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, 2001
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,
Regulation S-K (ss. 229.405 of this chapter) 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. |_|
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of February 18, 2002, was $67,850,000.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 25, 2002, was 5,032,821 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
2001, are incorporated into Part II.
Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders are
incorporated in Part I and Part III.
Exhibit Index on Page E-1
Page 1 of 37 pages
LINCOLN BANCORP
Form 10-K
INDEX
Page
FORWARD LOOKING STATEMENT......................................................3
PART I
Item 1. Business...........................................................3
Item 2. Properties........................................................32
Item 3. Legal Proceedings.................................................33
Item 4. Submission of Matters to a Vote of Security Holders...............33
Item 4.5. Executive Officers of the Registrant..............................33
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters...............................34
Item 6. Selected Financial Data...........................................34
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................34
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.......34
Item 8. Financial Statements and Supplementary Data.......................34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................34
PART III
Item 10. Directors and Executive Officers of Registrant....................34
Item 11. Executive Compensation............................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management....34
Item 13. Certain Relationships and Related Transactions....................34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....35
SIGNATURES....................................................................36
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, 2001,
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 office
in Greenwood, Indiana in September 2000. Also, in connection with the
acquisition of Citizens, Lincoln Federal added a second branch office in
Frankfort, Indiana. During 2001, Lincoln Federal purchased land in Greenwood for
a new branch to open in September 2002. 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 59.1% of its total
loan portfolio at December 31, 2001. Lincoln Federal also offers commercial real
estate loans, real estate construction loans and consumer loans. To a lesser
extent, Lincoln Federal also offers multi-family loans, land loans and
commercial operating loans. Commercial real estate loans totaled approximately
14.4% of the Bank's total loan portfolio, and real estate construction loans
totaled approximately 7.3% of Lincoln Federal's total loans as of December 31,
2001. Consumer loans were 13.5% of the loan portfolio at December 31, 2001.
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,
-------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------- ------------------ ----------------- ---------------- ------------------
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 $214,902 59.12% $231,157 68.44% $175,095 72.18% $152,893 76.19% $205,976 81.03%
Multi-family................. 5,795 1.59 2,606 .77 1,029 .42 1,022 .51 1,133 .45
Commercial real estate....... 52,176 14.35 31,784 9.41 16,073 6.63 14,548 7.25 14,914 5.87
Construction................. 26,681 7.34 24,843 7.36 18,127 7.47 7,411 3.69 9,912 3.90
Land......................... 5,367 1.48 4,692 1.39 3,609 1.49 2,664 1.33 1,455 .57
Commercial...................... 9,614 2.65 2,796 .83 91 .04 122 .06 242 .10
Consumer loans:
Home equity and second mortgages 37,724 10.38 32,572 9.64 24,272 10.01 18,482 9.21 17,218 6.77
Other........................ 11,227 3.09 7,287 2.16 4,282 1.76 3,532 1.76 3,340 1.31
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable..... $363,486 100.00% $337,737 100.00% $242,578 100.00% $200,674 100.00% $254,190 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
One-to-four-family
residential real estate (1) $266,682 73.37% $278,379 82.43% $209,379 86.31% $177,837 88.62% $232,966 91.65%
Multi-family real estate..... 5,795 1.59 2,606 .77 1,029 .43 1,022 .51 1,133 .45
Commercial real estate....... 64,801 17.83 41,977 12.43 24,188 9.97 15,498 7.72 15,054 5.92
Land......................... 5,367 1.48 4,692 1.39 3,609 1.49 2,664 1.33 1,455 .57
Deposits..................... 427 .12 856 .25 675 .28 962 .48 1,106 .44
Auto......................... 9,614 2.64 5,303 1.57 3,006 1.24 2,127 1.06 2,041 .80
Other security............... 10,317 2.84 3,349 .99 491 .20 475 .24 426 .17
Unsecured.................... 483 .13 575 .17 201 .08 89 .04 9 --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable..... 363,486 100.00 337,737 100.00 242,578 100.00 200,674 100.00 254,190 100.00
Deduct:
Allowance for loan losses....... 2,648 .73 2,367 .70 1,761 .73 1,512 .75 1,361 .54
Deferred loan fees (1).......... 515 .14 936 .28 822 .34 893 .45 1,690 .66
Loans in process................ 5,307 1.46 8,243 2.44 6,995 2.88 2,348 1.17 2,504 .99
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable......... $355,016 97.67% $326,191 96.58% $233,000 96.05% $195,921 97.63% $248,635 97.81%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage Loans:
Adjustable-rate.............. $103,234 30.13% $119,445 36.45% $ 68,452 28.74% 56,014 28.43% $ 95,106 37.95%
Fixed-rate................... 239,411 69.87 208,209 63.55 169,753 71.26 141,006 71.57 155,502 62.05
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total...................... $342,645 100.00% $327,654 100.00% $238,205 100.00% $197,020 100.00% $250,608 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
The following table sets forth certain information at December 31, 2001,
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 2005 2007 2012 2017
December 31, to to to and
2001 2002 2003 2004 2006 2011 2016 following
-------------- ------- ------- ------- ------- ------- ------- ---------
(In thousands)
Real estate mortgage loans:
One- to four-family
residential loans.......... $214,902 $ 39 $ 63 $ 287 $ 1,588 $16,975 $58,544 $137,406
Multi-family loans........... 5,795 23 -- 299 1,978 2,050 1,299 146
Commercial real estate loans. 52,176 5,985 5,585 3,520 22,446 7,893 3,908 2,839
Construction loans........... 26,681 21,012 5,669 -- -- -- -- --
Land loans................... 5,367 2,606 120 1,715 584 78 264 --
Commercial................... 9,614 4,029 130 2,028 1,820 1,607 -- --
Consumer loans:
Installment loans........... 10,800 886 1,794 1,681 6,191 248 -- --
Loans secured by deposits.... 427 202 98 45 82 -- -- --
Home equity loans and
and second mortgages....... 37,724 1,761 144 919 3,102 25,022 5,279 1,497
-------- ------- ------- ------- ------- ------- ------- --------
Total consumer loans....... 48,951 2,849 2,036 2,645 9,375 25,270 5,279 1,497
-------- ------- ------- ------- ------- ------- ------- --------
Total........ ........... $363,486 $36,543 $13,603 $10,494 $37,791 $53,873 $69,294 $141,888
======== ======= ======= ======= ======= ======= ======= ========
The following table sets forth, as of December 31, 2001, 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, 2002
----------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- --------
(In thousands)
Real estate mortgage loans:
One- to four-family residential loans...................... 162,829 52,034 214,863
Multi-family loans......................................... 2,411 3,361 5,772
Commercial real estate loans............................... 36,684 9,507 46,191
Construction loans......................................... 5,669 -- 5,669
Land loans................................................. 2,760 -- 2,760
Commercial.................................................... 5,451 135 5,586
Consumer Loans:
Installment loans.......................................... 9,914 -- 9,914
Loans secured by deposits.................................. 225 -- 225
Home equity loans and second mortgages..................... 11,651 24,312 35,963
------- ------ -------
Total Consumer Loans..................................... 21,790 24,311 46,102
------- ------ -------
Total Loans........................................... 237,594 89,349 326,943
======= ====== =======
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. Lincoln Federal's underwriting criteria for one- to
four-family residential loans include 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 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-, three- and five-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
COFI 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, 2001 provide for maximum rate adjustments
per year and over the life of the loan of 2% and 6%, respectively. Lincoln
Federal's residential ARM loans are amortized over 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. During 2001, Lincoln Federal did
not securitize any additional one- to four-family loans into FHLMC
mortgage-backed securities. At December 31, 2001, Lincoln Federal continued to
hold in its investment portfolio approximately $13.5 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 15 or more 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 nearly all 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 adjustments of the contractual interest rate are 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, 2001, approximately
24.2% 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, 2001, approximately $214.9 million, or 59.1% of Lincoln
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $1.1 million, or .5% 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 issues commercial
real estate loans as five-year balloon loans amortized over a 15- or 20-year
period, with an adjustable interest rate indexed primarily to the prime rate. At
December 31, 2001 Lincoln Federal had $29.1 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, 2001 Lincoln Federal's largest commercial real estate
borrower had a single loan outstanding in the amount of $3.3 million which was
secured by a church located in Plainfield, Indiana. At December 31, 2001,
approximately $52.2 million, or 14.4% 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, 2001, approximately $5.8 million, or 1.6% 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,
2001 was $1.8 million and was secured by an apartment complex in Fortville,
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 loan-to-one-borrower limitation limits
Lincoln Federal's ability to make loans to certain 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, 2001,
approximately $26.7 million, or 7.3% of Lincoln Federal's total loan portfolio,
consisted of construction loans. Of these loans, approximately $6.6 million were
for the acquisition and development of residential housing developments, $7.5
million financed the construction of one- to four-family residential properties
and $12.6 million financed the construction of commercial real estate. As of
December 31, 2001, Lincoln Federal's largest construction loan relationship had
a balance of $2.5 million and was secured by a motel located in Indianapolis,
Indiana. Also on that date, no construction loans 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. The term of construction loans on
commercial real estate properties generally do not to exceed 24 months.
Construction loans provide a comparable, and in some cases higher, yield
than a conventional mortgage loan, however, they also involve a higher degree 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, however, it may not be salable,
which might cause the borrower to default on the loan and require Lincoln
Federal take title to the project.
Land Loans. At December 31, 2001, approximately $5.4 million, or 1.5% of
Lincoln Federal's total loan portfolio, consisted of mortgage loans secured by
undeveloped real estate. Lincoln Federal requires 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, 2001, 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; lines of credit; automobile, recreational vehicle,
boat and motorcycle loans; and loans secured by deposits. Lincoln Federal
generally does not make indirect consumer loans. Consumer loans generally have
shorter terms and higher yields than permanent residential mortgage loans. At
December 31, 2001, Lincoln Federal's consumer loans aggregated approximately
$49.0 million, or 13.5% of Lincoln Federal's total loan portfolio. Included in
consumer loans at December 31, 2001 were $24.4 million of variable-rate home
equity lines of credit. These variable-rate loans improve Lincoln Federal's
exposure to interest rate risk.
Lincoln Federal's home equity lines of credit and fixed-term loans are
generally written for up to 95% of the available equity (the appraised value of
the property less any first mortgage amount) if Lincoln Federal holds the first
mortgage, and up to 90% of the available equity if Lincoln Federal does not hold
the first mortgage. Lincoln Federal's home equity and second mortgage loans
increased significantly from $18.5 million at December 31, 1998 to $37.7 million
at December 31, 2001, primarily as the result of a marketing campaign directed
at its existing customers. Lincoln Federal generally will write automobile loans
for up to 100% of the acquisition price for a new automobile and up to the NADA
retail value for a used automobile. New car loans are written for terms of up to
60 months and used car loans are written for terms up to 48 months, depending on
the age of the car. Loans for recreational vehicles and boats are written for no
more than 80% of the purchase price or "verified value," whichever is less, for
a maximum term of 120 months and 84 months, respectively. Motorcycle loans are
written for no more than 75% of the purchase price or "verified value" with a
term not to exceed 48 months. All of Lincoln Federal's consumer loans have a
fixed rate of interest except for home equity lines of credit, which are offered
at a variable rate. At December 31, 2001, consumer loans in the amount of
$73,000 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 under 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, 2001, commercial loans amounted to $9.6 million.
Commercial loans generally bear 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 has increased the amount of
loans it has made to small businesses in order to increase its rate of return
and diversify its portfolio. As of December 31, 2001, 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 evaluates the employment and credit history and
information on the historical and projected income and expenses of its
borrowers.
Lincoln Federal generally requires appraisals on all real property securing
its first-mortgage loans and requires title insurance 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, which secures 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, length of employment 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, 2001, Lincoln Federal had $20.2 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,
-------------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Gross loans receivable at beginning of period................. $337,737 $242,578 $200,674
Loans Originated:
Real estate mortgage loans:
One-to-four family loans (1)........................... 66,985 43,987 58,215
Multi-family loans..................................... 3,682 430 282
Commercial real estate loans........................... 23,543 9,467 4,746
Construction loans..................................... 16,542 18,098 13,469
Land loans............................................. 6,951 6,938 3,435
Commercial loans......................................... 10,373 3,139 43
Consumer loans........................................... 32,735 19,748 17,484
-------- -------- --------
Total originations................................... 160,811 101,807 97,674
-------- -------- --------
Purchases (sales) of participation loans, net................. (14,924) (2,724) 6,157
Transfer from Citizens merger................................. -- 56,599 --
Reductions:
Repayments and other deductions.......................... 119,616 60,111 61,709
Transfers from loans to real estate owned................ 522 412 218
-------- -------- --------
Total reductions....................................... 120,138 60,523 61,927
-------- -------- --------
Total gross loans receivable at end of period........ $363,486 $337,737 $242,578
======== ======== ========
- -----------------------------
(1) Includes certain home equity loans.
Lincoln Federal's total loan originations during the year ended December
31, 2001 totaled $160.8 million, compared to $101.8 million during the year
ended December 31, 2000 and $97.7 million for the year ended December 31, 1999.
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 telephone calls are
placed with the borrower to establish an acceptable repayment schedule. When
loans become 60 days in default, Lincoln Federal again contacts the borrower to
establish an acceptable repayment schedule. 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, 2001, $1.7 million, or .34%, of
Lincoln Federal's total assets, were non-performing (non-performing loans and
non-accruing loans) compared to $2.4 million, or .47%, of its total assets at
December 31, 2000. At December 31, 2001, residential loans accounted for $1.1
million of Lincoln Federal's non-performing assets, construction loans accounted
for $150,000 of its non-performing assets, and consumer loans accounted for
$73,000 of non-performing assets. Lincoln Federal had real estate owned ("REO")
properties in the amount of $356,000 as of December 31, 2001.
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,
-------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Non-performing assets:
Non-performing loans............................ $1,297 $2,263 $1,105 $1,292 $3,257
Troubled debt restructurings.................... -- -- -- -- 367
------ ------ ------ ------ ------
Total non-performing loans.................... 1,297 2,263 1,105 1,292 3,624
Foreclosed real estate.......................... 356 103 42 103 45
------ ------ ------ ------ ------
Total non-performing assets........................ $1,653 $2,366 $1,147 $1,395 $3,669
====== ====== ====== ====== ======
Non-performing loans to total loans................ .36% .69% .47% .65% 1.45%
Non-performing assets to total assets.............. .34% .47% .28% .38% 1.14%
Interest income of $70,000 for the year ended December 31, 2001, was
recognized on the non-performing loans summarized above. Interest income of
$103,000 for the year ended December 31, 2001, would have been recognized under
the original loan terms of these loans.
At December 31, 2001, Lincoln Federal held loans delinquent from 30 to 89
days totaling $6.8 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, 2001, 2000 and 1999, 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, 2001 At December 31, 2000
-------------------------------------------------------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More
------------------ ------------------ ------------------ ------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Residential
mortgage loans... 73 $3,358 22 $1,074 139 $ 5,851 38 $1,898
Commercial
real estate loans 3 873 -- -- 6 452 -- --
Multi-family
mortgage loans... -- -- -- -- -- -- -- --
Construction loans.. 2 671 1 150 6 2,890 1 190
Land loans.......... 3 932 -- -- 4 919 -- --
Commercial loan..... 3 404 -- -- 5 275 -- --
Consumer loans...... 31 570 5 73 75 725 27 175
--- ------ -- ------ --- ------- -- ------
Total.......... 115 $6,808 28 $1,297 235 $11,112 66 $2,263
=== ====== == ====== === ======= == ======
Delinquent loans to
total loans...... 2.23% 4.07%
==== ====
At December 31, 1999
---------------------------------------
30-89 Days 90 Days or More
------------------ ------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- --------- -------- ---------
Residential
mortgage loans... 88 $3,912 16 $ 722
Commercial
real estate loans -- -- -- --
Multi-family
mortgage loans... -- -- -- --
Construction loans.. 1 112 2 301
Land loans.......... -- -- -- --
Commercial loan..... -- -- -- --
Consumer loans...... 17 80 5 55
--- ------ -- ------
Total.......... 106 $4,104 22 $1,078
=== ====== == ======
Delinquent loans to
total loans...... 2.21%
====
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 its 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, 2001. 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, 2001.
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period..................... $2,367 $1,761 $1,512 $1,361 $1,241
Transfer from Citizens merger...................... -- 343 -- -- --
Charge-offs:
One- to four-family residential
mortgage loans................................ (60) (5) (79) (31) --
Commercial real estate mortgage loans........... -- -- -- (178) --
Construction loans.............................. -- -- -- (301) --
Consumer loans.................................. (266) (139) (62) (25) --
------ ------ ------ ------ ------
Total charge-offs............................. (326) (144) (141) (357) (178)
------ ------ ------ ------ ------
Recoveries:
One- to four-family residential
mortgage loans................................ 18 79 -- 15 --
Commercial real estate mortgage loans........... 4 4 4 1 --
Construction loans.............................. -- -- -- 301 --
Consumer loans.................................. 97 41 2 18 --
------ ------ ------ ------ ------
Total recoveries.............................. 119 124 6 335 --
------ ------ ------ ------ ------
Net charge-offs................................. (207) (20) (135) (22) (178)
------ ------ ------ ------ ------
Provision for losses on loans...................... 488 283 384 173 298
------ ------ ------ ------ ------
Balance end of period........................... $2,648 $2,367 $1,761 $1,512 $1,361
====== ====== ====== ====== ======
Allowance for loan losses as a percent of
total loans outstanding ............... 74% .72% .75% .77% .54%
Ratio of net charge-offs to average
loans outstanding............................... .06% -- .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,
------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- ---------------- ---------------- ---------------- ------------------
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 $ 674 59.12% $ 856 68.44% $ 718 72.18% $ 600 76.19% $ 401 81.03%
Multi-family................. 58 1.59 26 .77 10 .42 10 .51 11 .45
Commercial........................ 707 14.35 420 9.41 241 6.63 218 7.25 221 5.87
Construction loans........... 261 7.34 201 7.36 230 7.47 113 3.69 249 3.90
Land loans................... 68 1.48 73 1.39 54 1.49 40 1.33 15 .57
Commercial loans............... 122 2.65 29 .83 1 .04 2 .06 11 .10
Consumer loans................. 758 13.47 642 11.80 436 11.77 349 10.97 268 8.08
Unallocated.................... -- -- 120 -- 70 -- 180 -- 185 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............................ $2,648 100.00% $2,367 100.00% $1,761 100.00% $1,512 100.00% $1,361 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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, 2001,
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, 2001,
approximately $109.7 million, or 22.3%, of Lincoln Federal's total assets
consisted of such investments. The Bank also had $9.9 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 $65.8 million,
including $49.6 million in mortgage-backed securities and $16.2 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,
2001 2000 1999
------------------- ------------------- ------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------- --------- ------ --------- ------
(In thousands)
Investment securities available for sale:
Federal agencies.......................... $ 16,191 $16,162 $ 46,376 $ 44,615 $ 45,992 $ 41,606
Mortgage-backed securities................ 58,259 59,017 67,072 66,418 85,016 81,596
Corporate debt obligations................ 23,251 22,428 23,253 22,392 23,256 22,673
Marketable equity securities.............. 252 252 234 234 -- --
-------- ------- -------- -------- -------- --------
Total investment securities
available for sale................. 97,953 97,859 136,935 133,659 154,264 145,875
Investment securities held to maturity-
Municipals................................ 1,800 1,800 500 500 500 498
-------- ------- -------- -------- -------- --------
Total investment securities............. 99,753 99,659 137,435 134,159 154,764 146,373
Investment in limited partnerships........... 1,535 (1) 1,693 (1) 2,064 (1)
Investment in insurance company.............. 650 (1) 650 (1) 650 (1)
FHLB stock (2)............................... 7,734 7,734 7,734 7,734 5,447 5,447
-------- -------- --------
Total investments......................... $109,672 $147,512 $162,925
======== ======== ========
- ---------------------------
(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, 2001.
Amount at December 31, 2001 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............... $-- --% $ 5,154 5.95% $1,031 5.41% $10,006 6.40%
Corporate securities --
available for sale............... -- -- 7,990 6.54 -- -- 15,261 3.86
Municipals -- held to maturity...... 20 4.05 220 4.55 545 5.19 1,015 5.81
--- ---- ------- ---- ------ ---- ------- ----
$20 4.05% $13,364 6.28% $1,576 5.33% $26,282 4.90%
=== ==== ======= ==== ====== ==== ======= ====
At December 31, 2001, 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, 2001
and 2000.
December 31, 2001 December 31, 2000
-------------------------------- ---------------------------------
Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value
--------- -------- ------ --------- -------- ------
(Dollars in thousands)
Federal Home Loan
Mortgage Corporation................. $13,517 23.2% $13,965 $20,084 29.9% $20,356
Government National
Mortgage Association................. 6,777 11.6 6,785 8,549 12.8 8,446
Collateralized mortgage
obligations.......................... 37,965 65.2 38,267 38,439 57.3 37,616
------- ----- ------- ------- ----- -------
Total mortgage-backed securities........ $58,259 100.0% $59,017 $67,072 100.0% $66,418
======= ===== ======= ======= ===== =======
At December 31, 2001, mortgage-backed securities having an amortized cost
of $3,210,000 mature in five to ten years and have a weighted average yield of
6.66% and mortgage-backed securities having an amortized cost of $55,049,000
mature after ten years and have a weighted average yield of 6.45%.
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%.
The following table sets forth the changes in Lincoln Federal's
mortgage-backed securities portfolio for the years ended December 31, 2001, 2000
and 1999.
For the Year Ended December 31,
------------------------------------------
2001 2000 1999
------- ------- -------
(Dollars in thousands)
Beginning balance............................... $66,418 $81,596 $90,609
Securitization of loans......................... -- 4,982 --
Purchases....................................... 9,695 -- 14,772
Monthly repayments.............................. (18,554) (11,314) (19,435)
Proceeds from sales............................. -- (11,734) --
Net accretion................................... 46 21 --
Gains on sales.................................. -- 101 20
Change in unrealized gain on
securities available for sale........... 1,412 2,766 (4,370)
------- ------- -------
Ending balance $59,017 $66,418 $81,596
======= ======= =======
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 final payment
pursuant to this commitment had been made and no additional funds are required
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,
2001, LF had invested cash of approximately $4.2 million in BHA with two
additional annual capital contributions remaining to be paid in January of each
year through January 2003, totaling $737,000.
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, 2001, 87%
of the units in the Pedcor Project and 96% 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, 2001. 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 it 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, 2001, Lincoln Federal had no
remaining investment on the books for Pedcor, and LF's investment in BHA was
$1.5 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,
-----------------------------------------
2001 2000 1999
------ ------ ------
(In Thousands)
Investment in Pedcor............................................. $ -- $ -- $ --
====== ====== ======
Equity in losses, net of income tax effect....................... $ -- $ -- $ --
Tax credit....................................................... -- -- 18
------ ------ ------
Increase in after-tax net income from Pedcor investment $ -- $ -- $ 18
====== ====== ======
Year Ended December 31,
-----------------------------------------
2001 2000 1999
------ ------ ------
(In Thousands)
Investment in BHA................................................ $1,535 $1,693 $2,064
====== ====== ======
Equity in losses, net of income tax effect....................... $ (98) $ (230) $ (195)
Tax credit....................................................... 355 355 355
------ ------ ------
Increase in after-tax net income from BHA investment............. $ 257 $ 125 $ 160
====== ====== ======
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 deposits and the interest rate. Although
the Bank may sometimes accept brokered deposits and bids for public deposits, it
held only $2.6 million and $1.7 million of such funds, or 1.0% and .7% of its
total deposits, at December 31, 2001. 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 56.7% of Lincoln Federal's deposits consist of certificates
of deposit, which generally have higher interest rates than other deposit
products that it offers. Certificates of deposit have decreased 8.8% during the
year ended December 31, 2001. Money market savings accounts represent 20.2% of
Lincoln Federal's deposits and have grown 14.8% during the year ended December
31, 2001. Non-interest bearing demand accounts have grown $5.1, or 122.7%,
during the year ended December 31, 2001. 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, 2001, is as follows:
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 2001 Deposits Rate
-------- ------------ -------- --------
(Dollars in thousands)
Withdrawable:
Savings accounts $ 25 $ 32,766 13.00% 1.92%
Money market 1,000 50,899 20.19 2.23
NOW accounts 200 16,315 6.47 .60
Non-interest bearing
demand accounts 200 9,229 3.66 --
-------- ------ ----
Total withdrawable 109,209 43.32 1.71
Certificates (original terms):
3 months or less 1,000 1,363 .54 2.28
6 months 1,000 7,447 2.95 3.14
12 months 1,000 22,000 8.73 4.27
18 months 1,000 25,014 9.92 4.42
24 months 1,000 19,793 7.85 5.14
30 months 1,000 25,577 10.14 4.98
36 months 1,000 20,468 8.12 5.81
48 months 1,000 8,211 3.26 5.01
60 months 1,000 8,690 3.45 5.48
Public fund and brokered certificates 4,334 1.72 3.93
-------- ------
Total certificates 142,897 56.68 4.79
-------- ------
Total deposits $252,106 100.00% 3.46%
======== ====== ====
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,
-------------------------------------------
2001 2000 1999
-------- --------- --------
(In Thousands)
Less than 2.00% $ 249 $ -- $ --
2.00 to 2.99% 7,915 -- --
3.00 to 3.99% 30,529 65 228
4.00 to 4.99% 41,641 20,347 54,803
5.00 to 5.99% 32,795 49,433 62,883
6.00 to 6.99% 29,408 86,371 14,693
7.00 to 7.99% 360 514 --
-------- -------- --------
Total $142,897 $156,730 $132,607
======== ======== ========
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 2001. Matured certificates, which have not been renewed as of
December 31, 2001, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 2001 Maturing In
----------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
-------- ----- ----- ------------
(In thousands)
Less than 2.00%........ $ 249 $ -- $ -- $ --
2.00 to 2.99%.......... 6,057 1,297 561 --
3.00 to 3.99%.......... 17,968 9,271 3,290 --
4.00 to 4.99%.......... 22,262 12,797 3,235 3,347
5.00 to 5.99%.......... 16,982 6,151 7,968 1,694
6.00 to 6.99%.......... 23,581 2,854 1,076 1,897
7.00 to 7.99%.......... 281 74 -- 5
------- ------- ------- ------
Total................. $87,380 $32,444 $16,130 $6,943
======= ======= ======= ======
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, 2001.
At December 31, 2001
--------------------
Maturity Period (In thousands)
Three months or less................................... $ 5,326
Greater than three months through six months........... 4,910
Greater than six months through twelve months.......... 4,513
Over twelve months..................................... 8,381
-------
Total $23,130
=======
DEPOSIT ACTIVITY
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
2001 Deposits 2000 2000 Deposits 1999 1999 Deposits
------------ -------- --------- ------------ -------- ---------- ------------ --------
(Dollars in thousands)
Withdrawable:
Savings accounts.......... $ 32,766 13.00% $ 2,935 $ 29,831 11.84% $13,326 $16,505 8.05%
Money market accounts..... 50,899 20.19 6,553 44,346 17.61 2,601 41,745 20.37
NOW accounts.............. 16,315 6.47 (493) 16,808 6.67 6,079 10,729 5.23
Noninterest-bearing
demand accounts......... 9,229 3.66 5,085 4,144 1.65 748 3,396 1.66
-------- ------ ------- -------- ------- ------- -------- ------
Total withdrawable...... 109,209 43.32 14,080 95,129 37.77 22,754 72,375 35.31
-------- ------ ------- -------- ------- ------- -------- ------
Certificates (original terms):
91 days................... 1,363 .54 973 390 .16 160 230 .11
6 months.................. 7,447 2.95 4,190 3,257 1.29 107 3,150 1.54
12 months................. 22,000 8.73 (28,449) 50,449 20.03 29,469 20,980 10.24
18 months................. 25,014 9.92 11,585 13,429 5.33 (5,288) 18,717 9.13
24 months................. 19,793 7.85 (1,912) 21,705 8.62 (13,893) 35,598 17.37
30 months................. 25,577 10.14 (1,059) 26,636 10.58 1,457 25,179 12.28
36 months ................ 20,468 8.12 981 19,487 7.74 1,175 18,312 8.93
48 months ................ 8,211 3.26 7,977 234 .09 218 16 --
60 months................. 8,690 3.45 (3,527) 12,217 4.85 3,226 8,991 4.39
Public fund and brokered
certificates.............. 4,334 1.72 (4,592) 8,926 3.54 7,492 1,434 .70
-------- ------ ------- -------- ------- ------- -------- ------
Total certificates........... 142,897 56.68 (13,833) 156,730 62.23 24,123 132,607 64.69
-------- ------ ------- -------- ------- ------- -------- ------
Total deposits............... $252,106 100.00% $ 247 $251,859 100.00% $46,877 $204,982 100.00%
======== ====== ======= ======== ====== ======= ======== ======
Total deposits at December 31, 2001 were approximately $252.1 million,
compared to approximately $205.0 million at December 31, 1999. 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, 2001, Lincoln Federal had borrowings in the amount
of $133.1 million from the FHLB of Indianapolis which bear fixed and variable
interest rates and which are due at various dates through 2011. Lincoln Federal
is required to maintain eligible loans and investment securities in its
portfolio of at least 145% and 115%, respectively, 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 $15.0 million at December 31, 2001. 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, 2001, 2000 and 1999.
At or for the Year
Ended December 31,
--------------------------------------------
2001 2000 1999
--------- --------- ----------
(Dollars in thousands)
Outstanding at end of period
Securities sold under repurchase
agreements............................................... $ 15,000 $ 14,600 $ 4,600
FHLB advances.............................................. 133,121 138,423 103,938
Average balance outstanding for period
Securities sold under repurchase
agreements............................................... 14,921 5,365 3,680
FHLB advances.............................................. 128,656 116,721 78,874
Maximum amount outstanding at any
month-end during the period
Securities sold under repurchase agreements................ 15,000 14,600 4,600
FHLB advances.............................................. 138,687 148,420 104,188
Weighted average interest rate during the period
Securities sold under repurchase agreements................ 5.82% 6.36% 5.16%
FHLB advances.............................................. 5.32 6.00 5.30
Weighted average interest rate
at end of period
Securities sold under repurchase agreements................ 5.65 6.34 5.09
FHLB advances.............................................. 5.13 5.59 4.94
Note payable to BHA $ 737 $ 1,226 $ 1,714
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, 2001, Lincoln Federal received dividends of
$32,000 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 building 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 26 lots have been sold and
on which 26 houses have either been completed or are under construction, and 26
lots in the Meadow Brook Addition, of which 15 lots have been sold and on which
15 houses have either been completed or are under construction. The Southridge
lots have been priced generally from $19,000 to $23,000 each, with completed
homes selling generally from $90,000 to $120,000, and the Meadow Brook lots have
been priced generally from $22,000 to $27,000 with completed homes expected to
sell generally from $100,000 to $150,000. CLSC has delayed plans to complete the
development of the remaining 31 lots in the Southridge Addition at this time.
Phase II and Phase III of the Meadow Brook development, consisting of
approximately 63 lots, are still in the design stage.
CLSC also owns a 20-acre parcel of land, known as the Mann tract, and a
25-acre parcel known as the Chalfie 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 $28,000 for the year ended December 31, 2001. CLSC
incurred a loss of $1,000 for 2000 and a loss of $300 for 1999. At December 31,
2001, Lincoln had an investment in CLSC of $603,000 and loans outstanding to
CLSC of approximately $105,000 with an interest rate set at the prime rate. The
Holding Company's consolidated statements of income included elsewhere herein
include the operations of CLSC. All intercompany balances and transactions have
been eliminated in the consolidation.
Employees
As of December 31, 2001, the Company employed 108 persons on a full-time
basis and 11 on a part-time basis. None of the Company's employees are
represented by a collective bargaining group and management considers employee
relations to be good.
Employee benefits for the Company'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.
The Company 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. During 2001, Lincoln Federal's latest semi-annual assessment was
$53,000.
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, 2001, 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, 2001, Lincoln Federal's investment in stock of the
FHLB of Indianapolis was $7.7 million. For the fiscal year ended December 31,
2001, the FHLB of Indianapolis paid approximately $575,000 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 its member
institutions. 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 and, 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 FICO obligations have been
shared equally between BIF members and SAIF members since January 1, 2000.
Legislation is pending before Congress that would increase the deposit insurance
assessments paid by all financial institutions, including Lincoln Federal.
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, 2001, 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, 2001, would have been required
to deduct $4.2 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,
2001, 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"). Based on Lincoln Federal's retained net income standard at
December 31, 2001, Lincoln Federal would be required to file an application with
the OTS before making any capital distributions. 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, 2001. 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, 2001, Lincoln Federal was in compliance
with its QTL requirement, with approximately 88.8% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall be bound by regulations applicable to
national banks respecting payment of dividends. Three years after failing the
QTL test the association must dispose of any investment or activity not
permissible for a national bank and a savings association. If such a savings
association is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations applicable
to bank holding companies (including restrictions as to the scope of permissible
business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss. 7701(a)(19) of the Code or the asset
composition test of ss. 7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in
other states and, with state consent and subject to certain limitations, allows
banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law, which became effective in 1996, authorizes Indiana banks to
branch interstate by merger or de novo expansion, provided that such
transactions are not permitted to out-of-state banks unless the laws of their
home states permit Indiana banks to merge or establish de novo banks on a
reciprocal basis.
Transactions with Affiliates
Lincoln Federal 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, 2001:
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 $84,385 $1,242 9,925
Plainfield, IN 46168
134 South Washington Street Owned 1962 47,332 321 9,340
Crawfordsville, IN 47933
1900 East Wabash Street Owned 1974 30,689 278 2,670
Frankfort, IN 46041
60 South Main Street Owned 2000 28,308 772 11,750
Frankfort, IN 46041
975 East Main Street Owned 1981 29,953 257 2,890
Brownsburg, IN 46112
7648 East U.S. Highway 36 Owned 1999 15,351 958 2,800
Avon, IN
590 S. State Road 67 Leased 1999 7,983 247 1,500
Mooresville, IN 46158
648 Treybourne Drive Owned 2000 8,105 1,009 2,550
Greenwood, IN 46142
During 2001, Lincoln Federal purchased land in Greenwood, Indiana, for a
new branch to open in September of 2002. Included in premises and equipment at
December 31, 2001, were $402,000 of cost related to this new branch in
Greenwood. 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 $252,000 at December 31, 2001.
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 Aurum Technologies, located in Plano, Texas. The cost of these data
processing services is approximately $54,000 per month.
Lincoln Federal has contracted for items processing with DCM, Inc. The cost
of these processing services is approximately $11,000 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, 2001.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers are elected annually by the Holding Company's Board of
Directors and the Bank's Board of Directors.
T. Tim Unger (age 61) has been Chairman of the Board, President and Chief
Executive Officer of the Holding Company since January 1996. Mr. Unger also
serves as the President and Chief Executive Officer of the Bank. Before joining
the Company, 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 53) has served as the Holding Company's Secretary and
Treasurer since January 1998 and as Lincoln Federal's Senior Vice President,
Chief Financial Officer, Secretary and Treasurer since June 1997. Before working
for the Company, 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.
Paul S. Siebenmorgan (age 52) has served as the Holding Company's Vice
President since January 2002 and as the Bank's Senior Vice President and Chief
Lending Officer since May 2000. Prior to joining the Company, Mr. Siebenmorgan
served as Executive Vice President of Lakeland Financial Corporation and Lake
City Bank.
Rebecca J. Morgan (age 51) has served as the Holding Company's Vice
President since January 2002 and as the Bank's Senior Vice president and Retail
Sales Manager since June 1999. Prior to joining the Company, Ms. Morgan was
Senior Vice President and a Retail Sales Manager for First of America Bank.
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 45 of the Holding
Company's 2001 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
15 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 43 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 2002 Annual Shareholder Meeting (the "2002
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 2002 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 4 of the 2002 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to page
10 of the 2002 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 Accountants' Report............See Shareholder Annual Report
Page 19
Consolidated Balance Sheets at December 31, 2001
and 2000...................................See Shareholder Annual Report
Page 20
Consolidated Statements of Income for the Years
Ended December 31, 2001, 2000 and 1999.....See Shareholder Annual Report
Page 21
Consolidated Statements of Comprehensive
Income for the Years Ended December 31,
2001, 2000 and 1999........................See Shareholder Annual Report
Page 22
Consolidated Statements of Changes in
Shareholders' Equity for the
Years Ended December 31, 2001,
2000 and 1999..............................See Shareholder Annual Report
Page 23
Consolidated Statements of Cash Flows
for the Years Ended December 31,
2001, 2000 and 1999........................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, 2001.
(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(2), 10(3), 10(4), 10(7), 10(8), 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 29, 2002 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 29 day of March 2002.
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 29, 2002
)
)
)
(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 ) March 29, 2002
David E. Mansfield )
)
/s/ John C. Milholland )
---------------------------- 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
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 is incorporated by reference to Exhibit 10(12) to
the Annual Report on Form 10-K filed with the Commission on April
2, 2001 (the "2000 10-K")
(12) Employment Agreement between Lincoln Federal Savings Bank and
Rebecca M. Morgan is incorporated by reference to Exhibit 10(12)
to the 2000 10-K.
13 2001 Shareholder Annual Report
21 Subsidiaries of Registrant
23 Consent of Independent Accountants