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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 000-25219
LINCOLN BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-2055553
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
1121 East Main Street
Plainfield, Indiana 46168
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(317) 839-6539
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ] (N/A)
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 22, 2001 was $58,309,000.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 22, 2001, was 5,677,493 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
2000, are incorporated into Part II. Portions of the Proxy Statement for the
2001 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page E-1
Page 1 of 38 Pages
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LINCOLN BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement.................................................. 3
PART I
Item 1 Business................................................. 3
Item 2. Properties............................................... 33
Item 3. Legal Proceedings........................................ 34
Item 4. Submission of Matters to a Vote of Security Holders...... 34
Item 4.5. Executive Officers of the Registrant..................... 34
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters...................................... 34
Item 6. Selected Financial Data.................................. 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 35
Item 7A. Quantitative and Qualitative Disclosures about
Market Risks....................................... 35
Item 8. Financial Statements and Supplementary Data.............. 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 35
PART III
Item 10. Directors and Executive Officers of Registrant...... .....35
Item 11. Executive Compensation................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 35
Item 13. Certain Relationships and Related Transactions........... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 36
SIGNATURES ......................................................... 37
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), or
its directors or officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
Item 1. Business
General
Lincoln Bancorp (the "Holding Company" and together with the Bank, as
defined below, the "Company") is an Indiana corporation organized in September
1998 to become a savings and loan holding company upon its acquisition of all
the issued and outstanding capital stock of Lincoln Federal Savings Bank
("Lincoln Federal" or the "Bank") in connection with the Bank's conversion from
mutual to stock form. The Holding Company became the Bank's holding company on
December 30, 1998. The principal asset of the Holding Company currently consists
of 100% of the issued and outstanding shares of capital stock, $.01 par value
per share, of the Bank. Lincoln Federal was originally organized in 1884 as
Ladoga Federal Savings and Loan Association ("Ladoga Federal"), located in
Ladoga, Indiana. In 1979, Ladoga Federal merged with Plainfield First Federal
Savings and Loan Association, a federal savings and loan association located in
Plainfield, Indiana which was originally organized in 1896. Following the
merger, the Bank changed its name to Lincoln Federal Savings and Loan
Association and, in 1984, adopted its current name, Lincoln Federal Savings
Bank. On September 26, 2000, the Company acquired Citizens Bancorp ("Citizens"),
the holding company of Citizens Savings Bank of Frankfort ("Citizens Savings"),
a federally chartered savings bank. Citizens was merged into the Company and
Citizens Savings was merged into the Bank. Citizens Loan and Service Corporation
("CLSC"), an Indiana corporation and wholly-owned subsidiary of Citizens
Savings, will continue as a subsidiary of the Bank. At December 31, 2000,
Lincoln Federal conducted its business from eight full-service offices located
in Hendricks, Montgomery, Clinton, Johnson and Morgan Counties, Indiana, with
its main office located in Plainfield. Lincoln Federal opened its newest offices
in Greenwood, Indiana in September 2000, Avon, Indiana in January 1999 and in
Mooresville, Indiana in April 1999. Also, in connection with the acquisition of
Citizens, Lincoln Federal added a second branch office in Frankfort, Indiana.
The Bank's principal business consists of attracting deposits from the general
public and originating fixed-rate and adjustable-rate loans secured primarily by
first mortgage liens on one- to four-family residential real estate. Lincoln
Federal's deposit accounts are insured up to applicable limits required by the
SAIF of the FDIC.
Lincoln Federal offers a number of financial services, including: (i) one-
to four-family residential real estate loans; (ii) commercial real estate loans;
(iii) real estate construction loans; (iv) land loans; (v) multi-family
residential loans; (vi) consumer loans, including home equity loans and
automobile loans; (vii) commercial loans; (viii) money market demand accounts
("MMDAs"); (ix) savings accounts; (x) checking accounts; (xi) NOW accounts; and
(xii) certificates of deposit.
Lending Activities
The Bank has historically concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
Lincoln Federal's loan origination activities, representing 68.4% of its total
loan portfolio at December 31, 2000. Lincoln Federal also offers commercial real
estate loans, real estate construction loans and consumer loans. To a limited
extent, Lincoln Federal also offers multi-family loans, land loans and
commercial loans. Commercial real estate loans totaled approximately 9.4% of the
Bank's total loan portfolio, and real estate construction loans totaled
approximately 7.4% of Lincoln Federal's total loans as of December 31, 2000.
Consumer loans were 11.8% of the loan portfolio at December 31, 2000.
Loan Portfolio Data. The following table sets forth the composition of
Lincoln Federal's loan portfolio (including loans held for sale) by loan type
and security type as of the dates indicated, including a reconciliation of gross
loans receivable after consideration of the allowance for loan losses, deferred
loan fees and loans in process.
At December 31,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ----------------- ----------------- ----------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN Real estate mortgage loans:
One-to-four-family
residential (1)....... $231,157 68.44% $175,095 72.18% $152,893 76.19% $205,976 81.03% $269,618 84.84%
Multi-family............ 2,606 .77 1,029 .42 1,022 .51 1,133 .45 1,111 .35%
Commercial real estate.. 31,784 9.41 16,073 6.63 14,548 7.25 14,914 5.87 14,830 4.66%
Construction............ 24,843 7.36 18,127 7.47 7,411 3.69 9,912 3.90 13,159 4.14%
Land.................... 4,692 1.39 3,609 1.49 2,664 1.33 1,455 .57 2,725 .86%
Commercial................. 2,796 .83 91 .04 122 .06 242 .10 --- ---
Consumer loans:
Home equity and
second mortgages...... 32,572 9.64 24,272 10.01 18,482 9.21 17,218 6.77 13,239 4.17
Other................... 7,287 2.16 4,282 1.76 3,532 1.76 3,340 1.31 3,124 .98
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable $337,737 100.00% $242,578 100.00% $200,674 100.00% $254,190 100.00% $317,806 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
One-to-four-family
residential real estate (1) $278,379 82.43% $209,379 86.31% $177,837 88.62% $232,966 91.65% $290,956 91.55%
Multi-family real estate 2,606 .77 1,029 .43 1,022 .51 1,133 .45 1,111 .35
Commercial real estate.. 41,977 12.43 24,188 9.97 15,498 7.72 15,054 5.92 19,890 6.26
Land.................... 4,692 1.39 3,609 1.49 2,664 1.33 1,455 .57 2,725 .86
Deposits................ 856 .25 675 .28 962 .48 1,106 .44 1,155 .37
Auto.................... 5,303 1.57 3,006 1.24 2,127 1.06 2,041 .80 1,502 .47
Other security.......... 3,349 .99 491 .20 475 .24 426 .17 356 .11
Unsecured .............. 575 .17 201 .08 89 .04 9 --- 111 .03
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable 337,737 100.00 242,578 100.00 200,674 100.00 254,190 100.00 317,806 100.00
Deduct:
Allowance for loan losses.. 2,367 .70 1,761 .73 1,512 .75 1,361 .54 1,241 .39
Deferred loan fees (1)..... 936 .28 822 .34 893 .45 1,690 .66 2,707 .85
Loans in process........... 8,243 2.44 6,995 2.88 2,348 1.17 2,504 .99 8,086 2.55
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable.... $326,191 96.58% $233,000 96.05% $195,921 97.63% $248,635 97.81% $305,772 96.21%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage Loans:
Adjustable-rate......... $119,445 36.45% $ 68,452 28.74% $56,014 28.43% $95,106 37.95% $117,062 37.20%
Fixed-rate.............. 208,209 63.55 169,753 71.26 141,006 71.57 155,502 62.05 197,620 62.80
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total................. $327,654 100.00% $238,205 100.00% $197,020 100.00% $250,608 100.00% $314,682 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
- --------------------
(1) Net loans held for sale included in the above categories amounted to
$24,201,000 at December 31, 1996. There were no loans held for sale at
December 31, 2000, 1999, 1998 and 1997.
The following table sets forth certain information at December 31, 2000,
regarding the dollar amount of loans maturing in Lincoln Federal's loan
portfolio based on the contractual terms to maturity. Demand loans having no
stated schedule of repayments and no stated maturity and overdrafts are reported
as due in one year or less. This schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses. Management expects
prepayments will cause actual maturities to be shorter.
Due During Years Ended December 31,
Balance ------------------------------------------------------------------
Outstanding at 2004 2006 2011 2016
December 31, to to to and
2000 2001 2002 2003 2005 2010 2015 following
-------------- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Real estate mortgage loans:
One- to four-family
residential loans.......... $231,157 $69 $288 $369 $1,709 $18,192 $60,329 $150,201
Multi-family loans............ 2,606 --- 34 395 317 164 1,547 149
Commercial real estate loans.. 31,784 4,167 1,591 4,916 3,964 8,998 4,372 3,776
Construction loans............ 24,843 20,626 2,373 1,844 --- -- --- ---
Land loans.................... 4,692 2,338 116 362 1,598 92 186 ---
Commercial.................... 2,796 1,795 35 63 768 135 --- ---
Consumer loans:
Installment loans............ 6,431 540 519 1,610 3,443 308 11 ---
Loans secured by deposits..... 856 631 100 43 72 10 --- ---
Home equity loans and
and second mortgages....... 32,572 1,822 215 388 3,066 19,945 4,977 2,159
-------- ------- ------ ------ ------- ------- ------- --------
Total consumer loans....... 39,859 2,993 834 2,041 6,581 20,263 4,988 2,159
-------- ------- ------ ------ ------- ------- ------- --------
Total................. $337,737 $31,988 $5,271 $9,990 $14,937 $47,844 $71,422 $156,285
======== ======= ====== ====== ======= ======= ======= ========
The following table sets forth, as of December 31, 2000, the dollar amount
of all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
Due After December 31, 2001
----------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
One- to four-family residential loans.... $168,575 $62,513 $231,088
Multi-family loans....................... 771 1,835 2,606
Commercial real estate loans............. 20,667 6,950 27,617
Construction loans....................... 2,745 1,472 4,217
Land loans............................... 2,354 --- 2,354
Commercial.................................. --- 1,001 1,001
Installment loans........................... 5,064 827 5,891
Loans secured by deposits................... 225 --- 225
Home equity loans and second
mortgages................................ 12,699 18,051 30,750
-------- ------- --------
Total.................................. $231,100 $92,649 $305,749
======== ======= ========
One- to Four-Family Residential Loans. Lincoln Federal's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in its primary market area. Lincoln Federal
generally does not originate one- to four-family residential mortgage loans if
the ratio of the loan amount to the lesser of the current cost or appraised
value of the property (the "Loan-to-Value Ratio") exceeds 95%. Lincoln Federal
requires private mortgage insurance on loans with a Loan-to-Value Ratio in
excess of 80%. The cost of such insurance is factored into the annual percentage
rate on such loans.
In the past, Lincoln Federal's underwriting criteria for one- to
four-family residential loans focused heavily on the value of the collateral
securing the loan and placed less emphasis on the borrower's debt servicing
capacity and other credit factors. Lincoln Federal recently revised its lending
policies to emphasize factors other than the value of the underlying collateral,
such as the income, debt-to-income ratio, stability of earnings and past credit
history of a potential borrower, in making credit decisions. These revised
underwriting criteria are based upon FHLMC lending guidelines. The Bank
originates fixed-rate loans which provide for the payment of principal and
interest over a period of up to 30 years.
Lincoln Federal also offers adjustable-rate mortgage ("ARM") loans pegged
to the one-year U.S. Treasury securities yield adjusted to a constant maturity.
Lincoln Federal no longer offers adjustable rate loans with interest rates
pegged to the 11th District Cost of Funds Index ("COFI") because that index
adjusts less rapidly to changes in interest rates compared to other indices.
Lincoln Federal may offer discounted initial interest rates on ARM loans, but
requires that the borrower qualify for the loan at the fully-indexed rate (the
index rate plus the margin). A substantial portion of the ARM loans in the
Bank's portfolio at December 31, 2000 provide for maximum rate adjustments per
year and over the life of the loan of 2% and 6%, respectively. Lincoln Federal's
residential ARMs are amortized for terms up to 30 years.
In two separate transactions in August, 1997 and April, 1998, Lincoln
Federal securitized approximately $41.1 million of the COFI loans in its
portfolio and sold the resulting mortgage-backed securities on the secondary
market. In June, 1998 Lincoln Federal sold in a direct, whole-loan sale to a
private investor an additional $19.3 million of COFI loans. Following the
closing of this whole-loan sale, the amount of COFI loans in Lincoln Federal's
portfolio was reduced to $4.8 million. Lincoln Federal also pooled $75.0 million
of fixed-rate one- to four-family residential loans into FHLMC mortgage-backed
securities. Lincoln Federal sold on the secondary market $34.3 million of these
securities which were backed by lower-yielding, fixed-rate loans. During 2000,
Lincoln Federal made certain fixed-rate one- to four-family residential loans
with the intent of pooling these loans into FHLMC mortgage-backed securities.
During 2000, Lincoln Federal securitized $5.0 million of such loans. At December
31, 2000, Lincoln Federal continued to hold in its investment portfolio
approximately $20.1 million (amortized cost) of these securities that are backed
by higher-yielding, fixed-rate mortgage loans that it originated.
With the exception of the loans that were securitized during 1997 and 1998
and in the whole-loan sale in 1998, Lincoln Federal determines when it
originates a one- to four-family residential loan whether it intends to hold the
loan until maturity or sell it in the secondary market. Lincoln Federal
generally securitizes or sells on the secondary market all of the fixed-rate
loans that it originates with terms of more than 20 years that are written to
FHLMC standards, and retains in its loan portfolio any loans that it originates
that are not written to FHLMC standards. Lincoln Federal retains the servicing
rights on the loans that it sells.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because, as interest rates
increase, the underlying payments by the borrower also increase, thus increasing
the potential for default by the borrower. At the same time, the marketability
of the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At December 31, 2000, approximately
27.0% of Lincoln Federal's one- to four-family residential loans had adjustable
rates of interest.
All of the one- to four-family residential mortgage loans that Lincoln
Federal originates include "due-on-sale" clauses, which give Lincoln Federal the
right to declare a loan immediately due and payable in the event that, among
other things, the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. However, Lincoln Federal
occasionally permits assumptions of existing residential mortgage loans on a
case-by-case basis.
At December 31, 2000, approximately $231.2 million, or 68.4% of Lincoln
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $1.9 million, or .8% of total residential loans, were
included in non-performing assets as of that date.
Commercial Real Estate and Multi-Family Loans. Lincoln Federal's commercial
real estate loans are secured by churches, warehouses, office buildings, hotels
and other commercial properties. Lincoln Federal generally originates commercial
real estate loans as five-year balloon loans amortized over a 10- or 15-year
period, with an adjustable interest rate indexed primarily to the prime rate. At
December 31, 2000 Lincoln Federal had $15.7 million in outstanding balloon loans
secured by commercial and multi-family real estate. Lincoln Federal generally
requires a Loan-to-Value Ratio of at least 80% on commercial real estate loans,
although it may make loans with a higher Loan-to-Value Ratio on loans secured by
owner-occupied commercial real estate or by multi-family residential properties.
Commercial real estate loans generally are larger than one- to four-family
residential loans and involve a greater degree of risk. Commercial real estate
loans often involve large loan balances to single borrowers or groups of related
borrowers. Payments on these loans depend to a large degree on results of
operations and management of the properties and may be affected to a greater
extent by adverse conditions in the real estate market or the economy in
general. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate. In addition, balloon loans may involve a
greater degree of risk to the extent the borrower is unable to obtain financing
or cannot repay the loan when the loan matures and the balloon payment is due.
At December 31, 2000 Lincoln Federal's largest commercial real estate
borrower had a single loan outstanding in the amount of $4.0 million which was
secured by a church located in Plainfield, Indiana. At December 31, 2000,
approximately $31.8 million, or 9.4% of Lincoln Federal's total loan portfolio,
consisted of commercial real estate loans. On the same date, there were no
commercial real estate loans included in non-performing assets.
At December 31, 2000, approximately $2.6 million, or .8% of Lincoln
Federal's total loan portfolio, consisted of mortgage loans secured by
multi-family dwellings (those consisting of more than four units). Lincoln
Federal writes multi-family loans on terms and conditions similar to its
commercial real estate loans. The largest multi-family loan as of December 31,
2000 was $1.2 million and was secured by an apartment complex in Frankfort,
Indiana. On the same date, there were no multi-family loans included in
non-performing assets.
Multi-family loans, like commercial real estate loans, involve greater risk
than do residential loans. Also, the loans-to-one-borrower limitation limits
Lincoln Federal's ability to make loans to developers of apartment complexes and
other multi-family units.
Construction Loans. Lincoln Federal offers construction loans to developers
for the acquisition and development of residential and nonresidential real
estate and to builders of one- to four-family residential properties. A
significant portion of these loans are made on a speculative basis (i.e., before
the builder/developer obtains a commitment from a buyer). At December 31, 2000,
approximately $24.8 million, or 7.4% of Lincoln Federal's total loan portfolio,
consisted of construction loans. Of these loans, approximately $4.6 million were
for the acquisition and development of residential housing developments, $10.1
million financed the construction of one- to four-family residential properties
and $10.2 million financed the construction of commercial real estate. As of
December 31, 2000, Lincoln Federal's largest construction loan relationship had
a balance of $1.9 million and was secured an office park located in Fishers,
Indiana. Also on that date, construction loans in the amount of $190,000 were
included in non-performing assets.
Construction loans on residential properties where the borrower has entered
into a verifiable sales contract to a non-related party to purchase the
completed home may be made with a maximum Loan-to-Value Ratio of the lesser of
90% of the price stipulated in the sales contract or 80% of the appraised value
of the property. With respect to residential properties constructed on a
speculative basis, Lincoln Federal generally requires a Loan-to-Value Ratio of
75% of the "as completed" appraised value of the property. Although speculative
loans make up a significant percentage of Lincoln Federal's construction loan
portfolio, Lincoln Federal generally will finance only one speculative
construction project per builder. Residential construction loans are generally
written with a fixed rate of interest and for an initial term of six months.
Lincoln Federal generally offers construction loans on commercial land
development projects with a maximum Loan-to-Value Ratio of 75% of the appraised
value of the property or 80% of the property's cost plus 80% of the cost of
verifiable improvements to the property. Construction loans on commercial real
estate properties are generally written for a term not to exceed 30 months.
While providing a comparable, and in some cases higher, yield than a
conventional mortgage loan, construction loans involve a higher level of risk.
For example, if a project is not completed and the borrower defaults, Lincoln
Federal may have to hire another contractor to complete the project at a higher
cost. Also, a project may be completed, but may not be salable, resulting in the
borrower defaulting and requiring that Lincoln Federal take title to the
project.
Land Loans. At December 31, 2000, approximately $4.7 million, or 1.4% of
Lincoln Federal's total loan portfolio, consisted of mortgage loans secured by
undeveloped real estate. Lincoln Federal imposes a maximum Loan-to-Value Ratio
of 65% of the appraised value of the land or 90% of the cost of the undeveloped
land for pre-development land acquisition loans. Lincoln Federal writes these
loans for a maximum term of 12 months. At December 31, 2000, the Bank's largest
land loan relationship totaled $884,000 and was secured by undeveloped land
located in Plainfield, Indiana.
Land loans present greater risk than conventional loans since land
development borrowers who are over budget may divert the loan funds to cover
cost-overruns rather than direct them toward the purpose for which such loans
were made. In addition, land loans are more difficult to monitor than
conventional mortgage loans. As such, a defaulting borrower could cause Lincoln
Federal to take title to partially improved land that is unmarketable without
further capital investment.
Consumer Loans. Lincoln Federal's consumer loans consist of variable- and
fixed-rate home equity loans and lines of credit, automobile, recreational
vehicle, boat and motorcycle loans and loans secured by deposits. Lincoln
Federal does not make indirect consumer loans. Consumer loans tend to have
shorter terms and higher yields than permanent residential mortgage loans. At
December 31, 2000, Lincoln Federal's consumer loans aggregated approximately
$39.9 million, or 11.8% of Lincoln Federal's total loan portfolio. Included in
consumer loans at December 31, 2000 were $18.5 million of variable-rate home
equity lines of credit. These variable-rate loans improve Lincoln Federal's
exposure to interest rate risk.
Lincoln Federal's home equity lines of credit and fixed-term loans are
generally written for up to 95% of the available equity (the appraised value of
the property less any first mortgage amount) if Lincoln Federal holds the first
mortgage, and up to 90% of the available equity if Lincoln Federal does not hold
the first mortgage. Lincoln Federal's home equity and second mortgage loans
increased significantly from $18.5 million at December 31, 1998 to $32.6 million
at December 31, 2000, primarily as the result of a marketing campaign directed
at its existing customers. Lincoln Federal generally will write automobile loans
for up to 100% of the acquisition price for a new automobile and up to the NADA
retail value for a used automobile. New car loans are written for terms of up to
60 months and used car loans are written for terms up to 48 months, depending on
the age of the car. Loans for recreational vehicles and boats are written for no
more than 80% of the purchase price or "verified value," whichever is less, for
a maximum term of 120 months and 84 months, respectively. Motorcycles loans are
written for no more than 75% of the purchase price or "verified value" with a
term not to exceed 48 months. All of Lincoln Federal's consumer loans have a
fixed rate of interest except for home equity lines of credit, which are offered
at a variable rate. At December 31, 2000, consumer loans in the amount of
$175,000 were included in non-performing assets.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or are secured by
rapidly depreciable assets, such as automobiles. Further, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance. In addition, consumer loan
collections depend on the borrower's continuing financial stability, and thus
are more likely to be affected by adverse personal circumstances. Furthermore,
the application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Commercial Loans. Lincoln Federal offers commercial loans, which consist
primarily of loans to businesses that are secured by assets other than real
estate. As of December 31, 2000, commercial loans amounted to $2.8 million.
Commercial loans tend to bear somewhat greater risk than residential mortgage
loans, depending on the ability of the underlying enterprise to repay the loan.
Although commercial loans have not historically comprised a large portion of
Lincoln Federal's loan portfolio, Lincoln Federal intends to increase the amount
of loans it makes to small businesses in the future in order to increase its
rate of return and diversify its portfolio. As of December 31, 2000, none of
Lincoln Federal's commercial loans were included in nonperforming assets.
Origination, Purchase and Sale of Loans. Historically, Lincoln Federal has
confined its loan origination activities primarily to Hendricks, Montgomery,
Clinton, Johnson and Morgan Counties. Lincoln Federal may from time to time make
mortgage loans secured by property located outside of Indiana. Lincoln Federal's
loan originations are generated from referrals from existing customers, real
estate brokers, and newspaper and periodical advertising.
Lincoln Federal's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the adequacy
of the value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors.
Lincoln Federal generally requires appraisals on all real property securing
its first-mortgage loans and requires an attorney's opinion and a valid lien on
the mortgaged real estate. Appraisals for all real property securing
first-mortgage loans are performed by independent appraisers who are
state-licensed. Lincoln Federal requires fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan and also requires
flood insurance to protect the property securing its interest if the property is
in a flood plain. Lincoln Federal also generally requires private mortgage
insurance for all residential mortgage loans with Loan-to-Value Ratios of
greater than 80%. Lincoln Federal generally requires escrow accounts for
insurance premiums and taxes for residential mortgage loans that it originates.
Lincoln Federal's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
Lincoln Federal occasionally purchases participation interests in loans
originated by other financial institutions in order to diversify its portfolio,
supplement local loan demand and to obtain more favorable yields. The
participations that Lincoln Federal purchases normally represent a portion of
residential or commercial real estate loans originated by other Indiana
financial institutions, most of which are secured by property located in
Indiana. As of December 31, 2000, Lincoln Federal had $12.3 million loan
participations in its asset portfolio.
The following table shows loan origination and repayment activity for
Lincoln Federal during the periods indicated:
Year Ended December 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Gross loans receivable at
beginning of period............................... $242,578 $200,674 $254,190
-------- -------- --------
Loans Originated:
Real estate mortgage loans:
One-to-four family loans (1).................. 43,987 58,215 59,556
Multi-family loans............................ 430 282 ---
Commercial real estate loans.................. 9,467 4,746 5,271
Construction loans............................ 18,098 13,469 7,584
Land loans.................................... 6,938 3,435 2,042
Commercial loans................................ 3,139 43 10
Consumer loans.................................. 19,748 17,484 14,924
-------- -------- --------
Total originations.......................... 101,807 97,674 89,387
-------- -------- --------
Purchases (sales) of participation loans, net........ (2,724) 6,157 (67,369)
Transfer from Citizens merger........................ 56,599 --- ---
Reductions:
Repayments and other deductions................. 60,111 61,709 75,169
Transfers from loans to real estate owned....... 412 218 365
-------- -------- --------
Total reductions.............................. 60,523 61,927 75,534
-------- -------- --------
Total gross loans receivable at
end of period.......................... $337,737 $242,578 $200,674
======== ======== ========
(1) Includes certain home equity loans.
Lincoln Federal's total loan originations during the year ended December
31, 2000 totaled $101.8 million, compared to $97.7 million during the year ended
December 31, 1999 and $89.4 million for the year ended December 31, 1998.
Origination and Other Fees. Lincoln Federal realizes income from late
charges, checking account service charges, loan servicing fees and fees for
other miscellaneous services. Late charges are generally assessed if a loan
payment is not received within a specified number of days after it is due. The
grace period depends on the individual loan documents. The Bank also receives a
loan servicing fee of 1/4% on fixed-rate loans and 3/8% on ARM loans that it
services for others.
Non-Performing and Problem Assets
After a mortgage loan becomes 10 days past due, Lincoln Federal delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Lincoln Federal sends additional delinquency notices and makes personal contact
by telephone with the borrower to establish acceptable repayment schedules. When
loans become 60 days in default, Lincoln Federal again contacts the borrower,
this time in person, to establish acceptable repayment schedules. When a
mortgage loan is 90 days delinquent, Lincoln Federal will have either entered
into a workout plan with the borrower or referred the matter to its attorney for
collection. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.
Lincoln Federal reviews mortgage loans on a regular basis and places one-
to four-family residential loans on a non-accrual status when they become 120
days delinquent. Other loans are placed on a non-accrual status when they become
90 days delinquent. Generally, when loans are placed on a non-accrual status,
unpaid accrued interest is written off.
Non-performing Assets. At December 31, 2000, $2,366,000, or .5%, of Lincoln
Federal's total assets, were non-performing (non-performing loans and
non-accruing loans) compared to $1,147,000, or .3%, of its total assets at
December 31, 1999. At December 31, 2000, residential loans accounted for
$1,898,000 of Lincoln Federal's non-performing assets, construction loans
accounted for $190,000 of its non-performing assets, and consumer loans
accounted for $175,000 of non-performing assets. Lincoln Federal had real estate
owned ("REO") properties in the amount of $103,000 as of December 31, 2000.
The table below sets forth the amounts and categories of Lincoln Federal's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Lincoln Federal's policy
that earned but uncollected interest on all loans be reviewed monthly to
determine if any portion thereof should be classified as uncollectible for any
loan past due in excess of 90 days. Lincoln Federal deems any delinquent loan
that is 90 days or more past due to be a non-performing asset.
At December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Non-performing assets:
Non-performing loans.................... $2,263 $1,105 $1,292 $3,257 $2,397
Troubled debt restructurings............ -- --- --- 367 46
------ ------ ------ ------ ------
Total non-performing loans............ 2,263 1,105 1,292 3,624 2,443
Foreclosed real estate.................. 103 42 103 45 75
------ ------ ------ ------ ------
Total non-performing assets................ $2,366 $1,147 $1,395 $3,669 $2,518
====== ====== ====== ====== ======
Non-performing loans to total loans........ .69% .47% .65% 1.45% .80%
Non-performing assets to total assets...... .47% .28% .38% 1.14% .73%
Interest income of $138,000 for the year ended December 31, 2000, was
recognized on the non-performing loans summarized above. Interest income of
$162,000 for the year ended December 31, 2000, respectively, would have been
recognized under the original loan terms of these loans.
At December 31, 2000, Lincoln Federal held loans delinquent from 30 to 89
days totalling $11.1 million. As of that date, Lincoln Federal was not aware of
any other loans in which borrowers were experiencing financial difficulties and
was not aware of any assets that would need to be disclosed as non-performing
assets.
Delinquent Loans. The following table sets forth certain information at
December 31, 2000, 1999 and 1998, relating to delinquencies in Lincoln Federal's
portfolio. Delinquent loans that are 90 days or more past due are considered
non-performing assets.
At December 31, 2000 At December 31, 1999 At December 31, 1998
----------------------------------- -------------------------------- --------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More
------------------ ---------------- --------------- --------------- --------------- -----------------
Principal Principal Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance
of of of of of of of of of of of of
Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Residential
mortgage loans..... 139 $5,851 38 $1,898 88 $3,912 16 $ 722 99 $4,254 18 $ 775
Commercial
real estate loans.. 6 452 --- --- --- --- --- --- 3 335 1 103
Multi-family
mortgage loans..... --- --- --- --- --- --- --- --- --- ---
Construction loans 6 2,890 1 190 1 112 2 301 2 300
Land loans........... 4 919 --- --- --- --- --- --- --- ---
Commercial loan...... 5 275 --- --- --- --- --- --- --- ---
Consumer loans....... 75 725 27 175 17 80 5 55 15 158 3 114
---- ------- ----- ------ ---- ------ ---- ------ ---- ------ -----
Total............. 235 $11,112 66 $2,263 106 $4,104 22 $1,078 117 $4,747 24 $1,292
==== ======= ===== ====== ==== ====== ==== ====== ==== ====== ===== ======
Delinquent loans to
total loans 4.07% 2.21% 3.06%
==== ==== ====
Classified assets. Federal regulations and Lincoln Federal's Asset
Classification Policy provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser quality
as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for loan
losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
Lincoln Federal regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations.
Lincoln Federal's classified assets are made up entirely of non-performing
assets.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings. The allowance for loan losses is
determined in conjunction with Lincoln Federal's review and evaluation of
current economic conditions (including those of its lending area), changes in
the character and size of the loan portfolio, loan delinquencies (current status
as well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, Lincoln Federal's allowance for loan losses is adequate to absorb
probable losses inherent in the loan portfolio at December 31, 2000. However,
there can be no assurance that regulators, when reviewing the Bank's loan
portfolio in the future, will not require increases in its allowances for loan
losses or that changes in economic conditions will not adversely affect its loan
portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past five fiscal years ended December 31, 2000.
Year Ended December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period............... $1,761 $1,512 $1,361 $ 1,241 $ 1,121
Transfer from Citizens merger................ 343 --- --- --- ---
Charge-offs:
One- to four-family
residential mortgage loans.............. (5) (79) (31) --- ---
Commercial real estate mortgage loans..... --- --- (178) --- ---
Construction loans........................ --- --- (301) --- ---
Consumer loans............................ (139) (62) (25) --- ---
------ ------ ------ ------ ------
Total charge-offs....................... (144) (141) (357) (178) ---
------ ------ ------ ------ ------
Recoveries:
One- to four-family
residential mortgage loans.............. 79 --- 15 --- ---
Commercial real estate mortgage loans..... 4 4 1 --- ---
Construction loans........................ --- --- 301 --- ---
Consumer loans............................ 41 2 18 --- ---
------ ------ ------ ------ ------
Total recoveries........................ 124 6 335 --- ---
------ ------ ------ ------ ------
Net charge-offs........................... (20) (135) (22) (178) ---
------ ------ ------ ------ ------
Provision for losses on loans................ 283 384 173 298 120
------ ------ ------ ------ ------
Balance end of period..................... $2,367 $1,761 $1,512 $ 1,361 $ 1,241
====== ====== ====== ======= =======
Allowance for loan losses as a percent of
total loans outstanding................... .72% .75% 0.77% 0.54% 0.40%
Ratio of net charge-offs to average
loans outstanding......................... --- .06% .01% .06% ---
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Lincoln Federal's allowance for loan losses at the
dates indicated.
At December 31,
---------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ---------------- ----------------- ------------------ --------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of
period applicable to:
Real estate mortgage loans:
One- to four-family
residential......... $856 68.44% $718 72.18% $600 76.19% $401 81.03% $206 84.84%
Multi-family.......... 26 .77 10 .42 10 .51 11 .45 --- .35
Commercial............ 420 9.41 241 6.63 218 7.25 221 5.87 468 4.66
Construction loans.... 201 7.36 230 7.47 113 3.69 249 3.90 367 4.14
Land loans............ 73 1.39 54 1.49 40 1.33 15 .57 --- .86
Commercial loans........ 29 .83 1 .04 2 .06 11 .10 --- ---
Consumer loans.......... 642 11.80 436 11.77 349 10.97 268 8.08 98 5.15
Unallocated............. 120 --- 70 --- 180 --- 185 --- 102 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............... $2,367 100.00% $1,761 100.00% $1,512 100.00% $1,361 100.00% $1,241 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Investments
Investments. During the third quarter of 1997, the Bank adopted a revised
investment policy that authorizes investments in U.S. Treasury securities,
securities guaranteed by the Government National Mortgage Association ("GNMA"),
securities issued by agencies of the U.S. Government, mortgage-backed securities
issued by the FHLMC or the Federal National Mortgage Association ("FNMA") and in
highly-rated mortgage-backed securities, collateralized mortgage obligations and
investment-grade corporate debt securities. This revised policy permits the
Bank's management to react quickly to market conditions. Most of the securities
in its portfolio are considered available-for-sale. At December 31, 2000,
Lincoln Federal's investment portfolio consisted of investments in
mortgage-backed securities, corporate securities, federal agency securities,
FHLB stock, an investment in Pedcor Investments - 1987 - I, L.P., an investment
in Bloomington Housing Associates, L.P., and an investment in an insurance
company. See "-Investments in Multi-Family, Low- and Moderate-Income Housing
Projects" and "Service Corporation Subsidiary." At December 31, 2000,
approximately $147.5 million, or 29.5%, of Lincoln Federal's total assets
consisted of such investments. The Bank also had $10.0 million in
interest-earning deposits with the FHLB-Indianapolis and other financial
institutions as of that date. As of that date, Lincoln Federal also had pledged
as collateral, investment securities with a carrying value of $111.5 million,
including $37.6 million in mortgage-backed securities and $73.9 million in other
securities.
Investment Securities. The following table sets forth the amortized cost
and the market value of Lincoln Federal's investment portfolio at the dates
indicated.
At December 31,
-------------------------------------------------------------
2000 1999 1998
----------------- ------------------ ------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
Investment securities available for sale:
Federal agencies........................ $46,376 $44,615 $45,992 $41,606 $ 15,598 $ 15,670
Mortgage-backed securities.............. 67,072 66,418 85,016 81,596 89,658 90,609
Corporate debt obligations.............. 23,253 22,392 23,256 22,673 23,544 22,997
Marketable equity securitiesd........... 234 234 --- --- --- ---
------- ------- ------- ------- ------- -------
Total investment securities
available for sale............... 136,935 133,659 154,264 145,875 128,800 129,276
Investment securities held to maturity--
Federal agency securities............. 500 500 500 498 1,250 1,264
------- ------- ------- ------- ------- -------
Total investment securities............. 137,435 134,159 154,764 146,373 130,050 130,540
Investment in limited partnerships...... 1,693 (1) 2,064 (1) 2,387 (1)
Investment in insurance company......... 650 (1) 650 (1) 650 (1)
FHLB stock (2).......................... 7,734 7,734 5,447 5,447 5,447 5,447
-------- -------- --------
Total investments....................... $147,512 $162,925 $138,534
======== ======== ========
- --------------------
(1) Market values are not available
(2) Market value is based on the price at which the stock may be resold to the
FHLB of Indianapolis.
The following table sets forth the amount of investment securities
(excluding mortgage-backed securities and marketable equity securities) which
mature during each of the periods indicated and the weighted average yields for
each range of maturities at December 31, 2000.
Amount at December 31, 2000 which matures in
Less Than One Year Five to After
One Year to Five Years Ten Years Ten Years
-------------------- ------------------ ------------------- -------------------
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
>
Federal agency securities --
available for sale..... $25,650 6.38% $20,726 6.68%
Corporates securities --
available for sale..... $7,997 7.67% 15,256 7.62
Federal agency securities --
held to maturity....... $500 6.11%
---- ---- ------ ---- ------- ---- ------- ----
$500 6.11% $7,997 7.67% $25,650 6.38% $35,982 7.08%
==== ==== ====== ==== ======= ==== ======= ====
At December 31, 2000, Lincoln Federal had no corporate investments which
exceeded 10% of its equity capital.
Mortgage-backed Securities. The following table sets forth the composition
of Lincoln Federal's mortgage-backed securities portfolio at December 31, 2000
and 1999.
December 31, 2000 December 31, 1999
---------------------------- -----------------------------
Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value
--------- -------- ------ --------- -------- ------
(Dollars in thousands)
Federal Home Loan
Mortgage Corporation................. $20,084 29.9% $20,356 $23,003 27.1% $22,802
Federal National
Mortgage Association................. --- --- --- 4,593 5.4 4,551
Government National
Mortgage Association................. 8,549 12.8 8,446 9,417 11.1 8,872
Collateralized mortgage
obligations.......................... 38,439 57.3 37,616 48,003 56.4 45,371
------- ----- ------- ------- ----- -------
Total mortgage-backed
securities........................... $67,072 100.0% $66,418 $85,016 100.0% $81,596
======= ===== ======= ======= ===== =======
At December 31, 2000, mortgage-backed securities having an amortized cost
of $2,011,000 mature in five to ten years and have a weighted average yield of
6.69% and mortgage-backed securities having an amortized cost of $65,061,000
mature after ten years and have a weighted average yield of 6.96%.
At December 31, 1999, mortgage-backed securities having an amortized cost
of $2,404,000 mature in five to ten years and have a weighted average yield of
6.68% and mortgage-backed securities having an amortized cost of $82,612,000
mature after ten years and have a weighted average yield of 6.73%.
The following table sets forth the changes in Lincoln Federal's
mortgage-backed securities portfolio for the years ended December 31, 2000, 1999
and 1998.
For the Year Ended December 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Beginning balance........................... $81,596 $90,609 $29,399
Securitization of loans..................... 4,982 --- 39,728
Purchases................................... --- 14,772 52,406
Monthly repayments.......................... (11,314) (19,435) (9,999)
Proceeds from sales......................... (11,734) --- (21,089)
Net accretion............................... 21 --- 4
Gains on sales.............................. 101 20 113
Change in unrealized gain on
securities available for sale............ 2,766 (4,370) 47
------- ------- -------
Ending balance.............................. $66,418 $81,596 $90,609
======= ======= =======
Investments in Multi-Family, Low- and Moderate-Income Housing Projects.
Lincoln Federal has an investment in Pedcor Investments - 1987 - I, L.P.
("Pedcor"), an Indiana limited partnership that was organized to construct, own
and operate a 208-unit apartment complex in Indianapolis, Indiana (the "Pedcor
Project"). The Pedcor Project, which is operated as a multi-family, low- and
moderate-income housing project, has been completed and is performing as
planned. At the inception of the Pedcor Project in August, 1988, Lincoln Federal
committed to invest $2.7 million in Pedcor. In January, 1998, the Bank made its
final payment pursuant to this commitment and is no longer liable to contribute
additional funds for the Pedcor Project.
Lincoln Federal holds a separate investment in a multi-family, low- and
moderate-income housing project through its wholly-owned subsidiary, LF Service
Corp. ("LF"). LF has invested in Bloomington Housing Associates, L.P. ("BHA"),
which is an Indiana limited partnership that was organized to construct, own and
operate a 130-unit apartment complex in Bloomington, Indiana (the "BHA
Project"). Development of the BHA Project has been completed and the project is
performing as planned. LF committed to invest approximately $4.9 million in BHA
at the inception of the Bloomington Project in August, 1992. Through December
31, 2000, LF had invested cash of approximately $3.7 million in BHA with four
additional annual capital contributions remaining to be paid in January of each
year through January, 2003, totaling $1.2 million.
A low- and moderate-income housing project qualifies for certain federal
income tax credits if (i) it is a residential rental property, (ii) the units
are used on a nontransient basis, and (iii) 20% or more of the units in the
project are occupied by tenants whose incomes are 50% or less of the area median
gross income, adjusted for family size, or alternatively, at least 40% of the
units in the project are occupied by tenants whose incomes are 60% or less of
the area median gross income. Qualified low income housing projects generally
must comply with these and other rules for fifteen years, beginning with the
first year the project qualified for the tax credit, or some or all of the tax
credit together with interest may be recaptured. The tax credit is subject to
the limitations on the use of general business credit, but no basis reduction is
required for any portion of the tax credit claimed. As of December 31, 2000,
86.0% of the units in the Pedcor Project and 93.9% of the units in the
Bloomington Project were occupied and each project complied with the low income
occupancy requirements described above.
Lincoln Federal has received tax credits of $355,000 from the operation of
the Bloomington Project for the year ended December 31, 2000. The tax credits
from the BHA project will be available through 2007. Although Lincoln Federal
has reduced income tax expense by the full amount of the tax credit available
each year, it has not been able to fully utilize available tax credits to reduce
income taxes payable because it may not use tax credits that would reduce its
regular corporate tax liability below its alternative minimum tax liability.
Lincoln Federal may carry forward unused tax credits for a period of fifteen
years and management believes that the Bank will be able to utilize available
tax credits during the carry-forward period. Additionally, Pedcor and BHA have
incurred operating losses in the early years of their operations primarily due
to accelerated depreciation of assets. Lincoln Federal has accounted for its
investment in Pedcor, and LF has accounted for Lincoln Federal's investment in
BHA, on the equity method. Accordingly, Lincoln Federal and LF have each
recorded their share of these losses as reductions to their investments in
Pedcor and BHA, respectively. At December 31, 2000, Lincoln Federal had no
remaining investment on the books for Pedcor, and LF's investment in BHA was
$1.7 million.
The following summarizes Lincoln Federal's equity in Pedcor's losses and
tax credits and LF's equity in BHA's losses and tax credits recognized in
Lincoln Federal's consolidated financial statements.
Year Ended December 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Investment in Pedcor........................ $ --- $ --- $ ---
====== ====== ======
Equity in losses, net
of income tax effect..................... $ --- $ --- $(164)
Tax credit.................................. --- 18 242
------ ------ ------
Increase in after-tax net income from
Pedcor investment........................ $ --- $ 18 $ 78
====== ====== ======
Year Ended December 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Investment in BHA........................... $1,693 $2,064 $2,387
====== ====== ======
Equity in losses, net
of income tax effect..................... $(230) $ (195) $ (147)
Tax credit.................................. 355 355 355
------ ------ ------
Increase in after-tax net income from
BHA investment........................... $125 $ 160 $ 208
====== ====== ======
Sources of Funds
General. Deposits have traditionally been Lincoln Federal's primary source
of funds for use in lending and investment activities. In addition to deposits,
Lincoln Federal derives funds from scheduled loan payments, investment
maturities, loan prepayments, retained earnings, income on earning assets and
borrowings. While scheduled loan payments and income on earning assets are
relatively stable sources of funds, deposit inflows and outflows can vary widely
and are influenced by prevailing interest rates, market conditions and levels of
competition. Borrowings from the FHLB of Indianapolis have been used to
compensate for reductions in deposits or deposit inflows at less than projected
levels.
Deposits. Lincoln Federal attracts deposits principally from within
Hendricks, Montgomery, Clinton, Johnson and Morgan Counties through the offering
of a broad selection of deposit instruments, including passbook accounts, NOW
accounts, variable rate money market accounts, fixed-term certificates of
deposit, individual retirement accounts and savings accounts. Lincoln Federal
does not actively solicit or advertise for deposits outside of Hendricks,
Montgomery, Clinton, Johnson and Morgan Counties, and substantially all of
Lincoln Federal's depositors are residents of those counties. Deposit account
terms vary, with the principal differences being the minimum balance required,
the amount of time the funds remain on deposit and the interest rate. Lincoln
Federal does not accept brokered deposits. Although the Bank sometimes may bid
for public deposits, it held only $8.9 million of such funds, or 3.5% of its
total deposits, at December 31, 2000. Lincoln Federal periodically runs specials
on certificates of deposit with specific maturities.
Lincoln Federal establishes the interest rates paid, maturity terms,
service fees and withdrawal penalties on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and applicable regulations. Lincoln
Federal relies, in part, on customer service and long-standing relationships
with customers to attract and retain its deposits. The Bank also closely prices
its deposits to the rates offered by its competitors.
Approximately 62.2% of Lincoln Federal's deposits consist of certificates
of deposit, which generally have higher interest rates than other deposit
products that it offers. Certificates of deposit have increased 18.2% during the
year ended December 31, 2000. Money market savings accounts represent 17.6% of
Lincoln Federal's deposits and have grown 6.2% during the year ended December
31, 2000. During 2000, Lincoln Federal obtained deposits of approximately $33.0
million from the acquisition of Citizens. Lincoln Federal offers special rates
on certificates of deposit with maturities that fit its asset and liability
strategies.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that Lincoln Federal offers has
allowed it to compete effectively in obtaining funds and to respond with
flexibility to changes in consumer demand. Lincoln Federal has become more
susceptible to short-term fluctuations in deposit flows as customers have become
more interest rate conscious. Lincoln Federal manages the pricing of its
deposits in keeping with its asset/liability management and profitability
objectives. Based on its experience, management believes that Lincoln Federal's
savings accounts, NOW and MMDAs are relatively stable sources of deposits.
However, the ability to attract and maintain certificates of deposit, and the
rates Lincoln Federal pays on these deposits, have been and will continue to be
significantly affected by market conditions.
An analysis of Lincoln Federal's deposit accounts by type and maturity at
December 31, 2000, is as follows:
Minimum Balance at
Opening December 31, % of
Type of Account Balance 2000 Deposits
- --------------- ------- ------------ --------
(Dollars in thousands)
Withdrawable:
Savings accounts......................... $ 25 $29,831 11.84%
Money market................................ 1,000 44,346 17.61
NOW accounts............................. 200 16,808 6.67
Non-interest bearing demand accounts..... 200 4,144 1.65
------ -----
Total withdrawable..................... 95,129 37.77
------ -----
Certificates (original terms):
3 months or less......................... 1,000 390 .16
6 months................................. 1,000 3,257 1.29
12 months................................ 1,000 50,449 20.03
18 months................................ 1,000 13,429 5.33
24 months................................ 1,000 21,705 8.62
30 months................................ 1,000 26,636 10.58
36 months ............................... 1,000 19,487 7.74
48 months ............................... 1,000 234 .09
60 months................................ 1,000 12,217 4.85
Public fund certificates.................... 8,926 3.54
-------- ------
Total certificates.......................... 156,730 62.23
-------- ------
Total deposits.............................. $251,859 100.00%
======== ======
The following table sets forth by various interest rate categories the
composition of Lincoln Federal's time deposits at the dates indicated:
At December 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
3.00 to 3.99%............................... $ 65 $ 228 $ 191
4.00 to 4.99%............................... 20,347 54,803 24,274
5.00 to 5.99%............................... 49,433 62,883 81,030
6.00 to 6.99%............................... 86,371 14,693 41,966
7.00 to 7.99%............................... 514 --- ---
-------- -------- --------
Total.................................... $156,730 $132,607 $147,461
======== ======== ========
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 2000. Matured certificates, which have not been renewed as of
December 31, 2000, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 2000 Maturing In
----------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
3.00 to 3.99%............................... $ 65 $ --- $ --- $ ---
4.00 to 4.99%............................... 18,128 1,465 --- 754
5.00 to 5.99%............................... 34,963 11,586 2,089 795
6.00 to 6.99%............................... 58,826 23,238 2,630 1,677
7.00 to 7.99%............................... 165 270 74 5
-------- ------- ------ ------
Total.................................... $112,147 $36,559 $4,793 $3,231
======== ======= ====== ======
The following table indicates the amount of Lincoln Federal's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 2000.
At December 31, 2000
--------------------
Maturity Period (In thousands)
Three months or less................................. $4,005
Greater than three months through six months......... 11,335
Greater than six months through twelve months........ 6,234
Over twelve months................................... 5,759
-------
Total.......................................... $27,333
=======
DEPOSIT ACTIVITY
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
2000 Deposits 1999 1999 Deposits 1998 1998 Deposits
----------- -------- -------- ----------- -------- ------- ----------- --------
(Dollars in thousands)
Withdrawable:
Savings accounts............ $29,831 11.84% $13,326 $16,505 8.05% (4,077) $20,582 9.71%
Money market accounts....... 44,346 17.61 2,601 41,745 20.37 8,803 32,942 15.54
NOW accounts................ 16,808 6.67 6,079 10,729 5.23 2,188 8,541 4.03
Noninterest-bearing
demand accounts........... 4,144 1.65 748 3,396 1.66 912 2,484 1.17
-------- ------ ------- -------- ------ ------ -------- ------
Total withdrawable........ 95,129 37.77 22,754 72,375 35.31 7,826 64,549 30.45
-------- ------ ------- -------- ------ ------ -------- ------
Certificates (original terms):
91 days..................... 390 .16 160 230 .11 (376) 606 .29
6 months.................... 3,257 1.29 107 3,150 1.54 (625) 3,775 1.78
12 months................... 50,449 20.03 29,469 20,980 10.24 (11,190) 32,170 15.17
18 months................... 13,429 5.33 (5,288) 18,717 9.13 9,473 9,244 4.36
24 months................... 21,705 8.62 (13,893) 35,598 17.37 14,027 21,571 10.18
30 months................... 26,636 10.58 1,457 25,179 12.28 (32,984) 58,163 27.43
36 months .................. 19,487 7.74 1,175 18,312 8.93 9,380 8,932 4.21
48 months .................. 234 .09 218 16 --- 16 --- ---
60 months................... 12,217 4.85 3,226 8,991 4.39 (1,670) 10,661 5.03
Public fund certificates....... 8,926 3.54 7,492 1,434 .70 (905) 2,339 1.10
-------- ------ ------- -------- ------ ------ -------- ------
Total certificates............. 156,730 62.23 24,123 132,607 64.69 (14,854) 147,461 69.55
-------- ------ ------- -------- ------ ------ -------- ------
Total deposits................. $251,859 100.00% $46,877 $204,982 100.00% (7,028) $212,010 100.00%
======== ====== ======= ======== ====== ====== ======== ======
Total deposits at December 31, 2000 were approximately $251.9 million,
compared to approximately $205.0 million at December 31, 1998. Lincoln Federal's
deposit base depends somewhat upon the manufacturing sector of Hendricks,
Montgomery, Clinton, Johnson and Morgan Counties. Although the manufacturing
sector in these counties is relatively diversified and does not significantly
depend upon any industry, a loss of a material portion of the manufacturing
workforce could adversely affect Lincoln Federal's ability to attract deposits
due to the loss of personal income attributable to the lost manufacturing jobs
and the attendant loss in service industry jobs.
In the unlikely event of the Bank's liquidation, all claims of creditors
(including those of deposit account holders, to the extent of their deposit
balances) would be paid first followed by distribution of the liquidation
account to certain deposit account holders, with any assets remaining thereafter
distributed to the Holding Company as the sole shareholder of Lincoln Federal.
Borrowings. Lincoln Federal focuses on generating high quality loans and
then seeking the best source of funding from deposits, investments or
borrowings. At December 31, 2000, Lincoln Federal had borrowings in the amount
of $138.4 million from the FHLB of Indianapolis which bear fixed and variable
interest rates and which are due at various dates through 2010. Lincoln Federal
is required to maintain eligible loans and investment securities, including
mortgage-backed securities, in its portfolio of at least 160% of outstanding
advances as collateral for advances from the FHLB of Indianapolis. As an
additional funding source, Lincoln Federal has also sold securities under
repurchase agreements. Lincoln Federal had outstanding securities sold under
repurchase agreement in the amount of $14.6 million at December 31, 2000.
Lincoln Federal does not anticipate any difficulty in obtaining advances and
other borrowings appropriate to meet its requirements in the future.
The following table presents certain information relating to Lincoln
Federal's borrowings at or for the years ended December 31, 2000, 1999 and 1998.
At or for the Year
Ended December 31,
---------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Outstanding at end of period
Securities sold under repurchase
agreements........................................... $14,600 $ 4,600 $ ---
FHLB advances.......................................... 138,423 103,938 33,263
Average balance outstanding for period
Securities sold under repurchase
agreements........................................... 5,365 3,680 ---
FHLB advances.......................................... 116,721 78,874 49,773
Maximum amount outstanding at any
month-end during the period
Securities sold under repurchase agreements............ 14,600 4,600 ---
FHLB advances.......................................... 148,420 104,188 35,136
Weighted average interest rate during the period
Securities sold under repurchase agreements............ 6.36% 5.16% ---%
FHLB advances.......................................... 6.00 5.30 5.74
Weighted average interest rate
at end of period
Securities sold under repurchase agreements............ 6.34 5.09 ---
FHLB advances.......................................... 5.59 4.94 5.50
Note payable to Bloomington............................... $1,226 $1,714 $ 2,203
Service Corporation Subsidiaries
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
Lincoln Federal currently owns two subsidiaries, LF Service Corp. ("LF")
and Citizens Loan and Service Corporation ("CLSC"). LF's assets consist of an
investment in Family Financial Life Insurance Company ("Family Financial") and
in BHA. See "- Investments in Low- and Moderate-Income Housing Projects." LF
received regulatory approval in February 1998 to invest in Family Financial, an
Indiana stock insurance company. In May 1998, LF acquired a 16.7% interest in
Family Financial for $650,000. Fifty percent of the common stock of Family
Financial is held by Consortium Partners, a Louisiana general partnership.
Family Financial primarily engages in retail sales of mortgage and credit
insurance products in connection with loans originated by Lincoln Federal's
constituent shareholder financial institutions. Products offered by Family
Financial include group and individual term mortgage life insurance, group
mortgage disability insurance, group accidental death insurance, group credit
life insurance, and group credit accident and disability insurance policies.
Family Financial also markets a variety of tax-deferred annuity contracts which
are wholly reinsured by other insurance companies. LF expects to receive (1)
dividends paid on Family Financial shares owned directly by it, (2) a pro rata
allocation of dividends received on shares held by Consortium Partners, which
are divided among the partners based on the actuarially determined value of
Family Financial's various lines of insurance generated by customers of these
partners, and (3) commissions on sales of insurance products made to customers.
For the period ended December 31, 2000, Lincoln Federal received dividends of
$31,000 from Family Financial.
CLSC primarily engages in the purchase and development of tracts of
undeveloped land. Because CLSC engages in activities that are not permissible
for a national bank, OTS regulations prohibit Lincoln Federal from including its
investment in CLSC in its calculation of regulatory capital. CLSC purchases
undeveloped land, constructs improvements and infrastructure on the land, and
then sells lots to builders, who construct homes for sale to home buyers. CLSC
ordinarily receives payment when title is transferred.
CLSC owns a 104-acre tract of contiguous land on which it is presently
developing 59 acres. The 59 acres that are presently being developed will
include 64 building lots known as the Southridge Addition, and 89 builing lots
known as the Meadow Brook Addition. Both of these Additions have been annexed
into the Town of Frankfort, Indiana. Phase I of the development includes 33
completed lots in the Southridge Addition, of which 23 lots have been sold and
on which 23 houses have been completed, and 26 lots in the Meadow Brook
Addition, of which 13 lots have been sold and on which 13 houses have either
been completed or under construction. The Southridge lots have been priced
generally at $19,000 to $22,000 each, with completed homes selling generally for
$90,000 to $120,000, and the Meadow Brook lots have been priced generally at
$22,000 to $26,000 with completed homes expected to sell generally for $100,000
to $150,000. CLSC intends to develop the remaining 31 lots in the Southridge
Addition beginning in 2000. Phase II and Phase III of the Meadow Brook
development, consisting of approximately 63 lots, are still in the design stage.
CLSC also intends to develop a 25-acre tract located in Frankfort, Indiana with
homes generally selling for $175,000 to $300,000. This project is in the early
stages of development.
CLSC also owns a 20-acre parcel of land, known as the Mann tract. The
development of this land, which is part of the 104-acre tract discussed above,
is not currently under consideration. The Mann tract is presently being leased
for farming purposes. CLSC has no present intentions to acquire additional land
for development purposes.
CLSC incurred a loss of $1,000 for the year ended December 31, 2000. CLSC
incurred a loss of $300 for 1999 and a profit of $164,000 for 1998. At December
31, 2000, Lincoln had an investment in CLSC of $631,000 and loans outstanding to
CLSC of approximately $172,000 with an interest rate set at the prime rate. The
Holding Company's consolidated statements of income included elsehwere herein
include the operations of CLSC. All intercompany balances and transactions have
been eliminated in the consolidation.
Employees
As of December 31, 2000, Lincoln Federal employed 103 persons on a
full-time basis and 7 on a part-time basis. None of Lincoln Federal's employees
are represented by a collective bargaining group and management considers
employee relations to be good.
Employee benefits for Lincoln Federal's full-time employees include, among
other things, an employee stock ownership plan, a Pentegra Group (formerly known
as Financial Institutions Retirement Fund) defined benefit pension plan, which
is a noncontributory, multiple-employer comprehensive pension plan (the"Pension
Plan"), and hospitalization/major medical insurance, long-term disability
insurance, life insurance, and participation in the Lincoln Federal 401(k) Plan,
which is administered by Pentegra Group.
Lincoln Federal considers its employee benefits to be competitive with
those offered by other financial institutions and major employers in its area.
See "Executive Compensation and Related Transactions of Lincoln Federal."
COMPETITION
Lincoln Federal originates most of its loans to and accepts most of its
deposits from residents of Hendricks, Montgomery, Clinton, Johnson and Morgan
Counties, Indiana. Lincoln Federal is subject to competition from various
financial institutions, including state and national banks, state and federal
savings associations, credit unions, and certain nonbanking consumer lenders
that provide similar services in those counties with significantly larger
resources than are available to Lincoln Federal. Lincoln Federal also competes
with money market funds with respect to deposit accounts and with insurance
companies with respect to individual retirement accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Lincoln Federal competes for
loan originations primarily through the efficiency and quality of the services
that it provides borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that management cannot readily predict.
REGULATION
General
As a federally chartered, SAIF-insured savings association, Lincoln Federal
is subject to extensive regulation by the OTS and the FDIC. For example, Lincoln
Federal must obtain OTS approval before it may engage in certain activities and
must file reports with the OTS regarding its activities and financial condition.
The OTS periodically examines Lincoln Federal's books and records and, in
conjunction with the FDIC in certain situations, has examination and enforcement
powers. This supervision and regulation are intended primarily for the
protection of depositors and federal deposit insurance funds. A savings
association must pay a semi-annual assessment to the OTS based upon a marginal
assessment rate that decreases as the asset size of the savings association
increases, and which includes a fixed-cost component that is assessed on all
savings associations. The assessment rate that applies to a savings association
depends upon the institution's size, condition, and the complexity of its
operations. Lincoln Federal's semi-annual assessment is $43,000.
Lincoln Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuances or retirements of
Lincoln Federal's securities, and limitations upon other aspects of banking
operations. In addition, Lincoln Federal's activities and operations are subject
to a number of additional detailed, complex and sometimes overlapping federal
and state laws and regulations. These include state usury and consumer credit
laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and
Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the
Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining
legislation and antitrust laws.
Savings and Loan Holding Company Regulation
The Holding Company is regulated as a "non-diversified savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
(the "HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, the Holding Company is registered with the OTS and is thereby subject to
OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, Lincoln Federal is subject to
certain restrictions in its dealings with the Holding Company and with other
companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
obtaining the prior approval of the Director of the OTS, from acquiring control
of another savings association or savings and loan holding company or retaining
more than 5% of the voting shares of a savings association or of another holding
company which is not a subsidiary. The HOLA also restricts the ability of a
director or officer of the Holding Company, or any person who owns more than 25%
of the Holding Company's stock, from acquiring control of another savings
association or savings and loan holding company without obtaining the prior
approval of the Director of the OTS.
The Holding Company currently operates as a unitary savings and loan
holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB
Act") on November 12, 1999, there were no restrictions on the permissible
business activities of a unitary savings and loan holding company. The GLB Act
included a provision that prohibits any new unitary savings and loan holding
company, defined as a company that acquires a thrift after May 4, 1999, from
engaging in commercial activities. This provision also includes a grandfather
clause, however, that permits a company that was a savings and loan holding
company as of May 4, 1999, or had an application to become a savings and loan
holding company on file with the OTS as of that date, to acquire and continue to
control a thrift and to continue to engage in commercial activities. Because the
Holding Company qualifies under this grandfather provision, the GLB Act did not
affect the Holding Company's authority to engage in diversified business
activities.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would be deemed to be a bank
holding company subject to all of the provisions of the Bank Holding Company Act
of 1956 and other statutes applicable to bank holding companies, to the same
extent as if the Holding Company were a bank holding company and Lincoln Federal
were a bank. See "-Qualified Thrift Lender." At December 31, 2000, Lincoln
Federal's asset composition was in excess of that required to qualify as a
Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with
Lincoln Federal, the Holding Company would thereupon become a multiple savings
and loan holding company. Except where such acquisition is pursuant to the
authority to approve emergency thrift acquisitions and where each subsidiary
savings association meets the QTL test, the activities of the Holding Company
and any of Lincoln Federal's subsidiaries (other than Lincoln Federal or other
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings association, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings association, (iv) holding or managing
properties used or occupied by a subsidiary savings association, (v) acting as
trustee under deeds of trust, (vi) those activities in which multiple savings
and loan holding companies were authorized (by regulation) to directly engage on
March 5, 1987, or (vii) those activities authorized by the Federal Reserve Board
(the "FRB") as permissible for bank holding companies, unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS before a multiple savings and loan holding
company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend or make a capital distribution on its permanent or
nonwithdrawable stock unless it first gives the Director of the OTS 30 days
advance notice of such declaration and payment. Any dividend declared during
such period or without giving notice shall be invalid.
Federal Home Loan Bank System
Lincoln Federal is a member of the FHLB system, which consists of 12
regional banks. The Federal Housing Finance Board ("FHFB"), an independent
agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB
System provides a central credit facility primarily for member financial
institutions. At December 31, 2000, Lincoln Federal's investment in stock of the
FHLB of Indianapolis was $1.0 million. For the fiscal year ended December 31,
2000, the FHLB of Indianapolis paid approximately $86,000 in dividends to
Lincoln Federal.
All 12 FHLB's are required to provide funds to establish affordable
housing programs through direct loans or interest subsidies on advances to
members to be used for lending at subsidized interest rates for low- and
moderate-income, owner-occupied housing projects, affordable rental housing, and
certain other community projects. These contributions and obligations could
adversely affect the value of FHLB stock in the future. A reduction in the value
of such stock may result in a corresponding reduction in Lincoln Federal's
capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. 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 FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans not
more than 90 days delinquent or securities evidencing interests therein,
securities (including mortgage-backed securities) issued, insured or guaranteed
by the federal government or any agency thereof, cash or FHLB deposits, certain
small business and agricultural loans of smaller institutions and real estate
with readily ascertainable value in which a perfected security interest may be
obtained. Other forms of collateral may be accepted as additional security or,
under certain circumstances, to renew outstanding advances. All long-term
advances are required to provide funds for residential home financing and the
FHLB has established standards of community service that members must meet to
maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the SAIF for savings associations such as Lincoln
Federal and banks that have acquired deposits from savings associations. The
FDIC is required to maintain designated levels of reserves in each fund. During
1996, the reserves of the SAIF were below the level required by law, primarily
because a significant portion of the assessments paid into the SAIF had been
used to pay the cost of prior thrift failures, while the reserves of the BIF met
the level required by law. In 1996, however, legislation was enacted to
recapitalize the SAIF and eliminate the premium disparity between the BIF and
SAIF. See "- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
In 1996, legislation was enacted that included provisions designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Under the new law, Lincoln Federal was charged a one-time
special assessment equal to $.657 per $100 in assessable deposits at March 31,
1995. Lincoln Federal recognized this one-time assessment as a non-recurring
operating expense of approximately $1.3 million ($785,000 after tax) during the
three-month period ending September 30, 1996, and paid this assessment during
the fourth quarter of 1996. The assessment was fully deductible for both federal
and state income tax purposes. Beginning January 1, 1997, Lincoln Federal's
annual deposit insurance premium was reduced from .23% to .0644% of total
assessable deposits. In addition to the assessment for deposit insurance,
savings institutions are required to pay on bonds issued in the late 1980s by
the Financing Corporation ("FICO"), which is a federally-chartered corporation
that was organized to provide some of the financing to resolve the thrift crisis
in the 1980s. During 1998, FICO payments for SAIF members approximated 6.10
basis points, while BIF members paid 1.22 basis points. By law, payments on
Financing Corporation obligations have been shared equally between BIF members
and SAIF members since January 1, 2000.
Although Congress has considered merging the SAIF and the BIF, until
then, savings associations with SAIF deposits may not transfer deposits into the
BIF system without paying various exit and entrance fees. Such exit and entrance
fees need not be paid if a SAIF institution converts to a bank charter or merges
with a bank, as long as the resulting bank continues to pay applicable insurance
assessments to the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
The OTS requires a core capital level of 3% of total adjusted assets for savings
associations that receive the highest rating for safety and soundness, and 4% to
5% for all other savings associations. Under the tangible capital requirement, a
savings association must maintain tangible capital (core capital less all
intangible assets except purchased mortgage servicing rights which may be
included after making the above-noted adjustment in an amount up to 100% of
tangible capital) of at least 1.5% of total assets. Under the risk-based capital
requirements, a minimum amount of capital must be maintained by a savings
association to account for the relative risks inherent in the type and amount of
assets held by the savings association. The risk-based capital requirement
requires a savings association to maintain capital (defined generally for these
purposes as core capital plus general valuation allowances and permanent or
maturing capital instruments such as preferred stock and subordinated debt, less
assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets
are ranked as to risk in one of four categories (0-100%). A credit risk-free
asset, such as cash, requires no risk-based capital, while an asset with a
significant credit risk, such as a non-accrual loan, requires a risk factor of
100%. Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries). At December 31, 2000, Lincoln
Federal was in compliance with all capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. Even though the OTS has delayed implementing this
rule, Lincoln Federal nevertheless measures its interest rate risk in conformity
with the OTS regulation and, as of December 31, 2000, would have been required
to deduct $1.4 million from its total capital available to calculate its
risk-based capital requirement. The OTS recently proposed an amendment to its
interest rate risk rule that would delete the requirement that a savings
association with excess exposure to interest rate risk make this capital
deduction. The OTS has also revised its standards regarding the management of
interest rate risk to include summary guidelines to assist savings associations
in determining their exposures to interest rate risk. If an association is not
in compliance with the capital requirements, the OTS is required to prohibit
asset growth and to impose a capital directive that may restrict, among other
things, the payment of dividends and officers' compensation. In addition, the
OTS and the FDIC generally are authorized to take enforcement actions against a
savings association that fails to meet its capital requirements. These actions
may include restricting the operating activities of the association, imposing a
capital directive, cease and desist order, or civil money penalties, or imposing
harsher measures such as appointing a receiver or conservator or forcing the
association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
2000, Lincoln Federal was categorized as "well capitalized," meaning that its
total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
The OTS also restricts the amount of "capital distributions" that may
be made by savings associations. The regulation defines a capital distribution
as a distribution of cash or other property to a savings association's owners,
made on account of their ownership. This definition includes a savings
association's payment of cash dividends to shareholders, or any payment by a
savings association to repurchase, redeem, retire, or otherwise acquire any of
its shares or debt instruments that are included in total capital, and any
extension of credit to finance an affiliate's acquisition of those shares or
interests. The amended regulation does not apply to dividends consisting only of
a savings association's shares or rights to purchase such shares.
The regulation exempts certain savings associations from filing either
a notice or an application with the OTS before making any capital distribution
and requires a savings association to file an application for approval of a
proposed capital distribution with the OTS if the association is not eligible
for expedited treatment under OTS's application processing rules, or the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years (the "retained net
income standard"). At December 31, 2000, Lincoln Federal's retained net income
standard was approximately $3.9 million. A savings association must also file an
application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The regulation requires a savings association to file a notice of a
proposed capital distribution in lieu of an application if the association or
the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because
Lincoln Federal is a subsidiary of a savings and loan holding company, this
latter provision requires, at a minimum, that Lincoln Federal file a notice with
the OTS 30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, Lincoln Federal's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires Lincoln
Federal to establish and maintain a liquidation account for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders and prohibits
Lincoln Federal from making capital distributions to the Holding Company if its
net worth would be reduced below the amount required for the liquidation
account.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place
limitations on the ability of insured depository institutions to accept, renew
or roll over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other
insured depository institutions having the same type of charter in the
institution's normal market area. Under these regulations, "well-capitalized"
depository institutions may accept, renew or roll such deposits over without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll such deposits over with a waiver from the FDIC (subject to certain
restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The regulations
contemplate that the definitions of "well-capitalized," "adequately-capitalized"
and "undercapitalized" will be the same as the definition adopted by the
agencies to implement the corrective action provisions of FedICIA. Management
does not believe that these regulations will have a materially adverse effect on
Lincoln Federal's current operations.
Liquidity
The Financial Regulatory Relief and Economic Efficiency Act of 2000,
which was signed into law on December 27, 2000, repealed the former statutory
requirement that all savings associations maintain an average daily balance of
liquid assets in a minimum amount of not less than 4% or more than 10% of their
withdrawable accounts plus short-term borrowings. The OTS adopted an interim
final rule in March 2001 that implemented this revised statutory requirement,
although savings associations remain subject to the OTS regulation that requires
them to maintain sufficient liquidity to ensure their safe and sound operation.
Safety and Soundness Standards
In 1995, the federal banking agencies adopted final safety and soundness
standards for all insured depository institutions. The standards, which were
issued in the form of guidelines rather than regulations, relate to internal
controls, information systems, internal audit systems, loan underwriting and
documentation, compensation and interest rate exposure. In general, the
standards are designed to assist the federal banking agencies in identifying and
addressing problems at insured depository institutions before capital becomes
impaired. If an institution fails to meet these standards, the appropriate
federal banking agency may require the institution to submit a compliance plan.
Failure to submit a compliance plan may result in enforcement proceedings.
During 1996, the federal banking agencies added asset quality and earning
standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and be
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, Lincoln Federal may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30% of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. Lincoln Federal has
established an "in-house" lending limit of $3 million to a single or related
group of borrowers, which is significantly lower than the regulatory lending
limit described above. Any loan that exceeds this "in-house" lending limit up to
the regulatory lending limit must first be approved by Lincoln Federal's board
of directors. Lincoln Federal did not have any loans or extensions of credit to
a single or related group of borrowers in excess of its regulatory lending
limits at December 31, 2000. Management does not believe that the
loans-to-one-borrower limits will have a significant impact on Lincoln Federal's
business operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test that requires the association to
maintain an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise to qualify as a QTL. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of December 31, 2000, Lincoln Federal was in compliance
with its QTL requirement, with approximately 90.0% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall be bound by regulations applicable to
national banks respecting payment of dividends. Three years after failing the
QTL test the association must dispose of any investment or activity not
permissible for a national bank and a savings association. If such a savings
association is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations applicable
to bank holding companies (including restrictions as to the scope of permissible
business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss. 7701(a)(19) of the Code or the asset
composition test of ss. 7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in
other states and, with state consent and subject to certain limitations, allows
banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law, which became effective in 1996, authorizes Indiana banks to
branch interstate by merger or de novo expansion, provided that such
transactions are not permitted to out-of-state banks unless the laws of their
home states permit Indiana banks to merge or establish de novo banks on a
reciprocial basis.
Transactions with Affiliates
Lincoln Federal is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which restrict financial transactions between banks and their
directors, executive officers and affiliated companies. The statute limits
credit transactions between a bank or savings association and its executive
officers and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company have been registered with
the SEC under the 1934 Act and, as a result, the Holding Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following Lincoln Federal's conversion to stock form, if the Holding
Company has fewer than 300 shareholders, it may deregister its shares under the
1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company
meets the current public information requirements under Rule 144, each affiliate
of the Holding Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated Lincoln Federal's record of meeting community
credit needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as Lincoln Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using the experience method. As a result of the repeal of the
percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
associations meeting a residential mortgage loan origination test. Lincoln
Federal does not have any reserves taken after 1987 that must be recaptured. In
addition, the pre-1988 reserve, for which no deferred taxes have been recorded,
need not be recaptured into income unless (i) the savings association no longer
qualifies as a bank under the Code, or (ii) the savings association pays out
excess dividends or distributions. Although Lincoln Federal does have some
reserves from before 1988, Lincoln Federal is not required to recapture these
reserves.
Depending on the composition of its items of income and expense, a savings
association may be subject to the alternative minimum tax. A savings association
must pay an alternative minimum tax on the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid can be credited against
regular tax due in later years.
For federal income tax purposes, Lincoln Federal has been reporting its
income and expenses on the accrual method of accounting. Lincoln Federal's
federal income tax returns were audited in 2000 and no adjustments were made.
State Taxation
Lincoln Federal is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
Lincoln Federal's state income tax returns have not been audited in recent
years.
Item 2. Properties.
The following table provides certain information with respect to Lincoln
Federal's offices as of December 31, 2000:
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address Leased Opened Deposits Fixtures Footage
- ----------- ------ ------ -------- -------- -------
(Dollars in Thousands)
1121 East Main Street Owned 1970 $83,120 $1,340 9,925
Plainfield, IN 46168
134 South Washington Street Owned 1962 52,808 362 9,340
Crawfordsville, IN 47933
1900 East Wabash Street Owned 1974 34,254 294 2,670
Frankfort, IN 46041
60 South Main Street Owned 2000 31,544 809 11,750
Frankfort, IN 46041
975 East Main Street Owned 1981 29,032 282 2,890
Brownsburg, IN 46112
7648 East U.S. Highway 36 Owned 1999 14,016 1,017 2,800
Avon, IN
590 S. State Road 67 Leased 1999 6,057 285 1,500
Mooresville, IN 46158
648 Treybourne Drive Owned 2000 1,028 1,008 2,550
Greenwood, IN 46142
Lincoln Federal owns computer and data processing equipment which it uses
for transaction processing, loan origination, and accounting. The net book value
of Lincoln Federal's electronic data processing equipment was approximately
$352,000 at December 31, 2000.
Lincoln Federal currently operates ten automatic teller machines ("ATMs"),
with one ATM located at its main office and each of its branch offices plus two
stand-alone units. Lincoln Federal's ATMs participate in the Cirrus(R) and
MAC(R) networks.
Lincoln Federal has also contracted for the data processing and reporting
services of GFS Technologies, located in Oak Brook, Illinois. The cost of these
data processing services is approximately $56,000 per month.
Lincoln Federal has also executed a Correspondent Services Agreement with
the FHLB of Indianapolis under which it receives item processing and other
services for a fee of approximately $18,000 per month.
Item 3. Legal Proceedings.
Although the Holding Company and Lincoln Federal are involved, from time to
time, in various legal proceedings in the normal course of business, there are
no material legal proceedings to which they presently are a party or to which
any of the Holding Company's or Lincoln Federal's property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 2000.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
---- -----------------------------
T. Tim Unger Chairman of the Board, President and
Chief Executive Officer
John M. Baer Secretary and Treasurer
T. Tim Unger (age 60) has been President and Chief Executive Officer of
Lincoln Federal since January, 1996. Before then, Mr. Unger served as President
and Chief Executive Officer of Summit Bank of Clinton County from 1989 through
1995. Mr. Unger has served the banking industry since 1966.
John M. Baer (age 52) has served as Lincoln Federal's Chief Financial
Officer since June, 1997 and as Lincoln Federal's Secretary and Treasurer since
January, 1998. Before working for Lincoln Federal, Mr. Baer served as Vice
President and Chief Financial Officer of the Community Bank Group of Bank One in
Indianapolis, Indiana from June, 1996 through June, 1997. From October, 1989
through June, 1996 he served as Senior Vice President and Chief Financial
Officer of Bank One, Merrillville, NA, in Merrillville, Indiana. Mr. Baer has
served the banking industry since 1978.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information required by this item is incorporated by reference to the
material under the heading "Shareholder Information" on page 46 of the Holding
Company's 2000 Shareholder Annual Report (the "Shareholder Annual Report").
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Selected Consolidated Financial Data of Lincoln
Bancorp and Subsidiary" on pages 3 and 4 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is incorporated by reference to pages
4 through 15 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to pages
16 through 18 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes thereto
contained on pages 19 through 44 in the Shareholder Annual Report are
incorporated herein by reference. The Company's unaudited quarterly results of
operations contained on page 15 in the Shareholder Annual Report are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 4 and page 13 of the Holding
Company's Proxy Statement for its 2001 Annual Shareholder Meeting (the "2001
Proxy Statement"). Information concerning the Holding Company's executive
officers is included in Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to pages
6 through 12 of the 2001 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to pages
1 through 3 of the 2001 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to pages
9 and 10 of the 2001 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents included in the financial statements
filed as part of the report:
Independent Auditor's Report.......................See Shareholder Annual
Report Page 19
Consolidated Balance Sheet at December 31, 2000,
and 1999.......................................See Shareholder Annual
Report Page 20
Consolidated Statement of Income for the Years
Ended December 31, 2000, 1999 and 1998.........See Shareholder Annual
Report Page 21
Consolidatd Statement of Comprehensive Income for
the Years Ended December 31, 2000, 1999 and
1998...........................................See Shareholder Annual
Report Page 22
Consolidated Statement of Changes in Shareholders'
Equity for the Years Ended December 31, 2000,
1999 and 1998..................................See Shareholder Annual
Report Page 23
Consolidated Statement of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998.........See Shareholder Annual
Report Page 24
Notes to Consolidated Financial Statements.........See Shareholder Annual
Report Page 25
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 2000.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits is
an executive compensation plan and arrangement which is identified as
Exhibits 10(5), 10(11) and 10(12).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
LINCOLN BANCORP
Date: March 30, 2001 By: /s/ T. Tim Unger
-------------------------------
T. Tim Unger, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 30th day of March, 2001.
Signatures Title Date
---------- ----- ----
(1) Principal Executive Officer:
/s/ T. Tim Unger
---------------------------------- )
T. Tim Unger President and )
Chief Executive )
Officer )
)
)
(2) Principal Financial and Accounting )
Officer: )
)
/s/ John M. Baer )
---------------------------------- Treasurer )
John M. Baer )
)
) March 30, 2001
)
(3) The Board of Directors: )
)
/s/ Lester N. Bergum )
---------------------------------- Director )
Lester N. Bergum )
)
/s/ Dennis W. Dawes )
---------------------------------- Director )
Dennis W. Dawes )
)
/s/ W. Thomas Harmon )
---------------------------------- Director )
W. Thomas Harmon )
)
/s/ Jerry R. Holifield )
---------------------------------- Director )
Jerry R. Holifield )
)
/s/ Fred W. Carter )
---------------------------------- Director )
Fred W. Carter )
)
/s/ David E. Mansfield )
---------------------------------- Director )
David E. Mansfield )
)
/s/ John C. Milholland ) March 30, 2001
---------------------------------- Director )
John C. Milholland )
)
/s/ T. Tim Unger )
---------------------------------- Director )
T. Tim Unger )
)
/s/ John L. Wyatt )
---------------------------------- Director )
John L. Wyatt )
)
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
3 (1) Registrant's Articles of Incorporation are incorporated
by reference to Exhibit (1) to the Registrant's
Registration Statement on Form S-1 filed with the
Commission on September 14, 1998 (the "S-1 Registration
Statement")
(2) Registrant's Code of By-Laws is incorporated by
reference to Exhibit 3(2) to the Pre-Effective No. 1 to
the Form S-1 Registration Statement filed with the
Commission on November 2, 1998 (the "Amendment No. 1 to
Form S-1")
10 (2) Lincoln Bancorp Stock Option Plan is incorporated by
reference to Exhibit 10(2) to the S-1 Registration
Statement
(3) Lincoln Federal Savings Bank Recognition and Retention
Plan and Trust is incorporated by reference to Exhibit
10(3) to the S-1 Registration Statement
(4) Employment Agreement between Lincoln Federal Savings
Bank and T. Tim Unger is incorporated by reference to
Exhibit 10(4) to the S-1 Registration Statement
(5) Lincoln Federal Savings Bank Employee Stock Ownership
Plan and Trust Agreement is incorporated by reference
to Exhibit 10(5) to the S-1 Registration Statement
(6) ESOP Loan Commitment and Exempt Loan and Share Purchase
Agreement between Trust under Lincoln Bancorp Employee
Stock Ownership Plan and Trust Agreement and Lincoln
Bancorp is incorporated by reference to Exhibit 10(6)
to the Amendment No. 1 to Form S-1
(7) Unfunded Deferred Compensation Plan for the Directors
of Lincoln Federal Savings Bank (as Amended and
Restated Effective January 1, 1999) is incorporated by
reference to Exhibit 10(7) to the Registrant's
Registration Statement on Form S-4 filed with the
Commission on June 21, 2000 (the "S-4 Registration
Statement")
(8) Lincoln Federal Savings Bank Deferred Director
Supplemental Retirement Plan (Effective December 1,
1997) is incorporated by reference to Exhibit 10(8) to
the S-1 Registration Statement
(9) First Amendment to the Lincoln Federal Savings Bank
Employee Stock Ownership Plan and Trust Agreement is
incorporated by reference to Exhibit 10(a) to the S-4
Registration Statement
(10) Second Amendment to the Lincoln Federal Savings Bank
Employee Stock Ownership Plan and Trust Agreement is
incorporated by reference to Exhibit 10(10) to the S-4
Registration Statement
(11) Employment Agreement between Lincoln Federal Savings
Bank and John M. Baer
(12) Employment Agreement between Lincoln Federal Savings
Bank and Rebecca M. Morgan
13 2000 Shareholder Annual Report
21 Subsidiaries of Registrant
23 Consent of Independent Auditors