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
=========== =========== =========== ===========
<FN>
(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.
</FN>
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
=========== =========== =========== ===========
<FN>
(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.
</FN>
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
=========== =========== =========== =========== =========== ===========
<FN>
(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.
</FN>
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
=========== =========== =========== ===========
<FN>
(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.
</FN>
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
=========== =========== =========== =========== ===========
<FN>
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.
</FN>
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%
=========== =========== =========== =========== =========== ===========
</FN>
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.
</FN>
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
=========== =========== =========== =========== ===========
<FN>
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.
</FN>
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
=========== ===========
<FN>
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.
</FN>
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 scenarios. The model quantifies the income impact of changes in
customer preference for products, basis risk between the assets and the
liabilities that support them and the risk inherent in different yield curves,
as well as other factors. The ALCO committee reviews these possible outcomes
and makes loan, investment and deposit decisions that maintain reasonable
balance sheet structure in light of potential interest rate movements.
Although management does not consider GAP ratios in this planning, the
information can be used in a general fashion to look at asset and liability
mismatches. The Company's cumulative GAP ratio as of December 31, 2001, for
the next 12 months, was a negative 15.9% of earning assets.
The following tables provide information regarding the Company's
financial instruments used for purposes other than trading that are sensitive
to changes in interest rates. For loans, securities and liabilities with
contractual maturities, the tables present principal cash flows and related
weighted-average interest rates by contractual maturities, as well as the
Company's historical experience of the impact of interest-rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits such as demand deposits, interest-bearing
checking, savings and money market deposits that have no contractual maturity,
the tables present principal cash flows and, as applicable, related
weighted-average interest rates. These factors are based upon the Company's
historical experience, management's judgment and statistical analysis, as
applicable, concerning their most likely withdrawal behaviors.
Weighted-average variable rates are based upon rates existing at the reporting
date.
33
2001
Principal/Notional Amount Maturing in:
-----------------------------------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------------------------------
Fair
Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/01
--------- --------- --------- --------- --------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 117,107 $ 79,417 $ 81,748 $ 27,936 $ 31,522 $ 9,918 $ 347,648 $ 355,048
Average interest rate 7.65% 8.28% 7.81% 8.21% 7.02% 7.70% 7.82%
Variable interest rate loans $ 361,692 $ 1,157 $ 1,122 $ 1,117 $ 1,075 $ 32,905 $ 399,068 $ 398,909
Average interest rate 5.31% 8.55% 8.08% 7.63% 7.28% 5.60% 5.36%
Fixed interest rate securities $ 76,546 $ 55,842 $ 38,120 $ 28,114 $ 14,178 $ 53,811 $ 266,611 $ 270,297
Average interest rate 6.46% 6.41% 6.12% 5.91% 6.46% 5.70% 6.19%
Variable interest rate securities $ 154 $ 154 $ 154 $ 154 $ 154 $ 707 $ 1,477 $ 1,342
Average interest rate 4.99% 5.29% 5.29% 5.29% 5.29% 5.35% 5.29%
Other interest-bearing assets $ 8,904 - - - - - $ 8,904 $ 8,904
Average interest rate 1.75% - - - - - 1.75%
Rate sensitive liabilities:
Noninterest bearing checking $ 8,817 $ 7,867 $ 1,424 $ 1,356 $ 1,984 $ 148,101 $ 169,549 $ 169,549
Average interest rate - - - - - - -
Savings & interest bearing checking $ 17,810 $ 16,080 $ 14,280 $ 12,971 $ 10,401 $ 211,710 $ 283,252 $ 283,252
Average interest rate 1.82% 1.82% 1.82% 1.82% 1.82% 1.52% 1.61%
Time deposits $ 288,527 $ 31,211 $ 16,732 $ 2,963 $ 591 $ 555 $ 340,579 $ 343,252
Average interest rate 3.58% 4.51% 4.87% 5.40% 4.69% 3.87% 3.75%
Fixed interest rate borrowings $ 232,117 $ 11,389 - - - $ 19,318 $ 262,824 $ 265,424
Average interest rate 2.15% 4.05% - - - 9.26% 2.75%
2000
Principal/Notional Amount Maturing in:
-----------------------------------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------------------------------
Fair
Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/00
--------- --------- --------- --------- --------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 114,061 $ 73,736 $ 74,395 $ 58,977 $ 21,153 $ 12,893 $ 355,215 $ 364,107
Average interest rate 8.86% 8.77% 8.61% 8.33% 8.70% 8.21% 8.66%
Variable interest rate loans $ 318,843 $ 1,335 $ 1,263 $ 1,227 $ 1,235 $ 39,941 $ 363,844 $ 362,942
Average interest rate 9.75% 14.57% 14.67% 14.81% 14.85% 14.12% 10.29%
Fixed interest rate securities $ 46,587 $ 21,808 $ 29,764 $ 21,118 $ 19,565 $ 151,920 $ 290,762 $ 290,452
Average interest rate 5.75% 6.53% 6.22% 6.51% 6.65% 6.46% 6.34%
Variable interest rate securities $ 314 $ 321 $ 328 $ 337 $ 345 $ 1,544 $ 3,189 $ 3,156
Average interest rate 6.19% 6.62% 6.59% 6.56% 6.53% 6.58% 6.54%
Other interest-bearing assets $ 4,311 - - - - - $ 4,311 $ 4,311
Average interest rate 6.50% - - - - - 5.50%
Rate sensitive liabilities:
Noninterest bearing checking $ 8,559 $ 7,638 $ 1,383 $ 1,317 $ 1,926 $ 143,783 $ 164,606 $ 164,606
Average interest rate - - - - - - -
Savings & interest bearing checking $ 17,737 $ 16,015 $ 14,222 $ 12,919 $ 10,358 $ 213,006 $ 284,257 $ 284,257
Average interest rate 4.18% 4.18% 4.18% 4.18% 4.18% 3.58% 3.73%
Time deposits $ 338,762 $ 37,820 $ 12,117 $ 3,762 $ 3,126 $ 879 $ 396,466 $ 398,168
Average interest rate 6.35% 6.15% 5.89% 5.60% 6.01% 5.54% 6.30%
Fixed interest rate borrowings $ 147,978 $ 12,100 $ 1,433 - - $ 19,291 $ 180,802 $ 180,904
Average interest rate 5.50% 5.48% 6.15% - - 9.00% 5.87%
Variable interest rate borrowings $ 50,000 - - - - - $ 50,000 $ 50,000
Average interest rate 6.60% - - - - - 6.60%
34
These tables illustrate the Company's growth during 2001 and the
effect of the rate cuts during the year. The changes in the balances primarily
reflect the growth of the Company's existing offices and the acceptance of the
two offices opened during the year offset by the sale of five offices during
the year. The increase in loans during 2001 was driven primarily by strong
growth in the Company's commercial loan portfolio. The average interest rates
show the effect of the 475 basis point reduction in the Bank's prime rate
during 2001. The major impact has been in the average interest rate for
variable rate loans, which decreased 493 basis points during the year.
The Company's investment portfolio consists of U.S. Treasuries,
agencies, mortgage-backed securities, municipal bonds and corporate bonds.
During 2001, purchases in the securities portfolio consisted primarily of
mortgage-backed securities. As of December 31, 2001, the Company's investment
in mortgage-backed securities represented approximately 79.8% of total
securities and consisted of CMOs and mortgage pools issued by GNMA, FNMA and
FHLMC. The Federal government backs these securities, directly or indirectly.
All mortgage securities purchased by the Company are within risk tolerances
for price, prepayment, extension and original life risk characteristics
contained in the Company's investment policy. The Company uses Bloomberg
analytics to evaluate and monitor all purchases. As of December 31, 2001, the
securities in the AFS portfolio had a two and one-third year average life with
approximately 9.6% price depreciation in the event of a 300 basis points
upward movement. The portfolio had approximately 2.0% price appreciation in
the event of a 300 basis point downward movement in rates. As of December 31,
2001, all mortgage securities were performing in a manner consistent with
management's original expectations.
Capital Management
The Company believes that a strong, aggressively managed capital
position is critical to long-term earnings and expansion. Bank regulatory
agencies exclude the market value adjustment created by SFAS No. 115 (AFS
adjustment) from capital adequacy calculations. Excluding this adjustment from
the calculation, the Company had Tier I leverage capital, Tier I risk based
capital and Tier II risk based capital ratios of 7.7%, 10.3% and 11.2% as of
December 31, 2001. These ratios met or exceeded the FDIC "well-capitalized"
minimums of 5.0%, 6.0% and 10.0%.
The ability to maintain and grow these ratios is a function of the
balance between net income and a prudent dividend policy. Total stockholders'
equity increased by 13.2% to $73.5 million as of December 31, 2001, from $65.0
million as of December 31, 2000. The increase in 2001 resulted from net income
of $10.1 million less the following factors: (1) cash dividends of $3.5
million, (2) a favorable change in the AFS adjustment of $2.6 million, net of
tax, (3) a negative minimum pension liability adjustment of $441,000, net of
tax, and (4) $125,000 for the purchase of treasury stock. This 2001 AFS
adjustment reflected a 274 basis point decrease in the two to five year U.S.
Treasury rates during 2001. The increase in 2000 resulted from net income of
$9.3 million less the following factors: (1) cash dividends of $3.0 million,
(2) a favorable change in the AFS adjustment of $4.6 million, net of tax, and
(3) $123,000 for the purchase of treasury stock. This 2000 AFS adjustment
reflected a 250 basis point decrease in two to five year U.S. Treasury rates
during 2000. Due to the fact that the securities portfolio is primarily fixed
rate, a negative equity adjustment would likely occur if interest rates
increased. Management has factored this into the determination of the size of
the AFS portfolio to assure that stockholders' equity is adequate under
various scenarios.
Other than those indicated in this management's discussion,
management is not aware of any known trends, events or uncertainties that
would have a material effect on the Company's liquidity, capital and results
of operations. In addition, management is not aware of any regulatory
recommendations that, if implemented, would have such an effect.
Allowance for Credit Risk
At December 31, 2001, the allowance for loan losses was $7.9 million,
or 1.08% of total loans outstanding, versus $7.1 million, or 0.99%, of total
loans outstanding at December 31, 2000. The process of identifying probable
credit losses is a subjective process. Therefore, the Company maintains a
general allowance to cover probable credit losses within the entire portfolio.
The methodology management uses to determine the adequacy of the loan loss
reserve includes the following:
- - Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectability factors
(including impairment) and assesses the requirement for specific reserves
on such credits. For those loans not subject to specific review,
management reviews historical loan loss experience and ratios to
establish trends in charge-offs by loan category. The ratios of net
charge-offs to a particular type of loan enables management to establish
probable losses by loan category and thereby establish appropriate
reserves for loans that are not specifically reviewed.
35
- - Management reviews the current economic conditions of its lending market
to determine the effect by loan category, as well as the effect on the
aggregate loan portfolio.
- - Management reviews delinquent loan reports to determine risk of loss.
High delinquencies are generally indicative of an increase in loan
losses.
As a result of the methodology in determining the adequacy of the
allowance for loan losses, the provision for loan losses was $2.2 million in
2001 versus $1.2 million in 2000. The increase in the provision reflected a
number of factors as a result of more challenging economic conditions during
2001, including the increase in the size of the loan portfolio, the increase
of $799,000 in net charge-offs, the amount of impaired loans and management's
overall view on current credit quality. Overall, net loan growth in 2001 was
$19.3 million versus $65.0 million in 2000. Impaired loans as of December 31,
2001 and 2000 were $10.0 million and $1.4 million. $2.1 million of the 2001
impaired loan total was included in the total for nonaccrual loans. The
impaired loans for 2001 included twelve notes with one borrower totaling $7.5
million. Subsequent to year end, these notes were consolidated as part of a
restructuring of the debt into a single, amortizing loan. The borrower was
current on all principal and interest under this note, as of the date of this
filing. In addition, the Company improved its collateral position by securing
collateral totaling approximately $2.0 million of marketable securities
supporting the personal guarantee. The Company allocated $1.4 million and
$212,000 of the allowance for loan losses to the impaired loans in 2001 and
2000. As of December 31, 2001, loans past due 90 days or more and still
accruing were $264,000 (excluding impaired loans) versus $6.8 million as of
year end 2000. The decrease in loans past due 90 days or more and still
accruing resulted primarily from the customer's refinancing of a $1.4 million
loan with another bank, and the refinancing of terms of a $4.8 million loan.
As of December 31, 2001, nonaccrual loans were $2,234,000 versus $206,000 as
of year end 2000. The increase in nonaccrual loans resulted from the inclusion
of four commercial loans totaling $2.1 million.
Overall, the trend in non-performing loans reflects the weakening
economic conditions in some of the Company's markets, as well as the general
economic weakness prevalent throughout much of the country. The Company
believes that its overall expansion strategy has employed a credit risk
management approach that promotes diversification and therefore creates a
balanced portfolio with appropriate risk parameters.
The Company has experienced growth in total loans over the last three
years of $199.7 million, or 37.1%. The concentration of this loan growth was
in the commercial loan portfolio. Commercial loans comprised 64.8%, 61.3% and
57.4% of the total loan portfolio at December 31, 2001, 2000 and 1999.
Traditionally, this type of lending may have more credit risk than other types
of lending because of the size and diversity of the credits. The Company
manages this risk by adjusting its pricing to the perceived risk of each
individual credit and by diversifying the portfolio by customer, product,
industry and geography. Management believes that it is prudent to continue to
provide for loan losses in a manner consistent with its historical approach
due to loan growth described above and current economic conditions.
Inflation
The effects of price changes and inflation can vary substantially for
most financial institutions. While management believes that inflation affects
the growth of total assets, it believes that it is difficult to assess the
overall impact. Management believes this to be the case due to the fact that
generally neither the timing nor the magnitude of the inflationary changes in
the consumer price index ("CPI") coincides with changes in interest rates. The
price of one or more of the components of the CPI may fluctuate considerably
and thereby influence the overall CPI without having a corresponding affect on
interest rates or upon the cost of those goods and services normally purchased
by the Company. In years of high inflation and high interest rates,
intermediate and long-term interest rates tend to increase, thereby adversely
impacting the market values of investment securities, mortgage loans and other
long-term fixed rate loans. In addition, higher short-term interest rates
caused by inflation tend to increase the cost of funds. In other years, the
reverse situation may occur.
36
RESULTS OF OPERATIONS
2001 versus 2000
The Company reported record net income of $10.1 million in 2001, an
increase of $791,000, or 8.5% versus net income of $9.3 million in 2000. Net
interest income increased $2.4 million, or 6.8%, to $37.4 million versus $35.0
million in 2000. Interest income decreased $3.4 million, or 4.3%, from $80.1
million in 2000 to $76.6 million in 2001. The decrease occurred as a result of
a 475 basis point reduction in the Bank's prime rate, which was driven by
corresponding cuts by the Federal Reserve Bank during 2001. Interest expense
decreased $5.8 million, or 12.9%, from $45.0 million in 2000 to $39.2 million
in 2001. The Company had a net interest margin of 3.71% in 2001 versus 3.73%
in 2000. Average earning assets increased by $68.4 million to $1.0 billion in
2001 versus $965.5 million in 2000. The primary driver was a $50.6 million
increase in the average daily loan balance. Deposits increased to fund the
loan growth during 2001, driven primarily by a $54.2 million increase in the
average daily time deposit balance. 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 of the geographical markets the
Company serves.
Nonaccrual loans were $2.2 million, or 0.30% of total loans at year
end versus $206,000, or 0.03% of total loans at the end of 2000. There were
six relationships totaling $10.0 million classified as impaired as of December
31, 2001 versus one impaired loan totaling $1.4 million at the end of 2000.
One borrower represents $7.5 million of this amount in 2001. Subsequent to
year end, these notes were consolidated as part of a restructuring of the debt
into a single, amortizing loan. The borrower was current on all principal and
interest under this note, as of the date of this filing. In addition, the
Company improved its collateral position by securing collateral totaling
approximately $2.0 million of marketable securities supporting the personal
guarantee. Net charge-offs were $1.4 million, or 0.19%, of average daily loans
in 2001 versus $604,000, or 0.09%, of average daily loans in 2000. The
provision for loan loss expense was $2.2 million in 2001, resulting in an
allowance for loan losses at December 31, 2001 of $7.9 million, which
represented 1.08% of the loan portfolio, versus $7.1 million in 2000, or
0.99%, of the loan portfolio. The higher provision in 2001 versus 2000 was
attributable to a number of factors, but was primarily a result of the more
challenging economic conditions during 2001 and the resulting impact on asset
quality. The Company's management continues to monitor the adequacy of the
provision based on loan levels, asset quality, economic conditions and other
factors that may influence the assessment of the collectability of loans.
Noninterest income was $13.5 million in 2001 versus $10.9 million in
2000, an increase of $2.6 million, or 23.6%. The largest contributor to the
increase was a one-time gain of $753,000 relating to the sale of five
non-strategic branches in 2001. The increase in noninterest income was also
reflective of the falling rate environment which encouraged new mortgage and
mortgage refinancing activity. The increased mortgage activity resulted in a
rise in the gains on sale of mortgages, which were $1.2 million versus
$504,000 in 2000, an increase of 144.4%. Trust and brokerage fees increased
$515,000, or 24.1%, to $2.6 million versus $2.1 million in 2000, driven by
fees of approximately $156,000 related to the sale of several annuity
accounts. This portion of the increase may be non-recurring.
Noninterest expense increased 8.0% from $31.3 million in 2000 to
$33.8 million in 2001. Salaries and wages, exclusive of the $500,000 pension
plan curtailment gain in 2000, increased $897,000, or 5.5%, to $17.3 million
in 2001 versus $16.4 million in 2000. This increase was attributable to normal
salary increases. Other expense increased $1.3 million, or 12.8%, to $11.6
million in 2001 driven by costs associated with the Bank's compliance with new
regulations regarding its privacy policy, as well as increases in professional
fees and losses related to robberies during the year. Net occupancy expense
and equipment costs decreased from $5.1 million in 2000 to $4.9 million in
2001 as a result of the sale of five non-strategic branches during the second
half of 2001.
As a result of these factors, income before income tax expense
increased $1.4 million, or 10.6%, from $13.4 million in 2000 to $14.9 million
in 2001. Income tax expense was $4.7 million in 2001 versus $4.1 million in
2000. Income tax as a percentage of income before tax was 31.9% in 2001 versus
30.6% in 2000. The increase in income tax as a percentage of income before tax
resulted primarily from higher state franchise tax expense. Net income
increased $791,000, or 8.5%, to $10.1 million in 2001 versus $9.3 million in
2000. Basic earnings per share in 2001 were $1.74, an increase of 8.8% versus
$1.60 in 2000. The Company's net income performance represented a 15.5% return
on January 1, 2001, stockholders' equity (excluding the equity adjustment
related to SFAS No. 115) versus 15.8% in 2000. The net income performance
resulted in a 0.90% return on average daily assets in 2001 versus 0.88% in
2000.
37
2000 versus 1999
The Company reported net income of $9.3 million in 2000, an increase
of $1.0 million, or 12.1% versus net income of $8.3 million in 1999. The
increase resulted in part from a $109.3 million, or 10.5% growth in assets
from $1.0 billion in 1999 to $1.1 billion in 2000. The primary increase
occurred in total loans, which increased 9.9%, or $65.0 million, from $653.9
million in 1999 to $718.9 million in 2000.
Net interest income increased $2.7 million, or 8.5%, to $35.0 million
versus $32.3 million in 1999. Interest income increased $10.7 million, or
15.4%, from $69.4 million in 1999 to $80.1 million in 2000. The increase
occurred as a result of earning asset growth of $86.4 million, or 9.4%, from
$923.4 million in 1999 to over $1.0 billion in 2000. In addition, an overall
increase in interest rates that began at the end of 1999 and continued during
the first half of 2000 contributed to the increase in interest income. The
Company had a net interest margin of 3.73% in 2000 versus 3.70% in 1999.
Interest expense increased $7.9 million to $45.0 million, an increase of 21.3%
versus $37.1 million in 1999. Deposits increased to fund the loan growth
during 2000, driven primarily by an increase in time deposits. Increases in
noninterest bearing demand deposits of $28.0 million and Investor's Weekly
accounts of $9.2 million versus 1999 also contributed to the funding of loan
growth in 2000. The growth in relationship type accounts was a core funding
strategy of the Company during 1999 and 2000.
The Company maintained strong asset quality in 2000. Nonaccrual loans
were $206,000, or 0.03% of total loans versus $ 329,000, or 0.05% of total
loans in 1999. There was one loan of $1.4 million classified as impaired in
2000 and one loan of $246,000 classified as impaired in 1999. Net charge-offs
were $604,000, or 0.09% of average daily loans in 2000 versus $298,000, or
0.05% of average daily loans in 1999. The provision for loan loss expense was
$1.2 million in 2000, resulting in an allowance for loan losses at December
31, 2000 of $7.1 million, which represented 0.99% of the loan portfolio versus
$6.5 million in 1999, or 1.00% of the loan portfolio. The lower provision in
2000 versus 1999 was attributable to a number of factors, but was primarily a
result of slower loan growth during 2000. The Company's management continues
to monitor the adequacy of the provision based on loan levels, asset quality,
economic conditions and other factors that may influence the assessment of the
collectability of loans.
Noninterest income was $10.4 million in 2000 versus $12.0 million in
1999, a decrease of $1.6 million, or 13.2%. The largest contributor to the
decrease was the absence of security gains in 2000 versus gains of $1.3
million in 1999. The decrease in noninterest income was also reflective of the
rising rate environment which slowed new mortgage and mortgage refinancing
activity. The reduction in mortgage activity resulted in a decrease in the
gains on sale of mortgages, which were $504,000, a reduction of 61.3% versus
$1.3 million in 1999. Trust and brokerage fees increased $401,000, or 23.2%,
to $2.1 million versus $1.7 million in 1999.
Noninterest expense increased less than 1.0% from $30.5 million in
1999 to $30.8 million in 2000. Various increases in noninterest expense
categories were offset by a $500,000 gain that resulted from the Company's
curtailment of the pension plan in the second quarter of 2000. Salaries and
wages, exclusive of the pension plan curtailment gain, increased $516,000, or
3.2%, to $16.4 million in 2000 versus $15.9 million in 1999. This increase was
attributable to normal salary increases, staff additions and significantly
increased health care costs. Other expense increased $447,000, or 4.8%, to
$9.8 million in 2000 driven by an increase in professional fees. The increase
in professional fees was primarily due to expenses incurred with outside
financial and legal advisors related to the pension plan curtailment and
changes to employee benefit plans in 2000. Net occupancy expense and equipment
costs decreased from $5.3 million in 1999 to $5.1 million in 2000 as a result
of the sale of two branch offices and related equipment during 2000.
As a result of these factors, income before income tax expense
increased $1.0 million, or 8.3%, from $12.4 million in 1999 to $13.4 million
in 2000. Income tax expense was $4.1 million in both 2000 and 1999. Income tax
as a percentage of income before tax was 30.6% in 2000 versus 32.9% in 1999.
The decrease in income tax as a percentage of income before tax resulted from
the implementation of various tax strategies in 2000 and late 1999. Net income
increased $1.0 million, or 12.1%, to $9.3 million in 2000 versus $8.3 million
in 1999. Basic earnings per share in 2000 were $1.60, an increase of 11.9%
versus $1.43 in 1999. The Company's net income performance represented a 15.8%
return on January 1, 2000, stockholders' equity (excluding the equity
adjustment related to SFAS No. 115) versus 15.6% in 1999. The net income
performance resulted in a 0.88% return on average daily assets in 2000 versus
0.84% in 1999.
38
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk appear
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7, above, and is incorporated herein by
reference.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS (in thousands except share data)
- ---------------------------------------------------------------------------------------------------------------------------------
December 31 2001 2000
------------ ------------
ASSETS
Cash and due from banks $ 70,219 $ 84,682
Short-term investments 8,904 4,311
------------ ------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,123 88,993
Securities available for sale (carried at fair value) 271,639 293,608
Real estate mortgages held for sale 8,493 183
Total loans 738,223 718,876
Less allowance for loan losses 7,946 7,124
------------ ------------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730,277 711,752
Land, premises and equipment, net 24,252 27,297
Accrued income receivable 5,441 6,744
Intangible assets 6,161 9,624
Other assets 12,326 10,956
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,137,712 $ 1,149,157
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 169,549 $ 164,606
Interest bearing deposits 623,831 680,723
------------ ------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793,380 845,329
Short-term borrowings
Federal funds purchased 49,000 8,250
Securities sold under agreements to repurchase 149,117 138,154
U.S. Treasury demand notes 4,000 3,674
Other short-term borrowings 30,000 50,000
------------ ------------
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,117 200,078
Accrued expenses payable 6,131 6,684
Other liabilities 1,843 1,369
Long-term borrowings 11,389 11,433
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,318 19,291
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,064,178 1,084,184
Commitments, off-balance sheet risks and contingencies
STOCKHOLDERS' EQUITY
Common stock: 90,000,000 shares authorized, no par value,
5,813,984 shares issued, 5,775,632 outstanding as of December 31, 2001;
5,813,984 shares issued, 5,784,105 outstanding as of December 31, 2000 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 62,378 55,734
Accumulated other comprehensive income (loss) 1,835 (207)
Treasury stock, at cost (2001 - 38,352 shares, 2000 - 29,879 shares) (669) (544)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,534 64,973
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,137,712 $ 1,149,157
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
40
CONSOLIDATED STATEMENTS OF INCOME (in thousands except share and per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
------------ ------------ ------------
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 58,348 $ 61,554 $ 51,602
Tax-exempt 138 142 182
Interest and dividends on securities
Taxable 15,874 16,150 14,888
Tax-exempt 1,770 1,782 2,448
Interest on short-term investments 485 422 275
------------ ------------ ------------
Total interest income 76,615 80,050 69,395
Interest on deposits 29,850 32,395 27,153
Interest on borrowings
Short-term 6,904 10,083 7,139
Long-term 2,447 2,523 2,801
------------ ------------ ------------
Total interest expense 39,201 45,001 37,093
------------ ------------ ------------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,414 35,049 32,302
Provision for loan losses 2,225 1,206 1,310
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . 35,189 33,843 30,992
NONINTEREST INCOME
Trust and brokerage income 2,648 2,133 1,732
Service charges on deposits 4,988 4,423 4,321
Other income 3,757 3,857 3,732
Net gain on sale of branches 753 0 0
Net gains on the sale of loans held for sale 1,232 504 1,302
Net securities gains 120 0 1,340
------------ ------------ ------------
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,498 10,917 12,427
NONINTEREST EXPENSE
Salaries and employee benefits 17,324 15,927 15,911
Net occupancy expense 2,080 2,095 2,148
Equipment costs 2,801 2,991 3,167
Other expense 11,625 10,309 9,789
------------ ------------ ------------
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,830 31,322 31,015
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 14,857 13,438 12,404
Income tax expense 4,744 4,116 4,085
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,113 $ 9,322 $ 8,319
============ ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,813,984 5,813,984 5,813,984
============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 1.74 $ 1.60 $ 1.43
============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,841,196 5,813,999 5,813,992
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $ 1.73 $ 1.60 $ 1.43
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
41
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands except share and per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income (Loss) Stock Equity
------------ ------------ ------------ ------------- ------------ -------------
Balance at January 1, 1999 $ 1,453 $ 8,537 $ 43,652 $ 1,848 $ (334) $ 55,156
Comprehensive income:
Net Income 8,319 8,319
Unrealized gain/(loss) on
available-for-sale securities
arising during the period (5,836) (5,836)
Reclassification adjustments
for accumulated (gains)
losses included in net income (809) (809)
Comprehensive income (net of -------------
taxes of $(4,359)) 1,674
Cash dividends declared, $.44
per share (2,549) (2,549)
Acquisition of treasury stock (87) (87)
------------ ------------ ------------ ------------- ------------ -------------
Balance at December 31, 1999 1,453 8,537 49,422 (4,797) (421) 54,194
Comprehensive income:
Net Income 9,322 9,322
Unrealized gain/(loss) on
available-for-sale securities
arising during the period 4,590 4,590
Reclassification adjustments
for accumulated (gains)
losses included in net income 0 0
Comprehensive income (net of -------------
taxes of $3,011) 13,912
Cash dividends declared, $.52
per share (3,010) (3,010)
Acquisition of treasury stock (123) (123)
------------ ------------ ------------ ------------- ------------ -------------
Balance at December 31, 2000 1,453 8,537 55,734 (207) (544) 64,973
Comprehensive income:
Net Income 10,113 10,113
Unrealized gain/(loss) on
available-for-sale securities
arising during the period 2,556 2,556
Reclassification adjustments
for accumulated (gains)
losses included in net income (73) (73)
Net securities gain/(loss) ------------- -------------
activity during the period
(net of taxes of $1,411) 2,483 2,483
Minimum pension liability adjustment
(net of taxes of $(290)) (441) (441)
-------------
Comprehensive income 12,155
Cash dividends declared, $.60
per share (3,469) (3,469)
Acquisition of treasury stock (125) (125)
------------ ------------ ------------ ------------- ------------ -------------
Balance at December 31, 2001 $ 1,453 $ 8,537 $ 62,378 $ 1,835 $ (669) $ 73,534
============ ============ ============ ============= ============ =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
42
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 10,113 $ 9,322 $ 8,319
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation 2,338 2,429 2,373
Provision for loan losses 2,225 1,206 1,310
Pension plan curtailment gain 0 (500) 0
Amortization of intangible assets 825 925 957
Amortization of loan servicing rights 307 233 265
Net impairment of loan servicing rights 388 0 0
Loans originated for sale (68,306) (21,430) (79,276)
Net gain on sale of loans (1,232) (504) (1,302)
Proceeds from sale of loans 60,833 22,420 82,796
Net (gain) loss on sale of premises and equipment (14) 0 26
Net (gain) on sale of branches (753) 0 0
Net gain on sale of securities available for sale (120) 0 (1,340)
Net securities amortization 1,131 970 1,935
Increase (decrease) in taxes payable (601) (491) 1,078
(Increase) decrease in income receivable 1,303 (1,324) 249
Increase (decrease) in accrued expenses payable (2,291) 2,275 (14)
(Increase) decrease in other assets 192 (153) (1,789)
Increase (decrease) in other liabilities 474 (166) (54)
------------ ------------ ------------
Total adjustments (3,301) 5,890 7,214
------------ ------------ ------------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . 6,812 15,212 15,533
Cash flows from investing activities:
Proceeds from sale of securities available for sale 18,450 0 44,428
Proceeds from maturities, calls and principal paydowns of
securities available for sale 78,067 38,750 65,695
Purchases of securities available for sale (71,665) (54,306) (65,485)
Net increase in total loans (46,643) (65,582) (115,885)
Proceeds from sales of land, premises and equipment 0 436 82
Purchases of land, premises and equipment (1,476) (2,354) (3,919)
Net payments from branch divestitures (40,233) 0 0
------------ ------------ ------------
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . (63,500) (83,056) (75,084)
Cash flows from financing activities:
Net increase in total deposits 18,300 97,086 8,896
Proceeds from short-term borrowings 32,481,163 24,058,107 21,877,999
Payments on short-term borrowings (32,449,124) (24,053,403) (21,818,315)
Proceeds from long-term borrowings 0 0 5,124
Payments on long-term borrowings (44) (5,040) (10,037)
Dividends paid (3,352) (2,894) (2,433)
Purchase of treasury stock (125) (123) (87)
------------ ------------ ------------
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . 46,818 93,733 61,147
------------ ------------ ------------
Net increase in cash and cash equivalents (9,870) 25,889 1,596
Cash and cash equivalents at beginning of the year 88,993 63,104 61,508
------------ ------------ ------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . $ 79,123 $ 88,993 $ 63,104
============ ============ ============
Cash paid during the year for:
Interest $ 40,963 $ 43,351 $ 37,459
Income taxes $ 5,345 $ 4,605 $ 4,139
Loans transferred to other real estate $ 1,435 $ 0 $ 185
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
43
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation:
The consolidated financial statements include Lakeland Financial
Corporation and its wholly-owned subsidiaries, Lake City Bank and Lakeland
Capital Trust, together referred to as (the "Company"). Also included in the
consolidated financial statements is LCB Investments Limited, a wholly-owned
subsidiary of Lake City Bank. All intercompany transactions and balances are
eliminated in consolidation.
The Company provides financial services through its subsidiary, Lake
City Bank (the "Bank"), a full-service commercial bank with 40 branch offices
in eleven counties in northern Indiana. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are commercial, consumer and residential mortgage loans.
Substantially all loans are secured by specific items of collateral including
business assets, consumer assets and real estate. Commercial loans are
generally expected to be repaid from cash flow from operations of businesses.
Real estate loans are secured by both residential and commercial real estate.
Other financial instruments, which represent potential concentrations of
credit risk, include deposit accounts in other financial institutions.
Use of Estimates:
To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management
makes estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The
allowance for loan losses, the fair values of financial instruments, and the
fair value of loan servicing rights are particularly subject to change.
Cash Flows:
Cash and cash equivalents includes cash, demand deposits in other
financial institutions and short-term investments with maturities of 90 days
or less. Cash flows are reported net for customer loan and deposit
transactions.
Securities:
Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive
income (loss). Trading securities are bought for sale in the near term and are
carried at fair value, with changes in unrealized holding gains and losses
included in income. Federal Home Loan Bank Stock is carried at cost in other
assets. Securities are classified as held to maturity and carried at amortized
cost when management has the positive intent and ability to hold them to
maturity.
Interest income includes amortization of purchase premium or
discount. Gains and losses on sales are based on the amortized cost of the
security sold. Securities are written down to fair value when a decline in
fair value is not temporary.
The Company does not have any derivative instruments nor does the
Company participate in any hedging activities.
Loans:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs,
and an allowance for loan losses. Loans held for sale are reported at the
lower of cost or market on an aggregate basis.
44
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income is not reported when full loan repayment is in doubt and the loan is
placed on non-accrual. All unpaid accrued interest is reversed and interest
income is subsequently recorded only to the extent cash payments are received.
Accrual status is resumed when all contractually due payments are brought
current and future payments are reasonably assured.
Allowance for Loan Losses:
The allowance for loan losses is a valuation allowance for probable
incurred credit losses, increased by the provision for loan losses and
decreased by charge-offs less recoveries. Management estimates the allowance
balance required using past loan loss experience, known and inherent risks in
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. This evaluation is inherently subjective, as it requires estimates
that are susceptible to significant revision, as more information becomes
available or as future events change. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that,
in management's judgment, should be charged-off. Loan losses are charged
against the allowance when management believes the uncollectability of a loan
balance is confirmed.
A loan is impaired when full payment under the original loan terms is
not expected. Impairment is evaluated in total for smaller-balance loans of
similar nature such as residential mortgage, consumer, and credit card loans,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance may be allocated so that the loan is reported, net,
at the present value of estimated future cash flows using the loan's existing
rate or at the fair value of collateral if repayment is expected solely from
the collateral.
Foreclosed Assets:
Assets acquired through or instead of loan foreclosure are initially
recorded at fair value when acquired, establishing a new cost basis. If fair
value declines, a valuation allowance is recorded through expense. Costs after
acquisition are expensed.
Land, Premises and Equipment:
Land is carried at cost. Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed on both straight-line
and accelerated methods over the useful lives of the assets. Long-term assets
are reviewed for impairment when events indicate the carrying amount may not
be recoverable from future undiscounted cash flows. If impaired, the assets
are recorded at discounted amounts.
Loan Servicing Rights:
Loan servicing rights are recognized as assets for the allocated
value of retained servicing rights on loans sold. Loan servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance. Fair value is determined using prices for
similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions.
45
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangibles:
Purchased intangible assets, primarily goodwill and core deposit
value, are recorded at cost and amortized over the estimated life. Goodwill
amortization is straight-line over 15 years, and core deposit amortization is
accelerated over 12 years. Goodwill is reported net of accumulated
amortization of $2,605,000 and $1,997,000 at year end 2001 and 2000. Core
deposits are reported net of accumulated amortization of $985,000 and
$792,000.
Repurchase Agreements:
Substantially all repurchase agreement liabilities represent amounts
advanced by various customers. Securities are pledged to cover these
liabilities, which are not covered by federal deposit insurance.
Benefit Plans:
A noncontributory defined benefit pension plan covers substantially
all employees. Funding of the plan equals or exceeds the minimum funding
requirement determined by the actuary. The projected unit credit cost method
is used to determine expense. Benefits are based on years of service and
compensation levels. Effective April 1, 2000, the defined benefit pension plan
was frozen. The Company maintains a directors' deferred compensation plan. A
participant can elect to receive a return based on the Company's investment in
a certificate of deposit or tied to the performance of the Company's stock for
their contribution. For participants electing a return tied to the performance
of the Company's stock, the Company acquires shares on the open market and
records such shares as treasury stock.
Stock Compensation:
At the inception of the Lakeland Financial Corporation Stock Option
Plan, there were 600,000 shares of common stock reserved for grants of stock
options to employees of Lakeland Financial Corporation, its subsidiaries and
Board of Directors. As of December 31, 2001, 550,345 options had been granted
and 49,655 were available for future grants. These are accounted for under APB
No. 25. Employee compensation expense under the stock option plan is reported
if options are granted below market price at grant date. The Company has not
made any such grants. Pro forma disclosures of net income and earnings per
share are shown using the fair value method to measure expense for options
granted using an option pricing model to estimate fair value.
Income Taxes:
An annual consolidated federal income tax return is filed by the
Company. Income tax expense is recorded based on the amount of taxes due on
its tax return plus deferred taxes computed based upon the expected future tax
consequences of temporary differences between carrying amounts and tax bases
of assets and liabilities, using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
Financial Instruments:
Financial instruments include credit instruments, such as commitments
to make loans and standby letters of credit, issued to meet customer financing
needs. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
46
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Common Share:
Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share includes the dilutive effect of additional potential
common shares issuable under stock options. Earnings and dividends per share
are restated for all stock splits and dividends through the date of issue of
the financial statements. The common shares outstanding for the Stockholders'
Equity section of the Balance Sheet for 2001 and 2000 reflect the acquisition
of 38,352 and 29,879 shares, respectively of Lakeland Financial Corporation
common stock that have been purchased under the directors' deferred
compensation plan described above. Because these shares are held in trust for
the participants, they are treated as outstanding when computing the
weighted-average common shares outstanding for the calculation of both basic
and diluted earnings per share.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on
securities available for sale during the year and minimum pension liability
adjustments, which are also recognized as separate components of equity.
Loss Contingencies:
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood
of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will
have a material effect on the financial statements.
Restrictions on Cash:
The Company was required to have $1,740,000 and $50,000 of cash on
hand or on deposit with the Federal Reserve Bank to meet regulatory reserve
and clearing requirements at year-end 2001 and 2000. These balances do not
earn interest.
Dividend Restriction:
Banking regulations require maintaining certain capital levels and
may limit the dividends paid by the Bank to the Company or by the Company to
its shareholders.
Fair Value of Financial Instruments:
Fair values of financial instruments are estimated using relevant
market information and other assumptions, as more fully disclosed in a
separate note. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or in market conditions could significantly
affect the estimates.
Derivatives:
All derivative instruments are required to be recorded at their fair
values. If derivative instruments are designated as hedges of fair values,
both the change in the fair value of the hedge and the hedged item are
included in current earnings. Fair value adjustments related to cash flow
hedges are recorded in other comprehensive income and reclassified to earnings
when the hedged transaction is reflected in earnings. Ineffective portions of
hedges are reflected in income currently. For all periods presented, there
were no derivative instruments.
47
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Reclassifications:
Certain amounts appearing in the financial statements and notes
thereto for prior periods have been reclassified to conform with the current
presentation. The reclassifications had no effect on net income or
stockholders' equity as previously reported.
New Accounting Pronouncements:
A new accounting standard requires all business combinations to be
recorded using the purchase method of accounting for any transaction initiated
after June 30, 2001. Under the purchase method, all identifiable tangible and
intangible assets and liabilities of the acquired company must be recorded at
fair value at date of acquisition, and the excess of cost over fair value of
net assets acquired is recorded as goodwill. Identifiable intangible assets
must be separated from goodwill. Identifiable intangible assets with finite
useful lives will be amortized under the new standard, whereas unidentified
intangible assets resulting from business combinations, both amounts
previously recorded and future amounts purchased, will cease being amortized
starting in 2002. Annual impairment testing will be required for goodwill with
impairment being recorded if the carrying amount of goodwill exceeds its
implied fair value. Adoption of this standard on January 1, 2002 will not have
a material effect on the Company's financial statements.
NOTE 2 - SECURITIES
Information related to the fair value of securities available for
sale and the total gains and losses for securities with net gains and losses
in accumulated other comprehensive income (loss) at December 31 is provided in
the table below.
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
(in thousands)
2001
----
U.S. Treasury securities $ 7,866 $ 236 $ 0
U.S. Government agencies 11,574 46 0
Mortgage-backed securities 216,654 4,732 (1,132)
State and municipal securities 29,663 146 (568)
Other debt securities 5,882 107 (16)
------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 271,639 $ 5,267 $ (1,716)
============ ============ ============
2000
----
U.S. Treasury securities $ 38,066 $ 212 $ (183)
U.S. Government agencies 6,550 0 (122)
Mortgage-backed securities 207,594 1,809 (1,714)
State and municipal securities 35,430 214 (200)
Other debt securities 5,968 9 (368)
------------ ----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 293,608 $ 2,244 $ (2,587)
============ =========== ============
48
NOTE 2 - SECURITIES (continued)
Information regarding the fair value of available for sale debt
securities by maturity as of December 31, 2001 is presented below. Maturity
information is based on contractual maturity for all securities other than
mortgage-backed securities. Actual maturities of securities may differ from
contractual maturities because borrowers may have the right to prepay the
obligation without prepayment penalty.
Fair
Value
------------
(in thousands)
Due in one year or less $ 4,588
Due after one year through five years 18,532
Due after five years through ten years 1,855
Due after ten years 30,010
------------
Total contractual maturity securities 54,985
Mortgage-backed securities 216,654
------------
Total debt securities . . . . . . . . . . . . . . . . . . . . $ 271,639
============
Security proceeds, gross gains and gross losses for 2001, 2000 and
1999 were as follows:
2001 2000 1999
------------ ------------ ------------
(in thousands)
Sales and calls of securities
available for sale:
Proceeds $ 20,805 $ 807 $ 46,350
Gross gains 310 0 1,340
Gross losses 190 0 0
Securities with carrying values of $205,427,000 and $282,955,000 were
pledged as of December 31, 2001 and 2000, as collateral for deposits of public
funds, securities sold under agreements to repurchase, borrowings from the
FHLB and for other purposes as permitted or required by law.
NOTE 3 - LOANS
Total loans outstanding as of year-end consisted of the following:
2001 2000
------------ ------------
(in thousands)
Commercial and industrial loans $ 478,288 $ 440,941
Agri-business and agricultural loans 58,901 48,558
Real estate mortgage loans 44,898 49,104
Real estate construction loans 2,354 3,627
Installment loans and credit cards 153,782 176,646
------------ ------------
Total loans . . . . . . . . . . . . . . . . . . $ 738,223 $ 718,876
============ ============
49
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for 2001, 2000 and 1999:
2001 2000 1999
------------ ------------ ------------
(in thousands)
Balance, January 1 $ 7,124 $ 6,522 $ 5,510
Provision for loan losses 2,225 1,206 1,310
Loans charged-off 1,540 748 435
Recoveries 137 144 137
------------ ------------ ------------
Net loans charged-off 1,403 604 298
------------ ------------ ------------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,946 $ 7,124 $ 6,522
============ ============ ============
Nonaccrual loans $ 2,234 $ 206 $ 329
Interest not recorded on nonaccrual loans $ 142 $ 24 $ 26
Loans renegotiated as troubled debt restructuring $ 0 $ 1,127 $ 1,179
Interest income recognized on troubled debt restructuring $ 70 $ 106 $ 95
Impaired loans $ 10,008 $ 1,413 $ 246
Loans past due over 90 days and still accruing
(excluding impaired loans) $ 264 $ 6,791 $ 171
Impaired loans were as follows:
2001 2000
------------ ------------
(in thousands)
Year-end loans with no allocated allowance for loan losses $ 0 $ 0
Year-end loans with allocated allowance for loan losses 10,008 1,413
------------ ------------
Total $ 10,008 $ 1,413
============ ============
Amount of the allowance for loan losses allocated $ 1,471 $ 212
2001 2000 1999
------------ ------------ ------------
(in thousands)
Average of impaired loans during the year $ 2,136 $ 776 $ 7
Interest income recognized during impairment 340 101 0
Cash-basis interest income recognized 42 50 0
The Company is not committed to lend additional funds to debtors
whose loans have been modified. $2,062,000 of the 2001 impaired loan total was
included in the total for nonaccrual loans. The impaired loans for 2001
include twelve notes by one borrower totaling $7,460,000. Subsequent to year
end, these notes were consolidated as part of a restructuring of the debt into
a single, amortizing loan. The borrower was current on all principal and
interest under this note. In addition, the Company improved its collateral
position by securing collateral totaling approximately $2,000,000 of
marketable securities supporting the personal guarantee. The impaired loan in
1999 was included in the total for nonaccrual loans. The decrease in loans
past due 90 days or more and still accruing resulted primarily from the
customer's refinancing of a $1,404,000 loan with another bank and the
refinancing of terms of a $4,800,000 loan.
50
NOTE 5 - SECONDARY MORTGAGE MARKET ACTIVITIES
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
these loans were $149,197,000 and $150,875,000 at December 31, 2001 and 2000.
Net loan servicing income was $82,000, $147,000 and $57,000 for 2001, 2000 and
1999. Information on loan servicing rights follows:
Loan servicing rights: 2001 2000
------------ ------------
(in thousands)
Beginning of year $ 1,419 $ 1,459
Originations 395 193
Amortization (307) (233)
------------ ------------
End of year . . . . . . . . . . . . . . . . . . $ 1,507 $ 1,419
============ ============
Valuation allowance: 2001 2000
------------ ------------
(in thousands)
Beginning of year $ 0 $ 0
Additions expensed 705 0
Reductions credited to expense (317) 0
------------ ------------
End of year . . . . . . . . . . . . . . . . . . $ 388 $ 0
============ ============
NOTE 6 - LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation
were as follows at December 31:
2001 2000
------------ ------------
(in thousands)
Land $ 7,467 $ 6,989
Premises 18,721 21,060
Equipment 13,601 13,902
------------ ------------
Total cost . . . . . . . . . . . . . . . . . . . 39,789 41,951
Less accumulated depreciation 15,537 14,654
------------ ------------
Land, premises and equipment, net . . . . . . . $ 24,252 $ 27,297
============ ============
NOTE 7 - DEPOSITS
The aggregate amount of time deposits, each with a minimum
denomination of $100,000, was approximately $144,846,000 and $180,299,000 at
December 31, 2001 and 2000.
At December 31, 2001, the scheduled maturities of time deposits were
as follows:
Amount
------------
(in thousands)
Maturing in 2002 $ 288,527
Maturing in 2003 31,211
Maturing in 2004 16,732
Maturing in 2005 2,963
Maturing in 2006 591
Thereafter 555
------------
Total time deposits . . . . . . . . . . . . . . . . . . . . . $ 340,579
============
51
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase ("repo accounts")
represent collateralized borrowings with customers located primarily within
the Company's service area. Repo accounts are not covered by federal deposit
insurance and are secured by securities owned. Information on these
liabilities and the related collateral for 2001 and 2000 is as follows:
2001 2000
------------ ------------
(in thousands)
Average balance during the year $ 140,277 $ 121,267
Average interest rate during the year 3.72% 5.35%
Maximum month-end balance during the year $ 160,628 $ 143,677
Securities underlying the agreements at year-end
Amortized cost $ 182,106 $ 184,036
Fair value $ 185,139 $ 183,492
Collateral Value
--------------------------------------------------
U.S. Treasury Mortgage-backed
Weighted Securities Securities
Average ------------------------ ------------------------
Repurchase Interest Amortized Fair Amortized Fair
Term Liability Rate Cost Value Cost Value
- --------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(in thousands) (in thousands)
On demand $ 146,055 1.83% $ 0 $ 0 $ 170,794 $ 173,676
1 to 30 days 1,200 6.57 3,004 3,059 1,443 1,408
31 to 90 days 962 4.88 3,123 3,277 1,101 1,081
Over 90 days 900 4.95 1,503 1,530 1,138 1,108
----------- ----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 149,117 1.91% $ 7,630 $ 7,866 $ 174,476 $ 177,273
=========== =========== =========== =========== ===========
The Company retains the right to substitute similar type securities,
and has the right to withdraw all collateral applicable to repo accounts
whenever the collateral values are in excess of the related repurchase
liabilities. At December 31, 2001, there were no material amounts of
securities at risk with any one customer. The Company maintains control of
these securities through the use of third-party safekeeping arrangements.
NOTE 9 - BORROWINGS
Long-term borrowings at December 31 consisted of:
2001 2000
------------ ------------
(in thousands)
Federal Home Loan Bank of Indianapolis Notes, 5.25%, Due December 28, 2001 $ 0 $ 10,000
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 1,300 1,300
Federal Home Loan Bank of Indianapolis Notes, 3.76%, Due December 29, 2003 10,000 0
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due January 15, 2018 48 49
Capital Leases 41 84
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,389 $ 11,433
============ ============
All notes require monthly interest payments and were secured by
residential real estate loans and securities with a carrying value of
$50,878,000 at December 31, 2001. At December 31, 2001, the Company owned
$3,568,000 of Federal Home Loan Bank (FHLB) stock, which also secures debts to
the FHLB. The capital leases had original terms of approximately three years
and require monthly payments.
52
NOTE 9 - BORROWINGS (continued)
In addition to the long-term borrowings, the Company had $30 million
in fixed rate notes with the FHLB at December 31, 2001. These notes mature at
various times between April 8, 2002 and July 29, 2002. These notes are
classified as short-term borrowings in the financial statements. The Company
is authorized to borrow up to $100 million from the FHLB.
NOTE 10 - GUARANTEED PREFERRED BENEFICIAL INTERESTS
In September 1997, Lakeland Capital Trust ("Lakeland Trust")
completed a public offering of 2 million shares of cumulative trust preferred
securities ("Preferred Securities") with a liquidation preference of $10 per
security. The proceeds of the offering were loaned to the Company in exchange
for subordinated debentures with terms similar to the Preferred Securities.
The sole assets of Lakeland Trust are the subordinated debentures of the
Company and payments thereunder. The subordinated debentures and the back-up
obligations, in the aggregate, constitute a full and unconditional guarantee
by the Company of the obligations of Lakeland Trust under the Preferred
Securities. Distributions on the securities are payable quarterly at the
annual rate of 9% of the liquidation preference and are included in interest
expense in the consolidated financial statements. These securities are
considered as Tier I capital (with certain limitations applicable) under
current regulatory guidelines. As of December 31, 2001, the outstanding
principal balance of the subordinated debentures was $20,619,000. The
principal balance of the subordinated debentures less the unamortized issuance
costs constitute the guaranteed preferred beneficial interests in the
Company's subordinated debentures in the financial statements.
The Preferred Securities are subject to mandatory redemption, in
whole or in part, upon repayment of the subordinated debentures at maturity or
their earlier redemption at the liquidation preference. Subject to the Company
having received prior approval of the Federal Reserve if then required, the
subordinated debentures are redeemable prior to the maturity date of September
30, 2027 at the option of the Company on or after September 30, 2002, or upon
occurrence of specific events defined within the trust indenture. The Company
has the option to defer distributions on the subordinated debentures from time
to time for a period not to exceed 20 consecutive quarters.
53
NOTE 11 - EMPLOYEE BENEFIT PLANS
Information as to the Company's pension plan at December 31 is as follows:
2001 2000
------------ ------------
(in thousands)
Change in benefit obligation:
Beginning benefit obligation $ 2,053 $ 2,639
Service cost 0 155
Interest cost 164 186
Curtailment 0 (598)
Actuarial gain (loss) 163 (48)
Benefits paid (245) (281)
------------ ------------
Ending benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,135 2,053
Change in plan assets (primarily money market funds and equity and fixed
income investments), at fair value:
Beginning plan assets 2,634 2,469
Actual return (loss) (484) 387
Employer contribution 15 59
Benefits paid (245) (281)
------------ ------------
Ending plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,920 2,634
Funded status (215 581
Unrecognized net actuarial gain (loss) 829 (66)
Unrecognized prior service cost 0 0
------------ ------------
Prepaid benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 614 $ 515
============ ============
Net pension expense includes the following:
2001 2000 1999
------------ ------------ ------------
(in thousands)
Service cost $ 0 $ 155 $ 284
Interest cost 164 186 171
Expected return on plan assets (249) (256) (192)
Recognized net actuarial (gain) loss 0 (1) 23
Curtailment gain 0 (598) 0
------------ ------------ ------------
Net pension expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (85) $ (514) $ 286
============ ============ ============
The following assumptions were used in calculating the net pension expense:
Weighted average discount rate 7.50% 8.00% 7.50%
Rate of increase in future compensation N/A 4.50% 4.50%
Expected long-term rate of return 10.00% 10.00% 10.00%
On April 1, 2000, the Lakeland Financial Corporation Pension Plan was
frozen. As a result of this curtailment, a gain was recognized in the income
statement for the second quarter of 2000. The gain was included in the
salaries and employee benefits line of the income statement. At December 31,
2001, the pension plan recorded an additional minimum pension liability of
$731,000.
54
NOTE 11 - EMPLOYEE BENEFIT PLANS (continued)
The Company maintains a 401(k) profit sharing plan for all employees
meeting age and service requirements. The Company contributions are based upon
the rate of return on stockholders' equity as of January 1st of each year. The
expense recognized was $551,000, $499,000 and $344,000 in 2001, 2000 and 1999.
NOTE 12 - OTHER EXPENSE
Other expense for the years ended December 31, was as follows:
2001 2000 1999
------------ ------------ ------------
(in thousands)
Data processing fees and supplies $ 2,212 $ 2,078 $ 2,036
Corporate and business development 894 761 861
Advertising 669 577 436
Office supplies 557 591 687
Telephone and postage 1,265 1,241 1,375
Regulatory fees and FDIC insurance 237 250 160
Amortization of intangible assets 825 924 957
Miscellaneous 4,966 3,887 3,277
------------ ------------ ------------
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,625 $ 10,309 $ 9,789
============ ============ ============
NOTE 13 - INCOME TAXES
Income tax expense for the years ended December 31, consisted of the following:
2001 2000 1999
------------ ------------ ------------
(in thousands)
Current federal $ 5,105 $ 4,249 $ 2,998
Deferred federal (630) (300) 120
Current state 445 252 933
Deferred state (176) (85) 34
------------ ------------ ------------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,744 $ 4,116 $ 4,085
============ ============ ============
Income tax expense included $41,000, $0 and $531,000 applicable to
security transactions for 2001, 2000 and 1999. The differences between
financial statement tax expense and amounts computed by applying the statutory
federal income tax rate of 34% to income before income taxes were as follows:
2001 2000 1999
------------ ------------ ------------
(in thousands)
Income taxes at statutory federal rate $ 5,051 $ 4,569 $ 4,217
Increase (decrease) in taxes resulting from:
Tax exempt income (643) (648) (884)
Nondeductible expense 155 167 198
State income tax, net of federal tax effect 178 110 638
Net operating loss, Gateway (29) (29) (29)
Tax credits (48) (48) (48)
Other 80 (5) (7)
------------ ------------ ------------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,744 $ 4,116 $ 4,085
============ ============ ============
55
NOTE 13 - INCOME TAXES (continued)
The net deferred tax asset recorded in the consolidated balance sheets at December 31, consisted of the following:
2001 2000
-------------------------- --------------------------
Federal State Federal State
------------ ------------ ------------ ------------
Deferred tax assets: (in thousands)
Bad debts $ 2,638 $ 659 $ 2,358 $ 589
Pension and deferred compensation liability 437 109 411 103
Net operating loss carryforward 260 0 288 0
Other 278 70 229 61
------------ ------------ ------------ ------------
3,613 838 3,286 753
Deferred tax liabilities:
Accretion 23 6 33 8
Depreciation 391 98 499 125
Loan servicing rights 381 95 482 121
State taxes 185 0 125 0
Leases 251 63 224 56
Deferred loan fees 135 33 306 76
Other 0 0 0 0
------------ ------------ ------------ ------------
1,366 295 1,669 386
Valuation allowance 138 0 138 0
------------ ------------ ------------ ------------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,109 $ 543 $ 1,479 $ 367
============ ============ ============ ============
In addition to the net deferred tax assets included above, the
deferred income tax asset (liability) allocated to the unrealized net loss on
securities available for sale included in equity was $(1.3) million and
$136,000 for 2001 and 2000. The deferred income tax asset allocated to the
minimum pension liability included in equity was $289,000 and $0 for 2001 and
2000.
NOTE 14 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates as of
December 31, 2001 and 2000 were as follows:
2001 2000
------------ ------------
(in thousands)
Beginning balance $ 25,736 $ 24,718
New loans and advances 68,547 70,737
Effect of changes in related parties 46 (235)
Repayments (55,254) (69,484)
------------ ------------
Ending balance . . . . . . . . . . . . . . . . . . $ 39,075 $ 25,736
============ ============
Deposits from principal officers, directors, and their affiliates at
year-end 2001 and 2000 were $4,872,000 and $7,486,000. In addition, the
liability for the deferred directors' plan as of December 31, 2001 and 2000
were $927,000 and $577,000. The related expense for the deferred directors'
plan as of December 31, 2001, 2000 and 1999 were $399,000, $96,000 and
$63,000.
56
NOTE 15 - STOCK OPTIONS
A stock option plan was approved by shareholders at the annual
meeting in April 1998. The plan requires that the exercise price for the
options is the market price at the date the options are granted. The maximum
option term is ten years and the options vest over 3 to 5 years. A summary of
the activity in the plan follows:
2001 2000 1999
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of the year 454,770 $ 18.79 290,270 $ 22.58 188,935 $ 24.60
Granted 147,375 13.81 217,150 14.27 113,910 19.33
Exercised 0 0.00 0 0.00 0 0.00
Forfeited 51,800 20.80 52,650 21.03 12,575 23.49
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of the year . . . . . . . . . . . 550,345 $ 17.27 454,770 $ 18.79 290,270 $ 22.58
=========== =========== =========== =========== =========== ===========
Options exercisable at end of the year 42,000 $ 17.55 22,700 $ 23.29 0 $ 0.00
Weighted-average fair value of options
granted during the year $ 6.01 $ 7.07 $ 7.46
Options outstanding at year-end 2001 were as follows:
Outstanding Exercisable
------------------------ ------------------------
Weighted-
Average Weighted-
Remaining Average
Contractual Exercise
Number Life Number Price
----------- ----------- ----------- -----------
Range of exercise prices
$11.20 - $14.00 229,825 8.2 16,000 $ 13.56
$14.01 - $16.80 106,600 7.8 8,000 $ 15.13
$16.81 - $19.60 87,560 6.5 8,000 $ 19.44
$22.40 - $25.20 118,010 5.8 10,000 $ 24.38
$25.21 - $28.00 8,350 6.4 0 $ 0.00
----------- -----------
Outstanding at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,345 7.3 42,000 $ 17.55
=========== ===========
Had compensation cost for stock options been recorded in the
financial statements, net income and earnings per common share would have been
the pro forma amounts indicated below. The pro forma effect may increase in
the future if more options are granted.
2001 2000 1999
------------ ------------ ------------
Net income (in thousands) as reported $ 10,113 $ 9,322 $ 8,319
Pro forma net income (in thousands) $ 9,365 $ 8,497 $ 7,799
Basic earnings per common share as reported $ 1.74 $ 1.60 $ 1.43
Pro forma basic earnings per common share $ 1.61 $ 1.46 $ 1.34
Diluted earnings per common share as reported $ 1.73 $ 1.60 $ 1.43
Pro forma diluted earnings per common share $ 1.60 $ 1.46 $ 1.34
57
NOTE 15 - STOCK OPTIONS (continued)
The pro forma effects are computed with option pricing models, using
the following weighted-average assumptions as of the grant date for all
options granted to date:
2001 2000 1999
------------ ------------ ------------
Risk-free interest rate 5.54% 5.81% 5.26%
Expected option life 5.00 years 4.98 years 4.94 years
Expected price volatility 76.23% 79.88% 44.00%
Dividend yield 2.86% 2.46% 1.47%
NOTE 16 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Company and Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and
Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2001 and 2000, that the Company and Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the
federal regulators categorized the Company and Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company and Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the Company's or Bank's category.
58
NOTE 16 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (continued)
Minimum Required To
Be Well Capitalized
Minimum Required Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Regulations
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
As of December 31, 2001: (in thousands)
Total Capital (to Risk
Weighted Assets)
Consolidated $ 93,333 11.20% $ 66,670 8.00% $ 83,337 10.00%
Bank $ 91,660 11.01% $ 66,607 8.00% $ 83,259 10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated $ 85,387 10.25% $ 33,335 4.00% $ 50,002 6.00%
Bank $ 83,714 10.05% $ 33,304 4.00% $ 49,956 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 85,387 7.66% $ 44,608 4.00% $ 55,759 5.00%
Bank $ 83,714 7.51% $ 44,581 4.00% $ 55,726 5.00%
As of December 31, 2000:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 82,537 10.24% $ 64,496 8.00% $ 80,621 10.00%
Bank $ 81,020 10.06% $ 64,434 8.00% $ 80,542 10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated $ 75,414 9.35% $ 32,248 4.00% $ 48,372 6.00%
Bank $ 73,896 9.17% $ 32,217 4.00% $ 48,325 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 75,414 7.20% $ 41,874 4.00% $ 52,343 5.00%
Bank $ 73,896 7.06% $ 41,850 4.00% $ 52,313 5.00%
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 Department of Financial Institutions for the payment of any
dividend if the total amount of all dividends declared by the Bank during the
calendar year, including the proposed dividend, would exceed the sum of the
retained net income for the year to date combined with its retained net income
for the previous two years. Indiana law defines "retained net income" to mean
the net income of a specified period, calculated under the consolidated report
of income instructions, less the total amount of all dividends declared for
the specified period.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, the Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 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.
59
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table contains the estimated fair values and the
related carrying values of the Company's financial instruments at December 31,
2001 and 2000. Items, which are not financial instruments, are not included.
2001 2000
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
(in thousands)
Financial assets:
Cash and cash equivalents $ 79,123 $ 79,123 $ 88,993 $ 88,993
Real estate mortgages held for sale 8,493 8,493 183 183
Securities available for sale 271,639 271,639 293,608 293,608
Loans, net 730,277 737,518 711,752 719,742
Federal Home Loan Bank stock 3,568 3,568 3,568 3,568
Accrued interest income receivable 5,426 5,426 6,727 6,727
Loan servicing rights 1,119 1,119 1,419 1,419
Financial liabilities:
Certificates of deposit (340,579) (343,252) (396,466) (398,613)
All other deposits (452,801) (452,801) (448,863) (448,863)
Securities sold under agreements to repurchase (149,117) (149,132) (138,154) (138,243)
Other short-term borrowings (83,000) (83,000) (61,924) (61,924)
Long-term debt (11,389) (11,812) (11,433) (11,457)
Guaranteed preferred beneficial interests in Company's
subordinated debentures (19,318) (21,480) (19,291) (18,750)
Accrued interest expense payable (3,278) (3,278) (5,041) (5,041)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 2001 and 2000. The
estimated fair value for cash, cash equivalents, accrued interest and Federal
Home Loan Bank Stock is considered to approximate cost. Real estate mortgages
held for sale are based upon the actual contracted price for those loans sold
but not yet delivered, or the current Federal Home Loan Mortgage Corporation
price for normal delivery of mortgages with similar coupons and maturities at
year-end. The estimated fair value for securities and guaranteed preferred
beneficial interests in the Company's subordinated debentures are based on
quoted market rates for individual securities or for equivalent quality,
coupon and maturity securities. The estimated fair value of loans is based on
estimates of the rate the Company would charge for similar loans at December
31, 2001 and 2000, applied for the time period until estimated repayment. The
estimated fair value of loan servicing rights is based upon valuation
methodology, which considers current market conditions and historical
performance of the loans being serviced. The estimated fair value for demand
and savings deposits is based on their carrying value. The estimated fair
value for certificates of deposit and borrowings is based on estimates of the
rate the Company would pay on such deposits or borrowings at December 31, 2001
and 2000, applied for the time period until maturity. The estimated fair value
of short-term borrowed funds is considered to approximate carrying value. The
estimated fair value of other financial instruments and off-balance sheet loan
commitments approximate cost and are not considered significant to this
presentation.
While these estimates of fair value are based on management's
judgment of the most appropriate factors, there is no assurance that, were the
Company to have disposed of such items at December 31, 2001 and 2000, the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances. The estimated
fair values at December 31, 2001 and 2000 should not necessarily be considered
to apply at subsequent dates.
In addition, other assets and liabilities of the Company that are not
defined as financial instruments are not included in the above disclosures,
such as land, premises and equipment. Also, non-financial instruments
60
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
typically not recognized in financial statements nevertheless may have value
but are not included in the above disclosures. These include, among other
items, the estimated earnings power of core deposit accounts, the earnings
potential of the Company's trust department, the trained work force, customer
goodwill and similar items.
NOTE 18 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
During the normal course of business, the Company becomes a party to
financial instruments with off-balance sheet risk in order to meet the
financing needs of its customers. These financial instruments include
commitments to make loans and open-ended revolving lines of credit. Amounts as
of December 31, 2001 and 2000, were as follows:
2001 2000
------------------------ ------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
----------- ----------- ----------- -----------
(in thousands)
Commercial loan lines of credit $ 19,755 $ 204,667 $ 17,581 $ 144,622
Commercial loan standby letters of credit 0 8,681 0 7,845
Real estate mortgage loans 14,772 499 1,470 1,289
Real estate construction mortgage loans 0 427 0 1,478
Credit card open-ended revolving lines 7,127 0 7,356 0
Home equity mortgage open-ended revolving lines 0 42,641 0 37,460
Consumer loan open-ended revolving lines 0 3,663 0 4,809
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,654 $ 260,578 $ 26,407 $ 197,503
=========== =========== =========== ===========
At December 31, 2001 and 2000, the range of interest rates for
commercial loan commitments with a fixed rate was 4.92% to 14.50%. The range
of interest rates for commercial loan commitments with variable rates was
3.50% to 9.75% and 6.63% to 13.50% at December 31, 2001 and 2000. The index on
variable rate commercial loan commitments is principally the Company's base
rate. The range of interest rates for mortgage loan commitments with a fixed
rate was 5.75% to 7.38% and 7.88% to 8.50% at December 31, 2001 and 2000. The
range of interest rates for mortgage loan commitments with a variable rate was
6.50% to 7.88% and 7.00% to 8.88% at December 31, 2001 and 2000. At December
31, 2001 and 2000, the range of interest rates for fixed rate credit card
commitments was 14.95% to 17.95%. The range of interest rates for open-ended
revolving line commitments with a variable was 4.75% to 15.00% and 6.99% to
15.50% at December 31, 2001 and 2000.
Commitments, excluding open-ended revolving lines, generally have
fixed expiration dates of one year or less. Credit card open-ended revolving
lines of credit are normally reviewed bi-annually and other personal lines of
credit are normally reviewed annually. Since many commitments expire without
being drawn upon, the total commitment amount does not necessarily represent
future cash requirements. The Company follows the same credit policy
(including requiring collateral, if deemed appropriate) to make such
commitments as is followed for those loans that are recorded in its financial
statements.
The Company's exposure to credit losses in the event of
nonperformance is represented by the contractual amount of the commitments.
Management does not expect any significant losses as a result of these
commitments.
61
NOTE 19 - PARENT COMPANY STATEMENTS
The Company operates primarily in the banking industry, which
accounts for substantially all of its revenues, operating income, and assets.
Presented below are parent only financial statements:
CONDENSED BALANCE SHEETS
December 31
--------------------------
2001 2000
------------ ------------
(in thousands)
ASSETS
Deposits with Lake City Bank $ 1,313 $ 1,102
Investment in banking subsidiary 91,860 83,454
Investment in non-banking subsidiary 619 619
Other assets 2,190 1,909
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,982 $ 87,084
============ ============
LIABILITIES
Dividends payable and other liabilities $ 1,829 $ 1,492
Subordinated debt 20,619 20,619
STOCKHOLDERS' EQUITY 73,534 64,973
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,982 $ 87,084
============ ============
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(in thousands)
Dividends from Lake City Bank $ 5,128 $ 5,019 $ 3,928
Interest on deposits and repurchase agreements, Lake City Bank 7 5 5
Equity in undistributed income of subsidiaries 6,364 5,535 5,547
Interest expense on subordinated debt 1,800 1,800 1,800
Miscellaneous expense 490 208 120
------------ ------------ ------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,209 8,551 7,560
Income tax benefit 904 771 759
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,113 $ 9,322 $ 8,319
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(in thousands)
Cash flows from operating activities:
Net income $ 10,113 $ 9,322 $ 8,319
Adjustments to net cash from operating activities
Equity in undistributed income of subsidiaries (6,364) (5,535) (5,547)
Other changes 56 (17) 218
------------ ------------ ------------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . 3,805 3,770 2,990
Cash flows from investing activities 0 0 0
Cash flows from financing activities (3,594) (3,134) (2,637)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . 211 636 353
Cash and cash equivalents at beginning of the year 1,102 466 113
------------ ------------ ------------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . $ 1,313 $ 1,102 $ 466
============ ============ ============
62
NOTE 20 - EARNINGS PER SHARE
Following are the factors used in the earnings per share computations:
2001 2000 1999
------------ ------------ ------------
Basic earnings per common share
Net income $ 10,113,000 $ 9,322,000 $ 8,319,000
Weighted-average common shares outstanding 5,813,984 5,813,984 5,813,984
Basic earnings per common share $ 1.74 $ 1.60 $ 1.43
Diluted earnings per common share
Net income $ 10,113,000 $ 9,322,000 $ 8,319,000
Weighted-average common shares outstanding for
basic earnings per common share 5,813,984 5,813,984 5,813,984
Add: Dilutive effect of assumed exercises of stock options 27,212 15 8
Average shares and dilutive potential common shares 5,841,196 5,813,999 5,813,992
Diluted earnings per common share $ 1.73 $ 1.60 $ 1.43
Stock options for 224,270 and 454,270 shares of common stock were not
considered in computing diluted earnings per common share for 2001 and 2000
because they were antidilutive.
63
NOTE 21 - SELECTED QUARTERLY DATA (UNAUDITED) (in thousands except per share data)
4th 3rd 2nd 1st
2001 Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
Interest income $ 17,259 $ 19,283 $ 19,575 $ 20,498
Interest expense 7,291 9,387 10,614 11,909
------------- ------------- ------------- -------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . 9,968 9,896 8,961 8,589
Provision for loan losses 735 970 307 213
Noninterest income 3,389 4,001 3,238 2,870
Noninterest expense 8,331 8,815 8,441 8,243
Income tax expense 1,445 1,345 1,080 874
------------- ------------- ------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,846 $ 2,767 $ 2,371 $ 2,129
============= ============= ============= =============
Basic earnings per common share $ 0.48 $ 0.48 $ 0.41 $ 0.37
============= ============= ============= =============
Diluted earnings per common share $ 0.48 $ 0.47 $ 0.41 $ 0.37
============= ============= ============= =============
2000 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
Interest income $ 21,074 $ 20,398 $ 19,743 $ 18,835
Interest expense 12,137 11,650 10,818 10,396
------------- ------------- ------------- -------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . 8,937 8,748 8,925 8,439
Provision for loan losses 499 92 400 215
Noninterest income 2,766 2,802 2,665 2,684
Noninterest expense 7,886 8,169 7,524 7,743
Income tax expense 1,014 974 1,165 963
------------- ------------- ------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,304 $ 2,315 $ 2,501 $ 2,202
============= ============= ============= =============
Basic earnings per common share $ 0.39 $ 0.40 $ 0.43 $ 0.38
============= ============= ============= =============
Diluted earnings per common share $ 0.39 $ 0.40 $ 0.43 $ 0.38
============= ============= ============= =============
NOTE 22 - BRANCH DIVESTITURES
On September 21, 2001, the Company sold its the Greentown,
Logansport, Peru, Roann, and Wabash, Indiana offices to First Farmers Bank &
Trust Company, Converse, Indiana. The Company paid $39,826,000 to settle the
net liabilities assumed by the buyer and recorded a gain of $753,000. Summary
information regarding the effect of the sale on the balance sheet is
presented.
Assets sold: (in thousands)
------------
Cash and due from banks $ 407
Loans 24,458
Land, premises and equipment 2,197
Intangible assets 2,665
Other assets 13
Liabilities settled:
Deposits $ 70,249
Other liabilities 70
64
REPORT OF INDEPENDENT AUDITORS
- -----------------------------------------------------------------------------
Stockholders and Board of Directors
Lakeland Financial Corporation
Warsaw, Indiana
We have audited the accompanying consolidated balance sheets of
Lakeland Financial Corporation and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Lakeland Financial Corporation and subsidiaries as of December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 11, 2002
65
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's
consolidated financial statements and related information. Management believes
that the consolidated financial statements fairly reflect the form and
substance of transactions and that the financial statements reasonably present
the Company's financial position and results of operations and were prepared
in conformity with generally accepted accounting principles. Management also
has included in the Company's financial statements; amounts that are based on
estimates and judgments, which it believes, are reasonable under the
circumstances.
The Company maintains a system of internal controls designed to
provide reasonable assurance that all assets are safeguarded, financial
records are reliable for preparing consolidated financial statements and the
Company complies with laws and regulations relating to safety and soundness
which are designated by the FDIC and other appropriate federal banking
agencies. The selection and training of qualified personnel and the
establishment and communication of accounting and administrative policies and
procedures are elements of this control system. The effectiveness of the
internal control system is monitored by a program of internal audit and by
independent certified public accountants (independent auditors). Management
recognizes that the cost of a system of internal controls should not exceed
the benefits derived and that there are inherent limitations to be considered
in the potential effectiveness of any system. Management believes the
Company's system provides the appropriate balance between costs of controls
and the related benefits.
The independent auditors have audited the Company's consolidated
financial statements in accordance with generally accepted auditing standards
and provide an objective, independent review of the fairness of the reported
operating results and financial position. The board of directors of the
Company has an audit review committee composed of six non-management
directors. The committee meets periodically with the internal auditors and the
independent auditors.
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in the definitive Proxy Statement dated
March 8, 2002, is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the definitive Proxy Statement dated
March 8, 2002, is incorporated herein by reference in response to this item.
The sections in the Proxy Statement marked "Report of the Compensation
Committee on Executive Compensation", "Stock Price Performance" and "Audit
Committee Report" are furnished for the information of the Commission and are
not deemed to be "filed" as part of the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the definitive Proxy Statement dated
March 8, 2002, is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the definitive Proxy Statement dated
March 8, 2002, is incorporated herein by reference in response to this item.
67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The documents listed below are filed as a part of this report:
(a) Exhibits
Exhibit No. Document Incorporated by reference to
3.1 Amended and Restated Articles Exhibit 4.1 to the Company's
of Incorporation of Lakeland Form S-8 filed with the
Financial Corporation Commission on April 15, 1998
3.2 Bylaws of Lakeland Exhibit 3(ii) to the Company's
Financial Corporation Form 10-Q for the quarter
ended June 30, 1996
4.1 Form of Common Stock Certificate Attached hereto
4.2 Form of Trust Preferred Security Exhibit 4.6 5 to the Company's Form
S-3 filed with the Commission on
August 1, 1997
10.1 Lakeland Financial Exhibit 4.3 to the Company's
Corporation 1997 Share Form S-8 filed with the
Incentive Plan Commission on April 15, 1998
10.2 Form of Amended and Restated Trust Exhibit 4.5 to the Company's Form S-
3 filed with the Commission on August
1, 1997
10.3 Form of Indenture Exhibit 4.5 to the Company's Form S-
3 filed with the Commission on August
1, 1997
10.4 Lakeland Financial Corporation 401(k) Plan Exhibit 10.1 to the Company's Form
S-8 filed with the Commission on
October 23, 2000
10.5 Form of Change of Control Agreements Attached hereto
entered into with David M. Findlay and
Kevin L. Deardorff
21.0 Subsidiaries Attached hereto
23.1 Report of Independent Auditors Item 8 herein
(b) Reports on Form 8-K
None.
68
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
Date: February 20, 2002 By /s/R. Douglas Grant
-------------------
R. Douglas Grant, Chairman
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/Michael L. Kubacki
- ---------------------
Michael L. Kubacki Principal Executive Officer
and Director February 20, 2002
/s/David M. Findlay
- -------------------
David M. Findlay Principal Financial Officer February 20, 2002
/s/Teresa A. Bartman
- --------------------
Teresa A. Bartman Principal Accounting Officer February 20, 2002
/s/R. Douglas Grant
- -------------------
R. Douglas Grant Director February 20, 2002
/s/Eddie Creighton
- ------------------
Eddie Creighton Director February 20, 2002
/s/Anna K. Duffin
- -----------------
Anna K. Duffin Director February 20, 2002
/s/L. Craig Fulmer
- ------------------
L. Craig Fulmer Director February 20, 2002
- ------------------
Jerry L. Helvey Director February 20, 2002
- ------------------
Allan J. Ludwig Director February 20, 2002
69
/s/Charles E. Niemier
- ---------------------
Charles E. Niemier Director February 20, 2002
/s/D. Jean Northenor
- --------------------
D. Jean Northenor Director February 20, 2002
- ----------------------
Richard L. Pletcher Director February 20, 2002
/s/Steven D. Ross
- -----------------
Steven D. Ross Director February 20, 2002
/s/Donald B. Steininger
- -----------------------
Donald B. Steininger Director February 20, 2002
/s/Terry L. Tucker
- ------------------
Terry L. Tucker Director February 20, 2002
/s/M. Scott Welch
- -----------------
M. Scott Welch Director February 20, 2002
/s/G.L. White
- -------------
G.L. White Director February 20, 2002
70
EXHIBIT 21
Subsidiaries
1. Lake City Bank, Warsaw, Indiana, a banking corporation organized
under the laws of the State of Indiana.
2. Lakeland Capital Trust, a statutory business trust formed under
Delaware law.
3. LCB Investments Limited, a subsidiary of Lake City Bank formed under
the laws of Bermuda to manage a portion of the Bank's investment
portfolio.
71