UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2003
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 ___ NO _X_
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (Section 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. X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES ___ NO _X_
The aggregate market value of the Registrant's voting stock held by
non-affiliates, as of June 30, 2003, was $58,329,000.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 1, 2004, was 4,411,991 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
2003, are incorporated into Part II. Portions of the Proxy Statement for the
2004 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page E-1
Page 1 of 52 pages
LINCOLN BANCORP
Form 10-K
INDEX
Page
FORWARD LOOKING STATEMENT ............................................................. 3
PART I
Item 1. Business ............................................................ 3
Item 2. Properties .......................................................... 33
Item 3. Legal Proceedings ................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders ................. 34
Item 4.5 Executive Officers of the Registrant ................................ 34
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 34
Item 6. Selected Financial Data ............................................. 34
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ....................................... 34
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .......... 34
Item 8. Financial Statements and Supplementary Data ......................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ....................................... 35
Item 9A. Controls and Procedures ............................................. 35
PART III
Item 10. Directors and Executive Officers of the Registrant .................. 35
Item 11. Executive Compensation .............................................. 40
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ................................ 47
Item 13. Certain Relationships and Related Transactions ...................... 48
Item 14. Principal Accountant Fees and Services .............................. 49
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .... 50
SIGNATURES ............................................................................ 51
EXHIBITS .............................................................................. E-1
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") 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, which was renamed Lincoln Bank on September 1, 2003 ("Lincoln
Bank" or the "Bank" and together with the Holding Company, the "Company"), 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 Bank 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, changed its name to
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, continues as a subsidiary of the Bank. On March
10, 2004, Lincoln Bancorp signed a definitive agreement to acquire First Shares
Bancorp, Inc., Greenwood, Indiana. First Shares Bancorp is a $176 million asset
one-bank holding company and the owner of First Bank, an Indiana state-chartered
commercial bank with two branches in Greenwood with additional branches in
Bargersville, Franklin, Morgantown, Nashville and Trafalgar. See Consolidated
Financial Statements -- Note 21. At December 31, 2003, Lincoln Bank conducted
its business from nine full service offices located in Hendricks, Montgomery,
Clinton, Johnson and Morgan Counties, Indiana, with its main office located in
Plainfield. 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 Bank's deposit accounts are insured up to applicable limits
required by the SAIF of the FDIC.
Lincoln Bank 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;
(xii) certificates of deposit; and (xiii) financial planning.
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 a major focus of
Lincoln Bank's loan origination activities, representing 47.3% of its total loan
portfolio at December 31, 2003. Lincoln Bank also offers commercial real estate
loans, real estate construction loans and consumer loans. To a lesser extent,
Lincoln Bank also offers multi-family loans, land loans and commercial operating
loans. Commercial real estate loans totaled approximately 21.1% of the Bank's
total loan portfolio, and real estate construction loans totaled approximately
11.1% of Lincoln Bank's total loans as of December 31, 2003. Consumer loans were
9.9% of the loan portfolio at December 31, 2003.
Loan Portfolio Data. The following table sets forth the composition of
Lincoln Bank'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,
-----------------------------------------------------------------------------------------
2003 2002 2001 2000
------------------- ------------------ ---------------------- -------------------
Percent Percent Percent Percent
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 . $215,754 47.27% $168,054 44.59% $214,902 59.12% $231,157 68.44%
Multi-family ................... 5,301 1.16 5,553 1.47 5,795 1.59 2,606 .77
Commercial real estate ......... 96,079 21.05 80,753 21.43 52,176 14.35 31,784 9.41
Construction ................... 50,580 11.08 50,147 13.30 26,681 7.34 24,843 7.36
Land ........................... 6,518 1.43 6,103 1.62 5,367 1.48 4,692 1.39
Commercial ........................ 37,081 8.12 22,382 5.94 9,614 2.65 2,796 .83
Consumer loans:
Home equity and second mortgages 38,747 8.49 35,234 9.35 37,724 10.38 32,572 9.64
Other .......................... 6,374 1.40 8,655 2.30 11,227 3.09 7,287 2.16
-------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable ....... $456,434 100.00% $376,881 100.00% $363,486 100.00% $337,737 100.00%
======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY
One-to-four-family
residential real estate ...... $284,194 62.26% $228,429 60.61% $266,682 73.37% $278,379 82.43%
Multi-family real estate ....... 5,301 1.16 5,553 1.47 5,795 1.59 2,606 .77
Commercial real estate ......... 116,967 25.63 105,758 28.06 64,801 17.83 41,977 12.43
Land ........................... 6,518 1.43 6,103 1.62 5,367 1.48 4,692 1.39
Deposits ....................... 499 0.11 415 0.11 427 .12 856 .25
Auto ........................... 4,666 1.02 6,997 1.86 9,614 2.64 5,303 1.57
Other security ................. 37,987 8.32 23,247 6.17 10,317 2.84 3,349 .99
Unsecured ...................... 302 0.07 379 0.10 483 .13 575 .17
-------- ------ -------- ------ -------- ------ -------- ------
Gross loans receivable ....... $456,434 100.00 376,881 100.00 363,486 100.00 337,737 100.00
Deduct:
Allowance for loan losses ......... 3,532 0.77 2,932 0.78 2,648 .73 2,367 .70
Deferred loan fees ................ (213) (0.05) (63) (0.02) 515 .14 936 .28
Loans in process .................. 15,088 3.31 17,744 4.71 5,307 1.46 8,243 2.44
-------- ------ -------- ------ -------- ------ -------- ------
Net loans receivable ........... $438,027 95.97% $356,268 94.53% $355,016 97.67% $326,191 96.58%
======== ====== ======== ====== ======== ====== ======== ======
Mortgage Loans:
Adjustable-rate ................ $281,111 68.07% $120,205 34.76% 103,234 30.13 119,445 36.45%
Fixed-rate ..................... 131,869 31.93 225,638 65.24 239,411 69.87 208,209 63.55
-------- ------ -------- ------ -------- ------ -------- ------
Total ........................ $412,980 100.00% $345,843 100.00% $342,645 100.00% $327,654 100.00%
======== ====== ======== ====== ======== ====== ======== ======
(Table continued on following page)
(Table continued from previous page)
At December 31,
---------------------
1999
---------------------
Percent
Amount of Total
------ --------
TYPE OF LOAN
Real estate mortgage loans:
One-to-four-family residential . $ 175,095 72.18%
Multi-family ................... 1,029 .42
Commercial real estate ......... 16,073 6.63
Construction ................... 18,127 7.47
Land ........................... 3,609 1.49
Commercial ........................ 91 .04
Consumer loans:
Home equity and second mortgages 24,272 10.01
Other .......................... 4,282 1.76
-------- ------
Gross loans receivable ....... $242,578 100.00%
======== ======
TYPE OF SECURITY
One-to-four-family
residential real estate ...... $209,379 86.31%
Multi-family real estate ....... 1,029 .43
Commercial real estate ......... 24,188 9.97
Land ........................... 3,609 1.49
Deposits ....................... 675 .28
Auto ........................... 3,006 1.24
Other security ................. 491 .20
Unsecured ...................... 201 .08
-------- ------
Gross loans receivable ....... 242,578 100.00
Deduct:
Allowance for loan losses ......... 1,761 .73
Deferred loan fees ................ 822 .34
Loans in process .................. 6,995 2.88
-------- ------
Net loans receivable ........... $233,000 96.05%
======== ======
Mortgage Loans:
Adjustable-rate ................ $ 68,452 28.74%
Fixed-rate ..................... 169,753 71.26
-------- ------
Total ........................ $238,205 100.00%
======== ======
The following table sets forth certain information at December 31, 2003,
regarding the dollar amount of loans maturing in Lincoln Bank'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 2007 2009 2014 2019
December 31, to to to and
2003 2004 2005 2006 2008 2013 2018 following
-------------- -------- -------- -------- -------- -------- -------- ---------
(In thousands)
Real estate mortgage loans:
One- to four-family
residential loans ........ $215,754 $ 434 $ 168 $ 199 $ 2,218 $ 23,684 $ 82,368 $106,683
Multi-family loans ......... 5,301 -- -- 1,225 844 2,982 111 139
Commercial real estate loans 96,079 7,344 5,217 6,835 22,120 27,480 12,951 14,132
Construction loans ......... 50,580 31,451 18,437 692 -- -- -- --
Land loans ................. 6,518 2,887 968 2,146 240 209 68 --
-------- -------- -------- -------- -------- -------- -------- --------
Total real estate mortgage
loans .................. 374,232 42,116 24,790 11,097 25,422 54,355 95,498 120,954
-------- -------- -------- -------- -------- -------- -------- --------
Commercial loans .............. 37,081 15,702 2,376 3,472 7,017 6,128 826 1,560
Consumer loans:
Installment loans ......... 5,874 445 2,098 734 2,110 432 55 --
Loans secured by deposits .. 499 184 143 61 111 -- -- --
Home equity loans and
and second mortgages ..... 38,748 284 190 887 2,694 30,982 2,934 777
-------- -------- -------- -------- -------- -------- -------- --------
Total consumer loans ..... 45,121 913 2,431 1,682 4,915 31,414 2,989 777
-------- -------- -------- -------- -------- -------- -------- --------
Total .. $456,434 $ 58,731 $ 29,597 $ 16,251 $ 37,354 $ 91,897 $ 99,313 $123,291
======== ======== ======== ======== ======== ======== ======== ========
The following table sets forth, as of December 31, 2003, 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, 2004
--------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- ---------
(In thousands)
Real estate mortgage loans:
One- to four-family residential loans $171,437 $ 43,883 $215,320
Multi-family loans ................... 2,192 3,109 5,301
Commercial real estate loans ......... 53,920 34,815 88,735
Construction loans ................... 19,129 -- 19,129
Land loans ........................... 3,631 -- 3,631
-------- -------- --------
Total real estate mortgage loans . 250,309 81,807 332,116
-------- -------- --------
Commercial loans ........................ -- 21,379 21,379
Consumer loans:
Installment loans .................... 5,429 -- 5,429
Loans secured by deposits ............ 315 -- 315
Home equity loans and second mortgages 10,116 28,348 38,464
-------- -------- --------
Total Consumer Loans ............ 15,860 28,348 44,208
-------- -------- --------
Total Loans ................ $266,169 $131,534 $397,703
======== ======== ========
One- to Four-Family Residential Loans. Lincoln Bank'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 Bank
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 90%. Lincoln Bank
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 Bank'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 Bank 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 Bank 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, 2003 provide for maximum
rate adjustments per year and over the life of the loan of 2% and 6%,
respectively. Lincoln Bank's residential ARM loans are amortized over terms up
to 30 years.
Lincoln Bank occasionally makes certain fixed-rate one- to four-family
residential loans with the intent of pooling these loans into FHLMC
mortgage-backed securities. During 2002 Lincoln Bank securitized $18.2 million
of residential loans. No loans were securitized during 2003 or 2001. At December
31, 2003, Lincoln Bank continued to hold in its investment portfolio
approximately $10.2 million (amortized cost) of these securities that are backed
by higher-yielding, fixed-rate mortgage loans that it originated.
Lincoln Bank 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 Bank generally sells on the secondary market
all of the fixed-rate loans that it originates with terms more than 15 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. During the fourth
quarter of 2002, the Bank amended its policy and stopped selling fixed-rate
loans with maturity of 15 years or less. During the first and second quarter of
2003, the Bank retained some of the residential real estate loan volume with
maturities greater than 15 years. This was in response to the severe decline in
residential loans in the Bank's loan portfolio due to customer refinancing.
Lincoln Bank 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, 2003, approximately
20.4% of Lincoln Bank's one- to four-family residential loans had adjustable
rates of interest.
All of the one- to four-family residential mortgage loans that Lincoln Bank
originates include "due-on-sale" clauses, which give Lincoln Bank 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 Bank occasionally
permits assumptions of existing residential mortgage loans on a case-by-case
basis.
At December 31, 2003, approximately $215.8 million, or 47.3% of Lincoln
Bank's portfolio of loans, consisted of one- to four-family residential loans.
Approximately $1.5 million, or .7% of total residential loans, were included in
non-performing assets as of that date.
Commercial Real Estate and Multi-Family Loans. Lincoln Bank's commercial
real estate loans are secured by churches, warehouses, office buildings, hotels
and other commercial properties. Lincoln Bank generally issues commercial real
estate loans as five-year balloon loans amortized over a 15- or 20-year period,
with a fixed interest rate indexed primarily to a spread over the five-year swap
rate. At December 31, 2003 Lincoln Bank had $46.1 million in outstanding balloon
loans secured by commercial and multi-family real estate. Lincoln Bank 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, 2003 Lincoln Bank's largest commercial real estate borrower
had a single loan outstanding in the amount of $3.1 million which was secured by
a hotel located in Lebanon, Indiana. At December 31, 2003, approximately $96.1
million, or 21.1% of Lincoln Bank'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, 2003, approximately $5.3 million, or 1.2% of Lincoln Bank's
total loan portfolio, consisted of mortgage loans secured by multi-family
dwellings (those consisting of more than four units). Lincoln Bank writes
multi-family loans on terms and conditions similar to its commercial real estate
loans. The largest multi-family loan as of December 31, 2003 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 restricts
Lincoln Bank's ability to make loans to certain developers of apartment
complexes and other multi-family units.
Construction Loans. Lincoln Bank 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, 2003,
approximately $50.6 million, or 11.1% of Lincoln Bank's total loan portfolio,
consisted of construction loans. Of these loans, approximately $13.5 million
were for the acquisition and development of residential housing developments,
$16.2 million financed the construction of one- to four-family residential
properties and $20.9 million financed the construction of commercial real
estate. As of December 31, 2003, Lincoln Bank's largest construction loan
relationship had a balance of $1.4 million and was secured by a commercial
building located in Plainfield, Indiana. Also on that date, $.2 million of
construction loans, or .4% of total 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 Bank 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 Bank's construction loan
portfolio, Lincoln Bank 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 Bank
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 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 Bank 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 Bank
take title to the project.
Land Loans. At December 31, 2003, approximately $6.5 million, or 1.4% of
Lincoln Bank's total loan portfolio, consisted of mortgage loans secured by
undeveloped real estate. Lincoln Bank 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 Bank writes these loans
for a maximum term of 12 months. At December 31, 2003, the Bank's largest land
loan relationship totaled $1.7 million and was secured by a residential
development located in Indianapolis, Indiana. At December 31, 2003, land loans
in the amount of $11,000, or .2% of total land loans, were included in
non-performing assets.
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
Bank to take title to partially improved land that is unmarketable without
further capital investment.
Consumer Loans. Lincoln Bank'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 Bank generally
does not make indirect consumer loans. Consumer loans generally have shorter
terms and higher yields than permanent residential mortgage loans. At December
31, 2003, Lincoln Bank's consumer loans aggregated approximately $45.1 million,
or 9.9% of Lincoln Bank's total loan portfolio. Included in consumer loans at
December 31, 2003 were $28.3 million of variable-rate home equity lines of
credit. These variable-rate loans improve Lincoln Bank's exposure to interest
rate risk.
Lincoln Bank's home equity lines of credit and fixed-term loans are
generally written for up to 90% of the available equity (the appraised value of
the property less any first mortgage amount). Lincoln Bank's home equity and
second mortgage loans were $38.7 million, or 8.5% of total loans at December 31,
2003. Lincoln Bank 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 Bank'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, 2003, consumer loans in the amount of $.2 million, or .4%
of total consumer loans, 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 Bank offers commercial loans, which consist
primarily of loans to businesses that are secured by assets other than real
estate. As of December 31, 2003, commercial loans amounted to $37.1 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 Bank's loan portfolio, Lincoln Bank 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, 2003, $.2 million, or .5%, of
Lincoln Bank's commercial loans were included in nonperforming assets.
Origination, Purchase and Sale of Loans. Historically, Lincoln Bank has
confined its loan origination activities primarily to Hendricks, Montgomery,
Clinton, Johnson and Morgan Counties. Lincoln Bank may from time to time make
mortgage loans secured by property located outside of Indiana. Lincoln Bank's
loan originations are generated from referrals from existing customers, real
estate brokers, and newspaper and periodical advertising.
Lincoln Bank'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 Bank 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
Bank 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 Bank also generally requires private mortgage insurance for all
residential mortgage loans with Loan-to-Value Ratios of greater than 80%.
Lincoln Bank generally requires escrow accounts for insurance premiums and taxes
for residential mortgage loans that it originates.
Lincoln Bank'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 Bank 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 Bank 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, 2003, Lincoln Bank had $20.7 million of loan
participations in its asset portfolio.
The Bank occasionally sells participation interests in loans it originates
in order to limit the risk on a specific credit or industry type or to remain
within its self-imposed lending limit to a single borrower. The self-imposed
lending limit for Lincoln Bank is currently $3 million. Loans above this limit
require special Board of Director approval as an exception. Regulatory
guidelines allow significantly higher lending limits. As of December 31, 2003,
Lincoln Bank had $1.0 million of loan participations sold.
The following table shows loan origination and repayment activity for
Lincoln Bank during the periods indicated:
Year Ended December 31,
----------------------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Gross loans receivable at beginning of period ........ $ 376,881 $ 363,486 $ 337,737
Loans Originated:
Real estate mortgage loans:
One-to-four family loans (1) .................. 141,409 130,367 66,985
Multi-family loans ............................ -- 296 3,682
Commercial real estate loans .................. 42,290 35,034 23,543
Construction loans ............................ 56,696 34,990 16,542
Land loans .................................... 13,947 10,987 6,951
Commercial loans ................................ 17,401 14,546 10,373
Consumer loans .................................. 31,849 30,569 32,735
--------- --------- ---------
Total originations .......................... 303,592 256,789 160,811
--------- --------- ---------
Purchases (sales) of participation loans, net ........ (19,771) (93,530) (14,924)
Reductions:
Repayments and other deductions ................. 203,302 149,511 119,616
Transfers from loans to real estate owned ....... 966 353 522
--------- --------- ---------
Total reductions .............................. 204,268 149,864 120,138
--------- --------- ---------
Total gross loans receivable at end of period $ 456,434 $ 376,881 $ 363,486
========= ========= =========
- ---------------------
(1) Includes certain home equity loans.
Lincoln Bank's total loan originations during the year ended December 31,
2003 totaled $303.6 million, compared to $256.8 million during the year ended
December 31, 2002, and $160.8 million during the year ended December 31, 2001.
Origination and Other Fees. Lincoln Bank 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 17 days past due, Lincoln Bank delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Lincoln Bank 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 Bank again contacts the borrower to establish
an acceptable repayment schedule. When a mortgage loan is 90 days delinquent,
Lincoln Bank 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 Bank 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, 2003, $2.7 million, or .46%, of
Lincoln Bank's total assets, were non-performing (loans past due 90 days or more
and non-accruing loans) compared to $2.3 million, or .43%, of its total assets
at December 31, 2002. At December 31, 2003, residential loans accounted for
$1,473,000 of Lincoln Bank's non-performing assets, construction loans accounted
for none of its non-performing assets, land loans accounted for $11,000 of its
non-performing assets, commercial loans accounted for $238,000 of its
non-performing assets, and consumer loans accounted for $181,000 of
non-performing assets. Lincoln Bank had real estate owned ("REO") properties in
the amount of $825,000 as of December 31, 2003.
The table below sets forth the amounts and categories of Lincoln Bank's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last five years. It is Lincoln Bank'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 Bank deems any delinquent loan that is 90 days or
more past due to be a non-performing asset. Additionally, loans less than 90
days past due may be nonperforming if they are not accruing interest.
At December 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
Non-performing assets:
Non-performing loans ............. $1,903 $2,043 $1,297 $2,263 $1,105
Troubled debt restructurings ..... -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans ..... 1,903 2,043 1,297 2,263 1,105
Foreclosed real estate ........... 825 213 356 103 42
------ ------ ------ ------ ------
Total non-performing assets ...... $2,728 $2,256 $1,653 $2,366 $1,147
====== ====== ====== ====== ======
Non-performing loans to total loans . .43% .57% .36% .69% .47%
Non-performing assets to total assets .46% .43% .34% .47% .28%
Interest income of $55,000 for the year ended December 31, 2003, was
recognized on the non-performing loans summarized above. Interest income of
$126,000 for the year ended December 31, 2003, would have been recognized under
the original loan terms of these loans.
At December 31, 2003, Lincoln Bank held loans delinquent from 30 to 89 days
totaling $3.1 million. As of that date, Lincoln Bank 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, 2003, 2002 and 2001, relating to delinquencies in Lincoln Bank's
portfolio. Delinquent loans that are 90 days or more past due are considered
non-performing assets.
At December 31, 2003 At December 31, 2002
------------------------------------------------ ---------------------------------------------
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 .. 46 $1,727 27 $1,416 94 $4,474 27 $1,394
Commercial
real estate loans 5 866 -- -- 6 608 -- --
Multi-family
mortgage loans .. -- -- -- -- -- -- -- --
Construction loans . -- -- -- -- 4 3,651 1 54
Land loans ......... -- -- 1 11 -- -- 2 206
Commercial loan .... 5 116 1 238 7 455 1 59
Consumer loans ..... 25 385 8 181 49 499 18 330
------ ------ ------ ------ ------ ------ ------ ------
Total ......... 81 $3,094 37 $1,846 160 $9,687 49 $2,043
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to
total loans ..... 1.12% 3.29%
==== ====
At December 31, 2001
---------------------------------------------
30-89 Days 90 Days or More
--------------------- ---------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- --------- -------- ---------
Residential
mortgage loans .. 73 $3,358 22 $1,074
Commercial
real estate loans 3 873 -- --
Multi-family
mortgage loans .. -- -- -- --
Construction loans . 2 671 1 150
Land loans ......... 3 932 -- --
Commercial loan .... 3 404 -- --
Consumer loans ..... 31 570 5 73
------ ------ ------ ------
Total ......... 115 $6,808 28 $1,297
====== ====== ====== ======
Delinquent loans to
total loans ..... 2.28%
======
Classified Assets. Federal regulations and Lincoln Bank'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 Bank regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Lincoln
Bank'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 Bank'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 Bank's allowance for loan losses is adequate to absorb probable
losses inherent in the loan portfolio at December 31, 2003. 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. For
more discussion on the allowance for loan losses, see "Management's Discussion
and Analysis of Financial Condition and Results of Operation" in the Annual
Report.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past five fiscal years ended December 31, 2003.
Year Ended December 31,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Balance at beginning of period .......... $ 2,932 $ 2,648 $ 2,367 $ 1,761 $ 1,512
Transfer from Citizens merger ........... -- -- -- 343 --
Charge-offs:
One- to four-family residential
mortgage loans ..................... (22) -- (60) (5) (79)
Commercial real estate mortgage loans -- -- -- -- --
Construction loans ................... -- -- -- -- --
Commercial loans ..................... (20) -- -- -- --
Consumer loans ....................... (202) (77) (266) (139) (62)
------- ------- ------- ------- -------
Total charge-offs .................. (244) (77) (326) (144) (141)
------- ------- ------- ------- -------
Recoveries:
One- to four-family residential
mortgage loans ..................... 22 22 18 79 --
Commercial real estate mortgage loans 3 3 4 4 4
Construction loans ................... -- -- -- -- --
Commercial loans ..................... -- -- -- -- --
Consumer loans ....................... 66 34 97 41 2
------- ------- ------- ------- -------
Total recoveries ................... 91 59 119 124 6
------- ------- ------- ------- -------
Net charge-offs ...................... (153) (18) (207) (20) (135))
------- ------- ------- ------- -------
Provision for losses on loans ........... 753 302 488 283 384
------- ------- ------- ------- -------
Balance end of period ................ $ 3,532 $ 2,932 $ 2,648 $ 2,367 $ 1,761
======= ======= ======= ======= =======
Allowance for loan losses as a percent of
total loans outstanding .............. .80% .82% .74% .72% .75%
Ratio of net charge-offs to average
loans outstanding .................... .04% --% .06% --% .06%
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Lincoln Bank's allowance for loan losses at the
dates indicated.
At December 31,
---------------------------------------------------------------------------------------
2003 2002 2001 2000
----------------- ----------------- ----------------- ------------------
Percent Percent Percent Percent
of loans of loans of loans of loans
in each in each in each in each
category category category category
to total to total total to total
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 $ 717 47.27% $ 624 44.59%$ 674 59.12% $ 856 68.44%
Multi-family 53 1.16 58 1.47 58 1.59 26 .77
Commercial 999 21.05 838 21.43 707 14.35 420 9.41
Construction loans 526 11.08 338 13.30 261 7.34 201 7.36
Land loans 89 1.43 63 1.62 68 1.48 73 1.39
Commercial loans 385 8.12 235 5.94 122 2.65 29 .83
Consumer loans 619 9.89 771 11.65 758 13.47 642 11.80
Unallocated 144 -- 5 -- -- -- 120 --
------ ------ ------ ------ ------ ------ ------ ------
Total $3,532 100.00% $2,932 100.00% $2,648 100.00% $2,367 100.00%
====== ====== ====== ====== ====== ====== ====== ======
At December, 31,
-----------------
1999
-----------------
Percent
of loans
in each
category
to total
Amount loans
------ --------
(Dollars in thousands)
Balance at end of period applicable to:
Real estate mortgage loans:
One- to four-family residential $ 718 72.18%
Multi-family 10 .42
Commercial 241 6.63
Construction loans 230 7.47
Land loans 54 1.49
Commercial loans 1 .04
Consumer loans 436 11.77
Unallocated 70 --
------ ------
Total $1,761 100.00%
====== ======
Investments
Investments. The Company has adopted an 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 policy permits the Company's management to react quickly
to market conditions. Most of the securities in its portfolio are considered
available-for-sale. At December 31, 2003, the Company's investment portfolio
consisted of investments in mortgage-backed securities, corporate securities,
federal agency securities, municipal 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, 2003, approximately $107.1 million, or
18.1%, of the Company's total assets consisted of such investments. The Company
also had $12.9 million in interest-earning deposits with the FHLB-Indianapolis
and other financial institutions as of that date. As of that date, the Company
also had pledged as collateral investment securities with a carrying value of
$26.9 million, all of which are mortgage-backed securities and agency notes.
Investment Securities. The following table sets forth the amortized cost
and the market value of the Company's investment portfolio at the dates
indicated.
At December 31,
------------------------------------------------------------------
2003 2002 2001
------------------- ------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------- --------- -------- --------- --------
(In thousands)
Investment securities available for sale:
Federal agencies $ 45,403 $45,450 $ 24,053 $ 24,505 $ 16,191 $16,162
Mortgage-backed securities 21,761 22,339 44,971 46,705 58,259 59,017
Corporate debt obligations 20,595 19,786 23,906 22,444 23,251 22,428
Marketable equity securities 252 354 252 318 252 252
Municipal securities 6,138 6,208 5,574 5,628 -- --
-------- ------- -------- --------- --------- -------
Total investment securities
available for sale 94,149 94,137 98,756 99,600 97,953 97,859
Investment securities held to maturity:
Municipals 1,745 1,745 1,780 1,780 1,800 1,800
-------- ------- -------- --------- --------- -------
Total investment securities 95,894 95,882 100,536 101,380 99,753 99,659
Investment in limited partnerships 1,250 (1) 1,388 (1) 1,535 (1)
Investment in insurance company 650 (1) 650 (1) 650 (1)
FHLB stock (2) 9,270 9,270 8,160 8,160 7,734 7,734
-------- -------- ---------
Total investments $107,064 $110,734 $109,672
======== ======== ========
- ----------------------
(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, 2003.
Amount at December 31, 2003 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 .......... $11,160 2.59% $24,241 2.01% $ -- --% $10,002 6.41%
Corporate securities --
available for sale .......... 2,053 2.34 5,251 2.42 -- -- 13,291 1.86
Municipals -- held to maturity . 50 4.42 320 4.86 685 5.44 690 5.91
Municipals -- available for sale 1,473 2.30 4,665 2.13 -- -- -- --
------- ---- ------- ---- ------- ---- ------- ----
$14,736 2.53% $34,477 2.12% $ 685 5.44% $23,983 3.87%
======= ==== ======= ==== ======= ==== ======= ====
At December 31, 2003, the Company had no corporate investments which
exceeded 10% of its equity capital.
Mortgage-backed Securities. The following table sets forth the composition
of the Company's mortgage-backed securities portfolio at December 31, 2003 and
2002.
December 31, 2003 December 31, 2002
------------------------------- -------------------------------
Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value
--------- -------- ------ ---------- -------- ------
(Dollars in thousands)
Federal Home Loan
Mortgage Corporation $14,808 68.0% $15,272 $22,837 50.8% $23,975
Government National
Mortgage Association 1,822 8.4 1,925 4,376 9.7 4,583
Collateralized mortgage
obligations 5,131 23.6 5,142 17,758 39.5 18,147
------- ----- ------- ------- ----- -------
Total mortgage-backed securities $21,761 100.0% $22,339 $44,971 100.0% $46,705
======= ===== ======= ======= ===== =======
At December 31, 2003, mortgage-backed securities having an amortized cost
of $2,885,000 mature in five to ten years and have a weighted average yield of
6.48% and mortgage-backed securities having an amortized cost of $14,234,000
mature after ten years and have a weighted average yield of 5.85%.
At December 31, 2002, mortgage-backed securities having an amortized cost
of $3,000,000 mature in five to ten years and have a weighted average yield of
6.84% and mortgage-backed securities having an amortized cost of $41,971,000
mature after ten years and have a weighted average yield of 6.27%.
The following table sets forth the changes in the Company's mortgage-backed
securities portfolio for the years ended December 31, 2003, 2002 and 2001.
For the Year Ended December 31,
2003 2002 2001
---------- ---------- ----------
(Dollars in thousands)
Beginning balance ........................................ $ 46,705 $ 59,017 $ 66,418
Securitization of loans .................................. -- 18,222 --
Purchases ................................................ 7,963 5,047 9,695
Monthly repayments ....................................... (31,158) (36,417) (18,554)
Proceeds from sales ...................................... -- -- --
Net accretion (amortization) ............................. (15) (140) 46
Gains on sales ........................................... -- -- --
Change in unrealized gain on securities available for sale (1,156) 976 1,412
-------- -------- --------
Ending balance ........................................... $ 22,339 $ 46,705 $ 59,017
======== ======== ========
Investments in Multi-Family, Low- and Moderate-Income Housing Projects.
Lincoln Bank 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 Bank
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 Bank 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 has invested approximately $4.9 million in BHA since
the inception of the Bloomington Project in August 1992.
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, 2003,
92.6% of the units in the Pedcor Project and the Bloomington Project were
occupied and each project complied with the low income occupancy requirements
described above.
Lincoln Bank has received tax credits of $355,000 from the operation of the
Bloomington Project for the year ended December 31, 2003. The tax credits from
the BHA project will be available through 2007. Although Lincoln Bank 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 Bank 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.
Additionally, Pedcor and BHA have incurred operating losses in the early years
of their operations primarily due to accelerated depreciation of assets. Lincoln
Bank has accounted for its investment in Pedcor, and LF has accounted for
Lincoln Bank's investment in BHA, on the equity method. Accordingly, Lincoln
Bank and LF have each recorded their share of these losses as reductions to
their investments in Pedcor and BHA, respectively. At December 31, 2003, Lincoln
Bank had no remaining investment on the books for Pedcor, and LF's investment in
BHA was $1,250,000.
Sources of Funds
General. Deposits have traditionally been the Company's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Company 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. The Company 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. The Company does not
actively solicit or advertise for deposits outside of Hendricks, Montgomery,
Clinton, Johnson and Morgan Counties, and substantially all of the Company'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. The Company may sometimes accept
brokered deposits and bids for public deposits and it held $25.5 million and
$6.5 million of such funds, or 7.9% and 2.0% of its total deposits, at December
31, 2003. The Company periodically runs specials on certificates of deposit with
specific maturities.
The Company 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. The Company relies, in
part, on customer service and long-standing relationships with customers to
attract and retain its deposits. The Company also closely prices its deposits to
the rates offered by its competitors.
Approximately 49.0% of the Company's deposits consist of certificates of
deposit, which generally have higher interest rates than other deposit products
that it offers. Certificates of deposit have increased 3.6% during the year
ended December 31, 2003. Money market savings accounts represent 24.9% of the
Company's deposits and have grown 49.1% during the year ended December 31, 2003.
Non-interest bearing demand accounts have grown $3.9 million, or 29.2%, during
the year ended December 31, 2003. The Company 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 the Company offers has allowed
it to compete effectively in obtaining funds and to respond with flexibility to
changes in consumer demand. The Company has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. The Company manages the pricing of its deposits in keeping with
its asset/liability management and profitability objectives. Based on its
experience, management believes that the Company'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 the Company pays on these
deposits, have been and will continue to be significantly affected by market
conditions.
An analysis of the Company's deposit accounts by type and maturity at
December 31, 2003, is as follows:
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 2003 deposits Rate
--------- ---------- -------- ---------
(Dollars in thousands)
Withdrawable:
Savings accounts ................... $ 25 $ 33,405 10.38% 0.70%
Money market ....................... 1,000 80,179 24.91 1.03
NOW accounts ....................... 200 33,343 10.36 0.65
Non-interest bearing demand accounts 50 17,176 5.34 --
-------- ------
Total withdrawable ............... 164,103 50.99 0.78
-------- ------
Certificates (original terms):
3 months or less ................... 1,000 973 .30 .86
6 months ........................... 1,000 4,266 1.33 1.02
12 months .......................... 1,000 12,357 3.84 1.26
18 months .......................... 1,000 10,216 3.17 1.77
24 months .......................... 1,000 37,126 11.54 3.12
30 months .......................... 1,000 16,820 5.23 2.56
36 months .......................... 1,000 14,007 4.35 3.91
48 months .......................... 1,000 11,094 3.45 4.89
60 months .......................... 1,000 18,902 5.87 4.90
Public fund and brokered certificates . 31,975 9.93 1.38
-------- ------
Total certificates .................... 157,736 49.01 2.81
-------- ------
Total deposits ........................ $321,839 100.00% 1.77%
======== ======
The following table sets forth by various interest rate categories the
composition of the Company's time deposits at the dates indicated:
At December 31,
------------------------------------------------
2003 2002 2001
------------ ------------ -------------
(In Thousands)
Less than 2.00% $ 59,371 $ 26,989 $ 249
2.00 to 2.99% 35,409 34,303 7,915
3.00 to 3.99% 29,734 35,170 30,529
4.00 to 4.99% 12,992 25,908 41,641
5.00 to 5.99% 17,237 23,863 32,795
6.00 to 6.99% 2,988 5,886 29,408
7.00 to 7.99% 5 79 360
-------- -------- --------
Total $157,736 $152,198 $142,897
======== ======== ========
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 2003. Matured certificates, which have not been renewed as of
December 31, 2003, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 2003 Maturing In
--------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
--------- --------- -------- ------------
(In thousands)
Less than 2.00% $51,679 $ 3,499 $ 4,193 $ --
2.00 to 2.99% 8,865 22,340 3,560 644
3.00 to 3.99% 21,822 3,959 238 3,715
4.00 to 4.99% 5,525 2,561 1,959 2,947
5.00 to 5.99% 7,871 766 7,662 938
6.00 to 6.99% 1,029 1,156 803 --
7.00 to 7.99% -- -- 5 --
------- ------- ------- ------
Total $96,791 $34,281 $18,420 $8,244
======= ======= ======= ======
The following table indicates the amount of the Company's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 2003.
At December 31, 2003
--------------------
Maturity Period (In thousands)
Three months or less ........................ $27,245
Greater than three months through six months 6,216
Greater than six months through twelve months 4,953
Over twelve months .......................... 12,161
-------
Total ........................... $50,575
DEPOSIT ACTIVITY
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
2003 Deposits 2002 2002 Deposits 2001 2001 Deposits
------------ -------- --------- ------------ -------- --------- ------------ --------
(Dollars in thousands)
Withdrawable:
Savings accounts .......... $ 33,405 10.38% $ 49 $ 33,356 12.34% $ 590 $ 32,766 13.00%
Money market accounts ..... 80,179 24.91 26,404 53,775 19.89 2,876 50,899 20.19
NOW accounts .............. 33,343 10.36 15,594 17,749 6.56 1,434 16,315 6.47
Noninterest-bearing
demand accounts ......... 17,176 5.34 3,887 13,289 4.92 4,060 9,229 3.66
-------- ------ -------- -------- ------ -------- -------- ------
Total withdrawable ...... 164,103 50.99 45,934 118,169 43.71 8,960 109,209 43.32
-------- ------ -------- -------- ------ -------- -------- ------
Certificates (original terms):
91 days ................... 973 .30 170 803 .30 (560) 1,363 .54
6 months .................. 4,266 1.33 (1,793) 6,059 2.24 (1,388) 7,447 2.95
12 months ................. 12,357 3.84 (4,249) 16,606 6.14 (5,394) 22,000 8.73
18 months ................. 10,216 3.17 (1,709) 11,925 4.41 (13,089) 25,014 9.92
24 months ................. 37,126 11.54 3,734 33,392 12.35 13,599 19,793 7.85
30 months ................. 16,820 5.23 (3,691) 20,511 7.59 (5,066) 25,577 10.14
36 months ................. 14,007 4.35 (866) 14,873 5.50 (5,595) 20,468 8.12
48 months ................. 11,094 3.45 471 10,623 3.93 2,412 8,211 3.26
60 months ................. 18,902 5.87 1,697 17,205 6.36 8,515 8,690 3.45
Public fund and brokered
certificates .............. 31,975 9.93 11,774 20,201 7.47 15,867 4,334 1.72
-------- ------ -------- -------- ------ -------- -------- ------
Total certificates ........... 157,736 49.01 5,538 152,198 56.29 9,301 142,897 56.68
-------- ------ -------- -------- ------ -------- -------- ------
Total deposits ............... $321,839 100.00% $ 51,472 $270,367 100.00% $ 18,261 $252,106 100.00%
======== ====== ======== ======== ====== ======== ======== ======
Total deposits at December 31, 2003 were approximately $321.8 million,
compared to approximately $270.4 million at December 31, 2002. The Company'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 the Company'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 Bank.
Borrowings. Lincoln Bank focuses on generating high quality loans and then
seeking the best source of funding from deposits, investments or borrowings. At
December 31, 2003, Lincoln Bank had borrowings in the amount of $184.7 million
from the FHLB of Indianapolis which bear fixed and variable interest rates and
which are due at various dates through 2013. Lincoln Bank 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 Bank has
also sold securities under repurchase agreements. Lincoln Bank had no
outstanding securities sold under repurchase agreement at December 31, 2003. The
Company 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 Bank's
borrowings at or for the years ended December 31, 2003, 2002 and 2001.
At or for the Year
Ended December 31,
------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Outstanding at end of period
Securities sold under repurchase
agreements ................................ $ -- $ -- $ 15,000
FHLB advances ............................... 184,693 163,010 133,121
Average balance outstanding for period
Securities sold under repurchase
agreements ................................ -- 11,425 14,921
FHLB advances ............................... 170,343 138,941 128,656
Maximum amount outstanding at any
month-end during the period
Securities sold under repurchase agreements . -- 15,000 15,000
FHLB advances ............................... 184,695 163,010 138,687
Weighted average interest rate during the period
Securities sold under repurchase agreements . -- 5.94 5.82
FHLB advances ............................... 4.74 5.09 5.32
Weighted average interest rate
at end of period
Securities sold under repurchase agreements . -- -- 5.65
FHLB advances ............................... 4.38 4.69 5.13
Note payable to BHA ............................ $ -- $ 248 $ 737
Service Corporation Subsidiaries
OTS regulations permit federal savings banks 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 bank'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 banks to make specified types
of loans to such subsidiaries (other than special purpose finance subsidiaries)
in which the bank owns more than 10% of the stock, in an aggregate amount not
exceeding 50% of the bank's regulatory capital if the bank's regulatory capital
is in compliance with applicable regulations. A savings bank that acquires a
non-savings bank or 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 bank 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 Bank currently owns three subsidiaries, LF Service Corp. ("LF"),
Citizens Loan and Service Corporation ("CLSC") and LF Portfolio Services
("Portfolio"). 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 Bank'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, 2003, Lincoln Bank received dividends of
$17,000 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 Bank 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.
Portfolio is a Delaware corporation domiciled in Nevada. Portfolio holds
and manages a significant portion of Lincoln Bank's investment portfolio. As of
December 31, 2003, Portfolio had investments available for sale and
interest-bearing deposits of $97.1 million, total assets of $97.7 million, and
during the fiscal year ended December 31, 2003, had net income of $2.4 million.
Employees
As of December 31, 2003, the Company employed 128 persons on a full-time
basis and 18 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 Bank 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 Bank."
COMPETITION
Lincoln Bank originates most of its loans to and accepts most of its
deposits from residents of Hendricks, Montgomery, Clinton, Johnson and Morgan
Counties, Indiana. Lincoln Bank is subject to competition from various financial
institutions, including state and national banks, state and federal savings
banks and associations, credit unions, and certain nonbanking consumer lenders
that provide similar services in those counties with significantly larger
resources than are available to Lincoln Bank. Lincoln Bank 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 Bank 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 bank, Lincoln Bank is
subject to extensive regulation by the OTS and the FDIC. For example, Lincoln
Bank 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 Bank'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 2003, Lincoln Bank's latest semi-annual assessment was
$58,000.
Lincoln Bank 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 Bank's securities, and limitations upon other aspects of banking
operations. In addition, Lincoln Bank'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, antitrust laws and regulations protecting the confidentiality of
consumer financial information.
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 Bank 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") in November of 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 Bank
were a bank. See "-Qualified Thrift Lender." At December 31, 2003, Lincoln
Bank'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 Bank, 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 Bank's subsidiaries (other than Lincoln Bank 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 Bank 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, 2003, Lincoln Bank's investment in stock of the FHLB of
Indianapolis was $9.3 million. For the fiscal year ended December 31, 2003, the
FHLB of Indianapolis paid approximately $459,000 in dividends to Lincoln Bank.
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 Bank'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 Bank
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund.
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 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 Bank.
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, 2003, Lincoln
Bank was in compliance with all capital requirements imposed by law.
The OTS has 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,
2003, Lincoln Bank 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 Bank's retained net income standard at
December 31, 2003, Lincoln Bank 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 Bank is a subsidiary of a savings and loan holding company, this latter
provision requires, at a minimum, that Lincoln Bank file a notice with the OTS
30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, Lincoln Bank'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 Bank
to establish and maintain a liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders and prohibits Lincoln
Bank 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 Bank's current operations.
Liquidity
The Financial Regulatory Relief and Economic Efficiency Act of 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
The federal banking agencies have 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, interest rate exposure, asset quality and earnings
standards. 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.
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 Bank 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 Bank 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 Bank's board of
directors. Lincoln Bank 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, 2003. Management does not believe that the loans-to-one-borrower
limits will have a significant impact on Lincoln Bank'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, 2003, Lincoln Bank was in compliance
with its QTL requirement, with approximately 71.0% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; and (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 Section 7701(a)(19) of the Code or the asset
composition test of Section 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 Bank is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which limits credit transactions between a bank or savings
association and its executive officers and its affiliates. These provisions also
prescribe terms and conditions for bank affiliate transactions deemed to be
consistent with safe and sound banking practices, and restrict 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 Bank'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.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity or debt securities registered under the Securities
Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new
requirements for audit committees, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) new standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for the reporting company
and their directors and executive officers; and (v) new and increased civil and
criminal penalties for violation of the securities laws. Many of the provisions
became effective immediately while other provisions become effective over a
period of 30 to 270 days and are subject to rulemaking by the Securities and
Exchange Commission. Although the Holding Company anticipates that additional
expense will be incurred to comply with the provisions of the Sarbanes-Oxley Act
and the resulting regulations, management does not expect that such compliance
will have a material impact on our results of operations or financial condition.
Fair Credit Reporting Act Amendment
The Fair and Accurate Credit Transactions Act of 2003 (the "FACT Act") was
signed into law by President Bush on December 4, 2003. The FACT Act amends the
Fair Credit Reporting Act and makes permanent certain federal preemptions that
form the basis for a national credit reporting system. The FACT Act is also
intended to (i) address identity theft, (ii) increase access to credit
information, (iii) enhance the accuracy of credit reporting, (iv) facilitate the
opt-out by consumers from certain marketing solicitations, (v) protect medical
information, and (vi) promote financial literacy. The statute will affect credit
reporting agencies (commonly referred to as "credit bureaus"), financial
institutions, other users of credit reports and those who furnish information to
credit bureaus. The Bank does not anticipate that this legislation will have a
significant adverse effect on its business.
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 Bank's record of meeting community credit
needs as satisfactory.
Predatory Lending
The Federal Reserve Board issued a regulation that became effective on
October 1, 2002 that is aimed at curbing "predatory lending." The term
"predatory lending" encompasses a variety of practices, but the term generally
is used to refer to abusive lending practices involving fraud, deception or
unfairness. Predatory lending typically involves one or more of the following:
(i) making unaffordable loans based on the assets of the borrower rather than on
the borrower's ability to repay an obligation ("asset-based lending"); (ii)
inducing a borrower to refinance a loan repeatedly in order to charge high
points and fees each time the loan is refinanced ("loan flipping"); or (iii)
engaging in fraud or deception to conceal the true nature of the loan obligation
from an unsuspecting or unsophisticated borrower. The Federal Reserve Board's
new regulation, which amends Regulation Z, broadens the scope of loans subject
to the protections of the Home Ownership and Equity Protection Act of 1994
("HOEPA"). Among other things, the regulation brings within the scope of HOEPA
first-lien mortgage loans with interest rates that are at least 8 percentage
points above Treasury securities having a comparable maturity. In addition, the
regulation requires that the cost of optional insurance and similar debt
protection products paid by a borrower at closing be included in calculating the
finance charge paid by the borrower. HOEPA coverage is triggered if such finance
charges exceed 8 percent of the total loan. Finally, the regulation restricts
creditors from engaging in repeated refinancings of their own HOEPA loans over a
short time period when the transactions are not in the borrower's interest.
Lenders that violate the rules face cancellation of loans and penalties equal to
the finance charges paid. The Bank is unable at this time to determine the
impact that these new regulations, or any similar state predatory lending
regulations, may have on its financial condition or results of operation.
USA Patriot Act of 2001
On October 26, 2001, President Bush signed the USA Patriot Act of 2001. The
Patriot Act is intended is to strengthen U.S. law enforcement's and the
intelligence communities' abilities to work cohesively to combat terrorism on a
variety of fronts. The potential impact of the Act on financial institutions of
all kinds is significant and wide ranging. The Act contains sweeping anti-money
laundering and financial transparency laws. On April 30, 2003, the Treasury
Department issued final regulations requiring institutions to incorporate into
their written money laundering plans a board-approved customer identification
program implementing reasonable procedures for: (i) verifying the identity of
any person seeking to open an account, to the extent reasonable and practicable;
(ii) maintaining records of the information used to verify the person's
identity; and (iii) determining whether the person appears on any list of known
or suspected terrorists or terrorist organizations. The Bank does not anticipate
that these requirements will materially affect its operations.
TAXATION
Federal Taxation
Historically, savings associations, such as Lincoln Bank, 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. 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 Bank does have some reserves from before 1988, Lincoln Bank 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, the Company has been reporting its income
and expenses on the accrual method of accounting. The Company's federal income
tax returns were audited in 2000 and no adjustments were made.
State Taxation
The Company is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "apportioned adjusted gross income."
"Apportioned 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.
The Company'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
Bank's offices as of December 31, 2003:
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 $116,300 $1,461 9,925
Plainfield, IN 46168
134 South Washington Street Owned 1962 50,655 386 9,340
Crawfordsville, IN 47933
1900 East Wabash Street Owned 1974 30,626 267 2,670
Frankfort, IN 46041
60 South Main Street Owned 2000 32,072 779 11,750
Frankfort, IN 46041
975 East Main Street Owned 1981 38,457 568 2,890
Brownsburg, IN 46112
7648 East U.S. Highway 36 Owned 1999 23,716 869 2,800
Avon, IN 46123
590 S. State Road 67 Leased 1999 8,259 187 1,500
Mooresville, IN 46158
648 Treybourne Drive Owned 2000 18,715 939 2,550
Greenwood, IN 46142
18 Providence Drive Owned 2002 3,084 1,173 2,800
Greenwood, IN 46143
Lincoln Bank owns computer and data processing equipment which it uses for
transaction processing, loan origination, and accounting. The net book value of
Lincoln Bank's electronic data processing equipment was approximately $324,000
at December 31, 2003.
Lincoln Bank currently operates ten automatic teller machines ("ATMs"),
with one ATM located at its main office and each of its branch offices and one
stand alone ATM. Lincoln Bank's ATMs participate in the Star(R) network.
Lincoln Bank 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 $65,000 per month.
Lincoln Bank has contracted for items processing with DCM, Inc. The cost of
these processing services is approximately $12,000 per month.
Item 3. Legal Proceedings.
Although the Holding Company and Lincoln Bank 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 Bank's property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's shareholders during the
quarter ended December 31, 2003.
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 63) has been Chairman of the Board, President and Chief
Executive Officer of the Holding Company since December 1998. Mr. Unger also
serves as the President and Chief Executive Officer of the Bank since January
1996. Mr. Unger has served the banking industry since 1966.
John M. Baer (age 55) has served as the Holding Company's Secretary and
Treasurer since December 1998 and as Lincoln Bank's Senior Vice President, Chief
Financial Officer, Secretary and Treasurer since 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. Siebenmorgen (age 54) 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. Siebenmorgen
served as Executive Vice President of Lakeland Financial Corporation and Lake
City Bank.
Rebecca J. Morgan (age 53) 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 contained in the material under
the heading "Shareholder Information" on page 47 of the Holding Company's 2003
Shareholder Annual Report (the "Shareholder Annual Report"), which is
incorporated herein by this reference.
Item 6. Selected Financial Data.
The information required by this item is contained in the material under
the heading "Selected Consolidated Financial Data of Lincoln Bancorp and
Subsidiary" on pages 3 and 4 of the Shareholder Annual Report, which is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is contained on pages 4 through 21 of
the Shareholder Annual Report, which is incorporated herein by this reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is contained on pages 19 through 21
of the Shareholder Annual Report, which is incorporated herein by this
reference.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes thereto
contained on pages 23 through 45 in the Shareholder Annual Report are
incorporated herein by reference. The Company's unaudited quarterly results of
operations contained on page 19 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.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures. An evaluation was carried
out under the supervision and with the participation of the Holding Company's
management, including its Chief Executive Officer and Treasurer, of the
effectiveness of the Holding Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the fourth quarter of the 2003 fiscal
year covered by this report. Based on their evaluation, the Holding Company's
Chief Executive Officer and Treasurer have concluded that the Holding Company's
disclosure controls and procedures are, to the best of their knowledge,
effective to ensure that information required to be disclosed by the Holding
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
The Holding Company's management, including its Chief Executive Officer and
Treasurer, also have concluded that during the Holding Company's fiscal quarter
ended December 31, 2003, there have been no significant changes in the Holding
Company's internal controls or in other factors that could significantly affect
the internal controls, including any corrective action with regard to
significant deficiencies and material weaknesses.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers and Directors
Information concerning the Holding Company's executive officers is included
in Item 4.5 in Part I of this Annual Report on Form 10-K, which is incorporated
herein by reference.
The Board of Directors currently consists of eight members. All of the
directors except T. Tim Unger meet the standards for independence of Board
members set forth in the Listing Standards for the National Association of
Securities Dealers. The By-Laws provide that the Board of Directors is to be
divided into three classes as nearly equal in number as possible. The members of
each class are to be elected for a term of three years and until their
successors are elected and qualified. One class of directors is to be elected
annually. Directors must have their primary domicile in Clinton, Hendricks or
Montgomery Counties, Indiana, must have had a loan or deposit relationship with
the Bank for a continuous period of nine months prior to their nomination to the
Board (or in the case of directors in office on September 10, 1998, prior to
that date), and non-employee directors must have served as a member of a civic
or community organization based in Clinton, Hendricks or Montgomery Counties,
Indiana for at least a continuous period of 12 months during the five years
prior to their nomination to the Board.
The following table sets forth certain information regarding the directors
of the Holding Company and the number and percent of shares of Common Stock
beneficially owned by the directors on March 1, 2004. Unless otherwise
indicated, each director has sole investment and/or voting power with respect to
the shares shown as beneficially owned by him. No director is related to any
other director or executive officer of the Holding Company by blood, marriage,
or adoption. The table also sets forth the number of shares of Holding Company
Common Stock beneficially owned by certain executive officers of the Holding
Company, and by all directors and executive officers of the Holding Company as a
group.
Director Common Stock
Expiration of Director of the of the Beneficially
Term as Holding Bank Owned as of Percentage
Name Director Company Since Since March 1, 2004 of Class(1)
- ------------------------- ------------- --------------- ----------- ----------------- -------------
Directors
W. Thomas Harmon 2007 1998 1982 79,950 (2) 1.8%
Jerry R. Holifield 2007 1998 1992 52,020 (3) 1.2%
John C. Milholland 2007 1998 1988 74,293 (4) 1.7%
Lester N. Bergum, Jr. 2006 1998 1996 49,331 (5) 1.1%
Dennis W. Dawes 2006 1999 1999 18,000 (6) .4%
David E. Mansfield 2005 1998 1997 41,537 (7) .9%
T. Tim Unger 2005 1998 1996 262,598 (8) 5.8%
John L. Wyatt 2005 1998 1992 57,587 (9) 1.3%
Executive Officers
John M. Baer
Secretary, Treasurer
and Chief Financial Officer 107,772 (10) 2.4%
Paul S. Siebenmorgen 33,516 (11) .8%
Vice President
Rebecca J. Morgan 29,074 (12) .7%
Vice President
All directors and
executive officers
as a group (11 persons) 805,678 (13) 16.9%
- ---------------------------
(1) Based upon information furnished by the respective directors. Under
applicable regulations, shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic power
with respect to the shares. Includes shares beneficially owned by members
of the immediate families of the directors residing in their homes.
(2) Includes 2,103 shares held under the Lincoln Bank Recognition and Retention
Plan (the "RRP") and options for 21,024 shares granted under the Lincoln
Bank Stock Option Plan (the "Option Plan"). Does not include options for
5,260 shares granted under the Option Plan which are not exercisable within
60 days of March 1, 2004.
(3) Includes 15,000 shares held jointly by Mr. Holifield and his spouse, 2,103
shares held under the RRP, and options for 21,024 shares granted under the
Option Plan. Does not include options for 5,260 shares granted under the
Option Plan which are not exercisable within 60 days of March 1, 2004.
(4) Includes 4,204 shares held jointly by Mr. Milholland and his spouse, 2,103
shares held under the RRP, and options for 21,024 shares granted under the
Option Plan. Does not include options for 5,260 shares granted under the
Option Plan which are not exercisable within 60 days of March 1, 2004.
(5) Includes 13,814 shares held jointly by Mr. Bergum and his spouse, 2,103
shares held under the RRP, and options for 21,024 shares granted under the
Option Plan. Does not include options for 5,260 shares granted to Mr.
Bergum under the Option Plan which are not exercisable within 60 days of
March 1, 2004.
(6) Includes options for 12,000 shares granted under the Option Plan and 4,000
shares held under the RRP. Does not include options for 3,000 shares
granted to Mr. Dawes under the Option Plan which are not exercisable within
60 days of March 1, 2004.
(7) Includes 18,410 shares held jointly by Mr. Mansfield and his spouse, 2,103
shares held under the RRP and options for 21,024 shares granted under the
Option Plan. Does not include options for 5,260 shares granted under the
Option Plan which are not exercisable within 60 days of March 1, 2004.
(8) Includes 44,859 shares held jointly by Mr. Unger and his spouse, 11,215
shares held under the RRP, options for 140,184 shares granted under the
Option Plan, and 13,840 shares allocated to Mr. Unger's account under the
ESOP as of December 31, 2003. Does not include options for 35,047 shares
granted under the Option Plan which are not exercisable within 60 days of
March 1, 2004.
(9) Includes 21,474 shares held jointly by Mr. Wyatt with his spouse, 2,103
shares held under the RRP, and options for 20,624 shares granted under the
Option Plan. Does not include options for 5,260 shares granted under the
Option Plan which are not exercisable within 60 days of March 1, 2004.
(10) Includes 15,891 shares held jointly by Mr. Baer and his spouse, 7,009
shares held under the RRP, options for 40,000 shares granted under the
Option Plan, and 11,472 shares allocated to Mr. Baer's account under the
ESOP as of December 31, 2003. Does not include 20,092 shares granted under
the Option Plan which are not exercisable within 60 days of March 1, 2004.
(11) Includes 1,870 shares held jointly by Mr. Siebenmorgen and his spouse,
6,000 shares held under the RRP, options for 12,000 shares granted under
the Option Plan, and 4,646 shares allocated to Mr. Siebenmorgen's account
under the ESOP as of December 31, 2003. Does not include options for 8,000
shares granted under the Option Plan which are not exercisable within 60
days of March 1, 2004.
(12) Includes 6,870 shares held jointly by Mrs. Morgan and her spouse, 2,600
shares held under the RRP, options for 12,800 shares granted under the
Option Plan, and 6,804 shares allocated to Mrs. Morgan's account under the
ESOP as of December 31, 2003. Does not include options for 3,200 shares
granted under the Option Plan which are not exercisable within 60 days of
March 1, 2004.
(13) Includes 43,442 shares held under the RRP, options for 342,728 shares
granted under the Option Plan, and 36,762 shares allocated to the accounts
of such persons under the ESOP as of December 31, 2003. Does not include
options for 100,899 shares granted under the Option Plan which are not
exercisable within 60 days of March 1, 2004.
Presented below is certain information concerning the directors:
Lester N. Bergum, Jr. (age 55) is an attorney and partner with the firm of
Robison, Robison Bergum & Johnson in Frankfort, Indiana, where he has practiced
since 1974. He has also served since 1989 as president of Title Insurance
Services, Inc., a title agency located in Frankfort, Indiana.
Dennis W. Dawes (age 58) has served as President and Treasurer of Hendricks
Regional Health, President of Hendricks Regional Health Foundation, and Vice
Chairman of Suburban Health Organization in Danville, Indiana, since 1974.
W. Thomas Harmon (age 64) has served as the co-owner, Vice President,
Treasurer and Secretary of Crawfordsville Town & Country Homecenter, Inc. in
Crawfordsville, Indiana, since 1978. Mr. Harmon is also a co-owner and officer
of RGW, Inc., in Crawfordsville, a company that develops real estate
subdivisions and manages apartment rental properties, a position he has held
since 1965.
Jerry Holifield (age 62) became Chairman of the Board of the Bank in
December, 1999 and has been the School Superintendent of the Plainfield
Community School Corporation since 1991.
David E. Mansfield (age 61) has served as Vice President of Excel Group in
Greenwood, Indiana (sales and servicing of petroleum equipment) since 2003;
theretofore he served as an Administrative Supervisor for Marathon Oil Company
since 1973.
John C. Milholland (age 67) is a retired school administrator and real
estate broker. He served as Principal of Frankfort Senior High School in
Frankfort, Indiana from 1989 until 2001.
T. Tim Unger (age 63) has been President, Chief Executive Officer and
Chairman of the Board of the Holding Company since 1998, and President and Chief
Executive Officer of the Bank since January, 1996. Previously, Mr. Unger served
as President and Chief Executive Officer of Summit Bank of Clinton County from
1989 through 1995.
John L. Wyatt, CLU (age 67) is a Senior Agent for Northwestern Mutual
Financial Network where he has been employed since 1960.
The Bank also has a director emeritus program pursuant to which our former
directors may continue to serve as advisors to the Board of Directors upon their
retirement or resignation from the Board. Currently, Fred W. Carter, Edward E.
Whalen and Wayne E. Kessler serve as directors emeritus of the Bank.
The Board of Directors and its Committees
During the fiscal year ended December 31, 2003, the Board of Directors of
the Holding Company met or acted by written consent 14 times. No director
attended fewer than 75% of the aggregate total number of meetings during the
last fiscal year of the Board of Directors of the Holding Company held while he
served as director and of meetings of committees which he served during that
fiscal year. The Board of Directors of the Holding Company has an
Audit/Compliance Committee, a Compensation Committee, a Stock Compensation
Committee and an Executive/Governance/Nominating Committee, among its other
Board Committees. All committee members are appointed by the Board of Directors.
The Audit/Compliance Committee, the members of which are W. Thomas Harmon,
Dennis W. Dawes, David E. Mansfield and Jerry R. Holifield, recommends the
appointment of the Holding Company's independent accountants, and meets with
them to outline the scope and review the results of such audit. It also approves
internal audit reports, compliance reviews and training schedules. The
Audit/Compliance Committee met five times during the fiscal year ended December
31, 2003.
The Stock Compensation Committee administers the Option Plan and the RRP.
The Stock Compensation Committee met or acted by written consent one time during
fiscal 2003. The Holding Company's Compensation Committee establishes
compensation for the Holding Company's executive officers. It met one time at
the Bank level during fiscal 2003. It was established at the Holding Company
level in 2004. The members of these Committees are Messrs. Harmon, Holifield,
Mansfield and Milholland. All of these Committee members met the standards for
independence for compensation committee members set forth in the Listing
Standards of the National Association of Securities Dealers.
The Executive/Governance/Nominating Committee selects the individuals who
will run for election to the Holding Company's Board of Directors each year. Its
members for this year's nominations were Dennis W. Dawes, Lester N. Bergum, Jr.,
and John L. Wyatt. It met twice during 2003. All of these members meet the
standards for independence for nominating committee members set forth in the
Listing Standards of the National Association of Securities Dealers. The
Executive/Governance/ Nominating Committee does not have a separate charter but
it has Duties and Responsibilities that are available at www.lincolnbank.biz.
Although the Nominating Committee will consider nominees recommended by
shareholders, it has not actively solicited recommendations for nominees from
shareholders nor has it established procedures for this purpose, as it will
address nomination on a case by case basis. When considering a potential
candidate for membership on the Holding Company's Board of Directors, the
Executive/Governance/Nominating Committee considers skills in writing and
finance, business judgment, management skills, crisis response abilities,
industry knowledge, leadership and strategy/vision. The
Executive/Governance/Nominating Committee will also consider the qualification
requirements for Directors in the Holding Company's By-laws. The
Executive/Governance/Nominating Committee does not have specific minimum
qualifications that must be met by an Executive/Governance/Nominating
Committee-recommended candidate other than those prescribed by the By-laws and
it has no specific process for identifying such candidates. There are no
differences in the manner in which the Executive/Governance/Nominating Committee
evaluates a candidate that is recommended for nomination for membership on the
Holding Company's Board of Directors by a shareholder. The
Executive/Governance/Nominating Committee has not received any recommendations
from any of the Holding Company's shareholders in connection with the Annual
Meeting.
Article III, Section 12 of the Holding Company's By-Laws provides that
shareholders entitled to vote for the election of directors may name nominees
for election to the Board of Directors but there are certain requirements that
must be satisfied in order to do so. Among other things, written notice of a
proposed nomination must be received by the Secretary of the Holding Company not
less than 120 days prior to the Annual Meeting; provided, however, that in the
event that less than 130 days' notice or public disclosure of the date of the
meeting is given or made to shareholders (which notice or public disclosure
includes the date of the Annual Meeting specified in the Holding Company's
By-Laws if the Annual Meeting is held on such date), notice must be received not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
The Holding Company has adopted a policy for its shareholders to send
written communications to the Holding Company's directors. Under this policy,
shareholders may send written communications in a letter by first-class mail
addressed to any director at the Holding Company's main office. The Holding
Company has also adopted a policy that strongly encourages its directors to
attend each Annual Meeting of shareholders. All of the Holding Company's
directors attended the Annual Meeting of shareholders on April 22, 2003.
Audit/Compliance Committee Report, Charter, and Independence
Audit/Compliance Committee Report. The Audit/Compliance Committee reports
as follows with respect to the audit of the Holding Company's financial
statements for the fiscal year ended December 31, 2003, included in the Holding
Company's Shareholder Annual Report ("2003 Audited Financial Statements"):
The Committee has reviewed and discussed the Holding Company's 2003
Audited Financial Statements with the Holding Company's management.
The Committee has discussed with its independent auditors, BKD, LLP,
the matters required to be discussed by Statement on Auditing Standards 61,
which include, among other items, matters related to the conduct of the
audit of the Holding Company's financial statements.
The Committee has received written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard No.
1 (which relates to the auditor's independence from the Holding Company and
its related entities) and has discussed with the auditors the auditors'
independence from the Holding Company. The Committee considered whether the
provision of services by its independent auditors, other than audit
services including reviews of Forms 10-Q, is compatible with maintaining
the auditors' independence.
Based on review and discussions of the Holding Company's 2003 Audited
Financial Statements with management and with the independent auditors, the
Audit/Compliance Committee recommended to the Board of Directors that the
Holding Company's 2003 Audited Financial Statements be included in the
Holding Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003.
This Report is respectfully submitted by the Audit/Compliance
Committee of the Holding Company's Board of Directors.
Audit/Compliance Committee Members
----------------------------------
W. Thomas Harmon
Dennis W. Dawes
David E. Mansfield
Jerry R. Holifield
Audit/Compliance Committee Charter. The Board of Directors has adopted a
written charter for the Audit/Compliance Committee. The Board of Directors
reviews and approves changes to the Audit/Compliance Committee Charter annually.
A copy of that Charter is attached hereto as Exhibit A.
Independence of Audit/Compliance Committee Members. The Holding Company's
Audit/Compliance Committee is comprised of Messrs. Harmon, Dawes, Mansfield and
Holifield. Each of these members meets the requirements for independence set
forth in the Listing Standards of the National Association of Securities
Dealers. The Holding Company does not have a director on its Audit Committee who
is a "financial expert" as that term is defined in Item 401(h)(2) of Regulation
S-K promulgated under the Securities Exchange Act of 1934. The Holding Company's
Board of Directors has selected directors to serve on the Audit Committee based
on the Board's determination that they are fully qualified to supervise the
Holding Company's independent auditors, to monitor the Holding Company's
internal accounting operations, and to take steps resulting in financial
disclosures that fairly present the Holding Company's financial condition and
results of operations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires that the Holding Company's officers and directors and persons
who own more than 10% of the Holding Company's Common Stock file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10% shareholders are required
by SEC regulations to furnish the Holding Company with copies of all Section
16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Holding Company believes that during the
fiscal year ended December 31, 2003, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner.
Code of Ethics
The Holding Company has adopted a Code of Ethics that applies to all
employees, including the principal executive, financial and accounting officers
and to all directors. A copy of the Code of Ethics is attached to this Annual
Report on Form10-K as Exhibit 14.
Item 11. Executive Compensation.
Management Remuneration and Related Transactions
Remuneration of Named Executive Officers
During the fiscal year ended December 31, 2003, no cash compensation was
paid directly by the Holding Company to any of its executive officers. Each of
such officers was compensated by the Bank.
The following tables set forth information as to annual, long term and
other compensation for services in all capacities to the President and Chief
Executive Officer of the Holding Company, the Chief Financial Officer,
Secretary/Treasurer and Vice Presidents for the last three fiscal years or the
fiscal years during which they served as executive officers (the "Named
Executive Officers"). There were no other executive officers of the Holding
Company who earned over $100,000 in salary and bonuses during the fiscal year
ended December 31, 2003.
Summary Compensation Table
Annual Compensation
Long Term Compensation
Annual Compensation Awards
-------------------------------------- ---------------------------------------
Other All
Annual Restricted Securities Other
Name and Fiscal Compen- Stock Underlying Compen-
Principal Position Year Salary ($)(1) Bonus ($) sation($)(2) Awards($) Options(#) sation($)(3)
- ---------------------- ------- ------------- --------- ------------ ---------- ---------- ------------
T. Tim Unger, 2003 $205,000 $10,250 -- -- -- $8,670
President and Chief 2002 $194,000 $38,800 -- -- -- $8,189
Executive Officer 2001 $185,000 $37,000 -- -- -- $8,010
John M. Baer, Chief 2003 $124,441 $ 4,148 -- -- -- $3,717
Financial Officer, 2002 $119,655 $17,948 -- -- -- $3,576
Secretary and 2001 $115,609 $17,341 -- -- -- $3,456
Treasurer
Rebecca J. Morgan 2003 $ 99,038 $ 3,301 -- -- -- $2,843
Vice President 2002 $ 95,000 $14,250 -- -- -- $2,596
Paul S. Siebenmorgen 2003 $121,095 $ 4,037 -- -- -- $3,617
Vice President 2002 $117,000 $17,550 -- -- -- $3,496
- ------------------
(1) Mr. Unger does not receive any directors fees. Includes amounts deferred
pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Code") under the Bank's 401(k) Plan.
(2) The Named Executive Officers received certain perquisites, but the
incremental cost of providing such perquisites did not exceed the lesser of
$50,000 or 10% of their salary and bonus.
(3) All Other Compensation includes the Bank's matching contributions under its
401(k) Plan and, in Mr. Unger's case, insurance premiums paid by the Bank
for a policy on his life with his wife as beneficiary.
The following table includes the number of shares covered by exercisable
and unexercisable stock options held by the Named Executive Officers as of
December 31, 2003. Also reported are the values for "in-the-money" options
(options whose exercise price is lower than the market value of the shares at
fiscal year end) which represent the spread between the exercise price of any
such existing stock options and the fiscal year-end market price of the stock.
Outstanding Stock Option Grants and Value Realized as of 12/31/03
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End (#) Fiscal Year End ($) (1)
---------------------------------------- ---------------------------------------
Name Exercisable Unexercisable(2) Exercisable Unexercisable(2)
- ---- ----------- ---------------- ----------- ----------------
T. Tim Unger 140,184 35,047 $1,044,371 $261,100
John M. Baer 40,000 20,092 $ 298,000 $149,685
Rebecca J. Morgan 12,800 3,200 $ 95,360 $ 23,840
Paul S. Siebenmorgen 12,000 8,000 $ 82,650 $ 55,100
- ------------------------------
(1) Amounts reflecting gains on outstanding options are based on the closing
price per share for the shares on December 30, 2003, which was $19.95 per
share.
(2) The shares represented could not be acquired by the Named Executive
Officers as of December 31, 2003.
No stock options were granted to or exercised by the Named Executive
Officers during fiscal 2003.
Employment Contract
The Bank entered into a three-year employment contract with Mr. Unger and a
two-year contract with Mr. Baer, Mrs. Morgan, and Mr. Siebenmorgen (the
"Executives"). The contracts extend annually for an additional one-year term to
maintain their three- or two-year terms if the Bank's Board of Directors
determines to so extend them, unless notice not to extend is properly given by
either party to the contract. The Executives receive their current salary under
the contract with the Bank, subject to increases approved by the Board of
Directors. The contracts also provide, among other things, for participation in
other fringe benefits and benefit plans available to the Bank's employees. The
Executives may terminate their employment upon 60 days' written notice to the
Bank. The Bank may discharge the Executives for cause (as defined in the
contract) at any time or in certain specified events. If the Bank terminates an
Executive's employment for other than cause or if an Executive terminates his
own employment for cause (as defined in the contract), the Executive will
receive his base compensation under the contract for an additional three years
if the termination follows a change of control in the Holding Company, and for
the balance of the contract if the termination does not follow a change in
control. In addition, during such period, the Executive will continue to
participate in the Bank's group insurance plans and retirement plans, or receive
comparable benefits. Moreover, within a period of three months after such
termination following a change of control, the Executive will have the right to
cause the Bank to purchase any stock options he holds for a price equal to the
fair market value (as defined in the contract) of the shares subject to such
options minus their option price. If the payments provided for in the contract,
together with any other payments made to the Executive by the Bank, are deemed
to be payments in violation of the "golden parachute" rules of the Code, such
payments will be reduced to the largest amount which would not cause the Bank to
lose a tax deduction for such payments under those rules. As of the date hereof,
the cash compensation which would be paid under the contract to each Executive
if the contract were terminated after a change of control of the Holding
Company, without cause by the Bank or for cause by the Executive, would be
$639,000 for Mr. Unger, $386,400 for Mr. Baer, $315,000 for Mrs. Morgan, and
$376,005 for Mr. Siebenmorgen. For purposes of these employment contracts, a
change of control of the Holding Company is generally an acquisition of control,
as defined in regulations issued under the Change in Bank Control Act and the
Savings and Loan Holding Company Act.
The employment contracts protect the Bank's confidential business
information and protect the Bank from competition by the Executives should they
voluntarily terminate their employment without cause or be terminated by the
Bank for cause.
Compensation of Directors
Non-employee directors of the Holding Company receive director fees of
$3,520 per year. The Bank pays its non-employee directors an annual retainer of
$12,300 plus $480 for each regular meeting attended and $240 for each committee
meeting attended, with a maximum of $2,580 in annual committee fees. The Bank's
directors emeritus receive a $1,000 annual retainer. Total fees paid to
directors and directors emeritus for the year ended December 31, 2003 were
$166,240.
The Bank's directors and directors emeritus may, pursuant to a deferred
compensation agreement, defer payment of some or all of their directors fees,
bonuses or other compensation into a retirement account. Under this agreement,
deferred directors fees are to be distributed either in a lump-sum payment or in
equal annual or monthly installments over any period of from five to ten years.
The lump sum or first installment is payable to the director, at the director's
discretion, on the first day of the calendar year immediately following the year
in which he ceases to be a director, or in the year in which the director
attains that age specified by the retirement income test of the Social Security
Act. Any additional installments will be paid on the first day of each
succeeding year thereafter. At present, the following directors participate in
the deferred compensation plan: Lester N. Bergum, Jr., W. Thomas Harmon and John
C. Milholland.
The Bank has also adopted a Deferred Director Supplemental Retirement Plan
(the "Supplemental Plan") which provides for the continuation of directors fees
to a director upon the later of a director's attainment of age 70 or the date on
which he ceases to be a director. A director's interest in the Supplemental Plan
will vest gradually over a five-year period commencing upon the director's
completion of five years of service on our board. Upon completing nine years of
service, the director's interest in the Supplemental Plan will be fully vested.
The interests of directors who, as of December 1, 1997, had served at least one
year on the Board vested immediately upon the adoption of the Supplemental Plan.
The benefits payable to a director under the Supplemental Plan are calculated by
multiplying the director's vested percentage times the rate of directors fees
paid to the director immediately prior to his attainment of age 70 or, if
earlier, the date his status as a director terminated. In the event that a
director's death occurs prior to the commencement of payments under the
Supplemental Plan, the director's designated beneficiary shall receive a monthly
payment calculated by multiplying the director's vested percentage times the
rate of directors fees in effect immediately prior to the director's death or,
if earlier, the date on which his status as a director terminated. Payments
under the Supplemental Plan will continue for 120 months.
Pension Plan
The Bank's full-time employees are included in the Pension Plan. Separate
actuarial valuations are not made for individual employer members of the Pension
Plan. The Bank's employees are eligible to participate in the plan once they
have attained the age of 21 and completed one year of service for the Bank and
provided that the employee is expected to complete a minimum of 1,000 hours of
service in the 12 consecutive months following his enrollment date. An
employee's pension benefits are 100% vested after five years of service.
The Pension Plan provides for monthly or lump sum retirement benefits
determined as a percentage of the employee's average salary times his years of
service. Salary includes base annual salary as of each January 1, exclusive of
overtime, bonuses, fees and other special payments. Early retirement,
disability, and death benefits are also payable under the Pension Plan,
depending upon the participant's age and years of service. The Bank recorded
expenses totaling $260,996 for the Pension Plan during the fiscal year ended
December 31, 2003.
The estimated base annual retirement benefits presented on a straight-line
basis payable at normal retirement age (65) under the Pension Plan to persons in
specified salary and years of service classifications are as follows (benefits
noted in the table are not subject to any offset).
Career Years of Service
Average -------------------------------------------------------------------------------------------
Compensation 15 20 25 30 35 40 45
-------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
$120,000 27,000 36,000 45,000 54,000 63,000 72,000 81,000
140,000 31,500 42,000 52,500 63,000 73,500 84,000 94,500
160,000 36,000 48,000 60,000 72,000 84,000 96,000 108,000
180,000 40,500 54,000 67,500 81,000 94,500 108,000 121,500
200,000 45,000 60,000 75,000 90,000 105,000 120,000 135,000
220,000 49,500 66,000 82,500 99,000 115,500 132,000 148,500
240,000 54,000 72,000 90,000 108,000 126,000 144,000 162,000
Benefits are currently subject to maximum Code limitations of $160,000 per
year. The years of service credited under the Pension Plan as of December 31,
2003, to the Named Executive Officers are as follows:
Name of Executive Officer Years of Service
------------------------- ----------------
T. Tim Unger 8
John M. Baer 7
Rebecca J. Morgan 5
Paul S. Siebenmorgen 4
Joint Report of the Compensation Committee and the Stock Compensation
Committee
The Compensation Committee of the Bank's Board of Directors was comprised
during fiscal 2003 of Messrs. Harmon, Holifield, Mansfield and Milholland.
During fiscal 2004 this Compensation Committee was established at the Holding
Company level. The Committee reviews payroll costs, establishes policies and
objectives relating to compensation, and approves the salaries of all employees,
including executive officers. All decisions by the Compensation Committee
relating to salaries of the Holding Company's executive officers are approved by
the full Board of Directors of the Bank. In fiscal 2003, there were no
modifications to Compensation Committee actions and recommendations made by the
full Board of Directors. In approving the salaries of executive officers, the
Committee has access to and reviews compensation data for comparable financial
institutions in the Midwest. Moreover, from time to time the Compensation
Committee reviews information provided to it by independent compensation
consultants in making its decisions.
The objectives of the Compensation Committee and the Stock Compensation
Committee with respect to executive compensation are the following:
(1) provide compensation opportunities comparable to those offered by
other similarly situated financial institutions in order to be able to
attract and retain talented executives who are critical to the Holding
Company's long-term success;
(2) reward executive officers based upon their ability to achieve
short-term and long-term strategic goals and objectives and to enhance
shareholder value; and
(3) align the interests of the executive officers with the long-term
interests of shareholders by granting stock options which will become
more valuable to the executives as the value of the Holding Company's
shares increases.
At present, the Holding Company's executive compensation program is
comprised of base salary and annual incentive bonuses. The Option Plan and the
RRP provide long-term incentive bonuses in the form of stock options and awards
of Common Stock. Reasonable base salaries are awarded based on salaries paid by
comparable financial institutions, particularly in the Midwest, and individual
performance. The annual incentive bonuses are tied to the Holding Company's
performance in the areas of growth, profit, quality, and productivity as they
relate to earnings per share and return on equity for the current fiscal year,
and it is expected that stock options will have a direct relation to the
long-term enhancement of shareholder value. In years in which the performance
goals of the Holding Company are met or exceeded, executive compensation tends
to be higher than in years in which performance is below expectations.
Base Salary. Base salary levels of the Holding Company's executive officers
are intended to be comparable to those offered by similar financial institutions
in the Midwest. In determining base salaries, the Compensation Committee also
takes into account individual experience and performance.
Mr. Unger was the Holding Company's Chief Executive Officer throughout
fiscal 2003. Mr. Unger received a base salary of $194,000 in 2002 and $205,000
in 2003.
Annual Incentive Bonuses. Under the Holding Company's Annual Incentive
Plan, all qualifying employees of the Holding Company receive a cash bonus for
any fiscal year in which the Holding Company achieves certain goals, as
established by the Board of Directors, in the areas of growth, profit, quality
and productivity as they relate to earnings per share and return on equity.
Individual bonuses are equal to a percentage of the employee's base salary,
which percentage varies with the extent to which the Holding Company exceeds
these goals for the fiscal year.
The Holding Company believes that this program provides an excellent link
between the value created for shareholders and the incentives paid to
executives, since executives may not receive bonuses unless the above-mentioned
goals are achieved and since the level of those bonuses will increase with
greater achievement of those goals.
Mr. Unger's bonus for fiscal 2003 was $10,250 compared to $38,800 for
fiscal 2002.
Stock Options. The Option Plan is intended to align executive and
shareholder long-term interests by creating a strong and direct link between
executive pay and shareholder return, and enabling executives to acquire a
significant ownership position in the Holding Company's Common Stock. Stock
options are granted at the prevailing market price and will only have a value to
the executives if the stock price increases. The Stock Compensation Committee
has determined and will determine the number of option grants to make to
executive officers based on the practices of comparable financial institutions
as well as the executive's level of responsibility and contributions to the
Holding Company.
RRP. The RRP is intended to provide directors and officers with an
ownership interest in the Holding Company in a manner designed to encourage them
to continue their service with the Holding Company. In fiscal 1999, the Bank
contributed funds to the RRP to enable the RRP to acquire 280,370 shares of
Common Stock. Of these shares, 245,124 have been awarded to the Holding
Company's directors and officers, and vest gradually over a five-year period at
a rate of 20% of the shares awarded at the end of each 12-month period of
service by the director or officer with the Holding Company. In fiscal 1999, Mr.
Unger received an award of 56,074 shares, 44,859 of which have vested as of the
date hereof. This gradual vesting of a director's or officer's interest in the
shares awarded under the RRP is intended to create a long-term incentive for the
director or officer to continue his service with the Holding Company.
Finally, the Committee notes that Section 162(m) of the Code, in certain
circumstances, limits to $1 million the deductibility of compensation, including
stock-based compensation, paid to top executives by public companies. None of
the compensation paid to the executive officers named in the compensation table
on page seven for fiscal 2003 exceeded the threshold for deductibility under
section 162(m).
The Compensation Committee and the Stock Compensation Committee believe
that linking executive compensation to corporate performance results in a better
alignment of compensation with corporate goals and the interests of the Holding
Company's shareholders. As performance goals are met or exceeded, most probably
resulting in increased value to shareholders, executives are rewarded
commensurately. The Committee believes that compensation levels during fiscal
2003 for executives and for the chief executive officer adequately reflect the
Holding Company's compensation goals and policies.
Compensation Committee Members Stock Compensation Committee Members
------------------------------ ------------------------------------
W. Thomas Harmon W. Thomas Harmon
Jerry R. Holifield Jerry R. Holifield
David E. Mansfield David E. Mansfield
John C. Milholland John C. Milholland
Performance Graph
The following graph shows the performance of the Holding Company's Common
Stock since December 31, 1998, in comparison to the NASDAQ Combined Bank Index,
KBW Bank Index and the SNL Thrift Index.
(chart omitted)
Relative Return* Analysis
1999-2003
Nasdaq
Combined SNL
Bank Thrift
LNCB BKX Index Index
------ ------- --------- ------
12/31/98 100% 100% 100% 100%
03/31/99 96% 105% 95% 100%
06/30/99 114% 112% 102% 99%
09/30/99 109% 94% 92% 86%
12/31/99 97% 97% 93% 80%
03/31/00 91% 100% 84% 77%
06/30/00 92% 92% 83% 80%
09/30/00 110% 112% 99% 102%
12/31/00 118% 114% 108% 124%
03/31/01 122% 108% 105% 125%
06/30/01 130% 115% 117% 137%
09/30/01 142% 100% 115% 135%
12/31/01 164% 109% 119% 130%
03/31/02 160% 114% 130% 143%
06/30/02 159% 106% 134% 159%
09/30/02 172% 89% 123% 139%
12/31/02 153% 96% 125% 152%
03/31/03 156% 91% 122% 155%
06/30/03 167% 110% 138% 179%
09/30/03 177% 113% 146% 189%
12/31/03 183% 126% 164% 210%
* $100 invested on 12/31/98 in Stock or Index
Including Reinvestment of Dividends
Fiscal Year Ending December 31
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Equity Compensation Plan Information
The following table provides information, as of December 31, 2003,
regarding the securities authorized for issuance under the Company's equity
compensation plans.
Number of securities
Number of remaining available for
securities to be Weighted-average future issuance under
issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
- ------------------------- ----------------------- -------------------- --------------------------
Equity compensation
plans approved by
security holders 545,695 (1) $12.55 114,330
60,554 (2) 35,246
Equity compensation
plans not approved
by security holders -- -- --
------- ------- -------
Total 606,249 $12.55 (3) 149,576
======= ====== =======
- -----------------------
(1) The Lincoln Bancorp Stock Option Plan.
(2) The Lincoln Bancorp Recognition and Retention Plan and Trust ("RRP").
Column (a) includes 60,554 shares granted to management that have not yet
vested.
(3) The total in column (b) includes only the weighted-average price of stock
options, as the restricted shares awarded under the RRP have no exercise
price.
Voting Securities and Principal Holders Thereof
On March 1, 2004, there were 4,411,991 shares of the Common Stock issued
and outstanding, and the Holding Company had no other class of equity securities
outstanding. The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 1, 2004, by each person who
is known by the Holding Company to own beneficially 5% or more of the Common
Stock. Unless otherwise indicated, the named beneficial owner has sole voting
and dispositive power with respect to the shares.
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner(1) Beneficially Owned of Class
- ---------------------- ------------------ --------
HomeFederal Bank, as Trustee
501 Washington Street
Columbus, Indiana 47201 553,833 (2) 12.5%
T. Tim Unger
P.O. Box 510
1121 East Main Street
Plainfield, Indiana 46168 262,598 (3) 5.8%
- ---------------------------
(1) The information in this chart is based on Schedule 13G Reports filed by the
above-listed person with the Securities and Exchange Commission (the "SEC")
containing information concerning shares held by it. It does not reflect
any changes in those shareholdings which may have occurred since the date
of such filings.
(2) These shares are held by the Trustee of the Lincoln Bancorp Employee Stock
Ownership Plan and Trust (the "ESOP"). The Employees participating in that
Plan are entitled to instruct the Trustee how to vote shares held in their
accounts under the Plan. Unallocated shares held in a suspense account
under the Plan are required under the Plan terms to be voted by the Trustee
in the same proportion as allocated shares are voted.
(3) Includes 44,859 shares held jointly by Mr. Unger and his spouse, 11,215
shares held under the Lincoln Bank Recognition and Retention Plan and Trust
(the "RRP"), options for 140,184 shares granted under the Lincoln Bancorp
Stock Option Plan (the "Option Plan"), and 13,840 shares allocated to Mr.
Unger's account under the ESOP as of December 31, 2003. Does not include
options for 35,047 shares granted under the Option Plan which are not
exercisable within 60 days of March 1, 2004.
Information on the security ownership of management is incorporated herein
by reference to Item 10 above.
Item 13. Certain Relationships and Related Transactions.
Transactions With Certain Related Persons
The Bank follows a policy of offering to its directors, officers, and
employees real estate mortgage loans secured by their principal residence as
well as other loans. Current law authorizes the Bank to make loans or extensions
of credit to its executive officers, directors, and principal shareholders on
the same terms that are available with respect to loans made to all of its
employees. At present, the Bank offers loans to its executive officers,
directors, principal shareholders and employees with an interest rate that is
..5% lower than the rate generally available to the public, but otherwise with
substantially the same terms as those prevailing for comparable transactions,
except that in order to receive the .5% discount, monthly payments must be
automatically deducted from the employee's checking account. All loans to
directors and executive officers must be approved in advance by a majority of
the disinterested members of the Board of Directors. Loans to directors,
executive officers and their associates totaled approximately $1,372,000, or
1.7% of equity capital at December 31, 2003.
The law firm Robison Robison Bergum & Johnson, based in Frankfort, Indiana,
of which Lester N. Bergum, Jr., a director of the Holding Company is a partner,
serves as counsel to the Bank in connection with loan foreclosures, title
searches, collection services, and related matters in Frankfort, Clinton County,
Indiana. The Bank expects to continue using the services of the law firm for
such matters in the current fiscal year.
Item 14. Principal Accountant Fees and Servicer.
BKD, LLP has served as auditors for the Bank since November 30, 1975, and
for the Holding Company since its formation in 1998. The Holding Company
believes that a representative of BKD, LLP will be present at the Annual Meeting
with the opportunity to make a statement if he or she so desires. He or she will
also be available to respond to any appropriate questions shareholders may have.
The Board of Directors of the Holding Company has selected BKD, LLP to audit its
books, records and accounts for the fiscal year ended December 31, 2004.
Accountant's Fees
Audit Fees. The firm of BKD, LLP ("BKD") served as our independent public
accountants for each of our last two fiscal years ended December 31, 2002 and
2003. The aggregate fees billed by BKD for the audit of our financial statements
included in our annual report on Form 10-K and for the review of our financial
statements included in our quarterly reports on Form 10-Q for our fiscal years
ended December 31, 2002 and 2003, were $83,726 and $68,087, respectively.
Audit-Related Fees. BKD did not perform any assurance or other
audit-related services for us for 2003 or 2002.
Tax Fees. The aggregate fees billed in each of fiscal 2002 and 2003 for
professional services rendered by BKD for tax compliance, tax advice or tax
planning were $60,700 and $12,625, respectively.
All Other Fees. Fees billed in fiscal 2002 or 2003 for professional
services rendered by BKD, except as disclosed above, were $33,571 and $34,125,
respectively.
Board of Directors Pre-Approval. Our Board of Directors/Audit Committee
formally adopted resolutions pre-approving our engagement of BKD to act as our
independent auditor for the last two fiscal years ended December 31, 2003. The
Audit Committee has not adopted pre-approval policies and procedures in
accordance with paragraph (c) (7) (I) of Rule 2-01 of Regulation S-X, because it
anticipates that in the future the engagement of BKD will be made by the Audit
Committee and all non-audit and audit services to be rendered by BKD will be
pre-approved by the Audit Committee. Our independent auditors performed all work
described above with their respective full-time, permanent employees.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
(1) Financial Statements:
(2) Financial Statement Schedules:
(3) Exhibits:
The exhibits listed in the Exhibit Index are filed with or incorporated herein by reference.
Independent Accountants' Report.................................. See Shareholder Annual Report
Page 22
Consolidated Balance Sheets at December 31, 2003
and 2002................................................ See Shareholder Annual Report
Page 23
Consolidated Statements of Income for the Years
Ended December 31, 2003, 2002 and 2001.................. See Shareholder Annual Report
Page 24
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2003, 2002
and 2001................................................ See Shareholder Annual Report
Page 25
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 2003,
2002 and 2001........................................... See Shareholder Annual Report
Page 26
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2003, 2002 and 2001.................. See Shareholder Annual Report
Page 27
Notes to Consolidated Financial Statements....................... See Shareholder Annual Report
Page 28-45
(b) Reports on Form 8-K.
The Holding Company filed a Current Report on Form 8-K on October 24,
2003, to furnish the earnings release it issued on that date
announcing its results of operations for the quarter ended September
30, 2003.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
LINCOLN BANCORP
Date: March 30, 2004 By:/s/ T. Tim Unger
----------------------------------
T. Tim Unger, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 30th day of March 2004.
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 Secretary and Treasurer )
------------------------------ )
John M. Baer ) March 30, 2004
)
)
)
(3) The Board of Directors: )
)
)
/s/ Lester N. Bergum, Jr. Director )
------------------------------ )
Lester N. Bergum, Jr. )
)
)
/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/ David E. Mansfield Director )
------------------------------ )
David E. Mansfield )
)
) March 30, 2004
/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 (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 (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 (incorporated by reference to
Exhibit 10(2) to the S-1 Registration Statement).
(3) Lincoln Federal Savings Bank Recognition and Retention Plan and
Trust (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 (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 (incorporated by reference to Exhibit 10(5) to
the S-1 Registration Statement).
(6) ESOP Loan Commitment by Lincoln Bancorp and Exempt Loan and Share
Purchase Agreement, effective as of July 1, 1998, between Trust
under Lincoln Bancorp Exempt Stock Ownership Plan and Trust
Agreement and Lincoln Bancorp (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) (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) (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 (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 (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 (incorporated by reference to Exhibit 10(11) to the
2000 Annual Report on Form 10-K filed with the Commission on
April 2, 2001 (the "2000 10-K")).
(12)* Employment Agreement, dated January 16, 2001, between Lincoln
Federal Savings Bank and Rebecca M. Morgan (incorporated by
reference to Exhibit 10(12) to the 2000 10-K).
(13)* Employment Agreement, dated January 20, 2004, between Lincoln
Bank and Paul S. Siebenmorgen.
13 2003 Shareholder Annual Report
14 Ethics Policy
21 Subsidiaries of Registrant (incorporated by reference to Exhibit
21 to the 2002 Annual Report on Form 10-K filed with the
Commission on March 31, 2003).
23 Consent of Independent Accountants
31 (1) Certification
31 (2) Certification
32 Certification
* Compensation plans or arrangements in which directors or executive officers
are eligible to participate.