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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, 2002
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.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No___
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on the
Nasdaq Stock Market on June 28, 2002, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$152,816,786.
Number of shares of common stock outstanding at February 19, 2003: 5,770,565
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Proxy Statement for the Annual Meeting of
Shareholders mailed on March 7, 2003 are incorporated by reference into Part
III hereof.
LAKELAND FINANCIAL CORPORATION
Annual Report on Form 10-K
Table of Contents
Page Number
PART I
Item 1. Business 3
Forward -Looking Statements 4
Supervision and Regulation 7
Industry Segments 12
Guide 3 Information 13
Item 2. Properties 30
Item 3. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 31
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 31
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 33
Overview 33
Results of Operations 33
Financial Condition 36
Liquidity 38
Inflation 40
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 40
Item 8. Financial Statements and Supplemental Data 43
Financial Statements 43
Notes to Financial Statements 47
Report of Independent Auditors 71
Management's Responsibility for Financial Statements 72
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 73
PART III
Item 10. Directors and Executive Officers of the Registrant 73
Item 11. Executive Compensation 73
Item 12. Security Ownership of Certain Beneficial Owners and Management 73
Item 13. Certain Relationships and Related Transactions 74
Item 14. Controls and Procedures 74
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 75
Form 10-K Signature Page 76
Form 10-K Certifications 78
Exhibit 21 80
2
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, an Indiana
state bank headquartered in Warsaw, Indiana, and Lakeland Capital Trust. Also
included in the consolidated financial statements is LCB Investments Limited,
a wholly-owned subsidiary of Lake City Bank which is a Bermuda corporation
that manages a portion of the Bank's investment portfolio. All intercompany
transactions and balances are eliminated in consolidation.
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, 2002 the Bank had 41 offices in twelve
counties throughout northern Indiana.
Market Overview. While the Company operates in twelve counties, it
currently defines operations by three primary geographical markets. They are
the South Region, which includes Kosciusko and contiguous counties; the North
Region, which includes Elkhart and St. Joseph Counties; and the East Region,
which includes Allen and DeKalb Counties. The South Region includes the city
of Warsaw and is the location of the Company's headquarters. The Company has
had a presence in this region since 1873. It has been in the North Region
since 1990, which includes the cities of Elkhart, South Bend and Goshen. The
Company opened its first office in the East Region in 1999, which includes the
cities of Fort Wayne and Auburn.
The Company believes that these are well-established, diverse
economic regions. The Company's markets include a mix of industrial and
service companies with no business or industry concentrations. Furthermore, no
single industry or employer dominates any of the markets. Fort Wayne
represents the largest population center served by the Company with a
population of 206,000, according to 2000 U.S. Census Bureau data. South Bend,
with a 2000 population of 108,000 is the second largest city served by the
Company. Elkhart, with a 2000 population of 52,000, is the third largest city
that the Company currently serves. As a result of the presence of offices in
twelve counties that are widely dispersed, no single city or industry
represents an undue concentration.
Expansion Strategy. The Company's expansion strategy is driven
primarily by the potential for increased penetration in existing markets where
opportunities for market share growth exists. Additionally, the Company looks
to grow by entering new markets, in close geographic proximity to its current
operations that the Company believes would be receptive to its strategic plan
to deliver broad based financial services with a local flavor. The Company has
recently focused on growth through de novo branching in locations that
management believes have potential for creating new market opportunities or
for further penetrating existing markets. In new markets, the Company believes
it is critical to attract experienced local management with a similar
philosophy in order to provide a basis for success.
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The Company also considers opportunities beyond current markets when
the Company's board of directors and management believes that the opportunity
will provide a desirable strategic fit without posing undue risk. The Company
does not currently have any definitive understandings or agreements for any
acquisitions.
Products and Services. The Company is a full service commercial bank
and provides commercial, retail, trust and investment services to its
customers. Commercial products include commercial loans and technology-driven
solutions to commercial customers' cash management needs such as CommerciaLink
Internet business banking and on-line cash management services. Retail banking
clients are provided a wide array of traditional retail banking services,
including lending, deposit and investment services. Retail lending programs
are focused on mortgage loans, home equity lines of credit and traditional
retail installment loans. The Company also has an Honors Private Banking
program that is positioned to serve the more financially sophisticated
customer with a menu including brokerage and trust services, executive
mortgage programs and access to financial planning seminars and programs. The
Bank's Prospero Program is dedicated to serving the expanding financial needs
of the Latino community. The Company provides trust clients with traditional
personal and corporate trust services. The Company also provides retail
brokerage services, including an array of financial and investment products
such as annuities and life insurance.
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:
o 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.
o The economic impact of past and any future terrorist attacks,
acts of war or threats thereof and the response of the United
States to any such threats and attacks.
o The effects of, and changes in, federal, state and local
laws, regulations and policies affecting banking,
securities, insurance and monetary and financial matters.
o 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.
o 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.
o The inability of the Company to obtain new customers and to
retain existing customers.
4
o The timely development and acceptance of products and
services, including products and services offered through
alternative delivery channels such as the Internet.
o 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.
o The ability of the Company to develop and maintain secure and
reliable electronic systems.
o 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.
o Consumer spending and saving habits, which may change in a
manner that affects the Company's business adversely.
o Business combinations and the integration of acquired
businesses, which may be more difficult or expensive than
expected.
o The costs, effects and outcomes of existing or future
litigation.
o Changes in accounting policies and practices, as may be
adopted by state and federal regulatory agencies, the
Financial Accounting Standards Board, the Securities and
Exchange Commission and the Public Company Accounting
Oversight Board.
o 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,
(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.
5
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 currently
enforces an internal limit of $10.0 million, which is less than the amount
permitted by law. This maximum limits the Bank from providing loans 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, 2002, the Company, including its subsidiaries, had
427 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 and
employees can no longer accrue new benefits under that plan. 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.
Internet Website
The Company maintains an Internet site at www.lakecitybank.com. The
Company makes available free of charge on this site its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after it electronically files such
material with, or furnishes it to, the Securities and Exchange Commission.
6
SUPERVISION AND REGULATION
General
Financial institutions, their holding companies and their affiliates
are extensively regulated under federal and state law. As a result, the growth
and earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Indiana Department of Financial
Institutions (the "DFI"), the Board of Governors of the Federal Reserve System
(the "Federal Reserve") and the Federal Deposit Insurance Corporation (the
"FDIC"). Furthermore, taxation laws administered by the Internal Revenue
Service and state taxing authorities and securities laws administered by the
Securities and Exchange Commission (the "SEC") and state securities
authorities have an impact on the business of the Company. The effect of these
statutes, regulations and regulatory policies may be significant, and cannot
be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions regulate, among other things, the scope of business,
the kinds and amounts of investments, reserve requirements, capital levels
relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers and consolidations and the payment of
dividends. This system of supervision and regulation establishes a
comprehensive framework for the respective operations of the Company and its
subsidiaries and is intended primarily for the protection of the FDIC insured
deposits and depositors of the Bank, rather than shareholders.
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,
nor does it restate all of the requirements of those that are described. As
such, the following is qualified in its entirety by reference to applicable
law. Any change in statutes, 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,
and is subject to regulation by, the Federal Reserve under the Bank Holding
Company Act of 1956, 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 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.
Acquisitions, Activities and Change in Control. The primary purpose
of a bank holding company is to control and manage banks. The BHCA generally
requires the prior approval of the Federal Reserve for any merger involving a
bank holding company or any acquisition by a bank holding company of another
bank or bank holding company. Subject to certain conditions (including 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. In approving interstate acquisitions, 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 that 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 generally prohibits the Company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company that 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
7
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." This authority would permit the Company to engage in a
variety of banking-related businesses, including the operation of a thrift,
consumer finance, equipment leasing, the operation of a computer service
bureau (including software development), mortgage banking and brokerage. The
BHCA generally does not place territorial restrictions on the domestic
activities of non-bank subsidiaries of bank holding companies.
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 underwriting and
sales, merchant banking 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. 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 an FDIC-insured depository institution or its holding company
without prior notice to the appropriate federal bank regulator. "Control" is
conclusively presumed to exist upon the acquisition of 25% or more of the
outstanding voting securities of a bank or bank holding company, but may arise
under certain circumstances at 10% ownership.
Capital Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required 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 assets weighted
according to risk; 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 total 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 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 that 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, 2002, the Company had regulatory capital in excess
of the Federal Reserve's minimum requirements.
Dividend Payments. The Company's ability to pay dividends to its
shareholders may be affected by both general corporate law considerations and
policies of the Federal Reserve applicable to bank holding companies. As an
Indiana corporation, the Company is subject to the limitations of the Indiana
General Business Corporation Law, which 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.
Additionally, policies of the Federal Reserve caution that a bank holding
company should not pay cash dividends that exceed its net income or that 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
8
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 an
Indiana-chartered bank, the Bank is subject to the examination, supervision,
reporting and enforcement requirements of the DFI, the chartering authority
for Indiana banks, and the FDIC, designated by federal law as the primary
federal regulator of state-chartered, FDIC-insured banks that, like the Bank,
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, 2002, BIF assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2003, BIF assessment rates will continue to range from 0%
of deposits to 0.27% of deposits.
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,
2002, 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. The
amount of the assessment is calculated on the basis of the bank's total
assets. During the year ended December 31, 2002, the Bank paid supervisory
assessments to the DFI totaling $79,000.
Capital Requirements. Banks are generally required to maintain
capital levels in excess of other businesses. The FDIC has established the
following minimum capital standards for state-chartered FDIC-insured
non-member 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 total risk-weighted assets of 4%. For purposes of these capital
standards, the components of Tier 1 capital and total capital are the same as
those for bank holding companies discussed above.
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,
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.
9
Further, federal law and regulations provide various incentives for
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 that 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.
As of December 31, 2002: (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.
Dividend Payments. The primary source of funds for the Company is
dividends from the Bank. 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, 2002. As of December 31, 2002, approximately
$14.5 million was available to be paid as dividends 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, on investments
in the stock or other securities of the Company and the acceptance of the
stock or other securities of the Company as collateral for loans made by the
Bank. 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, to principal shareholders of the Company and to
"related interests" of such directors, officers and principal shareholders. In
addition, federal law and regulations may affect the terms upon which any
person who is a director or officer of the Company or the Bank or a principal
shareholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.
10
Safety and Soundness Standards. The federal banking agencies have
adopted guidelines that 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 required regulatory approvals. State and
national banks are allowed to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions, including
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 only if specifically authorized
by state law. Indiana law permits interstate mergers subject to certain
conditions, including a condition requiring an Indiana bank involved in an
interstate merger to have been in existence and continuous operation for more
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 that state.
State Bank Investments and Activities. The Bank generally is
permitted to make investments and engage in activities directly or through
subsidiaries as authorized by Indiana law. However, 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 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 $42.1
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $42.1 million, the
reserve requirement is $1.083 million plus 10% of the aggregate amount of
total transaction accounts in excess of $42.1 million. The first $6.0 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.
11
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.
12
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
2002 2001
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 766,962 $ 49,083 6.40% $ 727,330 $ 58,348 8.02%
Tax exempt (1) 3,935 279 7.09 2,420 209 8.64
Investments: (1)
Available for sale 274,155 15,677 5.72 291,901 18,556 6.36
Short-term investments 12,672 191 1.51 9,778 405 4.14
Interest bearing deposits 4,283 70 1.61 2,437 80 3.24
----------- ----------- ----------- -----------
Total earning assets 1,062,007 65,300 6.15% 1,033,866 77,598 7.51%
Nonearning assets:
Cash and due from banks 42,904 0 41,148 0
Premises and equipment 24,469 0 26,423 0
Other nonearning assets 26,744 0 27,429 0
Less allowance for loan losses (8,662) 0 (7,364) 0
----------- ----------- ----------- -----------
Total assets $ 1,147,462 $ 65,300 $ 1,121,502 $ 77,598
=========== =========== =========== ===========
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 and 34 percent tax rate for 2002 and 2001. 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.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 2002 and
2001, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
13
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
2001 2000
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 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
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.
(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.
(3) Nonaccrual loans are included in the average balance of taxable loans.
14
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
2002 2001
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 53,792 $ 404 0.75% $ 50,513 $ 613 1.21%
Interest bearing checking accounts 231,712 3,592 1.55 230,144 7,447 3.24
Time deposits:
In denominations under $100,000 203,531 7,491 3.68 211,728 11,151 5.27
In denominations over $100,000 224,437 5,604 2.50 203,067 10,639 5.24
Miscellaneous short-term borrowings 146,619 2,552 1.74 178,197 6,904 3.87
Long-term borrowings 44,999 2,886 6.41 30,716 2,447 7.97
----------- ----------- ----------- -----------
Total interest bearing liabilities 905,090 22,529 2.49% 904,365 39,201 4.33%
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 150,226 0 137,011 0
Other liabilities 13,093 0 10,135 0
Stockholders' equity 79,053 0 69,991 0
Total liabilities and stockholders' ----------- ----------- ----------- -----------
equity $ 1,147,462 $ 22,529 $ 1,121,502 $ 39,201
=========== =========== =========== ===========
Net interest differential - yield on
average daily earning assets $ 42,771 4.03% $ 38,397 3.71%
=========== ===========
15
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%
=========== ===========
16
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(fully taxable equivalent basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
2002 Over (Under) 2001 (1) 2001 Over (Under) 2000 (1)
------------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
----------- ----------- ----------- ----------- ----------- -----------
INTEREST AND LOAN FEE INCOME (2)
Loans:
Taxable $ 3,043 $ (12,308) $ (9,265) $ 4,385 $ (7,591) $ (3,206)
Tax exempt 113 (43) 70 3 (9) (6)
Investments:
Available for sale (1,085) (1,794) (2,879) 811 (1,105) (294)
Short-term investments 96 (310) (214) 195 (157) 38
Interest bearing deposits 42 (52) (10) 56 (32) 24
----------- ----------- ----------- ----------- ----------- -----------
Total interest income 2,209 (14,507) (12,298) 5,450 (8,894) (3,444)
----------- ----------- ----------- ----------- ----------- -----------
INTEREST EXPENSE
Savings deposits 38 (247) (209) (46) (240) (286)
Interest bearing checking accounts 50 (3,905) (3,855) (191) (1,980) (2,171)
Time deposits
In denominations under $100,000 (417) (3,243) (3,660) 546 (3,449) (2,903)
In denominations over $100,000 1,022 (6,057) (5,035) 2,394 421 2,815
Miscellaneous short-term borrowings (1,059) (3,293) (4,352) 93 (3,272) (3,179)
Long-term borrowings 982 (543) 439 (129) 53 (76)
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense 616 (17,288) (16,672) 2,667 (8,467) (5,800)
----------- ----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 1,593 $ 2,781 $ 4,374 $ 2,783 $ (427) $ 2,356
=========== =========== =========== =========== =========== ===========
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 2002, 2001 and 2000. 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 35, 34 and 34 percent tax rate for 2002, 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 expense.
17
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
------------------------ ------------------------ ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
Securities available for sale:
U.S. Treasury securities $ 5,143 $ 5,338 $ 7,630 $ 7,866 $ 38,037 $ 38,066
U.S. Government agencies and corporations 11,371 11,946 11,528 11,574 6,672 6,550
Mortgage-backed securities 216,619 222,036 213,054 216,654 207,499 207,594
State and municipal securities 33,534 34,785 30,085 29,663 35,416 35,430
Other debt securities 0 0 5,791 5,882 6,327 5,968
----------- ----------- ----------- ----------- ----------- -----------
Total debt securities available for sale $ 266,667 $ 274,105 $ 268,088 $ 271,639 $ 293,951 $ 293,608
=========== =========== =========== =========== =========== ===========
18
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, 2002, 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 $ 3,014 $ 2,129 $ 0 $ 0
Yield 10.75% 6.13%
Government agencies and corporations
Book value 0 11,371 0 0
Yield 5.88%
Mortgage-backed securities
Book value 0 26,669 75,439 114,511
Yield 3.71% 6.36% 6.14%
State and municipal securities
Book value 0 100 1,379 32,055
Yield 6.85% 5.52% 4.94%
Other debt securities
Book value 0 0 0 0
Yield
---------------- ---------------- ---------------- -----------
Total debt securities available for sale:
Book value $ 3,014 $ 40,269 $ 76,818 $ 146,566
Yield 1 0.75% 4.45% 6.35% 5.88%
================ ================ ================ ===========
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35% 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, other than the U.S. Government and its agencies that exceeded
10% of stockholders' equity at December 31, 2002.
19
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, 2002, 2001, 2000, 1999 and 1998 was as follows:
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Commercial loans:
Taxable $ 619,963 $ 534,645 $ 487,125 $ 419,034 $ 343,858
Tax exempt 4,974 2,544 2,374 3,048 2,867
----------- ----------- ----------- ----------- -----------
Total commercial loans 624,937 537,189 489,499 422,082 346,725
Real estate mortgage loans 47,184 47,252 52,731 46,872 60,555
Installment loans 75,692 95,592 129,729 146,711 100,196
Line of credit and credit card loans 74,863 58,190 46,917 38,233 31,020
----------- ----------- ----------- ----------- -----------
Total loans 822,676 738,223 718,876 653,898 538,496
Less allowance for loan losses 9,533 7,946 7,124 6,522 5,510
---------- ----------- ----------- ----------- -----------
Net loans $ 813,143 $ 730,277 $ 711,752 $ 647,376 $ 532,986
========== =========== =========== =========== ===========
The real estate mortgage loan portfolio included construction loans totaling $2,540, $2,354, $3,626, $4,488 and $2,975 as
of December 31, 2002, 2001, 2000, 1999 and 1998. 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.
20
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 scheduledmaturity of each principal payment. The following table indicates the scheduled
maturities of the loan portfolio as of December 31, 2002.
Line of
Real Credit and
Commercial Estate Installment Credit Card Total Percent
----------- ----------- ----------- ----------- ----------- -----------
Original maturity of one day $ 387,041 $ 0 $ 0 $ 71,404 $ 458,445 55.7%
Other within one year 74,646 11,082 29,880 2,839 118,447 14.4
After one year, within five years 153,411 5,242 43,715 572 202,940 24.7
Over five years 5,729 30,754 2,097 48 38,628 4.7
Nonaccrual loans 4,110 106 0 0 4,216 0.5
----------- ----------- ----------- ----------- ----------- -----------
Total loans $ 624,937 $ 47,184 $ 75,692 $ 74,863 $ 822,676 100.0%
=========== =========== =========== =========== =========== ===========
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, 2002 amounted to $229,214 and $38,703.
21
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, 2002, 2001, 2000, 1999 and 1998.
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 0 $ 170 $ 398 $ 0 $ 0
Commercial and industrial loans 3,245 0 7,635 20 159
Loans to individuals for household, family and
other personal expenditures 142 94 171 151 68
Loans to finance agriculture production and
other loans to farmers 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total past due loans 3,387 264 8,204 171 227
----------- ----------- ----------- ----------- -----------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 106 59 37 0 0
Commercial and industrial loans 4,110 2,175 169 329 0
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 4,216 2,234 206 329 0
----------- ----------- ----------- ----------- -----------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 0 0 1,127 1,179 1,281
----------- ----------- ----------- ----------- -----------
Total nonperforming loans $ 7,603 $ 2,498 $ 9,537 $ 1,679 $ 1,508
=========== =========== =========== =========== ===========
Nonearning assets of the Company include nonaccrual loans (as indicated above), nonaccrual investments, other real estate
and repossessions, which amounted to $7,741 at December 31, 2002.
22
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, 2002, there were $4.2 million of loans on
nonaccrual status, most of which were also on impaired status. There were $7.3
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, 2002 and 2001, there were no loans renegotiated as
troubled debt restructurings.
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.
23
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 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, $3.1 million, $2.2 million
and $1.2 million were charged to the provision for loan losses and added to
the allowance for loan losses in 2002, 2001 and 2000.
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.
24
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, 2002, 2001, 2000, 1999 and
1998.
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Amount of loans outstanding, December 31, $ 822,676 $ 738,223 $ 718,876 $ 653,898 $ 538,496
=========== =========== =========== =========== ===========
Average daily loans outstanding during the year
ended December 31, $ 770,897 $ 729,750 $ 679,198 $ 605,170 $ 489,336
=========== =========== =========== =========== ===========
Allowance for loan losses, January 1, $ 7,946 $ 7,124 $ 6,522 $ 5,510 $ 5,308
----------- ----------- ----------- ----------- -----------
Loans charged-off
Commercial 1,268 569 200 147 9
Real estate 0 0 30 6 0
Installment 509 868 483 252 329
Credit cards and personal credit lines 98 103 35 30 78
----------- ----------- ----------- ----------- -----------
Total loans charged-off 1,875 1,540 748 435 416
----------- ----------- ----------- ----------- -----------
Recoveries of loans previously charged-off
Commercial 270 3 45 10 44
Real estate 0 16 0 0 0
Installment 128 113 93 114 86
Credit cards and personal credit lines 8 5 6 13 8
----------- ----------- ----------- ----------- -----------
Total recoveries 406 137 144 137 138
----------- ----------- ----------- ----------- -----------
Net loans charged-off 1,469 1,403 604 298 278
Provision for loan loss charged to expense 3,056 2,225 1,206 1,310 480
----------- ----------- ----------- ----------- -----------
Balance, December 31, $ 9,533 $ 7,946 $ 7,124 $ 6,522 $ 5,510
=========== =========== =========== =========== ===========
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial 0.13% 0.08% 0.02% 0.02% (0.01)%
Real estate 0.00 0.00 0.00 0.00 0.00
Installment 0.05 0.10 0.06 0.02 0.05
Credit cards and personal credit lines 0.01 0.01 0.01 0.01 0.02
----------- ----------- ----------- ----------- -----------
Total 0.19% 0.19% 0.09% 0.05% 0.06%
=========== =========== =========== =========== ===========
Ratio of allowance for loan losses to
Nonperforming assets 123.15% 192.58% 73.83% 368.06% 258.20%
=========== =========== =========== =========== ===========
25
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, 2002, 2001, 2000, 1999 and 1998.
2002 2001 2000
------------------------ ------------------------ ------------------------
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 $ 7,824 75.96% $ 6,412 72.77% $ 5,205 68.09%
Real estate 123 5.74 127 6.40 132 7.34
Installment 573 9.20 728 12.95 974 18.04
Credit cards and personal credit lines 563 9.10 431 7.88 352 6.53
----------- ----------- ----------- ----------- ----------- -----------
Total allocated allowance for loan losses 9,083 100.00% 7,698 100.00% 6,663 100.00%
=========== =========== ===========
Unallocated allowance for loan losses 450 248 461
----------- ----------- -----------
Total allowance for loan losses $ 9,533 $ 7,946 $ 7,124
=========== =========== ===========
1999 1998
------------------------ ------------------------
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 $ 4,750 64.55% $ 1,647 64.39%
Real estate 120 7.17 130 11.24
Installment 1,202 22.43 845 18.61
Credit cards and personal credit lines 185 5.85 130 5.76
----------- ----------- ----------- -----------
Total allocated allowance for loan losses 6,257 100.00% 2,752 100.00%
=========== ===========
Unallocated allowance for loan losses 265 2,758
----------- -----------
Total allowance for loan losses $ 6,522 $ 5,510
=========== ===========
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.
26
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 2002, 2001 and 2000, and the average rates paid on those
deposits are summarized in the following table:
2002 2001 2000
----------------------- ------------------------ ------------------------
Average Average Average Average Average Average
Daily Rate Daily Rate Daily Rate
Balance Paid Balance Paid Balance Paid
----------- ----------- ----------- ----------- ----------- -----------
Demand deposits $ 150,226 0.00% $ 137,011 0.00% $ 134,270 0.00%
Savings and transaction accounts:
Regular savings 53,792 0.75 50,513 1.21 53,372 1.68
Interest bearing checking 231,712 1.55 230,144 3.24 234,906 4.09
Time deposits:
Deposits of $100,000 or more 224,437 2.50 203,067 5.24 157,040 4.98
Other time deposits 203,531 3.68 211,728 5.27 203,539 6.90
----------- ----------- -----------
Total deposits $ 863,698 1.98% $ 832,463 3.59% $ 783,127 4.14%
=========== =========== ===========
As of December 31, 2002, time certificates of deposit in denominations of $100,000 or more will mature as follows:
Within three months $ 107,430
Over three months, within six months 69,067
Over six months, within twelve months 24,011
Over twelve months 24,494
-----------
Total time certificates of deposit in
denominations of $100,000 or more $ 225,002
===========
27
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 material 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, 2002, 2001 and 2000
were as follows:
2002 2001 2000
----------- ----------- -----------
Percent of net income to:
Average daily total assets 1.08% 0.90% 0.88%
Average daily stockholders' equity 15.64 14.45 16.39
Percentage of dividends declared per
common share to basic earnings per
weighted average number of common
shares outstanding (5,813,984 shares
in 2002, 2001 and 2000) 31.92 34.48 32.50
Percentage of average daily
stockholders' equity to average
daily total assets 6.89 6.24 5.38
28
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.
2002 2001 2000
----------- ----------- -----------
Outstanding at year end $ 124,969 $ 149,117 $ 138,154
Approximate average interest rate at
year end 1.03% 1.91% 5.37%
Highest amount outstanding as of any
month end during the year $ 139,857 $ 160,628 $ 143,677
Approximate average outstanding
during the year $ 116,214 $ 140,277 $ 121,267
Approximate average interest rate
during the year 1.49% 3.72% 5.35%
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.
29
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
Auburn 1220 East 7th St. Auburn 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.
30
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 it uses for training and development. The
Company has purchased property at 410 Chevy Way, Warsaw, Indiana, where it
intends to construct a full-service bank branch during 2003. 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 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2002
Trading range (per share)*
Low $ 22.22 $ 23.57 $ 20.10 $ 17.41
High $ 24.99 $ 29.76 $ 28.84 $ 20.45
Dividends declared (per share) $ 0.17 $ 0.17 $ 0.17 $ 0.17
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
* 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, 2002,
the Company had approximately 550 shareholders of record.
The Company paid dividends as set forth in the table above. The
Company's ability to pay dividends to shareholders is largely dependent upon
the dividends it receives from the Bank, and the Bank is subject to regulatory
limitations on the amount of cash dividends it may pay. See "Business -
Supervision and Regulation - The Company - Dividend Payments" and "Business -
Supervision and Regulation - The Bank - Dividend Payments" for a more detailed
description of these limitations.
31
ITEM 6. SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(in thousands except share and per share data)
Interest income $ 64,335 $ 76,615 $ 80,050 $ 69,395 $ 63,667
Interest expense 22,529 39,201 45,001 37,093 36,091
----------- ----------- ----------- ----------- -----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . 41,806 37,414 35,049 32,302 27,576
Provision for loan losses 3,056 2,225 1,206 1,310 480
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 38,750 35,189 33,843 30,992 27,096
Other noninterest income 12,838 11,393 10,413 9,785 8,819
Net gain on sale of branches 0 753 0 0 0
Net gains on sale of real estate
mortgages held for sale 1,914 1,232 504 1,302 1,467
Net securities gains (losses) 55 120 0 1,340 1,256
Noninterest expense (34,671) (33,830) (31,322) (31,015) (26,824)
----------- ----------- ----------- ----------- -----------
Income before income tax expense . . . . . . . . . . . . . . . . 18,886 14,857 13,438 12,404 11,814
Income tax expense 6,520 4,744 4,116 4,085 3,926
----------- ----------- ----------- ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,366 $ 10,113 $ 9,322 $ 8,319 $ 7,888
=========== =========== =========== =========== ===========
Basic weighted average common shares
outstanding* 5,813,984 5,813,984 5,813,984 5,813,984 5,813,984
=========== =========== =========== =========== ===========
Basic earnings per common share* $ 2.13 $ 1.74 $ 1.60 $ 1.43 $ 1.36
=========== =========== =========== =========== ===========
Diluted weighted average common shares
outstanding* 5,958,386 5,841,196 5,813,999 5,813,992 5,813,984
=========== =========== =========== =========== ===========
Diluted earnings per common share* $ 2.08 $ 1.73 $ 1.60 $ 1.43 $ 1.36
=========== =========== =========== =========== ===========
Cash dividends declared* $ .68 $ 0.60 $ 0.52 $ 0.44 $ 0.33
=========== =========== =========== =========== ===========
* Adjusted for 2-for-1 stock split on April 30, 1998.
32
ITEM 6. SELECTED FINANCIAL DATA (continued)
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(in thousands)
Balances at December 31:
- -----------------------------------------
Total assets $ 1,247,786 $ 1,137,712 $ 1,149,157 $ 1,039,843 $ 978,909
Total deposits $ 913,325 $ 793,380 $ 845,329 $ 748,243 $ 739,347
Total short-term borrowings $ 184,968 $ 232,117 $ 200,078 $ 195,374 $ 135,690
Long-term borrowings $ 31,348 $ 11,389 $ 11,433 $ 16,473 $ 21,386
Guaranteed preferred beneficial interests in
Company's subordinated debentures $ 19,345 $ 19,318 $ 19,291 $ 19,264 $ 19,238
Total stockholders' equity $ 83,880 $ 73,534 $ 64,973 $ 54,194 $ 55,156
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Lakeland Financial Corporation is the holding company for Lake City
Bank. The Company is headquartered in Warsaw, Indiana and operates 41 offices
in twelve counties in northern Indiana. The Company earned $12.4 million for
the year ended 2002 versus $10.1 million for the year ended 2001, an increase
of 22.3%. The increase was driven by a $4.4 million increase in net interest
income and a $1.3 million increase in non-interest income. Offsetting these
positive impacts were increases of $831,000 in the provision for loan losses
and $841,000 in non-interest expense. The Company earned $10.1 million for the
year ended 2001 versus $9.3 million for the year ended 2000, an increase of
8.5%. The increase was a result of a $2.4 million increase in net interest
income and a $2.6 million increase in non-interest income. The increase in
non-interest income included a one-time gain of $753,000 on the sale of five
non-strategic branches during the third quarter of 2001. Offsetting these
positive impacts were increases of $1.0 million in the provision for loan
losses and $2.5 million in non-interest expense. Basic earnings per share for
the year ended 2002 was $2.13 per share versus $1.74 per share for the year
ended 2001 and $1.60 for the year ended 2000. Diluted earnings per share
reflect the potential dilutive impact of stock options granted under an
employee stock option plan. Diluted earnings per share for the year ended 2002
was $2.08 per share versus $1.73 per share for the year ended 2001 and $1.60
for the year ended 2000.
RESULTS OF OPERATIONS
2002 versus 2001
The Company reported record net income of $12.4 million in 2002, an
increase of $2.3 million, or 22.3%, versus net income of $10.1 million in
2001. Net interest income increased $4.4 million, or 11.7%, to $41.8 million
versus $37.4 million in 2001. Net interest income increased primarily due to
the implementation of a liability pricing strategy during 2001 that has
resulted in an improved net interest margin and continued growth in the loan
portfolio. Interest income decreased $12.3 million, or 16.0%, from $76.6
million in 2001 to $64.3 million in 2002. The decrease was driven primarily by
a 134 basis point reduction in the tax equivalent yield on average earning
assets over the year. Interest expense decreased $16.7 million, or 42.5%, from
$39.2 million in 2001 to $22.5 million in 2002. The decrease was primarily the
result of a 163 basis point decrease in the Company's daily cost of funds over
the year. The Company had a net interest margin of 4.03% in 2002 versus 3.71%
in 2001. Average earning assets increased by $27.1 million to $1.1 billion in
2002 versus $1.0 billion in 2001. The primary driver was a $40.1 million
increase in the average daily loan balance. Deposits increased to fund the
loan growth during 2002, driven primarily by increases of $13.6 million in the
average daily time deposit balances and increases of $13.2 million in the
average daily demand deposit balances. The increase in average daily total
33
deposits occurred despite the impact of the Company's September, 2001 branch
divestiture, which included $70.3 million in deposits. The Company believes
that the growth in the loan portfolio will continue in conjunction with the
strategic focus on commercial lending and the general expansion and
penetration of the geographical markets the Company serves.
Nonaccrual loans were $4.2 million, or 0.51% of total loans, at year
end versus $2.2 million, or 0.30% of total loans, at the end of 2001. There
were nine relationships totaling $7.3 million classified as impaired as of
December 31, 2002 versus six relationships totaling $10.0 million at the end
of 2001. One commercial credit represented $3.2 million of this amount in
2002. The renewal of this loan has been complicated as more than one bank is
involved, and therefore it is past maturity. While this loan is current as to
principal and interest, there can