10-K 1 lin_10k.txt 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.