CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (this "Agreement") is made as of the
______ day of ________________________, 2000, (the "Effective Date") by and
between LAKELAND FINANCIAL CORPORATION, an Indiana corporation, (the
"Company") and __________________________ (the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company and its Affiliates will have the continued dedication of the
Executive, notwithstanding the possibility, threat or occurrence of a Change
in Control (as defined below) of the Company.
B. The Executive is currently serving as an Executive of the
Company or one of its Affiliates.
C. The Company desires to continue to employ the Executive as
an Executive of the Company or one of its Affiliates and the Executive is
willing to continue such employment.
D. The Company recognizes that circumstances may arise in which a
change of control of the Company through acquisition or otherwise may occur
thereby causing uncertainty of employment without regard to the competence or
past contributions of the Executive, which uncertainty may result in the loss
of valuable services of the Executive, and the Company and the Executive wish
to provide reasonable security to the Executive against changes in the
employment relationship in the event of any such change in control.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter contained, it is covenanted and agreed by and
between the parties hereto as follows:
1. Payment of Severance Amount. If the Executive's employment by
the Company, or any Affiliate or successor of the Company, is terminated by
either the Company or the Executive during the time periods set forth in
subparagraphs (a) and (b) below, then the Company shall pay the Executive an
amount equal to the Change in Control Severance Amount, payable in one (1)
lump sum within fifteen (15) days after the Executive's termination of
employment:
(a) termination by the Company, or any Affiliate or successor of
the Company, without Cause, within either twelve (12) months
prior to a Change in Control or twelve (12) months immediately
following a Change in Control; or
(b) termination by the Executive, for any reason, within twelve
(12) months immediately following a Change in Control.
2. Definitions. As used throughout this Agreement, all of the terms
defined in this paragraph 2 shall have the meanings given below.
A. The "Act" shall mean the Securities Exchange Act of
1934, as amended.
B. An "Affiliate" shall mean any entity which owns or
controls, is owned by or is under common ownership or control with,
the Company.
C. A "Change in Control" shall mean a Change in Control
of a nature such that (1) it would be required to be reported by a
person or entity subject to the reporting requirements of Section 14(a)
of the Act in response to Schedule 14A of Regulation 14A, or successor
provisions thereto, as in effect on the date hereof, (2) a "person" or
"group" (as those terms are used in Sections 13(d) and 14(d) of the
Act), is or becomes the "beneficial owner" (as defined in Rule 13d-3
issued under the Act), directly or indirectly, of securities of the
Company, representing in excess of thirty percent (30%) of the voting
securities of the Company then outstanding, followed by the election
by said person or group of one or more representatives to the Board;
(3) a person or group, as hereinabove defined, is or becomes the
beneficial owner, directly or indirectly, of securities of the Company,
representing in excess of fifty percent (50%) of the voting securities
of the Company then outstanding, whether or not followed by the
election by said person or group of one or more representatives to the
Board; or (4) any other event, including but not limited to those set
forth in paragraphs (1) through (3) above, which shall have the effect
of placing control of the business and affairs of the Company in a
person or group as hereinabove defined, other than or different from
the present shareholders of the Company.
Notwithstanding the foregoing, a Change in Control shall not
be deemed to occur solely because fifty-one percent (51%) or more of
the combined voting power of the then outstanding securities of the
Company are acquired by: (1) a trustee or other fiduciary holding
securities under one or more employee benefit plans maintained for
employees of the Company or its Affiliates; or (2) any corporation
which, immediately prior to such acquisition, is owned directly or
indirectly by the stockholders in the same proportion as their
ownership of stock immediately prior to such acquisition.
D. "Change in Control Severance Amount" shall mean the
amount equal to two (2) times the sum of (i) the greater of the
Executive's then current annual base salary or the Executive's annual
base salary as of the date one (1) day prior to his or her Termination
Date and (ii) fifteen percent (15%) [twenty percent (20%)] of the
amount determined under (i) above.
E. "Cause" shall mean only a termination by the Company
or an Affiliate as a result of the Executive's fraud, misappropriation
of or intentional material damage to the property or business of the
Company (including its Affiliates), substantial and material failure
by the Executive to fulfill the duties and responsibilities of his or
her regular position and/or comply with the Company's or its
Affiliates' policies, rules or regulations, or the Executive's
conviction of a felony.
2
F. "Termination Date" shall mean the date of employment
termination indicated in the written notice provided by the Company or
the Executive to the other.
3. Medical and Dental Benefits. If the Executive is entitled to a
Change in Control Severance Amount hereunder, then to the extent that the
Executive or any of the Executive's dependents may be covered nder the terms
of any medical and dental plans of the Company (or any Affiliate) for active
employees immediately prior to the Termination Date, the Company will provide
the Executive and those dependents with equivalent coverages for a period not
to exceed twenty-four (24) months from the Termination Date. The coverages may
be procured directly by the Company (or any Affiliate, if appropriate) apart
from, and outside of the terms of the plans themselves; provided that the
Executive and the Executive's dependents comply with all of the conditions of
the medical or dental plans. In the event the Executive or any of the
Executive's dependents become eligible for coverage under the terms of any
other medical and/or dental plan of a subsequent employer which plan benefits
are comparable to Company (or any Affiliate) plan benefits, coverage under the
Company's (or any Affiliate's) plans will cease for the Executive and/or
dependent. The Executive and Executive's dependents must notify the Company
(or any Affiliate) of any subsequent employment and provide information
regarding medical and/or dental coverage available. In the event the Company
(or any Affiliate) discovers that the Executive and/or dependent has become
employed and not provided the above notification, all payments and benefits
under this Agreement will cease.
4. Golden Parachute Payment Adjustment. It is the intention of the
parties that the Change in Control Severance Amount under this Agreement and
the value of all other amounts and benefits provided pursuant to a Change in
Control, either under this Agreement or any other plan or agreement to which
the Executive is a party, shall not constitute "excess parachute payments"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), and any regulations thereunder. However, if the
independent accountants acting as auditors for the Company on the date of a
Change in Control (or another accounting firm designated by the parties)
determine, in consultation with legal counsel acceptable to the parties,
that any amount payable to the Executive by the Company under this Agreement,
or any other plan or agreement under which the Executive participates or is a
party, would constitute an excess parachute payment within the meaning of
Section 280G of the Code and be subject to the "excise tax" imposed by Section
4999 of the Code, then the Company shall pay to the Executive the amount of
such excise tax and all federal and state income or other taxes with respect
to the payment of the amount f such excise tax, including all such taxes with
respect to any such additional amount. If at a later date, the Internal
Revenue Service assesses a deficiency against the Executive for the excise tax
which is greater than that which was determined at the time such amounts were
paid, the Company shall pay to the Executive the amount of such excise tax
plus any interest, penalties and professional fees or expenses, incurred by
the Executive as a result of such assessment, including all such taxes with
respect to any such additional amount. The highest marginal tax rate
applicable to individuals at the time of payment of such amounts will be used
for purposes of determining the federal and state income and other taxes with
respect thereto. The Company shall withhold from any amounts paid under this
Agreement the amount of any excise tax or other federal, state or local taxes
3
then required to be withheld. Computations of the amount of any supplemental
compensation paid under this subparagraph shall be made by the independent
public accountants then regularly retained by the Company, in consultation
with legal counsel acceptable to the parties. The Company shall pay all
accountant and legal counsel fees and expenses.
5. A. Restrictive Covenant. The Company and the Executive have
jointly reviewed the customer lists and operations of the Company and have
agreed that the primary service area of the lending and deposit taking
functions of the Company and its Affiliates in which the Executive has
actively participated extends to an area encompassing sixty (60) mile radius
from the center of Warsaw, Indiana. Therefore, as an essential ingredient of
and in consideration of this Agreement and the payment of the Change in
Control Severance Amount, the Executive hereby agrees that, except with
the express prior written consent of the Company, for a period of two (2)
years after the termination of the Executive's employment with the Company
in connection with or upon a Change in Control and the Executive's receipt
of the Change in Control Severance Amount (the "Restrictive Period"), he will
not directly or indirectly compete with the business of the Company,
including, but not by way of limitation, by directly or indirectly owning,
managing, operating, controlling, financing, or by directly or indirectly
serving as an executive, officer or director of or consultant to, or by
soliciting or inducing, or attempting to solicit or induce, any employee
or agent of the Company or an Affiliate to terminate employment and become
employed by any person, firm, partnership, corporation, trust or other entity
which owns or operates, a bank, savings and loan association, credit union
or similar financial institution (a "Financial Institution") within a fifty
(50) mile radius of the center of Warsaw, Indiana the "Restrictive Covenant").
If the Executive violates the Restrictive Covenant and the Company brings
legal action for injunctive or other relief, the Company shall not, as a
result of the time involved in obtaining such relief, be deprived of the
benefit of the full period of the Restrictive Covenant. Accordingly, the
Restrictive Covenant shall be deemed to have the duration specified in this
paragraph computed from the date the relief is granted but reduced by the time
between the period when the Restrictive Period began to run and the date of
the first violation of the Restrictive Covenant by the Executive. The
foregoing Restrictive Covenant shall not prohibit the Executive from owning
directly or indirectly capital stock or similar securities which do not
represent more than one percent (1%) of the outstanding capital stock of any
Financial Institution listed on a securities exchange or quoted on the
National Association of Securities Dealers Automated Quotation System.
Notwithstanding the above, the Restrictive Covenant will be unenforceable in
the event the Executive elects to forego and not receive the Change in Control
Severance Amount.
B. Remedies for Breach of Restrictive Covenant. The Executive
acknowledges that the restrictions contained in this paragraph are reasonable
and necessary for the protection of the legitimate business interests of the
Company and its Affiliates, that any violation of these restrictions would
cause substantial injury to the Company and such interests, that the Company
would not have entered into this Agreement with the Executive without
receiving the additional consideration offered by the Executive in binding
himself to these restrictions and that such restrictions were a material
inducement to the Company to enter into this Agreement. In the event of any
violation or threatened violation of these restrictions, the Company, in
4
addition to and not in limitation of, any other rights, remedies or damages
available to the Company under this Agreement or otherwise at law or in
equity, shall be entitled to preliminary and permanent injunctive relief to
prevent or restrain any such violation by the Executive and any and all
persons directly or indirectly acting for or with him, as the case may be.
6. Notices. Notices and all other communications under this
Agreement shall be in writing and shall be deemed given when mailed by United
States registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Company to:
Lakeland Financial Corporation
Attention: Chairman of the Board
202 East Center Street
P.O. Box 1387
Warsaw, Indiana 46580
If to the Executive to:
_________________________________
_________________________________
_________________________________
or to such other address as either party may furnish to the other in writing,
except that notices of changes of address shall be effective only upon receipt.
7. Applicable Law. This Agreement is entered into under, and
shall be governed for all purposes by, the laws of the state of Indiana.
8. Severability. If a court of competent jurisdiction determines
that any provision of this Agreement is invalid or unenforceable, then the
invalidity or unenforceability of that provision shall not affect the
validity or enforceability of any other provision of this Agreement and
all other provisions shall remain in full force and effect.
9. Withholding of Taxes. The Company may withhold from any
benefits payable under this Agreement all federal, state, city or other taxes
as may be required pursuant to any law, governmental regulation or ruling.
10. Not an Employment Agreement. Nothing in this Agreement shall
give the Executive any rights (or impose any obligations) to continued
employment by the Company or any Affiliate or successor of the Company, nor
shall it give the Company any rights (or impose any obligations) for the
continued performance of duties by the Executive for the Company or any
Affiliate or successor of the Company.
5
11. No Assignment. The Executive's rights to receive payments
or benefits under this Agreement shall not be assignable or transferable
whether by pledge, creation of a security interest or otherwise, other than a
transfer by will or by the laws of descent or distribution. In the event of
any attempted assignment or transfer contrary to this paragraph, the Company
shall have no liability to pay any amount so attempted to be assigned or
transferred. This Agreement shall inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
12. Successors. This Agreement shall be binding upon and inure
to the benefit of the Company, its successors and assigns (including, without
limitation, any company into or with which the Company may merge or
consolidate). The Company agrees that it will not effect the sale or other
disposition of all or substantially all of its assets unless either (a) the
person or entity acquiring the assets, or a substantial portion of the assets,
shall expressly assume by an instrument in writing all duties and obligations
of the Company under this Agreement, or (b) the Company shall provide,
through the establishment of a separate reserve, for the payment in full of
all amounts which are or may reasonably be expected to become payable to the
Executive under this Agreement.
13. Legal Fees. All reasonable legal fees and related expenses
(including the costs of experts, evidence and counsel) paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating
this Agreement shall be paid or reimbursed by the Company if the Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement.
14. Term. The term of this Agreement shall commence on the
Effective Date and shall continue for a period of two (2) years. This
Agreement shall automatically extend for one (1) year on each anniversary
of the Effective Date, unless terminated by either party effective as of
the last day of the then current two (2) year extension by written notice to
that effect delivered to the other not less than ninety (90) days prior to the
anniversary of the Effective Date; provided however, no termination of this
Agreement shall be effective if a Change in Control occurs within twelve (12)
months of such termination. In the event of a Change in Control during the
term of this Agreement, this Agreement shall remain in effect for the Covered
Period.
15. Amendment. This Agreement may not be amended or modified
except by written agreement signed by the Executive and the Company.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the day and year first written.
LAKELAND FINANCIAL CORPORATION
By:
---------------------------------- ----------------------------------
R. Douglas Grant [Executive]
Chairman of the Board
7
Lakeland Financial Corporation
WARSAW, INDIANA
INCORPORATED UNDER THE LAWS OF THE STATE OF
NUMBER SHARES
THIS IS THE
CERTIFIES OWNER OF
THAT
CUSIP 511656 10 0
fully paid and non-assessable shares of the common capital
stock, no par value, of LAKELAND FINANCIAL CORPORATION,
(hereinafter called "Corporation"), transferable only on the
books of the Corporation by the holder hereof in person, or
by attorney, upon surrender of this Certificate properly
endorsed.
In Witness Whereof, the said Corporation has caused this
Certificate to be signed in facsimile by its duly authorized
officers.
Dated:
COUNTERSIGNED AND REGISTERED:
LAKE CITY BANK [WARSAW, INDIANA]
TRANSFER AGENT AND REGISTRAR
/s/Michael L. Kubacki
PRESIDENT & CHIEF EXECUTIVE OFFICER
/s/David M. Findlay BY:___________________________
SECRETARY AUTHORIZED SIGNATURE
A full statement of the kinds and classes of shares and the relative
rights, interests, preferences and restrictions of each class of shares within
the Corporation is authorized to issue will be furnished by the Corporation to
any shareholder upon a written request and without charge.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written but in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ...Custodian...
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform
survivorship and not as tenants Gifts to Minors
in common Act ...........
(Sigrn)
For value received ____________ hereby sell, assign and transfer unto PLEASE
INSERT SOCIEL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE __________________________________
______________________________________________________________________________
(PLEASE PRINT ON TYPEWRTE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE)
______________________________________________________________________________
______________________________________________________________________________
of the Common Capital Shares represented by the within Certificate and do
hereby irrevocably constitute and appoint _________________________________
______________________________________________________________________Attorney
to transfer the said shares on the books of the within-named Corporation with
full power of substitution in the premises.
Dated _______________________
Signature guaranteed by: Signature
__________________________________ ________________________________
__________________________________ ________________________________
COMMERCIAL BANK OR MEMBER FIRM
OF A MAJOR STOCK EXCHANGE
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We hereby consent to the incorporation by reference and use of our report,
dated January 12, 2001, on the consolidated financial statements of Lakeland
Financial Corporation, which is incorporated by reference in Lakeland
Financial Corporation's Registration Statements on Form S-3 (Registration No.
333-34626) and Form S-8 (Registration No. 333-48402).
Crowe, Chizek and Company LLP
South Bend, Indiana
March 27, 2001
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ____________________
Commission File No. 0-11487
LAKELAND FINANCIAL CORPORATION
------------------------------
(exact name of Registrant as specified in its charter)
INDIANA 35-1559596
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387
- ------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 1-219-267-6144
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common The Nasdaq Stock Market's National Market
Preferred Securities of Lakeland
Capital Trust The Nasdaq Stock Market's National Market
Securities registered pursuant to Section 12(g) of the Act:
None
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 other period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein and will not be contained,
to the best of the 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 ]
Aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed solely for the purposes of this requirement on the
basis of the Nasdaq closing value at February 21, 2001, and assuming solely
for the purposes of this calculation that all directors and executive officers
of the Registrant are "affiliates": $83,220,656.
Number of shares of common stock outstanding at February 21, 2001:
5,779,932
Cover page 1 of 2 pages
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the following documents are incorporated by reference in
the Parts of the 10-K indicated:
Part Document
---- --------
I, II & IV Lakeland Financial Corporation's Annual
Report to Shareholders for the year ended
December 31, 2000, portions of which are
incorporated into Parts I, II and IV of this
Form 10-K.
III Proxy statement mailed to shareholders on
March 14, 2001, which is incorporated into
Part III of this Form 10-K.
Cover page 2 of 2 pages
PART I
ITEM 1. BUSINESS
- ----------------
The Company was incorporated under the laws of the State of Indiana
on February 8, 1983. As used herein, the term "Company" refers to Lakeland
Financial Corporation, or if the context dictates, Lakeland Financial
Corporation and its wholly-owned subsidiaries, Lake City Bank and Lakeland
Capital Trust, as well as LCB Investments Limited, a wholly-owned subsidiary
of Lake City Bank.
General
Company's Business. The Company is a bank holding company as defined
in the Bank Holding Company Act of 1956, as amended. The Company owns all of
the outstanding stock of Lake City Bank, Warsaw, Indiana, a full service
commercial bank organized under Indiana law (the "Bank"), and Lakeland Capital
Trust, a statutory business trust formed under Delaware law ("Lakeland
Trust"). The Bank has a wholly-owned subsidiary, LCB Investments Limited, a
Bermuda company, which manages a portion of the Bank's investment portfolio.
The Company conducts no business except that incident to its ownership of the
outstanding stock of the Bank and the operation of the Bank.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation to the extent permissible by law. The Bank's main banking office
is located at 202 East Center Street, Warsaw, Indiana. As of December 31,
2000, the Bank had 43 offices in fifteen counties throughout north central
Indiana.
The Company conducts no business except that which is incident to its
ownership of the stock of the Bank, the collection of dividends from the Bank,
and the disbursement of dividends to shareholders.
Lakeland Trust, a statutory business trust, was formed under Delaware
law pursuant to a trust agreement dated July 24, 1997 and a certificate of
trust filed with the Delaware Secretary of State on July 24, 1997. Lakeland
Trust exists for the exclusive purposes of (i) issuing the trust securities
representing undivided beneficial interests in the assets of Lakeland Trust,
(ii) investing the gross proceeds of the trust securities in the subordinated
debentures issued by the Company, and (iii) engaging in only those activities
necessary, advisable, or incidental thereto. The subordinated debentures and
payments thereunder are the only assets of Lakeland Trust, and payments under
the subordinated debentures are the only revenue of Lakeland Trust. Lakeland
Trust has a term of 55 years, but may be terminated earlier as provided in the
trust agreement.
Forward-looking Statements
When used in this report and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results
to differ materially from historical earnings and those presently anticipated
or projected.
1
The Company wishes to caution readers not to place undo reliance on any
such forward-looking statements, which speak only as of the date made, and
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
Competition
The Bank was originally organized in 1872 and has continuously
operated under the laws of the State of Indiana since its organization. The
Bank's activities cover all phases of commercial banking, including checking
accounts, savings accounts, time deposits, the sale of securities under
agreements to repurchase, brokerage services, commercial and agricultural
lending, direct and indirect consumer lending, real estate mortgage lending,
safe deposit box services, trust and investment services. The interest rates
for both deposits and loans, as well as the range of services provided, are
nearly the same for all banks competing within the Bank's service area.
The Bank competes for loans principally through the range and quality of
services it provides including a focus on relationship development, interest
rates and loan fees. The Bank believes that its convenience, quality service
and hometown relationship approach to banking enhances its ability to compete
favorably in attracting and retaining individual and business customers. The
Bank actively solicits deposit-related customers and competes for customers by
offering personal attention, professional service and competitive interest
rates.
The Bank's service area is north central and north east Indiana. In
addition to the banks located within its service area, the Bank also competes
with savings and loan associations, credit unions, farm credit services,
finance companies, personal loan companies, insurance companies, money market
funds, and other non-depository financial intermediaries. Financial
intermediaries such as money market mutual funds and large retailers are not
subject to the same regulations and laws that govern the operation of
traditional depository institutions and accordingly may have an advantage in
competing for funds.
The Bank competes with other major banks for large commercial deposit
and loan accounts. The Bank is presently subject to an aggregate maximum loan
limit to any single account of approximately $10 million pursuant to Indiana
law and internal lending guidelines. This maximum prohibits the Bank from
providing a full range of banking services to those businesses or personal
accounts whose borrowing requirements may exceed this amount. In order to
retain at least a portion of the banking business of these large borrowers,
the Bank maintains correspondent relationships with other financial
institutions. The Bank also participates with local and other banks in the
placement of large borrowings in excess of its lending limit. The Bank is also
a member of the Federal Home Loan Bank of Indianapolis in order to broaden its
mortgage lending and investment activities and to provide additional funds, if
necessary, to support these activities.
Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000,
securities firms and insurance companies that elect to become financial
holding companies may acquire banks and other financial institutions. The
Gramm-Leach-Bliley Act may significantly change the competitive environment in
which the Company and the Bank conduct business. The financial services
industry is also likely to become more competitive as further technological
advances enable more companies to provide financial services. These
technological advances may diminish the importance of depository institutions
and other financial intermediaries in the transfer of funds between parties.
2
Foreign Operations
The Company has no investments with any foreign entity other than two
nominal demand deposit accounts. One is maintained with a Canadian bank in
order to facilitate the clearing of checks drawn on banks located in that
country. The other is maintained with a bank in Bermuda for LCB Investments
Limited to be used for administrative expenses. There are no foreign loans.
Employees
At December 31, 2000, the Company, including its subsidiaries, had
435 full-time equivalent employees. Benefit programs include a pension plan,
401(k) plan, group medical insurance, group life insurance and paid vacations.
Effective April 1, 2000, the defined benefit pension plan was frozen. The Bank
is not a party to any collective bargaining agreement, and employee relations
are considered good. The Company also has a stock option plan under which
stock options may be granted to employees and directors.
Supervision and Regulation
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions
and general economic conditions, but also by the requirements of applicable
state and federal statutes and regulations and the policies of various
governmental regulatory authorities, including the Indiana Department of
Financial Institutions (the "DFI"), the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Internal Revenue Service and state taxing
authorities and the Securities and Exchange Commission (the "SEC"). The effect
of applicable statutes, regulations and regulatory policies can be
significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as the Company and its subsidiaries, regulate,
among other things, the scope of business, investments, reserves against
deposits, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations
and dividends. The system of supervision and regulation applicable to the
Company and its subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the
FDIC's deposit insurance funds and the depositors, rather than the
shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not
describe all of the statutes, regulations and regulatory policies that apply
to the Company and its subsidiaries, nor does it restate all of the
requirements of the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety by reference to
the applicable statutes, regulations and regulatory policies. Any change in
applicable law, regulations or regulatory policies may have a material effect
on the business of the Company and its subsidiaries.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank
holding company. As a bank holding company, the Company is registered with,
3
and is subject to regulation by, the Federal Reserve under the Bank Holding
Company Act, as amended (the "BHCA"). In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances where
the Company might not otherwise do so. Under the BHCA, the Company is subject
to periodic examination by the Federal Reserve. The Company is also required
to file with the Federal Reserve periodic reports of the Company's operations
and such additional information regarding the Company and its subsidiaries as
the Federal Reserve may require. The Company is also subject to regulation by
the DFI under Indiana law.
Investments and Activities. Under the BHCA, a bank holding company
must obtain Federal Reserve approval before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after the acquisition, it would own or control more than
5% of the shares of the other bank or bank holding company (unless it already
owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank; or (iii) merging or
consolidating with another bank holding company. Subject to certain conditions
(including certain deposit concentration limits established by the BHCA), the
Federal Reserve may allow a bank holding company to acquire banks located in
any state of the United States without regard to whether the acquisition is
prohibited by the law of the state in which the target bank is located. In
approving interstate acquisitions, however, the Federal Reserve is required to
give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its
insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) and state
laws which require that the target bank have been in existence for a minimum
period of time (not to exceed five years) before being acquired by an
out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct
or indirect ownership or control of more than 5% of the voting shares of any
company which is not a bank and from engaging in any business other than that
of banking, managing and controlling banks or furnishing services to banks and
their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies that have
not received approval to operate as financial holding companies to engage in,
and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be "so closely related to banking ... as to be a proper
incident thereto." Under current regulations of the Federal Reserve, this
authority would permit the Company to engage in a variety of banking-related
businesses, including the operation of a thrift, sales and consumer finance,
equipment leasing, the operation of a computer service bureau (including
software development), and mortgage banking and brokerage. Eligible bank
holding companies that elect to operate as financial holding companies may
engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance activities and any other
activity that the Federal Reserve, in consultation with the Secretary of the
Treasury, determines by regulation or order is financial in nature, incidental
to any such financial activity or complementary to any such financial activity
and does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. The BHCA generally does not
place territorial restrictions on the domestic activities of non-bank
subsidiaries of bank or financial holding companies. As of the date of this
filing, the Company has not applied for nor received approval to operate as a
financial holding company.
Federal law also prohibits any person or company from acquiring
"control" of a bank or bank holding company without prior notice to the
appropriate federal bank regulator. "Control" is defined in certain cases as
the acquisition of 10% or more of the outstanding shares of a bank or bank
holding company.
4
Capital Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
risk-based requirement expressed as a percentage of total risk-weighted
assets; and (ii) a leverage requirement expressed as a percentage of total
assets. The risk-based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, at least one-half of which must
be Tier 1 capital. The leverage requirement consists of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly rated companies, with
a minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain mortgage servicing rights and
purchased credit card relationships). Total capital consists primarily of Tier
1 capital plus certain other debt and equity instruments which do not qualify
as Tier 1 capital and a portion of the company's allowance for loan and lease
losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any
banking organization experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions
(i.e., Tier 1 capital less all intangible assets), well above the minimum
levels.
As of December 31, 2000, the Company had regulatory capital in excess
of the Federal Reserve's minimum requirements, with a risk-based capital ratio
of 10.24% and a leverage ratio of 7.20%. As of December 31, 2000, the Company
was well-capitalized, as defined by Federal Reserve regulations.
Dividends. The Federal Reserve has issued a policy statement with
regard to the payment of cash dividends by bank holding companies. The policy
statement provides that a bank holding company should not pay cash dividends
which exceed its net income or which can only be funded in ways that weaken
the bank holding company's financial health, such as by borrowing. The Federal
Reserve also possesses enforcement powers over bank holding companies and
their non-bank subsidiaries to prevent or remedy actions that represent unsafe
or unsound practices or violations of applicable statutes and regulations.
Among these powers is the ability to proscribe the payment of dividends by
banks and bank holding companies.
Federal Securities Regulation. The Company's common stock is
registered with the SEC under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Consequently, the Company is subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the SEC under the
Exchange Act.
The Bank
General. The Bank is an Indiana-chartered bank, the deposit accounts
of which are insured by the FDIC's Bank Insurance Fund ("BIF"). As a
BIF-insured, Indiana-chartered bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the DFI, as the
chartering authority for Indiana banks, and the FDIC, as administrator of the
BIF.
5
Deposit Insurance. As an FDIC-insured institution, the Bank is
required to pay deposit insurance premium assessments to the FDIC. The FDIC
has adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well-capitalized (as
defined by the FDIC) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (as defined by the
FDIC) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
for each semi-annual assessment period.
During the year ended December 31, 2000, BIF assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2001, BIF assessment rates will continue to range from 0%
of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured
depository institution if the FDIC determines, after a hearing, that the
institution: (i) has engaged or is engaging in unsafe or unsound practices;
(ii) is in an unsafe or unsound condition to continue operations; or (iii) has
violated any applicable law, regulation, order or any condition imposed in
writing by, or written agreement with, the FDIC. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Management of the Bank is not aware of any activity or condition that could
result in termination of the deposit insurance of the Bank.
FICO Assessments. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF
members and BIF members became subject to assessments to cover the interest
payments on outstanding FICO obligations. These FICO assessments are in
addition to amounts assessed by the FDIC for deposit insurance. Between
January 1, 2000, and the final maturity of the outstanding FICO obligations in
2019, BIF members and SAIF members will share the cost of the interest on the
FICO bonds on a pro rata basis. During the year ended December 31, 2000, the
FICO assessment rate for BIF and SAIF members was approximately 0.02% of
deposits.
Supervisory Assessments. All Indiana bank are required to pay
supervisory assessments to the DFI to fund the operations of the DFI. During
the year ended December 31, 2000, the Bank paid supervisory assessments to the
DFI totaling $72,000.
Capital Requirements. The FDIC has established the following minimum
capital standards for state-chartered insured nonmember banks, such as the
Bank: (i) a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks with a minimum
requirement of at least 4% for all others; and (ii) a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
For purposes of these capital standards, Tier 1 capital and total capital
consist of substantially the same components as Tier 1 capital and total
capital under the Federal Reserve's capital guidelines for bank holding
companies (see "--The Company--Capital Requirements").
The capital requirements described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example, the
regulations of the FDIC provide that additional capital may be required to
take adequate account of, among other things, interest rate risk or the risks
posed by concentrations of credit, nontraditional activities or securities
trading activities.
6
During the year ended December 31, 2000, the Bank was not required by
the FDIC to increase its capital to an amount in excess of the minimum
regulatory requirement. As of December 31, 2000, the Bank exceeded its minimum
regulatory capital requirements with a leverage ratio of 7.06% and a
risk-based capital ratio of 10.06%.
Federal law provides the federal banking regulators with broad power
to take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators'
corrective powers include: (i) requiring the institution to submit a capital
restoration plan; (ii) limiting the institution's asset growth and restricting
its activities; (iii) requiring the institution to issue additional capital
stock (including additional voting stock) or to be acquired; (iv) restricting
transactions between the institution and its affiliates; (v) restricting the
interest rate the institution may pay on deposits; (vi) ordering a new
election of directors of the institution; (vii) requiring that senior
executive officers or directors be dismissed; (viii) prohibiting the
institution from accepting deposits from correspondent banks; (ix) requiring
the institution to divest certain subsidiaries; (x) prohibiting the payment of
principal or interest on subordinated debt; and (xi) ultimately, appointing a
receiver for the institution. As of December 31, 2000, the Bank was well
capitalized, as defined by FDIC regulations.
Dividends. Indiana law prohibits the Bank from paying dividends in an
amount greater than its undivided profits. The Bank is required to obtain the
approval of the DFI for the payment of any dividend if the total of all
dividends declared by the Bank during the calendar year, including the
proposed dividend, would exceed the sum of the retained net income for the
year to date combined with its retained net income for the previous two years.
Indiana law defines "retained net income" to mean the net income of a
specified period, calculated under the consolidated report of income
instructions, less the total amount of all dividends declared for the
specified period.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, the Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 2000. As of December 31, 2000, approximately $17
million was available to be paid as dividends to the Company by the Bank.
Notwithstanding the availability of funds for dividends, however, the FDIC may
prohibit the payment of any dividends by the Bank if the FDIC determines such
payment would constitute an unsafe or unsound practice.
Insider Transactions. The Bank is subject to certain restrictions
imposed by federal law on extensions of credit to the Company and its
subsidiaries, on investments in the stock or other securities of the Company
and its subsidiaries and the acceptance of the stock or other securities of
the Company or its subsidiaries as collateral for loans. Certain limitations
and reporting requirements are also placed on extensions of credit by the Bank
to its directors and officers, to directors and officers of the Company and
its subsidiaries, to principal stockholders of the Company, and to "related
interests" of such directors, officers and principal stockholders. In
addition, federal law and regulations may affect the terms upon which any
person becoming a director or officer of the Company or one of its
subsidiaries or a principal stockholder of the Company may obtain credit from
banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have
adopted guidelines which establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
7
The guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals
to be achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit
a plan for achieving and maintaining compliance. If an institution fails to
submit an acceptable compliance plan, or fails in any material respect to
implement a compliance plan that has been accepted by its primary federal
regulator, the regulator is required to issue an order directing the
institution to cure the deficiency. Until the deficiency cited in the
regulator's order is cured, the regulator may restrict the institution's rate
of growth, require the institution to increase its capital, restrict the rates
the institution pays on deposits or require the institution to take any action
the regulator deems appropriate under the circumstances. Noncompliance with
the standards established by the safety and soundness guidelines may also
constitute grounds for other enforcement action by the federal banking
regulators, including cease and desist orders and civil money penalty
assessments.
Branching Authority. Indiana banks, such as the Bank, have the
authority under Indiana law to establish branches anywhere in the State of
Indiana, subject to receipt of all regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act"), both state and national banks are allowed to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions, including certain limitations on the aggregate
amount of deposits that may be held by the surviving bank and all of its
insured depository institution affiliates. The establishment of new interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is
allowed by the Riegle-Neal Act only if specifically authorized by state law.
The legislation allowed individual states to "opt-out" of certain provisions
of the Riegle-Neal Act by enacting appropriate legislation prior to June 1,
1997. Indiana law permits interstate mergers subject to certain conditions,
including a prohibition against interstate mergers involving Indiana banks
that have been in existence and continuous operation for fewer than five
years. Additionally, Indiana law allows out-of-state banks to acquire
individual branch offices in Indiana and to establish new branches in Indiana
subject to certain conditions, including a requirement that the laws of the
state in which the out-of-state bank is headquartered grant Indiana banks
authority to acquire and establish branches in such state.
State Bank Activities. Under federal law and FDIC regulations, FDIC
insured state banks are prohibited, subject to certain exceptions, from making
or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also
prohibit FDIC insured state banks and their subsidiaries, subject to certain
exceptions, from engaging as principal in any activity that is not permitted
for a national bank or its subsidiary, respectively, unless the bank meets,
and continues to meet, its minimum regulatory capital requirements and the
FDIC determines the activity would not pose a significant risk to the deposit
insurance fund of which the bank is a member. These restrictions have not had,
and are not currently expected to have, a material impact on the operations of
the Bank.
Eligible state banks are also authorized to engage, through
"financial subsidiaries," in certain activities that are permissible for
financial holding companies (as described above) and certain activities that
the Secretary of the Treasury, in consultation with the Federal Reserve,
8
determines is financial in nature or incidental to any such financial
activity. As of the date of this filing, the Bank has not applied for nor
received approval to establish any financial subsidiaries.
Federal Reserve System. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW, Investor's Weekly
and regular checking accounts), as follows: for transaction accounts
aggregating $42.8 million or less, the reserve requirement is 3% of total
transaction accounts; and for transaction accounts aggregating in excess of
$42.8 million, the reserve requirement is $1.284 million plus 10% of the
aggregate amount of total transaction accounts in excess of $42.8 million. The
first $5.5 million of otherwise reservable balances are exempted from the
reserve requirements. These reserve requirements are subject to annual
adjustment by the Federal Reserve. The Bank is in compliance with the
foregoing requirements.
Industry Segments
The Company is engaged in a single industry and performs a single
service -- commercial banking. On the pages that follow are tables which set
forth selected statistical information relative to the business of the
Company. This data should be read in conjunction with the consolidated
financial statements, related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as set forth in the 2000
Annual Report to Shareholders herein incorporated by reference (attached
hereto as Exhibit 13).
9
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
2000 1999
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Earning assets:
Loans:
Taxable (2) $ 676,807 $ 61,554 9.09% $ 602,250 $ 51,602 8.57%
Tax exempt (1) 2,391 215 8.99 2,920 275 9.42
Investments: (1)
Available for sale 279,569 18,850 6.74 291,005 18,597 6.39
Held to maturity 0 0 0.00 0 0 0.00
Short-term investments 5,778 367 6.35 5,230 259 4.95
Interest bearing deposits 960 55 5.73 308 16 5.19
----------- ----------- ----------- ----------- ----------- -----------
Total earning assets 965,505 81,041 8.39% 901,713 70,749 7.85%
=========== ===========
Nonearning assets:
Cash and due from banks 41,202 0 37,767 0
Premises and equipment 27,276 0 27,248 0
Other nonearning assets 30,191 0 27,784 0
Less: allowance for loan losses (6,813) 0 (5,958) 0
----------- ----------- ----------- -----------
Total assets $ 1,057,361 $ 81,041 $ 988,554 $ 70,749
=========== =========== =========== ===========
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 2000 and 1999. The tax
equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, included the TEFRA adjustment
applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 2000 and
1999 are included as taxable loan interest income.
10
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
1999 1998
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Earning assets:
Loans:
Taxable (2) $ 602,250 $ 51,602 8.57% $ 486,437 $ 44,225 9.09%
Tax exempt (1) 2,920 275 9.42 2,899 295 10.18
Investments: (1)
Available for sale 291,005 18,597 6.39 142,499 9,062 6.36
Held to maturity 0 0 0.00 160,173 10,858 6.78
Short-term investments 5,230 259 4.95 9,545 510 5.34
Interest bearing deposits 308 16 5.19 133 9 6.77
----------- ----------- ----------- ----------- ----------- -----------
Total earning assets 901,713 70,749 7.85% 801,686 64,959 8.10%
=========== ===========
Nonearning assets:
Cash and due from banks 37,767 0 36,215 0
Premises and equipment 27,248 0 25,198 0
Other nonearning assets 27,784 0 24,324 0
Less: allowance for loan losses (5,958) 0 (5,403) 0
----------- ----------- ----------- -----------
Total assets $ 988,554 $ 70,749 $ 882,020 $ 64,959
=========== =========== =========== ===========
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 1999 and 1998. The tax
equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, included the TEFRA adjustment
applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1999 and
1998 are included as taxable loan interest income.
11
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
2000 1999
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 53,372 $ 899 1.68% $ 54,562 $ 935 1.71%
Interest bearing checking accounts 71,124 1,856 2.61 56,304 861 1.53
Time Deposits:
In denominations under $100,000 367,321 21,816 5.94 359,700 17,394 4.84
In denominations over $100,000 157,040 7,824 4.98 150,182 7,963 5.30
Miscellaneous short-term borrowings 176,562 10,083 5.71 146,680 7,139 4.87
Long-term borrowings 32,342 2,523 7.80 37,312 2,801 7.51
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities 857,761 45,001 5.25% 804,740 37,093 4.61%
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 134,270 0 120,808 0
Other liabilities 8,447 0 7,834 0
Stockholders' equity 56,883 0 55,172 0
----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity $ 1,057,361 $ 45,001 $ 988,554 $ 37,093
=========== =========== =========== ===========
Net interest differential - yield on
average daily earning assets $ 36,040 3.73% $ 33,656 3.73%
=========== =========== =========== ===========
12
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
1999 1998
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 54,562 $ 935 1.71% $ 55,299 $ 1,331 2.41%
Interest bearing checking accounts 56,304 861 1.53 65,895 1,322 2.01
Time Deposits:
In denominations under $100,000 359,700 17,394 4.84 326,123 17,234 5.28
In denominations over $100,000 150,182 7,963 5.30 142,589 8,267 5.80
Miscellaneous short-term borrowings 146,680 7,139 4.87 90,752 4,724 5.21
Long-term borrowings 37,312 2,801 7.51 44,349 3,213 7.24
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities 804,740 37,093 4.61% 725,007 36,091 4.98%
=========== ===========
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 120,808 0 98,957 0
Other liabilities 7,834 0 7,386 0
Stockholders' equity 55,172 0 50,670 0
Total liabilities and stockholders' ----------- ----------- ----------- -----------
equity $ 988,554 $ 37,093 $ 882,020 $ 36,091
=========== =========== =========== ===========
Net interest differential - yield on
average daily earning assets $ 33,656 3.73% $ 28,868 3.60%
=========== =========== =========== ===========
13
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(fully taxable equivalent basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
2000 Over (Under) 1999 (1) 1999 Over (Under) 1998 (1)
------------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
----------- ----------- ----------- ----------- ----------- -----------
INTEREST AND LOAN FEE INCOME (2)
Loans:
Taxable $ 6,651 $ 3,301 $ 9,952 $ 10,041 $ (2,664) $ 7,377
Tax exempt (48) (12) (60) 2 (115) (113)
Investments:
Available for sale (748) 1,001 253 8,881 (607) 8,274
Held to maturity 0 0 0 (10,858) 0 (10,858)
Short-term investments 29 79 108 (215) (37) (252)
Interest bearing deposits 37 2 39 10 (3) 7
----------- ----------- ----------- ----------- ----------- -----------
Total interest income 5,921 4,371 10,292 7,861 (3,426) 4,435
----------- ----------- ----------- ----------- ----------- -----------
INTEREST EXPENSE
Savings deposits (20) (16) (36) (18) (378) (396)
Interest bearing checking accounts 270 725 995 (175) (286) (461)
Time deposits
In denominations under $100,000 376 4,046 4,422 1,692 (1,532) 160
In denominations over $100,000 354 (493) (139) 426 (730) (304)
Miscellaneous short-term borrowings 1,591 1,353 2,944 2,740 (325) 2,415
Long-term borrowings (384) 106 (278) (525) 113 (412)
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense 2,187 5,721 7,908 4,140 (3,138) 1,002
----------- ----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 3,734 $ (1,350) $ 2,384 $ 3,721 $ (288) $ 3,433
----------- ----------- ----------- ----------- ----------- -----------
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 2000, 1999 and 1998. The changes in volume represent "changes in volume times the old rate". The changes in rate
represent "changes in rate times old volume". The changes in rate/volume were also calculated by "change in rate times change
in volume" and allocated consistently based upon the relative absolute values of the changes in volume and changes in rate.
(2) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 2000, 1999 and 1998. The tax
equivalent rate for tax exempt loans and tax exempt securities included the TEFRA adjustment applicable to nondeductible
interest expense.
14
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
------------------------ ------------------------ ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
Securities available for sale:
U.S. Treasury securities $ 38,037 $ 38,066 $ 35,133 $ 34,614 $ 38,938 $ 39,521
U.S. Government agencies 6,672 6,550 3,726 3,201 909 1,025
Mortgage-backed securities 207,499 207,594 196,245 192,569 225,741 225,914
State and municipal securities 35,416 35,430 35,432 32,714 56,924 59,112
Other debt securities 6,327 5,968 8,829 8,323 2,086 2,086
----------- ----------- ----------- ----------- ----------- -----------
Total debt securities available for sale $ 293,951 $ 293,608 $ 279,365 $ 271,421 $ 324,598 $ 327,658
----------- ----------- ----------- ----------- ----------- -----------
Securities held to maturity:
U.S. Treasury securities $ 0 $ 0 $ 0 $ 0 $ 21,170 $ 21,501
U.S. Government agencies 0 0 0 0 2,176 2,246
Mortgage-backed securities 0 0 0 0 116,788 117,185
State and municipal securities 0 0 0 0 22,418 24,044
Other debt securities 0 0 0 0 1,007 1,103
----------- ----------- ----------- ----------- ----------- -----------
Total debt securities held to maturity $ 0 $ 0 $ 0 $ 0 $ 163,559 $ 166,079
----------- ----------- ----------- ----------- ----------- -----------
15
ANALYSIS OF SECURITIES (cont.)
(Fully Tax Equivalent Basis)
(in thousands of dollars)
The weighted average yields (1) and maturity distribution (2) for debt securities portfolio at December 31, 2000, were as
follows:
After One After Five
Within Year Years Over
One Within Within Ten Ten
Year Five Years Years Years
----------- ----------- ----------- -----------
Securities available for sale:
U.S. Treasury securities
Book value $ 30,282 $ 7,755 $ 0 $ 0
Yield 6.35% 8.27%
Government agencies
Book value 0 6,671 0 0
Yield 5.51%
Mortgage-backed securities
Book value 120 5,879 86,573 114,742
Yield 7.00% 6.52% 6.90% 6.97%
State and municipal securities subdivisions
Book value 0 99 2,155 33,348
Yield 6.85% 5.13% 5.02%
Other debt securities
Book value 0 3,077 0 3,250
Yield 6.88% 8.84%
----------- ----------- ----------- -----------
Total debt securities available for sale:
Book value $ 30,402 $ 23,481 $ 88,728 $ 151,340
Yield 6.36% 6.86% 6.85% 6.58%
=========== =========== =========== ===========
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34% rate.
(2) The maturity distribution of mortgage-backed securities was based upon nticipated payments as computed by using the historic
average payment speed from date of issue.
There were no investments in securities of any one issuer that exceeded 10% of stockholders' equity at December 31, 2000.
16
ANALYSIS OF LOAN PORTFOLIO
Analysis of Loans Outstanding
(in thousands of dollars)
The Company segregates its loan portfolio into four basic segments: commercial (including agri-business and agricultural
loans), real estate mortgages, installment and personal line of credit loans(including credit card loans). The loan portfolio as
of December 31, 2000, 1999, 1998, 1997 and 1996 was as follows:
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Commercial loans:
Taxable $ 487,125 $ 419,034 $ 343,858 $ 269,887 $ 226,190
Tax exempt 2,374 3,048 2,867 3,065 3,414
Total commercial loans 489,499 422,082 346,725 272,952 229,604
Real estate mortgage loans 52,731 46,872 60,555 65,368 60,949
Installment loans 129,729 146,711 100,196 89,107 71,398
Line of credit and credit card loans 46,917 38,233 31,020 31,207 20,314
----------- ----------- ----------- ----------- -----------
Total loans 718,876 653,898 538,496 458,634 382,265
Less allowance for loan losses 7,124 6,522 5,510 5,308 5,306
----------- ----------- ----------- ----------- -----------
Net loans $ 711,752 $ 647,376 $ 532,986 $ 453,326 $ 376,959
=========== =========== =========== =========== ===========
The real estate mortgage loan portfolio included construction loans totaling $3,627, $4,488, $2,975, $3,089 and $1,647 as of
December 31, 2000, 1999, 1998, 1997 and 1996. The loan classifications are based on the nature of the loans as of the loan
origination date. There were no foreign loans included in the loan portfolio for the periods presented.
17
ANALYSIS OF LOAN PORTFOLIO (cont.)
Analysis of Loans Outstanding (cont.)
(in thousands of dollars)
Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules included in
the related loan agreements or upon scheduled maturity of each principal payment. The following table indicates the rate
sensitivity of the loan portfolio as of December 31, 2000. The table includes the real estate loans held for sale and assumes
these loans will not be sold during the various time horizons.
Line of
Credit
and
Real Credit
Commerciall Estate Installment Card Total Percent
----------- ----------- ----------- ----------- ----------- -----------
Immediately adjustable interest rates
or original maturity of one day $ 269,542 $ 0 $ 0 $ 43,399 $ 312,941 43.5%
Other within one year 68,908 5,563 42,555 2,550 119,576 16.6
After one year, within five years 142,641 5,058 84,797 825 233,321 32.5
Over five years 8,239 42,073 2,377 143 52,832 7.4
Nonaccrual loans 169 37 0 0 206 0.0
----------- ----------- ----------- ----------- ----------- -----------
Total loans $ 489,499 $ 52,731 $ 129,729 $ 46,917 $ 718,876 100.0%
=========== =========== =========== =========== =========== ===========
A portion of the loans are short-term maturities. At maturity, credits are reviewed, and if renewed, are renewed at rates and
conditions that prevail at the time of maturity.
Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or
adjustable interest rates as of December 31, 2000 amounted to $240,702 and $45,453.
18
ANALYSIS OF LOAN PORTFOLIO (cont.)
Review of Nonperforming Loans
(in thousands of dollars)
The following is a summary of nonperforming loans as of December 31, 2000, 1999, 1998, 1997 and 1996.
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 398 $ 0 $ 0 $ 0 $ 126
Commercial and industrial loans 7,635 20 159 236 22
Loans to individuals for household, family and
other personal expenditures 171 151 68 69 68
Loans to finance agriculture production and
other loans to farmers 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total past due loans 8,204 171 227 305 216
----------- ----------- ----------- ----------- -----------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 37 0 0 338 155
Commercial and industrial loans 169 329 0 720 229
Loans to individuals for household, family and
other personal expenditures 0 0 0 0 0
Loans to finance agriculture production and
other loans to farmers 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total nonaccrual loans 206 329 0 1,058 384
----------- ----------- ----------- ----------- -----------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,127 1,179 1,281 1,377 1,284
----------- ----------- ----------- ----------- -----------
Total nonperforming loans $ 9,537 $ 1,679 $ 1,508 $ 2,740 $ 1,884
=========== =========== =========== =========== ===========
Nonearning assets of the Company include nonaccrual loans (as indicated above), nonaccrual investments, other real estate and
repossessions, which amounted to $318 at December 31, 2000.
19
ANALYSIS OF LOAN PORTFOLIO (cont.)
Comments Regarding Nonperforming Assets
PART A - CONSUMER LOANS
Consumer installment loans, except those loans that are secured by
real estate, are not placed on a nonaccrual status since these loans are
charged-off when they have been delinquent from 90 to 180 days, and when the
related collateral, if any, is not sufficient to offset the indebtedness.
Advances under Mastercard and Visa programs, as well as advances under all
other consumer line of credit programs, are charged-off when collection
appears doubtful.
PART B - NONPERFORMING LOANS
When a loan is classified as a nonaccrual loan, interest on the loan
is no longer accrued and all accrued interest receivable is charged off. It is
the policy of the Bank that all loans for which the collateral is insufficient
to cover all principal and accrued interest will be reclassified as
nonperforming loans to the extent they are unsecured, on or before the date
when the loan becomes 90 days delinquent. Thereafter, interest is recognized
and included in income only when received.
Loans past due over 90 days and still accruing interest were
$6,791,000 (excluding impaired loans) at year-end 2000. The increase in loans
past due 90 days or more and still accruing resulted from the inclusion of two
commercial loans totaling $6.2 million, or approximately 90% of the $6.8
million in this category. Of this amount, $1.4 million was paid off subsequent
to the end of the fiscal year. A second loan of $4.8 million matured in the
fourth quarter of 2000 and has therefore been included in this category. The
borrower is current on all interest under the matured facility. The Company
has reached an agreement with a bank participant and the borrower to extend
the terms of the financing. This extension was completed during the first
quarter of 2001.
As of December 31, 2000, there were $206,000 of loans on nonaccrual
status and one loan of $1.4 million classified as impaired.
PART C - TROUBLED DEBT RESTRUCTURED LOANS
Loans renegotiated as troubled debt restructurings are those loans
for which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the terms of the loan.
Loans renegotiated as troubled debt restructurings totaled $1.1
million as of December 31, 2000. Interest income of $106,000 was recognized in
2000. Had these loans been performing under the original contract terms, an
additional $17,000 would have been reflected in interest income during 2000.
The Company is not committed to lend additional funds to debtors whose loans
have been modified.
PART D - OTHER NONPERFORMING ASSETS
Management is of the opinion that there are no significant
foreseeable losses relating to substandard or nonperforming assets, except as
discussed above in Part B - Nonperforming Loans and Part C - Troubled Debt
Restructured Loans.
PART E - LOAN CONCENTRATIONS
There were no loan concentrations within industries which exceeded
ten percent of total assets. It is estimated that over 90% of all the Bank's
commercial, industrial, agri-business and agricultural real estate mortgage,
real estate construction mortgage and consumer loans are made within its basic
trade area.
Basis For Determining Allowance For Loan Losses:
Management is responsible for determining the adequacy of the
allowance for loan losses. This responsibility is fulfilled by management in a
number of ways, including the following:
- - Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectability factors and
assesses the requirement for specific reserves on such credits. For those
loans not subject to specific reviews, management reviews previous loan
loss experience to establish historical ratios and trends in charge-offs
by loan category. The ratios of net charge-offs to particular types of
loans enable management to estimate charge-offs in future periods by loan
category and thereby establish appropriate reserves for loans not
specifically reviewed.
20
- - Management reviews the current economic conditions of its lending market
to determine the effects on loan charge-offs by loan category, in
addition to the effects on the loan portfolio as a whole.
- - Management reviews delinquent loan reports to determine risk of loan
charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Based upon these policies and objectives, $1.2 million, $1.3 million
and $480,000 were charged to the provision for loan losses and added to the
allowance for loan losses in 2000, 1999 and 1998, respectively.
The allocation of the allowance for loan losses to the various
lending areas is performed by management in relation to perceived exposure to
loss in the various loan portfolios. However, the allowance for loan losses is
available in its entirety to absorb losses in any particular loan category.
21
ANALYSIS OF LOAN PORTFOLIO (cont.)
Summary of Loan Loss
(in thousands of dollars)
The following is a summary of the loan loss experience for the years ended December 31, 2000, 1999, 1998,
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Amount of loans outstanding, December 31, $ 718,876 $ 653,898 $ 538,496 $ 458,634 $ 382,265
=========== =========== =========== =========== ===========
Average daily loans outstanding during the year
ended December 31, $ 678,967 $ 605,170 $ 489,336 $ 414,033 $ 352,811
=========== =========== =========== =========== ===========
Allowance for loan losses, January 1, $ 6,522 $ 5,510 $ 5,308 $ 5,306 $ 5,472
----------- ----------- ----------- ----------- -----------
Loans charged-off
Commercial 200 147 9 99 171
Real estate 30 6 0 33 0
Installment 483 252 329 190 158
Credit cards and personal credit lines 35 30 78 37 39
----------- ----------- ----------- ----------- -----------
Total loans charged-off 748 435 416 359 368
----------- ----------- ----------- ----------- -----------
Recoveries of loans previously charged-off
Commercial 45 10 44 18 12
Real estate 0 0 0 0 0
Installment 93 114 86 66 54
Credit cards and personal credit lines 6 13 8 8 16
----------- ----------- ----------- ----------- -----------
Total recoveries 144 137 138 92 82
----------- ----------- ----------- ----------- -----------
Net loans charged-off 604 298 278 267 286
Purchase loan adjustment 0 0 0 0 0
Provision for loan loss charged to expense 1,206 1,310 480 269 120
----------- ----------- ----------- ----------- -----------
Balance, December 31, $ 7,124 $ 6,522 $ 5,510 $ 5,308 $ 5,306
=========== =========== =========== =========== ===========
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial 0.02% 0.02% (0.01)% 0.02% 0.03%
Real estate 0.00 0.00 0.00 0.01 0.01
Installment 0.06 0.02 0.05 0.03 0.00
Credit cards and personal credit lines 0.01 0.01 0.02 0.01 0.04
----------- ----------- ----------- ----------- -----------
Total 0.09% 0.05% 0.06% 0.07% 0.08%
=========== =========== =========== =========== ===========
Ratio of allowance for loan losses to
Nonperforming assets 73.83% 368.06% 258.20% 176.99% 204.31%
=========== =========== =========== =========== ===========
22
ANALYSIS OF LOAN PORTFOLIO (cont.)
Allocation of Allowance for Loan Losses
(in thousands of dollars)
The following is a summary of the allocation for loan losses as of December 31, 2000, 1999, 1998, 1997 and 1996.
2000 1999 1998
------------------------ ------------------------ ------------------------
Allowance Loans as Allowance Loans as Allowance Loans as
For Percentage For Percentage For Percentage
Loan of Gross Loan of Gross Loan of Gross
Losses Loans Losses Loans Losses Loans
----------- ----------- ----------- ----------- ----------- -----------
Allocated allowance for loan losses
Commercial $ 5,205 68.09% $ 4,750 64.55% $ 1,647 64.39%
Real estate 132 7.34 120 7.17 130 11.24
Installment 974 18.04 1,202 22.43 845 18.61
Credit cards and personal credit lines 352 6.53 185 5.85 130 5.76
----------- ----------- ----------- ----------- ----------- -----------
Total allocated allowance for loan losses 6,663 100.00% 6,257 100.00% 2,752 100.00%
=========== =========== ===========
Unallocated allowance for loan losses 461 265 2,758
----------- ----------- -----------
Total allowance for loan losses $ 7,124 $ 6,522 $ 5,510
=========== =========== ===========
1997 1996
------------------------ ------------------------
Allowance Loans as Allowance Loans as
For Percentage For Percentage
Loan of Gross Loan of Gross
Losses Loans Losses Loans
----------- ----------- ----------- -----------
Allocated allowance for loan losses
Commercial $ 1,341 59.52% $ 1,213 60.07%
Real estate 131 14.25 123 15.94
Installment 673 19.43 530 18.68
Credit cards and personal credit lines 103 6.80 151 5.31
----------- ----------- ----------- -----------
Total allocated allowance for loan losses 2,248 100.00% 2,017 100.00%
=========== ===========
Unallocated allowance for loan losses 3,060 3,289
----------- -----------
Total allowance for loan losses $ 5,308 $ 5,306
=========== ===========
In 1999, the Company reviewed and revised the allocation process for the Allowance for Loan Losses. These changes primarily
effected the allocations as they pertain to the commercial loans classified in the Company's internal watch list. These changes
also brought the Company's methodology into conformity with recent regulatory guidance. The Company continues to review the
allocation process and the documentation for the Allowance for Loan Losses, therefore future changes may occur.
23
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 2000, 1999 and 1998, and the average rates paid on those
deposits are summarized in the following table:
2000 1999 1998
------------------------ ------------------------ ------------------------
Average Average Average Average Average Average
Daily Rate Daily Rate Daily Rate
Balance Paid Balance Paid Balance Paid
----------- ----------- ----------- ----------- ----------- -----------
Demand deposits $ 134,270 0.00% $ 120,808 0.00% $ 98,957 0.00%
Savings accounts:
Regular savings 53,372 1.68 54,562 1.71 55,299 2.41
Interest bearing checking 71,124 2.61 56,304 1.53 65,895 2.01
Time deposits:
Deposits of $100,000 or more 157,040 4.98 150,182 5.30 142,589 5.80
Other time deposits 367,321 5.94 359,700 4.84 326,123 5.28
----------- ----------- ----------- ----------- ----------- -----------
Total deposits $ 783,127 4.14% $ 741,556 3.66% $ 688,863 4.09%
=========== =========== =========== =========== =========== ===========
As of December 31, 2000, time certificates of deposit in denominations of $100,000 or more will mature as follows:
Within three months $ 79,481
Over three months, within six months 64,333
Over six months, within twelve months 28,996
Over twelve months 7,489
-----------
Total time certificates of deposit in
denominations of $100,000 or more $ 180,299
===========
24
QUALITATIVE MARKET RISK DISCLOSURE
Management's market risk disclosure appears under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 2000 Annual Report to Shareholders and is incorporated
herein by reference in response to this item. The Company's primary market
risk exposure is interest rate risk. The Company does not have a material
exposure to foreign currency exchange rate risk, does not own any derivative
financial instruments and does not maintain a trading portfolio.
RETURN ON EQUITY AND OTHER RATIOS
The rates of return on average daily assets and stockholders' equity, the
dividend payout ratio, and the average daily stockholders' equity to average
daily assets for the years ended December 31, 2000, 1999 and 1998 were as
follows:
2000 1999 1998
----------- ----------- -----------
Percent of net income to:
Average daily total assets 0.88% 0.84% 0.89%
Average daily stockholders' equity 16.39 15.08 15.57
Percentage of ividends declared per
common share to basic earnings per
weighted average number of common
shares outstanding (5,813,984 shares
in 2000, 1999 and 1998) 32.50 30.77 24.26
Percentage of average daily
stockholders' equity to average
daily total assets 5.38 5.58 5.74
25
SHORT-TERM BORROWINGS
(in thousands of dollars)
The following is a schedule, at the end of the year indicated, of
statistical information relating to securities sold under agreement to
repurchase maturing within one year and secured by either U.S. Government
agency securities or mortgage-backed securities classified as other debt
securities. There were no other categories of short-term borrowings for which
the average balance outstanding during the period was 30 percent or more of
stockholders' equity at the end of each period.
2000 1999 1998
----------- ----------- -----------
Outstanding at year end $ 138,154 $ 121,374 $ 110,163
Approximate average interest rate at
year end 5.37% 4.75% 4.78%
Highest amount outstanding as of any
month end during the year $ 143,677 $ 143,353 $ 110,163
Approximate average outstanding
during the year $ 121,267 $ 120,950 $ 84,157
Approximate average interest rate
during the year 5.35% 4.76% 5.19%
Securities sold under agreement to repurchase include fixed rate, term
transactions initiated by the investment department of the Bank, as well as
corporate sweep accounts.
26
ITEM 2. PROPERTIES
- ------------------
The Company conducts its operations from the following locations:
Branches/Headquarters
Main/Headquarters 202 E. Center St. Warsaw IN
Warsaw Drive-up East Center St. Warsaw IN
Akron 102 East Rochester Akron IN
Argos 100 North Michigan Argos IN
Bremen 1600 Indiana State Road 331 Bremen IN
Columbia City 601 Countryside Dr. Columbia City IN
Concord 4202 Elkhart Road Goshen IN
Cromwell 111 North Jefferson St. Cromwell IN
Elkhart Beardsley 864 East Beardsley St. Elkhart IN
Elkhart East 22050 State Road 120 Elkhart IN
Elkhart Hubbard Hill 58404 State Road 19 Elkhart IN
Elkhart Northwest 1208 N. Nappanee St. Elkhart IN
Fort Wayne North 302 East DuPont Rd. Fort Wayne IN
Fort Wayne Southwest 10429 Illinois Rd. Fort Wayne IN
Goshen Downtown 102 North Main St. Goshen IN
Goshen South 2513 South Main St. Goshen IN
Granger 12830 State Road 23 Granger IN
Greentown 520 W. Main Greentown IN
Huntington 1501 N. Jefferson St. Huntington IN
Kendallville East 631 Professional Way Kendallville IN
LaGrange 901 South Detroit LaGrange IN
Ligonier Downtown 222 S. Calvin St. Ligonier IN
Ligonier South 1470 U.S. Highway 33 South Ligonier IN
Logansport 3900 Highway 24 East Logansport IN
Medaryville Main St. Medaryville IN
Mentone 202 East Main St. Mentone IN
Middlebury 712 Wayne Ave. Middlebury IN
Milford Indiana State Road 15 North Milford IN
Mishawaka 5015 N. Main St. Mishawaka IN
Nappanee 202 West Market St. Nappanee IN
North Webster 644 North Main St. North Webster IN
Peru 2 N. Broadway Peru IN
Pierceton 202 South First St. Pierceton IN
Plymouth 862 E. Jefferson St. Plymouth IN
Roann 110 Chippewa St. Roann IN
Rochester 507 East 9th St. Rochester IN
Shipshewana 895 North Van Buren St. Shipshewana IN
Silver Lake 102 Main St. Silver Lake IN
Syracuse 502 South Huntington Syracuse IN
Wabash North 1004 North Cass St. Wabash IN
Warsaw East 3601 Commerce Dr. Warsaw IN
Warsaw West 1221 West Lake St. Warsaw IN
Winona Lake 99 Chestnut St. Winona Lake IN
Winona Lake East 1324 Wooster Rd. Winona Lake IN
27
The Company leases from third parties, the real estate and buildings for
its offices in Akron and Milford and the building for its Winona Lake East
office. In addition, the Company leases the real estate for its Wabash North
office and its freestanding ATMs. All the other branch facilities are owned by
the Company. The Company also owns parking lots in downtown Warsaw for the use
and convenience of Company employees and customers, as well as leasehold
improvements, equipment, furniture and fixtures necessary to operate the
banking facilities.
In addition, the Company owns buildings, which it uses for various
offices and computer facilities, for employee training and undeveloped real
estate which it currently intends to use for branch facilities in the future.
The Company also leases from third parties facilities for computer facilities
and the storage of supplies.
None of the Company's assets are the subject of any material
encumbrances.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Company and the
Bank are a party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- -----------------------------------------------------------------------------
Information relating to the principal market for and the prices of
the Company's common stock, and information as to dividends are contained
under the caption "Stock and Dividend Information" in the 2000 Annual Report
to Shareholders and are incorporated herein by reference. On December 31,
2000, the Company had approximately 1,900 shareholders of record, including
those employees who participate in the Company's 401(K) plan.
On January 15, 1997, the Company sold 20,000 shares of authorized but
previously unissued common stock for $15.50 per share (split adjusted).
In August, 1997, the common stock of the Company and the preferred
stock of its wholly-owned subsidiary, Lakeland Trust, began trading on The
Nasdaq Stock Market under the symbols LKFN and LKFNP.
At the annual meeting of shareholders on April 14, 1998, the
shareholders approved the Lakeland Financial Corporation 1997 Share Incentive
Plan. This plan reserves 600,000 shares of common stock (split adjusted) for
which incentive share options and non-qualified share options may be granted
to directors and employees of the Company and its subsidiaries.
On April 30, 1998, the common stock split two-for-one.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
A five-year consolidated financial summary, containing the required
selected financial data, appears under the caption "Selected Financial Data"
on page 7 in the 2000 Annual Report to Shareholders and is incorporated herein
by reference.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations appears under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 28 - 31 in
the 2000 Annual Report to Shareholders and is incorporated herein by
reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Quantitative and qualitative disclosures about market risk appear
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 28 - 31 in the 2000 Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The following consolidated financial statements appear in the 2000
Annual Report to Shareholders and are incorporated herein by reference.
Consolidated Balance Sheets at December 31, 2000 and 1999.
Consolidated Statements of Income for the years ended December 31, 2000, 1999
and 1998.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for
the years ended December 31, 2000, 1999 and 1998. Notes to Consolidated
Financial Statements.
Report of Independent Auditors.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -----------------------------------------------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information appearing in the definitive Proxy Statement dated
March 14, 2001, is incorporated herein by reference in response to this item.
Section 16(a) of the Securities Exchange Act of 1934 requires that
our executive officers, directors and persons who own more than 10% of our
common stock file reports of ownership and change in ownership with the
Securities and Exchange Commission. They are also required to furnish us with
copies of all Section 16(a) forms they file. Based solely on our review of the
copies of such forms, and, if appropriate, representations made to us by any
reporting person concerning whether a Form 5 was required to be filed for
2000, we are not aware that any of our directors, executive officers or 10%
shareholders failed to comply with the filing requirements of Section 16(a)
during 2000.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information appearing in the definitive Proxy Statement dated
March 14, 2001, is incorporated herein by reference in response to this item.
The sections in the Proxy Statement marked "Report of the Compensation
Committee on Executive Compensation" and "Stock Price Performance" are
furnished for the information of the Commission and are not deemed to be
"filed" as part of the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information appearing in the definitive Proxy Statement dated
March 14, 2001, is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information appearing in the definitive Proxy Statement dated
March 14, 2001, is incorporated herein by reference in response to this item.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) The documents listed below are filed as a part of this report:
(1) Financial Statements.
---------------------
The following financial statements appear in the 2000 Annual
Report to Shareholders and are specifically incorporated by reference under
Item 8 of this Form 10-K, or are a part of this Form 10-K, as indicated and at
the pages set forth below.
Reference
---------
2000 Annual
Form 10-K Report
--------- --------------
Consolidated Balance Sheets at December 31,
2000 and 1999. 9
Consolidated Statements of Income for the
years ended December 31, 2000, 1999 and 1998. 10
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998. 11
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998. 12
Notes to Consolidated Financial Statements. 13-26
Report of Independent Auditors. 27
(2) Financial Statement Schedules.
------------------------------
N/A
(3) Schedule of Exhibits.
---------------------
The Exhibit Index, which immediately follows the signature pages
to this Form 10-K is incorporated by reference.
(b) Reports on Form 8-K.
--------------------
The Company did notfile any Current Reports on Form 8-K during the fourth
quarter of 2000.
(c) Exhibits.
---------
The exhibits required to be filed with this Form 10-K are included with
this Form 10-K and are located immediately following the Exhibit Index to this
Form 10-K.
30
SIGNATURES
----------
Pursuant to the requirements of Section 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
Date: March 13, 2001 By /s/R. Douglas Grant
(R. Douglas Grant) Chairman
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 13, 2001 /s/Michael L. Kubacki
(Michael L. Kubacki) Principal
Executive Officer and Director
Date: March 13, 2001 /s/David M. Findlay
(David M. Findlay) Principal
Financial Officer
Date: March 13,2001 /s/Teresa A. Bartman
(Teresa A. Bartman) Principal
Accounting Officer
Date: March 13, 2001 /s/R. Douglas Grant
(R. Douglas Grant) Director
Date: March 13, 2001 _____________________________
(Eddie Creighton) Director
Date: March 13, 2001 /s/Anna K. Duffin
(Anna K. Duffin) Director
Date: March 13, 2001 /s/L. Craig Fulmer
(L. Craig Fulmer) Director
Date: March 13, 2001 _____________________________
(Jerry L. Helvey) Director
31
Date: March 13, 2001 /s/Allan J. Ludwig
(Allan J. Ludwig) Director
Date: March 13, 2001 /s/Charles E. Niemier
(Charles E. Niemier) Director
Date: March 13, 2001 /s/D. Jean Northenor
(D. Jean Northenor) Director
Date: March 13, 2001 /s/Richard L. Pletcher
(Richard L. Pletcher) Director
Date: March 13, 2001 /s/Steven D. Ross
(Steven D. Ross) Director
Date: March 13, 2001 /s/Terry L. Tucker
(Terry L. Tucker) Director
Date: March 13, 2001 /s/M. Scott Welch
(M. Scott Welch) Director
Date: March 13, 2001 /s/G.L. White
(G.L. White) Director
32
LAKELAND FINANCIAL CORPORATION
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
Incorporated
Herein by Filed
Exhibit No. Description Reference to Herewith
- ----------- ----------------------------- --------------------------- --------
3.1 Amended and Restated Exhibit 4.1 to the
Articles of Incorporation of Company's Form S-8 filed
Lakeland Financial on April 15, 1998
Corporation
3.2 Bylaws of Lakeland Exhibit 3(ii) to the
Financial Corporation Company's Form 10-Q
for the quarter ended June
30, 1996
13 Annual Report to X
Shareholders
10.1 Lakeland Financial Exhibit 4.3 to the
Corporation 1997 Share Company's Form S-8 filed
Incentive Plan on April 15, 1998
21 Subsidiaries X
4.1 Specimen Stock Certificate X
of Lakeland Financial
Corporation
10.2 Lakeland Financial Exhibit 10.1 to the
Corporation 401(k) Plan Company's Form S-8
Filed on October 23,2000
10.3 Form of Change of Control X
Agreements entered into with
Michael L. Kubacki, Charles
D. Smith, Walter L. Weldy
and Robert C. Condon
23 Consent of Crowe, Chizek and X
Company LLP
99 Proxy Statement (as Incorporated by reference
incorporated by reference from Schedule 14A filed by
into this Form 10-K) the Company on March 12,
2001
33
EXHIBIT 13
2000 Report to Shareholders with Report of Independent Auditors.
34
EXHIBIT 21
Subsidiaries
------------
1. Lake City Bank, Warsaw, Indiana, a banking corporation organized under the
laws of the State of Indiana.
2. Lakeland Capital Trust, a statutory business trust formed under Delaware
law.
3. LCB Investments Limited, a subsidiary of Lake City Bank formed under the
laws of Bermuda to manage a portion of the Bank's investment portfolio.
35
Annual Meeting
- ------------------------------------------------------------------------------
The annual meeting of the shareholders of Lakeland Financial Corporation
will be held at noon, April 10, 2001, at the Shrine Building, Kosciusko County
Fair Grounds, Warsaw, Indiana. As of December 31, 2000, there were
approximately 1,900 shareholders.
Special Notice: Form 10-K Available
- ------------------------------------------------------------------------------
The Company will provide without charge to each shareholder its Annual
Report on Form 10-K, including any financial statements and schedules that are
required to be filed with the Securities and Exchange Commission for the
Company's most recent fiscal year. Written request should be sent to Lakeland
Financial Corporation, Attn: Treasurer, P.O. Box 1387, Warsaw, Indiana
46581-1387. The Form 10-K and related exhibits are also available on the
Internet at www.sec.gov.
Registrar and Transfer Agent
- ------------------------------------------------------------------------------
Lake City Bank
Trust Department
P.O. Box 1387
Warsaw, Indiana 46581-1387
Stock and Dividend Information
- ------------------------------------------------------------------------------
The following companies are market makers in Lakeland Financial
Corporation stock:
Stifel, Nicolaus & Company, Inc., 500 North Broadway, St. Louis, Missouri,
63102
Raymond James & Associates, Inc., P.O. Box 130, Elkhart, Indiana, 46515
McDonald Investments, Inc., 214 South Main Street, Elkhart, Indiana, 46516
First Tennessee Capital Markets, 500 West Madison Street, Suite 2940,
Chicago, Illinois, 60661
As of August 25, 1997, the Company's common stock and the preferred
stock of its wholly-owned subsidiary, Lakeland Capital Trust, began trading on
The Nasdaq Stock MarketSM (Nasdaq) under the symbols LKFN and LKFNP. Nasdaq is
a highly-regulated electronic securities market comprised of competing market
makers whose trading is supported by a communications network linking them to
quotation dissemination, trade reporting, and order execution systems. This
market also provides specialized automation services for screen-based
negotiations of transactions, on-line comparison of transactions, and a range
of informational services tailored to the needs of the securities industry,
investors and issuers. Nasdaq is operated by The Nasdaq Stock Market, Inc., a
wholly-owned subsidiary of the National Association of Securities Dealers,
Inc. The high and low prices for 1999 and 2000, which appear in the report
were obtained from The Nasdaq Stock Market.
Forward-Looking Statements
When used in this report and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results
to differ materially from historical earnings and those presently anticipated
or projected.
The Company wishes to caution readers not to place undo reliance on any
such forward-looking statements, which speak only as of the date made, and
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
President's Letter
- ------------------------------------------------------------------------------
We are pleased to report on your Company's progress in 2000. Net income
of $9.3 million is an increase of 12% versus 1999 and represents our
thirteenth consecutive year of record earnings. We continued to successfully
grow our commercial loan portfolio by adding quality new business
relationships and expanding existing relationships. On the deposit side of the
business, we made a special effort to grow core product areas such as checking
and Investor's Weekly. Overall, total deposits increased 13% in 2000 to $845
million. Our trust and brokerage areas enjoyed a 23% increase in total fees
versus 1999 and grew to $2.1 million. Finally, through leveraging our
technology platform and tightly managing direct expenses, we were able to
achieve these results while growing expenses by only 1%.
The Commercial Banking Division had an excellent year of growth by
continuing the tradition of specialized service to our business partners.
Commercial loan outstandings increased to $489 million at year-end compared to
$422 million in 1999. With over 400 combined years of experience, our team of
25 banking officers provides the necessary expertise, personalized service and
understanding of the business trends in our market areas.
The goal of the Commercial Banking Division's cash management group is
to provide services to customers that are equal in quality to our larger
competitors with the attention to detail and hands-on customer service that is
a hallmark of Lake City Bank. Our increased capabilities in the area of cash
management have contributed to our success on the commercial front. An
additional 48 customers were added to our Sweep to Investment product over the
year and lockbox services were sold to 4 new clients. By far, our largest
increase in service provided was in the area of electronic transactions. These
transactions include direct deposit of payroll and direct payment collection
for our customers. We offer many options in this area to accommodate business
clients of all sizes. Our flexibility has paid off as we have seen an increase
of 340,000 electronic transactions over last year, an increase of 35%.
1
President's Letter (continued)
- ------------------------------------------------------------------------------
Higher interest rates in 2000 reduced home sales and housing starts and
diminished mortgage refinancing. Nevertheless, the gain on the sale of
mortgage loans totaled over $504,000 in 2000. The Mortgage Division expanded
product offerings during the year, adding secondary markets for jumbo fixed
rate loans and streamlining FHA/VA lending for affordable housing. The focus
of the Consumer Lending Division has shifted from indirect auto lending to the
home equity line of credit. This product continues to be the area of consumer
lending experiencing the greatest growth, with outstanding balances increasing
24% in 2000. The home equity line of credit is secured by a mortgage on the
borrower's residence, so the low interest rate and potential tax deductibility
makes this attractive to our customers. Historically low levels of delinquency
and loss, as well as variable rates and low servicing costs, make this an
excellent product for your Company.
As noted earlier, the Trust and Investment Management Division,
consisting of personal trust, investment management, brokerage, retirement
services and corporate trust experienced strong growth in 2000. Assets under
administration were more than $800 million by the end of the year. With our
clients' interests in mind, we have formed an alliance with Wright Investors'
Service. We believe that they are one of the premier professional investment
management organizations in the country with extensive databases, research
capabilities and economic forecasting expertise. This partnership should
provide our managers with the complete and current information they need to be
certain that our clients are receiving the best investment assistance. Our
transition to new, more powerful and efficient personal trust and corporate
trust systems should provide our clients with the latest in technological
innovation, including on-line access to their account information.
Banking via the Internet is growing with personal and small business
accounts numbering nearly 3,000. Internet customers enjoy the ease and
convenience of access to their accounts from their home or office. Bill
payment, offered in early 2001, has kept the emphasis on customer service with
advanced technology. We are developing a new corporate internet banking
product called CommercialLink. It provides multi-level security for customers
to view comprehensive account summary and details, deposit transactions
history, funds transfer, stop payments and wire transfer requests. Telephone
banking customers continue to increase with over 8,000 customers enjoying the
ease and convenience of accessing accounts either through the automated
system, with nearly 500,000 calls received, or by speaking to customer service
representatives who answered over 62,000 calls this year. With the variety of
options available to our customers, we continue to provide options and enhance
"Banking Like It Ought To Be".
2
President's Letter (continued)
- ------------------------------------------------------------------------------
Prospero, Spanish for prosperity, was introduced to assist our Latino
neighbors as they integrate into the community. On-site seminars at various
companies are designed to assist Latino employees in establishing banking
accounts, developing good credit and acquiring knowledge in purchasing
property. In addition, the program is designed to help the Company stabilize
it's workforce.
Young Adult Checking was introduced and has been a good addition to the
LCB product mix. We opened over 1,000 new accounts and have the opportunity
for additional banking relationships with this young segment of the
population. Money Market Checking was enhanced to include personal overnight
investments. The Direct Deposit Checking Account is a cost effective way for
people to have banking services and is meeting the needs of a large segment of
our market area by providing the option for free checking with the electronic
deposit of pension or payroll receipts.
During the year 2000, employees saw many positive benefit changes. The
Lake City Bank 401(k) plan was changed from a balance forward plan to a daily
valuation plan, offering employees access to their 401(k) accounts daily
through the Internet, as well as through a telephone voice response system.
Employees are given eight different investment options, with the ability to
trade daily. The vesting schedule also changed from a seven-year to a six-year
vesting schedule. Group Term Life and Accidental Death/Dismemberment Insurance
was enhanced to reflect coverage equal to two times an employee's annual
salary. Also, the health insurance plan was updated to include a prescription
card plan, as well as to offer basic dental and vision plans.
Lake City University (LCU) began in 2000. LCU exists to unify all
training activities and provide a way for employees to keep their job
knowledge fresh and develop their banking career. Over 14,000 contact hours
were offered in all areas of banking including customer service, commercial
and consumer lending, business development, PC and technical skills,
leadership and supervision, compliance, communication, interpersonal
relationships, and train-the-trainer. Monthly customer service representative
meetings and quarterly corporate training for all employees kept everyone
informed about new ventures in the world of banking. LCU staff also assisted
employees in accessing hundreds of hours of external training in seminars,
conferences, and specialized classes. Conversational Spanish for Bankers, a
ten-week course taught by a local Spanish-speaking instructor, allowed many of
our employees to learn the basics of the language that would assist them as
they opened new accounts and answered banking questions for our Latino
customers.
3
President's Letter (continued)
- ------------------------------------------------------------------------------
Executive Vice President D. Jean Northenor retired from active service
on February 9, 2001. She subsequently joined the Bank's Board of Directors as
well as the Board of Lakeland Financial Corporation. In her 17 years of
service, she has been a very important part of our management team and we will
miss her day-to-day presence. At the same time, we will certainly benefit from
her counsel in her new role as a Director.
David M. Findlay joined your Company as Executive Vice President and
Chief Financial Officer. He has over 16 years experience in the financial
sector, most recently serving as Chief Financial Officer and Treasurer of
Mishawaka, Indiana based Quality Dining. His prior experience included various
positions with Chicago based Northern Trust Company. Findlay, a native of
Elkhart, Indiana is a graduate of DePauw University.
Steven D. Ross, President of Bertsch Services, was elected to the Board
of Directors of both Lake City Bank and Lakeland Financial Corporation. Ross
is a graduate of Ball State University. An active community leader, he serves
as a board member of the Indiana Chamber of Commerce, is President of the
Indiana Vending Council and serves on many local boards and commissions. He is
a valuable addition to your Board.
Senior Management promotions since the beginning of 2000 include Charles
D. Smith and Kevin L. Deardorff to Executive Vice President in the Commercial
and Retail Banking Divisions, respectively. Promoted to Senior Vice President
were Jill A. DeBatty - Human Resources, Thomas P. Frantz - Retail Lending,
Michael E. Gavin and Harold A. "Rocky" Meyer - Commercial Lending. These 6
senior officers represent over 130 years of financial experience and are some
of your Company's most valuable resources.
The Fort Wayne Southwest office opened in October. We have been well
accepted in that market area. Other areas of current expansion include a third
Fort Wayne office located on the Northeast side of town and a third South Bend
office that will open in late spring. We will continue to be proactive in
pursuing expansion opportunities in areas where we believe we can grow
profitably.
4
President's Letter (continued)
- ------------------------------------------------------------------------------
Connecting on a personal level remains a constant with our offices. We
hosted many events including a cooperative effort with Bethel College on a
series of seminars. The popular Egg Breakfast, co-hosted with Creighton
Brothers celebrated its 30th year. Business and Agricultural seminars and a
401(k) informational meeting were of benefit to our customers in providing
needed information to keep current in the ever-changing marketplace. We
celebrate February birthdays and anniversaries at Grace Village in Winona Lake
and enjoy a Spring Celebration at Hubbard Hill in Elkhart. Our lives are
enriched during those times as the residents warmly welcome us into their
homes.
Overall, we overcame many obstacles during 2000, including the slow
mortgage market, narrowing interest margins and softening economic conditions
in several of our markets. Your Company's committed team rose to every
occasion and achieved a very solid performance in 2000. We enter 2001
confronted with many of these same issues. As we begin the year, there are
continuing signs of economic weakness that could lead to asset quality and
balance sheet growth challenges. While we intend to maintain our focus on
commercial loan growth, we will not compromise our historical credit
standards. The competition for customer's deposits and recent interest rate
movements have placed continued pressure on our net interest margin.
Nonetheless, we intend to provide the highest quality service to our
customers, to market ourselves aggressively, and to grow our earnings
consistently over the long term.
I would like to thank shareholders, customers and employees for your
support. Lake City Bank is a very special institution, and I look forward to
working with all of you to further extend its success.
Michael L. Kubacki
President & CEO
5
Lakeland Financial Corporation and Lake City Bank Board of Directors
- ------------------------------------------------------------------------------
Eddie Creighton Anna K. Duffin L. Craig Fulmer R. Douglas Grant
Former Partner and Civic Leader Chairman, Chairman,
General Manager, Heritage Financial Lakeland Financial
Creighton Brothers Group, Inc. Corporation and Lake
City Bank
Jerry L. Helvey Michael L. Kubacki Allan J. Ludwig Charles E. Niemier
President, President, Industrial Developer Senior Vice President,
Helvey & Associates, Inc. Lakeland Financial Biomet, Inc.
Corporation and Lake
City Bank
D. Jean Northenor Richard L. Pletcher Steven D. Ross Terry L. Tucker
Former Executive Vice President, President, President,
President, Pletcher Enterprises, Inc. Bertsch Services Maple Leaf Farms, Inc.
Lake City Bank
M. Scott Welch G.L. White
Chief Executive Officer, Former President,
Welch Packaging Group United Telephone
Company of Indiana
LAKELAND FINANCIAL CORPORATION OFFICERS
R. Douglas Grant Chairman
Michael L. Kubacki President and Chief Executive Officer
Robert C. Condon Executive Vice President
Kevin L. Deardorff Executive Vice President
David M. Findlay Executive Vice President and Secretary
Charles D. Smith Executive Vice President
Walter L. Weldy Executive Vice President
Teresa A. Bartman Vice President and Controller
James J. Nowak Vice President and Treasurer
6
Selected Financial Data (in thousands except share and per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
Interest income $ 80,050 $ 69,395 $ 63,667 $ 52,699 $ 45,941
Interest expense 45,001 37,093 36,091 28,060 23,737
------------- ------------- ------------- ------------- -------------
Net interest income . . . . . . . . . . . . . . . . . . 35,049 32,302 27,576 24,639 22,204
Provision for loan losses 1,206 1,310 480 269 120
------------- ------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 33,843 30,992 27,096 24,370 22,084
Other noninterest income 9,866 9,311 8,486 6,978 5,396
Net gains on sale of real estate
mortgages held for sale 504 1,302 1,467 545 412
Net securities gains (losses) 0 1,340 1,256 (19) (9)
Noninterest expense (30,775) (30,541) (26,491) (20,414) (17,935)
------------- ------------- ------------- ------------- -------------
Income before income tax expense . . . . . . . . . . . . 13,438 12,404 11,814 11,460 9,948
Income tax expense 4,116 4,085 3,926 3,920 3,504
------------- ------------- ------------- ------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 9,322 $ 8,319 $ 7,888 $ 7,540 $ 6,444
============= ============= ============= ============= =============
Average shares outstanding* 5,813,984 5,813,984 5,813,984 5,813,162 5,792,825
============= ============= ============= ============= =============
Basic earnings per common share* $ 1.60 $ 1.43 $ 1.36 $ 1.30 $ 1.11
============= ============= ============= ============= =============
Diluted earnings per common share* $ 1.60 $ 1.43 $ 1.36 $ 1.30 $ 1.11
============= ============= ============= ============= =============
Cash dividends declared* $ 0.52 $ 0.44 $ 0.33 $ 0.30 $ 0.23
============= ============= ============= ============= =============
Balances at December 31:
- ------------------------
Total assets $ 1,149,157 $ 1,039,843 $ 978,909 $ 796,478 $ 656,551
Total deposits $ 845,329 $ 748,243 $ 739,347 $ 612,992 $ 496,553
Total short-term borrowings $ 200,078 $ 195,374 $ 135,690 $ 84,117 $ 88,380
Long-term borrowings $ 11,433 $ 16,473 $ 21,386 $ 25,367 $ 23,531
Guaranteed preferred beneficial interests in
Company's subordinated debentures $ 19,291 $ 19,264 $ 19,238 $ 19,211 $ 0
Total stockholders' equity $ 64,973 $ 54,194 $ 55,156 $ 48,256 $ 42,043
* Adjusted for 2-for-1 stock splits on April 30, 1996 and April 30, 1998.
7
Stock and Dividend Information
- ----------------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
============= ============= ============= =============
2000
Trading range (per share)*
Low $ 10.56 $ 10.31 $ 11.25 $ 12.69
High $ 13.13 $ 14.00 $ 14.38 $ 17.88
Dividends declared (per share) $ 0.13 $ 0.13 $ 0.13 $ 0.13
1999
Trading range (per share)*
Low $ 13.75 $ 16.00 $ 17.06 $ 17.75
High $ 18.00 $ 19.88 $ 18.50 $ 19.88
Dividends declared (per share) $ 0.11 $ 0.11 $ 0.11 $ 0.11
* The trading ranges are the high and low as obtained from the Nasdaq Stock Market.
8
Consolidated Balance Sheets (in thousands except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 2000 1999
------------ ------------
ASSETS
Cash and due from banks $ 84,682 $ 59,321
Short-term investments 4,311 3,783
------------ ------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,993 63,104
Securities available for sale (carried at fair value) 293,608 271,421
Real estate mortgages held for sale 183 862
Total loans 718,876 653,898
Less allowance for loan losses 7,124 6,522
------------ ------------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 711,752 647,376
Land, premises and equipment, net 27,297 27,808
Accrued income receivable 6,744 5,420
Intangible assets 9,624 10,522
Other assets 10,956 13,330
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,149,157 $ 1,039,843
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 164,606 $ 136,595
Interest bearing deposits 680,723 611,648
------------ ------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 845,329 748,243
Short-term borrowings
Federal funds purchased 8,250 15,000
Securities sold under agreements to repurchase 138,154 121,374
U.S. Treasury demand notes 3,674 4,000
Other short-term borrowings 50,000 55,000
------------ ------------
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,078 195,374
Accrued expenses payable 6,684 4,760
Other liabilities 1,369 1,535
Long-term borrowings 11,433 16,473
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,291 19,264
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,084,184 985,649
Commitments, off-balance sheet risks and contingencies
STOCKHOLDERS' EQUITY
Common stock: 90,000,000 shares authorized, no par value,
5,813,984 shares issued, 5,784,105 outstanding as of December 31, 2000;
5,813,984 shares issued, 5,792,182 outstanding as of December 31, 1999 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 55,734 49,422
Accumulated other comprehensive income (loss) (207) (4,797)
Treasury stock, at cost (2000 - 29,879 shares, 1999 - 21,802 shares) (544) (421)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,973 54,194
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,149,157 $ 1,039,843
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
9
Consolidated Statements of Income (in thousands except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2000 1999 1998
------------ ------------ ------------
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 61,554 $ 51,602 $ 44,225
Tax-exempt 142 182 194
Interest and dividends on securities
Taxable 16,150 14,888 16,416
Tax-exempt 1,782 2,448 2,313
Interest on short-term investments 422 275 519
------------ ------------ ------------
Total interest income 80,050 69,395 63,667
Interest on deposits 32,395 27,153 28,154
Interest on borrowings
Short-term 10,083 7,139 4,724
Long-term 2,523 2,801 3,213
------------ ------------ ------------
Total interest expense 45,001 37,093 36,091
------------ ------------ ------------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,049 32,302 27,576
Provision for loan losses 1,206 1,310 480
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . 33,843 30,992 27,096
NONINTEREST INCOME
Trust and brokerage income 2,133 1,732 1,629
Service charges on deposits 4,423 4,321 4,004
Other income 3,310 3,258 2,853
Net gains on the sale of real estate mortgages held for sale 504 1,302 1,467
Net securities gains 0 1,340 1,256
------------ ------------ ------------
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,370 11,953 11,209
NONINTEREST EXPENSE
Salaries and employee benefits 15,927 15,911 14,076
Net occupancy expense 2,095 2,148 1,866
Equipment costs 2,991 3,167 2,205
Other expense 9,762 9,315 8,344
------------ ------------ ------------
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,775 30,541 26,491
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 13,438 12,404 11,814
Income tax expense 4,116 4,085 3,926
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,322 $ 8,319 $ 7,888
============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING 5,813,984 5,813,984 5,813,984
============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 1.60 $ 1.43 $ 1.36
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $ 1.60 $ 1.43 $ 1.36
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
10
Consolidated Statements of Changes in Stockholders' Equity (in thousands except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2000 1999 1998
-------------------------- -------------------------- --------------------------
COMMON STOCK
Balance at beginning of the period $ 1,453 $ 1,453 $ 1,453
------------ ------------ ------------
Balance at end of the period . . . . . . . . . 1,453 1,453 1,453
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of the period 8,537 8,537 8,537
------------ ------------ ------------
Balance at end of the period . . . . . . . . . 8,537 8,537 8,537
RETAINED EARNINGS
Balance at beginning of the period 49,422 43,652 37,766
Net income 9,322 $ 9,322 8,319 $ 8,319 7,888 $ 7,888
Cash dividends declared per share
($.52, $.44 and $.33) (3,010) (2,549) (2,002)
------------ ------------ ------------
Balance at end of the period . . . . . . . . . 55,734 49,422 43,652
ACCUMULATED OTHER
COMPREHENSIVE INCOME
Balance at beginning of the period (4,797) 1,848 685
Unrealized gain (loss) on available for sale
securities arising during the period 4,590 (5,836) (573)
Reclassification adjustments for accumulated
(gains) losses included in net income 0 (809) (759)
Cumulative effect of adopting SFAS No. 133 0 0 2,495
------------ ------------ ------------
Other comprehensive income (loss)
(net of taxes $3,011, $(4,359) and $762) 4,590 4,590 (6,645) (6,645) 1,163 1,163
------------ ------------ ------------ ------------ ------------ ------------
Balance at end of the period . . . . . . . . . (207) (4,797) 1,848
Total comprehensive income . . . . . . . . . . $ 13,912 $ 1,674 $ 9,051
============ ============ ============
TREASURY STOCK
Balance at beginning of the period (421) (334) (185)
Acquisition of treasury stock (123) (87) (149)
------------ ------------- ------------
Balance at end of the period . . . . . . . . . (544) (421) (334)
------------ ------------- ------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . $ 64,973 $ 54,194 $ 55,156
============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
11
Consolidated Statements of Cash Flows (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 9,322 $ 8,319 $ 7,888
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 2,429 2,373 1,782
Provision for loan losses 1,206 1,310 480
Pension plan curtailment gain (500) 0 0
Amortization of intangible assets 925 957 942
Amortization of loan servicing rights 233 265 171
Loans originated for sale (21,430) (79,276) (65,425)
Net gain on sale of loans (504) (1,302) (1,467)
Proceeds from sale of loans 22,420 82,796 64,612
Net (gain) loss on sale of premises and equipment 0 26 (40)
Net gain on sale of securities available for sale 0 (1,340) (1,257)
Net loss on calls of securities held to maturity 0 0 1
Net securities amortization 970 1,935 1,379
Increase (decrease) in taxes payable (491) 1,078 (1,207)
(Increase) decrease in income receivable (1,324) 249 (754)
Increase (decrease) in accrued expenses payable 2,275 (14) 862
Increase in other assets (153) (1,789) (1,940)
Increase (decrease) in other liabilities (166) (54) 62
------------ ------------ ------------
Total adjustments 5,890 7,214 (1,799)
------------ ------------ ------------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . 15,212 15,533 6,089
Cash flows from investing activities:
Proceeds from sale of securities available for sale 0 44,428 65,404
Proceeds from maturities, calls and principal paydowns of securities held to maturity 0 0 45,787
Proceeds from maturities, calls and principal paydowns of securities available for sale 38,750 65,695 32,980
Purchases of securities available for sale (54,306) (65,485) (89,948)
Purchases of securities held to maturity 0 0 (131,919)
Net increase in total loans (65,582) (115,885) (80,809)
Proceeds from sales of land, premises and equipment 436 82 530
Purchases of land, premises and equipment (2,354) (3,919) (3,950)
Net proceeds (payments) from acquisitions 0 0 30,020
------------ ------------ ------------
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . (83,056) (75,084) (131,905)
Cash flows from financing activities:
Net increase in total deposits 97,086 8,896 92,034
Proceeds from short-term borrowings 24,058,107 21,877,999 4,740,920
Payments on short-term borrowings (24,053,403) (21,818,315) (4,689,347)
Proceeds from long-term borrowings 0 5,124 20,050
Payments on long-term borrowings (5,040) (10,037) (24,031)
Dividends paid (2,894) (2,433) (1,915)
Purchase of treasury stock (123) (87) (149)
------------ ------------ ------------
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . 93,733 61,147 137,562
------------ ------------ ------------
Net increase in cash and cash equivalents 25,889 1,596 11,746
Cash and cash equivalents at beginning of the year 63,104 61,508 49,762
------------ ------------ ------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . $ 88,993 $ 63,104 $ 61,508
============ ============ ============
Cash paid during the year for:
Interest $ 43,351 $ 37,459 $ 35,228
Income taxes $ 4,605 $ 4,139 $ 3,610
Securities transferred from held to maturity to available for sale $ 0 $ 0 $ 249,087
Loans transferred to other real estate $ 0 $ 185 $ 683
The accompanying notes are an integral part of these consolidated financial statements.
12
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and
Principles of Consolidation:
The consolidated financial statements include Lakeland Financial
Corporation and its wholly-owned subsidiaries, Lake City Bank and Lakeland
Capital Trust, together referred to as the "Company". Also included in the
consolidated financial statements is LCB Investments Limited, a wholly-owned
subsidiary of Lake City Bank. All intercompany transactions and balances are
eliminated in consolidation.
The Company provides financial services through its subsidiary, Lake City
Bank (the Bank), a full-service commercial bank with 43 branch offices in
fifteen counties in northern Indiana. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are residential commercial, consumer loans and mortgage.
Substantially all loans are secured by specific items of collateral including
business assets, consumer assets and real estate. Commercial loans are
generally expected to be repaid from cash flow from operations of businesses.
Real estate loans are secured by both residential and commercial real estate.
Other financial instruments, which potentially represent concentrations of
credit risk, include deposit accounts in other financial institutions.
Use of Estimates:
To prepare financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions based on
available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, the fair values of
financial instruments, and the fair value of mortgage servicing rights are
particularly subject to change.
Cash Flows:
Cash and cash equivalents includes cash, demand deposits in other
financial institutions and short-term investments with maturities of 90 days
or less. Cash flows are reported net for customer loan and deposit
transactions.
Securities:
Securities are classified as available for sale when they might be sold
before maturity. Securities available for sale are carried at fair value, with
unrealized holding gains and losses reported in other comprehensive income
(loss). Trading securities are bought for sale in the near term and are
carried at fair value, with changes in unrealized holding gains and losses
included in income. Federal Home Loan Bank Stock is carried at cost in other
assets. Securities are classified as held to maturity and carried at amortized
cost when management has the positive intent and ability to hold them to
maturity.
The Company adopted SFAS No. 133 as of October 1, 1998. As permitted in
SFAS No. 133, on October 1, 1998, the Company transferred securities with an
amortized cost of $249,087,000 and a fair value of $253,218,000 from the held
to maturity portfolio to the available for sale portfolio. None of these
securities were sold during the fourth quarter of 1998. The Company does not
have any derivative instruments nor does the Company have any hedging
activities.
Interest income includes amortization of purchase premium or discount.
Gains and losses on sales are based on the amortized cost of the security
sold. Securities are written down to fair value when a decline in fair value
is not temporary.
Loans:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs,
and an allowance for loan losses. Loans held for sale are reported at the
lower of cost or market, on an aggregate basis.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income is not reported when full loan repayment is in doubt and the loan is
placed on non-accrual. All unpaid accrued interest is reversed and interest
income is subsequently recorded only to the extent cash payments are received.
Accrual status is resumed when all contractually due payments are brought
current and future payments are reasonably assured.
Allowance for Loan Losses:
The allowance for loan losses is a valuation allowance for probable
incurred credit losses, increased by the provision for loan losses and
decreased by charge-offs less recoveries. Management estimates the allowance
balance required using past loan loss experience, known and inherent risks in
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. This evaluation is inherently subjective, as it requires estimates
that are susceptible to significant revision, as more information becomes
available or as future events change. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that,
in management's judgment, should be charged-off. Loan losses are charged
against the allowance when management believes the uncollectability of a loan
balance is confirmed.
A loan is impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of
similar nature such as residential mortgage, consumer, and credit card loans,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at
the present value of estimated future cash flows using the loan's existing
rate or at the fair value of collateral if repayment is expected solely from
the collateral.
Foreclosed Assets:
Assets acquired through or instead of loan foreclosure are initially
recorded at fair value when acquired, establishing a new cost basis. If fair
value declines, a valuation allowance is recorded through expense. Costs after
acquisition are expensed.
Land, Premises and Equipment:
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on both straight-line and
accelerated methods over the useful lives of the assets. Long-term assets are
reviewed for impairment when events indicate the carrying amount may not be
recoverable from future undiscounted cash flows. If impaired, the assets are
recorded at discounted amounts.
Loan Servicing Rights:
Loan servicing rights are recognized as assets for the allocated value of
retained servicing rights on loans sold. Loan servicing rights are expensed in
proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and secondarily, as to geographic
and prepayment characteristics. Any impairment of a
13
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
grouping is reported as a valuation allowance. Fair value is determined using
prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions.
Intangibles:
Purchased intangible assets, primarily goodwill and core deposit value, are
recorded at cost and amortized over the estimated life. Goodwill amortization
is straight-line over 15 years, and core deposit amortization is accelerated
over 12 years. Goodwill is reported net of accumulated amortization of
$1,997,000 and $1,330,000 at year end 2000 and 1999, respectively. Core
deposits are reported net of accumulated amortization of $792,000 and
$561,000.
Repurchase Agreements:
Substantially all repurchase agreement liabilities represent amounts
advanced by various customers. Securities are pledged to cover these
liabilities, which are not covered by federal deposit insurance.
Benefit Plans:
A noncontributory defined benefit pension plan covers substantially all
employees. Funding of the plan equals or exceeds the minimum funding
requirement determined by the actuary. The projected unit credit cost method
is used to determine expense. Benefits are based on years of service and
compensation levels. Effective April 1, 2000, the defined benefit pension plan
was frozen. The Company maintains a directors' deferred compensation plan. At
inception, a participant can elect to receive interest based on the Company's
investment in either Company stock or a certificate of deposit for their
contribution. For participants electing Company stock, the Company acquires
shares on the open market and records such shares as treasury stock.
Stock Compensation:
At the inception of the Lakeland Financial Corporation Stock Option Plan,
there were 600,000 shares of common stock reserved for grants of stock options
to employees of Lakeland Financial Corporation, its subsidiaries and Board of
Directors. As of December 31, 2000, 454,770 options had been granted and
145,230 were available for future grants. These are accounted for under APB
No. 25. Employee compensation expenses under stock option plans is reported if
options are granted below market price at grant date. The Company has not made
any such grants. Pro forma disclosures of net income and earnings per share
are shown using the fair value method to measure expense for options granted
using an option pricing model to estimate fair value.
Income Taxes:
An annual consolidated federal income tax return is filed by the Company.
Income tax expense is recorded based on the amount of taxes due on its tax
return plus deferred taxes computed based upon the expected future tax
consequences of temporary differences between carrying amounts and tax bases
of assets and liabilities, using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
Financial Instruments:
Financial instruments include credit instruments, such as commitments to
make loans and standby letters of credit, issued to meet customer financing
needs. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
Earnings Per Common Share:
Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share includes the dilutive effect of additional potential
common shares issuable under stock options. Earnings and dividends per share
are restated for all stock splits and dividends through the date of issue of
the financial statements. The common shares outstanding for the Stockholders'
Equity section of the Balance Sheet for 2000 and 1999 reflect the acquisition
of 29,879 and 21,802 shares, respectively of Lakeland Financial Corporation
common stock that have been purchased under the directors' deferred
compensation plan described above. Because these shares are held in trust for
the participants, they are treated as outstanding when computing the
weighted-average common shares outstanding for the calculation of both basic
and diluted earnings per share.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on
securities available for sale during the year, which are also recognized as
separate components of equity.
Loss Contingencies:
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood
of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will
have a material effect on the financial statements.
Restrictions on Cash:
The Company was required to have $50,000 of cash on hand or on deposit
with the Federal Reserve Bank to meet regulatory reserve and clearing
requirements at both year-ends 2000 and 1999. These balances do not earn
interest.
Dividend Restriction:
Banking regulations require maintaining certain capital levels and may
limit the dividends paid by the Bank to the Company or by the Company to its
shareholders.
Fair Value of Financial Instruments:
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate note.
Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other
14
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Derivatives:
All derivative instruments are recorded at their fair values. If
derivative instruments are designated as hedges of fair values, both the
change in the fair value of the hedge and the hedged item are included in
current earnings. Fair value adjustments related to cash flow hedges are
recorded in other comprehensive income and reclassified to earnings when the
hedged transaction is reflected in earnings. Ineffective portions of hedges
are reflected in income currently. For all periods presented, there were no
derivative instruments.
Industry Segments:
Internal financial information is primarily reported and aggregated as a
single segment known as banking.
Reclassifications:
Certain amounts appearing in the financial statements and notes thereto
for prior periods have been reclassified to conform with the current
presentation. The reclassifications had no effect on net income or
stockholders' equity as previously reported.
NOTE 2 - SECURITIES
Information related to the fair value of securities and the total gains
and losses for securities with net gains and losses in accumulated other
comprehensive income (loss) at December 31 is provided in the table below.
Fair
Value Gains Losses
----------- ----------- -----------
(in thousands)
Securities available for sale at December 31, 2000:
U.S. Treasury securities $ 38,066 $ 212 $ (183)
U.S. Government agencies 6,550 0 (122)
Mortgage-backed securities 207,594 1,809 (1,714)
State and municipal securities 35,430 214 (200)
Other debt securities 5,968 9 (368)
----------- ----------- -----------
Total securities available for sale at December 31, 2000 . . . . . . . . . . . . . . $ 293,608 $ 2,244 $ (2,587)
=========== =========== ===========
Securities available for sale at December 31, 1999:
U.S. Treasury securities $ 34,614 $ 60 $ (579)
U.S. Government agencies 6,313 0 (380)
Mortgage-backed securities 192,569 51 (3,727)
State and municipal securities 32,714 37 (2,755)
Other debt securities 5,211 0 (651)
Total securities available for sale at December 31, 1999 . . . . . . . . . . . . . . $ 271,421 $ 148 $ (8,092)
=========== =========== ===========
Information regarding the fair value of available for sale debt
securities by maturity as of December 31, 2000, is presented below. Maturity
information is based on contractual maturity for all securities other than
mortgage-backed securities. Actual maturities of securities may differ from
contractual maturities because borrowers may have the right to prepay the
obligation without prepayment penalty.
Fair
Value
-----------
(in thousands)
Due in one year or less $ 30,173
Due after one year through five years 18,018
Due after five years through ten years 2,091
Due after ten years 35,732
-----------
Total contractual maturity securities 86,014
Mortgage-backed securities 207,594
-----------
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 293,608
===========
Security proceeds, gross gains and gross losses for 2000, 1999 and 1998
were as follows:
2000 1999 1998
----------- ----------- -----------
(in thousands)
Sales and calls of securities available for sale:
Proceeds $ 807 $ 46,350 $ 66,197
Gross gains 0 1,340 1,257
Gross losses 0 0 0
Calls of securities held to maturity:
Proceeds $ 0 $ 0 $ 1,532
Gross gains 0 0 0
Gross losses 0 0 1
15
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 2 - SECURITIES (continued)
Securities with carrying values of $282,955,000 and $264,847,000 were
pledged as of December 31, 2000 and 1999, as collateral for deposits of public
funds, securities sold under agreements to repurchase, borrowings from the
FHLB and for other purposes as permitted or required by law.
NOTE 3 - LOANS
Total loans outstanding as of year-end consisted of the following:
2000 1999
----------- -----------
(in thousands)
Commercial and industrial loans $ 440,941 $ 375,421
Agri-business and agricultural loans 48,558 46,661
Real estate mortgage loans 49,104 42,384
Real estate construction loans 3,627 4,488
Installment loans and credit cards 176,646 184,944
----------- -----------
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 718,876 $ 653,898
=========== ===========
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for 2000,
1999 and 1998:
2000 1999 1998
----------- ----------- -----------
(in thousands)
Balance, January 1 $ 6,522 $ 5,510 $ 5,308
Provision for loan losses 1,206 1,310 480
Loans charged-off 748 435 416
Recoveries 144 137 138
Net loans charged-off 604 298 278
----------- ----------- -----------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,124 $ 6,522 $ 5,510
=========== =========== ===========
Nonaccrual loans at December 31, 2000, 1999 and 1998, totaled $206,000,
$329,000 and $0. Interest not recorded on nonaccrual loans was approximately
$24,000, $26,000 and $42,000 for 2000, 1999 and 1998, respectively. Loans
renegotiated as troubled debt restructuring totaled $1,127,000 and $1,179,000
as of December 31, 2000 and 1999, respectively. Interest income of $106,000,
$95,000 and $84,000 was recognized in 2000, 1999 and 1998, respectively. Had
these loans been performing under the original contract terms, an additional
$17,000 would have been reflected in interest income during 2000, $22,000 in
1999 and $47,000 in 1998. The Company is not committed to lend additional
funds to debtors whose loans have been modified. At December 31, 2000 the
Company had one loan of $1.4 million meeting the definition of impaired. The
Company therefore has allocated $212,000 of the allowance for loan losses to
this loan. In 1999, the Company had one loan meeting the definition of
impaired totaling $246,000, which was included in the total of nonaccrual
loans. At December 31, 1998, the Company had no loans meeting the definition
of impaired. One loan was classified as impaired during 1998, but was repaid
prior to year-end. Loans past due over 90 days and still accruing interest
were $6,791,000 (excluding impaired loans) and $171,000 at year-end 2000 and
1999, respectively. The increase in loans past due 90 days or more and still
accruing resulted primarily from the inclusion of two commercial loans
totaling $6.2 million, or approximately 90% of the $6.8 million in this
category. Of this amount, $1.4 million was paid off subsequent to the end of
the fiscal year. A second loan of $4.8 million matured in the fourth quarter
of 2000 and has therefore been included in this category. The borrower is
current on all interest under the matured facility. The Company has reached an
agreement with a bank participant and the borrower to extend the terms of the
financing and anticipates that the extension will be completed during the
first quarter of 2001.
NOTE 5 - SECONDARY MORTGAGE MARKET ACTIVITIES
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
$150,875,000 and $147,932,000 at December 31, 2000 and 1999, respectively. Net
loan servicing income was $147,000, $57,000 and $11,000 for 2000, 1999 and
1998. Information on loan servicing rights follows:
2000 1999
----------- -----------
(in thousands)
Beginning of year $ 1,459 $ 1,008
Originations 193 716
Amortization (233) (265)
----------- -----------
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,419 $ 1,459
=========== ===========
At year end 2000 and 1999, there was no valuation allowance required.
16
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 6 - LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation were
as follows at December 31:
2000 1999
----------- -----------
(in thousands)
Land $ 6,989 $ 6,717
Premises 21,060 19,639
Equipment 13,902 14,551
----------- -----------
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,951 40,907
Less accumulated depreciation 14,654 13,099
----------- -----------
Land, premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,297 $ 27,808
=========== ===========
NOTE 7 - DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination
of $100,000, was approximately $180,299,000 and $125,919,000 at December 31,
2000 and 1999, respectively.
At December 31, 2000, the scheduled maturities of time deposits were as
follows:
Amount
-----------
(in thousands)
Maturing in 2001 $ 502,376
Maturing in 2002 37,820
Maturing in 2003 12,117
Maturing in 2004 3,762
Maturing in 2005 3,126
Thereafter 1,048
-----------
Total time deposits . . . . . . . . . . . . . . . . . . . . . . $ 560,249
===========
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repo accounts) represent
collateralized borrowings with customers located primarily within the
Company's trade area. Repo accounts are not covered by federal deposit
insurance and are secured by securities owned. Information on these
liabilities and the related collateral for 2000 and 1999 is as follows:
2000 1999
----------- -----------
(in thousands)
Average balance during the year $ 121,267 $ 120,950
Average interest rate during the year 5.35% 4.76%
Maximum month-end balance during the year $ 143,677 $ 143,353
Securities underlying the agreements at year-end
Amortized cost $ 184,036 $ 123,388
Fair value $ 183,492 $ 121,494
Collateral Value
--------------------------------------------------
U.S. Treasury Mortgage-backed
Weighted Securities Securities
Average ------------------------ ------------------------
Repurchase Interest Amortized Fair Amortized Fair
Term Liability Rate Cost Value Cost Value
- ---------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(in thousands) (in thousands)
On demand $ 118,550 5.25% $ 0 $ 0 $ 135,791 $ 135,361
1 to 30 days 2,350 5.92 5,323 5,330 377 372
31 to 90 days 5,821 5.90 4,905 4,907 5,210 5,176
Over 90 days 11,433 6.18 27,809 27,829 4,621 4,517
----------- ----------- ----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 138,154 5.37% $ 38,037 $ 38,066 $ 145,999 $ 145,426
=========== =========== =========== =========== =========== ===========
The Company retains the right to substitute similar type securities, and
has the right to withdraw all collateral applicable to repo accounts whenever
the collateral values are in excess of the related repurchase liabilities. At
December 31, 2000, there were no material amounts of securities at risk with
any one customer. The Company maintains control of these securities through
the use of third-party safekeeping arrangements.
17
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 9 - BORROWINGS
Long-term borrowings at December 31 consisted of:
2000 1999
----------- -----------
(in thousands)
Federal Home Loan Bank of Indianapolis Notes, Variable Rate, Due April 28, 2000 $ 0 $ 5,000
Federal Home Loan Bank of Indianapolis Notes, 5.25%, Due December 28, 2001 10,000 10,000
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 1,300 1,300
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due January 15, 2018 49 49
Capital Leases 84 124
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,433 $ 16,473
=========== ===========
All notes require monthly interest payments and were secured by
residential real estate loans and securities with a carrying value of
$110,952,000 at December 31, 2000. At December 31, 2000, the Company owned
$3,567,500 of Federal Home Loan Bank (FHLB) stock, which also secures debts to
the FHLB. The capital leases had original terms of approximately three years
and require monthly payments.
In addition to the long-term borrowings, the Company has $50 million in
variable rate notes with the FHLB at December 31, 2000. These notes mature at
various times between April 23, 2001 and June 26, 2001. These notes are
classified as short-term borrowings in the financial statements. The Company
is authorized to borrow up to $100 million from the FHLB.
NOTE 10 - GUARANTEED PREFERRED BENEFICIAL INTERESTS
In September 1997, Lakeland Capital Trust (Lakeland Trust) completed a
public offering of 2 million shares of cumulative trust preferred securities
(Preferred Securities) with a liquidation preference of $10 per security. The
proceeds of the offering were loaned to the Company in exchange for
subordinated debentures with terms similar to the Preferred Securities. The
sole assets of Lakeland Trust are the subordinated debentures of the Company
and payments thereunder. The subordinated debentures and the back-up
obligations, in the aggregate, constitute a full and unconditional guarantee
by the Company of the obligations of Lakeland Trust under the Preferred
Securities. Distributions on the securities are payable quarterly at the
annual rate of 9% of the liquidation preference and are included in interest
expense in the consolidated financial statements. These securities are
considered as Tier I capital (with certain limitations applicable) under
current regulatory guidelines. As of December 31, 2000, the outstanding
principal balance of the subordinated debentures was $20,619,000. The
principal balance of the subordinated debentures less the unamortized issuance
costs constitute the guaranteed preferred beneficial interests in the
Company's subordinated debentures in the financial statements.
The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the subordinated debentures at maturity or their
earlier redemption at the liquidation preference. Subject to the Company
having received prior approval of the Federal Reserve if then required, the
subordinated debentures are redeemable prior to the maturity date of September
30, 2027 at the option of the Company on or after September 30, 2002, or upon
occurrence of specific events defined within the trust indenture. The Company
has the option to defer distributions on the subordinated debentures from time
to time for a period not to exceed 20 consecutive quarters.
NOTE 11 - EMPLOYEE BENEFIT PLANS
Information as to the Company's pension plan at December 31 is as
follows:
2000 1999
----------- -----------
(in thousands)
Change in benefit obligation:
Beginning benefit obligation $ 2,639 $ 2,408
Service cost 155 284
Interest cost 186 171
Curtailment (598) 0
Actuarial gain (48) (93)
Benefits paid (281) (131)
----------- -----------
Ending benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,053 2,639
Change in plan assets (primarily money market funds
and equity and fixed income investments), at fair value:
Beginning plan assets 2,469 1,964
Actual return 387 408
Employer contribution 59 228
Benefits paid (281 (131)
----------- -----------
Ending plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,634 2,469
Funded status: 581 (170)
Unrecognized net actuarial gain (loss) (66) 133
Unrecognized prior service cost 0 (22)
----------- -----------
Prepaid (accrued) benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 515 $ (59)
=========== ===========
18
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (continued)
Net pension expense includes the following:
2000 1999 1998
----------- ----------- -----------
(in thousands)
Service cost $ 155 $ 284 $ 190
Interest cost 186 171 144
Expected return on plan assets (256) (192) (133)
Recognized net actuarial (gain) loss (1) 23 2
Curtailment (gain)loss (598) 0 0
----------- ----------- -----------
Net pension expense/(benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (514) $ 286 $ 203
=========== =========== ===========
The following assumptions were used in calculating the net pension expense:
Weighted average discount rate 8.00% 7.50% 6.75%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 10.00% 10.00% 8.00%
On April 1, 2000, the Lakeland Financial Corporation Pension Plan was
frozen. As a result of this curtailment, a gain was recognized in the income
statement for the second quarter of 2000. The gain was included in the
salaries and employee benefits line of the income statement.
The Company maintains a 401(k) profit sharing plan for all employees
meeting age and service requirements. The Company contributions are based upon
the rate of return on stockholders' equity as of January 1st of each year. The
expense recognized was $499,000, $344,000 and $401,000 in 2000, 1999 and 1998,
respectively.
NOTE 12 - OTHER EXPENSE
Other expense for the years ended December 31, was as follows:
2000 1999 1998
----------- ----------- -----------
(in thousands)
Data processing fees and supplies $ 2,078 $ 2,036 $ 1,605
Corporate and business development 761 861 750
Advertising 577 436 422
Office supplies 591 687 488
Telephone and postage 1,241 1,375 1,377
Regulatory fees and FDIC insurance 250 160 138
Amortization of intangible assets 924 957 942
Miscellaneous 3,340 2,803 2,622
----------- ----------- -----------
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,762 $ 9,315 $ 8,344
=========== =========== ===========
NOTE 13 - INCOME TAXES
Income tax expense for the years ended December 31, consisted of the
following:
2000 1999 1998
----------- ----------- -----------
(in thousands)
Current federal $ 4,249 $ 2,998 $ 2,829
Deferred federal (300) 120 54
Current state 252 933 982
Deferred state (85) 34 61
----------- ----------- -----------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,116 $ 4,085 $ 3,926
=========== =========== ===========
Income tax expense included $0, $531,000 and $498,000 applicable to
security transactions for 2000, 1999 and 1998. The differences between
financial statement tax expense and amounts computed by applying the statutory
federal income tax rate of 34% to income before income taxes were as follows:
2000 1999 1998
----------- ----------- -----------
(in thousands)
Income taxes at statutory federal rate $ 4,569 $ 4,217 $ 4,017
Increase (decrease) in taxes resulting from:
Tax exempt income (648) (884) (839)
Nondeductible expense 167 198 192
State income tax, net of federal tax effect 110 638 688
Net operating loss, Gateway (29) (29) (29)
Tax credits (48) (48) (33)
Other (5) (7) (70)
----------- ----------- -----------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,116 $ 4,085 $ 3,926
=========== =========== ===========
19
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (continued)
The net deferred tax asset recorded in the consolidated balance sheets
at December 31, consisted of the following:
2000 1999
------------------------ ------------------------
Federal State Federal State
----------- ----------- ----------- -----------
Deferred tax assets: (in thousands)
Bad debts $ 2,358 $ 589 $ 2,153 $ 538
Pension and deferred compensation liability 411 103 535 134
Net operating loss carryforward 288 0 288 0
Other 229 61 190 48
----------- ----------- ----------- -----------
3,286 753 3,166 720
Deferred tax liabilities:
Accretion 33 8 24 6
Depreciation 499 125 467 117
Mortgage servicing rights 482 121 496 124
State taxes 125 0 96 0
Leases 224 56 301 75
Deferred loan fees 306 76 465 116
Other 0 0 0 0
----------- ----------- ----------- -----------
1,669 386 1,849 438
Valuation allowance 138 0 138 0
----------- ----------- ----------- -----------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,479 $ 367 $ 1,179 $ 282
=========== =========== =========== ===========
In addition to the net deferred tax assets included above, the deferred
income tax asset allocated to the unrealized net loss on securities available
for sale included in equity was $136,000 and $3,147,000 for 2000 and 1999.
NOTE 14 - ACQUISITIONS
On February 20, 1998, the Company acquired the Peru, Indiana and
Greentown, Indiana offices of National City Bank. These acquisitions were
accounted for using the purchase method of accounting. The results of the
operations of the acquired offices are included in the income statement of the
Company beginning as of the purchase date.
The branch acquisitions were not considered to be acquisitions of a
business since, among other things, approximately 87% of the $34,335,000 in
assets received were in the form of cash and only a relatively small portion
of the assets were in the form of loans. The future earnings from the assets
acquired will be primarily dependent on the effective use of the cash and,
thus, historical operating results of the branches acquired would not be
indicative of future results. Accordingly, only summary information regarding
the effect of the acquisition on the balance sheet is presented.
(in thousands)
Assets: -----------
Cash and due from banks $ 30,020
Loans 14
Land, premises and equipment 1,584
Intangible assets 2,717
Liabilities:
Deposits $ 34,321
Other liabilities 14
NOTE 15 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2000
were as follows:
(in thousands)
-----------
Beginning balance $ 24,718
New loans and advances 70,737
Effect of changes in related parties (235)
Repayments (69,484)
-----------
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,736
===========
Deposits from principal officers, directors, and their affiliates at
year-end 2000 and 1999 were $7,486,000 and $7,422,000.
20
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 16 - STOCK OPTIONS
A stock option plan was approved by shareholders at the annual meeting
in April, 1998. The plan requires that the exercise price for the options is
the market price at the date the options are granted. The maximum option term
is ten years and the options vest over 3 to 5 years. A summary of the activity
in the plan follows:
2000 1999 1998
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of the year 290,270 $ 22.58 188,935 $ 24.60 0 $ 0.00
Granted 217,150 14.27 113,910 19.33 195,145 24.60
Exercised 0 0.00 0 0.00 0 0.00
Forfeited 52,650 21.03 12,575 23.49 6,210 24.38
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of the year . . . . . . . . . . . 454,770 $ 18.79 290,270 $ 22.58 188,935 $ 24.60
=========== =========== =========== =========== =========== ===========
Options exercisable at end of the year 22,700 $ 23.29 0 $ 0.00 925 $ 28.00
Weighted-average fair value of options granted
during the year $ 7.07 $ 7.46 $ 9.80
Options outstanding at year-end 2000 were as follows:
Outstanding Exercisable
------------------------ ------------------------
Weighted-
Average Weighted-
Remaining Average
Contractual Exercise
Number Life Number Price
----------- ----------- ----------- -----------
Range of exercise prices
$11.20 - $14.00 103,800 9.4 600 $ 13.50
$14.01 - $16.80 100,550 9.0 1,200 $ 15.13
$16.81 - $19.60 97,410 7.7 5,200 $ 19.44
$22.40 - $25.20 138,660 6.8 9,700 $ 24.38
$25.21 - $28.00 14,350 4.3 6,000 $ 27.50
----------- ----------- ----------- -----------
Outstanding at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454,770 8.0 22,700 $ 23.29
=========== =========== =========== ===========
Had compensation cost for stock options been recorded in the financial
statements, net income and earnings per common share would have been the pro
forma amounts indicated below. The pro forma effect may increase in the future
if more options are granted.
2000 1999 1998
----------- ----------- -----------
Net income (in thousands) as reported $ 9,322 $ 8,319 $ 7,888
Pro forma net income (in thousands) $ 8,497 $ 7,799 $ 7,752
Basic earnings per common share as reported $ 1.60 $ 1.43 $ 1.36
Pro forma basic earnings per common share $ 1.46 $ 1.34 $ 1.33
Diluted earnings per common share as reported $ 1.60 $ 1.43 $ 1.36
Pro forma diluted earnings per common share $ 1.46 $ 1.34 $ 1.33
The pro forma effects are computed with option pricing models, using the
following weighted-average assumptions as of the grant date:
2000 1999 1998
----------- ----------- -----------
Risk-free interest rate 5.81% 5.26% 5.53%
Expected option life 4.98 years 4.94 years 4.91 years
Expected price volatility 79.88% 44.00% 40.75%
Dividend yield 2.46% 1.47% 1.44%
21
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Company and Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and
Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2000 and 1999, that the Company and Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2000, the most recent notification from the federal
regulators categorized the Company and Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company and Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the Company's or Bank's category.
Minimum Required To Be
Minimum Required Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
As of December 31, 2000: (in thousands)
Total Capital (to Risk Weighted Assets)
Consolidated $ 82,537 10.24% $ 64,496 8.00% $ 80,621 10.00%
Bank $ 81,020 10.06% $ 64,434 8.00% $ 80,542 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 75,414 9.35% $ 32,248 4.00% $ 48,372 6.00%
Bank $ 73,896 9.17% $ 32,217 4.00% $ 48,325 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 75,414 7.20% $ 41,874 4.00% $ 52,343 5.00%
Bank $ 73,896 7.06% $ 41,850 4.00% $ 52,313 5.00%
As of December 31, 1999:
Total Capital (to Risk Weighted Assets)
Consolidated $ 74,844 10.26% $ 58,330 8.00% $ 72,913 10.00%
Bank $ 73,980 10.01% $ 59,144 8.00% $ 73,298 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 67,986 9.32% $ 29,165 4.00% $ 43,748 6.00%
Bank $ 67,458 9.12% $ 29,572 4.00% $ 44,358 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 67,986 6.77% $ 40,167 4.00% $ 50,208 5.00%
Bank $ 67,458 6.72% $ 40,183 4.00% $ 50,228 5.00%
Indiana law prohibits the Bank from paying dividends in an amount
greater than its undivided profits. The Bank is required to obtain the
approval of the DFI for the payment of any dividend if the total amount of all
dividends declared by the Bank during the calendar year, including the
proposed dividend, would exceed the sum of the retained net income for the
year to date combined with its retained net income for the previous two years.
Indiana law defines "retained net income" to mean the net income of a
specified period, calculated under the consolidated report of income
instructions, less the total amount of all dividends declared for the
specified period.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, the Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 2000. As of December 31, 2000, approximately $17
million was available to be paid as dividends to the Company by the Bank.
Notwithstanding the availability of funds for dividends, however, the FDIC may
prohibit the payment of any dividends by the Bank if the FDIC determines such
payment would constitute an unsafe or unsound practice.
22
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table contains the estimated fair values and the related
carrying values of the Company's financial instruments at December 31, 2000
and 1999. Items, which are not financial instruments, are not included.
2000 1999
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
(in thousands)
Financial assets:
Cash and cash equivalents $ 88,993 $ 88,993 $ 63,104 $ 63,104
Real estate mortgages held for sale 183 183 862 862
Securities available for sale 293,608 293,608 271,421 271,421
Loans, net 711,752 758,311 647,376 638,331
Federal Home Loan Bank stock 3,568 3,568 3,568 3,568
Accrued interest income receivable 6,727 6,727 5,402 5,402
Loan servicing rights 1,419 1,419 1,459 1,459
Financial liabilities:
Certificates of deposit (560,249) (562,396) (498,520) (498,654)
All other deposits (285,080) (285,080) (249,723) (249,723)
Securities sold under agreements to repurchase (138,154) (138,243) (121,374) (122,189)
Other short-term borrowings (61,924) (61,924) (74,000) (74,000)
Long-term debt (11,433) (11,457) (16,473) (16,213)
Guaranteed preferred beneficial interests in Company's subordinated (19,291) (18,750) (19,264) (18,500)
debentures
Accrued interest expenses payable (5,041) (5,041) (3,391) (3,391)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 2000 and 1999. The
estimated fair value for cash, cash equivalents, accrued interest and Federal
Home Loan Bank Stock is considered to approximate cost. Real estate mortgages
held for sale are based upon the actual contracted price for those loans sold
but not yet delivered, or the current FHLMC price for normal delivery of
mortgages with similar coupons and maturities at year-end. The estimated fair
value for securities and guaranteed preferred beneficial interests in the
Company's subordinated debentures are based on quoted market rates for
individual securities or for equivalent quality, coupon and maturity
securities. The estimated fair value of loans is based on estimates of the
rate the Company would charge for similar loans at December 31, 2000 and 1999,
applied for the time period until estimated repayment. The estimated fair
value of mortgage servicing rights is based upon valuation methodology, which
considers current market conditions and historical performance of the loans
being serviced. The estimated fair value for demand and savings deposits is
based on their carrying value. The estimated fair value for certificates of
deposit and borrowings is based on estimates of the rate the Company would pay
on such deposits or borrowings at December 31, 2000 and 1999, applied for the
time period until maturity. The estimated fair value of short-term borrowed
funds is considered to approximate carrying value. The estimated fair value of
other financial instruments and off-balance sheet loan commitments approximate
cost and are not considered significant to this presentation.
While these estimates of fair value are based on management's judgment
of the most appropriate factors, there is no assurance that, were the Company
to have disposed of such items at December 31, 2000 and 1999, the estimated
fair values would necessarily have been achieved at that date, since market
values may differ depending on various circumstances. The estimated fair
values at December 31, 2000 and 1999, should not necessarily be considered to
apply at subsequent dates.
In addition, other assets and liabilities of the Company that are not
defined as financial instruments are not included in the above disclosures,
such as land, premises and equipment. Also, non-financial instruments
typically not recognized in financial statements nevertheless may have value
but are not included in the above disclosures. These include, among other
items, the estimated earnings power of core deposit accounts, the earnings
potential of the Company's trust department, the trained work force, customer
goodwill and similar items.
NOTE 19 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
During the normal course of business, the Company becomes a party to
financial instruments with off-balance sheet risk in order to meet the
financing needs of its customers. These financial instruments include
commitments to make loans and open-ended revolving lines of credit. Amounts as
of December 31, 2000 and 1999, were as follows:
2000 1999
------------------------ ------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
----------- ----------- ----------- -----------
(in thousands)
Commercial loan lines of credit $ 17,581 $ 144,622 $ 30,797 $ 179,986
Commercial loan standby letters of credit 0 7,845 0 6,783
Real estate mortgage loans 1,470 1,289 2,424 1,030
Real estate construction mortgage loans 0 1,478 0 1,762
Credit card open-ended revolving lines 7,356 0 6,584 0
Home equity mortgage open-ended revolving lines 0 37,460 0 31,521
Consumer loan open-ended revolving lines 0 4,809 0 4,626
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,407 $ 197,503 $ 39,805 $ 225,708
=========== =========== =========== ===========
23
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 19 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES (continued)
At December 31, 2000 and 1999, the range of interest rates for
commercial loan commitments with a fixed rate was 4.92% to 14.50% and 4.92% to
12.50%. The range of interest rates for commercial loan commitments with
variable rates was 6.63% to 13.50% and 6.93% to 12.50% at December 31, 2000
and 1999. The index on variable rate commercial loan commitments is
principally the Company's base rate.
Commitments, excluding open-ended revolving lines, generally have fixed
expiration dates of one year or less. Credit card open-ended revolving lines
of credit are normally reviewed bi-annually and other personal lines of credit
are normally reviewed annually. Since many commitments expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. The Company follows the same credit policy (including
requiring collateral, if deemed appropriate) to make such commitments as is
followed for those loans that are recorded in its financial statements.
The Company's exposure to credit losses in the event of nonperformance
is represented by the contractual amount of the commitments. Management does
not expect any significant losses as a result of these commitments.
NOTE 20 - PARENT COMPANY STATEMENTS
The Company operates primarily in the banking industry, which accounts
for 100 percent of its revenues, operating income, and assets. Presented below
are parent only financial statements:
CONDENSED BALANCE SHEETS
December 31
------------------------
2000 1999
----------- -----------
(in thousands)
ASSETS
Deposits with Lake City Bank $ 1,102 $ 466
Investment in banking subsidiary 83,454 73,329
Investment in non-banking subsidiary 619 619
Other assets 1,909 1,705
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,084 $ 76,119
=========== ===========
LIABILITIES
Dividends payable and other liabilities $ 1,492 $ 1,306
Subordinated debt 20,619 20,619
STOCKHOLDERS' EQUITY 64,973 54,194
----------- -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,084 $ 76,119
=========== ===========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
-------------------------------------
2000 1999 1998
----------- ----------- -----------
(in thousands)
Dividends from Lake City Bank $ 5,019 $ 3,928 $ 2,182
Interest on deposits and repurchase agreements, Lake City Bank 5 5 6
Equity in undistributed income of subsidiaries 5,535 5,547 6,870
Interest expense on subordinated debt 1,800 1,800 1,800
Miscellaneous expense 208 120 134
----------- ----------- -----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,551 7,560 7,124
Income tax benefit 771 759 764
----------- ----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,322 $ 8,319 $ 7,888
============ =========== ===========
24
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 20 - PARENT COMPANY STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
-------------------------------------
2000 1999 1998
----------- ----------- -----------
(in thousands)
Cash flows from operating activities:
Net income $ 9,322 $ 8,319 $ 7,888
Adjustments to net cash from operating activities
Equity in undistributed income of subsidiaries (5,535) (5,547) (6,870)
Other changes (17) 218 (175)
----------- ----------- -----------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . 3,770 2,990 843
Cash flows from investing activities 0 0 0
Cash flows from financing activities (3,134) (2,637) (2,150)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 636 353 (1,307)
Cash and cash equivalents at beginning of the year 466 113 1,420
----------- ----------- -----------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . . . $ 1,102 $ 466 $ 113
=========== =========== ===========
NOTE 21 - EARNINGS PER SHARE
Following are the factors used in the earnings per share computations:
2000 1999 1998
----------- ----------- -----------
Basic earnings per common share
Net income $ 9,322,000 $ 8,319,000 $ 7,888,000
Weighted-average common shares outstanding 5,813,984 5,813,984 5,813,984
Basic earnings per common share $ 1.60 $ 1.43 $ 1.36
Diluted earnings per common share
Net income $ 9,322,000 $ 8,319,000 $ 7,888,000
Weighted-average common shares outstanding for
basic earnings per common share 5,813,984 5,813,984 5,813,984
Add: Dilutive effect of assumed exercises of stock options 15 8 0
Average shares and dilutive potential common shares 5,813,999 5,813,992 5,813,984
Diluted earnings per common share $ 1.60 $ 1.43 $ 1.36
Stock options for 454,270 and 290,262 shares of common stock were not
considered in computing diluted earnings per common share for 2000 and 1999
because they were antidilutive. The stock option plan was adopted in 1998.
25
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 22 - SELECTED QUARTERLY DATA (UNAUDITED)
4th 3rd 2nd 1st
2000 Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Interest income $ 21,074 $ 20,398 $ 19,743 $ 18,835
Interest expense 12,137 11,650 10,818 10,396
----------- ----------- ----------- -----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,937 8,748 8,925 8,439
Provision for loan losses 499 92 400 215
Noninterest income 2,636 2,638 2,534 2,562
Noninterest expense 7,756 8,005 7,393 7,621
Income tax expense 1,014 974 1,165 963
----------- ----------- ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,304 $ 2,315 $ 2,501 $ 2,202
=========== =========== =========== ===========
Basic earnings per common share $ 0.39 $ 0.40 $ 0.43 $ 0.38
=========== =========== =========== ===========
Diluted earnings per common share $ 0.39 $ 0.40 $ 0.43 $ 0.38
=========== =========== =========== ===========
4th 3rd 2nd 1st
1999 Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Interest income $ 18,215 $ 17,689 $ 17,075 $ 16,416
Interest expense 9,737 9,260 9,126 8,970
----------- ----------- ----------- -----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,478 8,429 7,949 7,446
Provision for loan losses 260 550 275 225
Noninterest income 2,495 3,288 3,146 3,024
Noninterest expense 7,882 7,947 7,571 7,141
Income tax expense 833 1,128 1,090 1,034
----------- ----------- ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,998 $ 2,092 $ 2,159 $ 2,070
=========== =========== =========== ===========
Basic earnings per common share $ 0.34 $ 0.36 $ 0.37 $ 0.36
=========== =========== =========== ===========
Diluted earnings per common share $ 0.34 $ 0.36 $ 0.37 $ 0.36
=========== =========== =========== ===========
26
REPORT OF INDEPENDENT AUDITORS
- ------------------------------------------------------------------------------
Stockholders and Board of Directors
Lakeland Financial Corporation
Warsaw, Indiana
We have audited the accompanying consolidated balance sheets of Lakeland
Financial Corporation and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lakeland
Financial Corporation and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with generally
accepted accounting principles.
As disclosed in Note 1, during 1998 the Company adopted new accounting
guidance on derivatives.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 12, 2001
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's
consolidated financial statements and related information appearing in this
annual report. Management believes that the consolidated financial statements
fairly reflect the form and substance of transactions and that the financial
statements reasonably present the Company's financial position and results of
operations and were prepared in conformity with generally accepted accounting
principles. Management also has included in the Company's financial
statements; amounts that are based on estimates and judgments, which it
believes, are reasonable under the circumstances.
The Company maintains a system of internal controls designed to provide
reasonable assurance that all assets are safeguarded, financial records are
reliable for preparing consolidated financial statements and the Company
complies with laws and regulations relating to safety and soundness which are
designated by the FDIC and other appropriate federal banking agencies. The
selection and training of qualified personnel and the establishment and
communication of accounting and administrative policies and procedures are
elements of this control system. The effectiveness of the internal control
system is monitored by a program of internal audit and by independent
certified public accountants (independent auditors). Management recognizes
that the cost of a system of internal controls should not exceed the benefits
derived and that there are inherent limitations to be considered in the
potential effectiveness of any system. Management believes the Company's
system provides the appropriate balance between costs of controls and the
related benefits.
The independent auditors have audited the Company's consolidated
financial statements in accordance with generally accepted auditing standards
and provide an objective, independent review of the fairness of the reported
operating results and financial position. The Board of Directors of the
Company has an Audit Review Committee composed of five non-management
Directors. The Committee meets periodically with the internal auditors and the
independent auditors.
27
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- ------------------------------------------------------------------------------
FINANCIAL CONDITION
Growth and Expansion
The Company's growth continued in 2000 through the addition of one new
office and the ongoing growth in existing offices. Since 1995, the Company has
added twenty new offices through acquisition and internal growth. As of
December 31, 2000, the Company had 43 offices serving 15 counties in north
central Indiana. This growth was evidenced by a 10.5% increase in total
assets, which were $1.1 billion as of December 31, 2000 versus $1.0 billion in
1999. In October, the Company opened a second office in Allen County, the
second largest trading area in the state. The Company intends to open a third
office in both Allen and St. Joseph Counties in 2001 and also continues to
evaluate expansion opportunities. The Company will consider future
opportunities with an emphasis on markets that it believes would be receptive
to its business philosophy of local, independent banking.
The Company experienced a $109.3 million, or 10.5% growth in assets from
$1.0 billion in 1999 to $1.1 billion in 2000. The primary increase occurred in
total loans, which increased 9.9%, or $65.0 million, from $653.9 million in
1999 to $718.9 million in 2000. Commercial loans grew 16.0% from $422.1
million to $ 489.5 million, an increase of $67.4 million versus 1999. Consumer
loans decreased $8.3 million, or 4.5%, versus 1999. During 2000, the Company
strategically focused on loan growth in the commercial loan portfolio that
historically produces higher returns than the consumer loan portfolio.
Mortgage loans increased 12.5%, or $5.9 million, versus 1999 to $52.7 million,
reflecting the Company's decision to retain a higher volume of mortgage loans
versus selling the loans in the secondary market. Core deposits, total
deposits and securities sold under agreements to repurchase (repurchase
agreements) increased $113.9 million, or 13.1% from $869.6 million in 1999 to
$983.5 million in 2000. Large time deposits, which are primarily short-term,
increased $54.4 million, or 43.2% from $125.9 million in 1999 to $180.3
million in 2000. The Company utilized these deposit increases to fund the loan
and other asset growth that occurred during 2000.
The Company reached a milestone in 1999, as total assets exceeded $1.0
billion as of December 31, 1999. This represented an increase of $60.9
million, or 6.2%, over December 31, 1998. Total loans increased 21.4% to
$653.9 million as of December 31, 1999. Total securities decreased 17.2% to
271.4 million as of December 31, 1999. This change in the asset mix resulted
from management's decision to employ the funding received from the branch
acquisitions late in 1997 and early in 1998 to fund loan growth. Prior to
1999, this funding was invested in the securities portfolio until such time as
it was required to fund loan growth. The Company also believes that it
employed a more aggressive funding strategy in 1999. Emphasis was placed on
growth in relationship type accounts. Therefore, while total deposits
increased 1.0%, growth in checking accounts and the Investor's Weekly products
were 15.4% and 25.4%, respectively. The Company also emphasized the sale of
cash management accounts during the year that resulted in a 40.2% increase in
overnight repurchase agreements. This growth, combined with a greater use of
short-term FHLB borrowings, resulted in an increase in short-term borrowings
of 44.0%, to $195.4 million as of December 31, 1999.
Liquidity
Management maintains a liquidity position that it believes will
adequately provide funding for loan demand and deposit run-off that may occur
in the normal course of business. The Company relies on a number of different
sources in order to meet these potential liquidity demands. The primary
sources are increases in deposit accounts and cash flows from loan payments
and the securities portfolio. Given current prepayment assumptions, the cash
flow from the securities portfolio is expected to provide approximately $66.0
million of funding in 2001.
In addition to these primary sources of funds, management has several
secondary sources available to meet potential funding requirements. As of
December 31, 2000, the Company had $78.5 million in Federal fund lines with
correspondent banks and may borrow up to $100 million at the Federal Home Loan
Bank of Indianapolis. On October 1, 1998, the Company transferred all
securities in its held to maturity portfolio to its available for sale (AFS)
portfolio as permitted by the early adoption of SFAS No. 133. This increased
the possible sources the Company may access due to the fact that these
securities may be sold to meet any funding demands. Management believes that
the securities in the AFS portfolio are of high quality and would therefore be
marketable. Approximately 85.8% of this portfolio is comprised of U.S.
Treasury securities, Federal agency securities or mortgage-backed securities
directly or indirectly backed by the Federal government. The Company has
historically sold mortgage loans on the secondary market to reduce interest
rate risk and to create an additional source of funding.
During 2000, cash and cash equivalents increased $25.9 million from $63.1
million to $89.0 million as of December 31, 2000. A $97.1 million increase in
deposit balances was the primary driver behind this change. Other sources of
funds included proceeds from calls and maturities of securities totaling $38.8
million and proceeds from the sales of loans of $22.5 million. A rising rate
environment contributed to a slowing demand for residential real estate
mortgage loans and resulted in a decrease in proceeds from the sale of
mortgage loans. In addition, the Company did not generate any securities gains
in 2000 versus securities gains of $1.3 million in 1999. The major uses of
funds included an increase in loans, purchases of securities and fixed asset
additions. Loans increased approximately $65.6 million, which was net of
approximately $21.4 million of loans originated and sold during 2000.
Purchases of securities totaled $54.3 million and purchases of land, premises
and equipment were $2.4 million.
During 1999, cash and cash equivalents increased $1.6 million to $63.1
million as of December 31, 1999. Lower interest rates prevailed in 1999
thereby maintaining a demand for residential real estate loans. Proceeds from
the sale of loans were $82.8 million in 1999. Other sources of funds included
proceeds from sales, calls and maturities of securities totaling $110.1
million. The sale of loans and securities also contributed $2.6 million to
pre-tax income. The major uses of funds included an increase in loans,
purchases of securities and fixed asset additions. Net loans increased
approximately $115.9 million in 1999, which was net of approximately $79.3
million of loans originated and sold during 1999. Purchases of securities were
$65.5 million and fixed asset additions were $3.9 million.
During 1998, cash and cash equivalents increased $11.7 million from $49.8
million to $61.5 million as of December 31, 1998. The cash and cash
equivalents increased in 1998 partially as a result of a $92.0 million
increase in deposit accounts, which did not include deposits acquired in
conjunction with office acquisitions, a slight increase in short-term
borrowings and cash flows from loan and security payments. The net proceeds
from the acquisition of offices from another financial institution in February
1998 added approximately $30.0 million. Historically low interest rates
generated a significant increase in residential real estate mortgage loan
demand. This increase resulted in proceeds from the sale of loans of $64.6
million in 1998 versus $27.4 million in 1997. The low rate environment also
provided the Company with an opportunity to sell securities from the AFS
portfolio at significant gains. Proceeds from the sales of securities during
1998 were $65.4 million. The sales of loans and securities provided a source
of funds to meet increased funding demands and added approximately $2.7
million to pre-tax income. Primary uses included the funding of increased loan
volume, the purchase of securities and fixed asset additions. Loans increased
approximately $80.8 million during 1998, net of approximately $63.0 million of
loans originated and sold during the year. During 1998, $223.0 million of
securities were purchased and approximately $4.0 million was directed to the
fixed asset additions, exclusive of fixed assets added through office
acquisitions.
Asset/Liability Management (ALCO) and Securities
Interest rate risk represents the Company's primary market risk exposure.
The Company does not have material exposure to foreign currency exchange risk,
does not own any derivative financial instruments and does not maintain a
trading portfolio. The Board of Directors annually reviews and approves the
ALCO policy used to manage interest rate risk. This policy sets guidelines for
balance sheet structure, which are designed to protect the Company from the
impact that interest rate changes could have on net income, but does not
necessarily indicate the effect on future net interest income. Given the
Company's mix of interest bearing liabilities and interest bearing assets on
December 31, 2000, the net interest margin could be expected to decline in a
falling interest rate environment and conversely, to increase in a rising rate
environment. During January, 2001 the Federal Reserve lowered the target for
the Federal Funds rate on two occasions by a total of 100 basis points. These
actions caused a corresponding decrease in Lake City Bank's Prime rate from
9.50% to 8.50%. As a result, these rate decreases have had an adverse impact
on the Company's net
28
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
interest margin subsequent to the conclusion of fiscal 2000. The Company
utilizes a computer program to stress test the balance sheet under a wide
variety of interest rate scenarios. The model quantifies the income impact of
changes in customer preference for products, basis risk between the assets and
the liabilities that support them and the risk inherent in different yield
curves, as well as other factors. The ALCO committee reviews these possible
outcomes and makes loan, investment and deposit decisions that maintain
reasonable balance sheet structure in light of potential interest rate
movements. Although management does not consider GAP ratios in this planning,
the information can be used in a general fashion to look at asset and
liability mismatches. The Company's cumulative GAP ratio as of December 31,
2000, for the next 12 months is a negative 24.8% of earning assets.
The following tables provide information regarding the Company's
financial instruments used for purposes other than trading that are sensitive
to changes in interest rates. For loans, securities, and liabilities with
contractual maturities, the tables present principal cash flows and related
weighted-average interest rates by contractual maturities, as well as the
Company's historical experience of the impact of interest-rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits such as demand deposits, interest-bearing
checking, savings and money market deposits that have no contractual maturity,
the tables present principal cash flows and, as applicable, related
weighted-average interest rates. These factors are based upon the Company's
historical experience, management's judgment and statistical analysis, as
applicable, concerning their most likely withdrawal behaviors.
Weighted-average variable rates are based upon rates existing at the reporting
date.
2000
Principal/Notional Amount Maturing in:
-----------------------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------------------
Fair
Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/00
--------- --------- --------- --------- --------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 114,061 $ 73,736 $ 74,395 $ 58,977 $ 21,153 $ 12,893 $ 355,215 $ 364,107
Average interest rate 8.86% 8.77% 8.61% 8.33% 8.70% 8.21% 8.66%
Variable interest rate loans $ 318,843 $ 1,335 $ 1,263 $ 1,227 $ 1,235 $ 39,941 $ 363,844 $ 362,942
Average interest rate 9.75% 14.57% 14.67% 14.81% 14.85% 14.12% 10.29%
Fixed interest rate securities $ 46,587 $ 21,808 $ 29,764 $ 21,118 $ 19,565 $ 151,920 $ 290,762 $ 290,452
Average interest rate 5.75% 6.53% 6.22% 6.51% 6.65% 6.46% 6.34%
Variable interest rate securities $ 314 $ 321 $ 328 $ 337 $ 345 $ 1,544 $ 3,189 $ 3,156
Average interest rate 6.19% 6.62% 6.59% 6.56% 6.53% 6.58% 6.54%
Other interest-bearing assets $ 4,311 - - - - - $ 4,311 $ 4,311
Average interest rate 6.50% - - - - - 6.50%
Rate sensitive liabilities:
Noninterest bearing checking $ 8,559 $ 7,638 $ 1,383 $ 1,317 $ 1,926 $ 143,783 $ 164,606 $ 164,606
Average interest rate - - - - - - -
Savings & interest bearing checking $ 5,257 $ 4,746 $ 4,215 $ 3,829 $ 3,070 $ 99,357 $ 120,474 $ 120,474
Average interest rate 1.82% 1.82% 1.82% 1.82% 1.82% 1.75% 1.76%
Time deposits $ 502,545 $ 37,820 $ 12,117 $ 3,762 $ 3,126 $ 879 $ 560,249 $ 561,951
Average interest rate 5.96% 6.15% 5.89% 5.60% 6.01% 5.54% 5.97%
Fixed interest rate borrowings $ 147,978 $ 12,100 $ 1,433 - - $ 19,291 $ 180,802 $ 180,904
Average interest rate 5.50% 5.48% 6.15% - - 9.00% 5.87%
Variable interest rate borrowings $ 50,000 - - - - - $ 50,000 $ 50,000
Average interest rate 6.60% - - - - - 6.60%
1999
Principal/Notional Amount Maturing in:
-----------------------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------------------
Fair
Value
Year 1 ear 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/99
--------- --------- --------- --------- --------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 78,484 $ 56,049 $ 49,134 $ 58,882 $ 80,464 $ 29,188 $ 352,201 $ 343,652
Average interest rate 8.65% 8.69% 8.66% 8.29% 7.97% 7.98% 8.39%
Variable interest rate loans $ 264,375 $ 1,657 $ 1,442 $ 1,300 $ 1,142 $ 32,643 $ 302,559 $ 302,062
Average interest rate 8.93% 10.25% 10.18% 10.26% 10.80% 8.98% 8.96%
Fixed interest rate securities $ 18,233 $ 47,209 $ 22,150 $ 26,985 $ 21,305 $ 139,405 $ 275,287 $ 267,414
Average interest rate 6.54% 5.65% 6.42% 6.10% 6.38% 6.11% 6.10%
Variable interest rate securities $ 209 $ 206 $ 218 $ 231 $ 245 $ 2,968 $ 4,077 $ 4,007
Average interest rate 6.36% 6.69% 6.69% 6.69% 6.69% 6.98% 6.88%
Other interest-bearing assets $ 3,783 - - - - - $ 3,783 $ 3,783
Average interest rate 5.50% - - - - - 5.50%
Rate sensitive liabilities:
Noninterest bearing checking $ 7,103 $ 6,338 $ 1,147 $ 1,093 $ 1,598 $ 119,316 $ 136,595 $ 136,595
Average interest rate - - - - - - -
Savings & interest bearing checking $ 4,669 $ 4,216 $ 3,744 $ 3,401 $ 2,727 $ 94,371 $ 113,128 $ 113,128
Average interest rate 1.82% 1.82% 1.82% 1.82% 1.82% 1.75% 1.76%
Time deposits $ 414,773 $ 61,477 $ 11,922 $ 5,623 $ 3,069 $ 1,656 $ 498,520 $ 498,654
Average interest rate 5.13% 5.71% 5.75% 5.38% 5.46% 5.55% 5.22%
Fixed interest rate borrowings $ 129,574 $ 20,800 - $ 1,473 - $ 19,264 $ 171,111 $ 170,902
Average interest rate 4.60% 5.58% - 6.15% - 9.00% 5.23%
Variable interest rate borrowings $ 60,000 - - - - - $ 60,000 $ 60,000
Average interest rate 5.42% - - - - - 5.42%
29
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
These tables illustrate the Company's growth during 2000. Increases in
variable rate loans, fixed rate loans, fixed rate securities, noninterest
bearing checking deposits and time deposits primarily reflect the growth of
the Company's existing offices. The increase in loans during 2000 was driven
primarily by strong growth in the Company's commercial loan portfolio. The
increase in demand deposits, which are noninterest bearing, and time deposits,
which are primarily short-term, were utilized to fund the increase in the loan
and securities portfolios.
During 1999, LCB Investments Limited was formed to manage a portion of
the Company's investment portfolio. LCB Investments Limited, a Bermuda-based
partnership, is a subsidiary of Lake City Bank and is included in the
consolidation of the Company's financial statements.
The Company's investment portfolio consists of U.S. Treasuries, agencies,
mortgage-backed securities, municipal bonds and corporate bonds. During 2000,
purchases in the securities portfolio consisted primarily of mortgage-backed
securities. As of December 31, 2000, the Company's investment in
mortgage-backed securities represented approximately 70.7% of total securities
and consisted of CMOs and mortgage pools issued by GNMA, FNMA and FHLMC. The
Federal government backs these securities, directly or indirectly. All
mortgage securities purchased by the Company are within risk tolerances for
price, prepayment, extension and original life risk characteristics contained
in the Company's investment policy. The Company uses Bloomberg analytics to
evaluate and monitor all purchases. As of December 31, 2000, the securities in
the AFS portfolio had a three year average life with approximately 9.9% price
depreciation in the event of a 300 basis points upward movement. The portfolio
had approximately 5.6% price appreciation in the event of a 300 basis point
downward movement in rates. As of December 31, 2000, all mortgage securities
were performing in a manner consistent with management's original
expectations.
Capital Management
The Company believes that a strong, aggressively managed capital position
is critical to long-term earnings and expansion. Bank regulatory agencies
exclude the market value adjustment created by SFAS No. 115 (AFS adjustment)
from capital adequacy calculations. Excluding this adjustment from the
calculation, the Company had Tier I leverage capital, Tier I risk based
capital and Tier II risk based capital ratios of 7.2%, 9.4% and 10.2%,
respectively as of December 31, 2000. These ratios met or exceeded the FDIC
"well-capitalized" minimums of 5.0%, 6.0% and 10.0%, respectively.
The ability to maintain and grow these ratios is a function of the
balance between net income and a prudent dividend policy. Total stockholders'
equity increased by 19.9%, to $65.0 million as of December 31, 2000, from
$54.2 million as of December 31, 1999. The increase in 2000 resulted from net
income of $9.3 million less the following factors: (1) cash dividends of $3.0
million, (2) a favorable change in the AFS adjustment of $4.6 million net of
tax, and (3) $123,000 for the purchase of treasury stock. This 2000 AFS
adjustment reflected a 250 basis point decrease in two to five year U.S.
Treasury rates during 2000. Due to the fact that the securities portfolio is
primarily fixed rate, a negative equity adjustment would likely occur if
interest rates increased. Management has factored this into the determination
of the size of the AFS portfolio to assure that stockholders' equity is
adequate under various scenarios. The 1999 decrease of $962,000 resulted from
net income of $8.3 million less the following: (1) cash dividends declared of
$2.5 million, (2) an unfavorable AFS adjustment of $6.6 million, net of tax,
and (3) $87,000 for the purchase of treasury stock. This 1999 AFS adjustment
reflected a 350 basis point increase in two to five year U. S. Treasury rates
during 1999.
Other than those discussed in this management discussion, management is
not aware of any known trends, events or uncertainties that would have a
material effect on the Company's liquidity, capital and results of operations.
In addition, management is not aware of any regulatory recommendations that,
if implemented, would have such an effect.
Allowance for Credit Risk
At December 31, 2000, the allowance for loan losses was $7.1 million, or
0.99% of total loans outstanding, versus $6.5 million, or 1.00%, of total
loans outstanding at December 31, 1999. The process of identifying probable
credit losses is a subjective process. Therefore, the Company maintains a
general allowance to cover all credit losses within the entire portfolio. The
methodology management uses to determine the adequacy of the loan loss reserve
includes the following:
- - Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectability factors
(including impairment) and assesses the requirement for specific reserves
on such credits. For those loans not subject to specific review,
management reviews historical loan loss experience and ratios to
establish trends in charge-offs by loan category. The ratios of net
charge-offs to a particular type of loan enables management to establish
probable losses by loan category and thereby establish appropriate
reserves for loans that are not specifically reviewed.
- - Management reviews the current economic conditions of its lending market
to determine the effect by loan category, as well as the effect on the
aggregate loan portfolio.
- - Management reviews delinquent loan reports to determine risk of loss.
High delinquencies are generally indicative of an increase in loan
losses.
As a result of the methodology in determining the adequacy of the
allowance for loan losses, the provision for loan losses was $1.2 million in
2000 versus $1.3 million in 1999. The slight decrease in the provision for
loan losses was primarily related to slower overall loan growth in 2000.
During 2000 a decision was made de-emphasize indirect consumer lending. This
action contributed to a decline in the consumer loan portfolio of $8.3 million
versus an increase of $53.7 million in 1999. Overall, net loan growth in 2000
was $65.0 million versus $115.9 million in 1999. As of December 31, 2000,
loans past due 90 days or more and still accruing were $6.8 million (excluding
impaired loans) versus $171,000 as of year end 1999 and nonaccrual loans were
$206,000 versus $329,000 as of year end 1999. The increase in loans past due
90 days or more and still accruing resulted primarily from the inclusion of
two commercial loans totaling $6.2 million, or approximately 90% of the $6.8
million in this category. Of this amount, $1.4 million was paid off subsequent
to the end of the fiscal year. A second loan of $4.8 million matured in the
fourth quarter of 2000 and has therefore been included in this category. The
borrower is current on all interest under the matured facility. The Company
has reached an agreement with a bank participant and the borrower to extend
the terms of the financing and anticipates that the extension will be
completed during the first quarter of 2001.
Overall, the trend in non-performing loans reflects the weakening
economic conditions in some of the Company's markets, as well as the general
economic weakness prevalent throughout much of the country. The Company
believes that its' overall expansion strategy has employed a credit risk
management approach that promotes diversification and therefore creates a
balanced portfolio with appropriate risk parameters.
The Company has experienced growth in total loans over the last three
years of $260.2 million, or 56.7%. The concentration of this loan growth was
in the commercial loan portfolio. Commercial loans comprised 61.3%, 57.4% and
56.0% of the total loan portfolio at December 31, 2000, 1999 and 1998,
respectively. Management believes that it is prudent to continue to provide
for loan losses at the current levels due to this historical loan growth and
current economic conditions.
30
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
Inflation
The effects of price changes and inflation can vary substantially for
most financial institutions. While management believes that inflation affects
the growth of total assets, it believes that it is difficult to assess the
overall impact. Management believes this to be the case due to the fact that
generally neither the timing nor the magnitude of the inflationary changes in
the consumer price index (CPI) coincides with changes in interest rates. The
price of one or more of the components of the CPI may fluctuate considerably
and thereby influence the overall CPI without having a corresponding affect on
interest rates or upon the cost of those goods and services normally purchased
by the Company. In years of high inflation and high interest rates,
intermediate and long-term interest rates tend to increase, thereby adversely
impacting the market values of investment securities, mortgage loans and other
long-term fixed rate loans. In addition, higher short-term interest rates
caused by inflation tend to increase the cost of funds. In other years, the
reverse situation may occur.
31
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
2000 versus 1999
The Company reported record net income of $9.3 million in 2000, an
increase of $1.0 million, or 12.1% versus net income of $8.3 million in 1999.
The increase resulted in part from a $109.3 million, or 10.5% growth in assets
from $1.0 billion in 1999 to $1.1 billion in 2000. The primary increase
occurred in total loans, which increased 9.9%, or $65.0 million, from $653.9
million in 1999 to $718.9 million in 2000.
Net interest income increased $2.7 million, or 8.5%, to $35.0 million
versus $32.3 million in 1999. Interest income increased $10.7 million, or
15.4%, from $69.4 million in 1999 to $80.1 million in 2000. The increase
occurred as a result of earning asset growth of $86.4 million, or 9.4%, from
$923.4 million in 1999 to over $1.0 billion in 2000. In addition, an overall
increase in interest rates that began at the end of 1999 and continued during
the first half of 2000 contributed to the increase in interest income. The
Company had a net interest margin of 3.72% in 2000 versus 3.70% in 1999.
Interest expense increased $7.9 million to $45.0 million, an increase of 21.3%
versus $37.1 million in 1999. Deposits increased to fund the loan growth
during 2000, driven primarily by an increase in time deposits. Increases in
noninterest bearing demand deposits of $28.0 million and Investor's Weekly
accounts of $9.2 million versus 1999 also contributed to the funding of loan
growth in 2000. The growth in relationship type accounts has been a core
funding strategy of the Company during 1999 and 2000. The Company believes
that the growth in the loan portfolio will continue in conjunction with the
ongoing funding strategy that was implemented in 1999.
The Company believes that it maintained strong asset quality in 2000.
Nonaccrual loans were $206,000, or 0.03% of total loans versus $ 329,000, or
0.05% of total loans in 1999. There were no loans classified as impaired in
2000 and one loan of $246,000 classified as impaired in 1999. Net charge-offs
were $604,000, or 0.09% of average daily loans in 2000 versus $298,000, or
0.05% of average daily loans in 1999. The provision for loan loss expense was
$1.2 million in 2000, resulting in an allowance for loan losses at December
31, 2000 of $7.1 million, which represented 0.99% of the loan portfolio versus
$6.5 million in 1999, or 1.00% of the loan portfolio. The lower provision in
2000 versus 1999 was attributable to a number of factors, but was primarily a
result of slower loan growth during 2000. The Company's management continues
to monitor the adequacy of the provision based on loan levels, asset quality,
economic conditions and other factors that may influence the assessment of the
collectability of loans.
Noninterest income was $10.4 million in 2000 versus $12.0 million in
1999, a decrease of $1.6 million, or 13.2%. The largest contributor to the
decrease was the absence of security gains in 2000 versus gains of $1.3
million in 1999. The decrease in noninterest income was also reflective of the
rising rate environment which slowed new mortgage and mortgage refinancing
activity. The reduction in mortgage activity resulted in a decrease in the
gains on sale of mortgages, which were $504,000, a reduction of 61.3% versus
$1.3 million in 1999. Trust and brokerage fees increased $401,000, or 23.2%,
to $2.1 million versus $1.7 million in 1999.
Noninterest expense increased less than 1.0% from $30.5 million in 1999
to $30.8 million in 2000. Various increases in noninterest expense categories
were offset by a $500,000 gain that resulted from the Company's curtailment of
the pension plan in the second quarter of 2000. Salaries and wages, exclusive
of the pension plan curtailment gain, increased $516,000, or 3.2%, to $16.4
million in 2000 versus $15.9 million in 1999. This increase was attributable
to normal salary increases, staff additions and significantly increased health
care costs. Other expense increased $447,000, or 4.8%, to $9.8 million in 2000
driven by an increase in professional fees. The increase in professional fees
was primarily due to expenses incurred with outside financial and legal
advisors related to the pension plan curtailment and changes to employee
benefit plans in 2000. Net occupancy expense and equipment costs decreased
from $5.3 million in 1999 to $5.1 million in 2000 as a result of the sale of
two branch offices and related equipment during 2000.
As a result of these factors, income before income tax expense increased
$1.0 million, or 8.3%, from $12.4 million in 1999 to $13.4 million in 2000.
Income tax expense was $4.1 million in both 2000 and 1999. Income tax as a
percent of income before tax was 30.6% in 2000 versus 32.9% in 1999. The
decrease in income tax as a percent of income before tax resulted from the
implementation of various tax strategies in 2000 and late 1999. Net income
increased $1.0 million, or 12.1%, to $9.3 million in 2000 versus $8.3 million
in 1999. Basic earnings per share in 2000 was $1.60, an increase of 11.9%
versus $1.43 in 1999. The Company's net income performance represented a 15.8%
return on January 1, 2000, stockholders' equity (excluding the equity
adjustment related to SFAS No. 115) versus 15.6% in 1999. The net income
performance resulted in a 0.88% return on average daily assets in 2000 versus
0.84% in 1999.
1999 versus 1998
The Company reported record earnings with net income at $8.3 million in
1999, an increase of $431,000, or 5.5%, versus $7.9 million in 1998. Interest
income in 1999 was $69.4 million, an increase of $5.7 million, or 9.0%, versus
$63.7 million in 1998. The increase resulted from the Company's strategy in
1999 to transfer assets from the securities portfolio to fund higher yielding
loans. The loan to deposit ratio increased from 72.8% as of December 31, 1998
to 87.4% at year-end 1999. Interest and fees on loans increased $7.4 million,
or 16.6%, while interest and dividends on securities decreased $1.4 million,
or 7.4%, versus 1998. Total interest expense was $37.1 million in 1999, an
increase of $1.0 million, or 2.8%, versus $36.1 million in 1998. An emphasis
on controlling the Company's funding costs during the year contributed to this
modest increase. The result of the above factors was net interest income of
$32.3 million in 1999, a 17.1% increase versus $27.6 million in 1998. The
impact to the interest margin was an increase of 12 basis points to 3.70% in
1999 versus 3.58% in 1998. During 1999, the Company intended to continue
growing the loan portfolio, as well as continuing the relationship funding
strategy implemented during 1999. The prime rate increased 75 basis points
during the second half of 1999 with 50 basis points of the increase occurring
in the last two months of the year. The effect of this increase was not
significant.
Nonaccrual loans were $329,000 at year-end, or 0.05% of total loans
versus $0 in 1998. The 1999 amount included one loan totaling $246,000, which
was recognized as impaired in 1999. Net charge-offs in 1999 were $298,000, or
0.05% of average daily loans, versus $278,000, or 0.06% of average daily loans
in 1998. Although the Company believes asset quality remained strong, the
growth in the loan portfolio made it necessary to recognize provision for loan
loss expense of $1.3 million. The allowance for loan losses at December 31,
1999 was $6.5 million, which represented 1.00% of the loan portfolio versus
$5.5 million, or 1.02% of the loan portfolio as of year-end 1998.
Noninterest income was strong in 1999; however slowing mortgage loan
demand reduced the contribution from this area as compared to 1998.
Noninterest income for 1999 was $12.0 million, an increase of $744,000, or
6.6%, versus $11.2 million in 1998. Deposit fees increased $317,000 or 7.9%,
with other major increases in brokerage income, which increased $159,000, or
37.7%, insurance and credit card fees. Mortgage originations decreased 3.6% in
1999 versus 1998 as a result of rising interest rates and lower refinancing
volume. Gains on sale of mortgage loans decreased 11.2% as a result. Security
gains in 1999 increased 6.6% to $ 1.3 million.
Noninterest expense in 1999 was $30.5 million, an increase of $4.1
million, or 15.3%, versus $26.5 million in 1998. Salaries and employee
benefits increased $1.8 million, or 13.0%, from $ 14.1 million to $ 15.9
million, reflecting normal salary increases, additions to staff and increased
health care costs. Occupancy and equipment expenses increased $1.2 million, or
30.6% from $ 4.1 million in 1998 to $ 5.3 million in 1999. This reflected the
investments in equipment and technology as part of the Company's commitment to
prepare for the year 2000. Other expense increased $971,000, or 11.6%, from
$8.3 million in 1998 to $9.3 million in 1999 with the largest increase
occurring in data processing fees, which increased $431,000 in 1999. This
reflected both changes in the Company's Trust Accounting System and year 2000
preparations.
As a result of these factors, income before income tax expense increased
$590,000, or 5.0%, to $12.4 million in 1999 versus $11.8 million in 1998.
Income tax expense was $4.1 million in 1999 versus $3.9 million in 1998.
Income tax as a percent of income before tax was 32.9% in 1999 versus 33.2% in
1998. Net income increased $431,000, or 5.5%, to $8.3 million in 1999 versus
$7.9 million in 1998. Basic earnings per share in 1999 were $1.43 versus $1.36
in 1998. Net income of $8.3 million represented a 15.6% return on January 1,
1999, stockholders' equity (excluding the equity adjustment related to SFAS
No. 115), and a 0.84% return on average daily assets.
32
LAKE CITY BANK OFFICERS
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Michael L. Kubacki President Operations
Robert C. Condon Executive Vice President Frank A. Soltis Senior Vice President
Kevin L. Deardorff Executive Vice President Vicki D. Martin Vice President
David M. Findlay Executive Vice President Angela K. Ritchey Vice President
Charles D. Smith Executive Vice President Lisa M. Bicknese Assistant Vice President
Walter L. Weldy Executive Vice President Jean A. Ciriello Assistant Vice President
Kirk B. Davis Assistant Vice President
Audit Joanie L. Foreman Assistant Vice President
Betty L. McHenry Senior Vice President Lisa A. Fulton Assistant Vice President
and Auditor Ruth A. Hutcherson Assistant Vice President
Michelle R. Halter Assistant Vice President Linda A. Owens Assistant Vice President
Teah D. Ruckman Assistant Auditor Lorretta J. Burnworth Operations Officer
Janice J. Cox Operations Officer
Commercial Services William L. Hilliard Operations Officer
Michael E. Gavin Senior Vice President Scot A. Karbach Operations Officer
H.A. "Rocky" Meyer Senior Vice President Jan R. Martin Operations Officer
J. A. Arnold Vice President Linda L. Swoverland Operations Officer
Kelly K. Ayers Vice President
David A. Bickel Vice President Retail Services
James R. Cowan Vice President Thomas P. Frantz Senior Vice President
Drew D. Dunlavy Vice President Dale L. Cramer Vice President
Brent E. Hoffman Vice President Dennis E. Dolby Vice President
Kenneth L. Kasamis Vice President James D. Tague Vice President
Joseph F. Kessie Vice President Janet K. Anderson Assistant Vice President
William D. Leedy Vice President Carolyn A. Crabb Assistant Vice President
J. Randall Leininger Vice President Craig A. Haecker Assistant Vice President
Jack E. Mills Vice President T. Larry Mitchell Assistant Vice President
Eric H. Ottinger Vice President W. John Pritz Assistant Vice President
Larry L. Penrod Vice President Sue L. Sands Assistant Vice President
Clinton R. Pletcher Vice President Shannon D. Schrock Assistant Vice President
Kelli S. Robinson Vice President Bradley W. Smith Assistant Vice President
Thomas G. Stark Vice President W. Randy Yoder Assistant Vice President
J. Chad Stoltzfus Vice President Glenn A. Goudey Senior Mortgage Underwriter
J. Mark Ulrich Vice President Lisa A. Stookey Merchant Services Officer
Randal U. Vutech Vice President Aaron M. Stroup Mortgage Banking Officer
Todd A. Bruce Assistant Vice President Melanie R. Shipley Retail Banking Officer
Kathy L. Sears Assistant Vice President Rafael M. Villalon Retail Banking Officer
Corporate Cash Management Trust & Investments
Julie W. Whitehead Vice President Patricia L. Culp Vice President
Abbe S. Muta Cash Management Officer Keith E. Davis Vice President
Jeanine D. Knowles Vice President
Financial Dennis A. Reeve Vice President
Teresa A. Bartman Vice President and Controller Alan S. Duff Assistant Vice President
James J. Nowak Vice President and Treasurer Larry L. Poyser Assistant Vice President
Brian M. Lamb Assistant Vice President Kevin M. Reed Assistant Vice President
Debra L. Rich Assistant Vice President
Marketing, Human Resources and Facilities Sarah A. Richardson Assistant Vice President
Jill A. DeBatty Senior Vice President Peggy L. Terhaar Assistant Vice President
Allyn P. Decker Vice President Marjorie E. Kurtz Trust Administrator
John W. Gove Vice President
Paul S. Purvis Vice President
Cathy L. Teghtmeyer Vice President
Aimee C. Morgan Human Resource Officer
33
LAKE CITY BANK OFFICERS (continued)
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Office Administration
Jeri L. Yoder-Gluck Vice President - Regional Manager
Jeannine P. Cooley Assistant Vice President
Karin A. Steffensmeier Assistant Vice President
Offices
Akron L. Jane Murphy Vice President
Argos Stanley G. Reinholt Assistant Vice President
Bremen Matthew K. Bixel Vice President
Columbia City Donald L. Sexton Vice President
Concord Steven Colagrossi Assistant Vice President
Cromwell Jana L. Miller Office Manager
Elkhart Beardsley Samuel M. Bouie Vice President
Elkhart East Kathleen M. Enfield Office Manager
Elkhart Hubbard Hill Jane E. Miller Vice President
Elkhart Northwest Don A. Brincefeild Vice President
Fort Wayne North Bruce A. Wright Vice President - Regional Manager
Fort Wayne Southwest Robert J. Savage Vice President
Goshen Downtown Jane M. Greene Assistant Vice President
Goshen South Clarence J. "CJ" Yoder Vice President
Granger Gregory A. Fawley Office Manager
Greentown Donna L. Graham Assistant Vice President
Huntington Joseph E. Blomeke Vice President
Kendallville East L. Duane Smith Vice President
Mark R. Rensner Office Manager
LaGrange Cathy I. Hefty Assistant Vice President
Ligonier Downtown Gaylord A. West Vice President
Lori I. Cunningham Assistant Office Manager
Ligonier South Craig R. Atz Vice President
Nanceen P. Briggs Office Manager
Logansport J. Bradley Glasson Assistant Vice President
Medaryville Elaine C. Parish Assistant Vice President
Mentone Karen A. Francis Vice President
Middlebury Ryan E. Bender Office Manager
Milford Brenda S. Peterson Office Manager
Mishawaka Robert J. DeCola Vice President - Regional Manager
Tricia D. Peffley Assistant Office Manager
Nappanee Jeffery W. Krusenklaus Office Manager
North Webster Jeanne G. Bowen Vice President
Peru Linda L. Rodgers Assistant Vice President
Pierceton Lisa L. Hockemeyer Assistant Vice President
Plymouth Michael D. Burroughs Vice President - Regional Manager
Carol D. Brown Assistant Office Manager
Roann Merrill A. Templin Assistant Vice President
Rochester Phyllis M. Biddinger Office Manager
Shipshewana Michele D. Grimm Office Manager
Sarah Miller-Bontrager Assistant Office Manager
Silver Lake Tammy D. Shafer Office Manager
Syracuse Amanda Russell Office Manager
Wabash North Merrill A. Templin Assistant Vice President
Warsaw Downtown Rosemary K. Baumgardner Assistant Vice President
Warsaw East Pamela F. Messmore Vice President
Warsaw West Shelly R. Fraley Office Manager
Winona Lake Allan L. Disbro Vice President
Winona Lake East Linda M. Riley Office Manager
34