UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____________ to ____________________ Commission File No. 0-11487 LAKELAND FINANCIAL CORPORATION ------------------------------ (exact name of Registrant as specified in its charter) INDIANA 35-1559596 ------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387 - ------------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 1-219-267-6144 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common The Nasdaq Stock Market's National Market Preferred Securities of Lakeland Capital Trust The Nasdaq Stock Market's National Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such other period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive Proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ X ] Aggregate market value of the voting stock held by non-affiliates of the Registrant, computed solely for the purposes of this requirement on the basis of the Nasdaq closing value at February 21, 2001, and assuming solely for the purposes of this calculation that all directors and executive officers of the Registrant are "affiliates": $83,220,656. Number of shares of common stock outstanding at February 21, 2001: 5,779,932 Cover page 1 of 2 pages
DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the following documents are incorporated by reference in the Parts of the 10-K indicated: Part Document ---- -------- I, II & IV Lakeland Financial Corporation's Annual Report to Shareholders for the year ended December 31, 2000, portions of which are incorporated into Parts I, II and IV of this Form 10-K. III Proxy statement mailed to shareholders on March 14, 2001, which is incorporated into Part III of this Form 10-K. Cover page 2 of 2 pages
PART I ITEM 1. BUSINESS - ---------------- The Company was incorporated under the laws of the State of Indiana on February 8, 1983. As used herein, the term "Company" refers to Lakeland Financial Corporation, or if the context dictates, Lakeland Financial Corporation and its wholly-owned subsidiaries, Lake City Bank and Lakeland Capital Trust, as well as LCB Investments Limited, a wholly-owned subsidiary of Lake City Bank. General Company's Business. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended. The Company owns all of the outstanding stock of Lake City Bank, Warsaw, Indiana, a full service commercial bank organized under Indiana law (the "Bank"), and Lakeland Capital Trust, a statutory business trust formed under Delaware law ("Lakeland Trust"). The Bank has a wholly-owned subsidiary, LCB Investments Limited, a Bermuda company, which manages a portion of the Bank's investment portfolio. The Company conducts no business except that incident to its ownership of the outstanding stock of the Bank and the operation of the Bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation to the extent permissible by law. The Bank's main banking office is located at 202 East Center Street, Warsaw, Indiana. As of December 31, 2000, the Bank had 43 offices in fifteen counties throughout north central Indiana. The Company conducts no business except that which is incident to its ownership of the stock of the Bank, the collection of dividends from the Bank, and the disbursement of dividends to shareholders. Lakeland Trust, a statutory business trust, was formed under Delaware law pursuant to a trust agreement dated July 24, 1997 and a certificate of trust filed with the Delaware Secretary of State on July 24, 1997. Lakeland Trust exists for the exclusive purposes of (i) issuing the trust securities representing undivided beneficial interests in the assets of Lakeland Trust, (ii) investing the gross proceeds of the trust securities in the subordinated debentures issued by the Company, and (iii) engaging in only those activities necessary, advisable, or incidental thereto. The subordinated debentures and payments thereunder are the only assets of Lakeland Trust, and payments under the subordinated debentures are the only revenue of Lakeland Trust. Lakeland Trust has a term of 55 years, but may be terminated earlier as provided in the trust agreement. Forward-looking Statements When used in this report and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. 1
The Company wishes to caution readers not to place undo reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. Competition The Bank was originally organized in 1872 and has continuously operated under the laws of the State of Indiana since its organization. The Bank's activities cover all phases of commercial banking, including checking accounts, savings accounts, time deposits, the sale of securities under agreements to repurchase, brokerage services, commercial and agricultural lending, direct and indirect consumer lending, real estate mortgage lending, safe deposit box services, trust and investment services. The interest rates for both deposits and loans, as well as the range of services provided, are nearly the same for all banks competing within the Bank's service area. The Bank competes for loans principally through the range and quality of services it provides including a focus on relationship development, interest rates and loan fees. The Bank believes that its convenience, quality service and hometown relationship approach to banking enhances its ability to compete favorably in attracting and retaining individual and business customers. The Bank actively solicits deposit-related customers and competes for customers by offering personal attention, professional service and competitive interest rates. The Bank's service area is north central and north east Indiana. In addition to the banks located within its service area, the Bank also competes with savings and loan associations, credit unions, farm credit services, finance companies, personal loan companies, insurance companies, money market funds, and other non-depository financial intermediaries. Financial intermediaries such as money market mutual funds and large retailers are not subject to the same regulations and laws that govern the operation of traditional depository institutions and accordingly may have an advantage in competing for funds. The Bank competes with other major banks for large commercial deposit and loan accounts. The Bank is presently subject to an aggregate maximum loan limit to any single account of approximately $10 million pursuant to Indiana law and internal lending guidelines. This maximum prohibits the Bank from providing a full range of banking services to those businesses or personal accounts whose borrowing requirements may exceed this amount. In order to retain at least a portion of the banking business of these large borrowers, the Bank maintains correspondent relationships with other financial institutions. The Bank also participates with local and other banks in the placement of large borrowings in excess of its lending limit. The Bank is also a member of the Federal Home Loan Bank of Indianapolis in order to broaden its mortgage lending and investment activities and to provide additional funds, if necessary, to support these activities. Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which the Company and the Bank conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. 2
Foreign Operations The Company has no investments with any foreign entity other than two nominal demand deposit accounts. One is maintained with a Canadian bank in order to facilitate the clearing of checks drawn on banks located in that country. The other is maintained with a bank in Bermuda for LCB Investments Limited to be used for administrative expenses. There are no foreign loans. Employees At December 31, 2000, the Company, including its subsidiaries, had 435 full-time equivalent employees. Benefit programs include a pension plan, 401(k) plan, group medical insurance, group life insurance and paid vacations. Effective April 1, 2000, the defined benefit pension plan was frozen. The Bank is not a party to any collective bargaining agreement, and employee relations are considered good. The Company also has a stock option plan under which stock options may be granted to employees and directors. Supervision and Regulation General Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the Indiana Department of Financial Institutions (the "DFI"), the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), the Internal Revenue Service and state taxing authorities and the Securities and Exchange Commission (the "SEC"). The effect of applicable statutes, regulations and regulatory policies can be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following is a summary of the material elements of the regulatory framework that applies to the Company and its subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply to the Company and its subsidiaries, nor does it restate all of the requirements of the statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies. Any change in applicable law, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries. The Company General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered with, 3
and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company's operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require. The Company is also subject to regulation by the DFI under Indiana law. Investments and Activities. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA also generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies that have not received approval to operate as financial holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be "so closely related to banking ... as to be a proper incident thereto." Under current regulations of the Federal Reserve, this authority would permit the Company to engage in a variety of banking-related businesses, including the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage. Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. As of the date of this filing, the Company has not applied for nor received approval to operate as a financial holding company. Federal law also prohibits any person or company from acquiring "control" of a bank or bank holding company without prior notice to the appropriate federal bank regulator. "Control" is defined in certain cases as the acquisition of 10% or more of the outstanding shares of a bank or bank holding company. 4
Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a risk-based requirement expressed as a percentage of total risk-weighted assets; and (ii) a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders' equity less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital and a portion of the company's allowance for loan and lease losses. The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 2000, the Company had regulatory capital in excess of the Federal Reserve's minimum requirements, with a risk-based capital ratio of 10.24% and a leverage ratio of 7.20%. As of December 31, 2000, the Company was well-capitalized, as defined by Federal Reserve regulations. Dividends. The Federal Reserve has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company should not pay cash dividends which exceed its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Federal Securities Regulation. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Bank General. The Bank is an Indiana-chartered bank, the deposit accounts of which are insured by the FDIC's Bank Insurance Fund ("BIF"). As a BIF-insured, Indiana-chartered bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFI, as the chartering authority for Indiana banks, and the FDIC, as administrator of the BIF. 5
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended December 31, 2000, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2001, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution: (i) has engaged or is engaging in unsafe or unsound practices; (ii) is in an unsafe or unsound condition to continue operations; or (iii) has violated any applicable law, regulation, order or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Bank is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank. FICO Assessments. Since 1987, a portion of the deposit insurance assessments paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has been used to cover interest payments due on the outstanding obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. Between January 1, 2000, and the final maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. During the year ended December 31, 2000, the FICO assessment rate for BIF and SAIF members was approximately 0.02% of deposits. Supervisory Assessments. All Indiana bank are required to pay supervisory assessments to the DFI to fund the operations of the DFI. During the year ended December 31, 2000, the Bank paid supervisory assessments to the DFI totaling $72,000. Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered insured nonmember banks, such as the Bank: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consist of substantially the same components as Tier 1 capital and total capital under the Federal Reserve's capital guidelines for bank holding companies (see "--The Company--Capital Requirements"). The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the FDIC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. 6
During the year ended December 31, 2000, the Bank was not required by the FDIC to increase its capital to an amount in excess of the minimum regulatory requirement. As of December 31, 2000, the Bank exceeded its minimum regulatory capital requirements with a leverage ratio of 7.06% and a risk-based capital ratio of 10.06%. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution's asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution. As of December 31, 2000, the Bank was well capitalized, as defined by FDIC regulations. Dividends. Indiana law prohibits the Bank from paying dividends in an amount greater than its undivided profits. The Bank is required to obtain the approval of the DFI for the payment of any dividend if the total of all dividends declared by the Bank during the calendar year, including the proposed dividend, would exceed the sum of the retained net income for the year to date combined with its retained net income for the previous two years. Indiana law defines "retained net income" to mean the net income of a specified period, calculated under the consolidated report of income instructions, less the total amount of all dividends declared for the specified period. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2000. As of December 31, 2000, approximately $17 million was available to be paid as dividends to the Company by the Bank. Notwithstanding the availability of funds for dividends, however, the FDIC may prohibit the payment of any dividends by the Bank if the FDIC determines such payment would constitute an unsafe or unsound practice. Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship. Safety and Soundness Standards. The federal banking agencies have adopted guidelines which establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. 7
The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the institution's rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments. Branching Authority. Indiana banks, such as the Bank, have the authority under Indiana law to establish branches anywhere in the State of Indiana, subject to receipt of all regulatory approvals. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), both state and national banks are allowed to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Indiana law permits interstate mergers subject to certain conditions, including a prohibition against interstate mergers involving Indiana banks that have been in existence and continuous operation for fewer than five years. Additionally, Indiana law allows out-of-state banks to acquire individual branch offices in Indiana and to establish new branches in Indiana subject to certain conditions, including a requirement that the laws of the state in which the out-of-state bank is headquartered grant Indiana banks authority to acquire and establish branches in such state. State Bank Activities. Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank. Eligible state banks are also authorized to engage, through "financial subsidiaries," in certain activities that are permissible for financial holding companies (as described above) and certain activities that the Secretary of the Treasury, in consultation with the Federal Reserve, 8
determines is financial in nature or incidental to any such financial activity. As of the date of this filing, the Bank has not applied for nor received approval to establish any financial subsidiaries. Federal Reserve System. Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW, Investor's Weekly and regular checking accounts), as follows: for transaction accounts aggregating $42.8 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $42.8 million, the reserve requirement is $1.284 million plus 10% of the aggregate amount of total transaction accounts in excess of $42.8 million. The first $5.5 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Bank is in compliance with the foregoing requirements. Industry Segments The Company is engaged in a single industry and performs a single service -- commercial banking. On the pages that follow are tables which set forth selected statistical information relative to the business of the Company. This data should be read in conjunction with the consolidated financial statements, related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as set forth in the 2000 Annual Report to Shareholders herein incorporated by reference (attached hereto as Exhibit 13). 9
<TABLE> DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (in thousands of dollars) <CAPTION> 2000 1999 ------------------------------------- ------------------------------------- Average Interest Average Interest Balance Income Yield (1) Balance Income Yield (1) ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> ASSETS Earning assets: Loans: Taxable (2) $ 676,807 $ 61,554 9.09% $ 602,250 $ 51,602 8.57% Tax exempt (1) 2,391 215 8.99 2,920 275 9.42 Investments: (1) Available for sale 279,569 18,850 6.74 291,005 18,597 6.39 Held to maturity 0 0 0.00 0 0 0.00 Short-term investments 5,778 367 6.35 5,230 259 4.95 Interest bearing deposits 960 55 5.73 308 16 5.19 ----------- ----------- ----------- ----------- ----------- ----------- Total earning assets 965,505 81,041 8.39% 901,713 70,749 7.85% =========== =========== Nonearning assets: Cash and due from banks 41,202 0 37,767 0 Premises and equipment 27,276 0 27,248 0 Other nonearning assets 30,191 0 27,784 0 Less: allowance for loan losses (6,813) 0 (5,958) 0 ----------- ----------- ----------- ----------- Total assets $ 1,057,361 $ 81,041 $ 988,554 $ 70,749 =========== =========== =========== =========== <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> </TABLE> 10
<TABLE> DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.) (in thousands of dollars) <CAPTION> 1999 1998 ------------------------------------- ------------------------------------- Average Interest Average Interest Balance Income Yield (1) Balance Income Yield (1) ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> ASSETS Earning assets: Loans: Taxable (2) $ 602,250 $ 51,602 8.57% $ 486,437 $ 44,225 9.09% Tax exempt (1) 2,920 275 9.42 2,899 295 10.18 Investments: (1) Available for sale 291,005 18,597 6.39 142,499 9,062 6.36 Held to maturity 0 0 0.00 160,173 10,858 6.78 Short-term investments 5,230 259 4.95 9,545 510 5.34 Interest bearing deposits 308 16 5.19 133 9 6.77 ----------- ----------- ----------- ----------- ----------- ----------- Total earning assets 901,713 70,749 7.85% 801,686 64,959 8.10% =========== =========== Nonearning assets: Cash and due from banks 37,767 0 36,215 0 Premises and equipment 27,248 0 25,198 0 Other nonearning assets 27,784 0 24,324 0 Less: allowance for loan losses (5,958) 0 (5,403) 0 ----------- ----------- ----------- ----------- Total assets $ 988,554 $ 70,749 $ 882,020 $ 64,959 =========== =========== =========== =========== <FN> (1) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 1999 and 1998. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, included the TEFRA adjustment applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans. (2) Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1999 and 1998 are included as taxable loan interest income. </FN> </TABLE> 11
<TABLE> DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.) (in thousands of dollars) <CAPTION> 2000 1999 ------------------------------------- ------------------------------------- Average Interest Average Interest Balance Expense Yield Balance Expense Yield ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Savings deposits $ 53,372 $ 899 1.68% $ 54,562 $ 935 1.71% Interest bearing checking accounts 71,124 1,856 2.61 56,304 861 1.53 Time Deposits: In denominations under $100,000 367,321 21,816 5.94 359,700 17,394 4.84 In denominations over $100,000 157,040 7,824 4.98 150,182 7,963 5.30 Miscellaneous short-term borrowings 176,562 10,083 5.71 146,680 7,139 4.87 Long-term borrowings 32,342 2,523 7.80 37,312 2,801 7.51 ----------- ----------- ----------- ----------- ----------- ----------- Total interest bearing liabilities 857,761 45,001 5.25% 804,740 37,093 4.61% Noninterest bearing liabilities and stockholders' equity: Demand deposits 134,270 0 120,808 0 Other liabilities 8,447 0 7,834 0 Stockholders' equity 56,883 0 55,172 0 ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity $ 1,057,361 $ 45,001 $ 988,554 $ 37,093 =========== =========== =========== =========== Net interest differential - yield on average daily earning assets $ 36,040 3.73% $ 33,656 3.73% =========== =========== =========== =========== </TABLE> 12
<TABLE> DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.) (in thousands of dollars) <CAPTION> 1999 1998 ------------------------------------- ------------------------------------- Average Interest Average Interest Balance Expense Yield Balance Expense Yield ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Savings deposits $ 54,562 $ 935 1.71% $ 55,299 $ 1,331 2.41% Interest bearing checking accounts 56,304 861 1.53 65,895 1,322 2.01 Time Deposits: In denominations under $100,000 359,700 17,394 4.84 326,123 17,234 5.28 In denominations over $100,000 150,182 7,963 5.30 142,589 8,267 5.80 Miscellaneous short-term borrowings 146,680 7,139 4.87 90,752 4,724 5.21 Long-term borrowings 37,312 2,801 7.51 44,349 3,213 7.24 ----------- ----------- ----------- ----------- ----------- ----------- Total interest bearing liabilities 804,740 37,093 4.61% 725,007 36,091 4.98% =========== =========== Noninterest bearing liabilities and stockholders' equity: Demand deposits 120,808 0 98,957 0 Other liabilities 7,834 0 7,386 0 Stockholders' equity 55,172 0 50,670 0 Total liabilities and stockholders' ----------- ----------- ----------- ----------- equity $ 988,554 $ 37,093 $ 882,020 $ 36,091 =========== =========== =========== =========== Net interest differential - yield on average daily earning assets $ 33,656 3.73% $ 28,868 3.60% =========== =========== =========== =========== </TABLE> 13
<TABLE> ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS (fully taxable equivalent basis) (in thousands of dollars) YEAR ENDED DECEMBER 31, <CAPTION> 2000 Over (Under) 1999 (1) 1999 Over (Under) 1998 (1) ------------------------------------- ------------------------------------- Volume Rate Total Volume Rate Total ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> INTEREST AND LOAN FEE INCOME (2) Loans: Taxable $ 6,651 $ 3,301 $ 9,952 $ 10,041 $ (2,664) $ 7,377 Tax exempt (48) (12) (60) 2 (115) (113) Investments: Available for sale (748) 1,001 253 8,881 (607) 8,274 Held to maturity 0 0 0 (10,858) 0 (10,858) Short-term investments 29 79 108 (215) (37) (252) Interest bearing deposits 37 2 39 10 (3) 7 ----------- ----------- ----------- ----------- ----------- ----------- Total interest income 5,921 4,371 10,292 7,861 (3,426) 4,435 ----------- ----------- ----------- ----------- ----------- ----------- INTEREST EXPENSE Savings deposits (20) (16) (36) (18) (378) (396) Interest bearing checking accounts 270 725 995 (175) (286) (461) Time deposits In denominations under $100,000 376 4,046 4,422 1,692 (1,532) 160 In denominations over $100,000 354 (493) (139) 426 (730) (304) Miscellaneous short-term borrowings 1,591 1,353 2,944 2,740 (325) 2,415 Long-term borrowings (384) 106 (278) (525) 113 (412) ----------- ----------- ----------- ----------- ----------- ----------- Total interest expense 2,187 5,721 7,908 4,140 (3,138) 1,002 ----------- ----------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN INTEREST DIFFERENTIALS $ 3,734 $ (1,350) $ 2,384 $ 3,721 $ (288) $ 3,433 ----------- ----------- ----------- ----------- ----------- ----------- <FN> (1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily balances for 2000, 1999 and 1998. The changes in volume represent "changes in volume times the old rate". The changes in rate represent "changes in rate times old volume". The changes in rate/volume were also calculated by "change in rate times change in volume" and allocated consistently based upon the relative absolute values of the changes in volume and changes in rate. (2) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 2000, 1999 and 1998. The tax equivalent rate for tax exempt loans and tax exempt securities included the TEFRA adjustment applicable to nondeductible interest expense. </FN> </TABLE> 14
<TABLE> ANALYSIS OF SECURITIES (in thousands of dollars) The amortized cost and the fair value of securities as of December 31, 2000, 1999 and 1998 were as follows: <CAPTION> 2000 1999 1998 ------------------------ ------------------------ ------------------------ Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Securities available for sale: U.S. Treasury securities $ 38,037 $ 38,066 $ 35,133 $ 34,614 $ 38,938 $ 39,521 U.S. Government agencies 6,672 6,550 3,726 3,201 909 1,025 Mortgage-backed securities 207,499 207,594 196,245 192,569 225,741 225,914 State and municipal securities 35,416 35,430 35,432 32,714 56,924 59,112 Other debt securities 6,327 5,968 8,829 8,323 2,086 2,086 ----------- ----------- ----------- ----------- ----------- ----------- Total debt securities available for sale $ 293,951 $ 293,608 $ 279,365 $ 271,421 $ 324,598 $ 327,658 ----------- ----------- ----------- ----------- ----------- ----------- Securities held to maturity: U.S. Treasury securities $ 0 $ 0 $ 0 $ 0 $ 21,170 $ 21,501 U.S. Government agencies 0 0 0 0 2,176 2,246 Mortgage-backed securities 0 0 0 0 116,788 117,185 State and municipal securities 0 0 0 0 22,418 24,044 Other debt securities 0 0 0 0 1,007 1,103 ----------- ----------- ----------- ----------- ----------- ----------- Total debt securities held to maturity $ 0 $ 0 $ 0 $ 0 $ 163,559 $ 166,079 ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> 15
<TABLE> ANALYSIS OF SECURITIES (cont.) (Fully Tax Equivalent Basis) (in thousands of dollars) The weighted average yields (1) and maturity distribution (2) for debt securities portfolio at December 31, 2000, were as follows: <CAPTION> After One After Five Within Year Years Over One Within Within Ten Ten Year Five Years Years Years ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Securities available for sale: U.S. Treasury securities Book value $ 30,282 $ 7,755 $ 0 $ 0 Yield 6.35% 8.27% Government agencies Book value 0 6,671 0 0 Yield 5.51% Mortgage-backed securities Book value 120 5,879 86,573 114,742 Yield 7.00% 6.52% 6.90% 6.97% State and municipal securities subdivisions Book value 0 99 2,155 33,348 Yield 6.85% 5.13% 5.02% Other debt securities Book value 0 3,077 0 3,250 Yield 6.88% 8.84% ----------- ----------- ----------- ----------- Total debt securities available for sale: Book value $ 30,402 $ 23,481 $ 88,728 $ 151,340 Yield 6.36% 6.86% 6.85% 6.58% =========== =========== =========== =========== <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 nticipated payments as computed by using the historic average payment speed from date of issue. There were no investments in securities of any one issuer that exceeded 10% of stockholders' equity at December 31, 2000. </FN> </TABLE> 16
<TABLE> ANALYSIS OF LOAN PORTFOLIO Analysis of Loans Outstanding (in thousands of dollars) The Company segregates its loan portfolio into four basic segments: commercial (including agri-business and agricultural loans), real estate mortgages, installment and personal line of credit loans(including credit card loans). The loan portfolio as of December 31, 2000, 1999, 1998, 1997 and 1996 was as follows: <CAPTION> 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> Commercial loans: Taxable $ 487,125 $ 419,034 $ 343,858 $ 269,887 $ 226,190 Tax exempt 2,374 3,048 2,867 3,065 3,414 Total commercial loans 489,499 422,082 346,725 272,952 229,604 Real estate mortgage loans 52,731 46,872 60,555 65,368 60,949 Installment loans 129,729 146,711 100,196 89,107 71,398 Line of credit and credit card loans 46,917 38,233 31,020 31,207 20,314 ----------- ----------- ----------- ----------- ----------- Total loans 718,876 653,898 538,496 458,634 382,265 Less allowance for loan losses 7,124 6,522 5,510 5,308 5,306 ----------- ----------- ----------- ----------- ----------- Net loans $ 711,752 $ 647,376 $ 532,986 $ 453,326 $ 376,959 =========== =========== =========== =========== =========== <FN> The real estate mortgage loan portfolio included construction loans totaling $3,627, $4,488, $2,975, $3,089 and $1,647 as of December 31, 2000, 1999, 1998, 1997 and 1996. The loan classifications are based on the nature of the loans as of the loan origination date. There were no foreign loans included in the loan portfolio for the periods presented. </FN> </TABLE> 17
<TABLE> ANALYSIS OF LOAN PORTFOLIO (cont.) Analysis of Loans Outstanding (cont.) (in thousands of dollars) Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules included in the related loan agreements or upon scheduled maturity of each principal payment. The following table indicates the rate sensitivity of the loan portfolio as of December 31, 2000. The table includes the real estate loans held for sale and assumes these loans will not be sold during the various time horizons. <CAPTION> Line of Credit and Real Credit Commerciall Estate Installment Card Total Percent ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Immediately adjustable interest rates or original maturity of one day $ 269,542 $ 0 $ 0 $ 43,399 $ 312,941 43.5% Other within one year 68,908 5,563 42,555 2,550 119,576 16.6 After one year, within five years 142,641 5,058 84,797 825 233,321 32.5 Over five years 8,239 42,073 2,377 143 52,832 7.4 Nonaccrual loans 169 37 0 0 206 0.0 ----------- ----------- ----------- ----------- ----------- ----------- Total loans $ 489,499 $ 52,731 $ 129,729 $ 46,917 $ 718,876 100.0% =========== =========== =========== =========== =========== =========== <FN> A portion of the loans are short-term maturities. At maturity, credits are reviewed, and if renewed, are renewed at rates and conditions that prevail at the time of maturity. Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 2000 amounted to $240,702 and $45,453. </FN> </TABLE> 18
<TABLE> ANALYSIS OF LOAN PORTFOLIO (cont.) Review of Nonperforming Loans (in thousands of dollars) The following is a summary of nonperforming loans as of December 31, 2000, 1999, 1998, 1997 and 1996. <CAPTION> 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE) Real estate mortgage loans $ 398 $ 0 $ 0 $ 0 $ 126 Commercial and industrial loans 7,635 20 159 236 22 Loans to individuals for household, family and other personal expenditures 171 151 68 69 68 Loans to finance agriculture production and other loans to farmers 0 0 0 0 0 ----------- ----------- ----------- ----------- ----------- Total past due loans 8,204 171 227 305 216 ----------- ----------- ----------- ----------- ----------- PART B - NONACCRUAL LOANS Real estate mortgage loans 37 0 0 338 155 Commercial and industrial loans 169 329 0 720 229 Loans to individuals for household, family and other personal expenditures 0 0 0 0 0 Loans to finance agriculture production and other loans to farmers 0 0 0 0 0 ----------- ----------- ----------- ----------- ----------- Total nonaccrual loans 206 329 0 1,058 384 ----------- ----------- ----------- ----------- ----------- PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,127 1,179 1,281 1,377 1,284 ----------- ----------- ----------- ----------- ----------- Total nonperforming loans $ 9,537 $ 1,679 $ 1,508 $ 2,740 $ 1,884 =========== =========== =========== =========== =========== <FN> Nonearning assets of the Company include nonaccrual loans (as indicated above), nonaccrual investments, other real estate and repossessions, which amounted to $318 at December 31, 2000. </FN> </TABLE> 19
ANALYSIS OF LOAN PORTFOLIO (cont.) Comments Regarding Nonperforming Assets PART A - CONSUMER LOANS Consumer installment loans, except those loans that are secured by real estate, are not placed on a nonaccrual status since these loans are charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. Advances under Mastercard and Visa programs, as well as advances under all other consumer line of credit programs, are charged-off when collection appears doubtful. PART B - NONPERFORMING LOANS When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued and all accrued interest receivable is charged off. It is the policy of the Bank that all loans for which the collateral is insufficient to cover all principal and accrued interest will be reclassified as nonperforming loans to the extent they are unsecured, on or before the date when the loan becomes 90 days delinquent. Thereafter, interest is recognized and included in income only when received. Loans past due over 90 days and still accruing interest were $6,791,000 (excluding impaired loans) at year-end 2000. The increase in loans past due 90 days or more and still accruing resulted from the inclusion of two commercial loans totaling $6.2 million, or approximately 90% of the $6.8 million in this category. Of this amount, $1.4 million was paid off subsequent to the end of the fiscal year. A second loan of $4.8 million matured in the fourth quarter of 2000 and has therefore been included in this category. The borrower is current on all interest under the matured facility. The Company has reached an agreement with a bank participant and the borrower to extend the terms of the financing. This extension was completed during the first quarter of 2001. As of December 31, 2000, there were $206,000 of loans on nonaccrual status and one loan of $1.4 million classified as impaired. PART C - TROUBLED DEBT RESTRUCTURED LOANS Loans renegotiated as troubled debt restructurings are those loans for which either the contractual interest rate has been reduced and/or other concessions are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan. Loans renegotiated as troubled debt restructurings totaled $1.1 million as of December 31, 2000. Interest income of $106,000 was recognized in 2000. Had these loans been performing under the original contract terms, an additional $17,000 would have been reflected in interest income during 2000. The Company is not committed to lend additional funds to debtors whose loans have been modified. PART D - OTHER NONPERFORMING ASSETS Management is of the opinion that there are no significant foreseeable losses relating to substandard or nonperforming assets, except as discussed above in Part B - Nonperforming Loans and Part C - Troubled Debt Restructured Loans. PART E - LOAN CONCENTRATIONS There were no loan concentrations within industries which exceeded ten percent of total assets. It is estimated that over 90% of all the Bank's commercial, industrial, agri-business and agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its basic trade area. Basis For Determining Allowance For Loan Losses: Management is responsible for determining the adequacy of the allowance for loan losses. This responsibility is fulfilled by management in a number of ways, including the following: - - Management reviews the larger individual loans (primarily in the commercial loan portfolio) for unfavorable collectability factors and assesses the requirement for specific reserves on such credits. For those loans not subject to specific reviews, management reviews previous loan loss experience to establish historical ratios and trends in charge-offs by loan category. The ratios of net charge-offs to particular types of loans enable management to estimate charge-offs in future periods by loan category and thereby establish appropriate reserves for loans not specifically reviewed. 20
- - Management reviews the current economic conditions of its lending market to determine the effects on loan charge-offs by loan category, in addition to the effects on the loan portfolio as a whole. - - Management reviews delinquent loan reports to determine risk of loan charge-offs. High delinquencies are generally indicative of an increase in future loan charge-offs. Based upon these policies and objectives, $1.2 million, $1.3 million and $480,000 were charged to the provision for loan losses and added to the allowance for loan losses in 2000, 1999 and 1998, respectively. The allocation of the allowance for loan losses to the various lending areas is performed by management in relation to perceived exposure to loss in the various loan portfolios. However, the allowance for loan losses is available in its entirety to absorb losses in any particular loan category. 21
<TABLE> ANALYSIS OF LOAN PORTFOLIO (cont.) Summary of Loan Loss (in thousands of dollars) The following is a summary of the loan loss experience for the years ended December 31, 2000, 1999, 1998, <CAPTION> 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> Amount of loans outstanding, December 31, $ 718,876 $ 653,898 $ 538,496 $ 458,634 $ 382,265 =========== =========== =========== =========== =========== Average daily loans outstanding during the year ended December 31, $ 678,967 $ 605,170 $ 489,336 $ 414,033 $ 352,811 =========== =========== =========== =========== =========== Allowance for loan losses, January 1, $ 6,522 $ 5,510 $ 5,308 $ 5,306 $ 5,472 ----------- ----------- ----------- ----------- ----------- Loans charged-off Commercial 200 147 9 99 171 Real estate 30 6 0 33 0 Installment 483 252 329 190 158 Credit cards and personal credit lines 35 30 78 37 39 ----------- ----------- ----------- ----------- ----------- Total loans charged-off 748 435 416 359 368 ----------- ----------- ----------- ----------- ----------- Recoveries of loans previously charged-off Commercial 45 10 44 18 12 Real estate 0 0 0 0 0 Installment 93 114 86 66 54 Credit cards and personal credit lines 6 13 8 8 16 ----------- ----------- ----------- ----------- ----------- Total recoveries 144 137 138 92 82 ----------- ----------- ----------- ----------- ----------- Net loans charged-off 604 298 278 267 286 Purchase loan adjustment 0 0 0 0 0 Provision for loan loss charged to expense 1,206 1,310 480 269 120 ----------- ----------- ----------- ----------- ----------- Balance, December 31, $ 7,124 $ 6,522 $ 5,510 $ 5,308 $ 5,306 =========== =========== =========== =========== =========== Ratio of net charge-offs during the period to average daily loans outstanding Commercial 0.02% 0.02% (0.01)% 0.02% 0.03% Real estate 0.00 0.00 0.00 0.01 0.01 Installment 0.06 0.02 0.05 0.03 0.00 Credit cards and personal credit lines 0.01 0.01 0.02 0.01 0.04 ----------- ----------- ----------- ----------- ----------- Total 0.09% 0.05% 0.06% 0.07% 0.08% =========== =========== =========== =========== =========== Ratio of allowance for loan losses to Nonperforming assets 73.83% 368.06% 258.20% 176.99% 204.31% =========== =========== =========== =========== =========== </TABLE> 22
<TABLE> ANALYSIS OF LOAN PORTFOLIO (cont.) Allocation of Allowance for Loan Losses (in thousands of dollars) The following is a summary of the allocation for loan losses as of December 31, 2000, 1999, 1998, 1997 and 1996. <CAPTION> 2000 1999 1998 ------------------------ ------------------------ ------------------------ Allowance Loans as Allowance Loans as Allowance Loans as For Percentage For Percentage For Percentage Loan of Gross Loan of Gross Loan of Gross Losses Loans Losses Loans Losses Loans ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Allocated allowance for loan losses Commercial $ 5,205 68.09% $ 4,750 64.55% $ 1,647 64.39% Real estate 132 7.34 120 7.17 130 11.24 Installment 974 18.04 1,202 22.43 845 18.61 Credit cards and personal credit lines 352 6.53 185 5.85 130 5.76 ----------- ----------- ----------- ----------- ----------- ----------- Total allocated allowance for loan losses 6,663 100.00% 6,257 100.00% 2,752 100.00% =========== =========== =========== Unallocated allowance for loan losses 461 265 2,758 ----------- ----------- ----------- Total allowance for loan losses $ 7,124 $ 6,522 $ 5,510 =========== =========== =========== 1997 1996 ------------------------ ------------------------ Allowance Loans as Allowance Loans as For Percentage For Percentage Loan of Gross Loan of Gross Losses Loans Losses Loans ----------- ----------- ----------- ----------- Allocated allowance for loan losses Commercial $ 1,341 59.52% $ 1,213 60.07% Real estate 131 14.25 123 15.94 Installment 673 19.43 530 18.68 Credit cards and personal credit lines 103 6.80 151 5.31 ----------- ----------- ----------- ----------- Total allocated allowance for loan losses 2,248 100.00% 2,017 100.00% =========== =========== Unallocated allowance for loan losses 3,060 3,289 ----------- ----------- Total allowance for loan losses $ 5,308 $ 5,306 =========== =========== <FN> In 1999, the Company reviewed and revised the allocation process for the Allowance for Loan Losses. These changes primarily effected the allocations as they pertain to the commercial loans classified in the Company's internal watch list. These changes also brought the Company's methodology into conformity with recent regulatory guidance. The Company continues to review the allocation process and the documentation for the Allowance for Loan Losses, therefore future changes may occur. </FN> </TABLE> 23
<TABLE> ANALYSIS OF DEPOSITS (in thousands of dollars) The average daily deposits for the years ended December 31, 2000, 1999 and 1998, and the average rates paid on those deposits are summarized in the following table: <CAPTION> 2000 1999 1998 ------------------------ ------------------------ ------------------------ Average Average Average Average Average Average Daily Rate Daily Rate Daily Rate Balance Paid Balance Paid Balance Paid ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Demand deposits $ 134,270 0.00% $ 120,808 0.00% $ 98,957 0.00% Savings accounts: Regular savings 53,372 1.68 54,562 1.71 55,299 2.41 Interest bearing checking 71,124 2.61 56,304 1.53 65,895 2.01 Time deposits: Deposits of $100,000 or more 157,040 4.98 150,182 5.30 142,589 5.80 Other time deposits 367,321 5.94 359,700 4.84 326,123 5.28 ----------- ----------- ----------- ----------- ----------- ----------- Total deposits $ 783,127 4.14% $ 741,556 3.66% $ 688,863 4.09% =========== =========== =========== =========== =========== =========== As of December 31, 2000, time certificates of deposit in denominations of $100,000 or more will mature as follows: Within three months $ 79,481 Over three months, within six months 64,333 Over six months, within twelve months 28,996 Over twelve months 7,489 ----------- Total time certificates of deposit in denominations of $100,000 or more $ 180,299 =========== </TABLE> 24
QUALITATIVE MARKET RISK DISCLOSURE Management's market risk disclosure appears under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2000 Annual Report to Shareholders and is incorporated herein by reference in response to this item. The Company's primary market risk exposure is interest rate risk. The Company does not have a material exposure to foreign currency exchange rate risk, does not own any derivative financial instruments and does not maintain a trading portfolio. RETURN ON EQUITY AND OTHER RATIOS The rates of return on average daily assets and stockholders' equity, the dividend payout ratio, and the average daily stockholders' equity to average daily assets for the years ended December 31, 2000, 1999 and 1998 were as follows: 2000 1999 1998 ----------- ----------- ----------- Percent of net income to: Average daily total assets 0.88% 0.84% 0.89% Average daily stockholders' equity 16.39 15.08 15.57 Percentage of ividends declared per common share to basic earnings per weighted average number of common shares outstanding (5,813,984 shares in 2000, 1999 and 1998) 32.50 30.77 24.26 Percentage of average daily stockholders' equity to average daily total assets 5.38 5.58 5.74 25
SHORT-TERM BORROWINGS (in thousands of dollars) The following is a schedule, at the end of the year indicated, of statistical information relating to securities sold under agreement to repurchase maturing within one year and secured by either U.S. Government agency securities or mortgage-backed securities classified as other debt securities. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of stockholders' equity at the end of each period. 2000 1999 1998 ----------- ----------- ----------- Outstanding at year end $ 138,154 $ 121,374 $ 110,163 Approximate average interest rate at year end 5.37% 4.75% 4.78% Highest amount outstanding as of any month end during the year $ 143,677 $ 143,353 $ 110,163 Approximate average outstanding during the year $ 121,267 $ 120,950 $ 84,157 Approximate average interest rate during the year 5.35% 4.76% 5.19% Securities sold under agreement to repurchase include fixed rate, term transactions initiated by the investment department of the Bank, as well as corporate sweep accounts. 26
ITEM 2. PROPERTIES - ------------------ The Company conducts its operations from the following locations: Branches/Headquarters Main/Headquarters 202 E. Center St. Warsaw IN Warsaw Drive-up East Center St. Warsaw IN Akron 102 East Rochester Akron IN Argos 100 North Michigan Argos IN Bremen 1600 Indiana State Road 331 Bremen IN Columbia City 601 Countryside Dr. Columbia City IN Concord 4202 Elkhart Road Goshen IN Cromwell 111 North Jefferson St. Cromwell IN Elkhart Beardsley 864 East Beardsley St. Elkhart IN Elkhart East 22050 State Road 120 Elkhart IN Elkhart Hubbard Hill 58404 State Road 19 Elkhart IN Elkhart Northwest 1208 N. Nappanee St. Elkhart IN Fort Wayne North 302 East DuPont Rd. Fort Wayne IN Fort Wayne Southwest 10429 Illinois Rd. Fort Wayne IN Goshen Downtown 102 North Main St. Goshen IN Goshen South 2513 South Main St. Goshen IN Granger 12830 State Road 23 Granger IN Greentown 520 W. Main Greentown IN Huntington 1501 N. Jefferson St. Huntington IN Kendallville East 631 Professional Way Kendallville IN LaGrange 901 South Detroit LaGrange IN Ligonier Downtown 222 S. Calvin St. Ligonier IN Ligonier South 1470 U.S. Highway 33 South Ligonier IN Logansport 3900 Highway 24 East Logansport IN Medaryville Main St. Medaryville IN Mentone 202 East Main St. Mentone IN Middlebury 712 Wayne Ave. Middlebury IN Milford Indiana State Road 15 North Milford IN Mishawaka 5015 N. Main St. Mishawaka IN Nappanee 202 West Market St. Nappanee IN North Webster 644 North Main St. North Webster IN Peru 2 N. Broadway Peru IN Pierceton 202 South First St. Pierceton IN Plymouth 862 E. Jefferson St. Plymouth IN Roann 110 Chippewa St. Roann IN Rochester 507 East 9th St. Rochester IN Shipshewana 895 North Van Buren St. Shipshewana IN Silver Lake 102 Main St. Silver Lake IN Syracuse 502 South Huntington Syracuse IN Wabash North 1004 North Cass St. Wabash IN Warsaw East 3601 Commerce Dr. Warsaw IN Warsaw West 1221 West Lake St. Warsaw IN Winona Lake 99 Chestnut St. Winona Lake IN Winona Lake East 1324 Wooster Rd. Winona Lake IN 27
The Company leases from third parties, the real estate and buildings for its offices in Akron and Milford and the building for its Winona Lake East office. In addition, the Company leases the real estate for its Wabash North office and its freestanding ATMs. All the other branch facilities are owned by the Company. The Company also owns parking lots in downtown Warsaw for the use and convenience of Company employees and customers, as well as leasehold improvements, equipment, furniture and fixtures necessary to operate the banking facilities. In addition, the Company owns buildings, which it uses for various offices and computer facilities, for employee training and undeveloped real estate which it currently intends to use for branch facilities in the future. The Company also leases from third parties facilities for computer facilities and the storage of supplies. None of the Company's assets are the subject of any material encumbrances. ITEM 3. LEGAL PROCEEDINGS - ------------------------- There are no material pending legal proceedings other than ordinary routine litigation incidental to the business to which the Company and the Bank are a party or of which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- No matter was submitted to a vote of security holders during the fourth quarter of 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS - ----------------------------------------------------------------------------- Information relating to the principal market for and the prices of the Company's common stock, and information as to dividends are contained under the caption "Stock and Dividend Information" in the 2000 Annual Report to Shareholders and are incorporated herein by reference. On December 31, 2000, the Company had approximately 1,900 shareholders of record, including those employees who participate in the Company's 401(K) plan. On January 15, 1997, the Company sold 20,000 shares of authorized but previously unissued common stock for $15.50 per share (split adjusted). In August, 1997, the common stock of the Company and the preferred stock of its wholly-owned subsidiary, Lakeland Trust, began trading on The Nasdaq Stock Market under the symbols LKFN and LKFNP. At the annual meeting of shareholders on April 14, 1998, the shareholders approved the Lakeland Financial Corporation 1997 Share Incentive Plan. This plan reserves 600,000 shares of common stock (split adjusted) for which incentive share options and non-qualified share options may be granted to directors and employees of the Company and its subsidiaries. On April 30, 1998, the common stock split two-for-one. ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- A five-year consolidated financial summary, containing the required selected financial data, appears under the caption "Selected Financial Data" on page 7 in the 2000 Annual Report to Shareholders and is incorporated herein by reference. 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations appears under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 28 - 31 in the 2000 Annual Report to Shareholders and is incorporated herein by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- Quantitative and qualitative disclosures about market risk appear under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 28 - 31 in the 2000 Annual Report to Shareholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- The following consolidated financial statements appear in the 2000 Annual Report to Shareholders and are incorporated herein by reference. Consolidated Balance Sheets at December 31, 2000 and 1999. Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements. Report of Independent Auditors. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ----------------------------------------------------------------------- Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- The information appearing in the definitive Proxy Statement dated March 14, 2001, is incorporated herein by reference in response to this item. Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers, directors and persons who own more than 10% of our common stock file reports of ownership and change in ownership with the Securities and Exchange Commission. They are also required to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms, and, if appropriate, representations made to us by any reporting person concerning whether a Form 5 was required to be filed for 2000, we are not aware that any of our directors, executive officers or 10% shareholders failed to comply with the filing requirements of Section 16(a) during 2000. ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- The information appearing in the definitive Proxy Statement dated March 14, 2001, is incorporated herein by reference in response to this item. The sections in the Proxy Statement marked "Report of the Compensation Committee on Executive Compensation" and "Stock Price Performance" are furnished for the information of the Commission and are not deemed to be "filed" as part of the Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information appearing in the definitive Proxy Statement dated March 14, 2001, is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- The information appearing in the definitive Proxy Statement dated March 14, 2001, is incorporated herein by reference in response to this item. 29
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------ (a) The documents listed below are filed as a part of this report: (1) Financial Statements. --------------------- The following financial statements appear in the 2000 Annual Report to Shareholders and are specifically incorporated by reference under Item 8 of this Form 10-K, or are a part of this Form 10-K, as indicated and at the pages set forth below. Reference --------- 2000 Annual Form 10-K Report --------- -------------- Consolidated Balance Sheets at December 31, 2000 and 1999. 9 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998. 10 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998. 11 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. 12 Notes to Consolidated Financial Statements. 13-26 Report of Independent Auditors. 27 (2) Financial Statement Schedules. ------------------------------ N/A (3) Schedule of Exhibits. --------------------- The Exhibit Index, which immediately follows the signature pages to this Form 10-K is incorporated by reference. (b) Reports on Form 8-K. -------------------- The Company did notfile any Current Reports on Form 8-K during the fourth quarter of 2000. (c) Exhibits. --------- The exhibits required to be filed with this Form 10-K are included with this Form 10-K and are located immediately following the Exhibit Index to this Form 10-K. 30
SIGNATURES ---------- Pursuant to the requirements of Section 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LAKELAND FINANCIAL CORPORATION Date: March 13, 2001 By /s/R. Douglas Grant (R. Douglas Grant) Chairman Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 13, 2001 /s/Michael L. Kubacki (Michael L. Kubacki) Principal Executive Officer and Director Date: March 13, 2001 /s/David M. Findlay (David M. Findlay) Principal Financial Officer Date: March 13,2001 /s/Teresa A. Bartman (Teresa A. Bartman) Principal Accounting Officer Date: March 13, 2001 /s/R. Douglas Grant (R. Douglas Grant) Director Date: March 13, 2001 _____________________________ (Eddie Creighton) Director Date: March 13, 2001 /s/Anna K. Duffin (Anna K. Duffin) Director Date: March 13, 2001 /s/L. Craig Fulmer (L. Craig Fulmer) Director Date: March 13, 2001 _____________________________ (Jerry L. Helvey) Director 31
Date: March 13, 2001 /s/Allan J. Ludwig (Allan J. Ludwig) Director Date: March 13, 2001 /s/Charles E. Niemier (Charles E. Niemier) Director Date: March 13, 2001 /s/D. Jean Northenor (D. Jean Northenor) Director Date: March 13, 2001 /s/Richard L. Pletcher (Richard L. Pletcher) Director Date: March 13, 2001 /s/Steven D. Ross (Steven D. Ross) Director Date: March 13, 2001 /s/Terry L. Tucker (Terry L. Tucker) Director Date: March 13, 2001 /s/M. Scott Welch (M. Scott Welch) Director Date: March 13, 2001 /s/G.L. White (G.L. White) Director 32
LAKELAND FINANCIAL CORPORATION EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K Incorporated Herein by Filed Exhibit No. Description Reference to Herewith - ----------- ----------------------------- --------------------------- -------- 3.1 Amended and Restated Exhibit 4.1 to the Articles of Incorporation of Company's Form S-8 filed Lakeland Financial on April 15, 1998 Corporation 3.2 Bylaws of Lakeland Exhibit 3(ii) to the Financial Corporation Company's Form 10-Q for the quarter ended June 30, 1996 13 Annual Report to X Shareholders 10.1 Lakeland Financial Exhibit 4.3 to the Corporation 1997 Share Company's Form S-8 filed Incentive Plan on April 15, 1998 21 Subsidiaries X 4.1 Specimen Stock Certificate X of Lakeland Financial Corporation 10.2 Lakeland Financial Exhibit 10.1 to the Corporation 401(k) Plan Company's Form S-8 Filed on October 23,2000 10.3 Form of Change of Control X Agreements entered into with Michael L. Kubacki, Charles D. Smith, Walter L. Weldy and Robert C. Condon 23 Consent of Crowe, Chizek and X Company LLP 99 Proxy Statement (as Incorporated by reference incorporated by reference from Schedule 14A filed by into this Form 10-K) the Company on March 12, 2001 33
EXHIBIT 13 2000 Report to Shareholders with Report of Independent Auditors. 34
EXHIBIT 21 Subsidiaries ------------ 1. Lake City Bank, Warsaw, Indiana, a banking corporation organized under the laws of the State of Indiana. 2. Lakeland Capital Trust, a statutory business trust formed under Delaware law. 3. LCB Investments Limited, a subsidiary of Lake City Bank formed under the laws of Bermuda to manage a portion of the Bank's investment portfolio. 35