UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ____________________
Commission File No. 0-11487
LAKELAND FINANCIAL CORPORATION
(exact name of registrant as specified in its charter)
INDIANA 35-1559596
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 1-219-267-6144
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such other period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein and will not be contained,
to the best of the Registrant's knowledge, in definitive Proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant, computed solely for the purposes of this requirement on the basis
of the book value at February 28, 1997, and assuming solely for the purposes
of this calculation that all Directors and executive officers of the
Registrant are "affiliates": $40,422,606.
Number of shares of common stock outstanding at February 28, 1997:
2,903,799
Cover page 1 of 2 pages
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in the
Part of 10-K indicated:
Part Document
I, II & IV Lakeland Financial Corporation's Annual Report to
Shareholders for year ended December 31, 1996,
parts of which are incorporated into Parts I, II
and IV of this Form 10-K.
III Proxy statement mailed to Shareholders on March 13,
1997, which is incorporated into Part III of this
Form 10-K.
Cover page 2 of 2 pages
<PAGE>
PART I.
ITEM 1. BUSINESS
The registrant was incorporated under the laws of the State of Indiana on
February 8, 1983. As used herein, the term "Registrant" refers to Lakeland
Financial Corporation or, if the context dictates, the Lakeland Financial
Corporation and its wholly owned subsidiary, Lake City Bank, Warsaw, Indiana.
GENERAL
Registrant's Business. The Registrant is a bank holding company as
defined in the Bank Holding Company Act of 1956, as amended. Registrant owns
all of the outstanding stock of Lake City Bank, Warsaw, Indiana, a full
service commercial bank organized under Indiana law (the "Bank"). Registrant
conducts no business except that incident to its ownership of the outstanding
stock of the Bank and the operation of the Bank.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation. The Bank's activities cover all phases of commercial banking,
including checking accounts, savings accounts, time deposits, the sale of
securities under agreements to repurchase, discount brokerage services,
commercial and agricultural lending, direct and indirect consumer lending,
real estate mortgage lending, safe deposit box service and trust services.
The Bank's main banking office is located at 202 East Center Street,
Warsaw, Indiana. As of December 31, 1996, the Bank had nine branch offices and
one drive-up facility in Kosciusko County, eight branch offices in Elkhart
County, three branch offices in Noble County, three branch offices in Wabash
County, two branch offices in LaGrange County, two branch offices in Marshall
County, one branch office in Whitley County and two branch offices and one
drive-up facility in Fulton County. The Bank's operations center is located at
113 East Market Street, Warsaw, Indiana.
Supervision and Regulation. The Registrant is a bank holding company
within the meaning of the Bank Holding Company Act of 1956, as amended ("BHC
Act"). As a bank holding company, the registrant is required to file with the
Federal Reserve Board (the "FRB") annual reports and such additional
information as the FRB may require. The FRB may also make an examination or
inspection of the Registrant.
The BHC Act prohibits a bank holding company from engaging in, or
acquiring direct or indirect control of more than five percent of the voting
shares of any company engaged in non-banking activities. One of the principal
exceptions to this prohibition is for activities deemed by the FRB to be
"closely related to banking". Under current regulations, bank holding
companies and their subsidiaries may engage in such bank related business
ventures as consumer finance, equipment leasing, computer service bureau and
software operations and mortgage banking.
The BHC Act also governs banking expansion by bank holding companies.
Before a bank holding company acquires more than five percent of the voting
shares of any other bank it must receive the prior written approval of the FRB
or its delegate. Furthermore, the BHC Act does not permit a bank holding
company to acquire a bank located outside the State of Indiana unless the
acquisition is specifically authorized by the laws of the State in which such
bank is located.
The acquisition of banking subsidiaries by bank holding companies is
subject to the jurisdiction of, and requires the prior approval of, the
Federal Reserve, and for institutions resident in Indiana, the Indiana
Department of Financial Institutions. Bank holding companies located in
Indiana are permitted to acquire banking subsidiaries throughout the state,
subject to limitations based upon the percentage of total state deposits of
the holding company's subsidiary banks. Indiana law permits the Registrant to
acquire banks, and be acquired by bank holding
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<PAGE>
companies, located in any state in the country which permits reciprocal entry
by Indiana bank holding companies.
The Registrant is an "affiliate" of the Bank within the meaning of
Section 23A of the Federal Reserve Act (as made applicable to the Bank by the
Federal Deposit Insurance Act) and Indiana Code 28-1-18.1. As a result, the
Bank is restricted in making loans to, investments in, or loans secured by
securities of, the Registrant. The BHC Act also prohibits the Registrant and
its subsidiaries from imposing "tie-in" requirements in connection with
extensions of credit and other services.
Under the provisions of Indiana law, the registrant may not acquire more
than twenty-five percent of the voting stock in any banks other than the Bank
without the approval of the Indiana Department of Financial Institutions. In
any such event, the Registrant would be required to obtain the prior approval
of the FRB as described above to purchase interest of five percent or more in
another bank.
The Bank is under supervision of and subject to examination by the
Indiana Department of Financial Institutions and the Federal Deposit Insurance
Corporation. Regulation and examination by banking regulatory agencies are
primarily for the benefit of depositors and not shareholders.
The earnings of commercial banks are affected not only by general
economic conditions, but also by the policies of various governmental
regulatory authorities. In particular, the FRB regulates money and credit
conditions and interest rates in order to influence general economic
conditions, primarily through open-market operations in U.S. Government
securities, the discount rate on bank borrowing, setting the reserves that
banks must maintain against certain bank deposits and the regulation of
interest rates payable by banks on certain time and savings deposits. These
policies have a significant effect on the overall growth and distribution of
bank loans, investments and deposits. They influence interest rates charged on
loans, earned on investments and paid for time and savings deposits. FRB
monetary policies have had significant effect on the operating results of
commercial banks in the past, and are expected to exert similar influence in
the future. The general effect, if any, of such policies upon the future
business and earnings of the Registrant and the Bank cannot be reasonably
predicted.
MATERIAL CHANGES AND BUSINESS DEVELOPMENTS
From the date of the Registrant's incorporation, February 8, 1983, until
October 31, 1983, the Registrant conducted no business and had no assets
(except nominal assets necessary to complete the acquisition of the Bank). The
Registrant has conducted no business since October 31, 1983, except that
incident to its ownership of the stock of the Bank, the collection of
dividends from the Bank, and the disbursement of dividends to the Registrant's
shareholders. During the period from 1985 to 1987, the Registrant owned all of
the outstanding shares of Lakeland Mortgage Corp., a mortgage lending and
servicing corporation doing business in Indiana. Lakeland Mortgage Corp.
discontinued business operations on December 15, 1987. The Registrant
continued to own all of the stock of Lakeland Mortgage Corp. until 1992,
during which year, Lakeland Mortgage Corp. was liquidated and all stock was
redeemed.
COMPETITION
The Bank was originally organized in 1872 and has continuously operated
under the laws of the State of Indiana since its organization. The Bank is a
full service bank providing both commercial and personal banking services.
Bank products offered include interest and noninterest bearing demand
accounts, savings and time deposit accounts, sale of securities under
agreements to repurchase, discount brokerage, commercial loans, mortgage
loans, consumer loans, letters of credit, and a wide range of trust services.
The interest rates for both deposits and loans, as well as the range of
services provided, are nearly the same for all banks competing within the
Bank's service area.
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<PAGE>
The Bank's service area is described as all of Kosciusko, Elkhart,
LaGrange, Noble and Wabash Counties and portions of Marshall, Fulton, Miami,
Huntington and Whitley Counties. In addition to the banks located within its
service area, the Bank also competes with savings and loan associations,
credit unions, farm credit services, finance companies, personal loan
companies, insurance companies, money market funds, and other non-depository
financial intermediaries. Also, financial intermediaries such as money market
mutual funds and large retailers are not subject to the same regulations and
laws that govern the operation of traditional depository institutions and
accordingly may have an advantage in competing for funds.
The Bank competes with other major banks for the large commercial deposit
and loan accounts. The Bank is presently subject to an aggregate maximum loan
limit to any single account in the amount of $7,012,000 pursuant to Indiana
law. This maximum prohibits the Bank from providing a full range of banking
services to those businesses or personal accounts whose borrowing periodically
exceed this amount. In order to retain at least a portion of the bank business
of these large borrowers, the Bank maintains correspondent relationships with
other financial institutions. The Bank also participates with local and other
banks in the placement of large borrowings in excess of its lending limit. The
Bank is also a member of the Federal Home Loan Bank of Indianapolis in order
to broaden its mortgage lending and investment activities and to provide
additional funds, if necessary, to support these activities.
FOREIGN OPERATIONS
The Bank has no investments with any foreign entity other than a nominal
demand deposit account which is maintained with a Canadian bank in order to
facilitate the clearing of checks drawn on banks located in that country.
There are no foreign loans.
EMPLOYEES
At December 31, 1996, the Registrant, including its subsidiary
corporation, had approximately 320 full time equivalent employees. Benefit
programs include a pension plan, 401(k) plan, group medical insurance, group
life insurance and paid vacations. The bank is not a party to any collective
bargaining agreement, and employee relations are considered good.
INDUSTRY SEGMENTS
The Registrant and the Bank are engaged in a single industry and perform
a single service -- commercial banking. On the pages that follow are tables
which set forth selected statistical information relative to the business of
the Registrant.
(Intentionally Left Blank)
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<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
<CAPTION>
1996 1995
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Income Yield* Balance Income Yield*
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Loans:
Taxable ** 349,336 32,724 9.37 305,806 29,859 9.76
Tax Exempt * 3,475 373 10.73 3,435 389 11.32
Investments:
Taxable 181,411 11,348 6.26 170,788 10,723 6.28
Tax Exempt * 22,626 2,088 9.23 16,724 1,572 9.40
Short-term investment 4,250 226 5.32 3,293 192 5.83
Interest bearing deposits 213 19 8.92 108 10 9.26
---------- ---------- ---------- ---------- ---------- ----------
Total Earning Assets $ 561,311 $ 46,778 8.33% $ 500,154 $ 42,745 8.55%
========== ==========
Nonearning assets:
Cash and due from banks 24,533 0 20,725 0
Premises and equipment 14,724 0 12,386 0
Other assets 9,424 0 7,668 0
Less: allowance for loan losses (5,382) 0 (5,238) 0
---------- ---------- ---------- ----------
Total assets $ 604,610 $ 46,778 $ 535,695 $ 42,745
========== ========== ========== ==========
<FN>
* Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1996 and 1995. Tax equivalent rate
for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to
nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
**Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1996, and
1995, are included as taxable loan interest income.
</FN>
</TABLE>
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<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
<CAPTION>
1995 1994
------------------------------------- ------------------------------------
Average Interest Average Interest
Balance Income Yield* Balance Income Yield*
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Loans:
Taxable ** 305,806 29,859 9.76 267,604 23,658 8.84
Tax Exempt * 3,435 389 11.32 3,787 413 10.91
Investments:
Taxable 170,788 10,723 6.28 149,049 8,842 5.93
Tax Exempt * 16,724 1,572 9.40 11,436 1,102 9.64
Short-term investment 3,293 192 5.83 3,551 152 4.28
Interest bearing deposits 108 10 9.26 98 3 3.06
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets $ 500,154 $ 42,745 8.55% $ 435,525 $ 34,170 7.85%
========== ==========
Nonearning assets:
Cash and due from banks 20,725 0 18,164 0
Premises and equipment 12,386 0 10,104 0
Other assets 7,668 0 7,508 0
Less: allowance for loan losses (5,238) 0 (4,417) 0
---------- ---------- ---------- ----------
Total assets $ 535,695 $ 42,745 $ 466,884 $ 34,170
========== ========== ========== ==========
<FN>
* Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1995 and 1994. Tax equivalent
rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to
nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
**Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1995,
and 1994, are included as taxable loan interest income.
</FN>
</TABLE>
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<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
<CAPTION>
1996 1995
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Expense Rate Balance Expense Rate
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities
Savings deposits $ 43,847 $ 1,118 2.55% $ 46,123 $ 1,069 2.32%
Interest bearing checking accounts 53,625 1,178 2.20 55,355 1,333 2.41
Time deposits
In denominations under $100,000 208,499 11,229 5.39 177,992 10,035 5.64
In denominations over $100,000 86,137 4,886 5.67 73,449 4,410 6.00
Miscellaneous short-term borrowings 78,823 4,213 5.34 66,610 3,803 5.71
Long-term borrowings 19,624 1,113 5.67 17,432 992 5.69
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities $ 490,555 $ 23,737 4.84% $ 436,961 $ 21,642 4.95%
========== ==========
Non-interest bearing liabilities
and stockholders' equity
Demand deposits 69,459 0 60,753 0
Other liabilities 5,553 0 4,897 0
Stockholders' equity 39,043 0 33,084 0
---------- ---------- ---------- ----------
Total liabilities and stock-
holders' equity $ 604,610 $ 23,737 3.93% $ 535,695 $ 21,642 4.04%
========== ========== ========== ========== ========== ==========
Net interest differential - yield on average
daily earning assets $ 23,041 4.10% $ 21,103 4.22%
========== ========== ========== ==========
</TABLE>
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<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
<CAPTION>
1995 1994
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Expense Rate Balance Expense Rate
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Interest bearing liabilities
Savings deposits $ 46,123 $ 1,069 2.32% $ 55,855 $ 1,517 2.72%
Interest bearing checking accounts 55,355 1,333 2.41 58,945 1,394 2.36
Time deposits
In denominations under $100,000 177,992 10,035 5.64 148,251 6,837 4.61
In denominations over $100,000 73,449 4,410 6.00 54,389 2,360 4.34
Miscellaneous short-term borrowings 66,610 3,803 5.71 47,220 1,879 3.98
Long-term borrowings 17,432 992 5.69 15,806 900 5.69
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities $ 436,961 $ 21,642 4.95% $ 380,466 $ 14,887 3.91%
========= ==========
Non-interest bearing liabilities
and stockholders' equity
Demand deposits 60,753 0 52,893 0
Other liabilities 4,897 0 4,606 0
Stockholders' equity 33,084 0 28,919 0
---------- ---------- ---------- ----------
Total liabilities and stock-
holders' equity $ 535,695 $ 21,642 4.04% $ 466,884 $ 14,887 3.19%
========== ========== ========== ========== ========== ==========
Net interest differential - yield on
average
daily earning assets $ 21,103 4.22% $ 19,283 4.43%
========== ========== ========== ==========
</TABLE>
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<PAGE>
<TABLE>
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(Fully Taxable Equivalent Basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
<CAPTION>
1996 Over (under) 1995(1) 1995 Over (under) 1994(1)
------------------------------------ ------------------------------------
Volume Rate Total Volume Rate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST AND LOAN FEE INCOME(2)
Loans:
Taxable $ 4,009 $ (1,144) $ 2,865 $ 3,581 $ 2,620 $ 6,201
Tax exempt 5 (21) (16) (39) 15 (24)
Investments:
Taxable 665 (40) 625 1,344 537 1,881
Tax exempt 544 (28) 516 496 (26) 470
Short-term investment 49 (15) 34 (12) 52 40
Interest bearing deposits 9 0 9 0 7 7
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 5,281 (1,248) 4,033 5,370 3,205 8,575
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE
Savings deposits (48) 97 49 (243) (205) (448)
Interest bearing checking accounts (41) (114) (155) (86) 25 (61)
Time deposits
In denominations under $100,000 1,616 (422) 1,194 1,517 1,681 3,198
In denominations over $100,000 700 (224) 476 979 1,071 2,050
Miscellaneous short-term borrowings 629 (219) 410 935 989 1,924
Long-term borrowings 124 (3) 121 93 (1) 92
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 2,980 (885) 2,095 3,195 3,560 6,755
---------- ---------- ---------- ---------- ---------- ----------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 2,301 $ (363) $ 1,938 $ 2,175 $ (355) $ 1,820
========== ========== ========== ========== ========== ==========
<FN>
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 1996, 1995 and 1994. The changes in volume represent "changes in volume times the old rate". The changes in rate
represent "changes in rate times old volume". The change in rate/volume were also calculated by "change in rate times change
in volume" and allocated consistently based upon the relative absolute values of the changes in volume and changes in rate.
(2) Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1996, 1995 and 1994. Tax
equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment
applicable to nondeductible interest expense.
</FN>
</TABLE>
-8-
<PAGE>
<TABLE>
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 1996, 1995 and 1994 are as follows:
<CAPTION>
1996 1995 1994
----------------------- ---------------------- ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury securities $ 31,604 $ 31,804 $ 27,549 $ 27,844 $ 26,960 $ 25,916
U.S. Government agencies and corporations 500 507 2,150 2,191 1,000 1,000
Mortgage-backed securities 46,002 46,332 48,302 48,843 30,734 28,987
Obligations of state and political
subdivisions 2,081 2,167 2,076 2,176 887 933
Other debt securities 1,000 1,032 999 1,066 999 1,026
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities available-for-sale 81,187 81,842 81,076 82,120 60,580 57,862
========== ========== ========== ========== ========== ==========
Securities held-to-maturity:
U.S. Treasury securities $ 17,020 $ 17,077 $ 13,611 $ 13,576 $ 14,714 $ 13,876
U.S. Government agencies and corporations 2,262 2,362 2,898 3,033 2,034 2,037
Mortgage-backed securities 83,811 83,719 77,319 77,471 78,781 73,673
Obligations of state and political
subdivisions 21,172 22,095 19,047 20,077 13,608 13,061
Other debt securities 1,009 1,120 1,013 1,171 1,015 1,076
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities held-to-maturity 125,274 126,373 113,888 115,328 110,152 103,723
Equity securities 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Total securities held to maturity $ 125,274 $ 126,373 $ 113,888 $ 115,328 $ 110,152 $ 103,723
========== ========== ========== ========== ========== ==========
</TABLE>
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<PAGE>
<TABLE>
ANALYSIS OF SECURITIES (cont.)
(Fully Tax Equivalent Basis)
(in thousands of dollars)
The maturity distribution (2) and weighted average yields (1) for debt securities portfolio at December 31, 1996, are as
follows:
<CAPTION>
After One After Five
Within Year Years Over
One Within Five Within Ten Ten
Year Years Years Years
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury securities
Book value 10,829 20,775 0 0
Yield 5.90 6.06
U.S. Government agencies and corporations
Book value 200 300 0 0
Yield 7.47 7.78
Mortgage-backed securities
Book value 0 10,568 25,065 10,369
Yield 6.74 6.72 6.90
Obligations of state and political
subdivisions
Book value 298 296 0 1,487
Yield 11.36 11.74 8.57
Other debt securities
Book value 1,000 0 0 0
Yield 9.39
------------ ------------ ------------ ------------
Total debt securities available-for-sale:
Book value 12,327 31,939 25,065 11,856
Yield 6.34 6.39 6.72 7.11
============ ============ ============ ============
Securities held-to-maturity:
U.S. Treasury securities
Book value 6,017 11,003 0 0
Yield 5.48 5.86
U.S. Government agencies and corporations
Book value 100 2,162 0 0
Yield 5.75 7.98
Mortgage-backed securities
Book value 402 19,984 36,955 26,470
Yield 5.63 7.02 6.20 6.03
Obligations of state and political
subdivisions
Book value 48 1,574 976 18,574
Yield 6.56 10.35 8.48 9.03
Other debt securities
Book value 0 1,009 0 0
Yield 9.73
------------ ------------ ------------ ------------
Total debt securities held-to-maturity:
Book value 6,567 35,732 37,931 45,044
Yield 5.51 6.90 6.24 7.30
============ ============ ============ ============
<FN>
(1) Tax exempt income converted to a fully taxable equivalent basis at a 34% rate.
(2) The maturity distribution of mortgage-backed securities is based upon anticipated payments as computed by using the historic
average repayment speed from date of issue.
(3) There are no investments in securities of any one issuer that exceed 10% of stockholders' equity.
</FN>
</TABLE>
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<PAGE>
<TABLE>
ANALYSIS OF LOAN PORTFOLIO
Analysis of Loans Outstanding
(in thousands of dollars)
The Registrant segregates its loan portfolio into four basic segments: commercial (including agri-business and agricultural
loans), real estate mortgages, installment and credit cards (including personal line of credit loans). The loan portfolio as of
December 31, 1996, 1995, 1994, 1993, and 1992 is as follows:
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial loans:
Taxable $ 226,190 $ 192,359 $ 173,325 $ 144,274 $ 128,268
Tax exempt 3,414 3,636 3,207 4,501 5,594
Total commercial loans 229,604 195,995 176,532 148,775 133,862
Real estate mortgage loans 60,949 55,948 47,296 49,816 50,413
Installment loans 71,398 58,175 48,228 46,914 36,111
Credit card and line of credit loans 20,314 17,499 15,900 14,680 13,816
---------- ---------- ---------- ---------- ----------
Total loans 382,265 327,617 287,956 260,185 234,202
Less allowance for loan losses 5,306 5,472 4,866 4,010 3,095
---------- ---------- ---------- ---------- ----------
Net loans $ 376,959 $ 322,145 $ 283,090 $ 256,175 $ 231,107
========== ========== ========== ========== ==========
<FN>
The real estate mortgage loan portfolio includes construction loans totaling $1,647, $1,224, $426, $223, and $1,164 as of
December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The above loan classifications are based on the nature of the loans as
of the loan origination date, and are independent as to the use of the funds by the borrower. There are no foreign loans included
in the above analysis.
</FN>
</TABLE>
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<PAGE>
<TABLE>
ANALYSIS OF LOAN PORTFOLIO (cont.)
Analysis of Loans Outstanding (cont.)
(in thousands of dollars)
Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules included in
the related loan agreements or upon scheduled maturity of each principal payment. The following table indicated the rate
sensitivity of the loan portfolio as of December 31, 1996. The table includes the real estate loans held-for-sale and assumes
these loans will not be sold during the various time horizons.
<CAPTION>
Credit
Card
Real and Line
Commercial Estate Installment of Credit Total Percent
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Immediately adjustable interest rates
or original maturity of one day $ 169,986 $ 2,091 $ 7,298 $ 17,317 $ 196,692 51.3%
Other within one year 17,267 24,834 23,731 0 65,832 17.2
After one year, within five years 38,357 21,737 39,584 2,997 102,675 26.8
Over five years 3,676 13,116 785 0 17,577 4.6
Nonaccrual loans 318 66 0 0 384 0.1
---------- ---------- ----------- ---------- ---------- ----------
Total loans $ 229,604 $ 61,844 $ 71,398 $ 20,314 $ 383,160 100.0%
========== ========== =========== ========== ========== ==========
<FN>
A portion of the Bank's loans are short-term maturities. At maturity, credits are reviewed, and if renewed, are renewed at
rates and conditions that prevail at the time of maturity.
Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or
adjustable interest rates as of December 31, 1996 amounted to $96,032 and $122,760 respectively.
</FN>
</TABLE>
-12-
<PAGE>
<TABLE>
ANALYSIS OF LOAN PORTFOLIO (cont.)
Review of Nonperforming Loans
(in thousands of dollars)
The following is a summary of nonperforming loans as of December 31, 1996, 1995, 1994, 1993 and 1992.
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 126 $ 122 $ 0 $ 1 $ 79
Commercial and industrial loans 22 69 16 315 100
Loans to individuals for household,
family and other personal expenditures 68 18 19 346 42
Loans to finance agriculture production
and other loans to farmers 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total past due loans 216 209 35 662 221
---------- ---------- ---------- ---------- ----------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 155 76 18 0 0
Commercial and industrial loans 229 456 0 0 0
Loans to individuals for household,
family and other personal expenditures 0 0 0 0 0
Loans to finance agriculture production
and other loans to farmers 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans 384 532 18 0 0
---------- ---------- ---------- ---------- ----------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,284 1,432 1,484 0 86
---------- ---------- ---------- ---------- ----------
Total nonperforming loans $ 1,884 $ 2,173 $ 1,537 $ 662 $ 307
========== ========== ========== ========== ==========
<FN>
Nonearning assets of the Corporation include nonaccrual loans (as indicated above), nonaccrual investments, other real
estate, and repossessions which amounted to $1,097 at December 31, 1996.
</FN>
</TABLE>
-13-
<PAGE>
ANALYSIS OF LOAN PORTFOLIO (cont.)
Comments Regarding Nonperforming Assets
PART A - CONSUMER LOANS
Consumer installment loans, except those loans that are secured by real
estate, are not placed on a nonaccrual status since these loans are
charged-off when they have been delinquent from 90 to 180 days, and when the
related collateral, if any, is not sufficient to offset the indebtedness.
Advances under Mastercard and Visa programs, as well as advances under all
other consumer lines of credit programs, are charged-off when collection
appears doubtful.
PART B - NONPERFORMING LOANS
When a loan is classified as a nonaccrual loan, interest on the loan is
no longer accrued and all accrued interest receivable is charged off. It is
the policy of the Bank that all unsecured loans (i.e. loans for which the
collateral is insufficient to cover all principal and accrued interest) will
be reclassified as nonperforming loans to the extent they are unsecured, on or
before the loan becomes 90 days delinquent. Thereafter, interest is recognized
and included in income only when received.
As of December 31, 1996, loans totaling $384,000 were on nonaccrual
status.
PART C - TROUBLED DEBT RESTRUCTURED LOANS
Loans renegotiated as troubled debt restructuring are those loans for
which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the terms of the loan.
Loans renegotiated as troubled debt restructuring totaled $1,284,000 as
of December 31, 1996. Interest income of $85,000 was recognized in 1996. Had
these loans been performing under the original contract terms, an additional
$44,000 would have been reflected in interest income during 1996. The Bank is
not committed to lend additional funds to debtors whose loans have been
modified.
PART D - OTHER NONPERFORMING ASSETS
The Bank adopted SFAS No. 114 and SFAS No. 118, 'Accounting by Creditors
for Impairment of a Loan' at January 1, 1995. Under these standards, loans
considered to be impaired are reduced to the present value of future cash
flows or to the fair value of collateral, by allocating a portion of the
allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require an increase, such increase is reported as
bad debt expense. As part of the loan review process, management reviews all
loans classified as 'special mention' or below, as well as other loans that
might warrant application of SFAS No. 114 and SFAS No. 118. The effect of
adopting these accounting standards on January 1, 1995 was immaterial and at
December 31, 1996, no loans were considered as impaired.
The management of the Bank is of the opinion that there are no
significant foreseeable losses relating to substandard or nonperforming
assets, except as discussed above.
-14-
<PAGE>
PART E - LOAN CONCENTRATIONS
There were no loan concentrations within industries which exceeded ten
percent of total assets. It is estimated that over 98% of all the Bank's
commercial, industrial, agri-business and agricultural real estate mortgage,
real estate construction mortgage and consumer loans are made within its basic
trade area.
Basis For Determining Allowance For Loan Losses
Management is charged with the responsibility of determining the adequacy
of the allowance for loan losses. This responsibility is fulfilled by
management in the following ways:
1. Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectibility factors and assesses
the requirement for specific reserves on such credits. For those loans not
subject to specific reviews, management reviews previous loan loss experience
to establish historical ratios and trends in charge-offs by loan category. The
ratios of net charge-offs to particular types of loans enable management to
estimate charge-offs in future periods by loan category and thereby establish
appropriate reserves for loans not specifically reviewed.
2. Management reviews the current and anticipated economic conditions of
its lending market to determine the effects on future loan charge-offs by loan
category, in addition to the effects on the loan portfolio as a whole.
3. Management reviews delinquent loan reports to determine risk of future
loan charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Based upon the above described policy and objectives, $120,000, $120,000
and $795,000 were charged to the provision for loan losses and added to the
allowance for loan losses in 1996, 1995 and 1994, respectively.
The allocation of the allowance for loan losses to the various lending
areas is performed by management in relation to perceived exposure to loss in
the various loan portfolios. However, the allowance for loan losses is
available in its entirety to absorb losses in any particular loan category.
(Intentionally Left Blank)
-15-
<PAGE>
<TABLE>
ANALYSIS OF LOAN PORTFOLIO (cont.)
Summary of Loan Loss
(in thousands of dollars)
Following is a summary of the loan loss experience for the years ended December 31, 1996, 1995, 1994, 1993, and 1992.
<CAPTION>
1996 1995 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding, December 31, $ 382,265 $ 327,617 $ 287,956 $ 260,185 $ 234,202
========== ========== ========== ========== ==========
Average daily loans outstanding during the
year ended December 31, $ 352,811 $ 309,241 $ 271,391 $ 240,466 $ 213,599
========== ========== ========== ========== ==========
Allowance for loan losses, January 1, $ 5,472 $ 4,866 $ 4,010 $ 3,095 $ 2,612
---------- ---------- ---------- ---------- ----------
Loans charged-off
Commercial 171 137 27 99 446
Real Estate 0 48 0 4 258
Installment 158 112 93 97 217
Credit cards and personal credit lines 39 58 15 28 39
---------- ---------- ---------- ---------- ----------
Total loans charged-off 368 355 135 228 960
---------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged-off
Commercial 12 26 107 40 11
Real Estate 0 0 1 1 0
Installment 54 63 81 56 85
Credit cards and personal credit lines 16 6 7 6 7
---------- ---------- ---------- ---------- ----------
Total recoveries 82 95 196 103 103
---------- ---------- ---------- ---------- ----------
Net loans charged-off 286 260 (61) 125 857
Purchase loan adjustment 0 746 0 250 0
Provision for loan loss charged to expense 120 120 795 790 1,340
---------- ---------- ---------- ---------- ----------
Balance December 31, $ 5,306 $ 5,472 $ 4,866 $ 4,010 $ 3,095
========== ========== ========== ========== ==========
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial 0.03% 0.03% (0.03)% 0.02% 0.20%
Real Estate 0.01 0.01 0.00 0.00 0.12
Installment 0.00 0.02 0.01 0.02 0.06
Credit cards and personal credit lines 0.04 0.02 0.00 0.01 0.02
---------- ---------- ---------- ---------- ----------
Total 0.08% 0.08% (0.02)% 0.05% 0.40%
========== ========== ========== ========== ==========
</TABLE>
-16-
<PAGE>
<TABLE>
ANALYSIS OF LOAN PORTFOLIO (cont.)
Allocation of Allowance for Loan Losses
(in thousands of dollars)
The following is a summary of the allocation for loan losses as of December 31, 1996, 1995, 1994, 1993 and 1992.
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
Allowance Loans as Allowance Loans as Allowance Loans as
For Percentage For Percentage For Percentage
Loan of Gross Loan of Gross Loan of Gross
Losses Loans Losses Loans Losses Loans
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allocated allowance for loan losses
Commercial $ 1,213 60.07 $ 811 59.82 $ 665 61.31
Real Estate 123 15.94 112 17.08 95 16.42
Installment 530 18.68 376 17.76 311 16.75
Credit cards and personal credit lines 151 5.31 112 5.34 101 5.52
---------- ---------- ---------- ---------- ---------- ----------
Total allocated allowance for loan losses 2,017 100.00 1,411 100.00 1,172 100.00
========== ========== ==========
3,289 4,061 3,694
---------- ---------- ----------
Total allowance for loan losses $ 5,306 $ 5,472 $ 4,866
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1993 1992
----------------------- -----------------------
Allowance Loans as Allowance Loans as
For Percentage For Percentage
Loan of Gross Loan of Gross
Losses Loans Losses Loans
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allocated allowance for loan losses
Commercial $ 1,120 57.18 $ 864 57.16
Real Estate 108 19.15 105 21.52
Installment 302 18.04 230 15.42
Credit cards and personal credit lines 95 5.63 87 5.90
---------- ---------- ---------- ----------
Total allocated allowance for loan losses 1,625 100.00 1,286 100.00
========== ==========
2,385 1,809
---------- ----------
Total allowance for loan losses $ 4,010 $ 3,095
========== ==========
</TABLE>
-17-
<PAGE>
<TABLE>
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 1996, 1995 and 1994, and the average rates paid on those deposits are
summarized in the following table:
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
Average Average Average Average Average Average
Daily Rate Daily Rate Daily Rate
Balance Paid Balance Paid Balance Paid
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 69,459 0.00 $ 60,753 0.00 $ 52,893 0.00
Savings accounts:
Regular savings 43,847 2.55 46,123 2.32 55,855 2.72
Interest bearing checking 53,625 2.20 55,355 2.41 58,945 2.36
Time deposits:
Deposits of $100,000 or more 86,137 5.67 73,449 6.00 54,389 4.34
Other time deposits 208,499 5.39 177,992 5.64 148,251 4.61
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 461,567 3.99 $ 413,672 4.07 $ 370,333 3.27
========== ========== ========== ========== ========== ==========
</TABLE>
As of December 31, 1996, time certificates of deposit in denominations of
$100,000 or more will mature as follows:
Within three months $ 54,553
Over three months, within six months 20,170
Over six months, within twelve months 14,012
Over twelve months 9,208
----------
Total time certificates of deposit in
denominations of $100,000 or more $ 97,943
==========
-18-
<PAGE>
RETURN ON EQUITY AND ASSETS
The rates of return on average daily assets and stockholders' equity, the
dividend payout ratio, and the average daily stockholders' equity to average
daily assets for the years ended December 31, 1996, 1995 and 1994 are as
follows:
1996 1995 1994
-------- -------- --------
Percent of net income to:
Average daily total assets 1.07 1.05 1.10
Average daily stockholders' equity 16.50 17.06 17.73
Percentage of dividends declared per
common share to net income per
weighted average number of common
shares outstanding (2,896,992 shares
in 1996, and 2,876,992 shares in 1995
and 1994) 20.72 18.88 16.57
Percentage of average daily
stockholders' equity to average
daily total assets 6.46 6.18 6.19
-19-
<PAGE>
SHORT-TERM BORROWINGS
The following is a schedule of statistical information relating to
securities sold under agreement to repurchase maturing within one year and are
secured by either U.S. Government agency securities or mortgage-backed
securities classified as other debt securities. There were no other categories
of short-term borrowings for which the average balance outstanding during the
period was 30 percent or more of shareholders' equity at the end of the
period.
1996 1995 1994
---------- ---------- ----------
Outstanding at year end $ 85,611 $ 58,151 $ 41,750
Approximate average interest rate at
year end 5.11% 5.35% 5.11%
Highest amount outstanding as of any
month end during the year $ 89,433 $ 79,334 $ 50,460
Approximate average outstanding
during the year $ 73,728 $ 61,398 $ 42,584
Approximate average interest rate
during the year 5.33% 5.69% 3.96%
Securities sold under agreement to repurchase include both transactions
initiated by the investment division of the Bank, as well as the automatic
borrowings from selected demand deposit customers who had excess balances in
their accounts.
-20-
<PAGE>
ITEM 2. PROPERTIES
The Bank conducts its operations from the following locations:
Branches/Headquarters
- ---------------------
Main / Headquarters 202 E. Center St. Warsaw IN
Warsaw Drive-up East Center St. Warsaw IN
Akron 102 East Rochester Akron IN
Argos 100 North Michigan Argos IN
Bremen 1600 Indiana State Road 331 Bremen IN
Columbia City 507 North Main St. Columbia City IN
Concord 4202 Elkhart Road Goshen IN
Cromwell 111 North Jefferson St. Cromwell IN
Elkhart 864 East Beardsley St. Elkhart IN
Elkhart East 22050 State Road 120 Elkhart IN
Goshen Downtown 102 North Main St. Goshen IN
Goshen South 2513 South Main St. Goshen IN
Hubbard Hill 58404 St. Road 19 Elkhart IN
Kendallville 631 Professional Way Kendallville IN
LaGrange 901 South Detroit LaGrange IN
Ligonier 1470 U.S. Highway 33 South Ligonier IN
Mentone 202 East Main St. Mentone IN
Middlebury 712 Wayne Ave. Middlebury IN
Milford Indiana State Road 15 North Milford IN
Nappanee 202 West Market St. Nappanee IN
North Webster 644 North Main St. North Webster IN
Pierceton 202 South First St. Pierceton IN
Roann 110 Chippewa St. Roann IN
Rochester 507 East 9th St. Rochester IN
Shipshewana 895 North Van Buren St. Shipshewana IN
Silver Lake 102 Main St. Silver Lake IN
Syracuse 502 South Huntington Syracuse IN
Wabash North 1004 North Cass St. Wabash IN
Wabash South 1940 South Wabash St. Wabash IN
Warsaw East 3601 Commerce Dr. Warsaw IN
Warsaw West 1221 West Lake St. Warsaw IN
Winona Lake 99 Chestnut St. Winona Lake IN
The Bank leases from third parties the real estate and buildings for its
offices in Akron and Milford. In addition, the Bank leases the real estate for
its Wabash North office and its free-standing ATMs. All the other branch
facilities are owned by the Bank. The Bank also owns parking lots in downtown
Warsaw for the use and convenience of Bank employees and customers, as well as
leasehold improvements, equipment, furniture and fixtures necessary and
appropriate to operate the banking facilities.
In addition, the Bank owns a building at 110 South High St., Warsaw,
Indiana, which it uses for various offices and a building at 113 East Center
St., Warsaw, Indiana, which it uses for office and computer facilities. The
Bank also leases from third parties facilities in Warsaw, Indiana, for the
storage of supplies and for employee training.
-21-
<PAGE>
None of the Bank's assets are the subject of any material encumbrances.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Registrant and the
Bank are a party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders from April 10, 1996
to December 31, 1996.
(Intentionally Left Blank)
-22-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information relating to the principal market for and the prices of the
Registrant's common stock, and information as to dividends declared by the
Registrant, are contained under the caption "Stock and Dividend Information"
in the 1996 Annual Report and are incorporated herein by reference in response
to this item. On December 31, 1996, the Registrant had 976 shareholders,
including those employees who participate in the Registrant's 401(K) plan.
On January 9, 1996, Lakeland Financial Corporation sold 10,000 shares of
authorized but previously unissued common stock for $41.50 per share. On April
30, 1996, Lakeland Financial Corporation common stock split two-for-one.
ITEM 6. SELECTED FINANCIAL DATA
A five year consolidated financial summary, containing the required
selected financial data, appears under the caption "Selected Financial Data"
in the 1996 Annual Report and is incorporated herein by reference in response
to this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations appears under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the 1996 Annual Report
and is incorporated herein by reference in response to this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements appear in the 1996 Annual
Report and are incorporated herein by reference in response to this item.
Consolidated Balance Sheets at December 31, 1996 and 1995.
Consolidated Statements of Income for the years ended December 31, 1996, 1995
and 1994.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-23-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in the Registrant's definitive Proxy Statement
dated March 13, 1997, is incorporated herein by reference in response to this
item.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Registrant's definitive Proxy Statement
dated March 13, 1997, is incorporated herein by reference in response to this
item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Registrant's definitive Proxy Statement
dated March 13, 1997, is incorporated herein by reference in response to this
item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Registrant's definitive Proxy Statement
dated March 13, 1997, is incorporated herein by reference in response to this
item.
-24-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The documents listed below are filed as a part of this report:
(1) Financial Statements.
The following financial statements of the Registrant and its
subsidiaries appear in the 1996 Annual Report and are specifically
incorporated by reference under Item 8 of this Form 10-K, or are a part of
this Form 10-K, as indicated and at the pages set forth below.
Reference
---------
1996 Annual
Form 10-K Report
--------- -----------
Consolidated Balance Sheets at December 31,
1996 and 1995. 8
Consolidated Statements of Income for the
years ended December 31, 1996, 1995 and 1994. 9
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994. 10
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994. 11
Notes to Consolidated Financial Statements. 12 - 21
Report of Independent Auditors. 22
(2) Financial Statement Schedules
The financial statement schedules of the Registrant and its subsidiary
have been omitted because of the absence of conditions under which they are
required or because the required information is given in the financial
statements or notes thereto.
[Intentionally Left Blank]
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
Date: March 11, 1997 By R Douglas Grant
(R. Douglas Grant) President
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 11, 1997 R. Douglas Grant
(R. Douglas Grant) Principal Executive
Officer and Director
Date: March 11, 1997 Terry M. White
(Terry M. White) Principal Financial and
Accounting Officer
Date: March 11, 1997 Anna K. Duffin
(Anna K. Duffin) Director
Date: March 11, 1997 Eddie Creighton
(Eddie Creighton) Director
Date: March 11, 1997 L. Craig Fulmer
(L. Craig Fulmer) Director
Date:
(Jerry L. Helvey) Director
Date:
(Kevin L. Lambright) Director
Date: March 11, 1997 Allan J. Ludwig
(Allan J. Ludwig) Director
Date: March 11, 1997 J. Alan Morgan
(J. Alan Morgan) Director
Date: March 11, 1997 Richard L. Pletcher
(Richard L. Pletcher) Director
Date:
(Joseph P. Prout) Director
Date:
(Terry L. Tucker) Director
Date:
(G.L. White) Director
-26-
<PAGE>
EXHIBIT INDEX
The following Exhibits are filed as part of this Report and not
incorporated by reference from another document:
Exhibit 13 - 1996 Report to Shareholders with Report of Independent
Auditors.
Exhibit 21 - Subsidiaries
Exhibit 27 - Financial Data Schedule
-27-
<PAGE>
EXHIBIT 13
1996 Report to Shareholders with Report of Independent Auditors.
-28-
<PAGE>
EXHIBIT 21
SUBSIDIARIES. The Registrant has one wholly owned subsidiary, Lake City Bank,
Warsaw, Indiana, a banking corporation organized under the laws of the State
of Indiana.
-29-
Annual Meeting
- -----------------------------------------------------------------------------
The annual meeting of the shareholders of Lakeland Financial Corporation
will be held at noon, April 8, 1997, at the Shrine Building, Kosciusko County
Fair Grounds, Warsaw, Indiana. As of December 31, 1996, there were 976
shareholders.
Special Notice: Form 10-K Available
- ------------------------------------------------------------------------------
The Corporation will provide without charge to each shareholder, Lakeland
Financial Corporation's Annual Report on Form 10-K, including financial
statements and schedules thereto required to be filed with the Securities and
Exchange Commission for the Corporation's most recent fiscal year upon written
request of Mr. Terry M. White, Secretary and Treasurer, P.O. Box 1387, Warsaw,
Indiana 46581-1387. The Form 10-K and related exhibits are also available on
the Internet at www.sec.gov.
Registrar and Transfer Agent
- ------------------------------------------------------------------------------
Lake City Bank
Trust Department
P.O. Box 1387
Warsaw, Indiana 46581-1387
Stock and Dividend Information
- ------------------------------------------------------------------------------
The following companies have indicated they are active in trading
Lakeland Financial Corporation stock and have reported the bid-ask prices for
the Corporation's stock as set forth in the Selected Quarterly Data. Such
bid-ask prices are not a definite indication that sales transactions occurred
at these prices or that sales did not occur outside of these prices. The
trading volume of the Corporation's stock continues to be limited, as a
result, these quotations do not necessarily reflect the price at which the
Corporation's stock would trade in a more active market.
Roney & Company, P.O. Box 130, Elkhart, Indiana, 46515, 1-800-43-Roney
McDonald and Company Securities, Inc., 214 South Main Street, Elkhart,
Indiana, 46516, 219-294-2526
Edward D. Jones & Co. , P.O. Box 1097, Warsaw, Indiana, 46581,
1-800-441-2914
<PAGE>
President's Letter
- ------------------------------------------------------------------------------
The year 1996 was a productive year for your Corporation. Despite
interest margin pressures experienced by all banks and the continued
restructuring within the industry, we are pleased to report record earnings
for the ninth consecutive year. In 1996, your Corporation earned $6,444,000,
which is an increase of 14 percent over 1995. Per share earnings were $2.22 in
1996 compared to $1.96 the year earlier.
At year-end 1995, the Corporation's stock price, adjusted for the stock
split during 1996, was $20.75 per share. At year-end 1996, the Corporation's
stock was being sold for $31.00 per share, an increase of $10.25 or 49 percent
over year-end 1995. This increase reflects the continued strong financial
performance of the Corporation. With these results, the Board of Directors
increased the annual dividend rate by 20 percent during 1996 to $.48 per
share.
During 1996, we continued to seek opportunities to profitably invest our
capital. This resulted in the opening of two new offices during the year,
increasing our total to 31 offices serving Kosciusko and surrounding counties.
This expansion and growth resulted in a record level of assets, $657 million
at year-end, an increase of $88 million over 1995. This expansion and growth
is also evident in total loans which increased $55 million, or about 17
percent, ending the year at $382 million. The increase in loans was funded by
increases in both deposits and repurchase agreements. Total deposits and
repurchase agreements, commonly referred to as core funding, increased $92
million, or approximately 19 percent.
Net interest income is a primary component of profitability. One would
expect that as the Corporation's assets grow, so would net interest income
dollars. This was indeed the case in 1996 as net interest income was $22.1
million, an increase of $1.9 million over 1995. However, throughout the
banking industry there is continued pressure on the net interest margin. This
means that the profit we generate on each dollar that the Corporation lends or
invests today is less than in prior years. For your Corporation this slight
reduction in the margin is primarily due to the competitive pressures found
within the markets we serve, and is an indication of the strong vibrant
economies where we do business. Strong economies promote profitability by
generating deposits and creating strong loan demand. The loan demand quality
has been excellent and thus the quality of the Corporation's assets remained
good in 1996. This resulted in a relatively low provision for loan losses of
$120,000 in 1996.
Another strong area of performance was noninterest income. Fees related
to trust services, loan and deposit accounts, and new electronic bank products
like the 24 Hour Bank card all contributed. The total increase in these
components, along with a $253,000 increase in the gains on the sale of real
estate mortgages, resulted in total noninterest income of $5.8 million in
1996, an increase of $1.0 million over 1995. The increase in the gain on the
sale of real estate mortgages reflects the sale of approximately $20 million
of real estate mortgages.
Noninterest expense increased $1.7 million, or 10 percent. Increases in
salaries, employee benefits and equipment costs were a result of expenses
related to the five new offices added during the past 18 months, and the
technology costs necessary to continue providing the highest level of customer
service. It is our expectation that these expenses will continue to increase
in future years as we pursue a strategy of expanding into profitable new
locations while continuing to streamline and centralize back-room operations.
1
<PAGE>
President's Letter (continued)
- ------------------------------------------------------------------------------
Electronic services are enhancing our position as a leader in the
financial community. Bill Payment Service facilitates automatic payments
through the computer or telephone. This feature is innovative and responsive
to present day customers who expect technology from their financial
institutions to expedite their transactions quickly and securely. Bill Payment
Service is the payment alternative that takes just minutes to learn.
We are developing a Home Page on the Internet to be more responsive to
the ever-growing population of techno-savvy customers that expect self-service
options in their banking relationships. Establishment of our domain name,
lakecitybank.com will be a convenient address for customers. In 1997, this
secure site will provide E-mail capabilities. Future site enhancements will
include account information and funds transfer.
In 1995, value was added to our checking accounts with the introduction
of the 24 Hour Visa Check Card. Customers enjoy the convenience of making
purchases without writing a check or carrying large amounts of cash. In 1996,
24 Hour Visa Check Card activity increased by 94 percent and bank income from
this product increased by 103 percent.
Direct Deposit is a convenience used by many customers. Payroll and
Social Security checks are deposited electronically from the employer's or
government's account directly into the customer's checking or savings account
each payday. The customer benefits include safety without lost or stolen
checks, convenience of money put directly into the account without effort, no
worry as to when the money is credited to the account, ability to write checks
and earn interest without delay, and the flexibility for the customer to
direct amounts into more than one account.
The introduction of our Direct Banking Center provides an efficient way
of conducting business quickly and privately from the convenience of home or
office. With the Direct Banking Center, customers can turn the telephone into
their personal Lake City Bank office. Information regarding products, new
account services, loan applications, investment opportunities, customer
assistance, and a medley of other services is available 20 hours a day. For
rotary telephone calls, voice recognition or a customer service representative
2
<PAGE>
President's Letter (continued)
- ------------------------------------------------------------------------------
is available. Lake City Bank is committed to serving customers with the local,
personal touch while continuing to offer advanced technology that saves time,
money and accommodates today's busy lifestyles.
Key to the success of the Mortgage Loan area is the expertise of the
local officers and staff. With the addition of two originators, the "Loan
Prospector" automated underwriting with electronic data interchange
capabilities, and the streamlined processing of the mortgage pipeline, the
result has been even quicker more efficient service. Mortgage loan volume
increased substantially, and while we sold mortgage loans into the secondary
market, we retained the servicing so that the customer continues to deal only
with us.
Customer interest in trust services continues strong, particularly for
estate planning, employee retirement plans, personal trust administration,
charitable foundations, corporate trust, and individual asset management. Our
trust and investment professionals provide quality, responsive, personal
service in building long-term relationships with our customers and their
families. Trust assets and income both increased over 24 percent in 1996.
Allan J. Ludwig was elected to the Lakeland Financial Corporation Board
of Directors this fall. Mr. Ludwig lives near Bristol and is a local
entrepreneur and industrial developer. He is a graduate of Loras College in
Iowa where he now serves as a trustee. He filled a vacancy created when Dr.
Homer Kent, former President of Grace College retired. Dr. Kent had joined the
Board in 1983. We welcome Mr. Ludwig to the Board and will greatly miss Dr.
Kent's advice and counsel.
3
<PAGE>
President's Letter (continued)
- ------------------------------------------------------------------------------
Walter L. Weldy was promoted to Executive Vice President with principal
responsibilities in the retail area. He has been with the Corporation for 6
years and has over 30 years of banking experience, including the presidency of
a local bank. He has also served as President of Bethel College.
Senior Vice President Dennis Cultice was named manager of the Trust
Department in addition to his duties heading up the Investment Department.
Dennis holds a Bachelor of Science degree in Business Administration from
Manchester College and has been with the bank for 12 years.
We opened an office in Kendallville in May on the east side of town. A
third Elkhart location south on State Road 19 near Hubbard Hill was opened in
the fall. A new free standing 24 Hour Teller is located near downtown Goshen
in the Linway Plaza, bringing the total ATM's in our system to 24.
Construction has started on an Elkhart office at North Nappanee and Bristol
Streets. A full service office on State Road 23 in the middle of Granger will
open later this year. Real estate has been purchased on North Main Street in
Mishawaka with a late 1997 office opening planned. We also purchased the
former Kline's building in downtown Warsaw for future possible expansion of
back-room operations.
1996 was another record year for your Corporation. To our customers who
are the reason for our existence, and to the employees who serve them
efficiently and professionally, we owe sincere gratitude. You, as shareholders
deserve the best we can offer. As the Corporation enters its 125th year of
service, we are dedicated to continuing this effort.
R. Douglas Grant
President
4
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION AND LAKE CITY BANK BOARD OF DIRECTORS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Picture Picture Picture Picture
Eddie Creighton Anna K. Duffin L. Craig Fulmer R. Douglas Grant
Partner and Civic Leader Chairman, Chairman and President,
General Manager, Heritage Financial Lakeland Financial
Creighton Brothers Group, Inc. Corporation and Lake
City Bank
Picture Picture Picture Picture
Jerry L. Helvey Allan J. Ludwig J. Alan Morgan Richard L. Pletcher
President, Industrial Developer Former President of President,
Helvey & Associates, Inc Zimmer USA and Pletcher Enterprises, Inc.
Vice President of
Bristol Myers Co.
Picture Picture Picture Picture
Joseph P. Prout Philip G. Spear Terry L. Tucker G.L. White
President, Former President, President, Former President,
Owens Supermarket, Inc. W.R. Thomas Stores, Inc. Maple Leaf Farms, Inc. United Telephone
Company of Indiana
</TABLE>
LAKELAND FINANCIAL CORPORATION OFFICERS
R. Douglas Grant .............................Chairman and President
Paul S. Siebenmorgen .........................Executive Vice President
Walter L. Weldy ..............................Executive Vice President
Terry M. White ...............................Secretary and Treasurer
James J. Nowak ...............................Assistant Secretary and Treasurer
5
<PAGE>
<TABLE>
Selected Financial Data (in thousands except for share and per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 45,941 $ 41,944 $ 33,556 $ 27,463 $ 27,500
Interest expense 23,737 21,642 14,887 12,022 13,622
------------ ------------ ------------ ------------ ------------
Net interest income 22,204 20,302 18,669 15,441 13,878
Provision for loan losses 120 120 795 790 1,340
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 22,084 20,182 17,874 14,651 12,538
Other noninterest income 5,396 4,297 4,198 2,957 2,918
Net gains on sale of real estate
mortgages held-for-sale 412 159 177 676 176
Net trading gains (losses) 0 0 0 0 (2)
Net securities gains (losses) (9) 315 (7) 175 323
Noninterest expense (17,935) (16,244) (14,092) (12,378) (10,832)
------------ ------------ ------------ ------------ ------------
Income before income tax expense and cumulative
effect of change in accounting principle 9,948 8,709 8,150 6,081 5,121
Income tax expense 3,504 3,064 3,024 2,171 1,762
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of change
in accounting principle 6,444 5,645 5,126 3,910 3,359
Cumulative effect of adopting SFAS No. 109 0 0 0 325 0
------------ ------------ ------------ ------------ ------------
Net income $ 6,444 $ 5,645 $ 5,126 $ 4,235 $ 3,359
============ ============ ============ ============ ============
Average shares outstanding* 2,896,992 2,876,992 2,876,992 2,876,992 2,876,992
============ ============ ============ ============ ============
Per average common share outstanding:*
Income before cumulative effect of change
in accounting principle $ 2.22 $ 1.96 $ 1.78 $ 1.36 $ 1.17
============ ============ ============ ============ ============
Net income $ 2.22 $ 1.96 $ 1.78 $ 1.47 $ 1.17
============ ============ ============ ============ ============
Cash dividends declared $ 0.46 $ 0.37 $ 0.30 $ 0.25 $ 0.21
============ ============ ============ ============ ============
Balances at December 31:
Total assets $ 656,551 $ 568,579 $ 496,963 $ 449,954 $ 362,497
============ ============ ============ ============ ============
Total deposits $ 496,553 $ 431,934 $ 396,740 $ 370,032 $ 284,308
============ ============ ============ ============ ============
Long-term debt $ 23,531 $ 17,432 $ 17,432 $ 9,300 $ 8,000
============ ============ ============ ============ ============
Total stockholders' equity $ 42,043 $ 36,754 $ 29,889 $ 27,912 $ 23,750
============ ============ ============ ============ ============
* Adjusted for a 2-for-1 stock split April 30, 1996.
</TABLE>
6
<PAGE>
<TABLE>
Selected Quarterly Data (in thousands except for per share data) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996
---------------------------------------------------------
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 12,032 $ 11,708 $ 11,267 $ 10,934
Interest expense 6,212 6,076 5,754 5,695
------------ ------------ ------------ ------------
Net interest income 5,820 5,632 5,513 5,239
Provision for loan losses 30 30 30 30
Noninterest income 1,491 1,477 1,477 1,354
Noninterest expense 4,777 4,661 4,273 4,224
Income tax expense 889 807 973 835
------------ ------------ ------------ ------------
Net income $ 1,615 $ 1,611 $ 1,714 $ 1,504
============ ============ ============ ============
Net income per common share * $ 0.56 $ 0.55 $ 0.59 $ 0.52
============ ============ ============ ============
Stock and Dividend Information
Trading range (per share)*
Bid $ 26.75 $ 25.50 $ 22.25 $ 20.75
Ask $ 31.00 $ 27.00 $ 26.75 $ 23.00
Dividends declared (per share)* $ 0.12 $ 0.12 $ 0.12 $ 0.10
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1995
---------------------------------------------------------
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 11,102 $ 10,928 $ 10,256 $ 9,658
Interest expense 5,796 5,805 5,232 4,809
------------ ------------ ------------ ------------
Net interest income 5,306 5,123 5,024 4,849
Provision for loan losses 30 30 30 30
Noninterest income 1,456 1,177 1,088 1,050
Noninterest expense 4,315 4,016 4,087 3,826
Income tax expense 865 814 648 737
------------ ------------ ------------ ------------
Net income $ 1,552 $ 1,440 $ 1,347 $ 1,306
============ ============ ============ ============
Net income per common share * $ 0.54 $ 0.50 $ 0.47 $ 0.45
============ ============ ============ ============
Stock and Dividend Information
Trading range (per share)*
Bid $ 19.75 $ 18.00 $ 17.00 $ 16.50
Ask $ 20.75 $ 19.75 $ 18.75 $ 17.75
Dividends declared (per share)* $ 0.10 $ 0.10 $ 0.09 $ 0.08
<FN>
- ----------------------------------------------------------------------------------------------------------------------------------
* Adjusted for a 2-for-1 stock split April 30, 1996.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
Consolidated Balance Sheets (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 41,190 $ 26,185
Short-term investments 3,689 710
------------ ------------
Total cash and cash equivalents 44,879 26,895
Securities available-for-sale (carried at fair value) 81,842 82,120
Securities held-to-maturity (fair value of $126,373 at 1996
and $115,328 at 1995) 125,274 113,888
Real estate mortgages held-for-sale 895 145
Total loans 382,265 327,617
Less allowance for loan losses 5,306 5,472
------------ ------------
Net loans 376,959 322,145
Land, premises and equipment, net 16,014 13,736
Accrued income receivable 4,254 4,003
Other assets 6,434 5,647
------------ ------------
Total assets $ 656,551 $ 568,579
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 77,664 $ 67,856
Interest bearing deposits 418,889 364,078
------------ ------------
Total deposits 496,553 431,934
Short-term borrowings
Federal funds purchased 0 17,100
Securities sold under agreements to repurchase 85,611 58,151
U.S. Treasury demand notes 2,769 1,880
------------ ------------
Total short-term borrowings 88,380 77,131
Accrued expenses payable 5,033 4,481
Other liabilities 1,011 847
Long-term debt 23,531 17,432
------------ ------------
Total liabilities 614,508 531,825
Commitments, off-balance sheet risks and contingencies
STOCKHOLDERS' EQUITY
Common stock: $.50 stated value, 10,000,000 shares authorized, 2,896,992
shares issued and outstanding as of December 31, 1996; $1.00 stated
value, 2,750,000 shares authorized, 1,438,496
shares issued and outstanding as of December 31, 1995 1,448 1,438
Additional paid-in capital 8,232 7,827
Retained earnings 31,967 26,858
Unrealized net gain (loss) on securities available-for-sale 396 631
------------ ------------
Total stockholders' equity 42,043 36,754
------------ ------------
Total liabilities and stockholders' equity $ 656,551 $ 568,579
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
Consolidated Statements of Income (in thousands except for share data)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 32,724 $ 29,859 $ 23,658
Tax-exempt 246 257 273
Interest and dividends on securities
Taxable 11,348 10,588 8,743
Tax-exempt 1,378 1,038 727
Interest on short-term investments 245 202 155
------------ ------------ ------------
Total interest income 45,941 41,944 33,556
Interest on deposits 18,411 16,847 12,108
Interest on borrowings
Short-term 4,213 3,803 1,879
Long-term 1,113 992 900
------------ ------------ ------------
Total interest expense 23,737 21,642 14,887
NET INTEREST INCOME 22,204 20,302 18,669
Provision for loan losses 120 120 795
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,084 20,182 17,874
NONINTEREST INCOME
Trust income 881 709 609
Service charges on deposits 2,809 2,262 2,078
Other income 1,706 1,326 1,511
Net gains on the sale of real estate mortgages held-for-sale 412 159 177
Net securities gains (losses) (9) 315 (7)
------------ ------------ ------------
Total noninterest income 5,799 4,771 4,368
NONINTEREST EXPENSE
Salaries and employee benefits 9,570 8,521 7,278
Net occupancy expense 1,339 1,229 1,057
Equipment costs 1,616 1,375 1,001
Other expense 5,410 5,119 4,756
------------ ------------ ------------
Total noninterest expense 17,935 16,244 14,092
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 9,948 8,709 8,150
Income tax expense 3,504 3,064 3,024
------------ ------------ ------------
NET INCOME $ 6,444 $ 5,645 $ 5,126
============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING 2,896,992 2,876,992 2,876,992
============ ============ ============
NET INCOME PER COMMON SHARE $ 2.22 $ 1.96 $ 1.78
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity (in thousands except for share data)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unrealized
Net Gain (Loss)
Common Stock Additional on Securities Total
-------------------------- Paid-in Retained Available- Stockholders'
Shares Amount Capital Earnings for-Sale Equity
------------ ------------ ------------ ------------ ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 1,438,496 $ 1,438 $ 7,827 $ 18,001 $ 646 $ 27,912
Net income for 1994 5,126 5,126
Net change in unrealized gain (loss)
on securities available-for-sale (2,301) (2,301)
Cash dividend declared
($.30 per share) (848) (848)
------------ ------------ ------------ ------------ ---------------- --------------
Balances, December 31, 1994 1,438,496 1,438 7,827 22,279 (1,655) 29,889
Net income for 1995 5,645 5,645
Net change in unrealized gain (loss)
on securities available-for-sale 2,286 2,286
Cash dividend declared
($.37 per share) (1,066) (1,066)
------------ ------------ ------------ ------------ ---------------- --------------
Balances, December 31, 1995 1,438,496 1,438 7,827 26,858 631 36,754
Net income for 1996 6,444 6,444
Net change in unrealized gain (loss)
on securities available-for-sale (235) (235)
Issued 10,000 shares 10,000 10 405 415
Shares issued in 2-for-1 stock split 1,448,496
Cash dividend declared
($.46 per share) (1,335) (1,335)
------------ ------------ ------------ ------------ ---------------- --------------
Balances, December 31, 1996 2,896,992 $ 1,448 $ 8,232 $ 31,967 $ 396 $ 42,043
============ ============ ============ ============ ================ ==============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 6,444 $ 5,645 $ 5,126
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 1,277 1,209 928
Provision for loan losses 120 120 795
Write down of other real estate owned 20 0 0
Loans originated for sale (27,599) (29,679) (9,426)
Net (gain) loss on sale of loans (412) (159) (177)
Proceeds from sale of loans 27,261 29,868 11,619
Net (gain) loss on sale of premises and equipment 3 0 1
Net (gain) loss on sale of securities available-for-sale 0 (331) 0
Net (gain) loss on calls of securities held-to-maturity 9 16 7
Net securities amortization 256 180 444
Increase (decrease) in taxes payable 237 (822) (15)
(Increase) decrease in income receivable (251) (539) (606)
Increase (decrease) in accrued expenses payable 360 1,227 340
(Increase) decrease in other assets (698) 411 1,735
Increase (decrease) in other liabilities 164 888 (495)
------------ ------------ ------------
Total adjustments 747 2,389 5,150
------------ ------------ ------------
Net cash from operating activities 7,191 8,034 10,276
Cash flows from investing activities
Proceeds from sale of securities available-for-sale 0 7,563 0
Proceeds from maturities and calls of securities held-to-maturity 8,784 6,268 8,899
Proceeds from maturities and calls of securities available-for-sale 14,130 5,022 6,409
Purchases of securities available-for-sale (14,429) (20,014) (9,033)
Purchases of securities held-to-maturity (20,247) (22,900) (19,494)
Net (increase) decrease in total loans (54,934) (39,174) (27,709)
Purchases of land, premises and equipment (3,558) (3,650) (2,490)
Net proceeds (payments) from acquisitions 0 (1,380) 0
------------ ------------ ------------
Net cash from investing activities (70,254) (68,265) (43,418)
Cash flows from financing activities
Net increase in total deposits 64,619 35,194 26,708
Proceeds from short-term borrowings 849,944 522,102 395,939
Payments on short-term borrowings (838,695) (493,294) (385,553)
Proceeds from long-term borrowings 14,000 0 8,132
Payments on long-term borrowings (8,000) 0 0
Proceeds under capital lease obligations 118 0 0
Payments under capital lease obligations (19) 0 0
Dividends paid (1,335) (1,023) (806)
Proceeds from sale of common stock 415 0 0
------------ ------------ ------------
Net cash from financing activities 81,047 62,979 44,420
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 17,984 2,748 11,278
Cash and cash equivalents at beginning of the year 26,895 24,147 12,869
------------ ------------ ------------
Cash and cash equivalents at end of year $ 44,879 $ 26,895 $ 24,147
============ ============ ============
Cash paid during the year for:
Interest $ 23,239 $ 21,052 $ 14,496
============ ============ ============
Income taxes $ 3,420 $ 3,116 $ 3,038
============ ============ ============
Securities transferred from held-to-maturity to available-for-sale $ 0 $ 12,918 $ 0
============ ============ ============
Loans transferred to other real estate $ 334 $ 0 $ 107
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
11
<PAGE>
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations:
Lakeland Financial Corporation (the Corporation) is a bank holding
company as defined in the Bank Holding Company Act of 1956. The Corporation
owns all of the outstanding stock of Lake City Bank (the Bank), a full service
commercial bank organized under Indiana law, and conducts no business except
that incident to its ownership of the Bank. The Bank is headquartered in
Warsaw, Indiana, and has 31 branch offices in eight counties in northern
Indiana.
Use of Estimates:
In preparing financial statements in conformity with generally accepted
accounting principles, management must make estimates and assumptions. These
estimates and assumptions affect the amounts reported therein and the
disclosures provided. Actual results could differ from these estimates.
Areas involving the use of management's estimates and assumptions include
the allowance for loan losses, the fair value of mortgage servicing rights,
the realization of deferred tax assets, fair values of certain securities, the
determination and carrying value of impaired loans, the carrying value of
loans held-for-sale, the carrying value of other real estate, the
determination of other-than-temporary reductions in the fair value of
securities, recognition and measurement of loss contingencies, depreciation of
premises and equipment, the carrying value and amortization of intangibles,
the actuarial present value of pension benefit obligations, and net periodic
pension expense and accrued pension costs recognized in the Corporation's
financial statements. Estimates that are more susceptible to change in the
near term include the allowance for loan losses, the fair value of financial
instruments, the fair value of mortgage servicing rights and the realization
of deferred tax assets.
Principles of Consolidation:
The consolidated financial statements include Lakeland Financial
Corporation and its wholly-owned subsidiary, Lake City Bank. All significant
intercompany balances and transactions are eliminated in consolidation.
Securities:
The Corporation classifies securities into held-to-maturity,
available-for-sale and trading categories. Held-to-maturity securities are
those which the Corporation has the positive intent and ability to hold to
maturity, and are reported at amortized cost. Available-for-sale securities
are those the Corporation may decide to sell if needed for liquidity,
asset-liability management or other reasons. Available-for-sale securities are
reported at fair value, with unrealized gains and losses included as a
separate component of 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. Realized gains and losses
resulting from the sale of securities are computed by the specific
identification method. Premiums and discounts are recognized in interest
income using the interest method over the period to maturity.
In November 1995, the Financial Accounting Standards Board issued its
Special Report 'A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities' (Guide). As permitted by
the Guide, on December 4, 1995, the Corporation made a one-time reassessment
and transferred securities from the held-to-maturity portfolio to the
available-for-sale portfolio. At the date of the transfer, these securities
had an amortized cost of $12,918,000 and increased the unrealized gain on
securities available-for-sale in stockholders' equity by $446,000, net of tax.
Real Estate Mortgages Held-for-Sale:
Real estate mortgages classified as held-for-sale to the secondary market
are carried at the lower of aggregate cost or estimated fair value. Net
unrealized losses are recognized in a valuation allowance by charges to
income. Gains and losses on sales of mortgages are recognized on the
settlement date. Gains and losses are determined by the difference between
sales proceeds and the carrying value of the mortgages.
Mortgage Servicing Rights:
The Corporation originates mortgage loans for sale to the secondary
market, and sells the loans with servicing retained. Effective January 1,
1996, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 122 on accounting for mortgage servicing rights, which requires
capitalizing the rights to service originated mortgage loans sold. The total
cost of mortgage loans originated with the intent to sell is allocated between
the mortgage servicing right and the mortgage loan without servicing, based
upon the relative fair values. The capitalized cost of mortgage servicing
rights is amortized in proportion to, and over the period of, estimated net
servicing revenue.
Impairment of mortgage servicing rights is assessed based upon the fair
value of those rights. For purposes of measuring impairment, the rights are
stratified based upon loan type, term and note rate. The amount of impairment
is the amount by which the capitalized mortgage servicing rights for a stratum
exceeds their fair value. Fair values for individual stratum are based upon
the present value of estimated future cash flows using a discount commensurate
with the risks involved. Estimates of fair value include assumptions about
prepayment, default and interest rates, and other factors which are subject to
change over time.
Loans:
Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses, and charge-offs. Interest
is accrued over the loan term based upon the principal balances outstanding.
Loan fees and related costs are netted and deferred. The deferral is included
in loans and recognized in interest income over the loan term on the level
yield method. Loans are placed on nonaccrual when interest collection becomes
doubtful. All unpaid accrued interest is reversed and interest income is
subsequently recognized only to the extent cash payments are received.
Concentration of Credit:
The Bank is a full service bank with headquarters in Warsaw, Indiana with
offices in 25 cities and towns located within Kosciusko and contiguous
counties. It is estimated that over 98% of all the Bank's commercial,
industrial, agri-business and agricultural real estate mortgage, real estate
construction mortgage and consumer loans are made within its basic trade area.
This area generally lies within a radius of 10 miles or less from any of its
existing offices. The loan portfolios are well diversified and are secured to
the extent deemed appropriate by management. Mortgage-backed securities are
collateralized by mortgages located throughout the United States.
Substantially all mortgage-backed securities are insured directly or
indirectly by the U. S. Government.
Allowance for Loan Losses:
The allowance is judgmentally determined by management and is maintained
at a level considered adequate to cover losses currently anticipated based on
past loss experience, general national and local economic conditions,
information about specific borrower situations, including their financial
12
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
position and collateral values, and other factors and estimates which may
change over time. While management may periodically allocate portions of the
allowance for specific problem loan situations, the whole allowance is
available for any loan charge-off that might occur. A loan is charged-off as a
loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur. Increases to the allowance are recorded by a
charge to expense and are based upon subjective judgments.
The Corporation adopted SFAS No. 114 and SFAS No. 118 on January 1, 1995.
Under these standards, loans considered to be impaired are reduced to the
present value of future cash flows or to the fair value of collateral, by
allocating a portion of the allowance for loan losses to such loans. If these
allocations cause the allowance for loan losses to require an increase, such
increase is reported as provision for loan losses. As part of the loan review
process, management reviews all loans classified as 'special mention' or below
for impairment, as well as other loans that might warrant application of SFAS
No. 114. Smaller-balance homogeneous loans are evaluated for impairment in
total. Such loans include residential first mortgage loans secured by
one-to-four family residences, residential construction loans, automobile,
home equity and second mortgage loans. The effect of adopting this accounting
standard on January 1, 1995, was not material.
The carrying values of impaired loans are periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and increases
in the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash
payments are reported as reductions in carrying value, while increases or
decreases due to changes in estimates of future payments and due to the
passage of time are reported as provision for loan losses.
Land, Premises and Equipment:
Land, premises, and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed on both straight-line and
declining-balance methods based on estimated useful lives of the assets. These
assets are reviewed for impairment under SFAS No. 121 when events indicate the
carrying amount may not be recoverable.
Other Real Estate Owned:
Other real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of acquisition.
Any reduction to fair value from the carrying value of the related loan at the
time of acquisition is accounted for as a loan loss and charged against the
allowance for loan losses. After acquisition, a valuation allowance is
recorded through a charge to income for the amount of estimated selling costs.
Valuations are periodically performed by management, and valuation allowances
are adjusted through a charge to income for changes in fair value or estimated
selling costs. Other real estate owned, other than Corporate premises,
amounted to $917,000, net of a $285,000 valuation allowance and $1,109,000,
net of a $415,000 valuation allowance at December 31, 1996 and 1995,
respectively, and is included in other assets in the consolidated balance
sheets.
Income Taxes:
The Corporation files annual consolidated federal income tax returns. The
Corporation records income tax expense based on the amount of taxes due on its
tax return plus deferred taxes computed based on the expected future tax
consequences of temporary differences between carrying amounts and tax bases
of assets and liabilities, using enacted tax rates.
Dividend Restriction:
The Bank is subject to banking regulations which require the maintenance
of certain capital levels and which may limit the amount of dividends which
may be paid to the Corporation. At December 31, 1996, approximately $4,984,000
of the Bank's retained earnings is available for distribution to the
Corporation without prior regulatory approval.
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 do not include the value of anticipated future business or the
values of assets and liabilities not considered financial instruments.
Earnings Per Share:
Earnings per common share are based upon the weighted average number of
common shares outstanding and are restated to reflect any stock dividends or
splits.
Pension Plan:
A noncontributory defined benefit pension plan covers substantially all
employees. Funding of the plan equals or exceeds the minimum funding
requirement determined by the actuary. The projected unit credit cost method
is used to determine expense. Benefits are based on years of service and
compensation levels.
Cash Equivalents:
Cash and cash equivalents include cash on hand, demand deposits in other
institutions and short-term investments with maturities of 90 days or less.
Reclassifications:
Certain amounts appearing in the financial statements and notes thereto
for prior periods have been reclassified to conform with the current
presentation.
NOTE 2 - PENDING ACCOUNTING CHANGES
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities, was issued by the Financial Accounting
Standards Board in 1996. It revises the accounting for transfers of financial
assets, such as loans and securities, and for distinguishing between sales and
secured borrowings. It is effective for some transactions in 1997 and others
in 1998. The effect on the consolidated financial statements has not yet been
determined.
13
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
<TABLE>
NOTE 3 - SECURITIES
Information related to the amortized cost and fair value of securities at December 31 is provided in the table below.
<CAPTION>
Unrealized Unrealized
Amortized Gross Gross Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale at December 31, 1996
U.S. Treasury securities $ 31,604 $ 261 $ (61) $ 31,804
U.S. Government agencies and corporations 500 7 0 507
Mortgage-backed securities 46,002 502 (172) 46,332
State and municipal securities 2,081 86 0 2,167
Other debt securities 1,000 32 0 1,032
------------ ------------ ------------ ------------
Total securities available-for-sale at December 31, 1996 $ 81,187 $ 888 $ (233) $ 81,842
============ ============ ============ ============
Securities held-to-maturity at December 31, 1996
U.S. Treasury securities $ 17,020 $ 113 $ (56) $ 17,077
U.S. Government agencies and corporations 2,262 101 (1) 2,362
Mortgage-backed securities 83,811 545 (637) 83,719
State and municipal securities 21,172 946 (23) 22,095
Other debt securities 1,009 111 0 1,120
------------ ------------ ------------ ------------
Total securities held-to-maturity at December 31, 1996 $ 125,274 $ 1,816 $ (717) $ 126,373
============ ============ ============ ============
Securities available-for-sale at December 31, 1995
U.S. Treasury securities $ 27,549 $ 378 $ (83) $ 27,844
U.S. Government agencies and corporations 2,150 41 0 2,191
Mortgage-backed securities 48,302 785 (244) 48,843
State and municipal securities 2,076 100 0 2,176
Other debt securities 999 67 0 1,066
------------ ------------ ------------ ------------
Total securities available-for-sale at December 31, 1995 $ 81,076 $ 1,371 $ (327) $ 82,120
============ ============ ============ ============
Securities held-to-maturity at December 31, 1995
U.S. Treasury securities $ 13,611 $ 34 $ (69) $ 13,576
U.S. Government agencies and corporations 2,898 141 (6) 3,033
Mortgage-backed securities 77,319 878 (726) 77,471
State and municipal securities 19,047 1,066 (36) 20,077
Other debt securities 1,013 158 0 1,171
------------ ------------ ------------ ------------
Total securities held-to-maturity at December 31, 1995 $ 113,888 $ 2,277 $ (837) $ 115,328
============ ============ ============ ============
</TABLE>
Information regarding the amortized cost and fair value of debt
securities by maturity as of December 31, 1996, is presented below. Maturity
information is based on contractual maturity for all securities other than
mortgage-backed securities. Actual maturities of securities may differ from
contractual maturities because borrowers may have the right to prepay the
obligation without prepayment penalty.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
December 31, 1996 December 31, 1996
-------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 12,327 $ 12,397 $ 6,165 $ 6,158
Due after one year through five years 21,371 21,569 15,748 16,051
Due after five years through ten years 0 0 976 1,000
Due after ten years 1,487 1,544 18,574 19,445
------------ ------------ ------------ ------------
35,185 35,510 41,463 42,654
Mortgage-backed securities 46,002 46,332 83,811 83,719
------------ ------------ ------------ ------------
Total debt securities $ 81,187 $ 81,842 $ 125,274 $ 126,373
============ ============ ============ ============
</TABLE>
14
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 3 - SECURITIES (continued)
<TABLE>
Security proceeds, gross gains and gross losses for 1996, 1995 and 1994 were as follows:
<CAPTION>
1996 1995 1994
----------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Sales and calls of securities available-for-sale
Proceeds $ 650 $ 7,563 $ 0
Gross gains 0 348 0
Gross losses 0 17 0
Calls of securities held-to-maturity
Proceeds $ 802 $ 414 $ 249
Gross gains 0 0 10
Gross losses 9 16 17
</TABLE>
Securities with carrying values of $121,109,000 and $100,572,000 were
pledged as of December 31, 1996 and 1995, respectively, as collateral for
deposits of public funds, securities sold under agreements to repurchase and
for other purposes as permitted or required by law.
NOTE 4 - TOTAL LOANS
Total loans outstanding as of December 31, 1996 and 1995, consist of the
following:
1996 1995
------------ ------------
(in thousands)
Commercial and industrial loans $ 202,532 $ 173,368
Agri-business and agricultural loans 27,072 22,627
Real estate mortgage loans 59,302 54,724
Real estate construction loans 1,647 1,224
Installment loans and credit cards 91,712 75,674
------------ ------------
Total loans $ 382,265 $ 327,617
============ ============
Loans aggregating $60,000 or more with executive officers and directors
(including their associates) amounted to $12,789,000 and $6,028,000 as of
December 31, 1996 and 1995, respectively. During 1996, new loans or advances
were $34,017,000, loan repayments were $32,762,000 and other changes were
$5,506,000.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
$51,802,000 and $37,117,000 at December 31, 1996 and 1995, respectively. The
balance of loans serviced for others related to servicing rights that have
been capitalized was $19,537,000 at December 31, 1996. The remaining balance
of loans serviced for others also have servicing rights associated with them,
however, these servicing rights arose prior to adoption of SFAS 122, and
accordingly have not been capitalized on the balance sheet. Income earned for
loan servicing was $96,000, $82,000 and $68,000 for 1996, 1995 and 1994,
respectively. Mortgage servicing rights of $220,000 were capitalized in 1996.
Amortization of mortgage servicing rights included in income earned for loan
servicing was $15,000 in 1996.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
<TABLE>
The following is an analysis of the allowance for loan losses for 1996, 1995 and 1994:
<CAPTION>
1996 1995 1994
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Balance, January 1 $ 5,472 $ 4,866 $ 4,010
Allowance related to acquisitions 0 746 0
Provision for loan losses 120 120 795
Loans charged-off 368 355 135
Recoveries 82 95 196
------------ ------------ ------------
Net loans charged-off (recoveries) 286 260 (61)
------------ ------------ ------------
Balance, December 31 $ 5,306 $ 5,472 $ 4,866
============ ============ ============
</TABLE>
Nonaccrual loans at December 31, 1996, 1995 and 1994, totaled $384,000,
$532,000 and $18,000, respectively. Interest lost on nonaccrual loans was
approximately $35,000 and $29,000 for 1996 and 1995, respectively. The amount
of interest lost for 1994 was not material. Loans renegotiated as troubled
debt restructuring totaled $1,284,000 and $1,432,000 as of December 31, 1996
and 1995, respectively. Interest income of $85,000, $96,000 and $82,000 was
recognized in 1996, 1995 and 1994. Had these loans been performing under the
original contract terms, an additional $44,000 would have been reflected in
interest income during 1996, $53,000 in 1995 and $31,000 in 1994. The
Corporation is not committed to lend additional funds to debtors whose loans
have been modified. During 1996 and 1995, the Corporation had no loans meeting
the definition of impaired under SFAS No. 114.
15
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 6 - LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation were as
follows at December 31:
1996 1995
------------ ------------
(in thousands)
Land $ 4,344 $ 3,648
Buildings 12,356 10,568
Equipment 8,001 7,069
------------ ------------
Total cost 24,701 21,285
Less accumulated depreciation 8,687 7,549
------------ ------------
Land, premises and equipment, net $ 16,014 $ 13,736
============ ============
NOTE 7 - DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination
of $100,000, was approximately $97,943,000 and $62,363,000 at December 31,
1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
Amount
------------
(in thousands)
Maturing in 1997 $ 229,858
Maturing in 1998 35,173
Maturing in 1999 16,751
Maturing in 2000 6,299
Maturing in 2001 3,368
Thereafter 17,094
------------
Total time deposits $ 308,543
============
Deposits of executive officers and directors (including their associates)
totalled $3,652,000 and $3,352,000 at December 31, 1996 and 1995,
respectively.
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repo accounts) represent
collateralized borrowings with customers located primarily within the
Corporation's trade area. Information on these liabilities and the related
collateral for 1996 and 1995 is as follows:
1996 1995
------------ ------------
(in thousands)
Average balance during the year $ 73,728 $ 61,398
Average interest rate during the year 5.33% 5.69%
Maximum month-end balance during the year $ 89,433 $ 79,419
Securities underlying the agreements at year-end
Amortized cost $ 87,817 $ 59,934
Fair Value $ 88,004 $ 60,458
<TABLE>
<CAPTION>
Collateral Value
------------------------------------------------------
U.S. Treasury Mortgage-backed
Weighted Securities Securities
Average -------------------------- --------------------------
Repurchase Interest Amortized Fair Amortized Fair
Term Liability Rate Cost Value Cost Value
- -------------------------------------------- ------------ --------------- ------------ ------------ ------------ ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
On demand $ 32,730 4.18% $ 0 $ 0 $ 32,939 $ 32,982
1 to 30 days 9,707 5.39 1,571 1,531 8,669 8,697
31 to 90 days 21,732 5.56 2,453 2,479 19,415 19,419
Over 90 days 21,442 5.95 12,625 12,700 10,145 10,196
------------ --------------- ------------ ------------ ------------ ------------
Total $ 85,611 5.11% $ 16,649 $ 16,710 $ 71,168 $ 71,294
============ =============== ============ ============ ============ ============
</TABLE>
The Corporation retains the right to substitute similar type securities,
and has the right to withdraw all collateral applicable to repo accounts
whenever the collateral values are in excess of the related repurchase
liabilities. At December 31, 1996, there were no material amounts of
securities at risk with any one customer. The Corporation maintains control of
these securities through the use of third-party safekeeping arrangements.
16
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 9 - LONG -TERM DEBT
Long-term debt at December 31 consisted of:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(in thousands)
<S> <C> <C>
Federal Home Loan Bank of Indianapolis Notes, 5.55%, Due January 2, 1996 $ 0 $ 8,000
Federal Home Loan Bank of Indianapolis Notes, 5.59%, Due January 14, 1997 8,132 8,132
Federal Home Loan Bank of Indianapolis Notes, 5.92% Due December 7, 1998 4,000 0
Federal Home Loan Bank of Indianapolis Notes, 5.50% Due December 28, 1998 10,000 0
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 1,300 1,300
Capital Leases 99 0
------------ ------------
Total $ 23,531 $ 17,432
============ ============
</TABLE>
All notes require monthly interest payments and are secured by
residential real estate loans with a carrying value of $30,432,000 at December
31, 1996. The capital leases had original terms of approximately three years
and require monthly payments.
NOTE 10 - EMPLOYEE BENEFIT PLANS
<TABLE>
Information as to the Corporation's pension plan at December 31 is as follows:
<CAPTION>
1996 1995
------------ ------------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $1,107,000 for 1996 and $949,000 for 1995 $ 1,214 $ 1,060
============ ============
Projected benefit obligation for service rendered to date $ 1,544 $ 1,355
Plan assets at fair value (primarily money market funds
and equity and fixed income investments) (1,151) (1,131)
Unrecognized gains (losses) (27) (29)
Unrecognized prior service cost 28 31
------------ ------------
Accrued balance sheet pension liability $ 394 $ 226
============ ============
</TABLE>
<TABLE>
Net pension expense includes the following:
<CAPTION>
1996 1995 1994
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Service cost for benefits earned $ 162 $ 116 $ 119
Interest cost 105 77 66
Actual return on plan assets (90) (97) (56)
Net amortization and deferrals (9) 19 (3)
------------ ------------ ------------
Net pension expense $ 168 $ 115 $ 126
============ ============ ============
The following assumptions were used in calculating the net pension cost:
Weighted average discount rate 7.75% 7.50% 8.00%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 8.00% 8.00% 8.00%
</TABLE>
Under a 401(k) profit sharing plan, the Corporation contributions are
based upon the rate of return on January 1 stockholders' equity. The expense
recognized was $532,000, $455,000 and $370,000 in 1996, 1995 and 1994,
respectively.
NOTE 11 - OTHER EXPENSE
<TABLE>
Other expense for the years ended December 31, were as follows:
<CAPTION>
1996 1995 1994
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Regulatory fees and FDIC insurance $ 57 $ 616 $ 904
Data processing fees and supplies 1,098 913 769
Office supplies 641 632 519
Telephone and postage 729 616 535
Miscellaneous 2,885 2,342 2,029
------------ ------------ ------------
Total other expense $ 5,410 $ 5,119 $ 4,756
============ ============ ============
</TABLE>
17
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES
<TABLE>
Income tax expense consists of the following:
<CAPTION>
1996 1995 1994
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Current federal income tax expense $ 2,503 $ 2,297 $ 2,301
Deferred federal income tax expense 107 5 11
Current state income tax expense 808 734 673
Deferred state income tax expense 86 28 39
------------ ------------ ------------
Total income tax expense $ 3,504 $ 3,064 $ 3,024
============ ============ ============
</TABLE>
Income tax expense (credit) included $(3,000), $114,000 and $(34,000)
applicable to security transactions for 1996, 1995 and 1994, respectively. The
differences between financial statement tax expense and amounts computed by
applying the statutory federal income tax rate of 34% for all three years to
income before income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Income taxes at statutory federal rate $ 3,382 $ 2,961 $ 2,771
Increase (decrease) in taxes resulting from:
Tax exempt income (540) (433) (338)
Nondeductible expense 140 119 73
State income tax, net of federal tax effect 590 503 471
Net operating loss, Gateway (29) (29) 0
Tax credits (22) (30) 0
Other (17) (27) 47
------------ ------------ ------------
Total income tax expense $ 3,504 $ 3,064 $ 3,024
============ ============ ============
</TABLE>
<TABLE>
The components of the net deferred tax asset recorded in the consolidated balance sheets at December 31 consist of the
following:
<CAPTION>
1996 1995
--------------------------- --------------------------
Federal State Federal State
------------- ------------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Deferred tax assets
Bad debts $ 1,237 $ 395 $ 1,344 $ 445
ORE 86 18 142 35
Pension and deferred compensation liability 281 59 289 72
Deferred loan fees 0 0 83 21
Net operating loss carryforward 335 0 385 0
Other 41 17 98 23
------------- ------------- ------------ ------------
1,980 489 2,341 596
Deferred tax liabilities
Depreciation 232 49 409 102
Mortgage servicing rights 58 12 0 0
State taxes 154 0 190 0
Leases 96 20 0 0
Deferred loan fees 15 3 0 0
Other 110 23 320 26
------------- ------------- ------------ ------------
665 107 919 128
Valuation allowance 158 0 158 0
------------- ------------- ------------ ------------
Net deferred tax asset $ 1,157 $ 382 $ 1,264 $ 468
============= ============= ============ ============
</TABLE>
For tax purposes, the acquisition of Gateway Bank (see Note 13) was
structured such that its tax basis of assets and liabilities carried over to
the Corporation. Therefore, Gateway Bank's net operating loss carryforward of
approximately $1,339,000 is available to the Corporation. However, due to the
ownership change, the Internal Revenue Service has certain limitations on the
amount of net operating loss carryforward that can be utilized by the
Corporation. As a result, at the date of acquisition the Corporation recorded
a deferred tax asset of approximately $385,000 and an offsetting valuation
reserve of approximately $158,000.
In addition to the net deferred tax assets included above, income taxes
(credits) allocated to the unrealized net gain (loss) account included in
equity were $259,000 and $414,000 for 1996 and 1995, respectively.
18
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 13 - ACQUISITIONS
On July 15, 1995, the Bank acquired Gateway Bank ("Gateway"), LaGrange,
Indiana. The Bank paid $1,380,000 for all the issued and outstanding shares of
Gateway common stock. The transaction was accounted for using the purchase
method of accounting. The acquisition added the following assets and
liabilities to the Bank:
(in thousands)
Assets ----------------
Cash and due from banks $ 292
Securities 10,307
Gross loans 9,073
Allowance for loan losses (746)
Other assets 1,636
Liabilities
Deposits $ 18,528
Other liabilities 102
As of the date of the acquisition, the former Gateway Bank became an
office of Lake City Bank. Gateway's results of operations are included in the
income statement of the Corporation beginning as of the purchase date.
NOTE 14 - PARENT COMPANY STATEMENTS
<TABLE>
The Corporation operates primarily in the banking industry, which accounts for more than 90 percent of its revenues,
operating income, and assets. Presented below are parent only financial statements:
<CAPTION>
CONDENSED BALANCE SHEETS
December 31
--------------------------
1996 1995
------------ ------------
(in thousands)
<S> <C> <C>
ASSETS
Deposits with Lake City Bank $ 15 $ 25
Investment in subsidiary 42,356 36,987
Other assets 8 11
------------ ------------
Total assets $ 42,379 $ 37,023
============ ============
LIABILITIES
Dividends payable and other liabilities $ 336 $ 269
STOCKHOLDERS' EQUITY 42,043 36,754
------------ ------------
Total liabilities and stockholders' equity $ 42,379 $ 37,023
============ ============
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Dividends from Lake City Bank $ 1,091 $ 928 $ 982
Interest on deposits and repurchase agreements, Lake City Bank 24 6 3
Miscellaneous income 0 10 22
Equity in undistributed income of subsidiary 5,353 4,719 4,168
Miscellaneous expense 17 14 68
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 6,451 5,649 5,107
Income tax expense (credit) 7 4 (19)
------------ ------------ ------------
NET INCOME $ 6,444 $ 5,645 $ 5,126
============ ============ ============
</TABLE>
19
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY STATEMENTS (continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 6,444 $ 5,645 $ 5,126
Adjustments to net cash from operating activities
Equity in undistributed income of subsidiary (5,353) (4,719) (4,168)
Other changes 70 3 18
------------ ------------ ------------
Net cash from operating activities 1,161 929 976
Cash flows from investing activities (251) 104 (137)
Cash flows from financing activities (920) (1,023) (848)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (10) 10 (9)
Cash and cash equivalents at beginning of the year 25 15 24
------------ ------------ ------------
Cash and cash equivalents at end of the year $ 15 $ 25 $ 15
============ ============ ============
</TABLE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
The following table contains the estimated fair values and the related carrying values of the Corporation's financial
instruments at December 31, 1996 and 1995. Items which are not financial instruments are not included.
<CAPTION>
1996 1995
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 44,879 $ 44,879 $ 26,895 $ 26,895
Real estate mortgages held-for-sale 895 907 145 147
Securities available-for-sale 81,842 81,842 82,120 82,120
Securities held-to-maturity 125,274 126,373 113,888 115,328
Loans, net 376,959 376,086 322,145 322,692
Accrued income receivable 4,254 4,254 4,003 4,003
Mortgage servicing rights 205 205 0 0
Certificates of deposit (308,543) (309,997) (265,038) (266,600)
All other deposits (188,010) (188,010) (166,896) (166,896)
Securities sold under agreements to repurchase (85,611) (85,717) (58,151) (58,496)
Other short-term borrowings (2,769) (2,769) (18,980) (18,980)
Long-term debt (23,531) (23,466) (17,432) (17,505)
Accrued expenses payable (5,033) (5,033) (4,481) (4,481)
</TABLE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1996 and 1995. The
estimated fair value for cash, cash equivalents and accruals is considered to
approximate cost. Real estate mortgages held-for-sale are based upon either
the actual contracted price for those loans sold but not yet delivered, or the
current FHLMC price for normal delivery of mortgages with similar coupons and
maturities at year-end. The estimated fair value for securities is based on
quoted market rates for individual securities or for equivalent quality,
coupon and maturity securities. The estimated fair value of loans is based on
estimates of the rate the Corporation would charge for similar loans at
December 31, 1996 and 1995, applied for the time period until estimated
repayment. The estimated fair value of mortgage servicing rights is based upon
valuation methodology which considers current market conditions and historical
performance of the loans being serviced. The estimated fair value for demand
and savings deposits is based on their carrying value. The estimated fair
value for certificates of deposit and borrowings is based on estimates of the
rate the Corporation would pay on such deposits or borrowings at December 31,
1996 and 1995, applied for the time period until maturity. The estimated fair
value of short-term borrowed funds is considered to approximate carrying
value. The estimated fair value of other financial instruments and off-balance
sheet loan commitments approximate cost and are not considered significant to
this presentation.
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that were the Corporation
to have disposed of such items at December 31, 1996 and 1995, the estimated
fair values would necessarily have been achieved at that date, since market
values may differ depending on various circumstances. The estimated fair
values at December 31, 1996 and 1995, should not necessarily be considered to
apply at subsequent dates.
In addition, other assets and liabilities of the Corporation that are not
defined as financial instruments are not included in the above disclosures,
such as land, premises and equipment. Also, non-financial instruments
typically not recognized in financial statements nevertheless may have value
but are not included in the above disclosures. These include, among other
items, the estimated earnings power of core deposit accounts, the earnings
potential of the Corporation's trust department, the trained work force,
customer goodwill and similar items.
20
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 16 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
<TABLE>
During the normal course of business, the Corporation becomes a party to financial instruments with off-balance sheet risk in
order to meet the financing needs of its customers. These financial instruments include commitments to make loans and open-ended
revolving lines of credit. Amounts as of December 31, 1996 and 1995, were as follows:
<CAPTION>
1996 1995
-------------------------- --------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Commercial loan lines of credit $ 13,063 $ 98,155 $ 2,558 $ 100,033
Commercial loan standby letters of credit 0 7,865 0 4,608
Real estate mortgage loans 941 532 699 199
Real estate construction mortgage loans 0 1,997 0 963
Credit card open-ended revolving lines 4,947 0 4,153 0
Home equity mortgage open-ended revolving lines 0 16,743 0 13,955
Consumer loan open-ended revolving lines 0 2,835 0 2,556
------------ ------------ ------------ ------------
Total $ 18,951 $ 128,127 $ 7,410 $ 122,314
============ ============ ============ ============
</TABLE>
At December 31, 1996 and 1995, the range of interest rates for commercial
loan commitments with a fixed rate was 7.86% to 12.00% and 6.99% to 12.00%,
respectively. The range of interest rates for commercial loan commitments with
variable rates was 7.75% to 12.25% and 6.84% to 12.50% at December 31, 1996
and 1995, respectively. The index on variable rate commercial loan commitments
is principally the Bank's base rate.
Commitments, excluding open-ended revolving lines, generally have fixed
expiration dates of one year or less. Credit card open-ended revolving lines
of credit are normally reviewed bi-annually and other personal lines of credit
are normally reviewed annually. Since many commitments expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. The Corporation follows the same credit policy (including
requiring collateral, if deemed appropriate) to make such commitments as is
followed for those loans that are recorded in its financial statements.
The Corporation's exposure to credit losses in the event of
nonperformance is represented by the contractual amount of the commitments.
Management does not expect any losses as a result of these commitments.
There are presently no lawsuits which, in the opinion of management and
legal counsel, would have a material affect on the financial statements.
NOTE 17 - REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly discretionary,
actions by regulators that, if undertaken, could have a direct material effect
on the Corporation's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Corporation
must meet specific capital guidelines that involve quantitative measures of
the Corporation's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996 and 1995, the Corporation meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the federal
regulators categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Corporation's category.
<TABLE>
<CAPTION>
Minimum Required To Be
Minimum Required Well Capitalized Under
For Capital Prompt Corrective Action
Actual Adequacy Purposes Regulations
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ------------ --------- ------------- ---------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital (to Risk Weighted Assets) $ 46,860 11.19% >=$ 33,501 >= 8.00% >=$ 41,876 >= 10.00%
Tier I Capital (to Risk Weighted Assets) $ 41,624 9.94% >=$ 16,750 >= 4.00% >=$ 25,125 >= 6.00%
Tier I Capital (to Average Assets) $ 41,624 6.29% >=$ 26,469 >= 4.00% >=$ 33,087 >= 5.00%
As of December 31, 1995
Total Capital (to Risk Weighted Assets) $ 40,709 11.38% >=$ 28,61 >= 8.00% >=$ 35,772 >= 10.00%
Tier I Capital (to Risk Weighted Assets) $ 36,224 10.13% >=$ 14,30 >= 4.00% >=$ 21,455 >= 6.00%
Tier I Capital (to Average Assets) $ 36,224 6.31% >=$ 22,96 >= 4.00% >=$ 28,703 >= 5.00%
</TABLE>
21
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- ------------------------------------------------------------------------------
Stockholders and Board of Directors
Lakeland Financial Corporation
Warsaw, Indiana
We have audited the accompanying consolidated balance sheets of Lakeland
Financial Corporation and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1996, 1995 and 1994. These
financial statements are the responsibility of the Corporation'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 Lakeland
Financial Corporation and subsidiary as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years ended December 31,
1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1, the Corporation adopted new accounting guidance
for impaired loans in 1995 and new accounting guidance for mortgage servicing
rights in 1996.
CROWE, CHIZEK AND COMPANY LLP
South Bend, Indiana
January 16, 1997
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Management is responsible for the preparation of the Corporation'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 that the financial
statements reasonably present the Corporation's financial position and results
of operations and were prepared in conformity with generally accepted
accounting principles. Management also has included in the Corporation's
financial statements, amounts that are based on estimates and judgments which
it believes are reasonable under the circumstances.
The Corporation maintains a system of internal controls designed to
provide reasonable assurance that all assets are safeguarded, financial
records are reliable for preparing Consolidated Financial Statements and the
Corporation complies with laws and regulations relating to safety and
soundness which are designated by the FDIC and other appropriate federal
banking agencies. The selection and training of qualified personnel and the
establishment and communication of accounting and administrative policies and
procedures are elements of this control system. The effectiveness of the
internal control system is monitored by a program of internal audit and by
independent certified public accountants ('independent auditors'). Management
recognizes that the cost of a system of internal controls should not exceed
the benefits derived and that there are inherent limitations to be considered
in the potential effectiveness of any system. Management believes the
Corporation's system provides the appropriate balance between costs of
controls and the related benefits.
The independent auditors have audited the Corporation's consolidated
financial statements in accordance with generally accepted auditing standards
and provide an objective, independent review of the fairness of the reported
operating results and financial position. The Board of Directors of the
Corporation has an Audit Review Committee composed of five non-management
Directors. The Committee meets periodically with the internal auditors and the
independent auditors.
22
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- ------------------------------------------------------------------------------
FINANCIAL CONDITION
Liquidity
The Corporation manages its primary liquidity position to provide funding
at the lowest possible cost, for anticipated loan demand and/or deposit
run-off that occurs in the regular course of business. Such sources of
liquidity are: Federal fund lines with correspondent banks, advances from the
Federal Home Loan Bank, repurchase agreements with local customers and cash
flow from the securities portfolio. This cash flow from the securities
portfolio could total approximately $49.6 million in 1997, given current
prepayment assumptions. Additionally, continuous growth into new markets in
northern Indiana has diversified the retail deposit base, reducing volatility
that might occur in one geographical location.
The Corporation manages a secondary liquidity position to provide funding
in the event of unanticipated loan demand and/or deposit run-off. Management
has designated approximately 39.3 percent of its investment portfolio as
available-for-sale (AFS). This designation provides the liquidity to fund
abnormal loan demand, or to manage the loss of deposits. The Corporation's
securities are all very high quality and easily marketable, with 87.8 percent
either U.S. Treasuries, Federal agency securities or mortgage-backed
securities directly or indirectly guaranteed by the Federal government.
The following is a brief description of the sources and uses of funds for
the indicated periods:
During the year ended December 31, 1996, there was a net increase of
$18.0 million in cash and cash equivalents. The major uses of cash during the
period included the funding of a $54.9 million increase in loans, the purchase
of securities totaling $34.7 million and the purchase of new premises and
equipment of $3.6 million. Major sources of funds were: a net increase in cash
from operating activities of $7.2 million, maturities and calls of securities
totaling $22.9 million, an increase in deposits of $64.6 million and a $17.3
million increase in total borrowings.
During the year ended December 31, 1995, there was a net increase of 2.7
million in cash and cash equivalents. The major uses of cash during the period
included the funding of a $39.2 million increase in loans, the purchase of
securities totaling $42.9 million and the purchase of new premises and
equipment of $3.7 million. Major sources of funds were: a net increase in cash
from operating activities of $8.1 million, maturities and sales of securities
totaling $18.9 million, an increase in deposits of $35.2 million and a $28.8
million increase in total borrowings.
During the year ended December 31, 1994, there was a net increase of
$11.3 million in cash and cash equivalents. The major uses of cash during the
period included the funding of a $27.7 million increase in loans and the
purchase of securities totaling $28.5 million. Major sources of funds were: a
net increase in cash from operating activities of $10.3 million, maturing
securities of $15.3 million, an increase in deposits of $26.7 million and an
$18.5 million increase in total borrowings.
Asset/Liability Management (ALCO) and Securities
The Board of Directors annually reviews and approves the ALCO policy used
to manage interest rate risk. This policy sets guidelines for balance sheet
structure that protects the Corporation from excessive net income volatility
that could result from changing interest rates. The Corporation uses a GAP
report, which details the relative mismatch of asset and liability cash flows
occurring in specified time horizons, and a computer program to stress test
the balance sheet under a wide variety of interest rate scenarios. This model
quantifies the impact on income of such things as: changes in customer
preference for products, basis risk between the assets and the funds
supporting them and the risk inherent in different yield curves. The ALCO
committee reviews these possible outcomes and makes loan, investment and
deposit decisions that maintain reasonable balance sheet structure in light of
potential interest rate movements. After the committee has specified a maximum
risk tolerance for dollar margin volatility, the committee develops guidelines
for the GAP ratios. As indicated in Table 1 - Repricing Opportunities, the
Corporation's cumulative GAP ratio at December 31, 1996, for the next 12
months is a negative 17.6 percent of total assets. This ratio indicates that
the interest margin could be slightly lower if interest rates rise, as
compared to flat or falling interest rate environments. The computer model
produces a slightly different result, and highlights one of the major problems
with GAP analysis. While GAP may provide a basic guide to rate risk exposure
in certain rate environments, it cannot effectively provide a dollar margin
impact since it ignores the rates on maturing assets and liabilities, the
different indices used to price products and the changes in customer
preference that occur whenever interest rates change. Factoring all of these
things into the computer simulation, the Corporation is exposed to falling
rates. That is, the interest margin could be slightly lower if rates fall. The
degree of this exposure is within policy limits.
The Corporation's investment portfolios consist of U.S. Treasuries,
agencies, mortgage-backed securities, municipal bonds and corporates. During
1996, purchases have been primarily U.S. Treasuries, mortgage-backed ecurities
and municipal bonds. At December 31, 1996, the Corporation's investment in
mortgage-backed securities comprised approximately 63 percent of total
securities and consisted of CMO's and mortgage pools issued by GNMA, FNMA and
FHLMC. As such, these securities are backed directly or indirectly by the
Federal government. All mortgage securities are purchased to conform to the
FFIEC high risk standards which prohibit the purchase of securities that have
excessive price, prepayment, extension and original life risk characteristics.
The Corporation uses Bloomberg analytics to evaluate and monitor all
purchases. At December 31, 1996, the mortgage securities in the AFS portfolio
had a one and one-half year average life, with approximately 6 percent price
depreciation should rates move up 300 basis points and approximately 4 percent
price appreciation should rates move down 300 basis points. The mortgage
securities in the HTM portfolio had a three year average life and the
potential for approximately 9 percent price depreciation should rates increase
300 basis points and approximately 7 percent price appreciation should rates
move down 300 basis points. As of December 31, 1996, all mortgage securities
continue to be in compliance with FFIEC guidelines, and are performing in a
manner consistent with management's original expectations.
Capital Management
The Corporation believes that a strong capital position is vital to
long-term earnings and expansion. Currently the Corporation maintains capital
levels in excess of "well-capitalized" levels as defined by the FDIC. Bank
regulatory agencies exclude the market value adjustment created by SFAS No.
115 (AFS adjustment) from capital adequacy calculations. Therefore, excluding
this adjustment from the calculation, the Corporation attained tier I leverage
capital, tier I risk based capital and tier II risk based capital ratios of
6.3 percent, 9.9 percent and 11.2 percent, respectively at December 31, 1996.
All three ratios exceed the "well-capitalized" minimums of 5.0 percent, 6.0
percent and 10.0 percent, respectively.
The ability to maintain these ratios at these levels is a function of net
income growth and a prudent dividend policy. Total stockholders' equity
increased by 14.4 percent, to $42,043,000 as of December 31, 1996, from
$36,754,000 as of December 31, 1995. Total stockholders' equity increased by
40.7 percent or $12,154,000 from $29,889,000 as of December 31, 1994. The 1996
growth resulted from the retention of net income of $6,444,000, minus cash
dividends declared of $1,335,000 less the change in the AFS adjustment of
$235,000, net of tax, plus $415,000 from issuing shares of common stock. The
AFS adjustment reflects an 82 basis point increase in three to five year U. S.
Treasury rates during 1996. Since the securities portfolio is primarily fixed
rate, a negative equity adjustment should occur whenever interest rates
increase. Management has factored this into the determination of the size of
the AFS portfolio, to assure that stockholders' equity is adequate under
various scenarios. The 1995 growth of $6,865,000 resulted from the retention
of net income of $5,645,000, minus cash dividends declared of $1,066,000, plus
the AFS adjustment of $2,286,000, net of tax. This 1996 AFS adjustment
reflected a 250 basis point decrease in three to five year U. S. Treasury
rates during 1995.
23
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
Management is not aware of any known trends, events or uncertainties that
would have a material effect on the Corporation's liquidity, capital and
results of operations. Nor is management aware of any regulatory
recommendations that, if implemented, would have such an effect.
Allowance for Credit Risk
At December 31, 1996, the allowance for loan losses was $5,306,000 or
1.39 percent of total loans outstanding, compared with $5,472,000 or 1.67
percent of total loans outstanding at December 31, 1995. The process of
identifying credit losses that may occur based upon current circumstances is
subjective. Therefore, the Corporation maintains a general allowance to cover
all credit losses within the entire portfolio. The methodology management uses
to determine the adequacy of the loan loss reserve is as follows:
1.Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectibility factors
(including impairment) and assesses the requirement for specific reserves
on such credits. For those loans not subject to specific reviews,
management reviews previous loan loss experience to establish historical
ratios and trends in charge-offs by loan category. The ratios of net
charge-offs to particular types of loans enables management to establish
charge-offs in future periods by loan category and thereby establish
appropriate reserves for loans not specifically reviewed.
2.Management reviews the current and anticipated economic conditions of
its lending market to determine the effects on future loan charge-offs by
loan category, in addition to the effects on the loan portfolio as a
whole.
3.Management reviews delinquent loan reports to determine risk of future
charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Given this methodology for determining the adequacy of the loan loss
reserve, the provision for loan losses was substantially lower in 1996 and
1995 as compared to prior periods. This reduction reflects the trend in past
due accruing loans (90 days or more) which are currently at historically low
levels. It also reflects the immaterial level of nonaccrual loans over the
same period. These trends in non-performing loans reflect both general
economic conditions that have promoted growth and expansion in the
Corporation's market area, and a credit risk management strategy that promotes
diversification.
At December 31, 1996, 62.0 percent of the Corporation's allowance for
loan losses was classified as unallocated. To a large extent, this reflects
the growth in total loans over the last three years of $122 million, or about
46.9 percent, and the concentration of this loan growth in the commercial loan
portfolio. With this type of commercial loan growth, management believes that
it is prudent to continue to provide for loan losses, due to the inherent risk
associated with commercial loans.
Inflation
For a financial institution, the effects of price changes and inflation
can vary substantially. Inflation affects the growth of total assets, but it
is difficult to assess its impact since neither the timing nor the magnitude
of the changes in the consumer price index (CPI) coincides with changes in
interest rates. The price of one or more of the important components of the
CPI may fluctuate considerably and thereby influence the overall CPI without
having a corresponding affect on interest rates or upon the cost of those
goods and services normally purchased by the Corporation. In years of high
inflation and high interest rates, intermediate and long-term interest rates
tend to increase, thereby adversely impacting the market values of investment
securities, mortgage loans and other long-term fixed rate loans. In addition,
higher short-term interest rates caused by inflation tend to increase the cost
of funds. In other years, the reverse situation may occur.
Growth and Expansion
The assets of the Corporation increased 15.5 percent, or $87,972,000, to
$656,551,000 as of December 31, 1996, from $568,579,000 as of December 31,
1995. Assets at December 31, 1995, increased 14.4 percent, or $71,616,000,
from $496,963,000 as of December 31, 1994. The Corporation has been pursuing
expansion into contiguous markets since 1990. Most recently, the Corporation
opened two additional offices and one free-standing ATM during 1996. Plans
call for additional expansion in Elkhart and St. Joseph counties in 1997.
Although growth continues to be strong in the traditional markets served by
the Corporation, much of the growth experienced in 1996 was in the new markets
served by the Corporation. The Corporation's market area now includes:
Elkhart, Fulton, Kosciusko, LaGrange, Marshall, Noble and Whitley counties. As
in the past, the Corporation expects to continue to serve its market by adding
new products, offices and ATM's in areas where the demographic trends dictate.
This activity will contribute to net income in future years.
Changes in Accounting Methods
Effective January 1, 1995, the Corporation adopted SFAS No. 114, and SFAS
No. 118, Accounting by Creditors for Impairment of a Loan. The effect on the
Corporation of the adoption of this accounting standard was not material.
On January 1, 1996, the Corporation adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights", which requires recognition of an asset when
servicing rights are retained on in-house originated loans that are sold.
Adopting SFAS No. 122 did not have a significant impact on the financial
condition and operations for 1996. The impact in subsequent years is difficult
to predict.
RESULTS OF OPERATIONS
1996 vs 1995
Continued growth and expansion have brought Corporation assets and
earnings to record levels again in 1996. Total assets of the Corporation were
$656,551,000 at December 31, 1996, an increase of $87,972,000 or 15.5 percent
over the assets at December 31, 1995. Total loans at December 31, 1996
increased to $382,265,000. That is an increase of $54,648,000 or 16.7 percent
over the balance at December 31, 1995. Total deposits increased to
$496,553,000 at December 31, 1996, an increase of $64,619,000 or 15.1 percent
while core funding, deposits plus securities sold under agreements to
repurchase, increased $92,079,000 or 18.8 percent to $582,164,000. On an
average daily basis, gross earning assets increased 12.6 percent and deposits
plus purchased funds increased 12.5 percent.
For 1996, total interest income was $45,941,000 which is an increase of
$3,997,000 or 9.5 percent from the prior year. This is a result of the
increased earning assets offset by a 24 basis point decrease in the earning
asset yield. The decrease in the earning asset yield reflects the 56 basis
point reduction in the average prime rate for 1996, as compared to 1995 and
its effect on the commercial loan portfolio yield.
24
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
Nonearning assets of the Corporation include nonaccrual loans and
investments, other real estate, and repossessions. These nonearning assets
were $1,097,000, $1,207,000 and $815,000 as of December 31, 1996, 1995 and
1994, respectively. Nonaccrual loans totaled $384,000, $532,000 and $18,000,
respectively at the end of the years 1996, 1995 and 1994.
Interest expense was $23,737,000 for 1996, an increase of $2,095,000 or
9.7 percent over the amount for 1995. This reflects a $62,299,000 increase in
the average daily balance of deposits and purchased funds offset by an 11
basis point decrease in the average rate paid on these funds. The largest
increase was in the average daily balance of time deposits which increased
$43,195,000 for 1996, as compared to 1995.
Net interest income for 1996 was $22,204,000 as compared to $20,302,000
for 1995, an increase of $1,902,000 or 9.4 percent. As a percentage of average
earning assets it was 4.06 percent for 1996, a 12 basis point decrease from
the percentage for 1995. This reflects the decrease in the average rate paid
on deposits and purchased funds being 13 basis points less than the decrease
in the average yield on earning assets and the continued shift of deposits to
the higher cost time deposits.
As indicated in the Notes to Consolidated Financial Statements and the
discussion of financial condition, management maintains the allowance for loan
losses at an appropriate level given many different factors. Management
believes the December 31, 1996 allowance of $5,306,000 is adequate to absorb
all potential risk applicable to the classification of loans as loss,
doubtful, substandard or special mention. This allowance does not represent or
result from trends that will materially adversely impact future operating
results, liquidity, or capital resources. Net interest income after the
provision for loan losses was $22,084,000 for 1996, an increase of $1,902,000
or 9.4 percent over the amount for 1995.
Noninterest income for 1996 increased $1,028,000 over the amount for
1995, totaling $5,799,000 for the year. All major components of noninterest
income increased except for security gains and losses. Trust income increased
24.3 percent from the amount for 1995 to $881,000 for 1996. Service charges on
deposit accounts increased 24.2 percent to $2,809,000 for 1996. This increase
resulted from the continued acceptance of the Corporation's individual deposit
accounts paying fees and adjustments to the schedule of deposit fees. The
$380,000 increase in other noninterest income resulted from increases in a
variety of income sources including discount brokerage fees, wire transfer
fees, and gains on sales of other real estate. The increase in gains on sales
of real estate mortgages held-for-sale are a result of continued sales of
mortgages to the secondary market and the adoption of SFAS No. 122. These
gains were $412,000 for 1996 as compared to $159,000 for 1995, an increase of
$253,000. Approximately $205,000 of these gains were a result of adopting SFAS
No. 122. The small security losses recorded in 1996 were primarily the result
of several partial calls. During 1995, sales of securities available-for-sale
and calls of securities held-to-maturity accounted for the gain of $315,000.
Noninterest expense was $17,935,000 for the year ended December 31, 1996,
an increase of $1,691,000 or 10.4 percent over the amount for 1995. All
components of noninterest expense increased with the largest increase being
salaries and employee benefits which increased $1, 049,000 or 12.3 percent.
The increase in salaries and employee benefits reflects the normal salary
increases along with the increases in staff related to the 5 new offices
opened during the last 18 months. The number of full-time equivalent employees
increased to 320 at December 31, 1996, as compared to 292 at December 31,
1995. The $110,000 increase in net occupancy expense also reflect the
additional offices. The increase of $241,000 in equipment costs reflects both
the additional offices and investments necessary to stay current with
technology. As indicated in the Notes to Consolidated Financial Statements,
all components of other expense increased except for the regulatory fees and
FDIC insurance. The decrease in regulatory fees and FDIC insurance is
primarily due to the reduced premium rates on FDIC insurance for 1996 as
compared to 1995.
As a result of all these factors, income before income tax expense
increased $1,239,000 or 14.2 percent to $9,948,000 for 1996, as compared to
$8,709,000 for 1995. Income tax expense was $3,504,000 and $3,064,000 for 1996
and 1995, respectively. For both 1996 and 1995, the income tax expense as a
percentage of income before tax remained at 35.2 percent. Net income increased
to $6,444,000 for 1996, an increase of $799,000 or 14.2 percent over the net
income of $5,645,000 for 1995. Net income per share for 1996 was $2.22 as
compared to $1.96 for 1995. Net income of $6,444,000 represents a 17.9 percent
return on January 1, 1996 stockholder's equity (excluding the equity
adjustment related to SFAS No. 115) and a 1.07 percent return on average daily
assets.
1995 vs 1994
Corporation assets and earnings were at record levels in 1995. Total
assets were at $568,579,000 at December 31, 1995, an increase of $71,616,000
or 14.4 percent over the assets at December 31, 1994. Loans increased 13.8
percent, or $39,661,000, to $327,617,000 at year-end 1995. Total deposits
increased 8.9 percent, or $35,194,000, to $431,934,000 at December 31, 1995.
Core funding, deposits plus securities sold under agreement to repurchase,
increased 11.8 percent, or $51,595,000, to $490,085,000. Net income totaled
$5,645,000, exceeding 1994 by 10.1 percent. On an average daily basis, gross
earning assets increased by 14.8 percent and total deposits and purchased
funds increased by 14.3 percent. The Gateway Bank office added in July, 1995
accounted for approximately one-third of this average daily earning asset
growth.
Total interest income increased 25.0 percent, or $8,424,000 to
$42,079,000 for the year ended December 31, 1995. This increase was a result
of the increase in daily average earning assets and a 97 basis point increase
in the overall tax equivalent yield on earning assets as compared to the 1994
overall tax equivalent yield. The increase in the tax equivalent yield on
earning assets is reflective of the 168 basis point increase in the average
prime rate during 1995, and the effect this prime rate increase had on the
commercial loan portfolio yield.
Nonearning assets of the Corporation include nonaccrual loans and
investments, other real estate, and repossessions. These nonearning assets
amounted to $1,207,000, $815,000 and $2,379,000 as of December 31, 1995, 1994
and 1993, respectively. Nonaccrual loans totaled $532,000, $18,000 and $0,
respectively at the end of the years 1995, 1994 and 1993. Four mortgage loans
acquired from Gateway account for the majority of the amount in nonaccrual
loans for 1995.
Interest expense for 1995 was $21,642,000. This is an increase of
$6,755,000, or 45.4 percent, over the interest expense for 1994. The increase
in interest expense is attributable to the continued growth in time deposit
balances and rising interest rates. Average daily balances of time deposits
increased 24.1 percent over the prior year average daily balances and the
average rate paid on time deposits increased 161 basis points.
Net interest income increased $1,669,000 or 8.9 percent, to $20,437,000
in 1995, from $18,768,000 in 1994. Net interest income as a percentage of
earning assets was 4.18 percent for 1995. This is a decrease of 23 basis
points from the 4.41 percentage for 1994. This decrease resulted from the
increase in the rates paid on deposits and purchased funds being 25 basis
points higher than the increase in the rates for earning assets. The increase
in rates paid on deposits and purchased funds reflected both the effects of
competition and the shift of balances from savings and money market funds to
higher cost time deposits.
As indicated in the Notes to Consolidated Financial Statements and the
discussion of financial condition, management maintains the allowance for loan
losses at an appropriate level given many different factors. The December 31,
1995, allowance of $5,472,000 was believed by management to be adequate to
absorb all potential risk applicable to the classification of loans as loss,
doubtful, substandard or special mention. Net interest income after provision
for loan losses increased $2,344,000, or 13.0 percent, to $20,317,000 in 1995,
from $17,973,000 in 1994.
Trust income and service charges on deposit accounts, two major
components of noninterest income, increased 10.6 percent, or $284,000 in 1995
to $2,971,000 in 1995, from $2,687,000 in 1994. Trust income increased to
$709,000 for 1995, as compared to $609,000 for 1994, an increase of 16.4
25
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
percent. Service charges on deposit accounts increased 8.9 percent to
$2,262,000 in 1995. This increase is reflective of the continued acceptance of
the Corporation's individual deposit accounts paying fees. Other income
decreased by $221,000 when compared to 1994. Other income in 1994 included a
one-time event relating to the reversal of certain other real estate valuation
allowances that contributed $404,000 to other income. Without that one-time
event in 1994, the other income for 1995 would have increased $183,000 over
the amount for 1994.
The Corporation continued its program of originating mortgages for sale
on the secondary market. Loans originated for sale in 1995 were $10,878,000 as
compared to $9,426,000 originated for sale in 1994. Gains on the sales of
these loans totaled $159,000 a decrease of $18,000 from the gains recorded in
1994.
The ALCO committee reviews the portfolio monthly and makes investment
decisions based upon the projected balance sheet needs. During 1995, there
were sales of securities available-for-sale which resulted in net gains of
$331,000 and there were calls of securities held-to-maturity which resulted in
losses of $16,000. The net of these activities resulted in security gains of
$315,000 for 1995 as compared to net security losses of $7,000 in 1994. The
small security losses in 1994 were the result of several partial calls on zero
coupon bonds.
The result of the changes in all components of noninterest income was an
increase in total noninterest income of $367,000, or 8.6 percent, over the
amounts recorded for 1994.
Salaries and employee benefit costs for 1995 increased $1,243,000, or
17.1 percent, to $8,521,000. This increase was attributable to a 5.0 percent
increase in full-time equivalent employees (FTE) in 1995, to 292, along with
normal salary increases. The increase in FTE was a result of the opening of
three new offices and the acquisition of Gateway Bank during 1995.
Additionally, the increase in salaries and employee benefits reflected the
increased cost of fringe benefit and indirect payroll programs which are tied
to Corporate performance.
Net occupancy and equipment costs increased to $2,604,000 in 1995, from
$2,058,000 in 1994, an increase of $546,000 or 26.5 percent. This increase was
also due to the new offices added during 1995 as well as having the expenses
for the full year for the two offices opened in the fourth quarter of 1994.
This increase was also a result of investments in the equipment needed to stay
current with technology.
Other expense increased 7.6 percent, or $363,000, to $5,119,000 for 1995.
As indicated in the Notes to Consolidated Financial Statements, all components
of other expense increased from 1994 to 1995 except for Regulatory Fees and
FDIC Insurance. During 1995, the FDIC announced that the Bank Insurance Fund
reached its capitalization target in May. As a result, the FDIC refunded
excess premiums that banks paid from June to September and reduced the FDIC
premium rates. This refund and the reduction in FDIC premiums resulted in the
$288,000 decrease in Regulatory Fees and FDIC Insurance for 1995 as compared
to 1994.
As a result of all these factors, income before income tax expense
increased $559,000, or 6.9 percent, to $8,709,000 from the $8,150,000 for
1994. Income tax expense was $3,064,000 and $3,024,000 in 1995 and 1994,
respectively, which represent 35.2 percent and 37.1 percent of income before
taxes. The reduction in the average tax rate is due to a higher level of tax
exempt income, the net operating loss carryforward related to the Gateway
acquisition and an increase in Federal and State tax credits. Net income
increased to $5,645,000 for 1995 from $5,126,000 for 1994, an increase of
$519,000, or 10.1 percent. Net income per share was $3.92 for 1995, as
compared to $3.56 for 1994. Net income of $5,645,000 represents a 17.9 percent
return on January 1, 1995, stockholders' equity (excluding the equity
adjustment related to SFAS No. 115), and a 1.05 percent return on average
daily assets.
<TABLE>
TABLE 1 - REPRICING OPPORTUNITIES
- ----------------------------------------------------------------------------------------------------------------------------------
The table below illustrates the funding gaps for selected maturity periods as of December 31, 1996, for Lake City Bank only.
Repricing opportunities for fixed rate loans and mortgage-backed securities are based upon anticipated prepayment speeds. Demand
deposit accounts and savings accounts are classified as having maturities beyond four years.
<CAPTION>
Repricing or Maturing Within
----------------------------------------------------
6 7-12 1-4
Months Months Years
--------------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C>
Earning Assets
Loans $ 228,759 $ 29,007 $ 93,006
Securities 25,996 9,921 119,924
Short-term investments 3,491 0 198
--------------- ---------------- ----------------
Total 258,246 38,928 213,128
--------------- ---------------- ----------------
Deposits and Purchased Funds
Transaction accounts 66,601 0 0
Time deposits 186,019 58,171 58,446
Short-term borrowings 70,582 12,023 5,775
Long-term borrowings 8,135 0 14,096
--------------- ---------------- ----------------
Total 331,337 70,194 78,317
--------------- ---------------- ----------------
Interest sensitivity GAP $ (73,091) $ (31,266) $ 134,811
=============== ================ ================
Cumulative interest sensitivity GAP $ (73,091) $ (104,357) $ 30,454
=============== ================ ================
Cumulative GAP as percent of earning assets (12.3)% (17.6)% 5.1%
=============== ================ ================
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C>
LAKE CITY BANK OFFICERS
R. Douglas Grant President
Paul S. Siebenmorgen Executive Vice President Retail Services
Walter L. Weldy Executive Vice President Kevin L. Deardorff Senior Vice President
Craig R. Atz Vice President
Dale L. Cramer Vice President
Commercial Services Thomas P. Frantz Vice President
Charles D. Smith Senior Vice President Janet K. Anderson Assistant Vice President
David A. Bickel Vice President Barry A. Bailey Assistant Vice President
James R. Cowan Vice President Dennis E. Dolby Assistant Vice President
Michael E. Gavin Vice President Craig A. Haecker Assistant Vice President
William D. Leedy Vice President W. Randy Yoder Assistant Vice President
J. Randall Leininger Vice President Glenn A. Goudey Senior Mtg. Underwriter
H.A. "Rocky" Meyer Vice President Rick A. Spicer Mortgage Underwriter
Willard N. Schieler Vice President April J. Gayton Mortgage Banking Officer
Thomas G. Stark Vice President Linda A. Rodriguez Mtg. Loan Originator
James C. Stout Vice President Melanie R. Shipley Retail Banking Officer
Randal U. Vutech Vice President Lisa A. Stookey Retail Banking Officer
Edward D. Jarrett Assistant Vice President
J. Chad Stoltzfus Assistant Vice President
Chad D. Broyette Commercial Banking Financial & Operations
Officer Terry M. White Senior Vice President
Brent E. Hoffman Commercial Banking James J. Nowak Vice President
Officer and Controller
Michael A. Zimmerman Commercial Banking Teresa A. Bartman Assistant Vice President
Officer and Assistant Controller
Dennis L. Huff Vice President and M.I.S.
Judy K. Harvey Vice President
Trust & Investments Lisa M. Bicknese Assistant Vice President
Dennis E. Cultice Senior Vice President Vicki D. Martin Assistant Vice President
Coral G. Amspaugh Vice President Rebecca M. Siery Assistant Vice President
Jeanine D. Knowles Vice President Lorretta J. Burnworth Operations Officer
Max A. Mock Vice President Jean A. Ciriello Operations Officer
Anne M. Bailey Assistant Vice President Joanie L. Foreman Operations Officer
Jill A. Hester Assistant Vice President William L. Hilliard Operations Officer
Connie S. Miller Trust Officer Jan R. Martin Operations Officer
Shelley A. Moore Trust Operations Officer Elizabeth A. Neves Operations Officer
Linda A. Owens Operations Officer
Angela K. Ritchey Operations Officer
Marketing, Human Resources and Linda L. Swoverland Operations Officer
Facilities
D. Jean Northenor
Gregory D. Lawrence Vice President
Cathy L. Teghtmeyer Vice President Audit
Paul S. Purvis Assistant Vice President Betty L. McHenry Senior Vice President
Bettie S. Moore Assistant Human and Auditor
Resources Officer Ryan B. Weaver Assistant Vice President
John W. Gove Facilities Manager Teah D. Wicks Assistant Auditor
</TABLE>
27
<PAGE>
Office Administration
Walter L. Weldy Executive Vice President
E. Ray Younce Senior Vice President
Peggy A. Guyas Vice President
Jane E. Miller Vice President
Timothy L. Sutton Vice President
Jeannine P. Cooley Assistant Vice President
Ruth A. Hutcherson Assistant Vice President
Nancy L. Hofer Retail Banking Officer
Sarah Miller-Bontrager Retail Banking Officer
<TABLE>
<S> <C> <C>
Offices
Akron Jane Murphy Assistant Vice President
Argos Michael D. Burroughs Vice President
Bremen Matthew K. Bixel Vice President
Columbia City Lisa A. Hockemeyer Assistant Vice President
Concord Jeri L. Yoder Assistant Vice President
Cromwell Jerry L. Stoner Office Manager
Elkhart Rosalie M. Smith Vice President
Debra L. Griggs Assistant Office Manager
Elkhart East Mervin "Bud" Hammon Vice President
Elkhart Hubbard Hill Thomas Walker Assistant Vice President
Elkhart Northwest Kathleen Dougherty Office Manager
Goshen Downtown Jane Greene Assistant Office Manager
Goshen South Clarence J. "CJ" Yoder Vice President
Kendallville Duane Smith Vice President
LaGrange Shannon Schrock Office Manager
Ligonier Jerry L. Stoner Office Manager
Mentone Karen A. Francis Assistant Vice President
Middlebury Jerry S. Troyer Vice President
Milford Jack A. Heeter Assistant Vice President
Nappanee Larry L. Penrod Vice President
North Webster Jeanne G. Bowen Vice President
Pierceton Pamela F. Messmore Office Manager
Roann Merrill Templin Assistant Vice President
Rochester Gail D. Law Assistant Vice President
Shipshewana John R. Munsell Vice President
Silver Lake Deborah A. Lotz Assistant Vice President
Syracuse Donna J. Beck Assistant Vice President
Wabash North T.F. "Bob" Fuller Vice President
Wabash South Jody A. Slacian Office Manager
Warsaw Downtown Traci Dahlinger Office Manager
Warsaw East Pamela F. Messmore Office Manager
Warsaw West Linda M. Riley Assistant Office Manager
Winona Lake Allan L. Disbro Vice President
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the 1996
report to shareholders and the 1996 Form 10-K and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 41,190
<INT-BEARING-DEPOSITS> 247
<FED-FUNDS-SOLD> 3,442
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,842
<INVESTMENTS-CARRYING> 125,274
<INVESTMENTS-MARKET> 126,373
<LOANS> 383,160
<ALLOWANCE> 5,306
<TOTAL-ASSETS> 656,551
<DEPOSITS> 496,553
<SHORT-TERM> 88,380
<LIABILITIES-OTHER> 6,044
<LONG-TERM> 23,531
0
0
<COMMON> 1,448
<OTHER-SE> 40,595
<TOTAL-LIABILITIES-AND-EQUITY> 656,551
<INTEREST-LOAN> 32,970
<INTEREST-INVEST> 12,726
<INTEREST-OTHER> 245
<INTEREST-TOTAL> 45,941
<INTEREST-DEPOSIT> 18,411
<INTEREST-EXPENSE> 23,737
<INTEREST-INCOME-NET> 22,204
<LOAN-LOSSES> 120
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 17,935
<INCOME-PRETAX> 9,948
<INCOME-PRE-EXTRAORDINARY> 6,444
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,444
<EPS-PRIMARY> 2.22
<EPS-DILUTED> 2.22
<YIELD-ACTUAL> 3.96
<LOANS-NON> 384
<LOANS-PAST> 216
<LOANS-TROUBLED> 1,284
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,472
<CHARGE-OFFS> 368
<RECOVERIES> 82
<ALLOWANCE-CLOSE> 5,306
<ALLOWANCE-DOMESTIC> 2,017
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,289
</TABLE>
