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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
For the transition period from _______ to ________
Commission file number 0-22461
LENAWEE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-3088340
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
49221
135 East Maumee Street (Zip Code)
Adrian, Michigan
(Address of principal executive offices)
517-265-5144
517-265-3926 (FAX)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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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 shorter 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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. _X_
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 18, 2001 are incorporated by reference into Parts II and III of
this report.
Item 1. Business.
Lenawee Bancorp, Inc. (the Company), a bank holding company, was
incorporated in Michigan in 1993. On April 15, 1993, the Company acquired all of
the stock of the Bank of Lenawee (the Bank), a Michigan banking corporation
chartered in 1869.
The business of the Company is concentrated primarily in a single industry
segment - commercial banking. The Bank provides a full range of banking services
to individuals, agricultural businesses, commercial businesses and industries
located in its service area. The Bank maintains a diversified loan portfolio,
including loans to individuals for home mortgages, automobiles and personal
expenditures, and loans to business enterprises for current operations and
expansion. The Bank offers a variety of deposit products, including checking,
savings, money market, individual retirement accounts and certificates of
deposit.
The principal markets for financial services are the mid-Michigan
communities in which the Bank is located and the areas immediately surrounding
these communities. The Bank serves these markets through nine locations in or
near these communities. The Bank of Lenawee owns Lenawee Financial Services, a
wholly owned subsidiary to provide local consumers brokerage and insurance
products. At the beginning of 2001, the Bank of Lenawee mortgage department was
reestablished as an independent company, Pavilion Mortgage Company, to provide a
broader array of product for expanding market needs. On January 8, 2001 the
Company chartered a new community bank, the Bank of Washtenaw, and assigned the
customer relationships from its Saline, Michigan office to the new bank. The
Bank does not have any material foreign assets or income.
The principal source of revenue for the Bank is interest and fees on loans.
On a consolidated basis, interest and fees on loans accounted for 84% of total
revenue in 2000, 79% in 1999, and 75% in 1998. Interest on investment securities
accounted for 6% of total revenue in 2000, 9% in 1999, and 10% in 1998.
The Bank has nine offices in addition to a mobile bank. See "Properties"
below for more detail on these facilities. Within these communities, its
principal competitors are United Bank & Trust, Key Bank, Mid-Am Bank, Standard
Federal Bank, and TLC Community Credit Union. Each of these financial
institutions, which have headquarters in larger metropolitan areas, with the
exception of United Bank & Trust and TLC Community Credit Union, have
significantly greater assets and financial resources than the Company. Based on
deposit information as of December 31, 2000, the Bank holds an estimated 18% of
the deposits in Lenawee County. Information as to asset size of competitor
financial institutions is derived from publicly available reports filed by and
with regulatory agencies.
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by such
statutes and regulations. A change in applicable laws or regulations may have a
material effect on the Company, the Bank and the business of the Company and the
Bank.
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include, but are not limited to, the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC,
the Commissioner of the Michigan Office of Financial and Insurance Services
("Commissioner"), the Internal Revenue Service, and state taxing authorities.
The effect of such statutes, regulations and 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 and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, 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
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the Bank establishes a comprehensive framework for their respective operations
and is intended primarily for the protection of the FDIC's deposit insurance
funds, the depositors of the Bank, and the public, rather than shareholders of
the Bank or the Company.
Federal law and regulations establish supervisory standards applicable to
the lending activities of the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
Recent Legislation
The enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act")
represents a pivotal point in the history of the financial services industry.
The GLB Act modifies many of the principal federal laws which regulate financial
institutions and sweeps away large parts of a regulatory framework that had its
origins in the Depression Era of the 1930s.
Effective March 11, 2000, new opportunities became available for banking
organizations, other depository institutions, insurance companies and securities
firms to enter into combinations that permit a single financial services
organization to offer customers a more complete array of financial products and
services. Specifically, the GLB Act provides two new vehicles through which a
banking organization can engage in a variety of activities which, prior to the
Act, were not permitted. First, a bank holding company meeting certain
requirements may elect to become a financial holding company ("FHC"). FHCs are
generally authorized to engage in all "financial activities" and, under certain
circumstances, to make equity investments in other companies (i.e., merchant
banking). In order to be eligible to elect to become a FHC, a bank holding
company and all of its depositary financial institutions must: (1) be "well
capitalized"; (2) be "well managed"; and (3) have a rating of "satisfactory" or
better in their most recent Community Reinvestment Act examination. Both the
bank holding company and all of its depositary financial institutions must also
continue to satisfy these requirements after the bank holding company elects to
become a FHC or else the FHC will be subject to various restrictions. The
Federal Reserve Board will be the umbrella regulator of FHCs, but functional
regulation of a FHC's separately regulated subsidiaries will be conducted by
their primary functional regulator.
Second, the GLB Act also provides that a national bank (and a state bank,
so long as otherwise allowable under its state's law), which satisfies certain
requirements, may own a new type of subsidiary called a financial subsidiary
("FS"). The GLB Act authorizes FSs to engage in many (but not all) of the
activities that FHCs are authorized to engage in. In order to be eligible to own
a FS, a bank must satisfy the three requirements noted above, plus several
additional requirements.
The GLB Act also imposes several rules that are designed to protect the
privacy of the customers of financial institutions. For example, the GLB Act
requires financial institutions to annually adopt and disseminate a privacy
policy and prohibits financial institutions from disclosing certain customer
information to "non-affiliated third parties" for certain uses. All financial
institutions, regardless of whether they elect to utilize FHCs or FSs, are
subject to the GLB Act's privacy provisions. The Company and the Bank are also
subject to certain state laws that deal with the use and distribution of
non-public personal information. In addition to its privacy provisions, the GLB
Act also contains various other provisions that apply to banking organizations,
regardless of whether they elect to utilize FHCs or FSs.
The Company believes that the GLB Act could significantly increase
competition in its business and is evaluating the desirability of electing to
become a FHC. The Company believes that it is qualified to elect FHC status but
has not yet decided to do so.
The Company
General. The Company is a bank holding company and, as such, is registered
with, and subject to regulation by, the Federal Reserve Board under the Bank
Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve Board, and is required to
file with the Federal Reserve Board periodic reports of its operations and such
additional information as the Federal Reserve Board may require.
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In accordance with Federal Reserve Board 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 do so absent such
policy. In addition, if the Commissioner deems the Bank's capital to be
impaired, the Commissioner may require the Bank to restore its capital by a
special assessment upon the Company as the Bank's sole shareholder. If the
Company were to fail to pay any such assessment, the directors of the Bank would
be required, under Michigan law, to sell the shares of the Bank's stock owned by
the Company to the highest bidder at either a public or private auction and use
the proceeds of the sale to restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition
by the Company of any voting shares of any bank which would result in the
Company's direct or indirect ownership or control of more than 5% of any class
of voting shares of such bank, and any merger or consolidation of the Company
with another bank company, will require the prior written approval of the
Federal Reserve Board under the BHCA. In acting on such applications, the
Federal Reserve Board must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in relevant
geographic and product markets, and each party's financial condition, managerial
resources, and record of performance under the Community Reinvestment Act.
Effective September 29, 1995, bank holding companies may acquire banks located
in any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of assets of another
bank, or the assumption of liability by such a subsidiary to pay any deposits in
another bank, will require the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain such cases an application to, and the prior
approval of, the Federal Reserve Board under the BHCA and/or the Commissioner
under the Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank company from
engaging, either directly or indirectly through a subsidiary, in any activity
other than managing or controlling banks unless the proposed non-banking
activity is one that the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Under current Federal Reserve Board regulations, such permissible
non-banking activities include such things as mortgage banking, equipment
leasing, securities brokerage, and consumer and commercial finance company
operations. As a result of recent amendments to the BHCA, well-capitalized and
well-managed bank holding companies may engage de novo in certain types of
non-banking activities without prior notice to, or approval of, the Federal
Reserve Board, provided that written notice of the new activity is given to the
Federal Reserve Board within 10 business days after the activity is commenced.
If a bank company wishes to engage in a non-banking activity by acquiring a
going concern, prior notice and/or prior approval will be required, depending
upon the activities in which the company to be acquired is engaged, the size of
the company to be acquired and the financial and managerial condition of the
acquiring bank company.
In evaluating a proposal to engage (either de novo or through the
acquisition of a going concern) in a non-banking activity, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the bank company, and the relative public benefits and
adverse effects which may be expected to result from the performance of the
activity by an affiliate of the bank company. The Federal Reserve Board may
apply different standards to activities proposed to be commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
Capital Requirements. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank company may, among other things,
be denied approval to acquire or establish additional banks or non-bank
businesses.
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The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
leverage capital requirement expressed as a percentage of total average assets,
and (ii) a risk-based requirement expressed as a percentage of total
risk-weighted assets. The leverage capital requirement consists of a minimum
ratio of Tier 1 capital (which consists principally of shareholders' equity) to
total average assets of 3% for the most highly rated companies, with minimum
requirements of 4% to 5% for all others. The risk-based requirement consists of
a minimum ratio of total capital to total risk-weighted assets of 8%, of which
at least one-half must be Tier 1 capital.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. For example, Federal Reserve Board regulations provide that
additional capital may be required to take adequate account of, among other
things, interest rate risk and 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. The Federal
Reserve Board has not advised the Company of any specific minimum Tier 1 Capital
leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the
Bank. Most of the Company's revenues are received by it in the form of dividends
paid by the Bank. Thus, the Company's ability to pay dividends to its
shareholders is indirectly limited by statutory restrictions on the Bank's
ability to pay dividends. See "SUPERVISION AND REGULATION - The Bank -
Dividends." Further, the Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies. In the policy
statement, the Federal Reserve Board expressed its view that a bank company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income or which can only be funded in ways that weakened the bank company's
financial health, such as by borrowing. Additionally, the Federal Reserve Board
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. Similar enforcement powers over the Bank are possessed by the
FDIC. The "prompt corrective action" provisions of federal law and regulation
authorizes the Federal Reserve Board to restrict the payment of dividends by the
Company for an insured bank which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve
Board, the Michigan Business Corporation Act provides that dividends may be
legally declared or paid only if after the distribution a corporation, such as
the Company, can pay its debts as they come due in the usual course of business
and its total assets equal or exceed the sum of its liabilities plus the amount
that would be needed to satisfy the preferential rights upon dissolution of any
holders of preferred stock whose preferential rights are superior to those
receiving the distribution. The Company's Articles of Incorporation do not
authorize the issuance of preferred stock and there are no current plans to seek
such authorization.
The Bank
General. The Bank is a Michigan banking corporation and its deposit
accounts are insured by the Bank Insurance Fund (the "BIF") of the FDIC. As a
BIF-insured Michigan chartered bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as the
chartering authority for Michigan banks, and the FDIC, as administrator of the
BIF. These agencies and the federal and state laws applicable to the Bank and
its operations, extensively regulate various aspects of the banking business
including, among other things, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates on
loans and on deposits, the maintenance of non-interest bearing reserves on
deposit accounts, and the safety and soundness of banking practices.
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 evaluation.
Institutions classified as well-capitalized (as defined by the
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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.
The Federal Deposit Insurance Act ("FDIA") requires the FDIC to establish
assessment rates at levels which will maintain the Deposit Insurance Fund at a
mandated reserve ratio of not less than 1.25% of estimated insured deposits.
Accordingly, the FDIC established the schedule of BIF insurance assessments for
the first semi-annual assessment period of 2000, ranging from 0% of deposits for
institutions in the lowest risk category to .27% of deposits for institutions in
the highest risk category. For 2000, the Bank paid $40,303 in BIF insurance
assessments, representing a premium of .01%.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. 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.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted September 30,
1996, the Bank, as a member of the BIF, is subject to assessments to cover the
payments on 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 predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF") which insures the deposits of thrift institutions.
Prior to January 1, 2000, the FICO assessments made against BIF members could
not exceed 20% of the amount of FICO assessments made against SAIF members. Last
year, SAIF members paid FICO assessments at a rate equal to approximately 0.063%
of deposits while BIF members paid FICO assessments at a rate equal to
approximately 0.012% of deposits. Between January 1, 2000 and the 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. It is
estimated that FICO assessments during this period will be less than 0.025% of
deposits.
Capital Requirements. The FDIC has established the following minimum
capital standards for state-chartered, FDIC-insured non-member banks, such as
the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total average assets of 3% for the most highly-rated banks with minimum
requirements of 4% to 5% for all others, and 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. Tier 1 capital consists
principally of shareholders' equity. These capital requirements are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual institutions. For
example, FDIC regulations provide that higher capital may be required to take
adequate account of, among other things, interest rate risk and the risks posed
by concentrations of credit, nontraditional activities or securities trading
activities.
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." Federal regulations define these capital categories as
follows:
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
------------- ------------- --------------
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- A ratio of tangible
equity to total assets
of 2% or less
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As of December 31, 2000, each of the Bank's ratios exceeded minimum
requirements for the well capitalized category.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts. A
Michigan state bank may not declare or pay a dividend unless the bank will have
a surplus amounting to at least 20% of its capital after the payment of the
dividend. If the Bank has a surplus less than the amount of its capital, it may
not declare or pay any dividend until an amount equal to at least 10% of net
profits for the preceding one-half year (in the case of quarterly or semi-annual
dividends) or full-year (in the case of annual dividends) has been transferred
to surplus. A Michigan state bank may, with the approval of the Commissioner, by
vote of shareholders owning 2/3 of the stock eligible to vote increase its
capital stock by a declaration of a stock dividend, provided that after the
increase the bank's surplus equals at least 20% of its capital stock, as
increased. The Bank may not declare or pay any dividend until the cumulative
dividends on preferred stock (should any such stock be issued and outstanding)
have been paid in full. The Bank's Articles of Incorporation do not authorize
the issuance of preferred stock and there are no current plans to seek such
authorization.
Federal law generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment of any assessment due to the FDIC. In
addition, the FDIC may prohibit the payment of dividends by the Bank, if such
payment is determined, by reason of the financial condition of the Bank, to be
an unsafe and unsound banking practice.
Insider Transactions. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act on any extensions of credit to the Company or its
subsidiaries, on investments in the stock or other securities of the Company or
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 shareholders of the Company, and to "related
interests" of such directors, officers and principal shareholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its subsidiaries or a principal
shareholder 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 to promote the safety and soundness of federally insured depository
institutions. These guidelines establish 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 guidelines prescribe the
goals to be achieved in each area, and each institution will be 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. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an institution
whose failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. Failure to
submit an
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acceptable compliance plan, or failure to adhere to a compliance plan that has
been accepted by the appropriate regulator, would constitute grounds for further
enforcement action.
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, as implemented by FDIC
regulations, also prohibits 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. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law. These restrictions are not currently
expected to have a material impact on the operations of the Bank.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
State usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. In receiving deposits, the Bank is subject
to extensive regulation under State and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
Branching Authority. Michigan banks, such as the Bank, have the authority
under Michigan law to establish branches anywhere in the State of Michigan,
subject to receipt of all required regulatory approvals (including the approval
of the Commissioner and the FDIC).
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") allows banks 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 de novo 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 IBBEA only if specifically
authorized by state law. The legislation allowed individual states to "opt-out"
of interstate branching authority by enacting appropriate legislation prior to
June 1, 1997.
Michigan did not opt out of IBBEA, and now permits both U.S. and non-U.S.
banks to establish branch offices in Michigan. The Michigan Banking Code
permits, in appropriate circumstances and with the approval of the Commissioner,
(i) the acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and
loan association located in another state, (ii) the acquisition by a
Michigan-chartered bank of all or substantially all of the assets of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, (iii) the consolidation of one or more Michigan-chartered banks
and FDIC-insured banks, savings banks or savings and loan associations located
in other states having laws permitting such consolidation, with the resulting
organization chartered by Michigan, (iv) the establishment by a foreign bank,
which has not previously designated any other state as its home state under the
International Banking Act of 1978, of branches located in Michigan, and (v) the
establishment or acquisition of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting Michigan-chartered banks to establish
branches in such jurisdiction. Further, the Michigan Banking Code permits, upon
written notice to the Commissioner, (i) the acquisition by a Michigan-chartered
bank of one or more branches (not comprising all or substantially all of the
assets) of an FDIC-insured bank, savings bank or savings and loan association
located in another state, the District of Columbia, or a U.S. territory or
protectorate, (ii) the establishment by Michigan-chartered banks of branches
located in other states, the District of Columbia, or U.S. territories or
protectorates, and (iii) the consolidation of one or more Michigan-chartered
banks and FDIC-insured banks, savings banks or savings and loan associations
located in other states, with the resulting organization chartered by one of
such other states.
-8-
Item 2. Properties.
The Bank of Lenawee's main office is located in Adrian. During 2000 it
served other communities with branch offices in Hudson, Morenci, Saline,
Tecumseh and Waldron. In January 2001, the Company established the Saline office
as a separate de novo bank, "Bank of Washtenaw," and that new bank also opened a
branch office in Ann Arbor. The Banks' offices are located throughout Lenawee
County, in the southeastern portion of Hillsdale County, and the southern
portion of Washtenaw County. The area in which the Banks' offices are located,
which is basically southeastern Michigan, has historically been rural in
character but now has a growing urban population as residents choose the area to
live in while commuting to Ann Arbor, Detroit, and Toledo. The populations of
the cities in which the Banks' offices are located are approximately as follows:
Adrian--22,000; Hudson--2,500; Morenci--2,300; Saline--7,600; Tecumseh--8,700;
Waldron--600; and Ann Arbor--110,000. The main office of Bank of Lenawee is a
three story 40,768 square foot building constructed in 1906. The other offices
of the Banks range in size from 1,200 square feet to 4,000 square feet. The
majority of the offices of Bank of Lenawee are owned and those of Bank of
Washtenaw are leased.
Item 3. Legal Proceedings.
During 1999 an extraordinary large anticipated loan loss was recognized
stemming from the Bank of Lenawee's purchase of $3.0 million participation out
of a $5.3 million credit package originated by another bank ("Lead Bank"). The
Lead Bank retained responsibility for overall credit administration and
monitoring and maintained exclusive contact with the borrower after the loan was
made. The borrower, a manufacturer located in Big Rapids, Michigan ("Borrower"),
unbeknownst to the Bank of Lenawee, began to experience financial difficulties
almost immediately and may have provided misleading information to both the Bank
of Lenawee and the Lead Bank. The credit is now deemed to be impaired as a
consequence of the inability of the Borrower to continue as a going concern, and
insufficiency of collateral to cover the current amount outstanding and the
inability of the individual guarantors to honor their personal guarantee
obligations. Over the course of 2000, Bank of Lenawee charged $2.3 million
against its allowance for loan losses with respect to this credit. Bank of
Lenawee has also instituted legal action against the Lead Bank claiming
negligence in its administration of the credit and seeking recovery of the loss
incurred as a result of participation in the credit. That litigation may
continue for some time, and as in all similar situations, the outcome is
uncertain.
Neither the Company nor the Bank is involved in any other legal proceedings
excepting routine litigation incidental to the ordinary conduct of the business
of the Bank, none of which would result in a material impact on the Company or
the Bank, individually or in the aggregate, in the event of an adverse outcome.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 2000.
Additional Item: Executive Officers of Registrant
The following information concerning executive officers of the Company has
been omitted from the Registrant's proxy statement pursuant to Instruction 3 to
Regulation SK, Item 401(b).
Officers of the Company are appointed annually by the Board of Directors of
the Company and serve at the pleasure of the Board of Directors. Information
concerning these executive officers is given below:
Patrick K. Gill (age 49) is the President and Chief Executive officer of
the Company and Bank of Lenawee. He began his career at the Bank of Lenawee in
1992 as Executive Vice President. In July of 1994 Mr. Gill was promoted to
President and Chief Operating Officer of Bank of Lenawee and the Company and in
January of 1997 he was promoted to President and Chief Executive Officer of Bank
of Lenawee and the Company.
Pamela S. Fisher (age 51) is the Corporate Secretary of the Company and
Senior Vice President of Administrative Services. Ms. Fisher joined the Bank of
Lenawee in 1979 and has served the bank in various capacities. She was elected
as Senior Vice President of Bank of Lenawee in 2000 and was elected Secretary of
the Company in 1995.
-9-
Loren V. Happel (age 45) is the Company's Treasurer, First Vice President
and Chief Financial Officer. Mr. Happel joined the Company and Bank of Lenawee
in December of 1994. At that time he was appointed Treasurer of the Company and
First Vice President and Chief Financial Officer of Bank of Lenawee.
Douglas L. Kapnick (age 57) was elected Chairman of the Board of the
Company in September of 2000 and has been a director of Bank of Lenawee since
1982 and has been a director of the holding company since it was formed in 1993.
Mr. Kapnick is President of Kapnick & Company a full service insurance broker
with offices in Adrian and Southfield employing a total of approximately 85
persons.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
The information under the caption "COMMON STOCK INFORMATION" at page 43 of
the Company's 2000 Annual Report to shareholders, is here incorporated by
reference to Exhibit 13.
Item 6. Selected Financial Data.
The information under the caption "SELECTED FINANCIAL DATA" at page 2 of
the Company's 2000 Annual Report to shareholders, is here incorporated by
reference to Exhibit 13.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information under the captions "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" at pages 3 through 16 of the
Company's 2000 Annual Report to shareholders, is here incorporated by reference
to Exhibit 13.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
The information under the captions "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" at pages 12 through 15 of the
Company's 2000 Annual Report to shareholders, is here incorporated by reference
to Exhibit 13.
Item 8. Financial Statements and Supplementary Data.
The financial statements, notes and report of independent auditors included
in the Company's 2000 Annual Report to shareholders, is here incorporated by
reference to Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to the Company's Executive Officers is included in
this report in Part I. The information with respect to Directors of the Company,
set forth under the caption "Information About Directors and Nominees" on pages
7 through 9 of the Company's definitive proxy statement, as filed with the
Commission and dated March 19, 2001, relating to the April 18, 2001 Annual
Meeting of Shareholders, is incorporated herein by reference.
-10-
Item 11. Executive Compensation.
The information set forth under the caption "Compensation of Executive
Officers" on page 11 through 13 of the Company's definitive proxy statement, as
filed with the Commission and dated March 19, 2001, relating to the April 18,
2001 Annual Meeting of Shareholders, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "VOTING SECURITIES AND
BENEFICIAL OWNERSHIP OF MANAGEMENT AND OTHERS" on page 6 of the Company's
definitive proxy statement, as filed with the Commission and dated March 19,
2001, relating to the April 18, 2001 Annual Meeting of Shareholders, is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" on page 12 of the Company's definitive proxy statement, as
filed with the Commission and dated March 19, 2001, relating to the April 18,
2001 Annual Meeting of Shareholders, is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of the Company and
Report of Crowe Chizek and Company LLP, Independent Auditors, are
incorporated by reference under Item 8 "Financial Statements and
Supplementary Data" of this document:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Crowe Chizek and Company LLP, Independent Accountants
2. Financial Statement Schedules
Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 2000.
-11-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, dated March 9, 2000.
LENAWEE BANCORP, INC.
//s// Patrick K. Gill
Patrick K. Gill
President and Chief Executive officer
(Principal Executive Officer)
//s// Loren V. Happel
Loren V. Happel
First Vice President and Chief Financial Officer)
(Chief Financial Officer)
Pursuant to the requirements of the Securities 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. Each director of the Registrant,
whose signature appears below, hereby appoints Patrick K. Gill and Loren V.
Happel, and each of them severally, as his or her attorney-in-fact, to sign in
his or her name and on his or her behalf, as a director of the Registrant, and
to file with the Commission any and all Amendments to this Report on Form 10-K.
Signature Date
//s// Allan F. Brittain March 9, 2001
Allan F. Brittain
//s// Fred R. Duncan March 9, 2001
Fred R. Duncan
//s// Edward J. Engle, Jr. March 9, 2001
Edward J. Engle, Jr.
//s// William R. Gentner March 9, 2001
William R. Gentner
//s// Patrick K. Gill March 9, 2001
Patrick K. Gill
//s// Douglas L. Kapnick March 9, 2001
Douglas L. Kapnick
//s// J. Paul Rupert March 9, 2001
J. Paul Rupert
//s// Emory M. Schmidt March 9, 2001
Emory M. Schmidt
//s// J. David Stutzman March 9, 2001
J. David Stutzman
-12-
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the
applicable assigned number:
Exhibit
Number
13 Rule 14a-3 Annual Report to Security Holders
21 Subsidiaries of Registrant
The following exhibits, indexed according to the applicable assigned
number, were previously filed by the Registrant and are incorporated by
reference in this Form 10-K Annual Report.
Exhibit
Number
3.1 Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form 10, as amended.
3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.2
of the Registrant's Registration Statement on Form 10, as amended.
4 Form of Registrant's Stock Certificate is incorporated by reference to
Exhibit 4 of the Registrant's Registration Statement on Form 10, as
amended.
10 2001 Stock Option Plan, incorporated by reference to Appendix A to the
Registrant's Definitive Proxy Statement filed with respect to its
April 18, 2001 annual meeting of shareholders.
10.1 1996 Stock Option Plan, incorporated by reference to Exhibit 10.1 to
the Registrant's Registration Statement filed on Form 10, as amended.
10.2 Employment Agreement dated February 22, 1999, and amended February 22,
2000, between Bank of Lenawee and Patrick K. Gill, incorporated by
reference to Exhibit 10.2 of the Registrant's Registration Statement
on Form 10, as amended.
10.3 Supplemental Executive Retirement Agreement dated December 19, 1997,
between Bank of Lenawee and Allan W. Brittain, incorporated by
reference to the Registrant's Registration Statement on Form 10, as
amended.
10.4 Consulting Agreement dated January 1, 1998, between Bank of Lenawee
and Allan W. Brittain, incorporated by reference to Registrant's
Registration Statement on Form 10, as amended.
-13-
Exhibit 13 - Rule 14a-3 Annual Report to Security Holders
Lenawee Bancorp, Inc.
2000
Annual Report
This 2000 Annual Report contains audited financial statements and a detailed
financial review. This is Lenawee Bancorp's 2000 annual report to shareholders.
Although attached to our proxy statement, this report is not part of our proxy
statement, is not deemed to be soliciting material, and is not deemed to be
filed with the Securities and Exchange Commission (the "SEC") except to the
extent that it is expressly incorporated by reference in a document filed with
the SEC.
The 2000 Summary Annual Report to Shareholders accompanies this proxy statement.
That report presents information concerning the business and financial results
of Lenawee Bancorp in a format and level of detail that we believe shareholders
will find useful and informative. Shareholder who would like to receive even
more detailed information than that contained in this 2000 Annual Report are
invited to request our Annual Report on Form 10-K.
Lenawee Bancorp, Inc.'s Form 10-K Annual Report to the Securities and Exchange
Commission will be provided to any shareholder without charge upon written
request. Requests should be addressed to Lenawee Bancorp, Inc., Attention:
Pamela S. Fisher, 135 East Maumee Street, Adrian, Michigan 49221.
LENAWEE BANCORP, INC.
2000 Annual Report
CONTENTS
SELECTED FINANCIAL DATA.................................................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS....................................... 3
REPORT OF INDEPENDENT AUDITORS............................................. 18
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS........................................... 19
CONSOLIDATED STATEMENTS OF INCOME..................................... 20
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY............ 21
CONSOLIDATED STATEMENTS OF CASH FLOWS................................. 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................ 23
COMMON STOCK INFORMATION................................................... 43
SELECTED FINANCIAL DATA
(In thousands, except per share data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
For the Year:
Total interest income $ 20,851 $ 17,923 $ 17,517 $ 16,929 $ 15,281
Total interest expense 8,710 6,312 7,205 7,586 6,934
Net interest income 12,141 11,611 10,312 9,343 8,347
Provision for loan losses 30 2,560 239 245 253
Noninterest income 2,064 2,237 2,850 1,769 1,459
Noninterest expense 9,414 8,994 8,913 7,632 6,803
Income before income taxes 4,761 2,294 4,010 3,235 2,750
Net income 3,205 1,563 2,660 2,132 1,865
Per Share Data:
Basic earnings per share $ 3.75 $ 1.83 $ 3.13 $ 2.51 $ 2.19
Diluted earnings per share 3.71 1.83 3.12 2.51 2.19
Cash dividends declared per share .94 .75 .67 .60 .58
Shareholders' equity and net ESOP obligation per share 29.91 26.72 26.26 23.71 21.61
Shareholders' equity per share 23.90 21.64 21.92 20.24 18.46
At Year-End:
Total assets $259,747 $239,904 $220,414 $ 212,920 $ 201,971
Loans receivable 214,512 197,308 158,487 163,039 151,021
Allowance for loan losses 2,287 4,646 2,182 1,964 1,761
Deposits 224,143 199,206 185,891 174,973 159,324
Borrowed funds 7,936 16,177 10,626 16,346 22,935
Shareholders' equity and net ESOP obligations 25,467 22,775 22,345 20,074 18,397
Shareholders' equity 20,353 18,449 18,648 17,137 15,721
Financial:
Net interest income to average earning assets 5.26% 5.66% 5.07% 4.72% 4.75%
Return on average shareholders' equity and
net ESOP obligation 13.29 6.65 12.46 10.99 10.47
Return on average shareholders' equity 16.59 8.02 14.76 12.84 12.27
Return on average assets 1.28 .70 1.21 1.00 .97
Tier 1 leverage ratio 9.90 9.90 9.90 9.30 9.30
Dividend payout ratio 25.07 40.98 21.41 23.86 26.48
Average shareholders' equity and net ESOP
obligation to average total assets 9.60 10.52 9.72 9.11 9.26
Average shareholders' equity to average total assets 7.72 8.72 8.21 7.79 7.90
All per share data has been adjusted to reflect stock splits and stock
dividends.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The following discussion provides information about the financial condition and
results of operations of Lenawee Bancorp, Inc.. It should be read in conjunction
with the consolidated financial statements included elsewhere in this Annual
Report.
BUSINESS OF LENAWEE BANCORP, INC.
Lenawee Bancorp, Inc. (the Company), a bank holding company, was incorporated in
Michigan in 1993. On April 15, 1993, the Company acquired all of the stock of
the Bank of Lenawee (the Bank), a Michigan banking corporation chartered in
1869.
The business of the Company is concentrated primarily in a single industry
segment - commercial banking. The Bank provides a full range of banking services
to individuals, agricultural businesses, commercial businesses and industries
located in its service area. The Bank maintains a diversified loan portfolio,
including loans to individuals for home mortgages, automobiles and personal
expenditures, and loans to business enterprises for current operations and
expansion. The Bank offers a variety of deposit products, including checking,
savings, money market, individual retirement accounts and certificates of
deposit.
The principal markets for financial services are the mid-Michigan communities in
which the Bank is located and the areas immediately surrounding these
communities. The Bank serves these markets through nine locations in or near
these communities. The Bank of Lenawee owns Lenawee Financial Services, a wholly
owned subsidiary to provide local consumers brokerage and insurance products. At
the beginning of 2001, the Bank of Lenawee mortgage department was reestablished
as an independent company, Pavilion Mortgage Company, to provide a broader array
of product for expanding market needs. On January 8, 2001 the company chartered
a new community bank, the Bank of Washtenaw, and assigned the customer
relationships from its Saline, Michigan office to the new bank. The Bank does
not have any material foreign assets or income.
The principal source of revenue for the Bank is interest and fees on loans. On a
consolidated basis, interest and fees on loans accounted for 84% of total
revenue in 2000, 79% in 1999, and 75% in 1998. Interest on investment securities
accounted for 6% of total revenue in 2000, 9% in 1999, and 10% in 1998.
2000 HIGHLIGHTS
Net income for 2000 was $3,204,933, resulting in earnings per share of $3.75.
This compares with net income for 1999 of $1,562,778, or $1.83 per share. Net
income for 1999 was unfavorably impacted by a one-time pre-tax adjustment to
earnings of $2,400,000 which was used to supplement the allowance for loan
losses in anticipation of a loss associated with a loan participation. Without
the one-time adjustment, 1999 net income would have been $3,080,777, or $3.61
per share. Net income and earnings per share for 2000 represent improvements of
4.03% and 3.88%, respectively, over the 1999 performance exclusive of this
one-time matter. Return on average assets for 2000 was 1.28% and return on
average shareholders' equity was 13.29%.
Total assets increased to $259.7 million in 2000 from $239.9 million in 1999.
This represents a $19.8 million or 8.25% increase. Net loans increased $19.6
million while the majority of other asset categories decreased or remained
substantially unchanged from the prior year.
3
Average Balance Sheet and Analysis of Net Interest Income
Years ended December 31,
----------------2000----------- -------------1999-------------- -------------1998--------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 203,698 $ 19,268 9.46% $ 171,276 $ 16,025 9.36% $ 163,916 $ 15,292 9.33%
Securities available for sale (1) 21,264 1,168 5.49 28,456 1,555 5.46 28,894 1,594 5.52
Federal funds sold 2,708 167 6.17 2,319 118 5.09 5,205 277 5.32
Federal Home Loan Bank Stock 2,504 200 7.99 2,504 200 7.99 2,504 200 7.99
Interest-bearing balances with other 782 48 6.14 517 25 4.84 3,027 154 5.09
financial institutions ---------- -------- --------- ------ ------- -------
Total interest-earning assets 230,956 20,851 9.03 205,072 17,923 8.74 203,546 17,517 8.61
Noninterest-earning assets:
Cash and due from financial
institutions 8,369 7,807 6,000
Premises and equipment, net 6,333 6,556 6,533
Other assets 5,466 3,893 3,403
---------- --------- ---------
Total assets $ 251,124 $ 223,328 $ 219,482
========== ========= =========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 53,156 $ 1,821 3.43% $ 48,636 $1,337 2.75% $ 45,655 $1,301 2.85%
Savings deposits 23,756 358 1.51 24,293 379 1.56 23,730 468 1.97
Time deposits 97,827 5,675 5.80 79,088 3,977 5.03 80,794 4,492 5.56
Repurchase agreements and other
borrowings 3,955 191 4.83 3,942 155 3.93 3,335 143 4.29
FHLB advances 10,637 665 6.25 7,812 464 5.94 13,194 801 6.07
--------- --------- --------- ------ --------- ---------
Total interest-bearing 189,331 8,710 4.60 163,771 6,312 3.85 166,708 7,205 4.32
liabilities
Noninterest-bearing liabilities:
Demand deposits 35,839 34,634 29,907
Other liabilities 1,846 1,430 1,527
--------- --------- --------
Total liabilities 227,016 199,835 198,142
Common stock subject to
repurchase obligation in ESOP 4,720 4,012 3,317
Shareholders' equity 19,388 19,481 18,023
Total liabilities and
shareholders' equity $ 251,124 $ 223,328 $ 219,482
========= ========= =========
Net interest income/interest rate
spread $ 12,141 4.43% $ 11,611 4.89% $ 10,312 4.29%
======== ===== ======== ===== ======== =====
Net interest margin (2) 5.26% 5.66% 5.07%
===== ===== =====
Average interest-earning assets to
average interest-bearing liabilities 121.9% 125.22% 122.10%
====== ======= =======
(1) Interest income on tax-exempt securities has not been adjusted to a taxable
equivalent basis.
(2) Net interest earnings divided by average interest-earning assets.
NET INTEREST INCOME
The largest component of the Bank's operating income is net interest income. Net
interest income is the difference between interest and fees earned on earning
assets and the interest paid on deposits and other borrowings. A number of
factors influence net interest income. These factors include: changes in volume
and mix of interest-earning assets and interest-bearing liabilities, government
monetary and fiscal policies, national and local market interest rates and
customer preference.
4
Net interest income was $12,141,000 in 2000, an increase of $530,000 or 4.56%.
Net interest income increased $1,299,000 or 12.60% in 1999 compared to 1998. The
Bank's 2000 increase in net interest income was primarily the result of an
increase in earning assets.
Net interest margin is net interest income divided by average earning assets.
Net interest margin declined to 5.26% in 2000 from 5.66% in 1999 and was 5.07%
in 1998. During 1999, the Federal Reserve increased the discount rate by 75
basis points. In addition, the Federal Reserve increased the discount rate 100
basis points during the first six months of 2000. As a result, the Bank's prime
lending rate increased from 8.5% at December 31, 1999 to 9.5% at December 31,
2000. The Bank manages pricing of the sources of interest income with its cost
of funding such that changes in the national interest rates have a minimal
impact on net income.
The cost associated with sustaining and attracting additional local deposit
funding has also increased; however, the interest rates required for the
maintenance of local deposits appear to be less sensitive to a general increase
in market rates and more responsive to quality of service.
The following table analyzes the effect of volume and rate changes on interest
income and expense for the periods indicated.
---------2000 Compared to 1999------- --------1999 Compared to 1998---------
Amount Amount Net Amount Amount Net
Due to Due to Increase Due to Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In thousands)
Interest income
Loans receivable $ 3,065 $ 178 $ 3,243 $ 688 $ 45 $ 733
Securities available for sale (395) 8 (387) (24) (15) (39)
Federal funds sold 22 27 49 (147) (12) (159)
Interest-bearing balances with
financial institutions 15 8 23 (122) (7) (129)
--------- --------- --------- -------- -------- ---------
Total interest income 2,707 221 2,928 395 11 406
Interest expense
Interest-bearing deposits
Demand 133 351 484 83 (47) 36
Savings (8) (13) (21) 11 (100) (89)
Time 1,030 668 1,698 (93) (422) (515)
Repurchase agreements and
other borrowings 1 35 36 25 (13) 12
FHLB advances 175 26 201 (320) (17) (337)
--------- --------- --------- -------- -------- ---------
Total interest expense 1,331 1,067 2,398 (294) (599) (893)
--------- --------- --------- -------- -------- ---------
Net interest income $ 1,376 $ (846) $ 530 $ 689 $ 610 $ 1,299
========= ========= ========= ======== ======== =========
The Bank experiences an immediate and short-term benefit from the increase in
the prime lending rate. A large portion of the Bank's variable rate business and
consumer loan portfolios are tied to the prime lending rate. The Bank manages
pricing of the sources of interest income and its cost of funding such that
changes in the national interest rates are expected to have minimal long term
impact on net income.
5
PROVISION FOR LOAN LOSSES
The provision for loan losses is the amount added to the allowance for loan
losses to absorb losses that are currently anticipated. The loan loss provision
is based on historical loss experience and such other factors, which, in
management's judgment, deserve current recognition in maintaining an adequate
allowance for loan losses.
The provision for loan losses was $30,000 in 2000, $2,560,000 in 1999, and
$239,000 in 1998. The provision was higher during 1999 because of an
extraordinary large anticipated loan loss stemming from the Bank of Lenawee's
purchase of $3.0 million participation out of a $5.3 million credit package
originated by another bank ("Lead Bank"). The Lead Bank retained responsibility
for overall credit administration and monitoring and maintained exclusive
contact with the borrower after the loan was made. The borrower, a manufacturer
located in Big Rapids, Michigan ("Borrower"), unbeknownst to the Bank of
Lenawee, began to experience financial difficulties almost immediately and may
have provided misleading information to both the Bank of Lenawee and the Lead
Bank. The credit is now deemed to be impaired as a consequence of the inability
of the Borrower to continue as a going concern, and insufficiency of collateral
to cover the current amount outstanding and the inability of the individual
guarantors to honor their personal guarantee obligations. Over the course of
2000, Bank of Lenawee charged $2.3 million against its allowance for loan losses
with respect to this credit. Bank of Lenawee has also instituted legal action
against the Lead Bank claiming negligence in its administration of the credit
and seeking recovery of the loss incurred as a result of participation in the
credit. That litigation may continue for some time, and as in all similar
situations, the outcome is uncertain.
The allowance for loan losses to total loan ratio was 1.08%, 2.41% and 1.40% for
2000, 1999 and 1998.
NONINTEREST INCOME
Noninterest income was $2,064,000 for the year ended December 31, 2000 a
$173,000 or 7.73% decrease compared to the year ended December 31, 1999.
The largest contributing factor to the 2000 decrease in noninterest income was a
$380,000 reduction in net gains on mortgage loan sales. The increase in interest
rates during 2000 slowed the pace of the mortgage loan origination and
refinancing business.
Noninterest income was $2,237,000 for the year ended December 31, 1999. This
represented a $613,000 or 21.5% decrease over 1998.
The low interest rate environment experienced in 1998 contributed to a heavy
volume of mortgage loan origination and refinancing. Net gain on mortgage loan
sales decreased $962,000 or 48.24% compared to 1999.
NONINTEREST EXPENSE
Noninterest expense increased $420,000 or 4.67% compared to 1999. Through a
combination of increased net interest income and cost control, the Bank's non
interest expense to revenue efficiency ratio only changed slightly from 64.95%
in 1999 to 66.26% in 2000.
Salary expense decreased $16,000 or .32% compared to 1999. The decrease was
attributable to reduced employee incentive payments. Full time equivalents
(FTE's) increased to 127 at December 31, 2000 compared to 123 in 1999 and 117 in
1998.
6
Other taxes, consisting primarily of Michigan Single Business Tax, decreased in
1999 as a result of decreased state taxable revenues.
Professional fees increased $183,000 or 87.56% during 2000 primarily due to
increased outsourcing and utilization of legal, accounting and loan review
services.
Noninterest expense in 1999 increased $81,000 or .91% compared to 1998. The
modest increase is reflective of a combination of cost control management and
enhanced utilization of existing resources.
INCOME TAX EXPENSE
The Bank's income tax expense was $1,556,000 in 2000 compared to $731,000 in
1999 and $1,350,000 in 1998. The increase from 1999 to 2000 was primarily the
result of a return to routine operations after recognizing a $782,000 tax
benefit associated with the participation loan loss as discussed in the
introduction
The statutory federal tax rate during 2000, 1999 and 1998 was 34%. The Bank's
effective tax rate was lower than the statutory rate in all three years,
primarily due to tax-exempt interest income. The reduction in tax-exempt income
in relation to taxable income increased the effective tax rate to 33% in 2000,
from 32% in 1999 which was slightly lower than the 34% rate in 1998.
7
SECURITIES PORTFOLIO
The following table shows securities by classification as of December 31, 2000
and the amounts and weighted-average yields by maturity period. Securities not
due at a single maturity date, primarily mortgage-backed securities, are not
shown.
--------------------------------------------MATURING----------------------------------------------------
Within After One But After Five But After
One Within Five Within Ten Ten
Year Years Years Years Total
(Dollars in thousands)
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Available For Sale
U.S. Treasuries
and government
agencies $ - $ 7,283 5.33% $ - $ - $ 7,283 5.33%
State and municipal (1) 1,675 6.01% 3,047 6.77 1,454 6.27% 735 7.0% 6,911 6.51%
Other securities 551 5.61 - - - 551 5.61%
------- -------- -------- ------ --------
Total $ 2,226 $ 10,330 $ 1,454 $ 735 $ 14,745
======= ======== ======== ====== ========
(1) Yields on tax-exempt securities are computed on a fully taxable-equivalent
basis.
The Bank's Asset/Liability Management Committee (Committee) is responsible for
developing investment guidelines and strategies. The Committee relies on the
expertise of an investment advisor to select appropriate investments for the
portfolio. Decisions to purchase securities and the maturity date selected are
coordinated with an overall plan to manage liquidity and interest rate exposure.
The Committee does not invest in derivative securities. The Bank held no
impaired securities at December 31, 2000. As of December 31, 2000, the aggregate
book value of investment securities issued by the State of Michigan and all its
political subdivisions totaled $5.1 million with an aggregate market value of
$5.2 million.
The U.S. Treasury and government agency securities identified as available for
sale are laddered to mature over five years with a 2.5 year average life. The
goal is to reduce the volatility in the securities portfolio yield and still
provide a predictable source of liquidity.
The Company had no held to maturity securities as of December 31, 2000, 1999 and
1998. The book value of securities available for sale, as of the dates
indicated, are summarized as follows:
-----------December 31,-------------
2000 1999 1998
---- ---- ----
(In thousands)
U.S. Treasuries and government agencies $ 7,283 $ 7,169 $ 12,774
State and municipal 6,911 9,376 9,232
Other securities 5,127 6,479 7,413
--------- -------- --------
$ 19,321 $ 23,024 $ 29,419
========= ======== ========
8
LOAN PORTFOLIO
Lending efforts are concentrated primarily in the Michigan communities in which
the Bank's offices are located. The Bank has no foreign loans.
Total loans increased $17.2 million or 8.7% from year-end 1999 to 2000.
Commercial, agricultural, real estate-construction and consumer loans all
increased during 2000 as a result of strong demand and a relatively stable
economy. Commercial, financial and agricultural loans increased $13.7 million or
10.1%, real estate-construction loans increased $3.5 million or 35.4% and
consumer loans increased $3 million or 8.6%. However, the increase in interest
rates has significantly reduced the mortgage refinance business during 2000 and
1999. Accordingly, real estate-mortgage loans decreased $3 million or 17.4% from
2000 to 1999. The Bank offers a variety of non-conforming residential real
estate products that have been well received by individuals seeking to finance a
residential purchase.
The following table presents the gross amount of loans outstanding by loan type:
--------------------------December 31,-------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
Commercial, financial and agricultural $ 149,058 $ 135,324 $ 112,451 $ 106,494 $ 97,869
Real estate - construction 13,383 9,934 - - -
Real estate - mortgage 14,225 17,203 17,010 27,835 27,592
Consumer 37,846 34,847 29,026 28,710 25,560
---------- ---------- ---------- --------- ----------
$ 214,512 $ 197,308 $ 158,487 $ 163,039 $ 151,021
========== ========== ========== ========= ==========
The following table shows the maturity of loans outstanding (in thousands) at
December 31, 2000. Also provided are the amounts due after one, year classified
according to their sensitivity to changes in interest rates.
Due
Due After One Due
Within But Within After
One Year Five Years Five Years Total
Commercial, financial and agricultural $ 53,801 $ 72,536 $ 22,721 $ 149,058
Real estate-construction 477 147 12,759 13,383
Real estate-mortgage 3,709 8,906 1,610 14,225
Consumer 10,426 19,504 7,916 37,846
----------- ----------- ----------- -----------
$ 68,413 $ 101,093 $ 45,006 $ 214,512
=========== =========== =========== ===========
Loans due after one year:
Fixed rate $ 94,945
Floating or adjustable rate 51,154
-----------
$ 146,099
9
ASSET QUALITY
Management believes that a conservative credit culture is critical to successful
performance. Through Officer and Director Loan Committees, management reviews
and monitors the quality of the various loan portfolios. Loan performance is
also reviewed regularly by internal and external loan review personnel. The Bank
continues to use independent loan review services. A stable regional economy
continues to contribute to a healthy lending environment.
Loans are placed on non-accrual status when principal or interest is past due 90
days or more, the loan is not well-secured and is in the process of collection
or when reasonable doubt exists concerning collectibility of interest or
principal. Any interest previously accrued in the current period but not
collected is reversed and charged against current earnings.
At December 31, 2000, the Bank had no loans for which payments are presently
current, but the borrowers are experiencing financial difficulties. As of
December 31, 2000 there were no concentrations of loans exceeding 10% of total
loans.
The following table summarizes non-accrual and past due loans and other real
estate owned:
--------------------------December 31,-------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
Non-accruing loans $ 113 $ 3,071 $ 121 $ 78 $ 24
Loans past due 90 days or more 523 275 275 367 369
--------- --------- -------- -------- ---------
Total nonperforming loans 636 3,346 396 445 393
Other real estate 294 255 341 232 415
--------- --------- -------- -------- ---------
Total nonperforming assets $ 930 $ 3,601 $ 737 $ 677 $ 808
========= ========= ======== ======== =========
Nonperforming loans as a percent of
total loans .30% 1.73% .25% .27% .26%
Nonperforming assets as a percent of
total loans .43% 1.87% .47% .42% .54%
Nonperforming loans as a percent of the
loan loss reserve 27.81% 77.50% 18.15% 22.66% 22.32%
10
ALLOWANCE FOR LOAN LOSSES
The following table summarizes changes in the allowance for loan losses.
--------------------Years ended December 31,-------------------
(in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans:
Average daily balance of loans for the year, net $ 203,698 $ 171,276 $163,916 $158,603 $ 141,422
Amount of loans outstanding at end of year, net $ 212,317 $ 192,721 $156,272 $161,102 $ 149,373
Allowance for loan losses:
Balance at beginning of year $ 4,646 $ 2,182 $ 1,964 $ 1,761 $ 1,651
Loans charged off:
Real estate - mortgage - 34 13 - -
Real estate - construction 18 - - - -
Commercial and agricultural 2,339 28 14 15 8
Consumer 120 96 26 61 166
--------- --------- -------- -------- ---------
2,477 158 53 76 174
--------- --------- -------- -------- ---------
Recoveries of loans previously charged-off:
Real estate-mortgage 2 15 - - -
Commercial and agricultural 36 6 10 14 14
Consumer 50 41 22 20 17
--------- --------- -------- -------- ---------
88 62 32 34 31
--------- --------- -------- -------- ---------
Net loans charged-off (recoveries) 2,389 96 21 42 143
Additions to allowance charged to operations 30 2,560 239 245 253
--------- --------- -------- -------- ---------
Balance at end of year $ 2,287 $ 4,646 $ 2,182 $ 1,964 $ 1,761
========= ========= ======== ======== =========
Ratios:
Net loans charged off to average net loans
outstanding 1.17% .06% .01% .03% .10%
Allowance for loan losses to net loans
outstanding 1.08% 2.41% 1.40% 1.22% 1.18%
The allowance for loan losses has been allocated according to the amount deemed
to be reasonably necessary to provide for the probability of losses being
incurred as follows:
------------------------------------------------December 31,----------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
------------------------------------------------------------------------------------------------------------
(In thousands)
Commercial, financial
and agricultural $ 1,774 69.49% $ 4,010 68.59% $ 1,680 70.95% $ 1,556 65.32% $ 1,564 64.80%
Real estate -
mortgage 1 6.63 33 8.72 18 10.73 2 17.07 1 18.27
Real estate -
construction 134 6.23 99 5.03 74 - 49 - 38 -
Consumer 119 17.65 135 17.66 130 18.32 27 17.61 2 16.93
Unallocated 259 - 369 - 280 - 330 - 156 -
--------- ------ -------- ------ ------- ------ ------- ------ ------- ------
$ 2,287 100.00% $ 4,646 100.00% $ 2,182 100.00% $ 1,964 100.00% $ 1,761 100.00%
========= ======== ======= ======= =======
11
LIQUIDITY
Liquidity is generally defined as the ability to meet cash flow needs of
customers for loans and deposit withdrawals. To meet cash flow requirements,
sufficient sources of liquid funds must be available. These sources include
short-term investments, repayments of loans, maturing and called securities,
sales of assets, growth in deposits and other liabilities and profits.
At December 31, 2000, the Bank had $5.2 million in federal funds sold. The Bank
also has $13.1 million of additional borrowing capacity at the Federal Home Loan
Bank and $4 million of borrowing capacity with correspondent banks.
During 2000, the Bank also generated $10.5 million in cash from operating
activities. The Bank's local community customer deposit base is its most stable
and ongoing source of funding. All of these sources are available to meet cash
flow needs of loan and deposit customers.
The Company also needs cash to pay dividends to its shareholders. The primary
source of cash is the dividends paid to the parent by the Bank. Management
believes that cash from operations is sufficient to supply the cash needed to
continue paying a reasonable dividend.
CAPITAL RESOURCES
At December 31, 2000, equity capital totaled $20.4 million. Management monitors
the capital levels of the Company and the Bank to provide for current and future
business opportunities and to meet regulatory guidelines for "well capitalized"
institutions. "Well capitalized" institutions are eligible for reduced FDIC
premiums, and also enjoy other reduced regulatory restrictions.
At December 31, 2000, the Company and the Bank exceeded all regulatory minimum
capital requirements and are considered to be "well capitalized."
ASSET LIABILITY MANAGEMENT
Asset liability management involves developing, implementing and monitoring
strategies to maintain sufficient liquidity, maximize net interest income and
minimize the impact that significant fluctuations in market interest rates would
have on earnings. The Bank's Asset/Liability Committee is responsible for
managing this process.
Quantitative and Qualitative Disclosures about Market Risk
The Bank's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. The Bank's transactions are denominated in U.S. dollars
with no significant foreign exchange exposure. Also, the Bank has a limited
exposure to commodity prices related to agricultural loans. Any impacts that
changes in foreign exchange rate and commodity prices would have on interest
rates are assumed to be insignificant.
Interest rate risk (IRR) is the exposure of a banking organization's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and stockholder value; however, excessive
levels of IRR could pose a significant threat to earnings and capital.
Accordingly, effective risk management that maintains IRR at prudent levels is
essential to the Bank's safety and soundness.
12
Evaluating exposure to changes in interest rates includes assessing both the
adequacy of management's process used to control IRR and the organization's
quantitative level of exposure. When assessing the IRR management process, the
Bank seeks to ensure that appropriate policies, procedures, management
information systems and internal controls are in place to maintain IRR at
prudent levels with consistency and continuity. Evaluating the quantitative
level of IRR exposure requires the assessment of existing and potential future
effects of changes in interest rates on its consolidated financial condition,
including capital adequacy, earnings, liquidity, and, where appropriate, asset
quality.
The Federal Reserve Board, together with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency
Policy Statement on IRR effective June 26, 1996. The policy statement provides
guidance to examiners and bankers on sound practices for managing IRR, which
will form the basis for ongoing evaluation of the adequacy of IRR management at
supervised institutions. The policy statement also outlines fundamental elements
of sound management that have been identified in prior Federal Reserve guidance
and discusses the importance of these elements in the context of managing IRR.
Specifically, the guidance emphasizes the need for active board of director and
senior management oversight and a comprehensive risk management process that
effectively identifies, measures and controls IRR.
The Bank derives the majority of its income from the excess of interest
collected over interest paid. The rates of interest earned on its assets and
owed on its liabilities generally are established contractually for a period of
time. Since market interest rates change over time, the Bank is exposed to lower
profit margins (or losses) if it cannot adapt to interest rate changes. For
example, assume that an institution's assets carry intermediate or long-term
fixed rates and that those assets are funded with short-term liabilities. If
market interest rates rise by the time the short-term liabilities must be
refinanced, the increase in the institution's interest expense on its
liabilities may not be sufficiently offset if assets continue to earn at the
long-term fixed rates. Accordingly, an institution's profits could decrease
because the institution will either have lower net interest income or possibly,
net interest expense. Similar risks exist when assets are subject to contractual
interest rate ceilings, or rate sensitive assets are funded by longer-term,
fixed-rate liabilities in a decreasing rate environment.
Various techniques might be used by an institution to minimize IRR. The Bank
periodically analyzes assets and liabilities and makes future financing and
investment decisions based on payment streams, interest rates, contractual
maturities, and estimated sensitivity to actual or potential changes in market
interest rates. Such activities fall under the broad definition of
asset/liability management.
Several ways an institution can manage IRR include: selling existing assets or
repaying certain liabilities; matching repricing periods for new assets and
liabilities, for example, by shortening terms of new loans or investments and
hedging existing assets, liabilities, or anticipated transactions. An
institution might also invest in more complex financial instruments intended to
hedge or otherwise change IRR. Interest rate swaps, futures contracts, options
on futures, and other such derivative financial instruments are often used for
this purpose. Because these instruments are sensitive to interest rate changes,
they require management's expertise to be effective. The Bank has not purchased
derivative financial instruments in the past and does not presently intend to
purchase such instruments.
The Bank is also subject to repayment risk when interest rates fall. For
example, mortgage loans and other financial assets may be prepaid by a debtor so
that the debtor may refinance their obligations at new, lower rates. Prepayments
of assets carrying higher rates reduces interest income and overall asset
yields.
Certain portions of an institution's liabilities may be short-term or due on
demand, while most of its assets may be invested in long-term loans or
investments. Accordingly, the Bank seeks to have in place sources of cash to
meet short-term demands. These funds can be obtained by increasing deposits or
selling assets. Also, Federal Home Loan Bank advances and short-term borrowings
provide additional sources of liquidity.
13
The following tables provide information about the Bank's financial instruments
that are sensitive to changes in interest rates as of December 31, 2000 and
1999. The Bank had no derivative financial instruments, or trading portfolio, as
of that date. The expected maturity date values for loans receivable,
mortgage-backed securities and investment securities were calculated without
adjusting the instrument's contractual maturity date for expectations of
prepayments. Expected maturity date values for interest-bearing core deposits
were not based upon estimates of the period over which the deposits would be
outstanding, but rather the opportunity for repricing.
Principal/notional amount as of December 31, 2000 maturing in:
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
(In thousands)
Rate Sensitive Assets
Federal funds sold $ 5,150 $ - $ - $ - $ - $ - $ 5,150 $ 5,150
Average interest rate 6.50% - - - 6.50%
Fixed interest rate securities 1,657 8,073 1,500 1,621 675 410 13,936 13,817
Average interest rate 5.73% 5.29% 6.02% 5.60% 5.78% 5.85% 5.50%
Tax-exempt fixed rate securities 485 225 945 660 770 2,352 5,437 5,504
Average interest rate 4.71% 5.29% 4.36% 5.90% 4.49% 5.42% 5.09%
FHLB stock 2,504 - - - - - 2,504 2,504
Average interest rate 8.00% - - - - - 8.00%
FRB stock 360 - - - - - 360 360
Average interest rate 6.00% - - - - - 6.00%
Fixed interest rate loans 12,203 6,891 10,733 21,661 11,384 44,276 107,148 106,779
Average interest rate 8.90% 9.13% 9.22% 8.94% 8.87% 7.54% 8.39%
Variable interest rate loans 56,210 17,259 17,910 13,119 2,136 730 107,364 107,323
Average interest rate 10.08% 8.65% 9.13% 9.06% 9.00% 8.99% 9.54%
Rate Sensitive Liabilities
Interest-bearing demand $ 55,611 $ - $ - $ - $ - $ - $55,611 $ 55,611
Average interest rate .86% - - - - - .86%
Savings 23,075 - - - - - 23,075 23,075
Average interest rate 1.50% - - - - - 1.50%
Time deposits 69,861 19,270 14,967 3,740 523 - 108,361 109,317
Average interest rate 6.08% 5.86% 6.15% 6.69% 6.66% - 6.07%
Securities sold under agreements
to repurchase 2,083 - - - - - 2,083 2,083
Average interest rate 3.60% - - - - - 3.60%
Fixed interest rate FHLB advances 348 376 407 441 477 3,804 5,853 5,788
Average interest rate 6.04% 6.04% 6.04% 6.04% 6.04% 6.04% 6.04%
14
Principal/notional amount as of December 31, 1999 maturing in:
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
(In thousands)
Rate Sensitive Assets
Federal funds sold $ 2,200 $ - $ - $ - $ - $ - $ 2,200 $ 2,200
Average interest rate 1.75% - - - - - 1.75%
Fixed interest rate securities 525 3,628 5,404 - - 6,515 16,072 15,660
Average interest rate 5.79% 5.85% 6.20% - - 5.75% 5.92%
Tax-exempt fixed rate securities 2,192 800 628 1,299 376 2,164 7,459 7,364
Average interest rate 3.70% 4.01% 4.88% 4.03% 3.39% 4.65% 4.15%
FHLB stock 2,504 - - - - - 2,504 2,504
Average interest rate 8.00% - - - - - 8.00%
FRB stock 360 - - - - - 360 360
Average interest rate 6.00% - - - - - 6.00%
Fixed interest rate loans 24,213 10,346 8,443 11,677 21,611 35,902 112,192 111,815
Average interest rate 8.30% 8.95% 9.10% 8.86% 8.45% 8.40% 8.54%
Variable interest rate loans 45,520 12,279 17,941 3.074 5,900 402 85,116 85,116
Average interest rate 9.04% 8.57% 8.50% 8.54% 8.58% 8.10% 8.80%
Rate Sensitive Liabilities
Interest-bearing demand $ 52,829 $ - $ - $ - $ - $ - $52,829 $52,829
Average interest rate .81% - - - - - .81%
Savings 23,029 - - - - - 23,029 23,029
Average interest rate 1.50% - - - - - 1.50%
Time deposits 32,328 19,353 10,617 15,324 9,039 - 86,661 87,189
Average interest rate 5.22% 5.06% 5.75% 5.84% 5.76% - 5.42%
Securities sold under agreements
to repurchase 2,002 - - - - - 2,002 2,002
Average interest rate 4.61% - - - - 4.61%
Fixed interest rate FHLB advances 8,322 348 376 407 440 4,281 14,174 14,181
Average interest rate 5.96% 6.04% 6.04% 6.04% 6.04% 6.04% 5.99%
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of operations
and other sections of this Annual Report contain forward looking statements that
are based on management's beliefs, assumptions, current expectations, estimates
and projections about the financial services industry, the economy and about the
Company itself. Words such as "anticipates", "believes", "estimates", "expects",
"forecasts", "foresee", "intends", "is likely", "plans", "product", "projects",
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such
forward-looking statements.
15
Furthermore, the Company undertakes no obligation to update, amend or clarify
forward-looking statements, whether as a result of new information, future
events or otherwise. Future Factors include:
o changes in interest rates and interest rate relationships; demand for
products and services;
o the degree of competition by traditional and non-traditional competitors;
o changes in banking regulations;
o changes in tax laws;
o changes in prices, levies and assessments;
o the impact of technology, governmental and regulatory policy changes;
o the outcome of pending and future litigation and contingencies;
o trends in customer behavior as well as their ability to repay loans; and
o changes in the national and local economies.
These are representative of the Future Factors that could cause a difference
between an actual outcome and a forward-looking statement.
16
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Lenawee Bancorp, Inc.'s
consolidated financial statements and related information appearing in this
Annual Report. Management believes that the consolidated financial statements
fairly reflect the form and substance of transactions and reasonably present
Lenawee Bancorp's financial position and results of operations and were prepared
in conformity with generally accepted accounting principles. Management also has
included in the Company's financial statements, amounts that are based on
estimates and judgments which it believes are reasonable under the
circumstances.
Lenawee Bancorp, Inc. maintains a system of internal controls designed to
provide reasonable assurance that all assets are safeguarded and financial
records are reliable for preparing the consolidated financial statements. The
Company complies with laws and regulations relating to safety and soundness
which are designated by the FDIC and other appropriate federal banking agencies.
The selection and training of qualified personnel and the establishment and
communication of accounting and administrative policies and procedures are
elements of this control system. The effectiveness of internal controls is
monitored by a program of internal audit. Management recognizes that the cost of
a system of internal controls should not exceed the benefits derived and that
there are inherent limitations to be considered in the potential effectiveness
of any system. Management believes that Lenawee Bancorp's system provides the
appropriate balance between costs of controls and the related benefits.
The independent auditors have audited the Company's consolidated financial
statements in accordance with generally accepted auditing standards and provide
an objective, independent review of the fairness of the reported operating
results and financial position. The Board of Directors of Lenawee Bancorp has an
Audit Committee composed of five non-management Directors. The Committee meets
periodically with the internal auditors and the independent auditors.
Patrick K. Gill Loren V. Happel
President and Chief Executive Officer Vice President and Chief Financial
Officer
17
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Lenawee Bancorp, Inc.
Adrian, Michigan
We have audited the accompanying consolidated balance sheets of Lenawee Bancorp,
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of income, changes in shareholders' equity and cash flows for each of the years
ended December 31, 2000, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lenawee Bancorp,
Inc. as of December 31, 2000 and 1999, and the results of its operations and its
cash flows for each of the years ended December 31, 2000, 1999 and 1998 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
February 9, 2001
18
LENAWEE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
---- ----
ASSETS
Cash and due from banks $ 7,842,516 $ 7,309,898
Federal funds sold 5,150,000 2,200,000
-------------- --------------
Total cash and cash equivalents 12,992,516 9,509,898
Securities available for sale 19,321,007 23,024,175
Federal Home Loan Bank stock, at cost 2,503,700 2,503,700
Federal Reserve Bank stock, at cost 360,000 360,000
Loans held for sale 803,040 758,651
Loans receivable, net of allowance for loan losses:
$2,287,438 - 2000, $4,646,484 - 1999 212,317,017 192,720,533
Premises and equipment, net 5,988,602 6,521,024
Accrued interest receivable 1,898,947 1,576,279
Mortgage servicing asset 1,515,924 1,335,419
Other assets 2,046,702 1,593,829
-------------- --------------
Total assets $ 259,747,455 $ 239,903,508
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 37,095,649 $ 36,686,950
Interest bearing 187,047,006 162,519,459
-------------- --------------
Total deposits 224,142,655 199,206,409
Borrowed funds 7,936,150 16,176,754
Accrued interest payable 945,791 643,831
Other liabilities 1,256,111 1,101,253
-------------- --------------
Total liabilities 234,280,707 217,128,247
Common stock subject to repurchase obligation in ESOP 5,113,770 4,326,300
Shareholders' equity
Common stock and paid-in capital, no par
value: 3,000,000 shares authorized; shares
issued and outstanding: 851,551 - 2000; 852,410 - 1999 9,631,958 10,430,303
Retained earnings 10,755,423 8,352,940
Accumulated other comprehensive loss,
net of tax (34,403) (334,282)
-------------- --------------
Total shareholders' equity 20,352,978 18,448,961
-------------- --------------
Total liabilities and shareholders' equity $ 259,747,455 $ 239,903,508
============== ==============
See accompanying notes to financial statements and report of independent
accountants.
19
LENAWEE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Interest and dividend income
Loans receivable, including fees $ 19,267,973 $ 16,025,062 $ 15,291,800
Taxable securities 850,100 1,222,553 1,290,115
Nontaxable securities 289,436 309,750 281,254
Federal funds sold 166,828 118,244 277,178
Dividend income 229,023 221,937 222,597
Other 47,993 25,184 154,327
--------------- --------------- ----------------
Total interest and dividend income 20,851,353 17,922,730 17,517,271
Interest expense
Deposits 7,853,587 5,693,930 6,262,000
Borrowed funds 856,797 618,291 943,615
--------------- --------------- ----------------
Total interest expense 8,710,384 6,312,221 7,205,615
--------------- --------------- ----------------
Net interest income 12,140,969 11,610,509 10,311,656
Provision for loan losses 30,000 2,560,000 239,000
--------------- --------------- ----------------
Net interest income after provision for
loan losses 12,110,969 9,050,509 10,072,656
Noninterest income
Service charges and fees 980,745 778,625 616,119
Net gains on loan sales 651,733 1,032,371 1,994,470
Loan servicing fees, net of amortization 107,109 113,222 (144,808)
Other 324,282 313,044 384,707
--------------- --------------- ----------------
2,063,869 2,237,262 2,850,488
Noninterest expense
Salaries and employee benefits 5,018,659 5,034,569 5,090,788
Occupancy and equipment 1,588,555 1,677,784 1,585,721
Insurance 141,445 63,851 118,223
Printing, postage and supplies 312,674 327,807 333,148
Professional and outside services 391,617 208,566 362,345
State and other taxes 163,313 169,032 172,052
Mobile banking costs 341,658 236,246 224,325
Receivable financing services 296,733 282,372 187,126
Other 1,158,875 994,229 838,942
--------------- --------------- ----------------
9,413,529 8,994,456 8,912,670
--------------- --------------- ----------------
Income before income taxes 4,761,309 2,293,315 4,010,474
Income tax expense 1,556,376 730,537 1,350,000
--------------- --------------- ----------------
Net income $ 3,204,933 $ 1,562,778 $ 2,660,474
=============== =============== ================
Basic earnings per share $ 3.75 $ 1.83 $ 3.13
=============== =============== ================
Diluted earnings per share $ 3.71 $ 1.83 $ 3.12
=============== =============== ================
See accompanying notes to financial statements and report of independent
accountants.
20
LENAWEE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
Common Accumulated
Stock and Other Total
Paid-In Retained Comprehensive Shareholders'
Capital Earnings Income (Loss) Equity
Balance January 1, 1998 $ 11,668,371 $ 5,333,690 $ 135,347 $ 17,137,408
Comprehensive income:
Net income 2,660,474 2,660,474
Unrealized gains (losses) on securities 132,738
Tax effect (45,131)
-------------- ---------------
Total other comprehensive income 87,607 87,607
-------------- ---------------
Total comprehensive income 2,748,081
---------------
Change in common stock subject to repurchase (761,300) (761,300)
Retirement of stock - 1,088 shares (27,200) (27,200)
Stock options exercised-issuance of
1,920 common shares 41,138 41,138
Proceeds from sale of stock - 3,148 shares 78,700 78,700
Cash dividends - $.67 per share (569,227) (569,227)
------------- ------------- -------------- ---------------
Balance December 31, 1998 10,999,709 7,424,937 222,954 18,647,600
Comprehensive income:
Net income 1,562,778 1,562,778
Unrealized gains (losses) on securities (848,818)
Reclassifications for realized gains (losses) 4,520
Tax effect 287,062
-------------- ---------------
Total other comprehensive income (557,236) (557,236)
-------------- ---------------
Total comprehensive income 1,005,542
---------------
Change in common stock subject to repurchase (628,500) (628,500)
Retirement of stock - 1,026 shares (36,936) (36,936)
Proceeds from sale of stock - 2,656 shares 96,030 96,030
Cash dividends - $.75 per share (634,775) (634,775)
------------- ------------- -------------- ---------------
Balance December 31, 1999 10,430,303 8,352,940 (334,282) 18,448,961
Comprehensive income:
Net income 3,204,933 3,204,933
Unrealized gains (losses) on securities 454,418
Tax effect (154,539)
-------------- ---------------
Total other comprehensive income 299,879 299,879
-------------- ---------------
Total comprehensive income 3,504,812
---------------
Change in common stock subject to repurchase (787,470) (787,470)
Retirement of stock - 3,441 shares (151,405) (151,405)
Proceeds from sale of stock - 2,582 shares 117,065 117,065
Issuance of stock options below market value 23,465 23,465
Cash dividends - $.94 per share (802,450) (802,450)
------------- -------------- -------------- ---------------
Balance December 31, 2000 $ 9,631,958 $ 10,755,423 $ (34,403) $ 20,352,978
============= ============= ============== ===============
See accompanying notes to financial statements.
21
LENAWEE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities
Net income $ 3,204,933 $ 1,562,778 $ 2,660,474
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 690,753 709,035 749,603
Provision for loan losses 30,000 2,560,000 239,000
Net amortization and accretion on securities
available for sale 69,728 116,787 72,446
Amortization of mortgage servicing rights 314,534 257,597 397,391
Loans originated for sale (37,696,914) (47,554,219) (102,921,516)
Proceeds from sales of mortgage loans 44,954,185 49,491,958 103,889,773
Net gains on sales of mortgage loans (651,733) (1,032,371) (1,994,470)
Net change in:
Deferred loan origination fees (33,877) (92,717) 60,964
Accrued interest receivable (322,668) 117,856 (43,629)
Other assets (481,094) (235,246) 353,691
Accrued interest payable 301,960 87,333 (117,783)
Other liabilities 154,858 106,052 142,391
--------------- --------------- ----------------
Net cash from operating activities 10,534,665 6,094,843 3,488,335
Cash flows from investing activities Proceeds from:
Maturities, calls and principal payments on
securities available for sale 4,087,858 9,699,134 11,684,767
Sales of securities available for sale - 7,674,558 -
Sales of portfolio loans - 1,483,725 10,424,013
Purchases of:
Securities available for sale - (11,945,000) (17,164,219)
Premises and equipment, net (158,331) (634,714) (1,028,051)
Net increase in loans (26,951,438) (39,916,902) (8,113,718)
Recoveries on loans charged-off 87,547 61,823 37,259
--------------- --------------- ----------------
Net cash from investing activities (22,934,364) (33,577,376) (4,159,949)
Cash flows from financing activities
Net change in deposits $ 24,936,246 $ 13,315,458 $ 10,917,507
Net change in short term borrowings 80,917 (2,151,706) 1,554,733
Proceeds from FHLB advances 10,000,000 14,000,000 -
Repayment of FHLB advances (18,321,521) (6,297,154) (7,274,634)
Repurchase of common stock (151,405) (36,936) (27,200)
Issuance of common stock 117,065 96,030 78,700
Exercise of stock options - - 41,138
Issuance of stock options below market
value 23,465 - -
Dividends paid and fractional shares (802,450) (634,775) (569,227)
--------------- --------------- ----------------
Net cash from financing activities 15,882,317 18,290,917 4,721,017
--------------- --------------- ----------------
Net change in cash and cash equivalents 3,482,618 (9,191,616) 4,049,403
Cash and cash equivalents at beginning of year 9,509,898 18,701,514 14,652,111
--------------- --------------- ----------------
Cash and cash equivalents at end of year $ 12,992,516 $ 9,509,898 $ 18,701,514
=============== =============== ================
Supplemental schedule of noncash activities Transfer from:
Loans to foreclosed real estate $ 126,318 $ 160,811 $ 239,144
Portfolio loans to loans held for sale 9,592,343 - 2,065,245
Loans held for sale to portfolio loans 2,447,377 679,146 -
Cash paid for:
Interest $ 8,408,424 $ 6,521,024 $ 7,323,398
Income taxes 1,147,000 1,215,000 1,602,000
(Continued)
22
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The accounting and reporting policies of Lenawee Bancorp, Inc. (the Company) and
its wholly-owned subsidiary, Bank of Lenawee (the Bank), conform to generally
accepted accounting principles and to general practice within the banking
industry. The following describes the significant accounting and reporting
policies which are employed in the preparation of the consolidated financial
statements.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company, the Bank and its wholly-owned subsidiary, Lenawee
Financial Services. All significant intercompany balances and transactions have
been eliminated in consolidation.
Nature of Operations, Industry Segments and Concentrations of Credit Risk: The
Company is a one-bank holding company which conducts limited business
activities. The Bank performs the majority of business activities.
The Bank provides a full range of banking services to individuals, agricultural
businesses, commercial businesses and light industries located in its service
area. It maintains a diversified loan portfolio, including loans to individuals
for home mortgages, automobiles and personal expenditures, and loans to business
enterprises for current operations and expansion. The Bank offers a variety of
deposit products, including checking, savings, money market, individual
retirement accounts and certificates of deposit. While the Company's chief
decision maker monitors the revenue stream of various Company products and
services, operations are managed and financial performance is evaluated on a
Company wide basis. Accordingly, all of Company's banking operations are
considered by management to be aggregated into one operating segment.
The principal market for the Bank's financial services are the Michigan
communities in which the Bank is located and the areas immediately surrounding
these communities. The Bank serves these markets through nine offices located in
Lenawee, Hillsdale and Washtenaw Counties in Michigan.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses and fair values of
securities and other financial instruments are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand
deposits with other financial institutions, federal funds sold and commercial
paper with original maturities of 90 days or less. Cash flows are reported, net,
for customer loan and deposit transactions, and securities sold under agreements
to repurchase with original maturities of 90 days or less.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income
and shareholders' equity, net of tax. Trading securities are bought principally
for sale in the near term, and are reported at fair value, with unrealized gains
and losses included in earnings. Securities are written down to fair value when
a decline in fair value is not temporary. Other securities such as Federal Home
Loan Bank and Federal Reserve Bank stock are carried at cost.
(Continued)
23
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest and dividend income, adjusted by amortization
of purchase premiums and discounts, is included in earnings. Securities are
written down to fair value when a decline in fair value is not temporary.
Loans Held for Sale: Loans held for sale are reported at the lower of cost or
market value in aggregate. Net unrealized losses are recorded in a valuation
allowance by charges to income.
Loans Receivable: Loans that management has the intent and the ability to hold
for the foreseeable future or until maturity or payoff are reported at the
principal balance outstanding, net of unearned interest, deferred loan fees and
costs, and an allowance for loan losses. Interest income is reported on the
interest method and includes amortization of net deferred loan fees and costs
over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days, unless the loan is both well secured
and in the process of collection. Payments received on such loans are reported
as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
balance using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage and consumer loans and on an individual loan basis
for other loans. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported, net, of the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using a combination of
straight-line and accelerated methods with useful lives ranging from 10 to 40
years for buildings and improvements, and 3 to 10 years for furniture and
equipment. These assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur. Major improvements are capitalized.
Servicing Rights: Servicing rights represent both purchased rights and the
allocated value of servicing rights retained on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
(Continued)
24
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Other Real Estate Owned: Real estate properties acquired in collection of a loan
receivable are recorded at fair value at acquisition. Any reduction to fair
value from the carrying value of the related loan is accounted for as a loan
loss. After acquisition, a valuation allowance reduces the reported amount to
the lower of the initial amount or fair value less costs to sell. Expenses,
gains and losses on disposition, and changes in the valuation allowance are
reported in other expense. Other real estate owned amounts to $294,000 and
$255,000 at December 31, 2000 and 1999.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Benefit Plans: A defined benefit pension plan covers substantially all
employees, with benefits based on years of service and compensation prior to
retirement. Pension expense is the net of service and interest cost, return on
plan assets, and amortization of gains and losses not immediately recognized.
Profit-sharing and 401(k) plan expense is the amount contributed as determined
by Board decision.
Expense for employee compensation under stock option plans is reported only if
options are granted below market price at grant date. Proforma disclosures of
net income and earnings per share are provided as if the option's fair value had
been recorded using an option pricing model.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Earnings and Dividends Per Share: Basic earnings per common share is based on
net income divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per common share shows the dilutive effect
of any additional potential common shares. Earnings and dividends per common
share are restated for all stock splits and stock dividends, including the
two-for-one split declared in 1999.
Stock Dividends: Dividends issued in stock are reported by transferring the
market value of the stock issued from retained earnings to common stock and
additional paid-in capital. Fractional shares are paid in cash for all stock
dividends.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes the net change in
unrealized appreciation (depreciation) on securities available for sale, net of
tax, which is also recognized as a separate component of shareholders' equity.
Financial Instruments with Off-Balance-Sheet Risk: Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and
standby letters of credit issued to meet customer's needs. The face amount for
these items represents the exposure to loss before considering customer
collateral or ability to repay. Such financial instruments are recorded when
they are funded.
(Continued)
25
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on-and off-balance-sheet
financial instruments does not include the value of anticipated future business
or values of assets and liabilities not considered financial instruments.
Reclassifications: Some items in the prior year financial statements have been
reclassified to conform with the current year presentation.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded a fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains or losses on the hedges and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. Adoption of this
standard on January 1, 2001 did not have a material effect on the Company's
financial condition or results of operations.
NOTE 2 - SECURITIES
Year-end securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2000 Cost Gains Losses Value
- ---- ---- ----- ------ -----
U. S. Treasury and
government agencies $ 7,351,837 $ - $ (68,538) $ 7,283,299
Obligations of states and
political subdivisions 6,843,588 87,370 (20,420) 6,910,538
Corporate notes 554,682 - (3,589) 551,093
Mortgage-backed securities 4,622,971 - (46,894) 4,576,077
--------------- ------------- -------------- ---------------
$ 19,373,078 $ 87,370 $ (139,441) $ 19,321,007
=============== ============= ============== ===============
1999
- ----
U. S. Treasury and
government agencies $ 7,400,712 $ - $ (231,465) $ 7,169,247
Obligations of states and
political subdivisions 9,473,289 24,091 (120,895) 9,376,485
Corporate notes 559,139 - (12,920) 546,219
Mortgage-backed securities 6,097,524 - (165,300) 5,932,224
--------------- ------------- -------------- ---------------
$ 23,530,664 $ 24,091 $ (530,580) $ 23,024,175
=============== ============= ============== ===============
(Continued)
26
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 2 - SECURITIES (Continued)
Contractual maturities of debt securities at year-end 2000 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
Amortized Fair
Cost Value
Due in one year or less $ 2,228,931 $ 2,225,951
Due from one to five years 10,365,485 10,329,768
Due from five to ten years 1,455,691 1,454,449
Due after ten years 700,000 734,762
---------------- ----------------
14,750,107 14,744,930
Mortgage-backed securities 4,622,971 4,576,077
---------------- ----------------
$ 19,373,078 $ 19,321,007
================ ================
Sales of securities available for sale were:
2000 1999 1998
---- ---- ----
Proceeds from sales $ - $ 7,674,558 $ -
Gross gains from sales - 5,785 -
Gross losses from sales - (10,305) -
In addition to Federal Home Loan Bank (FHLB) stock, securities having an
amortized cost of approximately $4,695,000 and $13,107,000 at year-end 2000 and
1999 were pledged to secure FHLB advances, public deposits, securities sold
under agreements to repurchase and U.S. Treasury demand notes. Except as
indicated, total securities of any state (including all its political
subdivisions) were less than 10% of shareholders' equity. At year-end 2000 and
1999, the amortized cost of securities issued by the state of Michigan and all
its political subdivisions totaled $5,104,000 and $7,210,000 with an estimated
market value of $5,185,000 and $7,174,000.
NOTE 3 - LOANS RECEIVABLE
Year-end loans receivable are as follows:
2000 1999
---- ----
Commercial $ 116,105,167 $ 103,569,923
Agricultural 32,952,291 31,754,542
Real Estate Mortgage 14,225,036 17,203,006
Real Estate Construction 13,383,023 9,934,302
Consumer 37,846,196 34,846,379
---------------- ----------------
Gross loans receivable 214,511,713 197,308,152
Deferred loan origination fees/costs, net 92,742 58,865
Allowance for loan losses (2,287,438) (4,646,484)
---------------- ----------------
Net loans receivable $ 212,317,017 $ 192,720,533
================ ================
(Continued)
27
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 3 - LOANS RECEIVABLE (Continued)
Certain directors and executive officers of the Company, including associates of
such persons, were loan customers of the Company during 2000. A summary of
aggregate related party loan activity for loans aggregating $60,000 or more to
any related party is as follows:
2000 1999
---- ----
Balance at January 1 $ 2,645,486 $ 2,413,784
New loans 2,480,776 3,759,932
Repayments (2,684,637) (3,528,230)
---------------- ----------------
Balance at December 31 $ 2,441,625 $ 2,645,486
================ ================
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
2000 1999 1998
---- ---- ----
Beginning balance $ 4,646,484 $ 2,181,749 $ 1,964,473
Loan charge-offs (2,476,593) (157,088) (58,983)
Loan recoveries 87,547 61,823 37,259
---------------- ----------------- ----------------
Net loan charge-offs (2,389,046) (95,265) (21,724)
---------------- ----------------- ----------------
Provision for loan losses 30,000 2,560,000 239,000
---------------- ----------------- ----------------
Ending balance $ 2,287,438 $ 4,646,484 $ 2,181,749
================ ================= ================
Impaired loans were as follows:
2000 1999 1998
---- ---- ----
Year-end loans with no allowance for
loan losses allocated $ - $ 95,000 $ 19,000
Year-end loans with allowance for loan
losses allocated 325,000 2,979,000 52,000
---------------- ----------------- ----------------
Total impaired loans $ 325,000 $ 4,074,000 $ 71,000
================ ================= ================
Amount of the allowance allocated $ 106,000 $ 2,352,000 $ 52,000
Average of impaired loans during the year 1,946,000 155,000 118,000
Interest income recognized during
impairment 49,000 13,000 14,000
Cash-basis interest income recognized 14,000 - -
(Continued)
28
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
Subsequent to December 31, 1999, the Company became aware of circumstances which
occurred in 1999, involving loans to a single borrower in which the Bank had
purchased a participating interest from another financial institution. As a
result of these circumstances, management concluded that a loss was probable
and, accordingly, recorded an additional provision for loan losses of $2.3
million for 1999 on loans outstanding of approximately $2.9 million. These loans
were considered to be impaired at December 31, 1999. During 2000, the Bank
charged-off $2.3 million of the total loans outstanding to this borrower.
NOTE 5 - LOAN SERVICING
Loans serviced for others are not reported as assets. These loans totaled
$213,449,000 and $181,102,000 at year-end 2000 and 1999. Related escrow balances
were $343,000 and $285,000 at year-end 2000 and 1999.
Activity for capitalized mortgage servicing rights was as follows:
2000 1999 1998
---- ---- ----
Servicing rights:
Beginning of year $ 1,335,419 $ 1,098,116 $ 518,945
Additions 495,039 494,900 976,562
Amortization (314,534) (257,597) (397,391)
---------------- ---------------- --------------
End of year $ 1,515,924 $ 1,335,419 $ 1,098,116
================ ================ ==============
NOTE 6 - PREMISES AND EQUIPMENT
Year-end premises and equipment consist of:
2000 1999
---- ----
Land $ 504,279 $ 499,668
Buildings and improvements 6,826,540 6,986,070
Furniture and equipment 5,552,616 5,281,617
---------------- --------------
Total cost 12,883,435 12,767,355
Accumulated depreciation (6,894,833) (6,246,331)
---------------- --------------
$ 5,988,602 $ 6,521,024
================ ==============
Depreciation expense was $690,753, $709,035 and $749,603 in 2000, 1999 and 1998,
respectively.
(Continued)
29
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 7 - DEPOSITS
At year-end 2000, stated maturities of time deposits were as follows, for the
years ending December 31:
2001 $ 69,860,662
2002 19,270,022
2003 14,967,024
2004 3,739,880
2005 523,000
-----------------
$ 108,360,588
=================
Time deposits exceeding $100,000 were approximately $49,766,000 and $30,059,000
at year-end 2000 and 1999.
At year-end 2000, stated maturities of time deposits exceeding $100,000 were as
follows:
In 3 months or less $ 24,601,492
Over 3 through 6 months 10,310,455
Over 6 through 12 months 3,433,122
Over 12 months 11,420,613
----------------
$ 49,765,682
================
Related party deposits were $1,942,000 and $1,806,000 at year-end 2000 and 1999.
NOTE 8 - BORROWED FUNDS
Securities Sold Under Agreements to Repurchase
Information concerning securities sold under agreements to repurchase is
summarized as follows:
2000 1999
---- ----
Amount outstanding at year-end $ 2,083,280 $ 2,002,363
Weighted average interest rate at year-end 3.60% 4.61%
Average daily balance during the year $ 3,652,025 $ 3,444,358
Weighted average interest rate during the year 4.65% 3.71%
Maximum month-end balance during the year $ 6,380,931 $ 5,143,802
(Continued)
30
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 8 - BORROWED FUNDS (Continued)
Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances totaled $5,852,870 and $14,174,391 at
year-end 2000 and 1999. At year-end 2000 the balance consisted of one fixed rate
advance with an interest rate of 6.04%. At December 31, 1999, advances had fixed
interest rates ranging from 5.88% to 6.04%.
Pursuant to collateral agreements with the Federal Home Loan Bank, in addition
to Federal Home Loan stock, advances are secured under a blanket lien
arrangement by qualified 1-to-4 family mortgage loans and U.S. Government agency
securities with a carrying value of approximately $21,734,000 and $38,465,000 at
year-end 2000 and 1999.
At year-end 2000 and 1999, scheduled principal reductions on these advances were
as follows for the years ending December 31:
2000 1999
---- ----
2000 $ - $ 8,321,521
2001 347,886 347,886
2002 376,412 376,412
2003 407,278 407,278
2004 440,675 440,675
2005 476,810 476,810
Thereafter 3,803,809 3,803,809
--------------- ---------------
Total FHLB advances $ 5,852,870 $ 14,174,391
=============== ===============
NOTE 9 - INCOME TAXES
Income tax expense consists of:
2000 1999 1998
---- ---- ----
Current $ 753,556 $ 1,464,775 $ 1,260,805
Deferred 802,820 (734,238) 89,195
--------------- -------------- --------------
Total $ 1,556,376 $ 730,537 $ 1,350,000
=============== ============== ==============
(Continued)
31
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 9 - INCOME TAXES (Continued)
Income tax expense calculated at the statutory federal income tax rate of 34%
differs from actual income tax expense as follows:
2000 1999 1998
---- ---- ----
Statutory rates $ 1,618,845 $ 779,727 $ 1,363,561
Increase (decrease) from:
Tax-exempt securities income (105,095) (106,804) (97,848)
Non-deductible interest expense 15,615 7,070 8,614
Other, net 27,011 50,544 75,673
--------------- -------------- --------------
$ 1,556,376 $ 730,537 $ 1,350,000
=============== ============== ==============
Year-end deferred tax assets and liabilities consist of:
2000 1999
---- ----
Deferred tax assets
Allowance for loan losses $ 578,903 $ 1,381,031
Net deferred loan fees 211,552 200,584
Net unrealized losses on
securities available for sale 17,704 172,205
Other 71,483 37,173
-------------- --------------
Total deferred tax assets 879,642 1,790,993
-------------- --------------
Deferred tax liabilities
Depreciation (307,447) (322,849)
Mortgage servicing rights (515,414) (454,042)
-------------- --------------
Total deferred tax liabilities (822,861) (776,891)
-------------- --------------
Net deferred tax asset $ 56,781 $ 1,014,102
============== ==============
NOTE 10 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic earnings per
share and diluted earnings per share computations for the years ended is
presented below:
Basic earnings per share 2000 1999 1998
---- ---- ----
Net income available to common
shareholders $ 3,204,933 $ 1,562,778 $ 2,660,474
============== =============== ==============
Weighted average common shares
outstanding 853,910 852,509 850,118
============== =============== ==============
Basic earnings per share $ 3.75 $ 1.83 $ 3.13
========= ======= ========
(Continued)
32
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 10 - EARNINGS PER SHARE (Continued)
2000 1999 1998
---- ---- ----
Diluted earnings per share
Net income available to common
shareholders $ 3,204,933 $ 1,562,778 $ 2,660,474
============== =============== ==============
Weighted average common shares
outstanding 853,910 852,509 850,118
Add: Dilutive effects of exercise of
stock options 10,881 1,857 1,468
-------------- --------------- --------------
Weighted average common and dilutive
potential common shares outstanding 864,791 854,366 851,586
============== =============== ==============
Diluted earnings per share $ 3.71 $ 1.83 $ 3.12
========= ======= ========
NOTE 11 - EMPLOYEE BENEFITS
Defined Benefit Plan
Information about the pension plan was as follows.
2000 1999
---- ----
Change in benefit obligation:
Beginning benefit obligation $ 1,559,521 $ 1,334,322
Service cost 154,300 127,921
Interest cost 122,931 100,871
Actuarial loss 102,065 32,357
Plan amendments 65,300 -
Benefits paid (45,616) (35,950)
--------------- --------------
Ending benefit obligation $ 1,958,501 $ 1,559,521
=============== ==============
Change in plan assets, at fair value:
Beginning plan assets 1,331,916 1,142,109
Actual return (31,089) 40,090
Employer contribution 189,600 185,667
Benefits paid (45,616) (35,950)
--------------- --------------
Ending plan assets $ 1,444,811 $ 1,331,916
=============== ==============
Net amount recognized:
Funded status $ (513,690) $ (227,605)
Unrecognized net actuarial loss 432,914 217,323
Unrecognized transition obligation 12,318 16,423
Unrecognized prior service cost 10,808 13,517
--------------- --------------
Prepaid (accrued) benefit cost $ (57,650) $ 19,658
=============== ==============
(Continued)
33
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 11 - EMPLOYEE BENEFITS (Continued)
The components of pension expense and related actuarial assumptions were as
follows.
2000 1999 1998
---- ---- ----
Service cost $ 154,300 $ 127,921 $ 111,178
Interest cost 122,931 100,871 86,414
Expected return on plan assets (94,578) (78,756) (61,124)
Amortization of prior service cost 2,709 2,709 2,709
Amortization of transition obligation 4,105 4,105 4,105
Recognized net actuarial loss 12,141 3,556 -
Special termination benefit loss 65,300 - -
-------------- --------------- --------------
Net pension expense $ 266,908 $ 160,406 $ 143,282
============== =============== ==============
Discount rate on benefit obligation 7.5% 7.5% 7.5%
Long-term expected rate of return
on plan assets 8.0% 8.0% 8.0%
Rate of compensation increase 5.0% 5.0% 5.0%
ESOP and 401(k) Plan
The Company maintains an employee stock ownership plan (ESOP) covering
substantially all employees. The ESOP is designed to enable employees to acquire
common stock of the Company. The cost of the ESOP is funded through
contributions to an Employee Stock Ownership Trust in amounts determined
annually by the Board of Directors. Shares of common stock acquired by the ESOP
are to be allocated to each participating employee and held until the employee's
termination, retirement or death. There were no cash contributions to the ESOP
for 2000, 1999 and 1998.
At year-end 2000 and 1999, the ESOP held 100,270 and 98,325 shares of the
Company's stock, all of which is allocated to employees. Upon distribution of
shares to a participant, the participant has the right to require the Company to
purchase shares at the most recent appraised value in accordance with the terms
and conditions of the plan. As such, these shares are not classified in
shareholders' equity as permanent equity. The appraisal value of the shares held
by the ESOP was $5,113,770 and $4,326,300 at year-end 2000 and 1999.
The ESOP plan includes a 401(k) provision. Employees may elect to contribute up
to 15% of their salaries, and the Company will match 100% of the contribution up
to 2% of the eligible salaries. Expense relating to the 401(k) provision was
$96,924 , $57,600 and $57,622 in 2000, 1999 and 1998.
(Continued)
34
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 11 - EMPLOYEE BENEFITS (Continued)
Stock Option Plan
SFAS No. 123, Accounting for Stock-Based Compensation requires proforma
disclosures for companies that do not adopt its fair value accounting method for
stock-based compensation. Accordingly, the following proforma information
presents net income and basic and diluted earnings per share had the fair value
method been used to measure compensation cost for stock options. The exercise
price of options granted during 1999 and 1998 is equivalent to the market value
of underlying stock at the grant date. Accordingly, no compensation expense was
actually recognized for stock options in 1999 and 1998. During 2000, 5,720
options were granted at an exercise price of $44, which was below market value
of the underlying stock as of the grant date. Accordingly, $23,465 of
compensation expense was recognized for stock options granted in 2000.
2000 1999 1998
---- ---- ----
Net income as reported $ 3,204,933 $ 1,562,778 $ 2,660,474
Proforma net income 3,151,125 1,533,382 2,639,183
Reported earnings per common share
Basic $ 3.75 $ 1.83 $ 3.13
Diluted 3.71 1.83 3.12
Proforma earnings per common share
Basic 3.69 1.80 3.10
Diluted 3.64 1.79 3.10
The fair value of options granted is estimated using option pricing models,
using the following weighted average information:
2000 1999 1998
---- ---- ----
Risk-free interest rate 6.64% 5.10% 5.53%
Expected option life 8 years 8 years 8 years
Expected stock price volatility 20.92% Nominal Nominal
Expected dividends 1.35% 1.86% 1.20%
The weighted average fair value of stock options granted was $24.86, $7.09 and
$4.57 for 2000, 1999 and 1998. At year-end 2000, options outstanding had a
weighted average remaining life of 7.1 years.
(Continued)
35
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 11 - EMPLOYEE BENEFITS (Continued)
Stock option plans are used to reward directors and certain executive officers
and provide them with an additional equity interest. Options are issued for 10
year periods and vest over five years. Information about options available for
grant and options granted follows:
Weighted-
Average
Available Options Exercise
For Grant(1) Outstanding(1) Price(1)
--------- ----------- -----
Balance at January 1, 1998 39,520 12,020 $ 19.46
Options issued (6,340) 6,340 25.00
Options exercised - (1,920) 21.43
------------ ------------ ----------
Balance at December 31, 1998 33,180 16,440 21.37
Options issued (5,720) 5,720 36.00
------------ ------------ ----------
Balance at December 31, 1999 27,460 22,160 25.14
Options issued (5,720) 5,720 44.00
------------- ------------ ----------
Balance at December 31, 2000 21,740 27,880 $ 29.01
============ ============ ==========
(1) Restated for a two-for-one stock split in 1999.
Options exercisable at year-end are as follows:
Weighted-
Average
Number of Exercise
Options Price
------- -----
2000 16,464 $ 24.09
1999 9,964 22.25
1998 4,908 19.82
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
At year-end 2000 and 1999, reserves of $3,573,000 and $2,895,000 were required
as deposits with the Federal Reserve or as cash on hand. These reserves do not
earn interest.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. These
involve, to varying degrees, credit and interest-rate risk in excess of the
amount reported in the financial statements.
(Continued)
36
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
The Company has the following commitments outstanding at year-end:
2000 1999
---- ----
Commitments to extend credit $ 58,476,000 $ 56,996,000
Credit card arrangements 2,725,000 2,185,000
Standby letters of credit 696,000 514,000
--------------- ---------------
$ 61,897,000 $ 59,695,000
=============== ===============
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit, and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments to guarantee a customer's performance to a
third party.
NOTE 13 - PARENT CORPORATION CONDENSED
The Company's primary source of funds to pay dividends to shareholders is the
dividends it receives from the Bank. The Bank is subject to certain restrictions
on the amount of dividends it may declare without prior regulatory approval. At
December 31, 2000, approximately $8,571,000 of the Bank's retained earnings is
available for transfer in the form of dividends without prior approval from
regulatory agencies.
Following are condensed parent corporation financial statements.
(Continued)
37
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 13 - PARENT CORPORATION CONDENSED (Continued)
CONDENSED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
---- ----
Assets
Cash and cash equivalents $ 1,031,430 $ 417,928
Securities available for sale 727,894 938,133
Investment in subsidiary 23,774,861 21,395,761
Other 437,518 23,439
-------------- ---------------
Total assets $ 25,971,703 $ 22,775,261
============== ===============
Liabilities and Shareholders' Equity
Other $ 504,955 $ -
Common stock subject to repurchase obligation in ESOP 5,113,770 4,326,300
Shareholders' equity 20,352,978 18,448,961
-------------- ---------------
Total liabilities and shareholders' equity $ 25,971,703 $ 22,775,261
============== ===============
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
2000 1999 1998
---- ---- ----
Dividends from subsidiary $ 1,200,000 $ 600,000 $ 700,000
Interest on securities 38,183 43,596 43,835
Other expenses (118,318) (15) (2,742)
-------------- -------------- ---------------
Income before equity in undistributed income
of subsidiary bank 1,119,865 643,581 741,093
Equity in undistributed net income of
subsidiary 2,085,068 919,197 1,919,381
-------------- -------------- ---------------
Net income $ 3,204,933 $ 1,562,778 $ 2,660,474
============== ============== ===============
(Continued)
38
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 13 - PARENT CORPORATION CONDENSED (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
2000 1999 1998
---- ---- ----
Operating activities
Net income $ 3,204,933 $ 1,562,778 $ 2,660,474
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of
subsidiary (2,085,068) (919,197) (1,919,381)
Net amortization of investment securities 4,100 3,627 3,035
Other 87,862 60,763 (10,322)
-------------- ------------- -------------
Net cash from operating activities 1,211,827 707,971 733,806
Investing Activities
Activity in available for sale securities
Maturities and calls 215,000 105,000 -
Purchases - - (113,177)
-------------- ------------- -------------
Net cash from investing activities 215,000 105,000 (113,177)
Financing Activities
Repurchase of common stock (151,405) (36,936) (27,200)
Issuance of common stock 117,065 96,030 78,700
Exercise of stock options - - 41,138
Issuance of stock options below market value 23,465 - -
Dividends paid and fractional shares (802,450) (634,775) (569,227)
-------------- ------------- -------------
Net cash from financing activities (813,325) (575,681) (476,589)
-------------- ------------- -------------
Net change in cash and cash equivalents 613,502 237,290 144,040
Beginning cash and cash equivalents 417,928 180,638 36,598
-------------- ------------- -------------
Ending cash and cash equivalents $ 1,031,430 $ 417,928 $ 180,638
============== ============= =============
(Continued)
39
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to approximate fair
value for cash and cash equivalents, demand and savings deposits, short-term
borrowings, accrued interest, and variable rate loans or deposits that reprice
frequently and fully. Securities fair values are based on quoted market prices
or, if no quotes are available, on the rate and term of the security and on
information about the issuer. For fixed rate loans or deposits and for variable
rate loans or deposits with infrequent repricing or repricing limits, the fair
value is estimated by discounted cash flow analysis using current market rates
for the estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable. Fair value of loans held for sale is based on market
estimates. Fair value of mortgage servicing rights is estimated using discounted
cash flows based on current market interest rates. The fair value of long-term
borrowings is based on currently available rates for similar financing. The fair
value of other financial instruments and off-balance-sheet items approximate
cost and are not considered significant to this presentation.
The estimated year-end fair values of financial instruments were:
2 0 0 0 1 9 9 9
------- -------
Carrying Carrying
Amount Fair Value Amount Fair Value
Financial assets: ------ ---------- ------ ----------
Cash and cash equivalents $ 12,992,516 $ 12,993,000 $ 9,509,898 $ 9,510,000
Securities available for sale 19,321,007 19,321,000 23,024,175 23,024,000
Stock in Federal Home Loan Bank 2,503,700 2,504,000 2,503,700 2,504,000
Stock in Federal Reserve Bank 360,000 360,000 360,000 360,000
Loans held for sale 803,040 803,000 758,651 759,000
Loans, net 212,317,017 211,907,000 192,720,533 192,344,000
Accrued interest receivable 1,898,947 1,899,000 1,576,279 1,576,000
Mortgage servicing rights 1,515,924 1,516,000 1,335,419 1,335,000
Financial liabilities:
Demand and savings deposits $ (115,782,067) $ (115,782,000) $ (112,545,250) $ (112,545,000)
Time deposits (108,360,588) (109,317,000) (86,661,159) (87,189,000)
Borrowed funds (7,936,150) (7,871,000) (16,176,754) (16,183,000)
(Continued)
40
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 15 - REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Company and Bank were categorized as well capitalized at year-end. Actual
and required capital levels (in millions) and ratios were:
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2000
Total capital (to risk weighted assets)
Consolidated $ 27.8 12.7% $ 17.5 8.0% $ 21.9 10.0%
Bank 26.1 11.9% 17.5 8.0% 21.9 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 25.5 11.6% 8.8 4.0% 13.2 6.0%
Bank 23.8 10.9% 8.8 4.0% 13.1 6.0%
Tier 1 capital (to average assets)
Consolidated 25.5 9.9% 10.3 4.0% 12.9 5.0%
Bank 23.8 9.3% 10.3 4.0% 12.8 5.0%
1999
Total capital (to risk weighted assets)
Consolidated $ 25.7 12.6% $ 16.3 8.0% $ 20.3 10.0%
Bank 24.3 12.1% 16.1 8.0% 20.1 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 23.1 11.3% 8.2 4.0% 12.2 6.0%
Bank 21.7 10.8% 8.0 4.0% 12.1 6.0%
Tier 1 capital (to average assets)
Consolidated 23.1 9.9% 9.4 4.0% 11.7 5.0%
Bank 21.7 9.3% 9.3 4.0% 11.7 5.0%
(Continued)
41
LENAWEE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings (Loss) per Share
-------------------------
Income Income Income (Loss) Basic Fully Diluted
------ ------ ------------ ----- -------------
2000
First quarter $ 4,833,000 $ 2,889,000 $ 704,000 $ 0.83 $ 0.81
Second quarter 5,143,000 3,013,000 822,000 0.96 0.95
Third quarter 5,378,000 3,040,000 804,000 0.94 0.93
Fourth quarter 5,497,000 3,199,000 875,000 1.02 1.02
1999
First quarter $ 4,149,000 $ 2,638,000 $ 656,000 $ 0.77 $ 0.77
Second quarter 4,323,000 2,822,000 793,000 0.93 0.93
Third quarter 4,608,000 3,035,000 844,000 0.99 0.99
Fourth quarter 4,843,000 3,116,000 (730,000)* (0.86) (0.86)
* The significant fluctuation in net income (loss) during the fourth quarter
of 1999 is primarily the result of recording additional provision for loan
losses of approximately $2.3 million attributed to loans to a single
borrower in which the Bank had purchased a participating interest from
another financial institution. This event is further discussed in Note 4.
42
COMMON STOCK INFORMATION
There is no active market for Company's common stock, and there is no published
information with respect to its market price. There are occasional sales through
brokers and direct sales by shareholders of which the Company's management is
aware. It is the understanding of the management of the Company that over the
last three years, the Company's common stock has sold at prices in excess of
book value. During 2000, there were, as far as the Company's management knows,
sales of shares of the Company's common stock, involving a total of 81,176
shares. The price was reported to management in only a few of these
transactions, and management has no way of confirming the prices that were
reported. During this period, the highest price known by management to be paid
was $72.50 per share, and the lowest price was $60.00 per share. To the
knowledge of management, the last sale of common stock occurred in December
2000, involving the sale of 75 shares at a price of $60.00 per share.
The following table sets forth the range of high and low sales prices of the
Company's Common Stock during 2000, 1999, and 1998 , based on information made
available to the Company, as well as per share cash dividends declared during
those periods. Although management is not aware of any transactions at higher or
lower prices, there may have been transactions at prices outside the ranges
listed below:
Cash
Sales Prices (1) Dividends Declared (1)
---------------- ----------------------
High Low
---- ---
2000
First Quarter............... $72.50 $65.00 0.34
Second Quarter.............. $67.50 $62.50 0.20
Third Quarter............... $65.00 $60.00 0.20
Fourth Quarter.............. $67.50 $60.00 0.20
1999 High Low
First Quarter............... $46.00 $46.00 0.23
Second Quarter.............. $52.50 $47.50 0.16
Third Quarter............... $70.00 $52.50 0.17
Fourth Quarter.............. $75.00 $70.00 0.19
1998 High Low
First Quarter............... $26.25 $25.00 0.20
Second Quarter.............. $35.00 $26.25 0.15
Third Quarter............... $42.50 $37.00 0.16
Fourth Quarter.............. $45.00 $42.50 0.16
(1) Adjusted for all stock splits.
There are 3,000,000 shares of the Company's common stock authorized, of which
851,551 shares were issued and outstanding as of December 31, 2000. There were
approximately 570 shareholders of record, including trusts and shares jointly
owned, as of that date.
The holders of the Company's common stock are entitled to dividends when, as and
if declared by the Board of Directors of the Company out of funds legally
available for that purpose. Dividends have been paid four times annually. In
determining dividends, the Board of Directors considers the earnings, capital
requirements and financial condition of the Company and the Bank, along with
other relevant factors. The Company's principal source of funds for cash
dividends is the dividends paid by the Bank. The ability of the Company and the
Bank to pay dividends is subject to regulatory restrictions and requirements.
43
Lenawee Bancorp, Inc. This Proxy is solicited
135 East Maumee Street on behalf of the
Adrian, Michigan 49221 Board of Directors
PROXY
The undersigned holder of _________________ shares of capital stock of
Lenawee Bancorp, Inc. hereby appoints Douglas L. Kapnick and Allan F. Brittain
as Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all the shares of Common
Stock of Lenawee Bancorp, Inc. held of record by the undersigned on March 8,
2001, at the annual meeting of shareholders to be held April 18, 2001, and at
any adjournment thereof.
1. In the election of three directors to be elected for terms expiring in 2004
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the to vote for all nominees
contrary below) listed below
(INSTRUCTION: To withhold authority to vote for any individual nominee
strike a line through the nominee's name in the list below.)
Fred R. Duncan - J. Paul Rupert - Emory M. Schmidt
2. Proposal to approve the Lenawee Bancorp 2001 Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to approve the selection of the Corporation's auditors for the
2001 fiscal year.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this Proxy will be
voted FOR all nominees listed in Item 1 and FOR the Other Proposals.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership or limited liability company, please sign in partnership or company
name by authorized person.
_____________________________________ _______________________________________
Signature Signature if held jointly
Dated: ______________________, 2001
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Exhibit 21
Subsidiaries of Registrant
Name Ownership Incorporation
---- --------- -------------
Bank of Lenawee 100% Michigan
Bank of Washtenaw 100% Michigan
Lenawee Financial Services, Inc. 100% by Michigan
Bank of Lenawee
Pavilion Mortgage Company 100% by Michigan
Bank of Lenawee