation
for the preceding five years. On each annual anniversary date from the date of
commencement, the severance agreements may be extended for one additional year
upon a determination by the Board of Directors. On July 18, 1995, the Board of
Directors extended the above severance agreements for another one year period.
NOTE 25 - RECENT PRONOUNCEMENTS
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, "Disclosures About the Fair Value of
Financial Instruments". This statement, which is not effective until years
ending after December 15, 1995, for companies with assets of less than $150
million, requires that certain fair values of all financial instruments be
disclosed in the footnotes to the financial statements. The Bank is not required
to adopt the standard for the periods reflected in these financial statements
and, accordingly, has not determined the impact on the financial statements of
adopting this standard.
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan", was issued by the Financial Accounting Standards
Board in May 1993, and is effective for fiscal years beginning after December
15, 1994. Statement No. 114 was subsequently amended by Statement No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures", which was issued in October 1994 and is also effective for fiscal
years beginning after December 15, 1994. These pronouncements require that
impaired loans be measured based on the present value of future cash flows. The
Bank is not required to adopt these standards for the periods reflected in these
financial statements and, accordingly, has not determined the impact on the
financial statements of adopting these standards.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Years ended June 30, 1995, 1994 and 1993
NOTE 26 - AGGREGATE EFFECT OF YEAR END ADJUSTMENTS
The 1994 Stock Option Plan, Management Recognition Plan and Directors Retirement
Plan were approved by the shareholders at their annual meeting in October 1994
subject to approval by the Office of Thrift Supervision. Notices of OTS approval
were received on May 18, 1995 and July 26, 1995 granting approval for these
plans effective the date of shareholder approval in October 1994. Upon receiving
OTS approval, the Company recognized, in the fourth quarter, $124,820 of
compensation expense related to these plans for the period from October 1994
through year end. In addition to the above, $53,845 in compensation expense
related to the ESOP (see Note 22) established and approved in connection with
the June 28, 1994 conversion from a mutual savings bank to a stock savings bank
was also recognized during the fourth quarter ended June 30, 1995.
NOTE 27 - SUBSEQUENT EVENTS
On July 18, 1995, the Board of Directors declared a dividend of $0.10 per share
payable on September 1 to shareholders of record on August 15.
<PAGE>
MARKET AND DIVIDEND INFORMATION
The Common Stock is listed over-the-counter through the National Daily
Quotation System "Pink Sheet" published by the National Quotation Bureau, Inc.
There are currently 423,200 shares of the Common Stock outstanding and
approximately 216 holders of record of the Common Stock (not including shares
held in "street name") as of September 15, 1995.
The following table sets forth certain information as to the range of
the high and low bid prices for the Common Stock for the calendar quarters
indicated and since the Common Stock's issuance on June 28, 1994.
<TABLE>
<CAPTION>
High Bid (1) Low Bid (1) Dividends
Paid
------------ ----------- ---------
<S> <C> <C> <C>
Fiscal Year 1994:
Fourth Quarter $12.50 (2) $12.50 (2) --
Fiscal Year 1995:
First Quarter $13.44 (2) $11.52 (2) --
Second Quarter 12.96 10.56 0.08
Third Quarter 11.76 10.56 0.08
Fourth Quarter 14.25 11.76 0.08
</TABLE>
- ----------------------
(1) Quotations reflect inter-dealer price, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.
(2) This information has been furnished by the Chicago Corporation, 208 South
LaSalle Street, Chicago, IL 60604.
The Board of Directors of the Company periodically reviews its
dividend policy in light of the performance of the Company and its subsidiary,
Lincoln Federal Savings Bank. Any change in the Company's dividend policy, as
determined by the Board of Directors, will depend on the Company's debt and
equity structure, earnings, regulatory capital requirements, and other factors,
including economic conditions, regulatory restrictions, and tax considerations.
See Note 2 of Notes to Consolidated Financial Statements for restrictions on the
payment of cash dividends.
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
------------------
<S> <C> <C>
Billy H. Fox Minor Teague Lee McAninch
Chairman of the Board of the Bank Secretary of the Bank and Retired Postal Service
and the Company and retired Owner the Company and retired County
of Fox Funeral Home Treasurer
Ben Gaines, Sr. Albert Jackson James W. Adams
Vice Chairman of the Bank and the Company and Retired Building Contractor Owner, Adams Industrial
Owner of Gaines Furniture Co. Sales Co.
Bruce Edgington Jeffrey Ralston Bill Payne, Jr.
President and Chief Executive Officer Attorney-at-Law Farm Manager/Partner
of the Bank and the Company Wilmot, May & Ralston Knob Lick Farm
EXECUTIVE OFFICERS
------------------
Bruce Edgington Calvin Denham Renita L. Hampton
President and Chief Executive Officer Vice President of Vice President of Compliance
of the Bank and the Company Public Relations and Treasurer of the Bank
Marvenna Smith Donna Delaney
Vice President of Teller Operations Comptroller; Treasurer of
and Assistant Secretary of the Bank; the Company
Vice President of the Company
</TABLE>
<TABLE>
<CAPTION>
OFFICE LOCATIONS
Main Office: Branch Offices: Loan Production Office:
- ------------ --------------- -----------------------
<S> <C> <C> <C>
111 West Main Street 614 East Main Street Hustonville Street 45 East Main Street
Stanford, Kentucky 40484 Stanford, Kentucky 40484 Liberty, Kentucky 42539 Mt. Vernon, Kentucky 40456
</TABLE>
<PAGE>
GENERAL INFORMATION
Independent Auditors
- --------------------
Potter & Company, LLP
Certified Public Accountants
Quality Place
300 East Main Street
Lexington, Kentucky 40507
General Counsel
- ---------------
Wilmot, May & Ralston
Attorneys at Law
202 Lancaster Street
Stanford, Kentucky 40484
Special Counsel
Housley Goldberg Kantarian
& Bronstein, P.C.
1220 19th Street, N.W. Suite 700
Washington, D.C. 20036
Annual Meeting
- --------------
The 1995 Annual Meeting of Stockholders will be held on October 25,
1995 at 1:00 p.m. at Lincoln Federal Savings Bank, 111 West Main Street,
Stanford, Kentucky 40484.
Transfer Agent and Registrar
- ----------------------------
Registrar and Transfer
Company 10 Commerce Drive
Cranford, New Jersey 07016
Annual Report on Form 10-K
- --------------------------
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED JUNE 30, 1995 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR THE
1995 ANNUAL MEETING UPON WRITTEN REQUEST TO BRUCE EDGINGTON, 111 WEST MAIN
STREET, P.O. BOX 267, STANFORD, KENTUCKY 40484-1253
<PAGE>
APPENDIX B
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24270
Lincoln Financial Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 61-1262732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 West Main Street, Stanford, Kentucky 40484
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (606) 365-2129
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 ninety days.
X
YES NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock $0.01 Par Value 440,128
---------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of May 7, 1996
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, March 31, 1996
and June 30, 1995
Consolidated Statements of Income, Three and Nine Months
Ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows, Nine
Months Ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of As of
March 31, June 30,
ASSETS 1996 1995
---------- --------
(Unaudited)
<S> <C> <C>
Cash and due from banks................................ $ 2,544 $ 1,774
Overnight deposits..................................... 1,200 200
Certificates of deposit................................ 270 360
Securities held to maturity (estimated market values
of $5,329,408 and $5,818,215 at March 31, 1996,
and June 30, 1995, respectively)..................... 5,090 5,897
Securities available for sale at market values ........ -- 1,992
Mortgage-backed securities (estimated market
values of $70,467 and $78,559 at March 31,
1996 and June 30, 1995, respectively)................ 65 77
Loans, net............................................. 40,533 36,954
Real estate owned, net................................. -- 68
Premises and equipment................................. 346 362
Federal Home Loan Bank Stock, at cost.................. 352 334
Accrued interest receivable............................ 186 140
Income tax refund receivable .......................... 33 33
Prepaid expenses and other assets...................... 21 27
------- -------
Total assets....................................... $50,640 $48,218
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................... $42,412 $40,452
Federal income taxes
Current.............................................. 67 --
Deferred............................................. 12 13
Liability for Directors Retirement Plan ............... 84 92
Liability for Management Recognition Plan ............. -- 33
Liability for Funds Held in Escrow .................... 250 --
Accrued expenses and other liabilities ................ 112 83
------- -------
Total liabilities ................................... $42,937 $40,673
======= =======
</TABLE>
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (cont.)
(In thousands)
<TABLE>
<CAPTION>
As of As of
March 31, June 30,
1996 1995
---------- --------
(Unaudited)
<S> <C> <C>
Stockholders' Equity:
Common stock .................................. $ 4 $ 4
Additional Paid In Capital ........................... 4,117 3,944
Retained earnings-substantially restricted............. 3,956 3,854
Unrealized gain on securities available for sale ...... -- 1
Unearned ESOP Plan Share .......................... (258) (258)
Unearned MRP Plan Share .......................... (116) --
-------- -----
Total Stockholders' equity.......................... $ 7,703 $ 7,545
-------- -------
Total liabilities and Stockholders' equity ....... $50,640 $48,218
======== =======
</TABLE>
See the Notes to Unaudited Condensed Consolidated Financial
Statements included elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three-Month For the Nine-Month
Periods Periods
Ended March 31, Ended March 31,
---------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except earnings per share )
<S> <C> <C> <C> <C>
Interest income:
Interest on loans ........................................ $ 868 $ 688 $2,507 $2,039
Interest and dividends on investment
and mortgage-backed securities ......................... 105 122 338 379
------ ------ ------ ------
Total interest income .................................. 973 810 2,845 2,418
Interest expense:
Deposits ................................................. 527 430 1,571 1,209
------ ------ ------
Net interest income ........................................ 446 380 1,274 1,209
Provision for loan losses .................................. -- -- 11 3
------ ------ ------
Net interest income after provision for
loan losses .............................................. 446 380 1,263 1,206
------ ------ ------
Non-interest income:
Commissions .............................................. 8 8 22 19
Service charges and miscellaneous ........................ 33 33 94 85
------ ------ ------
Total non-interest income .............................. 41 41 116 104
------ ------ ------
Non-interest expense:
Salaries and employee benefits ........................... 161 126 481 367
Net occupancy and equipment .............................. 18 17 55 50
Real estate owned, including provision
for loss on disposition ................................ -- -- -- 2
Advertising .............................................. 6 4 19 11
Directors' fees .......................................... 13 15 43 45
Directors Retirement Plan Expense ........................ 2 -- 5
Deposit insurance ........................................ 27 29 81 86
Office supplies, postage, telephone ...................... 17 18 57 54
Data processing expense .................................. 21 18 56 55
Other operating expense .................................. 52 67 199 188
------ ------ ------
Total non-interest expense ............................. 317 294 996 858
------ ------ ------
Income before income taxes ............................. 170 127 383 452
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
For the Three-Month For the Nine-Month
Periods Periods
Ended March 31, Ended March 31,
----------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except earnings per share )
Federal income taxes ....................................... 58 42 131 126
------ ------ ------
Net income ............................................. $ 112 $ 85 $ 252 $ 326
====== ====== ======
Earnings Per Share ......................................... $ 0.26 $ 0.20 $ 0.61 $ 0.77
</TABLE>
See the Notes to Unaudited Condensed Consolidated Financial Statements
included elsewhere herein.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine-Month
Periods
Ended March 31,
----------------------------
1996 1995
-------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . $ 252 $ 326
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . 24 29
Amortization of securities premiums . . 6 11
Accretion of securities discounts . . . (12) (34)
Amortization of deferred loan fees . . . 8 8
Provision for loan losses . . . . . . . 11 3
Provision for losses on real estate owned -- 1
Provision for management recognition plan 23 --
Stock dividends . . . . . . . . . . . . (18) (15)
Changes in:
Interest receivable . . . . . . . . . . (46) (4)
Liability for directors retirement plan (8) --
Liability for funds held in escrow . . 250 --
Prepaid expenses and other assets . . . 6 3
Accrued federal income taxes . . . . . 66 12
Accrued expenses and other liabilities 29 (30)
------- --------
Total adjustments . . . . . . . . . . 339 (16)
------- --------
Net cash provided by (used in) operating 591 310
activities
Cash flows from investing activities:
Net (increase) decrease in overnight deposits (1,000) 50
Purchase of securities available for sale -- (2,204)
Purchase of investment securities . . . -- (242)
Purchase of certificates of deposit . . -- (360)
Maturities of certificates of deposit . 90 --
Maturities of securities held to maturity 805 1,815
Maturities of securities available for sale 2,000 250
Maturities of mortgage-backed securities 12 16
Net (increase) decrease in loans . . . . (3,530) (1,302)
Purchase of premises and equipment . . (8) (51)
-------- --------
Net cash provided by (used in) investing (1,631) (2,028)
activities
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CASH FLOWS
(Unaudited)
<CAPTION>
For the Nine-Month
Periods
Ended March 31,
----------------------------
1996 1995
-------- ---------
(In thousands)
Cash flows from financing activities:
Net increase in demand deposit accounts 530 (324)
Net increase (decrease) in savings accounts (223) (1,659)
Net increase (decrease) in other deposits 1,653 1,274
Cash dividends paid . . . . . . . . . . (146) (67)
Purchase of Treasury Stock . . . . . . (25) --
Proceeds from sale of treasury stock.......... 21 --
-------- -------
Net cash provided (used) by financing 1,810 (776)
activities
Net increase (decrease) in cash and cash 770 (2,494)
equivalents
Cash and cash equivalents at beginning of 1,774 3,464
period
Cash and cash equivalents at end of period $ 2,544 $ 970
======= =======
Supplemental disclosure of cash flow
information
Cash paid for income taxes . . . . . . . $ 64 $ 106
Cash paid for interest . . . . . . . . . $ 1,572 $ 1,206
Supplemental disclosure of non-cash activities:
Additions to real estate acquired in
settlement of
Loans or through foreclosures ................ -- 67
Common stock issued to management recognition 172 --
plan
</TABLE>
See the Notes to Unaudited Condensed Consolidated Financial
Statements included elsewhere herein.
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Lincoln Financial Bancorp, Inc. (the "Company") was incorporated in
1994 at the direction of Lincoln Federal Savings Bank (the "Bank") to
become the holding company of the Bank upon the conversion of the Bank
from mutual to stock form. On June 28, 1994, the Bank converted from
mutual to stock form as a wholly owned subsidiary of the Company. In
conjunction with the conversion, the Company issued 423,200 shares of
its common stock to the public. The Company's primary assets are the
outstanding capital stock of the Bank, cash, a note receivable from the
Bank, and a note receivable from the ESOP, and its sole business is
that of the Bank. Accordingly, the financial statements and discussions
herein include both the Company and the Bank.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for
interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for fair
presentation have been included. The results of operations and other
data for the three and nine month periods ended March 31, 1996 are not
necessarily indicative of results that may be expected for the entire
fiscal year ending June 30, 1996.
(2) EARNINGS PER SHARE
For purposes of determining earnings per share for the three month and
nine month periods ended March 31, 1996, net earnings have been divided by the
weighted average number of shares of common stock issued and outstanding, and
the weighted average number of common stock equivalents. Stock options are
regarded as common stock equivalents and therefore have been included.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Developments -- Acquisition Agreement with First Southern Bancorp, Inc.
On March 25, 1996, the Company announced that it had entered into an
agreement with First Southern Bancorp, Inc. (the "First Southern"), the holding
company for five banks in Central Kentucky, that provides for the acquisition of
Lincoln by First Southern. The Agreement, as amended, provides for the merger of
Lincoln with a wholly owned subsidiary of First Southern, in which Lincoln
shareholders would receive $22.01 in cash for each of the 436,757 shares of
Lincoln common stock currently outstanding. Directors and officers of Lincoln
would receive $9.51 per share in cash for the currently outstanding options to
purchase 36,922 shares of Lincoln common stock. The total value of the
transaction is approximately $9,965,000. Lincoln also granted First Southern an
option to acquire up to 19.9% of the outstanding shares of Lincoln in certain
circumstances. The transaction is subject to regulatory approvals, approval by
Lincoln shareholders, and certain other conditions. The parties anticipate the
transaction will be completed during the third quarter of 1996.
<PAGE>
Financial Condition
At March 31, 1996, the total assets of the Bank were $51 million, an
increase of $2.4 million or 5.0% from June 30, 1995. The increase in assets
primarily reflects an increase in loans and deposits from June 30, 1995 to March
31, 1996.
Cash, due from banks, and overnight deposits increased from $2.0
million at June 30, 1995 to $3.7 million at March 31, 1996, an increase of 90%
due to the large increase in deposits from June 30, 1995 to March 31, 1996.
Investment securities, securities available for sale, and mortgage-backed
securities were $5.2 million at March 31, 1996, a decrease of $2.8 million from
June 30, 1995 or 35.3%. The decrease resulted from the increased demand in
lending as funds provided by maturing investment securities and securities
available for sale were used to finance the increase in loans.
Loans receivable, net of the provision of loan losses, increased from
$36.9 million at June 30, 1995 to $40.5 million at March 31, 1996, an increase
of $3.6 million or 9.7%. The increase primarily resulted from greater loan
demand from consumers attributable to stable interest rates charged during the
quarter and the possibility of higher rates in the future.
At March 31, 1996, total non-performing loans and other non-performing
assets amounted to $283,000 and $0, respectively, as compared to $79,000 and
$68,000, respectively, at June 30, 1995. The increase of $204,000 or 258% is due
to the increased number of delinquent loans. Potential problem loans at March
31, 1996 amounted to $1.2 million as compared to $1.1 million at June 30, 1995.
Potential problem loans increased $0.1 million during the nine months ended
March 31, 1996, due to the addition of several loans that are consistently late.
During the three and nine months ended March 31, 1996, the Bank's provision for
loan loss was $0 and $11,000, respectively, and at March 31, 1996, its allowance
for loan losses was $260,000 as compared to $264,000 at June 30, 1995, and
represented 92% of total non-performing loans at March 31, 1996.
Deposits increased from $40.4 million at June 30, 1995 to $42.4 million
at March 31, 1996, an increase of $2.0 million or 4.8%. Management believes that
this increase is primarily due to the Bank's pricing of interest rates payable
on its deposits to be competitive with its market area.
Results of Operations
Net Income. Net income for the three months ended March 31, 1996
increased $27,000, or 31.8%, to $112,000 from $85,000 for the three months ended
March 31, 1995. The increase was primarily attributable to the steady increase
in net interest income earned by the Bank on its adjustable rate mortgage loans,
which exceeded the increase in the interest rates paid on the Bank's deposits.
Net income for the nine months ended March 31, 1996, decreased $74,000,
or 22.3%, to $252,000 from $326,000 for the nine months ended March 31, 1995.
Such decrease was primarily attributable to an increase in interest expense, an
increase in provision for loan losses, a general increase in salary and employee
benefits, which include the accruals for the ESOP and MRP, an increase in other
operating expenses due to consultation fees as a public company, and offset in
part by an increase in interest income.
Net Interest Income. Net interest income for the quarter ended March
31, 1996 was $446,000, an increase of $66,000 or 17.4% as compared to $380,000
for the quarter ended March 31, 1995. This increase was due primarily to the
steady increase in net interest income earned by the Bank on its adjustable rate
<PAGE>
mortgage loans, which exceeded the increase in the interest rates paid on the
Bank's deposits. The net yield on interest-earning assets increased to 2.84% for
the quarter ended March 31, 1996, from 2.48% for the quarter ended March 31,
1995, while the ratio of average interest-earning assets to average
interest-bearing liabilities increased from 112.8% to 114.5% for the same
respective periods.
Net interest income increased by $65,000 for the nine months ended
March 31, 1996 compared to the nine months ended March 31, 1995. This increase
was also due primarily to the steady increase in net interest income earned by
the Bank on its adjustable rate mortgage loans that exceeded the increase in the
interest rates paid on deposits. The net yield on interest-earning assets
decreased to 2.73% for the nine month period ended March 31, 1996, from 2.78%
for the nine month period ended March 31, 1995, due to the Bank's use of
maturing investment securities and proceeds from the sale of securities
available for sale to fund increased loan demand, and due to an increase in
rates offered on certificates of deposit to reduce the outflow of deposits. The
ratio of average interest-earning assets to average interest-bearing liabilities
increased to 113.2% from 112.1% for the same respective periods. The effect on
net interest income of such decrease in net yield was more than offset by the
increase in the ratio of interest-earning assets to interest-bearing liabilities
during the same period.
Interest Income. Interest income for the quarter ended March 31, 1996,
was $973,000, an increase of $163,000 or 20.1% as compared to $810,000 for the
quarter ended March 31, 1995. The increase resulted primarily from a 80 basis
point increase in the average yield on interest-bearing assets, from 7.02%
during the quarter ended March 31, 1995 to 7.82% during the quarter ended March
31, 1996. The increase in average yield reflects the $3.6 million or 9.7%
increase in net loans receivable during the quarter ended March 31, 1996, as
compared to the quarter ended March 31, 1995.
Interest income for the nine month period ended March 31, 1996, was
$2,845,000, an increase of $427,000 or 17.8% as compared to $2,418,000 for the
nine month period ended March 31, 1995. The increase in interest income resulted
primarily from a 89 basis point increase in the average yield on
interest-bearing assets, from 6.81% for the nine month period ended March 31,
1995 to 7.70% for the nine month period ended March 31, 1996.
Interest Expense. Total interest expense increased from $0.4 million
for the quarter ended March 31, 1995 to $0.5 million for the quarter ended March
31, 1996, reflecting the increase in the Bank's deposit rates to maintain
deposit accounts and to be more competitive with the other banks in the area.
The average cost of deposits increased by 44 basis points from 4.54% for the
quarter ended March 31, 1995 to 4.98% for the quarter ended March 31, 1996.
Interest expense increased from $1.2 million for the nine month period
ended March 31, 1995 to $1.6 million for the nine month period ended March 31,
1996. The increase of $0.4 million reflects the increase in the deposit rates
paid in order to maintain deposit accounts. The average cost of deposits
increased by 94 basis points from 4.03% for the nine month period ended March
31, 1995 to 4.97% for the nine month period ended March 31, 1996.
Provision for Loan Losses. The provision for loan losses for the three
and nine months ended March 31, 1996 was $0 and $11,000, respectively, as
compared to $0 and $3,000, respectively, for the same three and nine month
period in 1995. The increase in the provision of $8,000 for the nine months
<PAGE>
ended March 31, 1996 is primarily due to reflect the current level of the Bank's
allowance for loan losses. Charge-offs during the three and nine months ended
were $0 and $14,000 respectively. Further, the Bank's total allowance for loan
losses was $260,000 at March 31, 1996 as compared to $263,000 at March 31, 1995.
Classified assets at March 31, 1996 increased to $1,148,000, an increase of
$106,000 or 10.2%, as compared to $1,042,000 at March 31, 1995 due to the
addition of several loans that are classified as scheduled items. In determining
its provision for loan losses, management considers various factors, including
the current level of the allowance for loan losses as compared to the total
non-performing loans, the assessment of the risk inherent in the potential
problem loans identified as of March 31, 1996, and the overall composition of
its loan portfolio. Therefore, no provision was made during this quarter.
Non-interest Income. Non-interest income for the quarters ended March
31, 1996 and March 31, 1995 was $41,000. These accounts reflect NOW account fee
charges, life insurance commission revenues, and fees earned from premature
redemption of certificates of deposits.
Non-interest income increased to $116,000 for the nine months ended
March 31, 1996 as compared to $104,000 for the same period in 1995. The increase
of $12,000 was primarily due to increases in NOW account fee charges, life
insurance commission revenues, and premature redemption of certificates of
deposits.
Non-interest Expense. Non-interest expense for the quarter ended March
31, 1996 was $317,000, an increase of $23,000 or 7.8% as compared to $294,000
for the quarter ended March 31, 1995. The increase was due primarily to a
$35,000 increase in salaries and the accruals for the ESOP and MRP plans, a
$3,000 increase in data processing expense, offset by a decrease of $15,000 in
other operating expenses.
Non-interest expense increased by $138,000 or 16.1%, to $996,000 for
the nine months ended March 31, 1996 from $858,000 for the same period in 1995.
Such increase was due primarily to a $114,000 increase in salaries and the
accruals for the ESOP and MRP plans, an $8,000 increase in advertising, the
addition of the accruals for the Directors Retirement Plan of $5,000, and a
$11,000 increase in other operating expenses due to increased professional fees
incurred in connection with the proposed merger transaction.
Liquidity and Capital Resources
The Bank's primary source of funds are deposits and principal and
interest payments on loans, mortgage-backed securities and investment
securities. While maturities and scheduled amortization of loans,
mortgage-backed securities and investment securities are predicable sources of
funds, deposit flows and loan and mortgage-backed securities prepayments are
strongly influenced by changes in general interest rates, economic conditions
and competition.
The Bank's most liquid assets are cash and cash equivalents and
short-term investments. The levels of the Bank's cash and cash equivalents are
dependent on the Bank's operating, financing, lending and investing activities
during any given period. At March 31, 1996, the Bank's cash and cash equivalents
totaled $3.7 million compared to $2.0 million at June 30, 1995. The increase in
cash and cash equivalents was due primarily to the Bank's pricing of its
deposits to reflect the range of those offered in it market area, and due to
investment securities held to maturity and securities available for sale
maturing and the proceeds disbursed to the Bank and Company.
<PAGE>
The Bank is required by federal regulations to maintain specified
levels of "liquid" assets consisting of cash and other eligible investments. At
March 31, 1996, the Bank's liquidity ratio of 17.90% satisfied these
requirements. At March 31, 1996, the Bank exceeded all fully phased-in
regulatory capital requirements. The table below presents certain information
relating to the Bank's capital compliance at March 31, 1996 and June 30, 1995.
<TABLE>
<CAPTION>
At March 31, 1996 At June 30, 1995
% of % of
Amount Assets Amount Assets
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible Capital ............................. $6,263 12.4% $5,930 12.6%
Core Capital ................................. 6,263 12.4% 5,930 12.6%
Risk Based Capital ........................... 6,514 22.7% 6,184 24.5%
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a
Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
2. Agreement and Plan of Reorganization as of March 23, 1996 between
First Southern Bancorp, Inc. and Lincoln Financial Bancorp, Inc.,
is incorporated by reference to Exhibit 2 to Current Report on Form
8-K dated March 25, 1996.
27. Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated March 25, 1996 to
announce the signing of an agreement with First Southern Bancorp,
Inc., providing for the acquisition of the Company by First Southern.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lincoln Financial Bancorp, Inc.
Date: May 7, 1996 /s/ Bruce Edgington
-------------------
Bruce Edgington
President, Chief Executive Officer
(Director and Principal Executive
Officer)
Date: May 7, 1996 /s/ Donna Delaney
-----------------
Donna Delaney
Chief Financial Officer
(Principal Finance and Accounting
Officer)
<PAGE>
APPENDIX C
March 22, 1996
Board of Directors
Lincoln Financial Bancorp, Inc.
111 West Main Street
Stanford, Kentucky 40484
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial perspective, to the common shareholders of Lincoln Financial Bancorp,
Inc. Stanford, Kentucky ("Company"), and it's wholly owned subsidiary Lincoln
Federal Savings Bank ("Bank"), of the proposed acquisition of the Company by
First Southern Bancorp, Inc. Stanford, Kentucky ("First Southern"). In the
proposed merger, Company shareholders will receive a total of approximately Nine
Million Nine Hundred and Sixty Four Thousand, One Hundred and Forty Nine Dollars
and Seventy-Nine Cents ($9,964,149.79) in cash , based upon a price of $22.01
per share of Company common stock and $9.51 per option share, assuming a total
of 436,757 shares of Company common stock and MRP shares outstanding and 36,922
option shares outstanding on the Closing Date, subject to certain adjustments as
defined by the Plan and Agreement of Merger between First Southern and the
Company (the "Agreement").
Professional Bank Services, Inc. ("PBS") is a bank consulting firm and as part
of its investment banking business is continually engaged in reviewing the
fairness, from a financial perspective, of bank acquisition transactions and in
the valuation of banks and other businesses and their securities in connection
with mergers, acquisitions, estate settlements and other purposes. We are
independent with respect to the parties of the proposed transaction.
For purposes of this opinion, PBS reviewed and analyzed the historical
performance of the Company as set fourth in: (i) June 30, 1995 Holding Company
audited Annual Report and 10K filed with the SEC; (ii) December 31 and September
30, 1995 Holding Company 10Qs filed with the SEC; (iii) December 31, 1995 Thrift
Financial Report as filed with the Office of Thrift Supervision; (iv) June 30,
1995 Uniform Thrift Performance Report for the Bank; (v) September 25, 1995
proxy statement; (vi) September 30, and June 30, 1995 Thrift Financial Reports
for the Bank as filed with the Office of Thrift Supervision;(vii) May 16, 1994
Offering Circular and Prospectus for the conversion of the Bank to a stock form
Holding Company; (viii) historical common stock trading activity of the Company;
and (ix) the premises and other fixed assets. We have reviewed and tabulated
statistical data regarding the loan portfolio, securities portfolio and other
performance ratios and statistics. Financial projections were prepared and
analyzed, as well as, other financial studies, analyses and investigations as
deemed relevant for the purposes of this opinion. We have reviewed and tabulated
consolidated statistical data regarding growth, growth prospects for service
<PAGE>
markets, liquidity, asset composition and quality, profitability, leverage and
capital adequacy. In review of the aforementioned information, we have taken
into account our assessment of general market and financial conditions, our
experience in other transactions, and our knowledge of the banking industry
generally.
We have not compiled, reviewed or audited the financial statements of the
Company or First Southern, nor have we independently verified any of the
information reviewed; we have relied upon such information as being complete and
accurate in all material respects. We have not made independent evaluation of
the assets of the Company or First Southern.
Based on the foregoing and all other factors deemed relevant, it is our opinion
as investment bankers, that, as of the date hereof, the consideration proposed
to be received by the shareholders of the Company under the Agreement is fair
and equitable from a financial perspective.
Very truly yours,
PROFESSIONAL BANK SERVICES, INC.
/s/Christopher L. Hargrove
Christopher L. Hargrove
Vice President
<PAGE>
APPENDIX D
AMENDED AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is
made and entered into as of this 23rd day of March, 1996, as amended, as of this
6th day of June, 1996 between FIRST SOUTHERN BANCORP, INC., a Kentucky
corporation ("Corporation"), FSB ACQUISITION CORPORATION, a Kentucky corporation
("Acquisition Corp"), and LINCOLN FINANCIAL BANCORP, INC., a Delaware
corporation ("LFB").
W I T N E S S E T H:
The Boards of Directors of Corporation, Acquisition Corp, and
LFB have approved, and deem it advisable and in their respective shareholders'
best interests to consummate, the business combination transaction (the
"Merger") provided for herein and in the Restated Plan of Merger between
Corporation, Acquisition Corp and LFB executed of even date herewith, a copy of
which is attached to this Agreement as Exhibit A and incorporated by reference
herein as if fully set out herein (the "Restated Plan").
As a condition to, and immediately after the execution of,
this Agreement, Corporation and LFB are entering into a Stock Option Agreement
pursuant to which LFB has granted Corporation an option exercisable upon the
occurrence of certain events (the "Stock Option Agreement").
Corporation, Acquisition Corp, and LFB are willing to make
certain representations, warranties and agreements in connection with the Merger
and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the premises and of the
respective representations, warranties, agreements and undertakings herein
contained, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
"BHCA" shall mean the Bank Holding Company Act cf 1956, as amended.
"Bank" shall mean Lincoln Federal Savings Bank, a wholly owned
subsidiary of LFB.
"Closing" shall mean the closing of the transactions contemplated
herein and in the Restated Plan, and "Closing Date" shall mean the
date and time specified pursuant to Section 2.2 hereof as the date
of the Closing.
"Commission" shall mean the Securities and Exchange Commission.
"Effective Time" is defined at Section 2.1.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
<PAGE>
"Federal Reserve" shall mean the Board of Governors of the Federal
Reserve System.
"GLC" means the General Corporation Law of the State cf Delaware.
"HOLA" means the Home Owners' Loan Act.
"KBCA" shall mean the Kentucky Business Corporation Act.
"LFB Common Stock" is defined at Section 4.1.B.
"LFB Financial Statements" shall mean (i) the audited consolidated
balance sheets (including related notes) of LFB as of June 30, 1995
and 1994, the related audited consolidated statements of income,
changes in shareholders' equity, and statements of cash flows
(including related notes) for the years ended June 30, 1995 and
1994, and the unaudited balance sheet as of December 31, 1995 and
the consolidated statements of income, changes in shareholders I
equity and cash flows (including related notes) of LFB for the six
months ended December 31, 1995, and (iii) the unaudited
consolidated balance sheet and related consolidated statements of
income changes in shareholders, equity and cash flows (including
related notes) of LFB with respect to periods ending subsequent to
December 31, 1995.
"LFB SEC Documents" is defined at Section 4.1D.
"LFB Subsidiary" is defined at Section 4.1C.
"OTS" shall mean the office of Thrift Supervision.
"Proxy Statement" shall mean the proxy statement together with any
supplements thereto sent to the shareholders of LFB to solicit
their votes in connection with this Agreement and the Restated
Plan.
"Securities Laws" shall mean [i] the Securities Act of 1933, as
amended (the "Securities Act"); the Exchange Act; the Investment
Company Act of 1940, as amended; the Trust Indenture Act cf 1939,
as amended; and the rules and regulations of the Commission
promulgated thereunder, and [ii] all applicable state securities
laws.
ARTICLE 2
The Merger
2.1 The Merger. Upon the terms and conditions set forth in this
Agreement and the Restated Plan, at the Effective Time (as hereinafter defined),
Acquisition Corp shall be merged with and into LFB in accordance with the
provisions of and with the effect provided in the KBCA and GCL. The terms of the
Merger shall be as set forth in this Agreement and the Restated Plan.
2.2 Effective Time of Merger. Upon the terms and conditions set forth
in this Agreement and the Restated Plan, Articles of Merger (the "Articles of
Merger") shall be duly prepared and executed by Acquisition Corp and LFB and
thereafter delivered to the Secretary of State of the Commonwealth of Kentucky
<PAGE>
for filing as provided in the KBCA, and to the Secretary of State of the State
of Delaware for filing as provided in the GCL, on the Closing Date. The Merger
shall become effective upon the filing with the Delaware Secretary of State and
the Kentucky Secretary of State, or at such time and date thereafter as is
provided in the Articles of Merger (the "Effective Time").
2.3 Conversion of LFB Capital Stock.
A. Conversion of LFB Common Stock. Except for Dissenting
Shares (as defined below), each share cf LFB Common Stock issued and outstanding
immediately prior to the Effective Time (which shares shall include, without
limitation, 29,440 shares of LFB Common Stock owned by the LFB Employee Stock
Ownership Plan ("ESOP") and 16,928 shares originally held by the Trust (the "MRP
Trust") formed under the LFB Management Recognition Plan ("MRP"), 13,557 of
which have been awarded and distributed to participants or awarded and will be
distributable at the Effective Time, and 3,371 of which are unawarded (the
"Unawarded MRP Shares") and will revert to LFB when all trust benefits have been
distributed) shall, automatically, by virtue of the Merger and at the Effective
Time, be exchanged for and converted into, without any further notice to or on
the part of the holder thereof, the right to receive Twenty Two Dollars and One
Cent ($22.01), payable in cash; provided, however, that the Unawarded MRP Shares
shall be canceled at the Effective Time, to the extent permissible, and the
Restated Plan shall he deemed to be automatically amended to provide for the
same. At and after the Effective Time, the former holders of shares of LFB
Common Stock shall be entitled only to the exchange rights provided for in this
Section 2.3 and in the Restated Plan or to the rights to dissent under Subtitle
13 of the KBCA. Certificates previously representing shares of LFB Common Stock
shall be exchanged for the cash consideration provided for herein upon the
surrender of such certificates in accordance with the Restated Plan.
B. Dissenting Shareholders. If any holder of shares of LFB
Common Stock shall, in accordance with the provisions of applicable law, seek
appraisal and perfect dissenting shareholder rights to be paid the fair value of
his or her shares ("Dissenting Shares"), then such holder shall be entitled to
receive such value as may be established pursuant to such provisions. LFB shall
give Corporation prompt notice of any written objections or demands received
from any shareholder pursuant to such provisions, and shall give Corporation the
opportunity to participate in all proceedings with respect to any such
objections or demands.
2.4 Stock Options. At or prior to the Closing, LFB shall cause each
option (whether or not vested) to purchase shares of LFB Common Stock (the
"Options") under the LFB 1994 Stock Option and Incentive Plan (the "Option
Plan") to be canceled in exchange for the consideration set forth in this
Section 2.4. At the Effective Time, each Option shall be exchanged for cash
equal to the product of [i] the total number of shares of LFB Common Stock
subject to the option and [ii] Nine Dollars and Fifty-One Cents ($9.51). The
Option Plan shall terminate as of the Effective Time.
2.5 Escrow Deposit. Upon execution of this Agreement, Corporation shall
deliver the sum of Two Hundred Fifty Thousand Dollars ($250,000) (the "Escrow
Deposit") with LFB to be held in escrow in accordance with the terms of this
Section 2.5. If the Merger is consummated, the Escrow Deposit shall be returned
to Corporation on the Closing Date. Upon the termination of this Agreement prior
to the Closing Date, the Escrow Deposit shall only he returned to Corporation on
the date of such termination if such termination was properly made by
Corporation pursuant to Section 6.2B of this Agreement. Otherwise, LFB shall be
entitled to and shall retain the Escrow Deposit for its benefit and the benefit
of its shareholders.
<PAGE>
2.6 Closing. The closing of the Merger (the "Closing") will take place
at 10:00 a.m. on a date to he specified by Corporation (the "Closing Date"),
which shall be no later than the fifth business day following the last to occur
of [i] the effective date of the last order, approval, or exemption of any
federal or state regulatory agency approving or exempting the Merger if such
action is required, and [ii] the expiration of all required waiting periods
after the filing of all notices to all federal or state regulatory agencies
required for consummation of the Merger, at the offices of Wyatt, Tarrant &
Combs, 2800 Citizens Plaza, Louisville, Kentucky, or at such other date and
time, and at such other place, as may he mutually agreed upon by Corporation and
LFB. In the event the Effective Time does not occur on or before November 1,
1996, LFB shall have the option either to (a) extend the Closing Date to a date
not later than January 2, 1997, or (b) declare and pay a dividend on shares of
LFB Common Stock in an amount not to exceed $.12 per share of LFB Common Stock.
ARTICLE 3
COVENANTS
3.1 Shareholders, Meeting. This Agreement and the Restated Plan shall
be submitted for approval to the shareholders of LFB at a meeting to be called
and held in accordance with the applicable provisions of law and the Certificate
of Incorporation and Bylaws of LFB (the "Meeting"). LFB shall cause the Meeting
to be held as promptly as practicable after the date hereof and shall
disseminate to its shareholders all materials required of it under law to be
disseminated in connection with the consideration by the shareholders of this
Agreement and the Restated Plan. Unless inconsistent with its fiduciary duties,
the Board of Directors of LFB shall recommend that its shareholders adopt and
approve this Agreement and the Restated Plan at the Meeting, and shall take all
action necessary or helpful to secure a vote of shareholders in favor of the
Merger. Immediately after the Meeting, LFB shall notify Corporation of the
results of the Meeting.
3.2 Proxy Statement. As promptly as practicable after the date hereof,
LFB shall prepare the Proxy Statement to be mailed to the shareholders of LFB in
connection with the Merger. Corporation and LFB shall cooperate with each other
in order to facilitate the preparation, filing and clearance of the Proxy
Statement under the Securities Laws. Each of Corporation and LFB will promptly
advise the other if it determines that any information furnished by it to the
other specifically for use in the Proxy Statement included therein, is or
becomes false or misleading in any material respect. In no event shall either
party hereto be liable for, and each party shall indemnify and hold the other
harmless from, any untrue statement of a material fact or omission to state a
material fact in the Proxy Statement made in reliance upon, and in conformity
with, written information concerning the other party furnished by such other
party specifically for use in the Proxy Statement.
3.3 Access to Information.
A. LFB shall afford to the officers, employees, accountants,
counsel and other representatives of Corporation, access, during normal business
hours during the period prior to the Effective Time, to all the properties,
books, contracts, commitments and records of LFB and, during such period, LFB
shall (and shall cause each of the LFB Subsidiaries to), make available to
Corporation (i) a copy of each report, schedule, registration statement and
other document filed or received by it during such period pursuant, to the
requirements of the Securities Laws or federal or state banking laws, such
reports, statements and other documents to be furnished promptly after their
<PAGE>
filing or the preparation thereof, and (ii) all other information concerning its
business, properties and personnel as Corporation may reasonably request.
Corporation shall provide LFB with prompt written notice of any fact, event,
act, omission or other matter the existence of which Corporation reasonably
believes would make any of the representations or warranties contained in this
Agreement by LFB t be materially inaccurate.
B. Corporation shall afford to the officers, employees,
accountants, counsel and other representatives of access, during normal business
hours during the period prior to the Effective Time, to all the books and
records of Corporation as LFB may reasonably request to determine Corporation's
ability to consummate the transactions contemplated by this Agreement and the
Restated Plan.
C. Corporation acknowledges and agrees that any and all
information concerning LFB and its business disclosed or made available to
Corporation hereunder shall constitute Evaluation Material (as defined in the
Confidentiality Agreement dated January 18, 1996 between Corporation and LFB
(the "Confidentiality Agreement")) and that Corporation reaffirms its
obligations under the Confidentiality Agreement with respect to all such
Evaluation Material whether disclosed hereunder or otherwise. Corporation and
LFB shall each, and each shall cause its directors, officers, attorneys and
advisors to, maintain the confidentiality of all information obtained from the
other in such investigation (including information obtained prior to the date
hereof) which is not otherwise publicly disclosed, other than as a result of a
disclosure by the other party or the other party's representatives (unless such
information (i) thereafter becomes lawfully obtainable from other sources or
(ii) is required to be disclosed in any application required to be filed
hereunder with any governmental agency or authority and confidential treatment
of such information is requested), and to return all such information, and not
retain any copies, extracts, or other reproductions in whole or in part, if this
Agreement is terminated pursuant to Article 6, said undertakings to survive any
termination of this Agreement pursuant to Article 6. No investigation by either
Corporation or LFB shall affect the representations and warranties to the other
except to the extent such representations and warranties are by their terms
qualified by disclosures made to the other party. The undertakings in this
Section 3.3C shall survive any termination of this Agreement.
D. Notwithstanding any other provision contained herein, if
either Corporation or LFB shall be aware of any breach of any of the other
party's representations or warranties contained herein on the date of execution
of this Agreement, whether by virtue of such party's due diligence investigation
of the other party prescribed herein or otherwise, such party shall be deemed to
have waived its rights contained herein to refuse to consummate the Merger on
account of such breach and the existence or occurrence of such breach and any
event or fact related to such breach shall not be deemed to constitute an
unsatisfied condition to such party's obligations to consummate the Merger,
including, without limitation, the conditions contained in Sections 5.1C, 5.1D,
5.2C, and 5.2D.
3.4 Cooperation. LFB and Corporation shall proceed expeditiously and
cooperate fully in making application for all necessary regulatory approvals, in
the procurement of any other consents and approvals, and in the taking of any
other action and the satisfaction of all other requirements prescribed by law or
otherwise, necessary for consummation of the Merger on the terms provided herein
and in the Restated Plan. Corporation shall, and LFB shall, and shall cause each
LFB Subsidiary to, use all reasonable efforts (i) to take, or cause to be taken,
all actions necessary to comply promptly with all legal requirements which may
<PAGE>
be imposed on such party with respect to the Merger and to consummate the
transactions contemplated by this Agreement and the Restated Plan, and (ii) to
obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any governmental
entity or any other public or private third party which is required to be
obtained or made by such party in connection with the Merger and the
transactions contemplated by this Agreement and the Restated Plan. Each of LFB
and Corporation shall cooperate fully with, and provide true,
complete and accurate information to, the other in connection with their
requests and applications for consents and governmental clearance, approvals,
licenses or permits, if any, which are necessary for the Merger and
Corporation's ownership and operation of LFB's business following the Merger.
3.5 Conduct of Business Prior to Closing. Except with the prior written
consent of Corporation or as expressly contemplated or permitted by this
Agreement, during the period from the date of this Agreement and continuing
until the earlier of the Effective Time or the date this Agreement is
terminated, neither LFB nor any LFB Subsidiary shall:
A. conduct its business other than in the usual, regular and
ordinary course or fail to use its best efforts to preserve its business
organization intact or to keep available to Corporation the services of its
present officers and employees or to preserve the good will of its customers and
others having business relations with it;
B. fail to comply in all material respects with all applicable
laws and regulations which relate to the conduct of its business;
C. amend its certificate of incorporation or charter or by-
laws;
D. issue any shares of authorized capital stock, except upon
the proper exercise of an outstanding option pursuant to the Option Plan, or
securities convertible into such shares, or purchase, redeem, retire or
otherwise acquire any of its outstanding shares, or sell or give any option or
right to purchase, hypothecate, pledge or otherwise encumber or dispose of any
such shares or any shares held in treasury, if any, make or effect any other
change in the structure or composition of its capital stock or agree to do any
of the foregoing;
E. in the case of LFB only, declare or pay any dividends or
otherwise make distributions with respect to its capital stock, except as
provided in Section 2.6 of this Agreement;
F. enter into, adopt, amend or terminate any employee benefit
plan, except as required by law, or enter into any employment agreement with any
person or, except in a manner consistent with past practices, grant any increase
in the compensation (including bonus and benefit plans and all other non-cash
compensation) of any of its employees;
G. borrow or agree to borrow any amount of funds or incur any
obligation or liability except in the ordinary course of business consistent
with prior practice, or guarantee or agree to guarantee any material obligations
of others except for letters of credit and guaranties of signatures in the
ordinary course of business;
<PAGE>
H. except in the ordinary course of business, cancel any
indebtedness owing to it or any claims that it might have possessed, waive any
material rights of substantial value or sell, lease, encumber, otherwise dispose
of, or agree to sell, lease, encumber or otherwise dispose of any of its assets;
I. solicit or encourage (including by way of furnishing
nonpublic information) inquiries, or authorize or permit any of its officers,
directors, employees, advisors or representatives to solicit or encourage, any
takeover proposal, as defined below, or, unless LFB's Board of Directors, upon
the advice of counsel, has reasonably determined in good faith that the failure
to do so would cause the Board of Directors to breach their fiduciary duties
under applicable law, (i) take any other action to facilitate any inquiries or
the making of any proposal which constitutes, or may reasonably be expected to
lead to, any takeover proposal, or (ii) agree to or endorse any takeover
proposal, or (iii) participate in any discussions or negotiations, or provide
third parties with any nonpublic information, relating to any such inquiry or
proposal. LFB shall immediately cease and cause to be terminated any activities,
discussions or negotiations conducted prior to the date of this Agreement with
any parties other than Corporation with respect to any takeover proposal. LFB
shall immediately advise Corporation following the receipt by it of any takeover
proposal and the details thereof, and advise Corporation of any developments
with respect to any takeover proposal immediately upon the occurrence thereof.
As used in this Agreement, "takeover proposal" shall mean any tender or exchange
offer, proposal for a merger, consolidation or other business combination
involving LFB or any LFB Subsidiary or any proposal or offer to acquire in any
manner a substantial equity interest in, or a substantial portion of the assets
or earning power of, LFB or any LFB Subsidiary other than the transactions
contemplated by this Agreement;
J. amend, modify or terminate any material agreement or
contract other than in the ordinary course of business or commit any act or omit
to do any act that would cause a breach of any lease, contract or commitment to
which it is a party or by which its property or business is bound or affected,
or which would have a material adverse effect on its financial condition,
operations or assets; or
K. enter into or agree to enter into any agreement or contract
that would have been required to be disclosed on a schedule pursuant to this
Agreement, other than such contracts and agreements entered into in the ordinary
course of business.
3.6 Termination Payment. If this Agreement is terminated pursuant to
its terms other than by LFB pursuant to Section 6.2C and a Purchase Event, as
defined below, shall have occurred or shall occur prior to December 31, 1996,
LFB shall pay promptly to Corporation, in immediately available funds, on the
date of such Purchase Event, the sum of Five Hundred Thousand Dollars
($500,000.00).
A "Purchase Event" shall have occurred when:
A. LFB shall have entered into an agreement with any person
(ether than the Corporation or any of its subsidiaries) pursuant to which such
person would: (x) merge or consolidate with, or enter into any similar
transaction with LFB or the Bank; (y) purchase, lease or otherwise acquire all
or substantially all of the assets of LFB or the Bank; or (z) purchase or
otherwise acquire (by merger, consolidation, share exchange or similar
transaction) securities representing twenty-five percent (25%) or more of the
voting shares of LFB or the Bank; or
<PAGE>
B. any person (other than Corporation or any of its
Subsidiaries) shall have purchased or otherwise acquired, pursuant to a tender
offer or otherwise, beneficial ownership of securities representing twenty five
percent (25%) or more of the voting shares of LFB or the Bank.
C. "Person" and "beneficial ownership" shall have the same
meanings as in Sections 3(a)(9) and 13(d) of the Exchange Act.
3.7 Employee Benefit Plans.
A. At, or as soon as administratively feasible after (in
which event the benefits of LFB and Bank shall remain in effect until
Corporation benefits apply) the Effective Time, employees and officers of LFB
and Bank shall be provided with benefits that Corporation generally provides to
its employees and officers from time to time, including, but not limited to,
life, medical and hospitalization and disability insurance and sick pay,
personal leave, vacation and severance benefits, on a non-discriminatory and
substantially similar basis. For purposes of providing such benefits to
employees and officers of LFB and Bank after the Effective Time, Corporation
shall credit such employees and officers for years of service at LFB and Bank
prior to the Effective Time for purposes of eligibility and benefits amounts or
privileges paid or provided, and no preexisting condition limitations or waiting
periods shall apply to such employees who become employees of Corporation at the
Effective Time.
B. Employees of LFB and Bank shall commence participation in
Corporation's retirement plans as soon as administratively feasible after the
Effective Time. For purposes of eligibility and vesting in Corporation's
retirement plans, employees of LFB and Bank will be given credit for past
service with LFB and Bank for purposes of eligibility and vesting in those
plans.
C. Subject to the provisions of the ESOP and applicable law,
including, without limitation, the continued qualification of the ESOP under
Section 401 of the Code and the continued tax-exempt status of the ESOP under
Section 501 of the Code, the ESOP shall be terminated as of the Effective Time,
the proceeds of the merger of LFB into Corporation (after repayment of the
ESOP's loan) shall be allocated to the accounts of participants in accordance
with the terms of the ESOP and applicable law, all participants shall be 100%
vested and distributions from the ESOP shall he made as soon as practicable,
taking into account any Internal Revenue Service filing Corporation, LFB or Bank
deem necessary or desirable in connection with the termination. Employees of LFB
and Bank shall have the option of rolling their cash distribution from the ESOP
into Corporation's 401(k) plan.
D. Upon the Effective Time, the shares of LFB Common Stock
held by the Trust created to fund the MRP shall be converted into cash in
accordance with Section 2.3 of this Agreement, and that cash shall be
distributed (along with dividends previously paid on awarded shares and earnings
on those dividends) to participants in the MRP in accordance with their awards,
which awards will become 100% immediately vested upon the Effective Time.
Thereafter, the MRP shall be terminated and the cash attributable to LFB Common
Stock that was not subject to an award shall be distributed to the Bank.
E. It is the express understanding and intention of
Corporation and LFB that no employee of LFB, Bank or any LFB Subsidiary or other
person shall be deemed to be a third party beneficiary, or have or acquire any
right to enforce the provisions of this Section 3.7.
<PAGE>
3.8 Employees. LFB expresses the hope that Corporation intends to
employ LFB's employees currently employed by LFB and Bank upon the Effective
Time either at the Bank or with Corporation or its affiliates. This Section 3.8
does not create any employment right with current employees of LFB or LFB
Subsidiary with Corporation.
3.9 Indemnification; Directors' and Officers' Insurance.
A. Corporation agrees that from and after the Effective Time,
Corporation will indemnify and hold harmless each present and former director
and officer of LFB and its Subsidiaries (the "Indemnified Parties") against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the Effective Time, to the fullest extent
that LFB or such Subsidiary would have been permitted under applicable law and
the certificate of incorporation or charter or bylaws of LFB or such Subsidiary
in effect on the date hereof to indemnify such person (and Corporation shall
advance expenses as incurred to the fullest extent permitted under applicable
law; provided, that the person to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that such
person is not entitled to such indemnification).
B. Any Indemnified Party wishing to claim indemnification
under section 3.9A, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Corporation thereof, provided that the
failure so to notify shall not affect the obligations of Corporation under this
Section 3.9 unless and to the extent such failure materially prejudices
Corporation's defense of such claim. In the event of any such claim, action,
suit, proceeding or investigation (whether arising before or after the Effective
Time), [i] Corporation shall have the right to assume the defense thereof and
Corporation shall not be liable to such Indemnified Party for any legal expenses
of other counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that, if Corporation
elects not to assume such defense or counsel for the Indemnified Parties advises
that there are issues which raise conflicts of interest between Corporation and
the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory
to them, and Corporation shall pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefore are
received; provided, that, unless counsel for the Indemnified Parties advises
that there are issues which raise conflicts of interest, Corporation shall be
obligated pursuant to this paragraph B to pay for only one firm of Counsel for
all Indemnified Parties in any jurisdiction; [ii] the Indemnified Parties will
cooperate in the defense of any such Litigation, and [iii] and Corporation shall
not be liable for any settlement effected without its prior written consent; and
provided, further, that Corporation shall not have any obligation hereunder to
any Indemnified Party when and if a court of competent jurisdiction shall
determine, and such determination shall have become final and nonappealable,
that the indemnification of such Indemnified Party in the manner contemplated
hereby is prohibited by applicable law.
C. From and after the Effective Time, the directors and
officers of LFB and its Subsidiaries who become directors or officers of
Corporation or any of its subsidiaries, except for the indemnification rights
set forth in Section 3.9A, shall have indemnification rights (with respect to
their capacities as directors, officers or employees of Corporation or any of
its subsidiaries at or after the Effective Time) with prospective application
<PAGE>
only. The prospective indemnification rights shall consist of such rights to
which directors and officers of Corporation and its subsidiaries are entitled
under the provisions of the Articles of Incorporation or similar governing
documents and bylaws of Corporation and its subsidiaries, as in effect from time
to time after the Effective Time, as applicable, and provisions of applicable
law as in effect from time to time after the Effective Time.
D. For a period of six years after the Effective Time, LFB and
Corporation shall use reasonable efforts to provide that portion of directors,
and officers, liability insurance that serves to reimburse the present and
former directors and officers of LFB and its Subsidiaries with respect to claims
against such officers and directors arising from facts or events which occurred
at or before the Effective Time; provided such coverage is reasonably available
and provided, further, that officers and directors of LFB and its Subsidiaries
may be required to make application and provide customary representations and
warranties to Corporation's insurance carrier for the purpose of obtaining such
insurance.
E. From and after the Effective Time, Corporation shall cause
the directors and officers of LFB and its subsidiaries who become directors or
officers of Corporation or any of its subsid iaries to be covered by
Corporation's directors and officers liability insurance policy on a basis at
least equal to the coverage currently provided to the directors and officers of
Corporation and its' subsidiaries.
F. The provisions of this Section 3.9 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party, his heirs
and representatives.
3.10 Press Releases. All parties to this Agreement agree that any press
release or other public announcement by either party pertaining to the Merger
shall be coordinated with the other parties hereto; provided, however, that
nothing contained herein shall prohibit either party from making any disclosure
required by law which its counsel deems necessary, provided the other party is
given written notice thereof.
3.11 Additional Agreements. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement and the Restated Plan, each party to this Agreement shall take
all such necessary action.
3.12 Regulatory Filings. The Corporation shall deliver to LFB copies of
all applications, reports, correspondence, filings and other documents prepared
by the Corporation seeking approval of the transactions contemplated herein from
the OTS or other appropriate regulatory authorities (the "Regulatory Filings")
not less than two days prior to the Corporation's filing thereof. The
Corporation shall further, promptly upon receipt, provide LFB with copies of any
and all responses, correspondence or other materials received from the OTS or
other appropriate authorities in connection with such Regulatory Filings.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO LFB AND CORPORATION
4.1 LFB's Representations and Warranties. LFB hereby represents and
warrants to Corporation that, except as set forth on LFB's Disclosure Schedule
delivered herewith to Corporation (the "LFB Disclosure Schedule,):
<PAGE>
A. Corporate Standing; Authorization.
[i] LFB is a savings and loan holding company
registered under the Home Owners' Loan Act and a Delaware corporation,
duly organized and validly existing under the laws of the State of
Delaware. LFB has paid all fees due and owing to the office of the
Delaware Secretary of State, has delivered to that office its most
recent annual report as required by the GCL, and has never filed
articles of dissolution with the Delaware Secretary of State. LFB has
delivered to Corporation true and correct copies of the Certificate of
Incorporation and Bylaws of LFB and all amendments thereto through the
date hereof. LFB has all requisite power and authority to own, lease
and operate its properties and to carry on its business as now being
conducted and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership
or leasing of its properties makes such qualification necessary.
[ii] The execution and delivery of this Agreement
and the Restated Plan do not, and the consummation of the transactions
contemplated hereby and thereby will not materially conflict with, or
result in any material violation of, or material default (with or
without notice or lapse of time, or both) under, or gave rise to a
right of termination, cancellation or acceleration of any material
obligation or the loss of a material benefit under, or the creation of
a material lien, pledge, security interest, charge or other
encumbrance on assets (any such conflict, violation, default, right of
termination, cancellation or acceleration, loss or creation, shall be
deemed hereunder a "Violation") pursuant to, any provision of the
articles of incorporation or charter or bylaws of LFB or any LFB
Subsidiary, or, subject to obtaining or making the consents,
approvals, orders, authorizations, registrations, declaration and
filings referred to in paragraph [iii] below, result in any material
Violation of any material loan or credit agreement, note, mortgage,
indenture, lease, Benefit Plan (as defined in Section 4.1L) or other
agreement, obligation, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to LFB or any LFB Subsidiary or their respective
properties or assets.
[iii] Except (a) for consents, approvals, orders, and
authorizations from applicable regulatory authorities including the
Federal Reserve and the OTS, and (b) for the filing of Articles of
Merger with the Kentucky Secretary of State and the Delaware Secretary
of State, no consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative
agency or commission or other governmental authority or
instrumentality, domestic or foreign, is required by or with respect to
LFB or any LFB Subsidiary in connection with the execution and delivery
of this Agreement and the Restated Plan, or the consummation by LFB of
the transactions contemplated hereby and thereby.
[iv] LFB has all requisite corporate power and
authority to enter into and, subject to the approval of its
shareholders, to consummate the transactions contemplated by this
Agreement and the Restated Plan. The execution and delivery of this
Agreement and the Restated Plan and the consummation of the
transactions contemplated hereby and thereby have been duly authorized
by all necessary corporate action on the part of LFB, subject to the
approval of this Agreement and the Restated Plan by the shareholders of
<PAGE>
LFB. This Agreement and the Restated Plan have been duly executed and
delivered by LFB, and constitute the legal, valid and binding
obligations of LFB enforceable against it in accordance with their
terms.
B. Capital Structure of LFB. The authorized capital stock of
LFB consists of 1,900,000 shares of common stock, $.01 par value per share ("LFB
Common Stock") and 100,000 shares of serial preferred stock, $.01 par value per
share ("LFB Preferred Stock"). At the date hereof, 440,128 shares of LFB Common
Stock (3,371 of which are owned by the MRP Trust and have not been awarded to
participants in the MRP) are validly issued and outstanding and fully paid and
nonassessable, no shares are held by LFB in treasury, and 36,922 shares are
reserved for issuance upon the exercise of outstanding options. At the date
hereof, no shares of LFB Preferred Stock are outstanding. There is outstanding
no subscription, option, warrant, call or commitment of any character relating
to shares of LFB's capital stock or any instruments that can be converted into
shares of LFB's capital stock. None of the shares of LFB Common Stock have been
issued in violation of any preemptive right. There are no outstanding
contractual obligations of LFB or any LFB Subsidiary to repurchase, redeem or
otherwise acquire any shares of capital stock of LFB. No bonds, debentures,
notes or other indebtedness having the right to vote (or convertible into or
exercisable for securities having the right to vote) on any matters on which
stockholders of LFB may vote are issued or outstanding.
C. Subsidiaries. The LFB Disclosure Schedule sets out each
company or other organization, whether incorporated or unincorporated, of which
LFB is a general partner or at least a majority of the securities or other
interests is directly or indirectly owned or controlled by LFB (each such
company or other organization is referred to in this Agreement as a "LFB
Subsidiary"). Each LFB
Subsidiary is duly chartered, validly existing and in good standing under the
laws of the state or jurisdiction of its incorporation and (a) has in all
material respects, all requisite corporate power and authority to own, operate
and lease its properties and to carry on its business as it is currently being
conducted, and (b) is in good standing and is duly qualified to do business in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its business makes such qualification necessary. LFB has
delivered to Corporation true and correct copies of the Articles of
Incorporation or Charter and Bylaws of each LFB Subsidiary, as amended through
the date hereof. The Bank is a federal savings bank duly organized, validly
existing and in good standing under the laws of the United States and engages
only in activities (and holds properties of the types) permitted by the HOLA and
the rules and regulations promulgated by the OTS thereunder or the FDIC for
insured depository institutions. The Bank's deposit accounts are insured by the
Savings Association Insurance Fund as administered by the FDIC to the fullest
extent permitted under applicable law. The LFB Disclosure Schedule sets out the
authorized, issued and outstanding capital stock of each LFB Subsidiary. No
shares of capital stock of any LFB Subsidiary are held in treasury. All of the
outstanding shares of capital stock of each LFB Subsidiary are validly issued
and outstanding and are fully paid and nonassessable and such shares are wholly
owned by LFB directly, free and clear of all liens, claims and encumbrances.
There is outstanding no subscription, option, warrant, call or commitment of any
character relating to or any instruments that can he converted into shares of
the capital stock of any LFB Subsidiary. No bonds, debentures, notes or other
indebtedness having the right to vote (or convertible into or exercisable for
securities having the right to vote) of any LFB Subsidiary are issued or
outstanding.
<PAGE>
D. SEC Documents. LFB has made available to Corporation a
true and complete copy of each report, schedule, and registration statement
filed by LFB with the Commission since January 1, 1993 through the date hereof
(as such documents have since the time of their filing been amended, the "LFB
SEC Documents"), which are all the documents that LFB was or will be required to
file with the Commission since such date. As of their respective dates, the LFB
SEC Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the Commission thereunder applicable to such LFB SEC Documents,
and none of the LFB SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements of LFB included
in the LFB SEC Documents comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the Commission with respect thereto, have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Form l0-Q of the Commission)
and fairly present the consolidated financial position of LFB and its
consolidated subsidiaries as at the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended. All material
agreements, contracts or other documents required to be filed as exhibits to any
of the LFB SEC Documents have been or will be so filed. All reports, schedules
and statements hereafter filed by LFB with the Commission which LFB shall
deliver to Corporation pursuant to Section 3.3 hereof will comply in all
material respects with the requirements of the Securities Laws, and none of such
reports, schedules or statements will contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of LFB included in such
reports, schedules and statements will comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the Commission with respect thereto, will be prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by Form 10-Q
of the Commission) and will fairly present the consolidated financial position
of LFB and its consolidated subsidiaries as at the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended.
E. Proxy Statement. The Proxy Statement, at the date of
mailing to shareholders of LFB and at the time of the meeting of such
shareholders to be held in connection with the Merger, will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided that LFB
makes no representation as to the accuracy of any information provided by
Corporation for inclusion in the Proxy Statement. The Proxy Statement will
comply as to form in all material respects with the provisions of the Exchange
Act and the rules and regulations thereunder.
F. LFB Financial Statements. The LFB Financial Statements were
and will be prepared in accordance with generally accepted accounting
principles, applied on a consistent basis, and fairly present and will fairly
present the financial condition of LFB and the LFB Subsidiaries at the
respective dates indicated therein, the results of operation of LFB and the LFB
<PAGE>
Subsidiaries for the periods covered thereby and the other financial information
purported to be shown thereon. The business of LFB has been conducted only in
the ordinary course of business since June 30, 1995.
G. Absence of Undisclosed Liabilities. Except as disclosed in
the LFB Financial Statements or the LFB SEC Documents, neither LFB nor any LFB
Subsidiary has any obligations or liabilities (contingent or otherwise) that
might reasonably be expected to have, individually or in the aggregate, a
material adverse effect on the business, assets, results of operations or
financial condition of LFB and the LFB Subsidiaries taken as a whole.
H. Loans and Allowance for Credit Losses. All material loans
reflected on the books and records of each LFB Subsidiary have been [i] made for
good, valuable and adequate consideration in the ordinary course of business and
[ii] evidenced by notes or other evidences of indebtedness that are true and
genuine. The allowance for credit losses ("Allowance") shown on the consolidated
balance sheet of LFB as of December 31, 1995 included in the LFB Financial
Statements was, and the Allowance shown on the consolidated balance sheets of
LFB as of dates subsequent to the execution of this Agreement included in the
LFB Financial Statements will be, in each case as of the dates thereof,
adequate, in the reasonable opinion of management, to provide for losses
relating to or inherent in the loan and lease portfolios of, and other
extensions of credit (including letters of credit and commitments to make loans
or extend credit) made by, LFB and each LFB Subsidiary.
I. Legal Proceedings. There are no claims of any kind or any
actions, suits, proceedings, arbitrations or investigations pending or, to the
best knowledge of LFB, threatened against LFB or any LFB Subsidiary or against
any asset, interest or right of any such company that might, individually or in
the aggregate, have a material adverse effect on the financial condition,
results of operation or business of LFB or any LFB Subsidiary taken as a whole,
nor is there any judgment, decree, injunction, rule or order of any governmental
entity or arbitrator outstanding against LFB or any LFB Subsidiary having or
which, insofar as reasonably can be foreseen, in the future could have any such
effect.
J. Agreements with Regulators. Neither LFB, any LFB
Subsidiary, nor any officer or director of LFB or any LFB Subsidiary, is a party
to any written agreement or memorandum of under standing with, or a party to any
commitment letter or similar undertaking to, or is subject to any order or
directive by, or is a recipient of any extraordinary supervisory letters from,
any banking regulator, nor has LFB or any LFB Subsidiary been advised in writing
by any banking regulator that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, extraordinary supervisory
letter, commitment letter or similar submission. No investigation by any
governmental entity with respect to LFB or any LFB Subsidiary is pending or, to
the best knowledge of LFB, threatened and neither LFB nor any LFB Subsidiary has
knowledge of any basis for the commencement of any regulatory or enforcement
action against LFB or any LFB Subsidiary by any governmental or regulatory
authority.
K. Compliance with Laws. LFB and each LFB Subsidiary holds all
permits, licenses, variances, exemptions, orders and approvals of all
governmental entities which are material to the operation of the businesses of
LFB and each LFB Subsidiary and is in compliance in all material respects with
the terms thereof. LFB and each LFB Subsidiary has complied with in all material
respects and is not in any default under (and has not been charged with or
<PAGE>
received notice with respect to nor, to the best of its knowledge, are
threatened with or under investigation with respect to, any charge concerning
any violation of any provision of) any federal, state or local law, regulation,
ordinance, rule or order (whether executive, judicial, legislative or
administrative) or any order, writ, injunction or decree of any court, agency or
instrumentality, except for possible violations or defaults that, individually
or in the aggregate, would not have a material adverse effect on LFB and its
Subsidiaries taken as a whole. There are no material uncured violations or
violations with respect to which refunds or restitution may be required cited in
any report concerning LFB or any LFB Subsidiary as a result of examination by
any regulatory authority and neither LFB nor any LFB Subsidiary has knowledge of
any basis on which refunds or restitution may be required by any regulatory
authority.
L. Employee Benefit Plans.
[i] The LFB Disclosure Schedule sets out a list and
brief description of all "employee pension benefit plans" (as defined
in Section 3(2) of ERISA) (sometimes referred to herein as "Pension
Plans"), all "employee welfare benefit plans" (as defined in Section
3(1) of ERISA) and all other bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock, retirement, vacation, severance,
disability, death benefit, hospitalization, medical or other plan,
arrangement or understanding (whether or not legally binding) providing
benefits to any current or former employee or director of LFB or any
LFB Subsidiary (collectively, "Benefit Plans"), maintained, or
contributed to, by LFB or any LFB Subsidiary for the benefit of any
current or former officers or employees of LFB or any LFB Subsidiary.
LFB has delivered or made available to Corporation true, complete and
correct copies of (1) each Benefit Plan (or, in the case of any
unwritten Benefit Plans, descriptions thereof), (2) the most recent
annual report on Form 5500 filed with the Internal Revenue Service with
respect to each Benefit Plan, (if any such report was required), (3)
the most recent summary plan description for each Benefit Plan for
which such summary plan description is required, and (4) each trust
agreement and group annuity contract relating to any Benefit Plan.
Since the date of the most recent LFB Financial Statements, there has
not been any adoption or amendment in any material respect by LFB or
any LFB Subsidiary of any Benefit Plan. There exist no employment,
consulting, severance, termination or indemni fication agreements,
arrangements or understandings between LFB or any LFB Subsidiary and
any current or former officer, director or key employee of LFB or any
LFB Subsidiary. Neither LFB nor any LFB Subsidiary has or maintains any
Pension Plan subject to Title IV of ERISA.
[ii] No Benefit Plan provides medical or hospital
nation benefits to retirees or other former employees, other than
benefits provided under the Consolidated Omnibus Budget Reconciliation
Act of 1985. Each employee bonus or profit sharing plan providing
benefits to any current or former officer, director or employee of LFB
or any LFB Subsidiary is terminable by LFB or such LFB Subsidiary
without notice at any time.
[iii] Each Benefit Plan has been administered in all
material respects in accordance with its terms. LFB, each LFB
Subsidiary and all the Benefit Plans are in compliance in all material
respects with the applicable provisions of ERISA and the Code. All
reports, returns and similar documents with respect to the Benefit
<PAGE>
Plans required to be filed with any governmental agency or distributed
to any Benefit Plan Participant have been duly and timely filed or
distributed. There are no investigations by any governmental agency,
termination proceedings or other claims (except claims for benefits
payable in the normal operation of the Benefit Plans), suits or
proceedings against or involving any Benefit Plan or asserting any
rights or claims to benefits under any Benefit Plan that could give
rise to any liability, and, to the best knowledge of LFB, there are not
any facts that could give rise to any liability in the event of any
such investigation, claim, suit or proceeding.
[iv] All Pension Plans have been the subject of
determination letters from the Internal Revenue Service to the effect
that such Pension Plans are qualified and exempt from Federal income
taxes under Sections 401(a) and 501(a), respectively, of the Code. No
such determination letter has been revoked nor, to the best knowledge
of LFB, has revocation been threatened, nor has any such Pension Plan
been amended since the date of its most recent determination letter or
application therefor in any respect that would adversely affect its
qualification or materially increase its costs.
[v] No Pension Plan that LFB, any LFB Subsidiary or
any other company under common control with LFB (within the meaning of
Section 4001(a)(14) of ERISA) maintains, or to which LFB, any LFB
Subsidiary or any such other company is obligated to contribute is
subject to Title IV or Section 302 of the ERISA or Section 412 of the
Code. Neither LFB nor any LFB Subsidiary has ever been required to
contribute to any multi-employer pension plan (as such term is defined
in Section 4001(a)(3) of ERISA).
[vi] None of LFB, any LFB Subsidiary or any officer
of LFB or any LFB Subsidiary or any of the Benefit Plans which are
subject to ERISA, or any trusts created thereunder, any administrator
or, to the best knowledge of LFB, any trustee thereof, has engaged in a
"prohibited transaction" (as such term is defined in Section 406 of
ERISA or Section 4975 of the Code) or any other breach of fiduciary
responsibility under ERISA, or engaged in any transaction or acted or
failed to act in a manner that could subject LFB or any LFB Subsidiary
to any material liability for breach of fiduciary duty under ERISA or
any other applicable law. Neither any Pension Plans nor any of their
related trusts have been terminated.
[vii] With respect to any Benefit Plan that is an
employee welfare benefit plan: (1) no such Benefit Plan is unfunded or
funded through a welfare benefits fund, as such term is defined in
Section 419(e) of the Code, (2) each such Benefit Plan that is a group
health plan, as such term is defined in Section 5000(b)(1) of the Code,
complies with the applicable requirements of Section 4980B(f) of the
Code and (3) each such Benefit Plan (including any such Plan covering
retirees or other former employees) may be prospectively amended or
terminated without material liability to LFB or any LFB Subsidiary on
or at any time after the Effective Time.
M. Labor Matters.
[i] LFB and each LFB Subsidiary is in compliance in
all material respects with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages
and hours and occupational safety and health;
<PAGE>
[ii] There is no unfair labor practice charge or
complaint or any other matter against or involving LFB or any LFB
Subsidiary pending or, to the knowledge of LFB, threatened before the
National Labor Relations Board or any court of law;
[iii] Neither LFB nor any LFB Subsidiary is a party
to or bound by any collective bargaining agreement or any similar labor
union arrangement;
[iv] There are no charges, investigations,
administrative proceedings or formal complaints of discrimination
(including discrimination based upon sex, age, marital status, race,
color, religion, national origin, sexual preference, disability,
handicap or veteran status) pending or, to the knowledge of LFB
threatened, before the Equal Employment Opportunity Commission or any
federal, state or local agency or court against LFB or any LFB
Subsidiary;
[v] There have been no governmental audits of the
equal employment opportunity practices of LF13 or any LFB Subsidiary
and, to the knowledge of LFB, no basis for any such claim exists; and
[vi] LFB and each LFB Subsidiary is in compliance in
all material respects with the requirements of the Americans With
Disabilities Act.
N. Brokers. Neither LFB, any LFB Subsidiary, nor any of their
respective officers, directors or employees, has employed any broker, finder or
financial advisor or incurred any liability for fees or commissions payable to
any broker, finder or financial advisor in connection with the negotiations
relating to or the transactions contemplated by this Agreement.
O. Assets. LFB and each LFB Subsidiary has good and marketable
title to all of the properties and assets, real and personal, tangible and
intangible, reflected on the LFB Financial Statements or acquired after the
dates thereof, free and clear of all liens, charges, security interests,
encumbrances and claims, except for [i] liens for current taxes not yet due and
payable, [ii] pledges to secure deposits and other liens incurred in the
ordinary course of its business, and [iii] such imperfections or irregularities
of title, easements, claims, liens, charges, security interests and
encumbrances, if any, as do not materially affect the use of the properties or
assets subject thereto or affected thereby or otherwise materially impair
business operations at such properties. All leases by which either of LFB or any
LFB Subsidiary leases real or personal property as lessee (other than leases
that are the equivalent of extensions of credit) are valid without default in
any material respect thereunder by the lessee or, to the best knowledge of LFB,
the lessor, and are in full force and effect in accordance with their respective
terms.
P. Material Contracts. Neither LFB nor any LFB Subsidiary is
a party to any:
[i] agreement, arrangement or commitment not made in
the ordinary course of business consistent with past practices;
[ii] employment agreement or an y bonus, incentive,
deferred compensation, severance pay, profit sharing, retirement, stock
purchase, stock option agreement or arrangement or employee benefit
plan for or in respect of any employee or former employee;
<PAGE>
[iii] collective bargaining agreement or other
agreement with any labor union or labor organization;
[iv] material agreement, indenture or other
instrument relating to the borrowing of money by LFB, or the guaranty
by LFB of any obligation for the borrowing of money;
[v] any agreement, contract or commitment containing
any covenant materially limiting the freedom of LFB or any LFB
Subsidiary to engage in any line of business in any geographic area or
to compete with any person;
[vi] agreement for loans or the provision, purchase
or sale of goods, services or property, or other contract or commitment
with any director, officer or employee;
[vii] any agreement the performance of which
involves consideration in excess of $20,000 per year or the performance
of which will extend over a period of more than one year.
Q. Good Standing of Contracts. No event or condition has
occurred or exists, or, to the best knowledge of LFB, is alleged by any of the
other parties thereto to have occurred or existed, which constitutes, or with
lapse of time or giving of notice or both might constitute, a default or breach
under any of the leases, contracts or agreements to which LFB or any LFB
Subsidiary is a party, which default is reasonably likely to result in a
material adverse change in the financial condition, results of operation or
business of LFB and LFB's Subsidiaries taken as a whole.
R. Insurance. The LFB Disclosure Schedule lists all policies
of fire, theft, liability and other insurance and bonds maintained with respect
to the assets or businesses of LFB and each LFB Subsidiary. All such policies
and bonds are valid and enforceable and in full force and effect and neither LFB
nor any LFB Subsidiary has received any notice of material premium increases or
cancellations with respect to any of such policies and bonds since June 30,
1995. To the best knowledge of LFB, neither LFB nor any LFB Subsidiary is liable
for any material retroactive premium adjustments with respect to any of its
insurance policies or bonds.
S. Tax Matters. Each member of the consolidated group of
which LFB is a member or has ever been a member (the "Group") has timely filed
or caused to be filed all federal, state, foreign and local income, franchise,
gross receipts, payroll, sales, use, withholding, occupancy, excise, real and
personal property, employment and other tax returns, tax information returns and
reports required to be filed, and has paid, or made adequate provisions for the
payment of, all taxes, duties or assessments of any nature whatsoever, interest
payments, penalties and additions (whether or not reflected in its returns as
filed) due and payable (and/or properly accruable for all periods ending on or
before the date of this Agreement) as reflected on such returns. The most recent
LFB Financial Statements reflect, in the reasonable opinion of management, an
adequate reserve for all taxes payable by LFB and each LFB Subsidiary accrued
through the date of such Financial Statements. No material deficiencies for any
taxes have been proposed, asserted or assessed against LFB or any LFB Subsidiary
that are not adequately reserved for. The consolidated federal income tax
returns of the Group have not been audited during the last five (5) fiscal years
of LFB. No audit, examination or investigation is presently being conducted cr,
to the best knowledge of LFB, threatened by any taxing authority; no unpaid tax
deficiencies or additional liabilities of any sort have been proposed by any
<PAGE>
governmental representative; and no agreements for the extension of time for the
assessment of any amounts of tax have been entered into by or on behalf of any
member of the Group.
T. Fiduciary Activities. Each LFB Subsidiary's fiduciary and
custodial activities have been and are being conducted in all material respects
in accordance with all applicable law.
U. Environmental Matters. To the best knowledge of LFB:
[i] LFB and each LFB Subsidiary is in substantial
compliance with all applicable federal, state and local laws, rules,
regulations, ordinances and requirements relating to the environment
("Environmental Laws");
[ii] No "Hazardous Wastes" (as hereinafter defined)
have ever been generated, transported, treated, stored, released or
disposed of on any real property owned or leased by LFB or LFB
Subsidiary, except in substantial compliance with all Environmental
Laws;
[iii] Neither LFB nor any LFB Subsidiary has
transported or disposed or caused or permitted any person to transport
or dispose of any Hazardous Wastes other than in accordance with all
Environmental Laws;
[iv] Neither LFB nor any LFB Subsidiary has ever
violated any of the Environmental Laws which violation caused a
material adverse change in the financial condition of LFB and any LFB
Subsidiary taken as a whole;
[v] No asbestos, PCBs or other Hazardous Wastes or
any petroleum product or constituents thereof is present on, in or
under any of the property owned by LFB or any LFB Subsidiary, whether
owned or leased or held as OREO (as such term is customarily used) or
in which LFB or any LFB Subsidiary has any legal or equitable interest;
[vi] There are no loans or other credits included in
the loan portfolio of any LFB Subsidiary with respect to which LFB or
any LFB Subsidiary is or could incur or become responsible for
liability under the Environmental Laws; and
[vii] No Hazardous wastes have ever been utilized on
any of the property now held or previously held by LFB or any LFB
Subsidiary as collateral or otherwise securing any loan made by LFB or
any LFB Subsidiary other than in substantial compliance with all
Environmental Laws.
"Hazardous Wastes" for purposes of this Agreement shall
include, without limitation: [i] hazardous substances or hazardous wastes, as
those terms are defined by the Comprehensive Environmen tal Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., and any other
applicable federal, state or local law, rule, regulation, ordinance or
requirement, all as amended or hereafter amended; [ii] petroleum, including
without limitation crude oil or any fraction thereof which is liquid at standard
conditions of temperature and pressure (60 degrees Fahrenheit and 14.7 pounds
per square inch absolute); [iii] any radioactive material, including without
<PAGE>
limitation any source, special nuclear, or by-product material as defined in 42
U.S.C. Section 2011 et seq.; and [iv] asbestos or any asbestiform minerals in
any form or condition.
V. Insider Loans. All loans, loan commitments and any other
extensions of credit and commitments to extend credit that are currently
outstanding by LFB or any LFB Subsidiary to direc tors, officers, or principal
shareholders of LFB or any LFB Subsidiary or any of their related interests,
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and substantially comply with all applicable provisions of
federal and state law. Such loans, extensions and commitments do not include
more than a normal risk of collectability.
W. Absence of Certain Changes and Events. Since June 30,
1995, LFB and each LFB Subsidiary has conducted its business only in the
ordinary course, and has not:
[i] Suffered any damage or destruction materially
and adversely affecting the properties or business of LFB;
[ii] Entered into any material commitment or
transaction, other than in the ordinary course of business, materially
and adversely affecting the operations of LFB;
[iii] Made any declaration, setting aside or payment
of any dividend or other distribution of assets (whether in cash, stock
or property) with respect to the capital stock of LFB or any direct or
indirect redemption, purchase or other acquisition of such stock;
[iv] Increased the compensation payable or to become
payable to any employee, except in accordance with past practice, or
increased any bonus, insurance, pension or other employee benefit plan,
payment or arrangement for such employees or entered into or amended
any employment, consulting, severance or similar agreement;
[v] Incurred any material liability or obligation
(absolute, accrued, contingent or otherwise) not incurred in the
ordinary course of business consistent with past practice;
[vi] Paid, discharged or satisfied any material
claim, liability or obligation other than payment in the ordinary
course of business consistent with past practice;
[vii] Waived any material claims or rights;
[viii] Sold, transferred or otherwise disposed of a
material portion of its assets, except in the ordinary course of
business consistent with past practice;
[ix] Made any change in any method of accounting, or
any material practice or principle of accounting;
[x] Paid, loaned or advanced any amount to or sold,
transferred or leased any asset to any employee except for normal
compensation involving salary and benefits and loans or advances on
terms substantially comparable to those offered to other persons; or
<PAGE>
[xi] Agreed in writing, or otherwise, to take any
action described in this Section.
Since June 30, 1995, there has been no change, or any event
involving a prospective change, in the business, assets, financial condition or
results of operations of LFB or any of its LFB Subsidiaries that has had, or is
reasonably likely to have, a material adverse effect on LFB and LFB's
Subsidiaries taken as a whole.
X. Adjustable Rate Mortgages. To the best knowledge of LFB,
each LFB Subsidiary has properly calculated, in accordance with the contractual
terms thereof and all applicable law, all adjustments required in its portfolio
of adjustable rate mortgage notes, except for adjustments the miscalculation of
which would not cause a material adverse change in the financial condition of
LFB.
Y. Regulatory Matters. Neither LFB nor any LFB Subsidiary
has, through the date hereof, taken or agreed to take any action or has
knowledge of any fact or circumstance that would materially impede or delay
receipt of any approval referred to in Section 5.2E hereof.
Z. Full Disclosure. No representation or warranty of LFB
contained in this Agreement and no statement contained in this Agreement or in
any certificate or other instrument furnished to corporation hereunder contains
or will contain any untrue statement of a material fact or omits or will omit to
state any material fact necessary to make the statements contained herein or
therein not misleading.
4.2 Corporation and Acquisition Corp's Representations and Warranties.
Corporation and Acquisition Corp hereby represent and warrant to LFB that:
A. Corporate Standing; Authorization.
[i] Corporation is a bank holding company registered
under the EHCA and a Kentucky corporation duly organized and validly
existing under the laws of the Commonwealth of Kentucky. Corporation
has paid all fees due and owing to the office of the Kentucky Secretary
of State, has delivered to that office its most recent annual report as
required by the Act, and has never filed articles of dissolution with
the Kentucky Secretary of State. Corporation has all requisite power
and authority to own, lease and operate its properties and to carry on
its business as now being conducted and is duly qualified and in good
standing to do business in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such
qualification necessary.
[ii] The execution and delivery of this Agreement and
the Restated Plan do not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with, or result in
any Violation pursuant to, any provision of the articles of
incorporation or bylaws of Corporation and Acquisition Corp or, subject
to obtaining or making the consents, approvals, orders, authorizations,
registrations, declarations and filings referred to in paragraph [iii]
below, result in any Violation of any loan or credit agreement, note,
mortgage, indenture, lease, benefit plan or other agreement,
obligation, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Corporation and Acquisition Corp or its
properties or assets.
<PAGE>
[iii] Except (a) for consents, approvals, orders, and
authorizations from the Federal Reserve and the OTS, and (b) for the
filing of Articles of Merger with the Kentucky Secretary of State, no
consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality, domestic
or foreign, is required by or with respect to Corporation and
Acquisition Corp in connection with the execution and delivery of this
Agreement and the Restated Plan, or the consummation by Corporation and
Acquisition Corp of the transactions contemplated hereby and thereby.
[iv] Corporation and Acquisition Corp has all
requisite corporate power and authority to enter into and to consummate
the transactions contemplated by this Agreement and the Restated Plan.
The execution and delivery of this Agreement and the Restated Plan and
the consummation of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action on the part
of Corporation and Acquisition Corp. This Agreement and the Restated
Plan have been duly executed and delivered by Corporation and
Acquisition Corp and constitute the legal, valid and binding
obligations of Corporation and Acquisition Corp enforceable against it
in accordance with their terms.
B. Pending or Threatened Litigation. There are no claims of
any kind or any actions, suits, proceedings, arbitrations or investigations
pending or, to the knowledge of corporation, threatened in any court or before
any governmental agency or instrumentality or arbitration panel or otherwise
against, by or affecting Corporation or any of its businesses, prospects,
conditions (financial or otherwise) or assets which would prevent the
performance of this Agreement or any of the transactions contemplated hereby or
declare the same unlawful or cause the rescission thereof.
C. Financial Statements. Corporation will deliver to LFB true
and complete copies of the audited consolidated balance sheet of Corporation and
the related consolidated statements of income and cash flows, as the case may
be, of Corporation for the year ended December 31, 1995 as soon as the same
become available (the "Corporation Audited Financial Statements"), and has
delivered to LFB true and complete copies of the unaudited consolidated balance
sheets of Corporation and related consolidated statements of income and cash
flows, as the case may be, of Corporation for the years ended December 31, 1995
and 1994, as well as Corporation's unaudited balance sheet and related
statements of income for the period ended February 29, 1996 (the "Corporation
Unaudited Financial Statements"). Corporation Audited Financial Statements and
the Corporation Unaudited Financial Statements (collectively, the "Corporation
Financial Statements") have been or will be prepared in conformity with
generally accepted accounting principles applied on a basis consistent with
prior periods. The Corporation Financial Statements present or will present
fairly the financial condition of Corporation as of their respective dates and
the results of Corporations operations for the respective periods covered
thereby in conformity with generally accepted accounting principles applied on a
consistent basis.
D. Resources. Corporation has on hand or has timely access
to capital funds sufficient to enable Corporation to (i) satisfy the capital
adequacy guidelines and requirements of the Federal Reserve and any other
applicable federal or state regulator or agency as those guidelines and
requirements apply and are actually applied to Corporation and the Merger, and
(ii) pay the consideration described in Sections 2.3A and 2.4.
<PAGE>
E. Regulatory Compliance. Neither Corporation nor any of its
affiliates is a party to any enforcement action instituted by or any memorandum
of understanding or cease and desist order with any federal or state regulatory
agency, and no such action, memorandum or order has, to Corporation's knowledge,
been threatened, and Corporation has not received any report of examination from
any federal or state regulatory agency which requires that Corporation address
any material problem or take any material action which has not already been
addressed or taken in a manner satisfactory to the regulatory agency.
F. Due Diligence. Corporation has been afforded full and
complete access to all books, records and other materials and information that
Corporation deemed necessary for the purposes of making its investment decision
in connection with the transactions contemplated herein, has the expertise and
resources necessary for that purpose, and has conducted such due diligence
investigation as it has deemed appropriate to fully evaluate the merits and
risks of such transactions.
G. Accuracy of Statements. The information supplied or to be
supplied by Corporation for inclusion in the Proxy Statement at the date of
mailing to stockholders of LFB and at the time of the meeting of the
stockholders of LFB to be held in connection with the Merger, will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
H. Brokers. Neither Corporation nor any of its officers,
directors or employees, has employed any broker, finder or financial advisor or
incurred any liability for fees or commissions in connection with the
negotiations relating to or the transactions contemplated by this Agreement.
I. Full Disclosure. No representation or warranty of
Corporation contained in this Agreement and no statement contained in this
Agreement or in any certificate or other instrument furnished to LFB hereunder
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary to make the statements contained
herein or therein not misleading.
4.3 Non-Survival of Representations and warranties. All representations
and warranties contained in this Agreement by any party hereto or set forth in
any certificate or other instrument delivered by or on behalf of the parties
pursuant to this Agreement shall expire at the Effective Time.
ARTICLE 5
CONDITIONS PRECEDENT
5.1 Conditions to Obligations of LFB. The obligation of LFB to
consummate the transactions contemplated by this Agreement and the Restated
Plan, including the Merger, is subject to the satisfaction of the following
conditions precedent on or before the Closing Date, any of which, except for
Section 5.1E, may be waived by LFB:
A. Approval of this Agreement and the Restated Plan by the
requisite affirmative vote of the shareholders of LFB at the Meeting.
B. There shall not be threatened, instituted or pending any
<PAGE>
action or proceeding before any domestic or foreign court or governmental agency
or other regulatory or administrative agency or commission, or by any other
person [i] challenging the Merger or the other transactions contemplated by this
Agreement or the terms thereof, or [ii] seeking to prohibit the Merger or the
other transactions contemplated by this Agreement, which, in the opinion of
LFB's counsel, has a reasonable probability of success.
C. The representations and warranties of Corporation set forth
in Section 4.2 of this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as if made
on the Closing Date, and Corporation and Acquisition Corp shall have furnished
to LFB a certificate dated the Closing Date executed by the chief executive
officer of Corporation and Acquisition Corp to that effect.
D. Corporation and Acquisition Corp in all material respects
shall have performed and observed its obligations and covenants as set forth in
this Agreement prior to or on the Closing Date and shall have delivered to LFB a
certificate dated the Closing Date of the chief executive officer of Corporation
and Acquisition Corp to that effect and evidence, in form and substance
reasonably satisfactory to counsel for LFB, that the transactions contemplated
by this Agreement and the Restated Plan were duly authorized by all necessary
corporate action of Corporation and Acquisition Corp.
E. Receipt of all permits, consents, approvals and
authorizations from federal and state governmental authorities and regulatory
agencies necessary to effect the Merger (including the expiration of all
applicable waiting periods) and the other transactions contemplated herein, and
the satisfaction of all other requirements prescribed by law which are necessary
to the carrying out of the Merger.
F. LFB shall have received an opinion of counsel of
Corporation and Acquisition Corp dated as of the Closing Date, in substantially
the form attached hereto as Exhibit B.
G. LFB shall have received an opinion, dated as of a date
prior to and reasonably close to the date of the shareholders meeting of LFB
respecting approval of the Merger, from Investment Bank Services, Incorporated,
to the effect that the Merger is fair to LFB's shareholders from a financial
point of view, which opinion shall be confirmed and not withdrawn on the Closing
Date.
H. The Severance Agreement attached hereto as Exhibit C shall
have been executed by Corporation and Bruce Edgington.
5.2 Conditions to Obligations of Corporation. The obligation of
Corporation to consummate the transactions contemplated by this Agreement and
the Restated Plan, including the Merger, is subject to the satisfaction of the
following conditions precedent on or before the Closing Date, any of which,
except for Section 5.2E, may he waived by Corporation:
A. Approval of this Agreement and the Restated Plan by the
requisite affirmative vote of the shareholders of LFB at the Meeting.
B. There shall not be threatened, instituted or pending any
action or proceeding before any domestic or foreign court or governmental agency
or other regulatory or administrative agency or commission, or by any other
person [i] challenging the Merger or the other transactions contemplated by this
Agreement or the terms thereof, or [ii] seeking to prohibit the Merger or the
<PAGE>
other transactions contemplated by this Agreement, which, in the opinion of
Corporation's counsel, has a reasonable probability of success.
C. The representations and warranties of LFB set forth in
Section 4.1 of this Agreement shall be true and correct in all material respects
as of the date of this Agreement and as of the Closing Date as if made on the
Closing Date, and LFB shall have furnished to Corporation a certificate dated
the Closing Date executed by the Chief Executive Officer of LFB to that effect.
D. LFB in all material respects shall have performed and
observed its obligations and covenants as set forth in this Agreement prior to
or on the Closing Date and shall have delivered to Corporation a certificate
dated the Closing Date of the Chief Executive Officer of LFB to that effect and
evidence, in form and substance reasonably satisfactory to counsel for
Corporation, that the transactions contemplated by this Agreement and the
Restated Plan were duly authorized by all necessary corporate action of LFB.
E. Receipt of all permits, consents, approvals and
authorizations from federal and state governmental authorities and regulatory
agencies necessary to effect the Merger (including the expiration of all
applicable waiting periods) and the other transactions contemplated herein, on
terms and conditions satisfactory to Corporation (other than standard terms and
conditions), and the satisfaction of all other requirements prescribed by law
which are necessary to the carrying out of the Merger.
F. There shall not have been any material adverse change in
the business, financial condition, prospects or operations of LFB or any LFB
Subsidiary since June 30, 1995.
G. Corporation shall have received an opinion of counsel for
LFB dated as of the Closing Date, in substantially the form attached hereto as
Exhibit D.
H. The Severance Agreement attached hereto as Exhibit C shall
have been executed by Corporation and Bruce Edgington.
ARTICLE 6
TERMINATION
6.1 Dissenting Shares. Prior to the Effective Time, this Agreement the
Restated Plan may be declared void and of no effect by Corporation if the number
of Dissenting Shares is greater than 20% of the issued and outstanding shares of
LFB.
6.2 Termination.This Agreement and the Restated Plan may be terminated:
A. by mutual agreement of Corporation and LFB;
B. by Corporation, upon prior written notice, if LFB
materially breaches any representation or warranty set out in Section 4.1 of
this Agreement or materially breaches any covenant in this Agreement, or upon
the failure and nonwaiver of any condition precedent set out in Section 5.2
unless, in the case of a material breach of a covenant or failure of a
condition, within thirty (30) days after written notice from Corporation, LFB
shall have cured such breach or failure;
<PAGE>
C. by LFB, upon prior written notice, if Corporation
materially breaches any representation or warranty set out in Section
4.2 of this Agreement or materially breaches any covenant in this
Agreement or upon the failure and nonwaiver of any condition precedent
set out in Section 5.1 unless, in the case of a material breach of a
covenant or failure of a condition, within thirty (30) days after
written notice from, LFB, Corporation shall have cured such breach or
failure; or
D. by LFB or Corporation if the Effective Time shall not have
occurred on or before December 31, 1996, unless LFB shall have
exercised its option to extend the Closing Date under Section 2.6 of
this Agreement.
6.3 Declaration. Any declaration of termination under this Article 6 by
Corporation or LFB shall he pursuant to resolution of its Board of Directors or
by executive officers thereof duly authorized by its Board of Directors to make
such a declaration, shall be made by written notice given to the other parties
setting forth the grounds for the termination, including, if applicable, the
alleged material misrepresentation, breach or failure, and, unless, in the case
of a material breach of a covenant or a failure of a condition, such material
breach or failure is timely cured, shall have the effect of terminating this
Agreement and the Restated Plan effective upon the delivery of such written
notice or the expiration of any applicable cure period, whichever is later,
whereupon the same shall have no further effect and the Merger provided for
herein and therein shall not be effected. Upon rightful termination of this
Agreement by either Corporation or LFB pursuant to Article 6, except for
Sections 2.5 relating to the Escrow Deposit, 3.3 relating to confidentiality,
3.6 relating to the termination fee, and 7.5 relating to expenses, which shall
survive to the extent permitted by applicable statutes of limitation, this
Agreement shall be void and of no further effect, and there shall be no
liability by reason of this Agreement, or the termination thereof on the part of
Corporation or LFB or the respective directors, officers, employees, agents or
shareholders of any of them.
ARTICLE 7
GENERAL PROVISIONS
7.1 Law and Section Headings. This Agreement shall be construed and
interpreted in accordance with the laws of the Commonwealth of Kentucky. Section
headings are used in this Agreement for convenience only and are to be ignored
in the construction of the terms of this Agreement.
7.2 Modifications. The parties hereto may amend, modify or supplement
this Agreement, before or after approval thereof by the shareholders of LFB, in
such manner as may be agreed by them in writing.
7.3 Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of the
remaining provisions.
7.4 Notices. All notices hereunder shall be in writing and shall be
deemed to have been given or made when delivered or mailed, first class,
registered or certified mail, postage prepaid, addressed as follows, until
notice of another address or additional addresses have been received by the
other parties:
<PAGE>
If to Corporation to:
First Southern Bancorp, Inc.
99 Lancaster Street
Stanford, Kentucky 40484
Attention: Jess Correll, President and Chief
Executive Officer
With a copy to:
Caryn F. Price, Esq.
WYATT, TARRANT & COMBS
2800 Citizens Plaza
Louisville, Kentucky 40202
If to LFB, to:
Lincoln Financial Bancorp, Inc.
111 West Main Street
Stanford, Kentucky 40484
Attention: Bruce Edgington, President and Chief
Executive Officer
With a copy to:
R. James Straus, Esq.
BROWN, TODD & HEYBURN
3200 Providian Center
Louisville, Kentucky 40202
7.5 Expenses. Whether or not the Merger is consummated, each of the
parties hereto will pay its own fees and expenses incurred in connection with
the merger and the other transactions contem plated by this Agreement and the
Restated Plan.
7.6 Counterparts. This Agreement may he executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
7.7 Time of Essence; Rest Efforts. Time is of the essence to the
performance of the obligations set forth in this Agreement. LFB and Corporation
each agree to use their respective best efforts to obtain the satisfaction of
the conditions to their respective obligations specified herein, and to advise
the other parties hereto in writing as to any unusual delays or impediments in
obtaining the same.
7.8 Closing. At the Closing, each party shall execute and deliver all
documents required by this Agreement, and such further documents as the other
party shall reasonably request in order to satisfy the fulfillment of each
party's agreements and undertakings hereunder.
7.9 Parties in Interest; Third Party Rights. All covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of their respective successors and
permitted assigns. No party to this Agreement may however, assign its rights
hereunder or delegate its obligations hereunder to any other person or entity
<PAGE>
without the express prior written consent of the other parties hereto. It is the
intention of the parties that nothing in this Agreement or the Restated Plan
shall be deemed to create any right with respect to any person or entity not a
party to this Agreement or the Restated Plan.
7.10 Entire Agreement; Waiver. This Agreement, including the Schedules
and Exhibits hereto and the Restated Plan, constitute and contain the entire
agreement of LFB and Corporation with respect to the Merger and supersede any
prior agreement by the parties, whether written or oral, except for the
Confidentiality Agreement, which shall remain in full force and effect except as
follows: (i) the provisions of Section 14 of the Confidentiality Agreement shall
terminate upon the execution of this Agreement, and (ii) in the event of any
conflict between the terms of the Confidentiality Agreement (including without
limitation the provisions of Sections 5 and 10 of the Confidentiality Agreement)
and this Agreement, the terms of this Agreement shall control in each instance.
The waiver of a breach of any term or condition of this Agreement must he in
writing signed by the party sought to be charged with such waiver and such
waiver shall not be deemed to constitute the waiver of any other breach of the
same or of any other term or condition of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers as of the date first
above written.
FIRST SOUTHERN BANCORP, INC.
By /s/ Jess Correll
Jess Correll, President and
Chief Executive Officer
By /s/ Randall Attkisson
Randall Attkisson, Vice
President and Treasurer
FSB ACQUISITION CORPORATION
By /s/ Randall Attkisson
Randall Attkisson, Vice President
LINCOLN FINANCIAL BANCORP, INC.
By /s/ Bruce Edgington
Bruce Edgington, President and
Chief Executive Officer
<PAGE>
APPENDIX E
RESTATED PLAN OF MERGER
THIS RESTATED PLAN OF MERGER (the "Restated Plan") is made and
entered effective as of the 6th day of June, 1996, by and among FIRST SOUTHERN
BANCORP, INC., a Kentucky corporation ("FSB"), FSB ACQUISITION CORPORATION, a
Kentucky corporation ("Acquisition Corp") and LINCOLN FINANCIAL BANCORP, INC., a
Delaware corporation ("LFB").
W I T N E S S E T H :
LFB is a corporation organized and existing under the laws of
the State of Delaware, the authorized capital stock of which consists of
1,900,000 shares of common stock, par value $.01 per share ("FSB Common Stock"),
of which at the date hereof 440,128 shares are issued and outstanding and fully
paid and nonassessable, and 100,000 shares of serial preferred stock, par value
$.01 per share, of which at the date hereof no shares are issued and
outstanding.
FSB is a corporation organized and existing under the laws of
the Commonwealth of Kentucky, the authorized capital stock of which consists of
150,000 shares of common stock without par value, of which at the date hereof
145,664 shares are issued and outstanding, and 1,600 shares of Class B preferred
stock, of which at the date hereof no shares are issued and outstanding.
Acquisition Corp is a corporation organized and existing under
the laws of the Commonwealth of Kentucky, the authorized capital stock of which
consists of 1,000 shares of common stock without par value, of which at the date
hereof 1,000 shares are issued and outstanding.
The respective Boards of Directors of FSB and LFB have
approved and adopted an Agreement and Plan of Reorganization (the "Agreement")
and a Plan of Merger (the "Plan of Merger"), each dated March 23, 1996, for the
general welfare and advantage of their respective shareholders, under which plan
LFB would be merged into FSB, in accordance with the terms of the Agreement and
the Plan of Merger.
The respective Boards of Directors of FSB, Acquisition Corp
and LFB have determined it is desirable to effect an Amendment to the Agreement
(the "Amendment"), and this Restate Plan, which Restated Plan amends and
restates the Plan of Merger in its entirety, and under which plan Acquisition
Corp would be merged into LFB, in accordance with the Agreement, the Amendment
and the Restated Plan. The respective Boards of Directors of FSB, Acquisition
Corp and LFB have approved and adopted the Amendment and the respective Boards
of Directors of Acquisition Corp and LFB have approved and adopted this Restated
Plan and have authorized the execution hereof.
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements and undertakings herein contained, the parties hereby agree as
follows:
<PAGE>
ARTICLE 1
THE MERGER
1.1 The Merger. Upon the terms and conditions set forth in this
Restated Plan, the Agreement and the Amendment, at the Effective Time (as
hereinafter defined), Acquisition Corp shall be merged with and into LFB (the
"Merger") in accordance with the provisions of and with the effect provided in
the General Corporation Law of the State of Delaware (the "GCL") and the
Kentucky Business Corporation Act (the "KBCA"). The terms of the Merger shall be
as set forth in the Agreement, the Amendment and this Restated Plan.
1.2 Articles of Merger. Upon the terms and conditions set forth in the
Agreement, the Amendment and this Restated Plan, Articles of Merger (the
"Articles of Merger") shall be duly prepared and executed by LFB and Acquisition
Corp, and thereafter delivered to the Secretary of State of the Commonwealth of
Kentucky for filing as provided in the KBCA, and to the Secretary of State of
the State of Delaware for filing as provided in the GCL, on the Closing Date, as
defined in the Agreement. The Merger shall become effective upon filing with the
Delaware Secretary of State and the Kentucky Secretary of State or at such time
and date thereafter as is provided in the Articles of Merger (the "Effective
Time").
1.3 Effect of Filing.
[A] At the Effective Time, [i] the separate existence of
Acquisition Corp shall cease, and Acquisition Corp shall be merged with and into
LFB (sometimes herein referred to as the "Surviving Corporation"), and [ii] the
Articles of Incorporation and Bylaws of LFB as in effect immediately prior to
the Effective Time shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation.
[B] At the Effective Time, the officers and Board of Directors
of the Surviving Corporation shall consist of ..those persons serving as the
officers and directors of Acquisition Corp immediately prior to the Effective
Time.
[C] At and after the Effective Time, the Merger will have the
effects set forth in the GCL and the KBCA and as otherwise provided by law.
ARTICLE 2
CONVERSION OF SHARES
2.1 Conversion of LFB Capital Stock.
[A] Conversion of LFB Common Stock. Except for Dissenting
Shares (as defined below), each share of LFB Common Stock issued and outstanding
immediately prior to the Effective Time (which shares shall include, without
limitation, 29,440 shares of LFB Common Stock owned by the LFB Employee Stock
Ownership Plan ("ESOP") and 16,928 shares originally held by the Trust (the "MRP
Trust") formed under the LFB Management Recognition Plan ("MRP"), 13,557 of
which have been awarded and distributed to participants or awarded and will be
distributable at the Effective Time, and 3,371 of which are unawarded (the
"Unawarded MRP Shares") and will revert to LFB when all trust benefits have been
distributed) shall, automatically, by virtue of the Merger and at the Effective
Time, be exchanged for and converted into, without any further notice to or on
the part of the holder thereof, the right to receive Twenty Two Dollars and One
<PAGE>
Cent ($22.01), payable in cash; provided, however, that the Unawarded MRP Shares
shall be canceled at the Effective Time, to the extent permissible, and this
Plan of Merger shall be deemed to be automatically amended to provide for the
same. At and after the Effective Time, the former holders of shares of LFB
Common Stock shall be entitled only to the exchange rights provided for in this
Section 2.1 or to the rights to dissent under the GCL. Certificates previously
representing shares of FSB Common Stock shall be exchanged for the cash
consideration provided for in this Section 2.1 upon the surrender of such
certificates in accordance with Section 2.2.
[B] Stock Options. At or prior to the Closing, LFB shall cause
each option to purchase shares of LFB Common Stock (the "Options") under the LFB
1994 Stock Option and Incentive Plan (the "Option Plan") to be canceled in
exchange for the consideration set forth in this Section 2.1B. At the Effective
Time, each Option shall be canceled and exchanged for cash equal to the product
of [i] the total number of shares of LFB Common Stock subject to the option, and
[ii] Nine Dollars and Fifty-One Cents ($9.51) (the "Option Consideration"). The
Option Consideration shall be paid to the holders of the Options by FSB on the
Closing Date. The Option Plan shall terminate as of the Effective Time.
2.2 Exchange of Certificates.
[A] At and after the Effective Time, each person who
immediately prior to the Effective Time held of record shares of LFB Common
Stock shall be entitled to receive, upon the surrender of the certificate(s)
which represented such shares (individually a "Certificate" and collectively the
"Certificates") to FSB, together with a letter of transmittal (in the form
contemplated by Section 2.2.B) duly executed, the consideration specified in
Section 2.1.
[B] Not later than five days prior to the Closing Date, FSB
shall mail or deliver to each holder who immediately prior to the Effective Time
held of record shares of LFB Common Stock, a form letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to FSB)
and instructions for use in effecting the surrender of the Certificates or
payment therefor. No interest will be paid or accrue on any consideration
payable on the surrender of such Certificate. If delivery of the consideration
payable pursuant to Section 2.1 is to be made to a person other than the person
in whose name the Certificate surrendered is registered, it shall be a condition
of payment that the Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
payment shall pay any transfer or other taxes required by reason of the payment
to a person other than the registered holder of the Certificate surrendered or
establish to the satisfaction of FSB that such tax has been paid or is not
applicable.
[C] At and after the Effective Time, holders of Certificates
shall cease to have any rights as shareholders of LFB except for the right to
receive upon such surrender the consideration specified in Section 2.1.
[D] After the Effective Time, except to the extent necessary
to issue replacement Certificates for any Certificates which may have been lost
or stolen or to comply with the payment instructions contained in a letter of
transmittal contemplated by Section 2.2.B., there shall be no further
registration of transfers on the stock transfer books of LFB of any Certificates
formerly evidencing the shares of LFB Common Stock which were outstanding
immediately prior to the Effective Time.
<PAGE>
[E] Neither LFB nor FSB shall be liable to any holder of
shares of LFB Common Stock for such shares or the cash into which they are
converted which is delivered to a public official pursuant to any abandoned
property, escheat or similar law.
2.3 Dissenting Shareholders. If any holder of shares of LFB Common
Stock shall, in accordance with the provisions of applicable law, seek appraisal
and perfect dissenting shareholder rights to be paid the fair value of his or
her shares ("Dissenting Shares"), then such holder shall be entitled to receive
such value as may he established pursuant to such provisions. LFB shall give FSB
prompt notice of any written objections or demands received from any shareholder
pursuant to such provisions, and shall give FSB the opportunity to participate
in all proceedings with respect to any such objections or demands.
2.4 Acquisition Corp Common Stock. The shares of common stock of
Acquisition Corp issued and outstanding immediately prior to the Effective Time
shall at the Effective Time be converted into the same number of shares of
capital stock of the Surviving Corporation.
ARTICLE 3
TERMINATION
Anything contained in this Plan notwithstanding and
notwithstanding adoption hereof by the shareholders of LFB, this Restated Plan
may be terminated and the Merger abandoned as provided in the Agreement.
ARTICLE 4
CONDITIONS PRECEDENT
The obligations of LFB and Acquisition Corp to effect the
Merger as herein provided shall be subject to satisfaction, unless duly waived,
of the conditions set forth in the Agreement.
ARTICLE 5
GENERAL PROVISIONS
5.1 Law and Section Headings. This Restated Plan shall be construed and
interpreted in accordance with the laws of the Commonwealth of Kentucky. Section
headings are used in this Restated Plan for convenience only and are to be
ignored in the construction of the terms of this Restated Plan.
5.2 Modifications. The parties hereto may amend, modify or supplement
this Restated Plan, before or after approval thereof by the shareholders of LFB,
in such manner as may be agreed by them in writing.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Restated Plan to be executed by their duly authorized officers as of the date
first above written.
FSB ACQUISITION CORPORATION
By /s/ Randall Attkisson
Randall Attkisson, Vice President
LINCOLN FINANCIAL BANCORP, INC.
By /s/ Bruce Edgington
Bruce Edgington, President
<PAGE>
APPENDIX F
PROVISIONS OF DELAWARE LAW CONCERNING
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Section 262 APPRAISAL RIGHTS. - (a) Any stockholder of a corporation
of this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this Section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this Section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to ss.228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section. As
used in this Section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a non-stock
corporation, and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258 or 263 of this Chapter:
(1) provided, however, that no appraisal rights under this
Section shall be available for the shares of any class or series of stock which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive stock notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held of
record by more than 2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the vote of
the stockholders of the surviving corporation as provided in subsection (f) or
(g) of Section 251 of this Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of
this Section, appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of this
Chapter to accept for such stock anything except (i) shares of stock of the
corporation surviving or resulting from such merger or consolidation, or
depository receipts in respect thereof, (ii) shares of stock of any other
corporation, or depository receipts in respect thereof, which shares of stock or
depository receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders; (iii)
cash in lieu of fractional shares or fractional depository receipts described in
the foregoing clauses (i) and (ii), or (iv) any combination of the shares of
stock, depository receipts and cash in lieu of fractional shares, or
<PAGE>
fractional depository receipts described in the foregoing clause (i), (ii) and
(iii) of this subsection.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this Chapter is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this Section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this Section, including those set forth in subsections (d) and
(e), shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this Section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this Section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to take
such action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the surviving
or resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in favor of
or consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this Chapter, the surviving or resulting
corporation, either before the effective date of the merger or consolidation or
within 10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the constituent
corporation, and shall include in such notice a copy of this Section. The notice
shall be sent by certified or registered mail, return receipt requested,
addressed to the stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of the notice, demand in writing from the surviving or
resulting corporation the appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
<PAGE>
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
<PAGE>
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this Section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this Section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this Section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
<PAGE>
LINCOLN FINANCIAL BANCORP, INC. ("Lincoln")
Stanford, Kentucky
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
The undersigned stockholder in Lincoln constitutes and appoints the
Board of Directors of Lincoln, with full power of substitution, to represent me
to vote all shares of Lincoln's Common Stock held of record by me or which I am
otherwise entitled to vote at the close of business on ________, 1996, at the
Special Meeting of Stockholders to be held on _______, 1996, at 4:00 p.m., and
at any adjournments thereof, with all powers the undersigned would possess if
personally present, as follows:
1. ACQUISITION PROPOSAL. A proposal to approve an Agreement and Plan
of Reorganization, as amended (the "Acquisition Agreement")
between the Corporation and First Southern Bancorp, Inc. ("FSB"),
a related Plan of Merger, as amended (the "Plan of Merger")
providing for the merger of a wholly-owned subsidiary of FSB with
and into the Corporation (the "Merger"), and to authorize such
further action by the board of directors of the Corporation and
any of its executive and other proper officers as may be
necessary or appropriate to carry out the objects, intents, and
purposes of the Acquisition Agreement and the related Plan of
Merger.
_____ FOR _____ AGAINST _____ ABSTAIN
The Board of Directors recommends a vote FOR Proposal 1.
2. OTHER BUSINESS. In their discretion, the proxies are authorized
to act upon such other matters as may properly be brought before
the Special Meeting or any adjournment thereof.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND WILL BE VOTED AS
SPECIFIED AND IN ACCORDANCE WITH THE ACCOMPANYING PROXY STATEMENT. IF NO
INSTRUCTION IS INDICATED, THIS PROXY WILL BE VOTED "FOR" PROPOSAL 1.
The above-named proxies are granted the authority, in their discretion,
to act upon such other matters as may properly come before the Special Meeting
or any adjournment or adjournments thereof.
This proxy may be revoked at any time prior to its use.
Please sign exactly as name appears below. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee, or guardian, please give full title as such. If a
corporation, please sign full corporate name by President or other authorized
officer. If a partnership, please sign partnership name by authorized person.
Date _______________________, 1996
Signature
Number of Shares _______________
Additional signature, if necessary
PLEASE MARK, SIGN, DATE, AND RETURN
THE PROXY PROMPTLY USING THE
ENCLOSED ENVELOPE.
