ITEM 1. Business.
General
Lafayette Bancorporation (the "Corporation") is a registered one-bank holding company that holds all the outstanding stock of Lafayette Bank and Trust Company (the "Bank"). The Corporation was incorporated under Indiana law on February 16, 1984, at the direction of the Board of Directors of the Bank to facilitate the Bank's adoption of a one-bank holding company structure. The Bank became a wholly-owned subsidiary of the Corporation on April 30, 1985, pursuant to a Plan of Exchange in which all the outstanding stock of the Bank was exchanged for stock of the Corporation. Prior to its acquisition of the Bank's stock, the Corporation conducted no business or operations. The Corporation's principal executive offices are located at 133 North 4th Street, Lafayette, Indiana 47902 and its telephone number is (765) 423-7100.
As a bank holding company, the Corporation engages in commercial banking through its sole banking subsidiary, the Bank, and can engage in certain non-banking activities and own certain other business corporations that are not banks, subject to applicable laws and regulations. All references hereinafter to the activities or operations of the Corporation reflect the Corporation's acting or operating through the Bank.
On March 12, 1999, the Bank completed the acquisition of three branches from Bank One Indiana, National Association. The three branches are located in DeMotte, Remington and Rensselaer, in Jasper County, Indiana. This branch purchase added approximately $117 million in deposits and represented approximately 30% of the deposits in Jasper County. The branch acquisition expanded the Bank's market area into an additional county in northwestern Indiana.
The Bank was chartered as an Indiana state-chartered bank in 1899. The Bank's principal executive offices are also located at 133 North 4th Street, Lafayette, Indiana 47902 and its telephone number is (765) 423-7100. At December 31, 2000, the Bank was the largest bank headquartered in Tippecanoe County with total assets of $741,147,000 and total deposits of $578,297,000.
Competition
The banking business is highly competitive. The Corporation's market area consists principally of Tippecanoe, White and Jasper Counties in Indiana, although the Bank also competes with other financial institutions in surrounding counties in Indiana in obtaining deposits and providing many types of financial services. The Corporation competes with larger regional banks for the business of companies located in the Corporation's market area.
The Bank also competes with savings and loan associations, credit unions, production credit associations and federal land banks and with finance companies, personal loan companies, money market funds and other non-depository financial intermediaries. Many of these financial institutions have resources many times greater than those of the Bank. In addition, 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.
Recent changes in federal and state law have resulted in and are expected to continue to result in increased competition. The reductions in legal barriers to the acquisition of banks by out-of-state bank holding companies resulting from implementation of interstate banking legislation and other recent and proposed changes are expected to continue to further stimulate competition in the markets in which the Bank operates, although it is not possible to predict the extent or timing of such increased competition.
Employees
The Corporation has no compensated employees. At December 31, 2000, the Bank employed 267 full-time employees and 57 part-time employees. The Bank is not a party to any collective bargaining agreements, and employee relations are considered to be good.
Regulation and Supervision
The Bank is chartered under the banking laws of the State of Indiana and is subject to the supervision of, and is regularly examined by, the Department of Financial Institutions (the "DFI") and the Federal Deposit Insurance Corporation (the "FDIC"). The Corporation is a bank holding company within the meaning of the Bank Holding Company Act (the "BHC Act") and is registered as such with, and is subject to the supervision of, the Federal Reserve Board (the "FRB"). Certain legislation and regulations affecting the businesses of the Corporation and the Bank are discussed below.
General. -------
As a bank holding company, the Corporation is subject to the BHC Act. The Corporation reports to, registers with, and is examined by the FRB. The FRB also has the authority to examine the Corporation's subsidiaries which includes the Bank.
The FRB requires the Corporation to maintain certain levels of capital. See "Capital Standards" herein. The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, violates certain laws, regulations, or conditions imposed in writing by the FRB. See "Prompt Corrective Action and Other Enforcement Mechanisms" herein.
Under the BHC Act, a company generally must obtain the prior approval of the FRB before it exercises a controlling influence over, or acquires directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any bank or bank holding company. Thus, the Corporation is required to obtain the prior approval of the FRB before it acquires, merges or consolidates with any bank, or bank holding company. Any company seeking to acquire, merge or consolidate with the Corporation also would be required to obtain the FRB's approval.
The Corporation is generally prohibited under the BHC Act from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company. A bank holding company, with the approval of the FRB, may engage or acquire the voting shares of companies engaged, in activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity. Legislation enacted in December 1999 provides for bank holding companies that satisfy certain conditions to qualify as "financial holding companies" and thereby be permitted to engage in a much broader range of financial activities.
The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company's financial position. The FRB's policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition.
Transactions between the Corporation, the Bank and any future subsidiaries of the Corporation are subject to a number of other restrictions. FRB policies forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). Additionally, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit, sale or lease of property, or furnishing of services. See also "Inter-Corporate Borrowings" below for a discussion of additional restrictions.
Capital Standards. -----------------
The FRB, FDIC and other federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. On March 2, 1999, the four federal banking agencies published in the Federal Register uniform final rules that amended the leverage capital standards to make them more uniform and streamlined and amended the risk-based standards applicable to three types of assets. The new standards became effective on April 1, 1999.
A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. The regulators measure risk-adjusted assets and off-balance sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for loan losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital are subject to certain other requirements and limitations of the federal banking agencies. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%; all other institutions are required to have a minimum ration of 4%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.
For a detailed discussion of the regulatory capital requirements and the Corporation's and Bank's compliance with those requirements, see "Capital Adequacy" in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note [14] of Notes to Consolidated Financial Statements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required the federal financial institution agencies to prescribe standards for assessing interest rate risk, which is the exposure of a bank's earnings and capital arising from adverse movements in interest rates. The banking agencies issued a joint policy statement on interest rate risk in May 1996 that describes prudent methods for monitoring such risk that rely primarily on the maintenance of adequate internal risk measurement systems and active oversight of risk management activities by the Board of Directors and senior management.
Prompt Corrective Action and Other Enforcement Mechanisms. ---------------------------------------------------------
FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more of the prescribed minimum capital ratios. The law requires each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The federal banking agencies have issued uniform regulations implementing the prompt corrective action provisions of FDICIA. An insured depository institution generally will be classified in the following categories based on capital measures indicated below:
"Well-Capitalized": ----------------
Total risk-based capital of 10% or more; Tier 1 risk-based ratio capital of 6% or more; and Leverage ratio of 5% or more.
"Adequately Capitalized": ----------------------
Total risk-based capital of at least 8%; Tier 1 risk-based capital of at least 4%; and Leverage ratio of at least 4%.
"Undercapitalized": ----------------
Total risk-based capital less than 8%; Tier 1 risk-based capital less than 4%; or Leverage ratio less than 4%.
"Significantly Undercapitalized": ------------------------------
Total risk-based capital less than 6%; Tier 1 risk-based capital less than 3%; or Leverage ratio less than 3%.
"Critically Undercapitalized": ---------------------------
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency. Undercapitalized institutions may be required to submit an acceptable capital restoration plan with a guarantee of performance issued by the holding company. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. The most important additional measure is that the appropriate federal banking agency is required to either appoint a receiver for the institution within 90 days or obtain the concurrence of the FDIC in another form of action.
In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a prima facie showing by the agency that such relief is appropriate. Additionally, a holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company.
As discussed in the "Capital Adequacy" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report to Shareholders and Note 14 to the Corporation's Financial Statements, which are incorporated herein by reference, the consolidated and bank-only capital levels were significantly reduced as a result of the Bank's acquisition of the three Jasper County branches on March 12, 1999. In response, the Corporation borrowed $14,000,000 and contributed $13,000,000 of capital to the Bank for the Bank to maintain its well-capitalized status. As of December 31, 1999, the Bank was categorized as well-capitalized under the regulatory framework for prompt corrective action, but the Corporation was categorized as undercapitalized as of December 31, 1999, as the total capital ratio was 7.99%, slightly below the 8% minimum. Although the Corporation's capital was slightly below the minimum at December 31, 1999, no corrective action was initiated by the banking regulatory authorities. The Corporation returned to adequately capitalized status as of March 31, 2000 and maintained that status through December 31, 2000. See Items 7 and 8 below.
Safety and Soundness Standards. ------------------------------
FDICIA also implemented certain specific restrictions on transactions and required the regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation, and asset growth. Among other things, for undercapitalized institutions FDICIA limits the interest rates paid on deposits, the use of brokered deposits and the aggregate extension of credit by a depository institution to an executive officer, director, principal stockholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts.
The FDICIA also required the agencies to establish safety and soundness standards for insured financial institutions covering (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees and benefits; (7) asset quality, earnings and stock valuation; and (8) excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. The agencies have adopted guidelines covering most of these items.
Restrictions on Dividends and Other Distributions. -------------------------------------------------
The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized.
An FRB policy statement provides that a bank holding company should not declare or pay a cash dividend to its stockholders if the dividend would place undue pressure on the capital of its subsidiary banks or if the dividend could be funded only through additional borrowings or other arrangements that might adversely affect the financial position of the bank holding company. Specifically, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each consistent with its capital needs, asset quality, and overall financial condition. Further, the Corporation is expected to act as a source of financial strength for the Bank and to commit resources to support the Bank in circumstances when it might not do so absent such policy.
The Corporation's ability to pay dividends depends in large part on the ability of the Bank to pay dividends to the Corporation. The ability of the Bank to pay dividends is subject to restrictions set forth in the Indiana banking laws and regulations of the FDIC.
Under Indiana law, the Bank may declare a dividend in an amount deemed expedient by the Board of Directors of the Bank. Any such dividend, however, may not (i) impair the capital stock of the Bank, (ii) be in an amount greater than the remainder of undivided profits then on hand after deducting losses, bad debts, depreciation, and all other expenses, or (iii) constitute a withdrawal of any portion of the capital stock of the Bank. In addition, the Bank must obtain the prior 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 (i) the total of the net profits of the Bank and (ii) the retained net profits of the Bank for the previous two years. The amount of "net profits" is determined by subtracting all current operating expenses, actual losses, and all federal, state and local taxes from all earnings from current operations plus actual recoveries on loans, investments and other assets.
Additionally, under FDICIA, the Bank may not make any capital distribution, including the payment of dividends, if after making such distribution the Bank would be in any of the "under-capitalized" categories under the FDIC's Prompt Corrective Action regulations.
Also, under the Financial Institution's Supervisory Act, the FDIC also has the authority to prohibit the Bank from engaging in business practices which the FDIC considers to be unsafe or unsound. It is possible, depending upon the financial condition of the Bank and other factors, that the FDIC could assert that the payment of dividends or other payments in some circumstances might be such an unsafe or unsound practice and thereby prohibit such payment.
FDIC Insurance Assessments. --------------------------
The FDIC has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"), both of which are administered by the FDIC. The Bank's deposits are insured through BIF except for those deposits the Bank acquired from the Resolution Trust Corporation in December, 1990. This acquisition consisted of two branches of the former Hometown Federal Savings Bank in Delphi, Indiana, and these deposits remain insured through SAIF.
As required by FDICIA, the FDIC has adopted a risk-based assessment system for deposit insurance premiums. Under this system, depository institutions are charged anywhere from zero to $.27 for every $100 in insured domestic deposits, based on such institutions' capital levels and supervisory subgroup assignment. The FDIC's rules set forth which supervisory subgroup assignments are made by the FDIC, the assessment classification review procedure, provide for the assignment of new institutions to the "well-capitalized" assessment group, set forth when an institution is to make timely adjustments as appropriate, and set forth the basis, and report data, on which capital group assignments are made for insured branches of foreign banks, and expressly address the treatment of certain lifeline accounts for which special assessment treatment is given.
The BIF reached its required 1.25 reserve ratio in 1995, and in response the FDIC reduced deposit insurance assessment rates on BIF-insured deposits to historic low levels. Legislation enacted in September, 1996 included provisions for the recapitalization of the SAIF. The legislation imposed a one-time assessment in the amount of 65.7 basis points on all SAIF-insured deposits held as of March 31, 1996. The Bank paid an assessment in the amount of $31,000 on the small portion of its deposits that are SAIF-insured. As a result of the payment of the special assessment and the adoption of regulations implementing the legislation, rates for deposits insured through SAIF have been brought into parity with BIF rates. The BIF and SAIF deposit insurance assessment rates currently in effect range from zero to $.27 per $100 of insured deposits, with the healthiest financial institutions, including the Bank, not being required to pay any deposit insurance premiums.
Interstate Banking and Branching. --------------------------------
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") was signed into law. The Interstate Act effectively permits nationwide banking. As of September 30, 1995, the Interstate Act provides that adequately capitalized and adequately managed bank holding companies may acquire banks in any state, even in those jurisdictions that had previously barred acquisitions by out-of-state institutions, subject to deposit concentration limits. The deposit concentration limits provide that regulatory approval by the Federal Reserve Board may not be granted for a proposed interstate acquisition if after the acquisition, the acquiror on a consolidated basis would control more than 10% of the total deposits nationwide or would control more than 30% of deposits in the state where the acquiring institution is located. The deposit concentration state limit does not apply for initial acquisitions in a state and, in every case, may be waived by the state regulatory authority. Interstate acquisitions are subject to compliance with the Community Reinvestment Act ("CRA"). States are permitted to impose age requirements not to exceed five years on target banks for interstate acquisitions.
Branching between states may be accomplished either by merging separate banks located in different states into one legal entity, or by establishing de novo branches in another state. Interstate branching by consolidation of banks was permitted beginning in June 1, 1997, except in states that passed legislation prior to that date "opting-out" of interstate branching. Banks located in states that opted out of interstate branching may not participate in interstate branching. The laws of the host state regarding community reinvestment, fair lending, consumer protection (including usury limits) and establishment of branches apply to the interstate branches.
De novo branching by an out-of-state bank is not permitted unless the host state expressly permits de novo branching by banks from out-of-state. The establishment of an initial de novo branch in a state is subject to the same conditions as apply to initial acquisition of a bank in the host state other than the deposit concentration limits. Effective March 14, 1996, Indiana "opted in" to the interstate branching provision of the Interstate Act.
Community Reinvestment Act. --------------------------
A comprehensive revision of the regulations implementing the Community Reinvestment Act ("CRA"), enacted in 1977 to promote lending by financial institutions to individuals and businesses located in low and moderate income areas, became effective on July 1, 1995. The revised CRA regulations emphasize an assessment of actual performance rather than of the procedures followed by a bank, to evaluate compliance with the CRA. Overall CRA compliance continues to be rated across a four-point scale from "outstanding" to "substantial noncompliance," and continues to be a factor in review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in "substantial noncompliance" with the revised CRA regulations may be subject to enforcement proceedings. Different evaluation methods are used depending on the asset size of the bank.
The "lending, investments and service test method" is applicable to all banks with more than $250 million in assets which are not wholesale or limited purpose banks and do not elect to be evaluated by the "strategic plan assessment method" which is discussed below. Central to this method is the requirement that such banks collect and report to their primary federal banking regulators detailed information regarding home mortgage, small business and farm and community development loans which is then used to evaluate CRA compliance. At the bank's option, data regarding consumer loans and any other loan distribution it may choose to provide also may be collected and reported.
Using such data, a bank will be evaluated regarding its (i) lending performance according to the geographic distribution of its loans, the characteristics of its borrowers, the number and complexity of its community development loans, the innovativeness or flexibility of its lending practices to meet low and moderate income credit needs and, at the bank's election, lending by affiliates or through consortia or third-parties in which the bank has an investment interest; (ii) investment performance by measure of the bank's "qualified investments," that is, the extent to which the bank's investments, deposits, membership shares in a credit union, or grants primarily to benefit low or moderate income individuals and small businesses and farms, address affordable housing or other needs not met by the private market, or assist any minority or women-owned depository institution by donating, selling on favorable terms or provisioning on a rent-free basis any branch of the bank located in a predominately minority neighborhood; and (iii) service performance by evaluating the demographic distribution of the bank's branches and ATMs, its record of opening and closing them, the availability of alternative retail delivery systems (such as telephone banking, banking by mail or at work, and mobile facilities) in low and moderate income geographies and to low and moderate income individuals, and (given the characteristics of the bank's service area(s) and its capacity and constraints) the extent to which the bank provides "community development services" (services which primarily benefit low and moderate income individuals or small farms and businesses or address affordable housing needs not met by the private market) and their innovativeness and responsiveness.
Any bank may request to be evaluated by the "strategic plan assessment method" by submitting a strategic plan for review and approval. Such a plan must involve public participation in its preparation, and contain measurable goals for meeting low and moderate income credit needs through lending, investments and provision of services. Such plans generally will be evaluated by measuring strategic plan goals against standards similar to those which will be applied in evaluating a bank according to the "lending, investments and service test method."
The federal financial institution regulatory agencies issued a final rule effective as of January 1, 1996, to make certain technical corrections to the revised CRA regulations. Among other matters, the rule clarifies the transition from the former CRA regulations to the revised CRA regulations by confirming that when an institution either voluntarily or mandatorily becomes subject to the performance tests and standards of the revised regulations, the institution must comply with all of the requirements of the revised regulations and is no longer subject to the provisions of the former CRA regulations.
The Bank is evaluated under the "lending, investment and service" test method. The Bank's most recent CRA exam was conducted by the FDIC on November 1, 1999. The Bank was given the CRA rating of "outstanding."
Inter-Corporate Borrowings. --------------------------
Bank holding companies also are restricted as to the extent to which they and their subsidiaries may borrow or otherwise obtain credit from one another or engage in certain other transactions. The "covered transactions" that an insured depository institution and its subsidiaries are permitted to engage in with their nondepository affiliates are limited to the following amounts: (1) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and the surplus of the insured depository institution; and (ii) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. In addition, extensions of credit that constitute covered transactions must be collateralized in prescribed amounts.
"Covered transactions" are defined by statute to include a loan or extension of credit to the affiliate, a purchase of securities issued by an affiliate, a purchase of assets from the affiliate (unless otherwise exempted by the Federal Reserve Board), the acceptance of securities issued by the affiliate as collateral for a loan and the issuance of a guarantee, acceptance, or letter of credit for the benefit of an affiliate. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
Impact of Monetary Policies. ---------------------------
Banking is a business which depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and other borrowings, and the interest rate earned by banks on loans, securities and other interest-earning assets comprises the major source of banks' earnings. Thus, the earnings and growth of banks are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the FRB. The FRB implements national monetary policy, such as seeking to curb inflation and combat recession, by its open-market dealings in United States government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements and through adjustments to the discount rate applicable to borrowings by banks which are members of the FRB. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates. The nature and timing of any future changes in such policies and their impact on the Corporation cannot be predicted. In addition, adverse economic conditions could make a higher provision for loan losses a prudent course and could cause higher loan loss charge-offs, thus adversely affecting the Bank's net earnings.
Recent Legislative and Regulatory Changes. -----------------------------------------
The Gramm-Leach-Bliley Act, which was signed into law on December 12, 1999 and became effective March 11, 2000, permits bank holding companies to qualify as "financial holding companies" that may engage in a broad range of financial activities that are "financial in nature," including underwriting, dealing in and making a market in securities; insurance underwriting and agency activities; and merchant banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through financial subsidiaries in nearly all of the activities permitted for financial holding companies.
The Gramm-Leach-Bliley Act also imposes significant new financial privacy obligations and reporting requirements on banks as well as on other financial institutions. Among other things, financial institutions are required to (a) establish privacy policies and disclose them to customers both at the time of establishing the customer relationship and on an annual basis, and (b) permit customers to opt out of the financial institution's disclosure of customer nonpublic personal information to third parties that are not affiliated with the financial institution. In May 2000, the banking agencies issued final regulations implementing the Gramm-Leach-Bliley Act provisions governing the privacy of consumer financial information. Full compliance with the new regulations is required by July 1, 2001.
The Corporation and the Bank do not believe that the Gramm-Leach-Bliley Act will have a material adverse effect on the Bank's operations. To the extent that the Gramm-Leach-Bliley Act permits banks, securities firms and insurance companies to affiliate, however, the financial services industry is likely to experience further consolidation, resulting in increased competition for the Bank from larger and diverse companies, many of which may have substantially greater financial resources than the Corporation and the Bank.
FORWARD-LOOKING STATEMENTS
This Form 10-K and future filings made by the Corporation with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by the Corporation and the Bank, and oral statements made by executive officers of the Corporation and Bank, may include forward-looking statements relating to such matters as (a) assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which the Corporation and the Bank do business, and (b) expectations for increased revenues and earnings for the Corporation and Bank through growth resulting from acquisitions, attraction of new deposit and loan customers and the introduction of new products and services. Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk.
The Corporation notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Corporation's and Bank's business include the following: (a) the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates; (b) changes in the legislative and regulatory environment that negatively impact the Corporation and Bank through increased operating expenses; (c) increased competition from other financial and non-financial institutions; (d) the impact of technological advances; and (e) other risks detailed from time to time in the Corporation's filings with the Securities and Exchange Commission. The Corporation and Bank do not undertake any obligation to update or revise any forward-looking statements subsequent to the date on which they are made.
ITEM 2.
ITEM 2. Properties.
The Corporation, through the Bank, currently operates from its main office in downtown Lafayette and from 18 additional locations in Tippecanoe, White and Jasper Counties in Indiana. Information about the Bank's locations is set forth in the table below:
The Bank owns its main office and all its branch offices, except the Market Square, Tippecanoe Court Pay Less, Elmwood Pay Less, Valley Lakes, Lafayette Super Wal-Mart, and Monticello Super Wal-Mart branches, all of which are leased. The West Lafayette and 26 East branch facilities are owned by the Bank; however, both are subject to land leases. The main office facility, which is used predominantly by the Corporation and the Bank, contains approximately 63,000 square feet. The remaining space is leased to various unrelated business operations. The other branches range in size from nearly 12,225 square feet down to approximately 450 square feet. The Bank's Data Center is located at 320 North Street in Lafayette, Indiana, and houses the Bank's data processing operations in addition to the proof and checking departments.
ITEM 3.
ITEM 3. Legal Proceedings.
There are no material pending legal proceedings, other than routine litigation incidental to their business, to which the Corporation or the Bank is a party or of which any of its property is subject.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders.
There was no matter submitted during the fourth quarter of 2000 to a vote of security holders, by solicitation of proxies or otherwise.
Special Item. Executive Officers of the Registrant.
Officers are elected annually by the Board of Directors and serve for a one-year period and until their successors are elected. No officers have employment contracts. There are no family relationships between any of the officers of the Corporation.
Except as indicated below, each of the officers has held the same or similar position with the Corporation or the bank or the past five (5) years.
Mr. Bonner retired as President and Chief and Executive Officer of the Corporation and the Bank effective January 31, 1997.
Mr. Weeder has served as President of the Bank since August, 1996 and as President of the Corporation since September, 1996. He assumed the positions of Chief Executive Officer of the Corporation and the Bank upon Mr. Bonner's retirement in January, 1997.
Mr. Albrecht became Senior Vice President and Manager of Commercial Loans of the Bank in April 1999, prior to which time he had served as Vice President of the Bank. Prior to his employment by the Bank in August 1998, he was employed by Bank One, Indiana as Vice President of Commercial Lending.
Mr. Brisco became Senior Vice President of the Bank in December, 1996, prior to which time he had served as Vice President of the Bank. Prior to his employment by the Bank in April, 1995, he was employed by Huntington Bank of Indiana as Vice President, Secondary Market Operations.
Mr. Job became Regional President of the Jasper County Market in March 1999 resulting from the Jasper County branch acquisition in March 1999. Prior to his employment by the Bank in March 1999, he was employed by Bank One, Indiana as Market President, Rensselaer.
Mr. Gick became Senior Vice President and Manager of Retail Banking in November 1999, prior to which time he had served as Regional Senior Vice President resulting from the Jasper County branch acquisition in March 1999. Prior to his employment by the Bank in March 1999, he was employed by Bank One, Indiana as Senior Vice President, Rensselaer Market.
Mr. Ralston became Executive Vice President of the Bank in December, 1996, and was appointed Secretary/Treasurer of the Bank in September, 1996.
Ms. Turnpaugh was appointed Secretary/Treasurer of the Corporation in September, 1996.
Mr. Wise became Senior Vice President of the Bank in December, 1996.
PART II
The information in Part II of this report is incorporated by reference to the indicated sections of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2000.
ITEM 5.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Annual Report to Shareholders Page
(a) Market 37 (b) Holders 37 (c) Dividends 37
ITEM 6.
ITEM 6. Selected Financial Data.
Annual Report to Shareholders Page
Selected Financial Data 11
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Annual Report to Shareholders Pages
Management's Discussion and Analysis of Financial Condition and Results of Operations 10-23
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Annual Report to Shareholders Page
Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk 22
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
Annual Report to Shareholders Pages
Financial Statements and Supplementary Data 24-36
ITEM 9.
ITEM 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Except as set forth below in "Directors and Executive Officers of the Corporation," the information for Items 10 through 13 of this Report is incorporated herein by reference from the Corporation's definitive Proxy Statement for its Annual Meeting of Shareholders to be held April 9, 2001, which was filed with the Commission pursuant to Regulation 14A on March 2, 2001.
ITEM 10.
ITEM 10. Directors and Executive Officers of the Corporation.
The information required by this item relating to Executive Officers is found under the heading "Special Item. Executive Officers of the Registrant" in Part I of this Report and the information required by this item relating to Directors is included under the caption "Election of Directors" in the Corporation's definitive Proxy Statement for its Annual Meeting of Shareholders to be held April 9, 2001, which has been filed with the Commission and is incorporated herein by reference in this Form 10-K.
ITEM 11.
ITEM 11. Executive Compensation.
The information required by this item is included under the caption "Executive Compensation" in the Corporation's definitive Proxy Statement for its Annual Meeting of Shareholders to be held April 9, 2001, which has been filed with the Commission and is incorporated by reference in this Form 10-K.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is included under the caption "Election of Directors" in the Corporation's definitive Proxy Statement for its Annual Meeting of Shareholders to be held April 9, 2001, which has been filed with the Commission and is incorporated by reference in this Form 10-K.
ITEM 13.
ITEM 13. Certain Business Relationships and Related Transactions.
The information required by this item is included under the captions "Certain Business Relationships and Transactions" and "Compensation Committee Interlocks and Insider Participation" in the Corporation's definitive Proxy Statement for its Annual Meeting of Shareholders to be held April 9, 2001, which has been filed with the Commission and is incorporated by reference in this Form 10-K.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
The documents listed below are either filed as a part of this Report or incorporated by reference from the Annual Report to Shareholders or the Corporation's Registration Statement as indicated.
(a)1. Financial Statements.
Annual Report to Shareholders Page ----------
Report of Independent Auditors 24
Consolidated Balance Sheets as of December 31, 2000 and 1999 25
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 26
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 27
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 28
Notes to Consolidated Financial Statements 29-36
All other schedules have been omitted because the required information is either inapplicable or has been included in the Corporation's consolidated financial statement or notes thereto.
(a)2. Schedules.
All schedules have been omitted because the required information is either inapplicable or has been included in the Corporation's consolidated financial statements or notes thereto.
(a)3. Exhibits.
The exhibits filed as part of this Report on Form 10-K are identified in the Exhibit Index, which Exhibit Index specifically identifies those exhibits that describe or evidence all management contracts and compensatory plans or arrangements required to be filed as exhibits to this Report. Such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31, 2000.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
Dated: March 27, 2001 LAFAYETTE BANCORPORATION
By:/s/ Robert J. Weeder Robert J. Weeder, President
In accordance with the Exchange Act, this report was signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated: March 27, 2001 /s/ Robert J. Weeder Robert J. Weeder, President (Principal Executive Officer) and Director
Dated: March 27, 2001 /s/ Marvin S. Veatch Marvin S. Veatch, Controller (Principal Accounting Officer and Principal Financial Officer)
Dated: March 27, 2001 /s/ Richard A. Boehning Richard A. Boehning, Director
Dated: March 27, 2001 /s/ Joseph A. Bonner Joseph A. Bonner, Director
Dated: March 27, 2001 /s/ Wilbur L. Hancock Wilbur L. Hancock, Director
Dated: March 27, 2001 /s/ Roy D. Meeks Roy D. Meeks, Director
EXHIBIT INDEX
Exhibit Page Number Description Number
3.1 Restated Articles of Incorporation of the Corporation are incorporated by reference to Exhibit 3.1 to Registrant's Form 10, which became effective on June 30, 1997.
3.2 Bylaws of the Corporation, as amended, are incorporated by reference to Exhibit 3.2 to the Registrant's Form 10, which became effective June 30, 1997.
10.1* Lafayette Bancorporation Non-Qualified Stock Option Plan, including schedule identifying material terms of options granted to Directors and named executive officers, is incorporated by reference to Exhibit 10.1 in the Registrant's Form 10, which became effective on June 30, 1997.
10.2* Lafayette Bancorporation Officers' Stock Appreciation Rights Plan, including schedule identifying material terms of stock appreciation rights granted to named executive officers, is incorporated by reference to Exhibit 10.2 in the Registrant's Form 10, which became effective on June 30, 1997.
10.3* Lafayette Bank and Trust Company Directors Deferred Compensation Plan and Form of Agreement (1987) are incorporated by reference to Exhibit 10.3 of Registrant's Form 10, which became effective on June 30, 1997.
10.4* Lafayette Bank and Trust Company Directors Deferred Compensation Form of Agreement (1994) is incorporated by reference to Exhibit 10.4 of Registrant's Form 10, which became effective on June 30, 1997.
10.5* Lafayette Bancorporation 1998 Nonqualified Stock Option Plan is incorporated by reference to Exhibit 10.5 of the Registrant's Form 10-K for the year ended December 31, 1998.
10.6* Lafayette Bancorporation Director Emeritus Supplemental Retirement Benefits Plan is incorporated by reference to Exhibit 10.6 of the Registrant's Form 10-K filed for the year ended December 31, 1998.
13 Registrant's 2000 Annual Report to Shareholders (includes only portions incorporated by reference).
21 Subsidiaries of Registrant.
23 Consent of Independent Auditors
* Indicates Exhibits that describe or evidence management contracts or compensatory plans or arrangements required to be filed as Exhibits to this Form 10-K.