SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission file number 0-11487
LAKELAND FINANCIAL CORPORATION
Indiana 35-1559596
(State of incorporation) (I.R.S. Employer Identification No.)
202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387
(Address of principal executive offices)
Telephone (574) 267-6144
Securities registered pursuant to Section 12(b) of
the Act: None Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
Preferred Securities of Lakeland Capital Trust
(Title of class)
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 twelve
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 ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant is $102,014,592 and is based upon the last sales price as quoted on
the Nasdaq Stock Market on January 31, 2002.
Number of shares of common stock outstanding at February 20, 2002: 5,771,837
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Proxy Statement for the Annual Meeting of
Shareholders mailed on March 8, 2002 are incorporated by reference into Part
III hereof.
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, Warsaw,
Indiana, and Lakeland Capital Trust, Warsaw, Indiana.
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"). In trust, the Bank recognizes a wholly-owned subsidiary, LCB
Investments Limited, 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. 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, commercial and agricultural
lending, direct and indirect consumer lending, real estate mortgage lending,
safe deposit box service and trust and brokerage services.
The Bank's main banking office is located at 202 East Center Street,
Warsaw, Indiana. As of December 31, 2001 the Bank had 40 offices in eleven
counties throughout northern Indiana.
Forward-looking Statements
This document (including information incorporated by reference)
contains, and future oral and written statements of the Company and its
management may contain, forward-looking statements, within the meaning of such
term in the Private Securities Litigation Reform Act of 1995, with respect to
the financial condition, results of operations, plans, objectives, future
performance and business of the Company. Forward-looking statements, which may
be based upon beliefs, expectations and assumptions of the Company's
management and on information currently available to management, are generally
identifiable by the use of words such as "believe," "expect," "anticipate,"
"plan," "intend," "estimate," "may," "will," "would," "could," "should" or
other similar expressions. Additionally, all statements in this document,
including forward-looking statements, speak only as of the date they are made,
and the Company undertakes no obligation to update any statement in light of
new information or future events.
The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors, which could have
a material adverse effect on the operations and future prospects of the
Company and its subsidiaries include, but are not limited to, the following:
- The strength of the United States economy in general and the
strength of the local economies in which the Company
conducts its operations which may be less favorable than
expected and may result in, among other things, a
deterioration in the credit quality and value of the
Company's assets.
- The economic impact of the terrorist attacks that occurred
on September 11th, as well as any future threats and
attacks, and the response of the United States to any such
threats and attacks.
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- The effects of, and changes in, federal, state and local
laws, regulations and policies affecting banking,
securities, insurance and monetary and financial matters.
- The effects of changes in interest rates (including the
effects of changes in the rate of prepayments of the
Company's assets) and the policies of the Board of Governors
of the Federal Reserve System.
- The ability of the Company to compete with other financial
institutions as effectively as the Company currently intends
due to increases in competitive pressures in the financial
services sector.
- The inability of the Company to obtain new customers and to
retain existing customers.
- The timely development and acceptance of products and
services, including products and services offered through
alternative delivery channels such as the Internet.
- Technological changes implemented by the Company and by
other parties, including third party vendors, which may be
more difficult or more expensive than anticipated or which
may have unforeseen consequences to the Company and its
customers.
- The ability of the Company to develop and maintain secure
and reliable electronic systems.
- The ability of the Company to retain key executives and
employees and the difficulty that the Company may experience
in replacing key executives and employees in an effective
manner.
- Consumer spending and saving habits, which may change in a
manner that affects the Company's business adversely.
- Business combinations and the integration of acquired
businesses, which may be more difficult or expensive than
expected.
- The costs, effects and outcomes of existing or future
litigation.
- Changes in accounting policies and practices, as may be
adopted by state and federal regulatory agencies and the
Financial Accounting Standards Board.
- The ability of the Company to manage the risks associated
with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Additional information concerning the Company and its business,
including other factors that could materially affect the Company's financial
results, is included in the Company's filings with the Securities and Exchange
Commission.
Business Developments
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,
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(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.
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, commercial and agricultural lending, direct and
indirect consumer lending, real estate mortgage lending, safe deposit box
services and trust and brokerage 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 a high degree of
customer contact, timely loan review and approval, market-driven competitive
loan pricing in certain situations and the Bank's reputation throughout the
region. The Bank believes that its convenience, quality service and hometown
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 primary service area is northern 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. Also, 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 pursuant to Indiana law. The Bank enforces a limit
of $10.0 million. This maximum prohibits the Bank from providing a full range
of banking services to those businesses or personal accounts whose borrowings
periodically 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.
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 other
countries. 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, 2001, the Company, including its subsidiaries, had
431 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.
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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.
Recent Regulatory Developments
The terrorist attacks in September 2001, have impacted the financial
services industry and have already led to federal legislation that attempts to
address certain related issues involving financial institutions. On October
26, 2001, President Bush signed into law the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (the "USA PATRIOT Act"). Among its other provisions, the USA
PATRIOT Act requires each financial institution: (i) to establish an
anti-money laundering program; (ii) to establish due diligence policies,
procedures and controls with respect to its private banking accounts and
correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of,
foreign banks that do not have a physical presence in any country. The USA
PATRIOT Act also requires the Secretary of the Treasury to prescribe, by
regulations to be issued jointly with the federal banking regulators and
certain other agencies, minimum standards that financial institutions must
follow to verify the identity of customers, both foreign and domestic, when a
customer opens an account. In addition, the USA PATRIOT Act contains a
provision encouraging cooperation among financial institutions, regulatory
authorities and law enforcement authorities with respect to individuals,
entities and organizations engaged in, or reasonably suspected of engaging in,
terrorist acts or money laundering activities. At this time, the Company is
unable to determine whether the provisions of the USA PATRIOT Act will have a
material impact 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,
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
5
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 voting 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 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. Additionally, bank
holding companies that meet certain eligibility requirements prescribed by the
BHCA and 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 holding companies or financial holding companies. As of
the date of this filing, the Company has neither 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.
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% and a minimum ratio of Tier 1
capital to risk-weighted assets of 4%. 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
6
stockholders' equity less intangible assets (other than certain loan 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, 2001, the Company had regulatory capital in excess
of the Federal Reserve's minimum requirements.
Dividends. The Indiana Business Corporation Law prohibits the Company
from paying dividends if the Company is, or by payment of the dividend would
become, insolvent, or if the payment of dividends would render the Company
unable to pay its debts as they become due in the usual course of business.
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, which under federal law
is designated as the primary federal regulator of state-chartered,
FDIC-insured banks that are not members of the Federal Reserve System.
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, 2001, BIF assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2002, 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
7
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 until the final maturity of such
obligations in 2019. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. During the year ended December 31,
2001, the FICO assessment rate for BIF and SAIF members was approximately
0.02% of deposits.
Supervisory Assessments. All Indiana banks are required to pay
supervisory assessments to the DFI to fund the operations of the DFI. During
the year ended December 31, 2001, the Bank paid supervisory assessments to the
DFI totaling $78,000.
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% and a minimum ratio of Tier 1 capital to
risk-weighted assets of 4%. 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.
Further, federal law and regulations provide various incentives to
financial institutions to maintain regulatory capital at levels in excess of
minimum regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may
qualify for expedited processing of other required notices or applications.
Additionally, one of the criteria which determines a bank holding company's
eligibility to operate as a financial holding company is a requirement that
all of its financial institution subsidiaries be "well-capitalized". Under the
regulations of the FDIC, in order to be "well-capitalized" a financial
institution must maintain a ratio of total capital to total risk-weighted
assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted
assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or
greater.
Federal law also 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 "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.
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As of December 31, 2001: (i) the Bank was not subject to a directive
from the FDIC to increase its capital to an amount in excess of the minimum
regulatory capital requirements; (ii) the Bank exceeded its minimum regulatory
capital requirements under FDIC capital adequacy guidelines; and (iii) 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 Bank's 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, 2001. As of December 31, 2001, 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.
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.
9
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
directly or indirectly 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.
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 and regular
checking accounts), as follows: for transaction accounts aggregating $41.3
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $41.3 million, the
reserve requirement is $1.239 million plus 10% of the aggregate amount of
total transaction accounts in excess of $41.3 million. The first $5.7 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
While the Company's chief decision-makers monitor the revenue streams
of the various Company products and services, the identifiable segments are
not material and operations are managed and financial performance is evaluated
on a Company-wide basis. Accordingly, all of the Company's financial service
operations are considered by management to be aggregated in one reportable
operating segment -- commercial banking. On the pages that follow are tables
that 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 Items 7&8,
below, herein incorporated by reference.
10
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
2001 2000
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Earning assets:
Loans:
Taxable (2) $ 727,330 $ 58,348 8.02% $ 676,807 $ 61,554 9.09%
Tax exempt (1) 2,420 209 8.64 2,391 215 8.99
Investments: (1)
Available for sale 291,901 18,556 6.36 279,569 18,849 6.74
Held to maturity 0 0 0.00 0 0 0.00
Short-term investments 9,778 405 4.14 5,778 367 6.35
Interest bearing deposits 2,437 80 3.24 960 55 5.73
----------- ----------- ----------- -----------
Total earning assets 1,033,866 77,598 7.51% 965,505 81,040 8.39%
Nonearning assets:
Cash and due from banks 41,148 0 41,202 0
Premises and equipment 26,423 0 27,276 0
Other nonearning assets 27,429 0 30,191 0
Less allowance for loan losses (7,364) 0 (6,813) 0
----------- ----------- ----------- -----------
Total assets $ 1,121,502 $ 77,598 $ 1,057,361 $ 81,040
=========== =========== =========== ===========
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 2001 and 2000. 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, 2001 and
2000 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 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 18,849 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 81,040 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 $ 81,040 $ 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.
12
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
2001 2000
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 50,513 $ 613 1.21% $ 53,372 $ 899 1.68%
Interest bearing checking accounts 230,144 7,447 3.24 234,906 9,618 4.09
Time deposits:
In denominations under $100,000 211,728 11,151 5.27 203,539 14,054 6.90
In denominations over $100,000 203,067 10,639 5.24 157,040 7,824 4.98
Miscellaneous short-term borrowings 178,197 6,904 3.87 176,562 10,083 5.71
Long-term borrowings 30,716 2,447 7.97 32,342 2,523 7.80
----------- ----------- ----------- -----------
Total interest bearing liabilities 904,365 39,201 4.33% 857,761 45,001 5.25%
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 137,011 0 134,270 0
Other liabilities 10,135 0 8,447 0
Stockholders' equity 69,991 0 56,883 0
Total liabilities and stockholders' ----------- ----------- ----------- -----------
equity $ 1,121,502 $ 39,201 $ 1,057,361 $ 45,001
=========== =========== =========== ===========
Net interest differential - yield on
average daily earning assets $ 38,397 3.71% $ 36,039 3.73%
=========== ===========
13
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 234,906 9,618 4.09 210,890 7,009 3.32
Time deposits:
In denominations under $100,000 203,539 14,054 6.90 205,114 11,246 5.48
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 $ 36,039 3.73% $ 33,656 3.73%
=========== ===========
14
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(fully taxable equivalent basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
2001 Over (Under) 2000 (1) 2000 Over (Under) 1999 (1)
------------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
----------- ----------- ----------- ----------- ----------- -----------
INTEREST AND LOAN FEE INCOME (2)
Loans:
Taxable $ 4,385 $ (7,591) $ (3,206) $ 6,651 $ 3,301 $ 9,952
Tax exempt 3 (9) (6) (48) (12) (60)
Investments:
Available for sale 811 (1,105) (294) (748) 1,000 252
Held to maturity 0 0 0 0 0 0
Short-term investments 195 (157) 38 29 79 108
Interest bearing deposits 56 (32) 24 37 2 39
----------- ----------- ----------- ----------- ----------- -----------
Total interest income 5,450 (8,894) (3,444) 5,921 4,370 10,291
----------- ----------- ----------- ----------- ----------- -----------
INTEREST EXPENSE
Savings deposits (46) (240) (286) (20) (16) (36)
Interest bearing checking accounts (191) (1,980) (2,171) 859 1,750 2,609
Time deposits
In denominations under $100,000 546 (3,449) (2,903) (87) 2,895 2,808
In denominations over $100,000 2,394 421 2,815 354 (493) (139)
Miscellaneous short-term borrowings 93 (3,272) (3,179) 1,591 1,353 2,944
Long-term borrowings (129) 53 (76) (384) 106 (278)
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense 2,667 (8,467) (5,800) 2,313 5,595 7,908
----------- ----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 2,783 $ (427) $ 2,356 $ 3,608 $ (1,225) $ 2,383
=========== =========== =========== =========== =========== ===========
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 2001, 2000 and 1999. 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 2001, 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 expense.
15
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
------------------------ ------------------------ ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
Securities available for sale:
U.S. Treasury securities $ 7,630 $ 7,866 $ 38,037 $ 38,066 $ 35,133 $ 34,614
U.S. Government agencies and corporations 11,528 11,574 6,672 6,550 3,726 3,201
Mortgage-backed securities 213,054 216,654 207,499 207,594 196,245 192,569
State and municipal securities 30,085 29,663 35,416 35,430 35,432 32,714
Other debt securities 5,791 5,882 6,327 5,968 8,829 8,323
----------- ----------- ----------- ----------- ----------- -----------
Total debt securities available for sale $ 268,088 $ 271,639 $ 293,951 $ 293,608 $ 279,365 $ 271,421
=========== =========== =========== =========== =========== ===========
16
ANALYSIS OF SECURITIES (cont.)
(Fully Tax Equivalent Basis)
(in thousands of dollars)
The weighted average yields (1) and maturity distribution (2) fordebt securities portfolio at December 31,2001, 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 $ 4,588 $ 3,278 $ 0 $ 0
Yield 6.50 10.75
Government agencies and corporations
Book value 0 11,574 0 0
Yield 5.89
Mortgage-backed securities
Book value 0 39,541 67,803 109,310
Yield 7.07 6.31 6.89
State and municipal securities
Book value 0 544 1,855 27,264
Yield 5.51 5.19 4.99
Other debt securities
Book value 0 3,136 0 2,746
Yield 6.88 8.54
----------- ----------- ----------- -----------
Total debt securities available for sale:
Book value $ 4,588 $ 58,073 $ 69,658 $ 139,320
Yield 6.50 8.42 7.45 5.22
=========== =========== =========== ===========
(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 anticipated 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, 2001.
17
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, 2001, 2000, 1999, 1998 and 1997 was as follows:
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Commercial loans:
Taxable $ 534,645 $ 487,125 $ 419,034 $ 343,858 $ 269,887
Tax exempt 2,544 2,374 3,048 2,867 3,065
----------- ----------- ----------- ----------- -----------
Total commercial loans 537,189 489,499 422,082 346,725 272,952
Real estate mortgage loans 47,252 52,731 46,872 60,555 65,368
Installment loans 95,592 129,729 146,711 100,196 89,107
Line of credit and credit card loans 58,190 46,917 38,233 31,020 31,207
----------- ----------- ----------- ----------- -----------
Total loans 738,223 718,876 653,898 538,496 458,634
Less allowance for loan losses 7,946 7,124 6,522 5,510 5,308
----------- ----------- ----------- ----------- -----------
Net loans $ 730,277 $ 711,752 $ 647,376 $ 532,986 $ 453,326
=========== =========== =========== =========== ===========
The real estate mortgage loan portfolio included construction loans totaling $2,354, $3,626, $4,488, $2,975 and $3,089 as
of December 31, 2001, 2000, 1999, 1998 and 1997. 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.
18
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 scheduled
maturities of the loan portfolio as of December 31, 2001. 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
Real Credit and
Commercial Estate Installment Credit Card Total Percent
----------- ----------- ----------- ----------- ----------- -----------
Original maturity of one day $ 296,390 $ 0 $ 0 $ 54,821 $ 351,211 47.6%
Other within one year 69,769 9,376 35,051 2,665 116,861 15.8
After one year, within five years 161,039 4,962 58,464 629 225,094 30.5
Over five years 7,816 32,855 2,077 75 42,823 5.8
Nonaccrual loans 2,175 59 0 0 2,234 0.3
----------- ----------- ----------- ----------- ----------- -----------
Total loans $ 537,189 $ 47,252 $ 95,592 $ 58,190 $ 738,223 100.0%
=========== =========== =========== =========== =========== ===========
A portion of the loans is 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, 2001 amounted to $230,376 and $37,541.
19
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, 2001, 2000, 1999, 1998 and 1997.
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 170 $ 398 $ 0 $ 0 $ 0
Commercial and industrial loans 0 7,635 20 159 236
Loans to individuals for household, family and
other personal expenditures 94 171 151 68 69
Loans to finance agriculture production and
other loans to farmers 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total past due loans 264 8,204 171 227 305
----------- ----------- ----------- ----------- -----------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 59 37 0 0 338
Commercial and industrial loans 2,175 169 329 0 720
Loans to individuals for household, family and
other personal expenditures 0 0 0 0 0
other loans to farmers 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total nonaccrual loans 2,234 206 329 0 1,058
----------- ----------- ----------- ----------- -----------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 0 1,127 1,179 1,281 1,377
----------- ----------- ----------- ----------- -----------
Total nonperforming loans $ 2,498 $ 9,537 $ 1,679 $ 1,508 $ 2,740
=========== =========== =========== =========== ===========
Nonearning assets of the Company include nonaccrual loans (as indicated above), nonaccrual investments, other real estate
and repossessions, which amounted to $3,862 at December 31, 2001.
20
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. Interest not recorded on
non-accrual loans is referenced in Footnote 4 in Item 8 below.
As of December 31, 2001, there were $2.2 million of loans on
nonaccrual status, most of which were also on impaired status. There were
$10.0 million of loans 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.
As of December 31, 2001, there were no loans renegotiated as troubled
debt restructurings. Interest income of $70,000 was recognized in 2001. Had
these loans been performing under the original contract terms, an additional
$0 would have been reflected in interest income during 2001. 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
service area.
21
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:
1. Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectibility 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.
2. 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.
3. 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, $2.2 million, $1.2 million
and $1.3 million were charged to the provision for loan losses and added to
the allowance for loan losses in 2001, 2000 and 1999.
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.
22
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, 2001, 2000, 1999, 1998
and 1997.
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Amount of loans outstanding, December 31, $ 738,223 $ 718,876 $ 653,898 $ 538,496 $ 458,634
=========== =========== =========== =========== ===========
Average daily loans outstanding during the year
ended December 31, $ 729,750 $ 679,198 $ 605,170 $ 489,336 $ 414,033
=========== =========== =========== =========== ===========
Allowance for loan losses, January 1, $ 7,124 $ 6,522 $ 5,510 $ 5,308 $ 5,306
----------- ----------- ----------- ----------- -----------
Loans charged-off
Commercial 569 200 147 9 99
Real estate 0 30 6 0 33
Installment 868 483 252 329 190
Credit cards and personal credit lines 103 35 30 78 37
----------- ----------- ----------- ----------- -----------
Total loans charged-off 1,540 748 435 416 359
----------- ----------- ----------- ----------- -----------
Recoveries of loans previously charged-off
Commercial 3 45 10 44 18
Real estate 16 0 0 0 0
Installment 113 93 114 86 66
Credit cards and personal credit lines 5 6 13 8 8
----------- ----------- ----------- ----------- -----------
Total recoveries 137 144 137 138 92
----------- ----------- ----------- ----------- -----------
Net loans charged-off 1,403 604 298 278 267
Purchase loan adjustment 0 0 0 0 0
Provision for loan loss charged to expense 2,225 1,206 1,310 480 269
----------- ----------- ----------- ----------- -----------
Balance, December 31, $ 7,946 $ 7,124 $ 6,522 $ 5,510 $ 5,308
=========== =========== =========== =========== ===========
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial 0.08% 0.02% 0.02% (0.01)% 0.02%
Real estate 0.00 0.00 0.00 0.00 0.01
Installment 0.10 0.06 0.02 0.05 0.03
Credit cards and personal credit lines 0.01 0.01 0.01 0.02 0.01
----------- ----------- ----------- ----------- -----------
Total 0.19% 0.09% 0.05% 0.06% 0.07%
=========== =========== =========== =========== ===========
Ratio of allowance for loan losses to
Nonperforming assets 192.58% 73.83% 368.06% 258.20% 176.99%
=========== =========== =========== =========== ===========
23
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, 2001, 2000, 1999, 1998 and 1997.
2001 2000 1999
------------------------ ------------------------ ------------------------
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 $ 6,412 72.77% $ 5,205 68.09% $ 4,750 64.55%
Real estate 127 6.40 132 7.34 120 7.17
Installment 728 12.95 974 18.04 1,202 22.43
Credit cards and personal credit lines 431 7.88 352 6.53 185 5.85
----------- ----------- ----------- ----------- ----------- -----------
Total allocated allowance for loan losses 7,698 100.00% 6,663 100.00% 6,257 100.00%
=========== =========== ===========
Unallocated allowance for loan losses 248 461 265
----------- ----------- -----------
Total allowance for loan losses $ 7,946 $ 7,124 $ 6,522
=========== =========== ===========
1998 1997
------------------------ ------------------------
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 $ 1,647 64.39% $ 1,341 59.52%
Real estate 130 11.24 131 14.25
Installment 845 18.61 673 19.43
Credit cards and personal credit lines 130 5.76 103 6.80
----------- ----------- ----------- -----------
Total allocated allowance for loan losses 2,752 100.00% 2,248 100.00%
=========== ===========
Unallocated allowance for loan losses 2,758 3,060
----------- -----------
Total allowance for loan losses $ 5,510 $ 5,308
=========== ===========
In 2001 and 1999, the Company reviewed and revised the allocation process for the Allowance for Loan Losses. These
changes primarily affected 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 closer conformity with regulatory guidance. The Company continues
to review the allocation process and the documentation for the Allowance for Loan Losses, therefore future changes may occur.
24
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 2001, 2000 and 1999, and the average rates paid on those
deposits are summarized in the following table:
2001 2000 1999
------------------------ ------------------------ ------------------------
Average Average Average Average Average Average
Daily Rate Daily Rate Daily Rate
Balance Paid Balance Paid Balance Paid
----------- ----------- ----------- ----------- ----------- -----------
Demand deposits $ 137,011 0.00% $ 134,270 0.00% $ 120,808 0.00%
Savings and transaction accounts:
Regular savings 50,513 1.21 53,372 1.68 54,562 1.71
Interest bearing checking 230,144 3.24 234,906 4.09 210,890 3.32
Time deposits:
Deposits of $100,000 or more 203,067 5.24 157,040 4.98 150,182 5.30
Other time deposits 211,728 5.27 203,539 6.90 205,114 5.48
----------- ----------- -----------
Total deposits $ 832,463 3.59% $ 783,127 4.14% $ 741,556 3.66%
=========== =========== ===========
As of December 31, 2001, time certificates of deposit in denominations of $100,000 or more will mature as follows:
Within three months $ 62,054
Over three months, within six months 64,913
Over six months, within twelve months 10,684
Over twelve months 7,195
-----------
Total time certificates of deposit in
denominations of $100,000 or more $ 144,846
===========
25
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 Item 7, below, 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, 2001, 2000 and 1999
were as follows:
2001 2000 1999
----------- ----------- -----------
Percent of net income to:
Average daily total assets 0.90% 0.88% 0.84%
Average daily stockholders' equity 14.45 16.39 15.08
Percentage of dividends declared per
common share to basic earnings per
weighted average number of common
shares outstanding (5,813,984 shares
in 2001, 2000 and 1999) 34.48 32.50 30.77
Percentage of average daily
stockholders' equity to average
daily total assets 6.24 5.38 5.58
26
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.
2001 2000 1999
----------- ----------- -----------
Outstanding at year end $ 149,117 $ 138,154 $ 121,374
Approximate average interest rate at
year end 1.91% 5.37% 4.75%
Highest amount outstanding as of any
month end during the year $ 160,628 $ 143,677 $ 143,353
Approximate average outstanding
during the year $ 140,277 $ 121,267 $ 120,950
Approximate average interest rate
during the year 3.72% 5.35% 4.76%
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.
27
ITEM 2. PROPERTIES
The Company conducts its operations from the following locations:
Branches/Headquarters
Main/Headquarters 202 East 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 Rd. 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 North Nappanee St. Elkhart IN
Fort Wayne North 302 East DuPont Rd. Fort Wayne IN
Fort Wayne Northeast 10411 Maysville 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
Huntington 1501 North Jefferson St. Huntington IN
Kendallville East 631 Professional Way Kendallville IN
LaGrange 901 South Detroit LaGrange IN
Ligonier Downtown 222 South Cavin St. Ligonier IN
Ligonier South 1470 U.S. Highway 33 South Ligonier 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 North Main St. Mishawaka IN
Nappanee 202 West Market St. Nappanee IN
North Webster 644 North Main St. North Webster IN
Pierceton 202 South First St. Pierceton IN
Plymouth 862 East Jefferson St. Plymouth IN
Rochester 507 East 9th St. Rochester IN
Shipshewana 895 North Van Buren St. Shipshewana IN
Silver Lake 102 Main St. Silver Lake IN
South Bend Northwest 21113 Cleveland Rd. South Bend IN
Syracuse 502 South Huntington Syracuse 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
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 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.
28
In addition, the Company owns buildings at 110 South High St.,
Warsaw, Indiana, and 114-118 East Market St., Warsaw, Indiana, which it uses
for various offices, a building at 113 East Market St., Warsaw, Indiana, which
it uses for office and computer facilities, and a building at 109 South
Buffalo St., Warsaw, Indiana, which is uses for training and development. The
Company also leases from third parties facilities in Warsaw, Indiana, for the
storage of supplies and in Elkhart, Indiana, for computer facilities.
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 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001
Trading range (per share)*
Low $ 15.50 $ 15.10 $ 13.35 $ 11.63
High $ 17.62 $ 17.00 $ 15.87 $ 16.38
Dividends declared (per share) $ 0.15 $ 0.15 $ 0.15 $ 0.15
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
* The trading ranges are the high and low as obtained from the Nasdaq Stock
Market.
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. On December 31, 2001,
the Company had approximately 2,000 shareholders of record, including those
employees who participate in the Company's 401(k) plan.
29
ITEM 6. SELECTED FINANCIAL DATA
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(in thousands except share and per share data)
Interest income $ 76,615 $ 80,050 $ 69,395 $ 63,667 $ 52,699
Interest expense 39,201 45,001 37,093 36,091 28,060
----------- ----------- ----------- ----------- -----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . 37,414 35,049 32,302 27,576 24,639
Provision for loan losses 2,225 1,206 1,310 480 269
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 35,189 33,843 30,992 27,096 24,370
Other noninterest income 11,393 10,413 9,785 8,819 7,222
Net gain on sale of branches 753 0 0 0 0
Net gains on sale of real estate
mortgages held for sale 1,232 504 1,302 1,467 545
Net securities gains (losses) 120 0 1,340 1,256 (19)
Noninterest expense (33,830) (31,322) (31,015) (26,824) (20,658)
----------- ----------- ----------- ----------- -----------
Income before income tax expense . . . . . . . . . . . . . . . . 14,857 13,438 12,404 11,814 11,460
Income tax expense 4,744 4,116 4,085 3,926 3,920
----------- ----------- ----------- ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,113 $ 9,322 $ 8,319 $ 7,888 $ 7,540
=========== =========== =========== =========== ===========
Basic weighted average common shares 5,813,984 5,813,984 5,813,984 5,813,984 5,813,162
=========== =========== =========== =========== ===========
outstanding*
Basic earnings per common share* $ 1.74 $ 1.60 $ 1.43 $ 1.36 $ 1.30
=========== =========== =========== =========== ===========
Diluted weighted average common shares 5,841,196 5,813,999 5,813,992 5,813,984 5,813,162
=========== =========== =========== =========== ===========
outstanding*
Diluted earnings per common share* $ 1.73 $ 1.60 $ 1.43 $ 1.36 $ 1.30
=========== =========== =========== =========== ===========
Cash dividends declared* $ 0.60 $ 0.52 $ 0.44 $ 0.33 $ 0.30
=========== =========== =========== =========== ===========
* Adjusted for 2-for-1 stock split on April 30, 1998.
30
ITEM 6. SELECTED FINANCIAL DATA (continued)
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(in thousands)
Balances at December 31:
Total assets $ 1,137,712 $ 1,149,157 $ 1,039,843 $ 978,909 $ 796,478
Total deposits $ 793,380 $ 845,329 $ 748,243 $ 739,347 $ 612,992
Total short-term borrowings $ 232,117 $ 200,078 $ 195,374 $ 35,690 $ 84,117
Long-term borrowings $ 11,389 $ 11,433 $ 16,473 $ 21,386 $ 25,367
Guaranteed preferred beneficial interests in
Company's subordinated debentures $ 19,318 $ 19,291 $ 19,264 $ 19,238 $ 19,211
Total stockholders' equity $ 73,534 $ 64,973 $ 54,194 $ 55,156 $ 48,256
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Growth and Expansion
As of December 31, 2001, the Company had 40 offices serving 11
counties in northern Indiana. The Company added two new offices and sold five
existing offices during 2001. Since 1996, the Company has added eighteen new
offices through acquisition and internal growth. As a result of the office
sales in 2001, total assets decreased 1.0% from $1.149 billion as of December
31, 2000 to $1.138 billion as of December 31, 2001. The Company opened a third
office in St. Joseph County in May 2001 and a third office in Allen County in
September 2001. The Company intends to open an office in Dekalb County in 2002
and also continues to evaluate additional expansion opportunities. The Company
will consider future acquisition and expansion opportunities with an emphasis
on markets that it believes would be receptive to its business philosophy of
local, independent banking.
On September 22, 2001, the Company sold five southern market offices
to First Farmers Bank and Trust of Converse, Indiana. The offices included in
the sale are located in Peru, Greentown, Wabash, Roann, and Logansport,
Indiana. Collectively, the offices had approximately $70.2 million in
deposits, $24.5 million in loans, $2.7 million in intangible assets, $2.2
million in fixed assets and $0.4 million in vault cash. The sale resulted in a
gain of $753,000. Management believes the sale of these non-strategic branches
will position the Company to focus on growth opportunities in its core
northern markets, which are anchored by the cities of Warsaw, Fort Wayne,
Elkhart and South Bend, Indiana.
The divestiture of five branches resulted in a decrease in assets of
$11.4 million, or 1.0% from $1.149 billion in 2000 to $1.138 billion in 2001.
Including the sale of the five branches, total loans increased 2.7%, or $19.3
million, from $718.9 million in 2000 to $738.2 million in 2001. Commercial
loans increased $47.7 million, or 9.7%, from $489.5 million in 2000 to $537.2
million in 2001. This increase was partially offset by a decrease of $5.4
million, or 9.0%, in mortgage loans and a decrease of $22.9 million, or 12.9%,
in consumer loans. These changes reflect the strategy implemented in 2000 to
focus on commercial loan growth, as well as somewhat tighter credit standards
due to the weaker economic conditions. Total securities decreased $22.0
million, or 7.5%, from $293.6 million in 2000 to $271.6 million in 2001. The
decision to decrease the security portfolio was primarily driven by the
decrease in deposits from the branch sale. Core deposits, total deposits and
securities sold under agreements to repurchase (repurchase agreements) also
31
decreased 4.2%, or $41.0 million, from $983.5 million in 2000 to $942.5
million in 2001 as a result of the branch sale. The primary decrease was in
large time deposits, which decreased $35.5 million, or 19.7% from $180.3
million in 2000 to $144.8 million in 2001.
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 higher volume of mortgage originations and 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.
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 $44.0
million of funding in 2002.
In addition to these primary sources of funds, management has several
secondary sources available to meet potential funding requirements. As of
December 31, 2001, the Company had $110.0 million in Federal Fund lines with
correspondent banks and may borrow up to $100 million at the Federal Home Loan
Bank of Indianapolis. The Company recorded its securities in the available for
sale (AFS) portfolio. Therefore the Company may sell securities to meet
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. In addition, 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 2001, cash and cash equivalents decreased $9.9 million from
$89.0 million as of December 2000 to $79.1 million as of December 31, 2001.
The primary driver of this decrease was the effect of the branch sale. Other
uses of funds were purchases of securities, an increase in loans and payments
for the branch sale. Purchases of securities totaled $71.7 million. Net loans
increased $46.6 million in 2001, which was net of approximately $68.3 million
of loans originated and sold during 2001. Payments for the branch sale were
$40.2 million. The major sources of funds included proceeds from sales, calls
and maturities of securities of $96.5 million and proceeds from the sale of
loans of $60.8 million. Lower interest rates created more demand for
residential real estate mortgage loans and resulted in an increase in proceeds
from the sale of mortgage loans.
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.
32
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.
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, 2001, 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 2001, the Federal Reserve lowered the target
for the Federal Funds rate on eleven occasions, decreasing the rate from 6.50%
on January 1, 2001 to 1.75% by December 31, 2001, a total of 475 basis points.
These actions caused a corresponding decrease in Lake City Bank's prime rate
from 9.50% to 4.75%. Due to the asset sensitive nature of the balance sheet,
these rate decreases have had an adverse impact on the Company's net interest
margin during fiscal 2001. During 2001, the Company took an aggressive
position in managing the liability pricing structure in an attempt to optimize
the net interest margin in a declining rate environment. The Company utilizes
a computer program to stress test the balance sheet under a wide variety of
interest rate