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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ____________________
Commission File No. 0-11487
LAKELAND FINANCIAL CORPORATION
------------------------------
(exact name of Registrant as specified in its charter)
INDIANA 35-1559596
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387
- ------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 1-219-267-6144
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common The Nasdaq Stock Market's National Market
Preferred Securities of Lakeland
Capital Trust The Nasdaq Stock Market's National Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such other period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein and will not be contained,
to the best of the Registrant's knowledge, in definitive Proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ X ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed solely for the purposes of this requirement on the basis
of the Nasdaq closing value at February 28, 1999, and assuming solely for the
purposes of this calculation that all directors and executive officers of the
Registrant are "affiliates": $97,180,974.
Number of shares of common stock outstanding at February 5, 1999:
5,794,743
Cover page 1 of 2 pages
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the following documents are incorporated by reference in the
Parts of the 10-K indicated:
Part Document
---- --------
I, II & IV Lakeland Financial Corporation's Annual Report to
Shareholders for the year ended December 31, 1998,
portions of which are incorporated into Parts I,
II and IV of this Form 10-K.
III Proxy statement mailed to shareholders on March
15, 1999, 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 terms "Registrant" and "Company" refer
to Lakeland Financial Corporation, or if the context dictates, the Lakeland
Financial Corporation and its wholly-owned subsidiaries, Lake City Bank,
Warsaw, Indiana, and Lakeland Capital Trust, Warsaw, Indiana.
General
- -------
Registrant's Business. The Company is a bank holding company as defined
in the Bank Holding Company Act of 1956, as amended. The Company owns all of
the outstanding stock of Lake City Bank, Warsaw, Indiana, a full service
commercial bank organized under Indiana law (the "Bank"), and Lakeland Capital
Trust, a statutory business trust formed under Delaware law ("Lakeland
Trust"). The Company conducts no business except that incident to its
ownership of the outstanding stock of the Bank and the operation of the Bank.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation. The Bank's activities cover all phases of commercial banking,
including checking accounts, savings accounts, time deposits, the sale of
securities under agreements to repurchase, 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, 1998, the Bank had 42 offices in fourteen
counties throughout north central Indiana.
Supervision and Regulation.
---------------------------
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions
and general economic conditions, but also by the requirements of applicable
state and federal statutes and regulations and the policies of various
governmental regulatory authorities, including the Board of Governors of the
Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Indiana Department of Financial Institutions
(the "DFI"), the Internal Revenue Service and state taxing authorities and the
Securities and Exchange Commission (the "SEC"). The effect of applicable
statutes, regulations and regulatory policies can be significant, and cannot
be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, non-interest earning reserves
against certain deposit accounts, capital levels relative to operations, the
nature and amount of collateral for loans, the establishment of branches,
mergers, consolidations and dividends. The system of supervision and
regulation applicable to the Company and its subsidiaries establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors, rather than shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not
describe all of the statutes, regulations and regulatory policies that apply
to the Company and its subsidiaries, nor does it restate all of the
-1-
<PAGE>
requirements of the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety by reference to
the applicable statutes, regulations and regulatory policies. Any change in
applicable law, regulations or regulatory policies may have a material impact
on the business of the Company and its subsidiaries.
Recent Regulatory developments
Pending Legislation. Legislation has been introduced in the Congress that
would allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. The expanded powers generally would be available to a bank holding
company only if the bank holding company and its subsidiaries remain well-
capitalized and well-managed. At this time, the Company is unable to predict
whether the proposed legislation will be enacted and, therefore, is unable to
predict the impact such legislation may have on the Company or the Bank.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank
holding company. As a bank holding company, the Company is registered with,
and is subject to regulation by, the Federal Reserve under the Bank Holding
Company Act, as amended (the"BHCA"). In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances where
the Company might not otherwise do so. Under the BHCA, the Company is subject
to periodic examination by the Federal Reserve. The Company is also required
to file with the Federal Reserve periodic reports of the Company's operations
and such additional information regarding the Company and its subsidiaries as
the Federal Reserve may require. The Company is also subject to regulation by
the DFI under Indiana law.
Investments and Activities. Under the BHCA, a bank holding company must
obtain Federal Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
shares of the other bank or bank holding company (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating with another
bank holding company. Subject to certain conditions (including certain deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state in the United
States without regard to whether the acquisition is prohibited by the law of
the state in which the target bank is located. In approving interstate
acquisitions, however, the Federal Reserve is required to give effect to
applicable state law limitations on the aggregate amount of deposits that may
be held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located
(provided those limits do not discriminate against out-of-state depository
institutions or their holding companies) and state laws which require that the
target bank has been in existence for a minimum period of time (not to exceed
five years) before being acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company which is not a bank and from engaging in any business other than that
of banking, managing and controlling banks or furnishing services to banks and
their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be "so closely related to banking ... as to be a proper
incident thereto." Under current regulations of the Federal Reserve, the
Company and its non-bank subsidiaries are permitted to engage in a variety of
banking-related businesses, including the operations of a thrift, sales and
-2-
<PAGE>
consumer finance, equipment leasing, the operation of a computer service
bureau (including software development), mortgage banking and brokerage. The
BHCA generally does not place territorial restrictions on the domestic
activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring "control"
of a bank or a bank holding company without prior notice to the appropriate
federal bank regulator. "Control" is defined in certain cases as the
acquisition of 10% of the outstanding shares of a bank or a bank holding
company.
Capital Requirement. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier I
capital. The leverage requirement consists of a minimum ratio of Tier I
capital to total assets of 3% for the most highly rated companies, with a
minimum requirement of 4% for all others. For purposes of these capital
standards, Tier I capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain mortgage servicing rights and
purchased credit card relationships). Total capital consists primarily of Tier
I capital plus certain other debt and equity instruments which do not qualify
as Tier I capital and a portion of the company's allowance for loan and lease
losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any
banking organization experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions
(i.e., Tier I capital less all intangible assets), well above the minimum
levels.
Under the Federal Reserve's guidelines, the capital standards described
above apply on a consolidated basis to bank holding companies that have more
than $150 million in total consolidated assets, but generally apply on a
bank-only basis to bank holding companies that have less than $150 million in
total assets. As of December 31, 1998, the Company had regulatory capital,
calculated on a consolidated basis, in excess of the Federal Reserve's minimum
requirements, with a risk based ratio of 10.83% and a leverage ratio of 6.39%.
Dividends. The Federal Reserve has issued a policy statement with regard
to the payment of cash dividends by bank holding companies. This policy
statement provides that a bank holding company should not pay cash dividends
which exceed its net income or which can be only funded in ways that weaken
the bank holding company's financial health, such as by borrowing. The Federal
Reserve also possesses enforcement powers over bank holding companies and
their non-bank subsidiaries to prevent or remedy actions that represent unsafe
or unsound practices or violations of applicable statutes or regulations.
Among these powers is the ability to proscribe the payment of dividends by
banks and bank holding companies.
Federal Securities Regulation. The Company's common stock is registered
with the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation, insider trading
-3-
<PAGE>
and other restrictions and requirements of the SEC under the Exchange Act.
The Bank
General. The Bank is an Indiana-chartered bank, the deposits of which are
insured by the FDIC's Bank Insurance Fund ("BIF"). As a BIF insured, Indiana-
chartered bank, the Bank is subject to the examination, supervision, reporting
and enforcement requirements of the DFI, as the chartering authority for
Indiana banks, and the FDIC, as administrator of the BIF.
Deposit Insurance. As an FDIC-insured institution, the Bank is required
to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted
a risk-based assessment system under which all insured depository institutions
are placed into one of nine categories and assessed insurance premiums based
upon their respective levels of capital and results of supervisory
evaluations. Institutions classified as well-capitalized (as defined by the
FDIC) and considered healthy pay the lowest premium while institutions that
are less than adequately capitalized (as defined by the FDIC) and considered
of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
During the year ended December 31, 1998, BIF assessments ranged from 0%
of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 1999, BIF assessments will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance on any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an
unsafe or unsound condition to continue operations or (iii) has violated any
applicable law, regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of
insurance if the institution has no tangible capital. Management of the
Company is not aware of any activity or condition that could result in
termination of the deposit insurance of the Bank.
FICO Assessment. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF and
BIF members became subject to assessments to cover interest payments on
outstanding FICO obligations. These FICO assessments are in addition to the
amounts assessed by the FDIC for deposit insurance. Until January 1, 2000, the
FICO assessments made against BIF members may not exceed 20% of the amount of
the FICO assessments made against SAIF members. Between January 1, 2000, and
the final maturity on the FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. During the year ended December 31, 1998, the FICO assessment rate for
SAIF members ranges between approximately 0.061% of deposits and approximately
0.063% of deposits, while the FICO assessment rate for BIF members ranged from
approximately 0.012% of deposits and approximately 0.013% of deposits. During
the year ended December 31, 1998, the Bank paid FICO assessments totaling
approximately $79,000.
Supervisory Assessments. All Indiana banks are required to pay
supervisory assessments to the DFI to fund the operations of the DFI. During
the year ended December 31, 1998, the Bank paid supervisory assessments to the
DFI totaling approximately $58,000.
Capital Requirements. The FDIC has established the following minimum
-4-
<PAGE>
capital standards for state-chartered non-member banks, such as the Bank: a
leverage requirement consisting of a minimum ratio of Tier I capital to total
assets of 3% for the most highly rated banks with a minimum requirement of at
least 4% for all others, and a risk-based capital requirement consisting of a
minimum ratio of total capital to risk-weighted assets of 8%, at least
one-half of which must be Tier I capital. For purposes of these capital
standards, Tier I capital and total capital consist of substantially the same
components as Tier I capital and total capital under the Federal Reserve's
capital guidelines for bank holding companies (see "The Company -- Capital
Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances
or risk profiles of individual institutions. For example, the regulations of
the FDIC provide that additional capital may be required to take account of,
among other things, interest rate risk or the risks posed by concentrations of
credit, nontraditional activities or securities trading activities.
During the year ended December 31, 1998, the Bank was not required by the
FDIC to increase its capital to an amount in excess of the minimum regulatory
requirement. As of December 31, 1998, the Bank exceeded its minimum regulatory
capital requirements with a leverage ratio of 6.55% and a risk-based capital
ratio of 10.71%.
Federal law provides the federal banking regulators with broad powers to
take prompt corrective actions to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well-capitalized", "adequately-capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized", in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators'
corrective powers include: requiring the institution to submit a capital
restoration plan; limiting the institution's asset growth and restricting its
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting
transactions between the institution and its affiliates; restricting the
interest rate the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on subordinated
debt; and ultimately, appointing a receiver for the institution. As of
December 31, 1998, the Bank was "well-capitalized".
Dividends. Indiana law prohibits the Bank from paying dividends in an
amount greater than its undivided profits. The Bank is required to obtain the
approval of the DFI for the payment of any dividend if the aggregate amount of
all dividends paid by the Bank during the calendar year, including the
proposed dividend, would exceed the sum of: (i) the total net profits of the
Bank for that year; and (ii) the retained profits of the Bank for the previous
two years. Indiana law defines "net profits" to mean the sum of all earnings
from current operations plus actual recoveries on loans, investments and other
assets, less the sum of all current operating expenses, actual losses, accrued
dividends on preferred stock, if any, and all federal, state, and local taxes.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, the Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 1998. As of December 31, 1998, approximately $17
million was available to be paid as dividends to the Company by the Bank.
Notwithstanding the availablitiy of funds for dividends, however, the FDIC may
prohibit the payments of dividends by the Bank if the FDIC determines such
payment would constitute an unsafe or unsound practice.
-5-
<PAGE>
Insider Transactions. The Bank is subject to certain restrictions imposed
by federal law on extensions of credit to the Company and its subsidiaries, on
investments in the stock or other securities of the Company and its
subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by the Bank to
its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company and to "related
interests" of such directors, officers and principal stockholders. In
addition, federal law and regulations may affect the terms upon which any
person becoming a director or officer of the Company or one of its
subsidiaries or a principal stockholder of the Company may obtain credit from
banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In addition, in October, 1998, the federal banking regulators issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing
its own procedure to achieve those goals. If an institution fails to comply
with any of the standards set forth in the guidelines, the institution's
primary federal regulator may require the institution to submit a plan for
achieving and maintaining compliance. If an institution fails to submit an
acceptable compliance plan, or fails in any material respect to implement a
compliance plan that has been accepted by its primary federal regulator, the
regulator is required to issue an order directing the institution to cure the
deficiency. Until the deficiency cited in the regulator's order is cured, the
regulator may restrict the institution's rate of growth, require the
institution to increase its capital, restrict the rate the institution pays on
its deposits or require the institution to take any action the regulator deems
appropriate under the circumstances. Noncompliance with the standards
established by the safety and soundness guidelines may also constitute grounds
for other enforcement action by the federal banking regulators, including
cease and desist orders and civil money penalty assessments.
Branching Authority. Indiana banks, such as the Bank, have the authority
under Indiana law to establish branches anywhere in the State of Indiana,
subject to receipt of all regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the"Riegle-Neal Act"), both state and national banks are allowed to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions, including certain limitations on the aggregate
amount of deposits that may be held by the surviving bank and all of its
insured depository institution affiliates. The establishment of new interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is
allowed by the Riegle-Neal Act only if specifically authorized by state law.
The legislation allowed individual states to "opt-out" of certain provisions
of the Riegle-Neal Act by enacting appropriate legislation prior to June 1,
1997. Indiana has enacted legislation permitting interstate mergers subject to
certain conditions, including a prohibition against interstate mergers
involving Indiana banks that have been in existence and continuous operation
for fewer than five years. Additionally, Indiana law allows out-of-state banks
to acquire individual branch offices in Indiana and to establish new branches
in Indiana subject to certain conditions, including a requirement that the
laws of the state in which the out-of-state bank is headquartered grant
Indiana banks authority to acquire and establish branches in such state.
-6-
<PAGE>
State Bank Activities. Under federal law and FDIC regulations, FDIC
insured state banks are prohibited, subject to certain exceptions, from making
or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also
prohibit FDIC insured state banks and their subsidiaries, subject to certain
exceptions, from engaging as principal in any activity that is not permitted
for a national bank or its subsidiary, respectively, unless the bank meets,
and continues to meet, its minimum regulatory capital requirements, and that
the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. These restrictions have
not had, and are not currently expected to have, a material impact on the
operations of the Bank
Federal Reserve System. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular
checking accounts) as follows: for transaction accounts aggregating $46.5
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $46.5 million, the
reserve requirement is $1.395 million plus 10% of the aggregate amount of
total transaction accounts in excess of $46.5 million. The first $4.9 million
of otherwise reservable balances are exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by the Federal
Reserve. The Bank is in compliance with the foregoing requirements.
Forward-looking Statements
- --------------------------
Statements contained in this Report and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases
and in oral statements made with the approval of an authorized executive
officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). There can be no assurance, in light of certain risks and
uncertainties, that such forward-looking statements will in fact transpire.
The following important factors, risks and uncertainties, among others, could
cause actual results to differ materially from such forward-looking
statements:
Credit risk: Approximately 64.4% and 59.5% of the Company's loans at
December 31, 1998 and December 31, 1997, were commercial in nature
(including agri-business and agricultural loans), and, as of both
December 31, 1998 and December 31, 1997, the Company estimates that in
excess of 90% of its commercial, industrial, agri-business and
agricultural real estate mortgage loans, real estate construction
mortgage and consumer loans are made within the Bank's basic trade area.
Changes in local and national economic conditions could adversely affect
credit quality in the Company's loan portfolio.
Interest rate risk: Although the Company actively manages its interest
rate sensitivity, such management is not an exact science. Rapid
increases or decreases in interest rates could adversely impact the
Company's net interest margin if changes in its cost of funds do not
correspond to the changes in income yields.
Competition: The Company's activities involve competition with other
banks as well as other financial institutions and enterprises. Also, the
financial service markets have, and likely will continue to, experience
substantial changes which could significantly change the Company's
competitive environment in the future.
Legislative and regulatory environment: The Company operates in a rapidly
changing legislative and regulatory environment. It cannot be predicted
how or to what extent future developments in these areas will affect the
-7-
<PAGE>
Company. These developments could negatively impact the Company through
increased operating expenses for compliance with new laws and
regulations, restricted access to new products and markets, or in other
ways.
General business and economic trends: General business and economic
trends, including the impact of inflation levels, influence the Company's
results in numerous ways, including operating expense levels, deposit and
loan activity, and availability of trained individuals needed for future
growth.
The use of estimates and assumptions: In preparing financial statements
in conformity with generally accepted accounting principles, management
must make estimates and assumptions that affect the amounts reported
therein and the disclosures provided. Actual results could differ from
these estimates.
The foregoing list should not be construed as exhaustive, and the Company
disclaims any obligation to subsequently update or revise any forward-looking
statements contained in this Report after the date of this Report.
Material Changes and Business Developments
- ------------------------------------------
The Company conducts no business 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 shareholders. During the period from 1985 to
1987, the Company 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 Company 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.
Lakeland Trust, a statutory business trust, was formed under Delaware law
pursuant to a trust agreement dated July 24, 1997 and a certificate of trust
filed with the Delaware Secretary of State on July 24, 1997. Lakeland Trust
exists for the exclusive purposes of (i) issuing the trust securities
representing undivided beneficial interests in the assets of Lakeland Trust,
(ii) investing the gross proceeds of the trust securities in the subordinated
debentures issued by the Company, and (iii) engaging in only those activities
necessary, advisable, or incidental thereto. The subordinated debentures and
payments thereunder are the only assets of Lakeland Trust, and payments under
the subordinated debentures are the only revenue of Lakeland Trust. Lakeland
Trust has a term of 55 years, but may be terminated earlier as provided in the
trust agreement.
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.
The Bank competes for loans principally through the range and quality of
services it provides, interest rates and loan fees. The Bank believes that its
convenience, quality service and hometown approach to banking enhances its
ability to compete favorably in attracting and retaining individual and
-8-
<PAGE>
business customers. The Bank actively solicits deposit-related customers and
competes for customers by offering personal attention, professional service
and competitive interest rates.
The Bank's service area is north central Indiana. In addition to the
banks located within its service area, the Bank also competes with savings and
loan associations, credit unions, farm credit services, finance companies,
personal loan companies, insurance companies, money market funds, and other
non-depository financial intermediaries. Also, financial intermediaries such
as money market mutual funds and large retailers are not subject to the same
regulations and laws that govern the operation of traditional depository
institutions and accordingly may have an advantage in competing for funds.
The Bank competes with other major banks for large commercial deposit and
loan accounts. The Bank is presently subject to an aggregate maximum loan
limit to any single account of approximately $10 million pursuant to Indiana
law. This maximum prohibits the Bank from providing a full range of banking
services to those businesses or personal accounts whose borrowings
periodically exceed this amount. In order to retain at least a portion of the
banking business of these large borrowers, the Bank maintains correspondent
relationships with other financial institutions. The Bank also participates
with local and other banks in the placement of large borrowings in excess of
its lending limit. The Bank is also a member of the Federal Home Loan Bank of
Indianapolis in order to broaden its mortgage lending and investment
activities and to provide additional funds, if necessary, to support these
activities.
Foreign Operations
- ------------------
The Company has no investments with any foreign entity other than 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, 1998, the Company, including its subsidiaries, had 435
full- time equivalent employees. Benefit programs include a pension plan,
401(k) plan, group medical insurance, group life insurance and paid vacations.
The Bank is not a party to any collective bargaining agreement, and employee
relations are considered good. The Company also has a stock option plan under
which stock options may be granted to employees and directors.
Industry Segments
- -----------------
The Company is engaged in a single industry and performs a single service
- -- commercial banking. On the pages that follow are tables which set forth
selected statistical information relative to the business of the Company. This
data should be read in conjunction with the consolidated financial statements,
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as set forth in the 1998 Annual Report to
Shareholders herein incorporated by reference (attached hereto as Exhibit 13).
-9-
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
<CAPTION>
1998 1997
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Income Yield(1) Balance Income Yield(1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Loans:
Taxable (2) 486,437 44,225 9.09 410,798 38,265 9.31
Tax exempt (1) 2,899 295 10.18 3,235 345 10.66
Investments:(1)
Available-for-sale 142,499 9,062 6.36 80,627 5,396 6.69
Held-to-maturity 160,173 10,858 6.78 136,618 9,244 6.77
Short-term investments 9,545 510 5.34 5,275 284 5.38
Interest bearing deposits 133 9 6.77 234 19 8.12
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 801,686 64,959 8.10% 636,787 53,553 8.41%
========== ==========
Nonearning assets:
Cash and due from banks 36,215 0 27,479 0
Premises and equipment 25,198 0 17,961 0
Other nonearning assets 24,324 0 11,735 0
Less: allowance for loan losses (5,403) 0 (5,302) 0
---------- ---------- ---------- ----------
Total assets $ 882,020 $ 64,959 $ 688,660 $ 53,553
========== ========== ========== ==========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 1998 and 1997. The tax
equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, included the TEFRA adjustment
applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1998 and
1997, are included as taxable loan interest income.
</FN>
</TABLE>
-10-
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Income Yield(1) Balance Income Yield(1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Loans:
Taxable (2) 410,798 38,265 9.31 349,336 32,724 9.37
Tax exempt (1) 3,235 345 10.66 3,475 373 10.73
Investments:(1)
Available-for-sale 80,627 5,396 6.69 84,145 5,371 6.38
Held-to-maturity 136,618 9,244 6.77 119,892 8,065 6.73
Short-term investments 5,275 284 5.38 4,250 226 5.32
Interest bearing deposits 234 19 8.12 213 19 8.92
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 636,787 53,553 8.41% 561,311 46,778 8.33%
========== ==========
Nonearning assets:
Cash and due from banks 27,479 0 24,533 0
Premises and equipment 17,961 0 14,724 0
Other nonearning assets 11,735 0 9,424 0
Less: allowance for loan losses (5,302) 0 (5,382) 0
---------- ---------- ---------- ----------
Total assets $ 688,660 $ 53,553 $ 604,610 $ 46,778
========== ========== ========== ==========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 1997 and 1996. The tax
equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, included the TEFRA adjustment
applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1997 and
1996, are included as taxable loan interest income.
</FN>
</TABLE>
-11-
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
<CAPTION>
1998 1997
------------------------------------ ------------------------------------
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 $ 55,299 $ 1,331 2.41% $ 45,278 $ 1,152 2.54%
Interest bearing checking accounts 65,895 1,322 2.01 55,063 1,180 2.14
Time deposits:
In denominations under $100,000 326,123 17,234 5.28 230,171 12,406 5.39
In denominations over $100,000 142,589 8,267 5.80 109,759 6,445 5.87
Miscellaneous short-term borrowings 90,752 4,724 5.21 90,097 4,921 5.46
Long-term borrowings 44,349 3,213 7.24 29,655 1,956 6.60
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 725,007 36,091 4.98% 560,023 28,060 5.01%
========== ===========
Non-interest bearing liabilities
and stockholders' equity:
Demand deposits 98,957 0 77,276 0
Other liabilities 7,386 0 6,498 0
Stockholders' equity 50,670 0 44,863 0
---------- ---------- ---------- ----------
Total liabilities and stock-
holders' equity $ 882,020 $ 36,091 $ 688,660 $ 28,060
========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 28,868 3.60% $ 25,493 4.00%
========== ========= ========== ==========
</TABLE>
-12-
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
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 $ 45,278 $ 1,152 2.54% $ 43,847 $ 1,118 2.55%
Interest bearing checking accounts 55,063 1,180 2.14 53,625 1,178 2.20
Time deposits:
In denominations under $100,000 230,171 12,406 5.39 208,499 11,229 5.39
In denominations over $100,000 109,759 6,445 5.87 86,137 4,886 5.67
Miscellaneous short-term borrowings 90,097 4,921 5.46 78,823 4,213 5.34
Long-term borrowings 29,655 1,956 6.60 19,624 1,113 5.67
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 560,023 28,060 5.01% 490,555 23,737 4.84%
========== ==========
Non-interest bearing liabilities
and stockholders' equity:
Demand deposits 77,276 0 69,459 0
Other liabilities 6,498 0 5,553 0
Stockholders' equity 44,863 0 39,043 0
---------- ---------- ---------- ----------
Total liabilities and stock-
holders' equity $ 688,660 $ 28,060 $ 604,610 $ 23,737
========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 25,493 4.00% $ 23,041 4.10%
========== ========== ========== ==========
</TABLE>
-13-
<PAGE>
<TABLE>
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(fully taxable equivalent basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
<CAPTION>
1998 Over (Under) 1997(1) 1997 Over (Under) 1996(1)
------------------------------------ ------------------------------------
Volume Rate Total Volume Rate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST AND LOAN FEE INCOME(2)
Loans:
Taxable $ 6,896 $ (936) $ 5,960 $ 5,724 $ (183) $ 5,541
Tax exempt (35) (15) (50) (26) (2) (28)
Investments:
Available-for-sale 3,947 (281) 3,666 (230) 255 25
Held-to-maturity 1,597 17 1,614 1,131 48 1,179
Short-term investments 228 (2) 226 1 57 58
Interest bearing deposits (7) (3) (10) 1 (1) 0
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 12,626 (1,220) 11,406 6,601 174 6,775
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE
Savings deposits 244 (65) 179 35 (1) 34
Interest bearing checking accounts 221 (79) 142 31 (29) 2
Time deposits
In denominations under $100,000 5,075 (247) 4,828 1,168 9 1,177
In denominations over $100,000 1,904 (82) 1,822 1,382 177 1,559
Miscellaneous short-term borrowings 36 (233) (197) 614 94 708
Long-term borrowings 1,049 208 1,257 640 203 843
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 8,529 (498) 8,031 3,870 453 4,323
---------- ---------- ---------- ---------- ---------- ----------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 4,097 $ (722) $ 3,375 $ 2,731 $ (279) $ 2,452
========== ========== ========== ========== ========== ==========
<FN>
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 1998, 1997 and 1996. The changes in volume represent "changes in volume times the old rate". The changes in rate
represent "changes in rate times old volume". The changes in rate/volume were also calculated by "change in rate times change
in volume" and allocated consistently based upon the relative absolute values of the changes in volume and changes in rate.
(2) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 1998, 1997 and 1996. The
tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, included the TEFRA
adjustment applicable to nondeductible interest expense.
</FN>
</TABLE>
-14-
<PAGE>
<TABLE>
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 1998, 1997 and 1996 were as follows:
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury securities $ 38,938 $ 39,521 $ 28,833 $ 29,286 $ 31,604 $ 31,804
U.S. Government agencies and corporations 1,990 2,030 100 100 500 507
Mortgage-backed securities 225,741 225,914 52,746 53,309 46,002 46,332
Obligations of state and political
subdivisions 56,924 59,112 1,787 1,904 2,081 2,167
Other debt securities 1,005 1,081 0 0 1,000 1,032
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities available-for-sale $ 324,598 $ 327,658 $ 83,466 $ 84,599 $ 81,187 $ 81,842
========== ========== ========== ========== ========== ==========
Securities held-to-maturity:
U.S. Treasury securities $ 0 $ 0 $ 21,170 $ 21,501 $ 17,020 $ 17,077
U.S. Government agencies and corporations 0 0 2,176 2,246 2,262 2,362
Mortgage-backed securities 0 0 116,788 117,185 83,811 83,719
Obligations of state and political
subdivisions 0 0 22,418 24,044 21,172 22,095
Other debt securities 0 0 1,007 1,103 1,009 1,120
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities held-to-maturity $ 0 $ 0 $ 163,559 $ 166,079 $ 125,274 $ 126,373
========== ========== ========== ========== ========== ==========
</TABLE>
-15-
<PAGE>
<TABLE>
ANALYSIS OF SECURITIES (cont.)
(Fully Tax Equivalent Basis)
(in thousands of dollars)
The weighted average yields (1) and maturity distribution (2) for debt securities portfolio at December 31, 1998, were 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 $ 5,000 $ 33,938 $ 0 $ 0
Yield 5.85% 6.36%
Government agencies and corporations
Book value 1,990 0 0 0
Yield 7.18
Mortgage-backed securities
Book value 2,501 10,871 112,608 99,761
Yield 7.60 7.17 7.03 7.78
Obligations of state and political
subdivisions
Book value 220 344 5,968 50,392
Yield 6.64 6.79 5.71 5.23
Other debt securities
Book value 0 1,005 0 0
Yield 10.13
------------ ------------ ------------ ------------
Total debt securities available-for-sale:
Book value $ 9,711 $ 46,158 $ 118,576 $ 150,153
Yield 6.59% 6.64% 6.96% 6.92%
============ ============ ============ ============
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34% rate.
(2) The maturity distribution of mortgage-backed securities was based upon anticipated payments as computed by using the historic
average repayment speed from date of issue.
There were no investments in securities of any one issuer that exceed 10% of stockholders' equity at December 31, 1998.
</FN>
</TABLE>
-16-
<PAGE>
<TABLE>
ANALYSIS OF LOAN PORTFOLIO
Analysis of Loans Outstanding
(in thousands of dollars)
The Company segregates its loan portfolio into four basic segments: commercial (including agri-business and agricultural
loans), real estate mortgages, installment and personal line of credit loans (including credit card loans). The loan portfolio as
of December 31, 1998, 1997, 1996, 1995 and 1994 was as follows:
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial loans:
Taxable $ 343,858 $ 269,887 $ 226,190 $ 192,359 $ 173,325
Tax exempt 2,867 3,065 3,414 3,636 3,207
---------- ---------- ---------- ---------- ----------
Total commercial loans 346,725 272,952 229,604 195,995 176,532
Real estate mortgage loans 60,555 65,368 60,949 55,948 47,296
Installment loans 100,196 89,107 71,398 58,175 48,228
Line of credit and credit card loans 31,020 31,207 20,314 17,499 15,900
---------- ---------- ---------- ---------- ----------
Total loans 538,496 458,634 382,265 327,617 287,956
Less allowance for loan losses 5,510 5,308 5,306 5,472 4,866
---------- ---------- ---------- ---------- ----------
Net loans $ 532,986 $ 453,326 $ 376,959 $ 322,145 $ 283,090
========== ========== ========== ========== ==========
<FN>
The real estate mortgage loan portfolio included construction loans totaling $2,975, $3,089, $1,647, $1,224, and $426 as of
December 31, 1998, 1997, 1996, 1995 and 1994. The loan classifications are based on the nature of the loans as of the loan
origination date. There were no foreign loans included in the loan portfolio for the periods presented.
</FN>
</TABLE>
-17-
<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 indicates the rate
sensitivity of the loan portfolio as of December 31, 1998. The table includes the real estate loans held-for-sale and assumes
these loans will not be sold during the various time horizons.
<CAPTION>
Line of
Credit
and
Real Credit
Commercial Estate Installment Card Total Percent
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Immediately adjustable interest rates
or original maturity of one day $ 211,701 $ 0 $ 0 $ 28,040 $ 239,741 44.2%
Other within one year 26,079 43,980 33,619 2,980 106,658 19.7
After one year, within five years 88,708 13,522 63,629 0 165,859 30.6
Over five years 20,237 6,849 2,948 0 30,034 5.5
Nonaccrual loans 0 0 0 0 0 0.0
------------ ------------ ------------ ------------ ------------ ------------
Total loans $ 346,725 $ 64,351 $ 100,196 $ 31,020 $ 542,292 100.0%
============ ============ ============ ============ ============ ============
<FN>
A portion of the loans are short-term maturities. At maturity, credits are reviewed, and if renewed, are renewed at rates and
conditions that prevail at the time of maturity.
Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or
adjustable interest rates as of December 31, 1998 amounted to $179,000 and $48,703.
</FN>
</TABLE>
-18-
<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, 1998, 1997, 1996, 1995 and 1994.
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 0 $ 0 $ 126 $ 122 $ 0
Commercial and industrial loans 159 236 22 69 16
Loans to individuals for household,
family and other personal expenditures 68 69 68 18 19
Loans to finance agriculture production
and other loans to farmers 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total past due loans 227 305 216 209 35
---------- ---------- ---------- ---------- ----------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 0 337 155 76 18
Commercial and industrial loans 0 720 229 456 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 0 1,057 384 532 18
---------- ---------- ---------- ---------- ----------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,281 1,377 1,284 1,432 1,484
---------- ---------- ---------- ---------- ----------
Total nonperforming loans $ 1,508 $ 2,739 $ 1,884 $ 2,173 $ 1,537
========== ========== ========== ========== ==========
<FN>
Nonearning assets of the Company include nonaccrual loans (as indicated above), nonaccrual investments, other real estate,
and repossessions, which amounted to $626 at December 31, 1998.
</FN>
</TABLE>
-19-
<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 line of credit programs, are charged-off when collection
appears doubtful.
PART B - NONPERFORMING LOANS
- ----------------------------
When a loan is classified as a nonaccrual loan, interest on the loan is
no longer accrued and all accrued interest receivable is charged off. It is
the policy of the Bank that loans for which the collateral is insufficient to
cover all principal and accrued interest will be reclassified as nonperforming
loans to the extent they are unsecured, on or before the date when the loan
becomes 90 days delinquent. Thereafter, interest is recognized and included in
income only when received.
As of December 31, 1998, there were no loans on nonaccrual status.
PART C - TROUBLED DEBT RESTRUCTURED LOANS
- -----------------------------------------
Loans renegotiated as troubled debt restructurings are those loans for
which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the terms of the loan.
Loans renegotiated as troubled debt restructurings totaled $1,281,000 as
of December 31, 1998. Interest income of $84,000 was recognized in 1998. Had
these loans been performing under the original contract terms, an additional
$47,000 would have been reflected in interest income during 1998. The Company
is not committed to lend additional funds to debtors whose loans have been
modified.
PART D - OTHER NONPERFORMING ASSETS
- -----------------------------------
Management is of the opinion that there are no significant foreseeable
losses relating to substandard or nonperforming assets, except as discussed
above.
PART E - LOAN CONCENTRATIONS
- ----------------------------
There were no loan concentrations within industries which exceeded ten
percent of total assets. It is estimated that over 90% of all the Bank's
commercial, industrial, agri-business and agricultural real estate mortgage,
real estate construction mortgage and consumer loans are made within its basic
trade area.
Basis For Determining Allowance For Loan Losses
Management is responsible for determining the adequacy of the allowance
for loan losses. This responsibility is fulfilled by management in 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
-20-
<PAGE>
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 these policies and objectives, $480,000, $269,000 and $120,000
were charged to the provision for loan losses and added to the allowance for
loan losses in 1998, 1997 and 1996.
The allocation of the allowance for loan losses to the various lending
areas is performed by management in relation to perceived exposure to loss in
the various loan portfolios. However, the allowance for loan losses is
available in its entirety to absorb losses in any particular loan category.
-21-
<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, 1998, 1997, 1996, 1995 and 1994.
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding, December 31, $ 538,496 $ 458,634 $ 382,265 $ 327,617 $ 287,956
========== ========== ========== ========== ==========
Average daily loans outstanding during the
year ended December 31, $ 489,336 $ 414,033 $ 352,811 $ 309,241 $ 271,391
========== ========== ========== ========== ==========
Allowance for loan losses, January 1, $ 5,308 $ 5,306 $ 5,472 $ 4,866 $ 4,010
---------- ---------- ---------- ---------- ----------
Loans charged-off
Commercial 9 99 171 137 27
Real estate 0 33 0 48 0
Installment 329 190 158 112 93
Credit cards and personal credit lines 78 37 39 58 15
---------- ---------- ---------- ---------- ----------
Total loans charged-off 416 359 368 355 135
---------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged-off
Commercial 44 18 12 26 107
Real estate 0 0 0 0 1
Installment 86 66 54 63 81
Credit cards and personal credit lines 8 8 16 6 7
---------- ---------- ---------- ---------- ----------
Total recoveries 138 92 82 95 196
---------- ---------- ---------- ---------- ----------
Net loans charged-off 278 267 286 260 (61)
Purchase loan adjustment 0 0 0 746 0
Provision for loan loss charged to expense 480 269 120 120 795
---------- ---------- ---------- ---------- ----------
Balance, December 31, $ 5,510 $ 5,308 $ 5,306 $ 5,472 $ 4,866
========== ========== ========== ========== ==========
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial (0.01)% 0.02% 0.03% 0.03% (0.03)%
Real estate 0.00 0.01 0.01 0.01 0.00
Installment 0.05 0.03 0.00 0.02 0.01
Credit cards and personal credit lines 0.02 0.01 0.04 0.02 0.00
---------- ---------- ---------- ---------- ----------
Total 0.06% 0.07% 0.08% 0.08% (0.02)%
========== ========== ========== ========== ==========
Ratio of allowance for loan losses to
nonperforming assets 258.20% 176.99% 204.31% 192.20% 208.48%
========== ========== ========== ========== ==========
</TABLE>
-22-
<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, 1998, 1997, 1996, 1995 and 1994.
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
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 $ 1,647 64.39 $ 1,341 59.52 $ 1,213 60.07
Real estate 130 11.24 131 14.25 123 15.94
Installment 845 18.61 673 19.43 530 18.68
Credit cards and personal credit lines 130 5.76 103 6.80 151 5.31
---------- ---------- ---------- ---------- ---------- ----------
Total allocated allowance for loan losses 2,752 100.00 2,248 100.00 2,017 100.00
========== ========== ==========
Unallocated allowance for loan losses 2,758 3,060 3,289
---------- ---------- ----------
Total allowance for loan losses $ 5,510 $ 5,308 $ 5,306
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
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 $ 811 59.82 $ 665 61.31
Real estate 112 17.08 95 16.42
Installment 376 17.76 311 16.75
Credit cards and personal credit lines 112 5.34 101 5.52
---------- ---------- ---------- ----------
Total allocated allowance for loan losses 1,411 100.00 1,172 100.00
========== ==========
Unallocated allowance for loan losses 4,061 3,694
---------- ----------
Total allowance for loan losses $ 5,472 $ 4,866
========== ==========
</TABLE>
-23-
<PAGE>
<TABLE>
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 1998, 1997 and 1996, and the average rates paid on those deposits
are summarized in the following table:
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
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 $ 98,957 0.00 $ 77,276 0.00 $ 69,459 0.00
Savings accounts:
Regular savings 55,299 2.41 45,278 2.54 43,847 2.55
Interest bearing checking 65,895 2.01 55,063 2.14 53,625 2.20
Time deposits:
Deposits of $100,000 or more 142,589 5.80 109,759 5.87 86,137 5.67
Other time deposits 326,123 5.28 230,171 5.39 208,499 5.39
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 688,863 4.09 $ 517,547 4.09 $ 461,567 3.99
========== ========== ========== ========== ========== ==========
</TABLE>
As of December 31, 1998, time certificates of deposit in denominations of
$100,000 or more will mature a as follows:
Within three months $ 71,117
Over three months, within six months 51,027
Over six months, within twelve months 21,711
Over twelve months 10,136
----------
Total time certificates of deposit in
denominations of $100,000 or more $ 153,991
==========
-24-
<PAGE>
QUALITATIVE MARKET RISK DISCLOSURE
Management's market risk disclosure appears under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1998 Annual Report to Shareholders and is incorporated
herein by reference in response to this item. The Company's primary market
risk exposure is interest rate risk. The Company does not have a material
exposure to foreign currency exchange rate risk, does not own any derivative
financial instruments and does not maintain a trading portfolio.
RETURN ON EQUITY AND 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, 1998, 1997 and 1996 were as
follows:
1998 1997 1996
--------- --------- ---------
Percent of net income to:
Average daily total assets 0.89% 1.10% 1.07%
Average daily stockholders' equity 15.57 16.81 16.50
Percentage of dividends declared per
common share to net income per weighted
average number of common shares
outstanding (5,813,984 shares in 1998,
5,813,162 shares in 1997, and 5,792,825
shares in 1996) 24.26 23.08 20.72
Percentage of average daily
stockholders' equity to average
daily total assets 5.74 6.51 6.46
-25-
<PAGE>
SHORT-TERM BORROWINGS
(in thousands of dollars)
The following is a schedule, at the end of the year indicated, of
statistical information relating to securities sold under agreement to
repurchase maturing within one year and secured by either U.S. Government
agency securities or mortgage-backed securities classified as other debt
securities. There were no other categories of short-term borrowings for which
the average balance outstanding during the period was 30 percent or more of
stockholders' equity at the end of each period.
1998 1997 1996
---------- ---------- ----------
Outstanding at year end $ 110,163 $ 65,467 $ 85,611
Approximate average interest rate at
year end 4.78% 4.90% 5.11%
Highest amount outstanding as of any
month end during the year $ 110,163 $ 98,917 $ 89,433
Approximate average outstanding
during the year $ 84,157 $ 83,732 $ 73,728
Approximate average interest rate
during the year 5.19% 5.45% 5.33%
Securities sold under agreement to repurchase include both fixed rate,
term transactions initiated by the investment department of the Bank, as well
as corporate sweep accounts.
-26-
<PAGE>
ITEM 2. PROPERTIES
- ------------------
The Company conducts its operations from the following locations:
Branches/Headquarters
Main / Headquarters 202 E. Center St. Warsaw IN
Warsaw Drive-up East Center St. Warsaw IN
Akron 102 East Rochester Akron IN
Argos 100 North Michigan Argos IN
Bremen 1600 Indiana State Road 331 Bremen IN
Columbia City 601 Countryside Dr. Columbia City IN
Concord 4202 Elkhart Road Goshen IN
Cromwell 111 North Jefferson St. Cromwell IN
Elkhart Beardsley 864 East Beardsley St. Elkhart IN
Elkhart East 22050 State Road 120 Elkhart IN
Elkhart Hubbard Hill 58404 State Road 19 Elkhart IN
Elkhart Northwest 1208 N. Nappanee St. Elkhart IN
Goshen Downtown 102 North Main St. Goshen IN
Goshen South 2513 South Main St. Goshen IN
Granger 12830 State Road 23 Granger IN
Greentown 520 W. Main Greentown IN
Huntington 1501 N. Jefferson St. Huntington IN
Kendallville East 631 Professional Way Kendallville IN
Kendallville Downtown 113 N. Main St. Kendallville IN
LaGrange 901 South Detroit LaGrange IN
Ligonier Downtown 222 S. Calvin St. Ligonier IN
Ligonier South 1470 U.S. Highway 33 South Ligonier IN
Logansport 3900 Highway 24 East Logansport IN
Medaryville Main St. Medaryville IN
Mentone 202 East Main St. Mentone IN
Middlebury 712 Wayne Ave. Middlebury IN
Milford Indiana State Road 15 North Milford IN
Mishawaka 5015 N. Main St. Mishawaka IN
Nappanee 202 West Market St. Nappanee IN
North Webster 644 North Main St. North Webster IN
Peru 2 N. Broadway Peru IN
Pierceton 202 South First St. Pierceton IN
Plymouth 862 E. Jefferson St. Plymouth IN
Roann 110 Chippewa St. Roann IN
Rochester 507 East 9th St. Rochester IN
Shipshewana 895 North Van Buren St. Shipshewana IN
Silver Lake 102 Main St. Silver Lake IN
Syracuse 502 South Huntington Syracuse IN
Wabash North 1004 North Cass St. Wabash IN
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 Company leases from third parties the real estate and buildings for
its offices in Akron and Milford. In addition, the Company leases the real
estate for its Wabash North office and its free-standing ATMs. All the other
branch facilities are owned by the Company. The Company also owns parking lots
in downtown Warsaw for the use and convenience of Company employees and
customers, as well as leasehold improvements, equipment, furniture and
fixtures necessary and appropriate to operate the banking facilities.
-27-
<PAGE>
In addition, the Company owns buildings at 110 South High St., Warsaw,
Indiana, and 114-118 East Market St., Warsaw, Indiana, which it uses for
various offices and a building at 113 East Market St., Warsaw, Indiana, which
it uses for office and computer facilities. The Company also leases from third
parties facilities in Warsaw, Indiana, for the storage of supplies and for
employee training.
None of the Company's assets are the subject of any material
encumbrances.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Company and the
Bank are a party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- ------------------------------------------------------------------------------
Information relating to the principal market for and the prices of the
Company's common stock, and information as to dividends are contained under
the caption "Stock and Dividend Information" in the 1998 Annual Report to
Shareholders and are incorporated herein by reference. On December 31, 1998,
the Registrant had 1,536 shareholders of record, including those employees who
participate in the Company's 401(K) plan.
On January 9, 1996, the Company sold 40,000 shares of authorized but
previously unissued common stock for $10.38 per share (as adjusted for all
subsequent stock splits). On April 30, 1996, the common stock split
two-for-one.
On January 15, 1997, Lakeland Financial Corporation sold 20,000 shares of
authorized but previously unissued common stock for $15.50 per share (split
adjusted).
In August, 1997, the common stock of the Company and the preferred stock
of its wholly-owned subsidiary, Lakeland Trust, began trading on The Nasdaq
Stock Market under the symbols LKFN and LKFNP.
At the annual meeting of shareholders on April 14, 1998, the shareholders
approved the Lakeland Financial Corporation 1997 Share Incentive Plan. This
plan reserves 600,000 shares of common stock (split adjusted) for which
incentive share options and non-qualified share options may be granted to
directors and employees of the Company and its subsidiaries.
On April 30, 1998, the common stock split two-for-one.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
A five year consolidated financial summary, containing the required
selected financial data, appears under the caption "Selected Financial Data"
on page 7 in the 1998 Annual Report to Shareholders and is incorporated herein
by reference.
-28-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations appears under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 27 - 32 in the 1998
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------------
Quantitative and qualitative disclosures about market risk appear under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 27 - 32 in the 1998 Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following consolidated financial statements appear in the 1998 Annual
Report to Shareholders and are incorporated herein by reference.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information appearing in the definitive Proxy Statement dated March
15, 1999, is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information appearing in the definitive Proxy Statement dated March
15, 1999, is incorporated herein by reference in response to this item. The
sections in the Proxy Statement marked "Report of the Compensation Committee
on Executive Compensation" and "Stock Price Performance" are furnished for the
information of the Commission and are not deemed to be "filed" as part of the
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information appearing in the definitive Proxy Statement dated March
15, 1999, is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information appearing in the definitive Proxy Statement dated March
15, 1999, is incorporated herein by reference in response to this item.
-29-
<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 appear in the 1998 Annual Report to
Shareholders and are specifically incorporated by reference under Item 8 of
this Form 10-K, or are a part of this Form 10-K, as indicated and at the pages
set forth below.
Reference
---------
1998 Annual
Form 10-K Report
--------- ------------
Consolidated Balance Sheets at December 31,
1998 and 1997. 9
Consolidated Statements of Income for the
years ended December 31, 1998, 1997 and 1996. 10
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996. 11
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996. 12
Notes to Consolidated Financial Statements. 13 - 24
Report of Independent Auditors. 26
(2) Financial Statement Schedules.
------------------------------
Financial statement schedules 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.
-30-
<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 9, 1999 By R. Douglas Grant
(R. Douglas Grant) Chairman
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 9, 1999 Michael L. Kubacki
(Michael L. Kubacki) Principal
Executive Officer and Director
Date: March 9, 1999 Terry M. White
(Terry M. White) Principal Financial
and Accounting Officer
Date: March 9, 1999 R. Douglas Grant
(R. Douglas Grant) Director
Date:
(Anna K. Duffin) Director
Date: March 9, 1999 Eddie Creighton
(Eddie Creighton) Director
Date: March 9, 1999 L. Craig Fulmer
(L. Craig Fulmer) Director
Date: March 9, 1999 Jerry L. Helvey
(Jerry L. Helvey) Director
Date:
(Allan J. Ludwig) Director
Date: March 9, 1999 Charles E. Niermier
(Charles E. Niemier) Director
-31-
<PAGE>
Date: March 9, 1999 Richard L. Pletcher
(Richard L. Pletcher) Director
Date: March 9, 1999 Terry L. Tucker
(Terry L. Tucker) Director
Date:
(M. Scott Welch) Director
Date: March 9, 1999 G. L. White
(G. L. White) Director
-32-
<PAGE>
EXHIBIT INDEX
The following Exhibits are filed as part of this Report and not
incorporated by reference from another document:
Exhibit 13 - 1998 Report to Shareholders with Report of Independent
Auditors.
Exhibit 21 - Subsidiaries
Exhibit 27 - Financial Data Schedule
-33-
<PAGE>
EXHIBIT 13
1998 Report to Shareholders with Report of Independent Auditors.
-34-
<PAGE>
EXHIBIT 21
Subsidiaries. The Registrant has two wholly-owned subsidiaries, Lake City
Bank, Warsaw, Indiana, a banking corporation organized under the laws of the
State of Indiana, and Lakeland Capital Trust, a statutory business trust
formed under Delaware law.
-35-
Annual Meeting
- -----------------------------------------------------------------------------
The annual meeting of the shareholders of Lakeland Financial Corporation
will be held at noon, April 13, 1999, at the Shrine Building, Kosciusko County
Fair Grounds, Warsaw, Indiana. As of December 31, 1998, there were
approximately 1,500 shareholders.
Special Notice: Form 10-K Available
- -----------------------------------------------------------------------------
The Company will provide without charge to each shareholder its Annual
Report on Form 10-K, including financial statements and schedules thereto
required to be filed with the Securities and Exchange Commission for the
Company's most recent fiscal year upon written request of Lakeland Financial
Corporation, Attn: 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 are market makers in Lakeland Financial
Corporation stock and have reported the bid-ask prices for the Company's stock
as set forth in the Selected Quarterly Data for the first three quarters of
1997.
Stifel, Nicolaus & Company, Inc., 500 North Broadway, St. Louis, Missouri,
63102
Roney & Company, P.O. Box 130, Elkhart, Indiana, 46515
McDonald Investments, Inc., 214 South Main Street, Elkhart, Indiana, 46516
As of August 25, 1997, the Company's common stock and the preferred stock
of its wholly-owned subsidiary, Lakeland Capital Trust, began trading on The
Nasdaq Stock MarketSM under the symbols LKFN and LKFNP. "The Nasdaq Stock
Market" or "Nasdaq" is a highly-regulated electronic securities market
comprised of competing market makers whose trading is supported by a
communications network linking them to quotation dissemination, trade
reporting, and order execution systems. This market also provides specialized
automation services for screen-based negotiations of transactions, on-line
comparison of transactions, and a range of informational services tailored to
the needs of the securities industry, investors and issuers. The Nasdaq Stock
Market is operated by The Nasdaq Stock Market, Inc., a wholly-owned subsidiary
of the National Association of Securities Dealers, Inc.
The high-low prices as set forth in the Selected Quarterly Data for the
fourth quarter of 1997 were obtained from the Bloomberg Business News service.
The high-low prices for 1998 were obtained from The Nasdaq Stock Market.
<PAGE>
Chairman's Letter
- -----------------------------------------------------------------------------
Dear Shareholders:
This is my last letter to you as Chief Executive Officer of Lakeland
Financial Corporation and Lake City Bank. We can all be pleased that this is
the result of my aging process and the inevitable passage of time, and not
because of a sale or merger of our fine Corporation.
It has been an exciting privilege to serve the Lake City Bank for 19
years. I am proud of our management team as well as our employees who have
contributed to our joint success. Assets have grown from about $100 million to
just under $1 billion with corresponding increases in earnings, stock value,
and other key numbers. This has been an exciting time in the financial
industry, and I was lucky to be a part of it with a truly great local,
independent, community bank. My successor, CEO and President Michael L.
Kubacki, will now competently carry the flag.
It is noteworthy that Mike Kubacki not only possesses an outstanding
banking resume but also has local roots, having grown up in Kosciusko County
and graduated from the old Pierceton High School. He is an alumni of Indiana
University and has an MBA from the University of Chicago.
Mike Kubacki was with Northern Trust Company for 25 years. Early he ran
that bank's Correspondent Banking Department with responsibility for lending
to banks and insurance companies across the country. In the late 1980's he was
President and CEO of a subsidiary bank in Oak Brook, Illinois. More recently
he worked in California for Northern Trust as an Executive Vice President
heading up the Los Angeles area.
While stepping down as CEO, I do not plan to disassociate myself from the
Bank. I will be active as Chairman of the Board on a daily basis for a
relatively short period of time, but continue on after retirement as Chairman
of the Board for the foreseeable future. This will entail the usual Chairman's
duties as well as serving on various Board committees and offering counsel
when appropriate.
My sincere thanks to all of our customers, employees and shareholders for
the opportunity of working together in building a great institution.
R. Douglas Grant
Chairman
1
<PAGE>
Shareholder's Letter
- -----------------------------------------------------------------------------
Historically low interest rates, the competitive environment, and Year
2000 issues provided many challenges and opportunities for Lakeland Financial
Corporation and Lake City Bank in 1998. The success we enjoyed in meeting
these challenges resulted in record net income, loans and assets. A major
factor in the Corporation's success continues to be a commitment to providing
convenient, quality service to our customers. The hometown approach to banking
continues to be well received in our communities, as demonstrated by your
Corporation's growth during 1998.
And our growth continues strong. Through branch acquisitions and de novo
offices, we added nineteen offices in the last five years. Our primary market
area comprises 42 offices in 33 towns in 14 counties in north central Indiana.
Assets totaled $979 million at year-end 1998, representing a 22.9 percent
increase over year-end 1997. This strong growth reflects the economic vitality
of our markets and the benefits derived from being a locally owned and
operating independent community bank. The recent sales and consolidation of
banks in northern Indiana has resulted in some customer dissatisfaction with
the service they provide. This dissatisfaction has contributed to our recent
loan and deposit growth as customers have sought more personal, traditional
relationships.
Total assets increased $182 million over the prior year. Approximately
$35 million of this increase was due to the Peru and Greentown offices
acquired from Cleveland's National City Bank in February. We opened a new
office in Plymouth, Indiana, which was well received and added over $7 million
in 1998. The remaining increase was a result of growth in existing offices.
Net income for the year was a record $7,888,000, an increase of 5 percent over
1997. This reflects continued pressure on the interest margin, excellent asset
quality, a strong fee income year, and the increased expenses related to our
growth and investment in technology.
The financial services industry continued to feel pressure on the
interest margin as interest rates remained at historically low levels and
competition for loans and deposits intensified. As expected, the interest
margin, or spread between what we earn on assets and what we pay on deposits
and other funds used to support these assets, declined again in 1998. A
contributing factor in this decline was the acquisitions of offices from other
financial institutions in late 1997 and early 1998. The majority of assets
received in these acquisitions were cash and facilities. The cash received was
mostly invested in securities. Since securities normally earn less than loans,
this has resulted in a lower spread on these funds until they can be more
profitably invested in quality loans. While loan growth continued to be strong
in 1998, especially in the commercial area, our challenge to increased
profitability in 1999 will be our ability to continue generating high quality
loans.
Our success in growing loans in 1998 was made possible by a professional,
knowledgeable staff dedicated to responding to customer needs. Through their
efforts loans grew 17 percent with significant growth in commercial and
consumer loans. Commercial loans grew by 27 percent and consumer loans grew by
9 percent. Delinquencies and charge-offs remained low as compared to industry
averages.
2
<PAGE>
Shareholder's Letter (continued)
- -----------------------------------------------------------------------------
We are also pleased with the growth in deposits during 1998. Total
deposits increased $126 million, or about 21 percent, during 1998.
Approximately $35 million of this growth was a result of the offices acquired
in February, with the remaining growth in existing offices. This growth is a
reflection of the economic strength in the markets we serve and of our
commitment to providing the quality products and services demanded.
The low interest rate environment during the year had a significant
impact on noninterest income. This environment helped generate a significant
increase in mortgage lending activity. The gains on sales of mortgage loans
increased 169 percent to $1.5 million. This interest rate environment also
provided an opportunity to sell securities from the available-for-sale
portfolio at a profit, while better positioning the portfolio for future
liquidity needs. These gains were approximately $1.3 million.
All other components of noninterest income increased. We are particularly
pleased with our results in the brokerage area, which far exceeded
expectations for growth in accounts and fees in 1998. The increase in service
charges on deposits reflects the large increase in the number of deposit
accounts.
A major challenge during 1998 was the completion of a two-year, $4.5
million investment in technology. As we grew from $497 million in 1994, to
$979 million in 1998, updated technology was needed for us to continue to
provide superior local service and to ensure our preparedness for the Year
2000. These investments included new teller and sales systems, new image
capture software and hardware, a data warehouse system, and a new telephone
system. These investments in technology also include modifications and
replacements of systems, computer programs and equipment based upon an
extensive review and analysis of the potential impact of Year 2000. These
improvements position us for future growth, and allow any bank office to
provide customers with the type of service and information that they expect
from the hometown bank. The cost of these improvements, and the thirty percent
increase in the branch network in 1998, resulted in a similar percentage
increase in occupancy and equipment costs in 1998. We experienced a 24.4
percent increase in salaries and benefits related to the growth in offices.
Also $942,000 of expense was incurred due to the amortization of the
intangible assets relating to the branch purchases in late 1997 and early
1998.
The Commercial Banking Division had an excellent year providing financing
for large and small businesses. Commercial loans outstanding increased by a
record $74 million to $347 million at year end from $273 million a year
earlier while maintaining asset quality. The Division hosted several seminars
designed to assist business and agri-business customers in dealing with the
complex challenges faced in today's competitive business climate. The Year
2000 seminar provided guidance to customers on this timely important topic.
Our commitment to this portion of the marketplace is very strong. At year end
we had 25 commercial lending officers on staff, with an average experience
level of 20 years.
The Retail Division originated $87 million in residential mortgage loans
in 1998, as compared to $43 million for 1997. Of this total, $65 million was
sold into the secondary market, generating nearly $1.5 million in gains.
Consumer loans outstanding grew by about $11 million or 9 percent, in
3
<PAGE>
Shareholder's Letter (continued)
- -----------------------------------------------------------------------------
1998. The Bank introduced a "lease look-alike" product to compete with the
lease market, and also a software product facilitating preapproval of credit
cards and personal lines of credit.
With the introduction of the Executive and Professional Program, business
customers can enjoy the benefits of housing all of their accounts in one bank,
with the assurance of knowing that their banking officer will be able to
expertly and expeditiously assist them. A unique new product, the Budget Saver
auto loan was developed and has been enthusiastically received by consumers
and auto dealers. The Direct Banking Center responds to nearly 200 customers
each day and offers personal service. Our brokerage services continued to be
used by our customers who want to buy/sell stocks, bonds, mutual investments
and other non-insured investment needs. Income increased over 74 percent in
1998. Customers appreciate the convenience of investing where they are known
by name and receive friendly service from knowledgeable and experienced
professionals. The Investor's Weekly account was enhanced and experienced
strong deposit growth of 68 percent in 1998. This account is a premier product
for our customers who want high money market yields, convenient access to
funds, security of FDIC Insurance up to $100,000, no fees, and ease of use.
Products, specifically tailored for our customers, with emphasis on providing
the service of a hometown bank, are utmost in our thoughts as we continue to
develop the most beneficial groupings.
Trust assets under management increased 16 percent in 1998 to $725
million. We recognize that investors today face a highly complex investment
environment. Many providers of investment management and trust services have
grown larger, more inflexible, impersonal and distant. Our approach to
providing financial services is uncommon, but traditional. We work to build a
personal relationship with customers on a local level, and deliver competitive
investment results, which allow our clients to achieve their overall financial
goals. In doing this we sponsored a Valentine Party for our retired friends, a
Leading Ladies Luncheon, several professional receptions in our communities,
investment breakfasts, and business after hours receptions. The Leading Ladies
highly successful program is designed and tailored to provide an innovative
financial program for the bank's female customers.
Charles E. Niemier and M. Scott Welch were elected to the Lakeland
Financial Corporation Board of Directors. Mr. Niemier is a graduate of Indiana
University and Valparaiso University where he serves as a Trustee. He is
Senior Vice President of Biomet, Inc. Mr. Welch, CEO of Welch Packaging Group
and President of Elkhart Container, holds a BS degree in psychology from
Depauw University. He serves on the Elkhart General Hospital Board and both
the Elkhart and Indiana Chambers of Commerce. They replace Board members
Joseph P. Prout and J. Alan Morgan who retired after 27 years and 24 years
respectively of service to the Bank. Their leadership was appreciated and will
be missed.
D. Jean Northenor was promoted to Executive Vice President, with
principal responsibilities in the human resource, marketing, and facilities
area. She joined the Bank in 1983 after completing 12 years in Kosciusko
County government, eight as the elected county auditor.
4
<PAGE>
Shareholder's Letter (continued)
- -----------------------------------------------------------------------------
In 1999, we will open our first office in Allen County. This market
includes Ft. Wayne, the second largest city in the state. Bank consolidation
has been very rapid in Ft. Wayne, and we expect that customer acceptance of
our Corporation will be positive over the next several years. We continue to
evaluate other expansion opportunities throughout northern Indiana, with an
emphasis on markets that would be receptive to a local, hometown business
philosophy.
The Trust, Discount Brokerage, Investment Services and other operational
departments moved into the newly remodeled Trust Building in downtown Warsaw
(formerly Kline's Department Store) during the third quarter. The building
with state of the art technology has a friendly ambiance with user efficiency.
Since 1872 Lake City Bank has been a symbol of strength, innovation and
integrity. We remain responsive to our customers by providing need solving
financial products handled by a professional, knowledgeable staff and
supported by state of the art technology. Our success and reputation as a
leading community bank would not be possible without the dedication and hard
work of our employees and the support of our shareholders. We are grateful for
this, and optimistic about the future.
Michael L. Kubacki R.Douglas Grant
President Chairman
5
<PAGE>
<TABLE>
<CAPTION>
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,
General Manager, Heritage Financial Lakeland Financial
Creighton Brothers Group, Inc. Corporation and Lake
City Bank
Picture Picture Picture Picture
Jerry L. Helvey Michael L. Kubacki Allan J. Ludwig Charles E. Niemier
President, President, Industrial Developer Senior Vice President,
Helvey & Associates, Inc. Lakeland Financial Biomet, Inc.
Corporation and Lake
City Bank
Picture Picture Picture Picture
Richard L. Pletcher Terry L. Tucker M. Scott Welch G.L. White
President, President, Chief Executive Officer, Former President,
Pletcher Enterprises, Inc. Maple Leaf Farms, Inc. Welch Packaging Group United Telephone
Company of Indiana
</TABLE>
LAKELAND FINANCIAL CORPORATION OFFICERS
R. Douglas Grant ....................Chairman (Chief Executive Officer through
1998)
Michale L. Kubacki...................President and Chief Executive Officer
D. Jean Northenor ...................Executive Vice President
Paul S. Siebenmorgem.................Executive Vice President
Walter L. Weldy .....................Executive Vice President
Terry M. White ......................Executive Vice President
Secretary and Treasurer
James J. Nowak.......................Assistant Secretary and Treasurer
6
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data (in thousands except for share and per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 63,667 $ 52,699 $ 45,941 $ 41,944 $ 33,556
Interest expense 36,091 28,060 23,737 21,642 14,887
------------ ------------ ------------ ------------ ------------
Net interest income . . . . . . . . . . . . . . . . . 27,576 24,639 22,204 20,302 18,669
Provision for loan losses 480 269 120 120 795
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 27,096 24,370 22,084 20,182 17,874
Other noninterest income 8,486 6,978 5,396 4,297 4,198
Net gains on sale of real estate
mortgages held-for-sale 1,467 545 412 159 177
Net securities gains (losses) 1,256 (19) (9) 315 (7)
Noninterest expense (26,491) (20,414) (17,935) (16,244) (14,092)
------------ ------------ ------------ ------------ ------------
Income before income tax expense . . . . . . . . . . . 11,814 11,460 9,948 8,709 8,150
Income tax expense 3,926 3,920 3,504 3,064 3,024
------------ ------------ ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 7,888 $ 7,540 $ 6,444 $ 5,645 $ 5,126
============ ============ ============ ============ ============
Average shares outstanding* 5,813,984 5,813,162 5,792,825 5,753,984 5,753,984
============ ============ ============ ============ ============
Basic earnings per common share* $ 1.36 $ 1.30 $ 1.11 $ 0.98 $ 0.89
============ ============ ============ ============ ============
Diluted earnings per common share* $ 1.36 $ 1.30 $ 1.11 $ 0.98 $ 0.89
============ ============ ============ ============ ============
Cash dividends declared* $ 0.33 $ 0.30 $ 0.23 $ 0.19 $ 0.15
============ ============ ============ ============ ============
Balances at December 31:
- ------------------------
Total assets $ 978,909 $ 796,478 $ 656,551 $ 568,579 $ 496,963
Total deposits $ 739,347 $ 612,992 $ 496,553 $ 431,934 $ 396,740
Long-term borrowings $ 21,386 $ 25,367 $ 23,531 $ 17,432 $ 17,432
Guaranteed preferred beneficial interests in
Company's subordinated debentures $ 19,238 $ 19,211 $ 0 $ 0 $ 0
Total stockholders' equity $ 55,156 $ 48,256 $ 42,043 $ 36,754 $ 29,889
</TABLE>
* Adjusted for 2-for-1 stock splits on April 30, 1996 and April 30, 1998.
7
<PAGE>
<TABLE>
<CAPTION>
Selected Quarterly Data (in thousands except for per share data) (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st
1998 Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 16,451 $ 16,366 $ 15,904 $ 14,946
Interest expense 9,344 9,354 9,037 8,356
------------ ------------ ------------ ------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . 7,107 7,012 6,867 6,590
Provision for loan losses 120 120 120 120
Noninterest income 3,018 3,020 2,731 2,440
Noninterest expense 6,920 7,059 6,478 6,034
Income tax expense 1,106 981 965 874
------------ ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,979 $ 1,872 $ 2,035 $ 2,002
============ ============ ============ ============
Basic earnings per common share** $ 0.34 $ 0.33 $ 0.35 $ 0.34
============ ============ ============ ============
Diluted earnings per common share** $ 0.34 $ 0.33 $ 0.35 $ 0.34
============ ============ ============ ============
Stock and Dividend Information
Trading range (per share)* **
Low $ 16.50 $ 19.00 $ 22.25 $ 23.00
High $ 20.00 $ 24.50 $ 29.00 $ 34.00
Dividends declared (per share) ** $ 0.09 $ 0.09 $ 0.08 $ 0.07
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st
1997 Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 13,775 $ 13,344 $ 13,180 $ 12,400
Interest expense 7,574 7,240 6,832 6,414
------------ ------------ ------------ ------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 6,201 6,104 6,348 5,986
Provision for loan losses 89 60 60 60
Noninterest income 2,003 2,016 1,886 1,599
Noninterest expense 5,777 5,156 4,825 4,656
Income tax expense 695 1,034 1,149 1,042
------------ ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,643 $ 1,870 $ 2,200 $ 1,827
============ ============ ============ ============
Basic earnings per common share** $ 0.28 $ 0.32 $ 0.38 $ 0.32
============ ============ ============ ============
Diluted earnings per common share** $ 0.28 $ 0.32 $ 0.38 $ 0.32
============ ============ ============ ============
Stock and Dividend Information
Trading range (per share)* **
Low $ 23.00 $ 17.75 $ 16.88 $ 15.38
High $ 24.50 $ 24.50 $ 17.88 $ 17.50
Dividends declared (per share)** $ 0.08 $ 0.07 $ 0.08 $ 0.07
<FN>
* The trading range for the first three quarters of 1997 is the bid-asked prices as reported by the market makers for the
Company's common stock. The trading range for the fourth quarter of 1997 is the high and low as reported by Bloomberg
Business News. The fourth quarter of 1997 is the first full quarter the Company's common stock was traded on Nasdaq. The
trading ranges for 1998 are the high and low as obtained from the Nasdaq Stock Market.
** Per share data has been adjusted for a 2-for-1 stock split on April 30, 1998.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets (in thousands except for share data)
- ---------------------------------------------------------------------------------------------------------------------------------
December 31 1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 45,933 $ 45,317
Short-term investments 15,575 4,445
------------ ------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,508 49,762
Securities available-for-sale (carried at fair value) 327,658 84,599
Securities held-to-maturity (fair value of $0 at 1998
and $166,079 at 1997) 0 163,559
Real estate mortgages held-for-sale 3,796 1,516
Total loans 538,496 458,634
Less allowance for loan losses 5,510 5,308
------------ ------------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 532,986 453,326
Land, premises and equipment, net 26,370 23,108
Accrued income receivable 5,669 4,915
Intangible assets 11,453 9,649
Other assets 9,469 6,044
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 978,909 $ 796,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 118,361 $ 92,467
Interest bearing deposits 620,986 520,525
------------ ------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 739,347 612,992
Short-term borrowings
Federal funds purchased 0 14,650
Securities sold under agreements to repurchase 110,163 65,467
U.S. Treasury demand notes 1,527 4,000
Other short-term borrowings 24,000 0
------------ ------------
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,690 84,117
Accrued expenses payable 6,503 5,040
Other liabilities 1,589 1,495
Long-term borrowings 21,386 25,367
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,238 19,211
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 923,753 748,222
Commitments, off-balance sheet risks and contingencies
STOCKHOLDERS' EQUITY
Common stock: 90,000,000 shares authorized, no par value,
5,813,984 shares issued, 5,796,918 outstanding as of December 31, 1998;
5,813,984 shares issued, 5,803,232 outstanding as of December 31, 1997 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 43,652 37,766
Unrealized net gain on securities available-for-sale 1,848 685
Treasury stock, at cost (334) (185)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,156 48,256
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 978,909 $ 796,478
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income (in thousands except for share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 44,225 $ 38,265 $ 32,724
Tax-exempt 194 228 246
Interest and dividends on securities
Taxable 16,416 12,472 11,348
Tax-exempt 2,313 1,431 1,378
Interest on short-term investments 519 303 245
------------ ------------ ------------
Total interest income 63,667 52,699 45,941
Interest on deposits 28,154 21,183 18,411
Interest on borrowings
Short-term 4,724 4,921 4,213
Long-term 3,213 1,956 1,113
------------ ------------ ------------
Total interest expense 36,091 28,060 23,737
------------ ------------ ------------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,576 24,639 22,204
Provision for loan losses 480 269 120
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . 27,096 24,370 22,084
NONINTEREST INCOME
Trust income 1,205 1,188 881
Service charges on deposits 4,004 3,369 2,809
Other income 3,277 2,421 1,706
Net gains on the sale of real estate mortgages held-for-sale 1,467 545 412
Net securities gains (losses) 1,256 (19) (9)
------------ ------------ ------------
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,209 7,504 5,799
NONINTEREST EXPENSE
Salaries and employee benefits 14,076 11,317 9,570
Net occupancy expense 1,866 1,397 1,339
Equipment costs 2,205 1,747 1,616
Other expense 8,344 5,953 5,410
------------ ------------ ------------
26,491 20,414 17,935
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 11,814 11,460 9,948
Income tax expense 3,926 3,920 3,504
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,888 $ 7,540 $ 6,444
============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING 5,813,984 5,813,162 5,792,825
============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 1.36 $ 1.30 $ 1.11
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $ 1.36 $ 1.30 $ 1.11
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity (in thousands except for share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of the period $ 1,453 $ 1,448 $ 1,438
Issued shares of previously
authorized, unissued stock
(10,000 - 1997; 10,000 - 1996) 0 5 10
------------ ------------ ------------
Balance at end of the period . . . . . . . 1,453 1,453 1,448
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of the period 8,537 8,232 7,827
Issued shares of previously
authorized, unissued stock
(10,000 - 1997; 10,000 - 1996) 0 305 405
------------ ------------ ------------
Balance at end of the period . . . . . . . 8,537 8,537 8,232
.
RETAINED EARNINGS
Balance at beginning of the period 37,766 31,967 26,858
Net income 7,888 $ 7,888 7,540 $ 7,540 6,444 $ 6,444
Cash dividends declared ($.33, $.30 and $.23)
Per share (2,002) (1,741) (1,335)
------------ ------------ ------------
Balance at end of the period . . . . . . . 43,652 37,766 31,967
UNREALIZED NET GAIN ON
SECURITIES AVAILABLE-FOR-SALE
Balance at beginning of the period 685 396 631
Unrealized gain (loss) on available-for-sale
securities arising during the period (573) 289 (235)
Reclassification adjustments for accumulated
(gains) losses included in net income (759) 0 0
Cumulative effect of adopting SFAS No. 133 2,495 0 0
------------ ------------ ------------
Other comprehensive income
(net of taxes $762, $190 and [$154]) 1,163 1,163 289 289 (235) (235)
------------ ----------- ------------ ----------- ------------ -----------
Balance at end of the period . . . . . . . 1,848 685 396
Total comprehensive income . . . . . . . $ 9,051 $ 7,829 $ 6,209
=========== =========== ===========
TREASURY STOCK
Balance at beginning of the period (185) 0 0
Acquisition of treasury stock (149) (185) 0
------------ ------------ ------------
Balance at end of the period . . . . . . (334) (185) 0
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . $ 55,156 $ 48,256 $ 42,043
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
----------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 7,888 $ 7,540 $ 6,444
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 1,782 1,393 1,277
Provision for loan losses 480 269 120
Write down of other real estate owned 0 19 20
Amortization of intangible assets 942 26 0
Loans originated for sale (65,425) (27,426) (27,599)
Net (gain) loss on sale of loans (1,467) (545) (412)
Proceeds from sale of loans 64,612 27,350 27,261
Net (gain) loss on sale of premises and equipment (40) 11 3
Net (gain) loss on sale of securities available-for-sale (1,257) 0 0
Net loss on calls of securities held-to-maturity 1 19 9
Net securities amortization 1,379 23 256
Increase (decrease) in taxes payable (1,207) (217) 237
Increase in income receivable (754) (661) (251)
Increase in accrued expenses payable 949 224 360
(Increase) decrease in other assets (1,769) 459 (698)
Increase in other liabilities 62 427 164
----------- ------------ ------------
Total adjustments (1,712) 1,371 747
----------- ------------ ------------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . 6,176 8,911 7,191
Cash flows from investing activities
Proceeds from sale of securities available-for-sale 65,404 0 0
Proceeds from maturities and calls of securities held-to-maturity 45,787 14,557 8,784
Proceeds from maturities and calls of securities available-for-sale 32,980 26,100 14,130
Purchases of securities available-for-sale (89,948) (28,315) (14,429)
Purchases of securities held-to-maturity (131,919) (52,946) (20,247)
Net (increase) decrease in total loans (80,809) (53,286) (54,934)
Proceeds from sales of land, premises and equipment 530 0 0
Purchases of land, premises and equipment (3,950) (5,464) (3,558)
Net proceeds (payments) from acquisitions 30,020 58,889 0
----------- ------------ ------------
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . (131,905) (40,465) (70,254)
Cash flows from financing activities
Net increase in total deposits 92,034 21,257 64,619
Proceeds from short-term borrowings 4,740,920 889,826 849,944
Payments on short-term borrowings (4,689,347) (894,089) (838,695)
Proceeds from long-term borrowings 20,050 10,000 14,118
Payments on long-term borrowings (24,031) (8,163) (8,019)
Dividends paid (2,002) (1,741) (1,335)
Proceeds from sale of common stock 0 310 415
Net proceeds from issuance of guaranteed preferred beneficial interests
in Company's subordinated debentures 0 19,222 0
Purchase of treasury stock (149) (185) 0
----------- ------------ ------------
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . 137,475 36,437 81,047
----------- ------------ ------------
Net increase in cash and cash equivalents 11,746 4,883 17,984
Cash and cash equivalents at beginning of the year 49,762 44,879 26,895
----------- ------------ ------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . $ 61,508 $ 49,762 $ 44,879
=========== ============ ============
Cash paid during the year for:
Interest $ 35,228 $ 27,921 $ 23,239
Income taxes $ 3,610 $ 3,918 $ 3,420
Securities transferred from held-to-maturity to available-for-sale $ 249,087 $ 0 $ 0
Loans transferred to other real estate $ 683 $ 284 $ 334
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
12
<PAGE>
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation:
The consolidated financial statements include Lakeland Financial
Corporation and its wholly-owned subsidiaries, Lake City Bank and Lakeland
Capital Trust, together referred to as the "Company". Intercompany
transactions and balances are eliminated in consolidation.
The Company provides financial services through its subsidiary, Lake City
Bank (the Bank), a full-service commercial bank with 42 branch offices in
fourteen counties in northern Indiana. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are residential mortgage, commercial, and consumer loans.
Substantially all loans are secured by specific items of collateral including
business assets, consumer assets and real estate. Commercial loans are
expected to be repaid from cash flow from operations of businesses. Real
estate loans are secured by both residential and commercial real estate. Other
financial instruments which potentially represent concentrations of credit
risk include deposit accounts in other financial institutions.
Use of Estimates:
To prepare financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions based on
available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, the fair values of
financial instruments, and the fair value of mortgage servicing rights are
particularly subject to change.
Cash Flows:
Cash and cash equivalents includes cash, demand deposits in other
financial institutions and short-term investments with maturities of 90 days
or less. Cash flows are reported net for customer loan and deposit
transactions.
Securities:
Securities are classified as held-to-maturity and carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. Securities are classified as available-for-sale when they might be
sold before maturity. Securities available-for-sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive
income. Trading securities are bought for sale in the near term and are
carried at fair value, with changes in unrealized holding gains and losses
included in income. Federal Home Loan Bank Stock is carried at cost.
The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities in June, 1998.
The Company adopted SFAS No. 133 as of October 1, 1998. As permitted in SFAS
No. 133, on October 1, 1998, the Company transferred securities with an
amortized cost of $249,087,000 and a fair value of $253,218,000 from the
held-to-maturity portfolio to the available-for-sale portfolio. None of these
securities were sold during the fourth quarter of 1998. The Company does not
have any derivative instruments nor does the Company have any hedging
activities.
Interest income includes amortization of purchase premium or discount.
Gains and losses on sales are based on the amortized cost of the security
sold. Securities are written down to fair value when a decline in fair value
is not temporary.
Loans:
Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Loans held for sale are reported at the lower of cost or market, on an
aggregate basis.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income is not reported when full loan repayment is in doubt. All unpaid
accrued interest is reversed and interest income is subsequently recorded only
to the extent cash payments are received.
Allowance for Loan Losses:
The allowance for loan losses is a valuation allowance for probable
credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance
required using past loan loss experience, known and inherent risks in the
nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged-off. A loan is charged-off as a loss when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
A loan is impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of
similar nature such as residential mortgage, consumer, and credit card loans,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at
the present value of estimated future cash flows using the loan's existing
rate or at the fair value of collateral if repayment is expected solely from
the collateral.
Foreclosed Assets:
Assets acquired through or instead of loan foreclosure are initially
recorded at fair value when acquired, establishing a new cost basis. If fair
value declines, a valuation allowance is recorded through expense. Costs after
acquisition are expensed.
Land, Premises and Equipment:
Land, premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on both straight-line and accelerated
methods over the useful lives of the assets. These assets are reviewed for
impairment when events indicate the carrying amount may not be recoverable.
Servicing Rights:
Servicing rights are recognized as assets for the allocated value of
retained servicing rights on loans sold. Servicing rights are expensed in
proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
13
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangibles:
Purchased intangible assets, primarily goodwill and core deposit value,
are recorded at cost and amortized over the estimated life. Goodwill
amortization is straight-line over 15 years, and core deposit amortization is
accelerated over 12 years.
Repurchase Agreements:
Substantially all repurchase agreement liabilities represent amounts
advanced by various customers. Securities are pledged to cover these
liabilities, which are not covered by federal deposit insurance.
Benefit Plans:
A noncontributory defined benefit pension plan covers substantially all
employees. Funding of the plan equals or exceeds the minimum funding
requirement determined by the actuary. The projected unit credit cost method
is used to determine expense. Benefits are based on years of service and
compensation levels.
Stock Compensation:
There are 600,000 shares of common stock reserved for which stock options
may be granted to employees of Lakeland Financial Corporation, its
subsidiaries and Board of Directors. These are accounted for under APB No. 25.
Pro forma disclosures of net income and earnings per share are shown using the
fair value method of SFAS No. 123 to measure expense for options granted using
an option pricing model to estimate fair value.
Income Taxes:
An annual consolidated federal income tax return is filed by the Company.
Income tax expense is recorded based on the amount of taxes due on its tax
return plus deferred taxes computed based upon the expected future tax
consequences of temporary differences between carrying amounts and tax bases
of assets and liabilities, using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
Financial Instruments:
Financial instruments include credit instruments, such as commitments to
make loans and standby letters of credit, issued to meet customer financing
needs. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay.
Earnings Per Common Share:
Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share includes the dilutive effect of additional potential
common shares issuable under stock options. Earnings and dividends per share
are restated for all stock splits and dividends through the date of issue of
the financial statements. The common shares outstanding for the Stockholders'
Equity section of the Balance Sheet reflect the acquisition of 17,066 shares
of Lakeland Financial Corporation common stock to offset a liability for a
directors' deferred compensation plan. These shares are treated as outstanding
when computing the weighted-average common shares outstanding for the
calculation of both basic and diluted earnings per share.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on
securities available-for-sale which are also recognized as separate components
of equity. The accounting standard that requires reporting comprehensive
income first applies for 1998, with prior information restated to be
comparable.
Loss Contingencies:
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood
of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will
have a material effect on the financial statements.
Dividend Restriction:
Banking regulations require maintaining certain capital levels and may
limit the dividends paid by the Bank to the Company or by the Company to its
shareholders.
Fair Value of Financial Instruments:
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate note.
Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
Industry Segments:
Internal financial information is primarily reported and aggregated in
the line of business of banking.
Reclassifications:
Certain amounts appearing in the financial statements and notes thereto
for prior periods have been reclassified to conform with the current
presentation. The reclassifications had no effect on net income or
stockholders' equity as previously reported.
14
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 2 - SECURITIES
Information related to the amortized cost and fair value of securities at
December 31 is provided in the table below.
<TABLE>
<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, 1998
U.S. Treasury securities $ 38,938 $ 751 $ (168) $ 39,521
U.S. Government agencies and corporations 1,990 40 0 2,030
Mortgage-backed securities 225,741 1,086 (913) 225,914
State and municipal securities 56,924 2,312 (124) 59,112
Other debt securities 1,005 76 0 1,081
------------ ------------ ------------ ------------
Total securities available-for-sale at December 31, 1998 . . . . . $ 324,598 $ 4,265 $ (1,205) $ 327,658
============ ============ ============ ============
Securities available-for-sale at December 31, 1997
U.S. Treasury securities $ 28,833 $ 468 $ (15) $ 29,286
U.S. Government agencies and corporations 100 0 0 100
Mortgage-backed securities 52,746 734 (171) 53,309
State and municipal securities 1,787 117 0 1,904
------------ ------------ ------------ ------------
Total securities available-for-sale at December 31, 1997 . . . . . $ 83,466 $ 1,319 $ (186) $ 84,599
============ ============ ============ ============
Securities held-to-maturity at December 31, 1997
U.S. Treasury securities $ 21,170 $ 344 $ (13) $ 21,501
U.S. Government agencies and corporations 2,176 70 0 2,246
Mortgage-backed securities 116,788 713 (316) 117,185
State and municipal securities 22,418 1,628 (2) 24,044
Other debt securities 1,007 96 0 1,103
------------ ------------ ------------ ------------
Total securities held-to-maturity at December 31, 1997 . . . . . . $ 163,559 $ 2,851 $ (331) $ 166,079
============ ============ ============ ============
</TABLE>
Information regarding the amortized cost and fair value of debt
securities by maturity as of December 31, 1998, 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
December 31, 1998
--------------------------
Amortized Fair
Cost Value
------------ ------------
(in thousands)
<S> <C> <C>
Due in one year or less $ 7,210 $ 7,277
Due after one year through five years 35,287 35,922
Due after five years through ten years 5,968 6,468
Due after ten years 50,392 52,077
------------ ------------
98,857 101,744
Mortgage-backed securities 225,741 225,914
------------ ------------
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 324,598 $ 327,658
============ ============
</TABLE>
15
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 2 - SECURITIES (continued)
Security proceeds, gross gains and gross losses for 1998, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Sales and calls of securities available-for-sale
Proceeds $ 66,197 $ 100 $ 650
Gross gains 1,257 0 0
Gross losses 0 0 0
Calls of securities held-to-maturity
Proceeds $ 1,532 $ 638 $ 802
Gross gains 0 0 0
Gross losses (1) 19 9
</TABLE>
Securities with carrying values of $143,450,000 and $122,482,000 were
pledged as of December 31, 1998 and 1997, as collateral for deposits of public
funds, securities sold under agreements to repurchase and for other purposes
as permitted or required by law.
NOTE 3 - LOANS
Total loans outstanding as of December 31, 1998 and 1997, consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Commercial and industrial loans $ 301,682 $ 237,132
Agri-business and agricultural loans 45,043 35,820
Real estate mortgage loans 57,580 62,279
Real estate construction loans 2,975 3,089
Installment loans and credit cards 131,216 120,314
------------ ------------
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 538,496 $ 458,634
============ ============
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Balance, January 1 $ 5,308 $ 5,306 $ 5,472
Provision for loan losses 480 269 120
Loans charged-off 416 359 368
Recoveries 138 92 82
------------ ------------ ------------
Net loans charged-off 278 267 286
------------ ------------ ------------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,510 $ 5,308 $ 5,306
============ ============ ============
</TABLE>
Nonaccrual loans at December 31, 1998, 1997 and 1996, totaled $0,
$1,058,000 and $384,000. Interest lost on nonaccrual loans was approximately
$42,000, $44,000 and $35,000 for 1998, 1997 and 1996. Loans renegotiated as
troubled debt restructuring totaled $1,281,000 and $1,377,000 as of December
31, 1998 and 1997. Interest income of $84,000, $92,000 and $85,000 was
recognized in 1998, 1997 and 1996. Had these loans been performing under the
original contract terms, an additional $47,000 would have been reflected in
interest income during 1998, $50,000 in 1997 and $44,000 in 1996. The Company
is not committed to lend additional funds to debtors whose loans have been
modified. At December 31, 1998, 1997 and 1996, the Company had no loans
meeting the definition of impaired. One loan was classified as impaired during
1998, but was repaid prior to year-end.
NOTE 5 - SECONDARY MORTGAGE MARKET ACTIVITIES Mortgage loans serviced for
others are not included in the accompanying consolidated balance sheets. The
unpaid principal balances of these loans were $106,392,000 and $68,028,000 at
December 31, 1998 and 1997, respectively. Net loan servicing income was
$11,000, $98,000 and $96,000 for 1998, 1997 and 1996. Information on mortgage
servicing rights follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Beginning of year $ 425 $ 205
Originations 754 268
Amortization (171) (48)
------------ ------------
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,008 $ 425
============ ============
</TABLE>
16
<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:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Land $ 6,274 $ 5,953
Premises 18,269 15,915
Equipment 13,059 11,227
------------ ------------
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,602 33,095
Less accumulated depreciation 11,232 9,987
------------ ------------
Land, premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,370 $ 23,108
============ ============
</TABLE>
NOTE 7 - DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination
of $100,000, was approximately $153,991,000 and $108,497,000 at December 31,
1998 and 1997.
At December 31, 1998, the scheduled maturities of time deposits were as
follows:
Amount
------------
(in thousands)
Maturing in 1999 $ 425,808
Maturing in 2000 47,775
Maturing in 2001 13,619
Maturing in 2002 7,029
Maturing in 2003 4,292
Thereafter 1,634
------------
Total time deposits . . . . . . . . . . . . . . . . . . . . . $ 500,157
============
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repo accounts) represent
collateralized borrowings with customers located primarily within the
Company's trade area. Repo accounts are not covered by federal deposit
insurance and are secured by securities owned. Information on these
liabilities and the related collateral for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Average balance during the year $ 84,157 $ 83,732
Average interest rate during the year 5.19% 5.45%
Maximum month-end balance during the year $ 110,163 $ 98,917
Securities underlying the agreements at year-end
Amortized cost $ 112,301 $ 66,183
Fair value $ 113,078 $ 67,258
</TABLE>
<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 $ 68,322 4.21% $ 523 $ 520 $ 68,795 $ 69,158
1 to 30 days 4,016 5.08 606 616 3,579 3,580
31 to 90 days 7,600 5.60 1,615 1,633 6,218 6,222
Over 90 days 30,225 5.83 22,000 22,337 8,965 9,012
------------ --------------- ------------ ------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . $ 110,163 4.78% $ 24,744 $ 25,106 $ 87,557 $ 87,972
============ =============== ============ ============ ============ ============
</TABLE>
The Company retains the right to substitute similar type securities, and
has the right to withdraw all collateral applicable to repo accounts whenever
the collateral values are in excess of the related repurchase liabilities. At
December 31, 1998, there were no material amounts of securities at risk with
any one customer. The Company maintains control of these securities through
the use of third-party safekeeping arrangements.
17
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 9 - LONG -TERM BORROWINGS
Long-term borrowings at December 31 consisted of:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Federal Home Loan Bank of Indianapolis Notes, Variable Rate, Due April 27, 1998 $ 0 $ 10,000
Federal Home Loan Bank of Indianapolis Notes, 5.92%, Due December 7, 1998 0 4,000
Federal Home Loan Bank of Indianapolis Notes, 5.50%, Due December 28, 1998 0 10,000
Federal Home Loan Bank of Indianapolis Notes, Variable Rate, Due April 27, 1999 10,000 0
Federal Home Loan Bank of Indianapolis Notes, 5,25%, Due December 28, 2001 10,000 0
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 1,300 1,300
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due January 15, 2018 50 0
Capital Leases 36 67
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,386 $ 25,367
============ ============
</TABLE>
All notes require monthly interest payments and were secured by
residential real estate loans and securities with a carrying value of
$179,766,000 at December 31, 1998. At December 31, 1998, the Company owned
$2,844,100 of Federal Home Loan Bank (FHLB) stock, which also secures debts to
the FHLB. The capital leases had original terms of approximately three years
and require monthly payments. In addition to the long-term borrowings, the
Company has a $24 million variable rate FHLB note due June 6, 1999. This note
is classified as a short-term borrowing in the financial statements. The
Company is authorized to borrow up to $100 million from the FHLB.
NOTE 10 - GUARANTEED PREFERRED BENEFICIAL INTERESTS
In September 1997, Lakeland Capital Trust (Lakeland Trust) completed a
public offering of 2 million shares of cumulative trust preferred securities
(Preferred Securities) with a liquidation preference of $10 per security. The
proceeds of the offering were loaned to the Company in exchange for
subordinated debentures with terms similar to the Preferred Securities. The
sole assets of Lakeland Trust are the subordinated debentures of the Company
and payments thereunder. The subordinated debentures and the back-up
obligations, in the aggregate, constitute a full and unconditional guarantee
by the Company of the obligations of Lakeland Trust under the Preferred
Securities. Distributions on the securities are payable quarterly at the
annual rate of 9% of the liquidation preference and are included in interest
expense in the consolidated financial statements. These securities are
considered as Tier I capital (with certain limitations applicable) under
current regulatory guidelines. As of December 31, 1998, the outstanding
principal balance of the subordinated debentures was $20,619,000. The
principal balance of the subordinated debentures less the unamortized issuance
costs constitute the guaranteed preferred beneficial interests in the
Company's subordinated debentures in the financial statements.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the subordinated debentures at maturity or their
earlier redemption at the liquidation preference. Subject to the Company
having received prior approval of the Federal Reserve if then required, the
subordinated debentures are redeemable prior to the maturity date of September
30, 2027 at the option of the Company on or after September 30, 2002, or upon
occurrence of specific events defined within the trust indenture. The Company
has the option to defer distributions on the subordinated debentures from time
to time for a period not to exceed 20 consecutive quarters.
NOTE 11 - EMPLOYEE BENEFIT PLANS
Information as to the Company's pension plan at December 31 is as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Change in benefit obligation:
Beginning benefit obligation $ 1,949 $ 1,544
Service cost 177 165
Interest cost 149 130
Actuarial gain 276 177
Benefits paid (143) (67)
------------ ------------
Ending benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,408 1,949
Change in plan assets (primarily money market funds and equity and fixed
income investments), at fair value:
Beginning plan assets 1,640 1,151
Actual return (68) 306
Employer contribution 535 250
Benefits paid (143) (67)
------------ ------------
Ending plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,964 1,640
------------ ------------
Funded status (444) (309)
Unrecognized net actuarial loss 466 2
Unrecognized prior service cost (24) (27)
------------ ------------
Prepaid (accrued) benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2) $ (334)
============ ============
</TABLE>
18
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (continued)
Net pension expense includes the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Service cost $ 190 $ 178 $ 162
Interest cost 144 120 105
Expected return on plan assets (133) (306) (90)
Recognized net actuarial (gain) loss 2 197 (9)
------------ ------------ ------------
Net pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 203 $ 189 $ 168
============ ============ ============
The following assumptions were used in calculating the net pension
expense:
Weighted average discount rate 6.75% 7.25% 7.75%
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>
The Company maintains a 401(k) profit sharing plan for all employees
meeting age and service requirements. The Company contributions are based upon
the rate of return on January 1 stockholders' equity. The expense recognized
was $401,000, $393,000 and $532,000 in 1998, 1997 and 1996.
NOTE 12 - OTHER EXPENSE
Other expense for the years ended December 31, was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Data processing fees and supplies $ 1,605 $ 1,151 $ 1,098
Corporate and business development 1,172 1,034 932
Office supplies 488 633 641
Telephone and postage 1,377 833 729
Regulatory fees and FDIC insurance 138 122 57
Miscellaneous 3,564 2,180 1,953
------------ ------------ ------------
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,344 $ 5,953 $ 5,410
============ ============ ============
</TABLE>
NOTE 13 - INCOME TAXES
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Current federal $ 2,829 $ 2,881 $ 2,503
Deferred federal 54 100 107
Current state 982 906 808
Deferred state 61 33 86
------------ ------------ ------------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,926 $ 3,920 $ 3,504
============ ============ ============
</TABLE>
Income tax expense (credit) included $498,000, $(8,000) and $(3,000)
applicable to security transactions for 1998, 1997 and 1996. 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 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Income taxes at statutory federal rate $ 4,017 $ 3,896 $ 3,382
Increase (decrease) in taxes resulting from:
Tax exempt income (839) (554) (540)
Nondeductible expense 192 135 140
State income tax, net of federal tax effect 688 661 590
Net operating loss, Gateway (29) (29) (29)
Tax credits (33) (23) (22)
Other (70) (166) (17)
------------ ------------ ------------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,926 $ 3,920 $ 3,504
============ ============ ============
</TABLE>
19
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (continued)
The net deferred tax asset recorded in the consolidated balance sheets at
December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
Federal State Federal State
------------- ------------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Deferred tax assets
Bad debts $ 1,809 $ 452 $ 1,528 $ 430
ORE 0 0 97 24
Pension and deferred compensation liability 460 115 440 110
Net operating loss carryforward 317 0 346 0
Other 161 41 75 20
------------- ------------- ------------ ------------
2,747 608 2,486 584
Deferred tax liabilities
Accretion 103 26 148 37
Depreciation 372 93 284 71
Mortgage servicing rights 343 86 145 36
State taxes 107 0 128 0
Leases 165 41 169 42
Deferred loan fees 186 46 82 20
Other 0 0 5 1
------------- ------------- ------------ ------------
1,276 292 961 207
Valuation allowance 172 0 172 0
------------- ------------- ------------ ------------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . $ 1,299 $ 316 $ 1,353 $ 377
============= ============= ============ ============
</TABLE>
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 $1,212,000 and $450,000 for 1998 and 1997.
NOTE 14 - ACQUISITIONS
On February 20, 1998, the Company acquired the Peru, Indiana and
Greentown, Indiana offices of National City Bank. These acquisitions were
accounted for using the purchase method of accounting. The results of the
operations of the acquired offices are included in the income statement of the
Company beginning as of the purchase date.
The branch acquisitions were not considered to be acquisitions of a
business since, among other things, approximately 87% of the $34,335,000 in
assets received were in the form of cash and only a relatively small portion
of the assets were in the form of loans. The future earnings from the assets
acquired will be primarily dependent on the effective use of the cash and,
thus, historical operating results of the branches acquired would not be
indicative of future results. Accordingly, only summary information regarding
the effect of the acquisition on the balance sheet is presented below:
(in thousands)
Assets ----------------
Cash and due from banks $ 30,020
Loans 14
Land, premises and equipment 1,584
Intangible assets 2,717
Liabilities
Deposits $ 34,321
Other liabilities 14
On November 3, 1997, the Company acquired the Huntington, Indiana office
of 1st Chicago/NBD. On December 8, 1997, the Company acquired Indiana offices
in Columbia City, Kendallville, Ligonier, Logansport, Medaryville and
Rochester from KeyCorp. Subsequent to the acquisitions, the Company closed the
Rochester office acquired from KeyCorp and the Company's previously existing
office in Columbia City. These acquisitions were accounted for using the
purchase method of accounting. The results of the operations of the acquired
offices are included in the income statement of the Company beginning as of
the respective purchase dates.
The branch acquisitions were not considered to be acquisitions of a
business since, among other things, approximately 62% of the $95,235,000 in
assets received were in the form of cash and only a relatively small portion
of the assets were in the form of loans. The future earnings from the assets
acquired will be primarily dependent on the effective use of the cash and,
thus, historical operating results of the branches acquired would not be
indicative of future results. Accordingly, only summary information regarding
the effect of the acquisitions on the balance sheet is presented below:
(in thousands)
----------------
Assets
Cash and due from banks $ 58,889
Loans 23,591
Land, premises and equipment 3,076
Intangible assets 9,675
Other assets 4
Liabilities
Deposits $ 95,181
Other liabilities 54
20
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 15 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 1998 were
as follows:
(in thousands)
----------------
Beginning balance $ 18,378
New loans and advances 64,226
Effect of changes in related parties (4,216)
Repayments (57,384)
----------------
Ending balance . . . . . . . . . . . . . . . . . . . . . . . $ 21,004
================
Deposits from principal officers, directors, and their affiliates at
year-end 1998 and 1997 were $9,579,000 and $7,852,000.
NOTE 16 - STOCK OPTIONS
A stock option plan was approved by shareholders at their annual meeting
in April, 1998. The exercise price for the options is the market price at the
date the options are granted. The maximum option term is ten years and the
options vest over 3 to 5 years. A summary of the activity in the plan follows:
1998
--------------------------
Weighted-
Average
Exercise
Shares Price
------------ ------------
Outstanding at beginning of the year 0 $ 0.00
Granted 195,145 24.60
Exercised 0 0.00
Forfeited 6,210 24.38
------------ ------------
Outstanding at end of the year . . . . . . . . 188,935 $ 24.60
============ ============
Options exercisable at end of the year 925 $ 28.00
Weighted-average fair value of options granted
during the year $ 9.80
Options outstanding at year-end 1998 were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------- --------------------------
Weighted-
Average Weighted-
Remaining Average
Contractual Exercise
Number Life Number Price
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Range of exercise prices
$22.40 - $25.20 167,660 9.3 0
$25.21 - $28.00 21,275 9.0 925 $ 28.00
------------- ------------- ------------ ------------
Outstanding at year-end . . . . . . . . . . . . . . . . . . . . . . . . 188,935 9.3 925 $ 28.00
============= ============= ============ ============
</TABLE>
Had compensation cost for stock options been measured using SFAS No. 123,
net income and earnings per common share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more
options are granted.
1998
------------
Net income (in thousands) as reported $ 7,888
Pro forma net income (in thousands) 7,752
Basic earnings per common share as reported $ 1.36
Pro forma basic earnings per common share $ 1.30
Diluted earnings per common share as reported $ 1.36
Pro forma diluted earnings per common share $ 1.30
21
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 16 - STOCK OPTIONS (continued)
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of the grant date:
1998
------------
Risk-free interest rate 5.53%
Expected option life 4.91 years
Expected price volatility 40.75%
Dividend yield 1.44%
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS The
Company and Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly discretionary,
actions by regulators that, if undertaken, could have a direct material effect
on the financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and Bank must
meet specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weighting, and other factors. Quantitative measures established by regulation
to ensure capital adequacy require the Company and Bank to maintain minimum
amounts and ratios (set forth in the following table) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998 and 1997, that the Company and Bank meet all
capital adequacy requirements to which they are subject. As of December 31,
1998, the most recent notification from the federal regulators categorized the
Company and Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Company and Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Company's or Bank's
category.
<TABLE>
<CAPTION>
Minimum Required To
Minimum Required Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ------------ --------- ------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk Weighted Assets)
Consolidated $ 67,264 10.83% >=$ 49,703 >= 8.00% >=$ 62,129 >= 10.00%
Bank $ 66,535 10.71% >=$ 49,687 >= 8.00% >=$ 62,109 >= 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 59,524 9.58% >=$ 24,851 >= 4.00% >=$ 37,277 >= 6.00%
Bank $ 61,025 9.83% >=$ 24,844 >= 4.00% >=$ 37,265 >= 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 59,524 6.39% >=$ 37,286 >= 4.00% >=$ 46,607 >= 5.00%
Bank $ 61,025 6.55% >=$ 37,290 >= 4.00% >=$ 46,612 >= 5.00%
As of December 31, 1997
Total Capital (to Risk Weighted Assets)
Consolidated $ 63,188 12.42% >=$ 40,710 >= 8.00% >=$ 50,887 >= 10.00%
Bank $ 61,326 12.06% >=$ 40,692 >= 8.00% >=$ 50,865 >= 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 53,736 10.56% >=$ 20,355 >= 4.00% >=$ 30,532 >= 6.00%
Bank $ 56,017 11.01% >=$ 20,346 >= 4.00% >=$ 30,519 >= 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 53,736 7.41% >=$ 28,994 >= 4.00% >=$ 36,243 >= 5.00%
Bank $ 56,017 7.73% >=$ 29,000 >= 4.00% >=$ 36,249 >= 5.00%
</TABLE>
22
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table contains the estimated fair values and the related
carrying values of the Company's financial instruments at December 31, 1998
and 1997. Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 61,508 $ 61,508 $ 49,762 $ 49,762
Real estate mortgages held-for-sale 3,796 3,796 1,516 1,533
Securities available-for-sale 327,658 327,658 84,599 84,599
Securities held-to-maturity 0 0 163,559 166,079
Loans, net 532,986 537,223 453,326 450,542
Accrued income receivable 5,669 5,669 4,915 4,915
Mortgage servicing rights 1,008 1,008 425 425
Liabilities:
Certificates of deposit (500,157) (502,823) (393,620) (394,543)
All other deposits (239,190) (239,190) (219,372) (219,372)
Securities sold under agreements to repurchase (110,163) (111,311) (65,467) (65,557)
Other short-term borrowings (25,527) (25,527) (18,650) (18,650)
Long-term debt (21,386) (21,568) (25,367) (25,442)
Guaranteed preferred beneficial interests in Company's (19,238) (22,500) (19,211) (20,187)
subordinated debentures
Accrued expenses payable (6,503) (6,503) (5,040) (5,040)
</TABLE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1998 and 1997. 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 and guaranteed
preferred beneficial interests in Company's subordinated debentures are based
on quoted market rates for individual securities or for equivalent quality,
coupon and maturity securities. The estimated fair value of loans is based on
estimates of the rate the Company would charge for similar loans at December
31, 1998 and 1997, 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 Company would pay on such deposits or borrowings at December 31, 1998
and 1997, applied for the time period until maturity. The estimated fair value
of short-term borrowed funds is considered to approximate carrying value. The
estimated fair value of other financial instruments and off-balance sheet loan
commitments approximate cost and are not considered significant to this
presentation.
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that were the Company to
have disposed of such items at December 31, 1998 and 1997, 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, 1998 and 1997, should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Company that are not
defined as financial instruments are not included in the above disclosures,
such as land, premises and equipment. Also, non-financial instruments
typically not recognized in financial statements nevertheless may have value
but are not included in the above disclosures. These include, among other
items, the estimated earnings power of core deposit accounts, the earnings
potential of the Company's trust department, the trained work force, customer
goodwill and similar items.
NOTE 19 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
During the normal course of business, the Company becomes a party to
financial instruments with off-balance sheet risk in order to meet the
financing needs of its customers. These financial instruments include
commitments to make loans and open-ended revolving lines of credit. Amounts as
of December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Commercial loan lines of credit $ 16,783 $ 124,975 $ 6,503 $ 102,822
Commercial loan standby letters of credit 0 14,186 0 11,959
Real estate mortgage loans 4,473 908 1,185 586
Real estate construction mortgage loans 0 2,237 0 2,211
Credit card open-ended revolving lines 5,514 0 5,161 0
Home equity mortgage open-ended revolving lines 0 29,178 0 26,548
Consumer loan open-ended revolving lines 0 4,185 0 3,877
------------ ------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,770 $ 175,669 $ 12,849 $ 148,003
============ ============ ============ ============
</TABLE>
23
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 19 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES (continued)
At December 31, 1998 and 1997, the range of interest rates for commercial
loan commitments with a fixed rate was 4.92% to 12.50% and 7.86% to 12.50%.
The range of interest rates for commercial loan commitments with variable
rates was 7.00% to 11.75% and 7.50% to 12.50% at December 31, 1998 and 1997.
The index on variable rate commercial loan commitments is principally the
Company'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 Company follows the same credit policy (including
requiring collateral, if deemed appropriate) to make such commitments as is
followed for those loans that are recorded in its financial statements.
The Company's exposure to credit losses in the event of nonperformance is
represented by the contractual amount of the commitments. Management does not
expect any 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 20 - PARENT COMPANY STATEMENTS
The Company operates primarily in the banking industry, which accounts
for 100 percent of its revenues, operating income, and assets. Presented below
are parent only financial statements:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31
--------------------------
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
ASSETS
Deposits with Lake City Bank $ 113 $ 1,420
Investment in subsidiaries 75,045 67,013
Other assets 1,108 577
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,266 $ 69,010
============ ============
LIABILITIES
Dividends payable and other liabilities $ 491 $ 135
Subordinated debt 20,619 20,619
STOCKHOLDERS' EQUITY 55,156 48,256
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,266 $ 69,010
============ ============
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Dividends from Lake City Bank $ 2,182 $ 982 $ 1,091
Interest on deposits and repurchase agreements, Lake City Bank 6 24 24
Equity in undistributed income of subsidiaries 6,870 7,085 5,353
Interest expense on subordinated debt 1,800 655 0
Miscellaneous expense 134 242 17
------------ ------------ ------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,124 7,194 6,451
Income tax expense (benefit) (764) (346) 7
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,888 $ 7,540 $ 6,444
============ ============ ============
</TABLE>
24
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
NOTE 20 - PARENT COMPANY STATEMENTS (continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 7,888 $ 7,540 $ 6,444
Adjustments to net cash from operating activities
Equity in undistributed income of subsidiaries (6,870) (7,085) (5,353)
Other changes (175) (770) 70
------------ ------------ ------------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . 843 (315) 1,161
Cash flows from investing activities 0 (17,283) (251)
Cash flows from financing activities (2,150) 19,003 (920)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . (1,307) 1,405 (10)
Cash and cash equivalents at beginning of the year 1,420 15 25
------------ ------------ ------------
Cash and cash equivalents at end of the year. . . . . . . . . . . . . . . . . . . . . . $ 113 $ 1,420 $ 15
============ ============ ============
</TABLE>
NOTE 21 - EARNINGS PER SHARE
Following are the factors used in the earnings per share computations:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Basic earnings per common share
Net income $ 7,888 $ 7,540 $ 6,444
Weighted-average common shares outstanding 5,813,984 5,813,162 5,792,825
Basic earnings per common share $ 1.36 $ 1.30 $ 1.11
Diluted earnings per common share
Net income $ 7,888 $ 7,540 $ 6,444
Weighted-average common shares outstanding for
basic earnings per common share 5,813,984 5,813,162 5,792,825
Add: Dilutive effect of assumed exercises of stock options 0 0 0
Average shares and dilutive potential common shares 5,813,984 5,813,162 5,792,825
Diluted earnings per common share $ 1.36 $ 1.30 $ 1.11
</TABLE>
All stock options for shares of common stock were not considered in
computing diluted earnings per common share for 1998 because they were
antidilutive.
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- -----------------------------------------------------------------------------
Stockholders and Board of Directors
Lakeland Financial Corporation
Warsaw, Indiana
We have audited the accompanying consolidated balance sheets of Lakeland
Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended December 31, 1998, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lakeland
Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years ended
December 31, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 15, 1999
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Management is responsible for the preparation of the Company'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 Company's financial position and results of
operations and were prepared in conformity with generally accepted accounting
principles. Management also has included in the Company's financial
statements, amounts that are based on estimates and judgments which it
believes are reasonable under the circumstances.
The Company maintains a system of internal controls designed to provide
reasonable assurance that all assets are safeguarded, financial records are
reliable for preparing consolidated financial statements and the Company
complies with laws and regulations relating to safety and soundness which are
designated by the FDIC and other appropriate federal banking agencies. The
selection and training of qualified personnel and the establishment and
communication of accounting and administrative policies and procedures are
elements of this control system. The effectiveness of the internal control
system is monitored by a program of internal audit and by independent
certified public accountants ('independent auditors'). Management recognizes
that the cost of a system of internal controls should not exceed the benefits
derived and that there are inherent limitations to be considered in the
potential effectiveness of any system. Management believes the Company's
system provides the appropriate balance between costs of controls and the
related benefits.
The independent auditors have audited the Company's consolidated
financial statements in accordance with generally accepted auditing standards
and provide an objective, independent review of the fairness of the reported
operating results and financial position. The Board of Directors of the
Company has an Audit Review Committee composed of five non-management
Directors. The Committee meets periodically with the internal auditors and the
independent auditors.
26
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -----------------------------------------------------------------------------
FINANCIAL CONDITION
Growth and Expansion
Company growth continues to be strong. Through branch acquisitions and
establishing de novo offices, the Company has added nineteen new offices in
the last five years. The Company's primary market area now comprises 14
counties in north central Indiana being served by 42 offices. Total assets
totaled $979 million at year-end 1998, representing a 22.9 percent increase
over year-end 1997. This exceptional growth reflects economic vitality in the
markets we serve and the benefits we derive from being a locally owned and
operated community bank. The rapid consolidation of banks in northern Indiana
has resulted in greater customer dissatisfaction with the service provided by
large regional banks. This dissatisfaction has contributed greatly to the
Company's recent loan and deposit growth. In 1999, the Company will open its
first office in Allen County. This market includes Ft. Wayne, the second
largest city in the state. Bank consolidation has been very rapid in Ft.
Wayne, and we expect that customer acceptance of our Company will be positive
over the next several years. The Company continues to evaluate other expansion
opportunities throughout northern Indiana, with an emphasis on markets that
would be receptive to our local, hometown business philosophy.
Liquidity
Management maintains a liquidity position to ensure funding is available
to provide for loan demand and deposit run-off that occurs in the normal
course of business. The Company relies on various funding sources in order to
meet these demands. Primary sources include increases in deposit accounts and
cash flows from loan payments and the securities portfolio. The cash flow from
the securities portfolio alone, given current prepayment assumptions, is
anticipated to be approximately $63.7 million in 1999.
In addition to the primary sources of funds, management can draw upon
several secondary sources to meet any unusual demands including potential
demand created by customer concerns about Year 2000 issues. The Company has
been taking the necessary actions to prepare for the Year 2000, but management
is aware there may possibly be additional demands for funds, especially in the
later part of 1999, if customers take precautionary measures for the Year
2000. The Company has $58 million in Federal fund lines with correspondent
banks, which can be used to meet immediate needs. The Company has also been
authorized to borrow up to $100 million at the Federal Home Loan Bank of
Indianapolis. On October 1, 1998, the Company transferred all securities in
its held-to-maturity (HTM) portfolio to its available-for-sale (AFS) portfolio
as permitted by the early adoption of SFAS No. 133. This increases the
possible sources the Company may access since these securities may be sold to
meet any funding demands. All securities in the AFS portfolio are high quality
and easily marketable. Approximately 81.5 percent of this portfolio are U.S.
Treasury securities, Federal agency securities or mortgage-backed securities
directly or indirectly backed by the Federal government. The Company also
sells mortgage loans on the secondary market to reduce interest rate risk and
as a source of funding.
During 1998, cash and cash equivalents increased $11.7 million to
$61,508,000 at December 31, 1998. Part of the increase in the cash and cash
equivalents during 1998 was the result of the $92 million increase in deposit
accounts which does not include deposits acquired in conjunction with offices
acquired from other financial institutions, the small increase in short-term
borrowings and cash flows from loan and security payments. The net proceeds
from the acquisition of offices from another financial institution in February
added approximately $30 million in additional funds. Historically low interest
rates generated a significant increase in residential real estate loan demand.
This increased activity resulted in proceeds from the sales of loans of $65
million for 1998, as compared to $27 million in 1997. These low rates also
provided the Company with an opportunity to sell securities from the AFS
portfolio at significant gains. Proceeds from the sales of securities during
1998 were $65 million. The sales of loans and securities accomplished several
objectives, providing a source of funds to meet increased funding demands and
adding approximately $2.7 million to pre-tax income. Major uses of the funds
generated were funding the increases in loans, the purchases of securities and
the purchases of fixed assets. Loans increased approximately $80 million
during 1998. This increase was net of approximately $63 million of loans
originated and sold during 1998. During 1998, $223 million of securities were
purchased and approximately $4 million was spent for land, premises and
equipment, not including what was added through office acquisitions.
During the year 1997, cash and cash equivalents increased $5 million. In
addition to the funds from the payments on loans and the calls and maturities
of securities, major sources of funds were the proceeds from sales of loans of
$27 million, the proceeds of $59 million from the acquisitions of offices from
other financial institutions, and $21 million from the increase in deposit
accounts net of deposits obtained through acquisitions. Another major source
of funds during 1997 was the $19 million net proceeds from the issuance of
guaranteed preferred beneficial interests in the Company's subordinated
debentures. Major uses of funds during 1997 were the $53 million increase in
loans, purchases of securities totaling $81 million, and $5 million for
purchases of land, premises and equipment not including those related to
acquisitions from other financial institutions.
During 1996, there was a net increase in cash and cash equivalents of $18
million. The major sources for the increase were $23 million of proceeds from
calls and maturities of securities, an increase of $65 million of deposits,
and a $17 million increase in total borrowings. The major uses of funds were
the $55 million increase in loans, the $35 million for purchases of securities
and $4 million for the purchases of land, premises and equipment.
Asset/Liability Management (ALCO) and Securities
The Company's primary market risk exposure is interest rate risk. The
Company does not have a material exposure to foreign currency exchange risk,
does not own any derivative financial instruments and does not maintain a
trading portfolio. The Board of Directors annually reviews and approves the
ALCO policy used to manage interest rate risk. This policy sets guidelines for
balance sheet structure that protects the Company from excessive net income
volatility that could result from changing interest rates. The Company uses 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 Company's cumulative GAP ratio at December 31,
1998, for the next 12 months is a negative 19.6 percent of total assets. The
current degree of interest rate exposure is within policy limits.
The following tables provide information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For loans, securities, and liabilities with contractual
maturities, the tables presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest-rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits (demand deposits, interest-bearing checking,
savings and money market deposits) that have no contractual maturity, the
tables presents principal cash flows and, as applicable, related
weighted-average interest rates based upon the Company's historical
experience, management's judgment and statistical analysis, as applicable,
concerning their most likely withdrawal behaviors. Weighted-average variable
rates are based upon rates existing at the reporting date.
27
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
Principal/Notional Amount Maturing in:
--------------------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------------------
Fair
Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/98
---------- --------- --------- --------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $ 117,708 $ 42,340 $ 34,989 $ 18,088 $ 41,387 $ 20,781 $ 275,293 $ 276,230
Average interest rate 8.86% 8.84% 8.70% 8.83% 8.13% 7.83% 8.65%
Variable interest rate loans $ 216,002 $ 1,861 $ 1,762 $ 1,615 $ 1,565 $ 40,398 $ 263,203 $ 260,993
Average interest rate 9.67% 7.76% 7.83% 8.02% 8.06% 7.47% 9.28%
Fixed interest rate securities $ 69,716 $ 57,082 $ 67,696 $ 27,003 $ 15,946 $ 81,943 $ 319,386 $ 322,446
Average interest rate 6.52% 6.54% 5.88% 6.43% 6.46% 5.65% 6.14%
Variable interest rate securities $ 1,658 $ 1,122 $ 777 $ 535 $ 368 $ 752 $ 5,212 $ 5,212
Average interest rate 6.44% 6.43% 6.44% 6.45% 6.46% 6.52% 6.45%
Other interest-bearing assets $ 15,575 - - - - - $ 15,575 $ 15,575
Average interest rate 4.75% - - - - - 4.75%
Rate sensitive liabilities:
Noninterest bearing checking $ 6,143 $ 5,492 $ 994 $ 947 $ 1,385 $ 103,400 $ 118,361 $ 118,361
Average interest rate - - - - - - -
Savings & interest bearing checking $ 16,183 $ 14,618 $ 12,931 $ 11,749 $ 9,432 $ 55,916 $ 120,829 $ 120,829
Average interest rate 1.54% 1.54% 1.54% 1.54% 1.54% 1.70% 1.61%
Time deposits $ 425,808 $ 47,775 $ 13,619 $ 7,029 $ 4,292 $ 1,634 $ 500,157 $ 502,823
Average interest rate 5.09% 5.63% 5.68% 6.16% 5.48% 5.94% 5.18%
Fixed interest rate borrowings $ 101,139 $ 10,550 $ 10,090 - $ 1,297 $ 19,238 $ 142,314 $ 146,906
Average interest rate 4.67% 5.90% 5.25% - 6.15% 9.00% 5.40%
Variable interest rate borrowings $ 34,000 - - - - - $ 34,000 $ 34,000
Average interest rate 4.96% - - - - - 4.96%
</TABLE>
<TABLE>
<CAPTION>
1997
Principal/Notional Amount Maturing in:
-------------------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------------------
Fair
Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/97
---------- --------- --------- --------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $ 85,734 $ 38,579 $ 33,630 $ 20,674 $ 17,971 $ 20,309 $ 216,897 $ 215,592
Average interest rate 9.38% 9.10% 8.98% 8.87% 8.77% 8.53% 9.09%
Variable interest rate loans $ 102,472 $ 24,403 $ 20,135 $ 22,491 $ 15,970 $ 57,782 $ 243,253 $ 241,791
Average interest rate 9.30% 9.40% 9.51% 9.25% 9.28% 8.15% 9.05%
Fixed interest rate securities $ 64,455 $ 37,132 $ 33,906 $ 39,637 $ 25,595 $ 41,049 $ 241,774 $ 245,614
Average interest rate 5.84% 6.46% 6.84% 6.83% 6.63% 6.26% 6.39%
Variable interest rate securities $ 5,251 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,251 $ 5,064
Average interest rate 6.73% - - - - - 6.73%
Other interest-bearing assets $ 4,445 $ 0 $ 0 $ 0 $ 0 $ 0 $ 4,445 $ 4,445
Average interest rate 5.57% - - - - - 5.57%
Rate sensitive liabilities:
Noninterest bearing checking $ 4,802 $ 4,294 $ 774 $ 742 $ 1,080 $ 80,775 $ 92,467 $ 92,467
Average interest rate - - - - - - -
Savings & interest bearing checking $ 9,647 $ 8,715 $ 7,703 $ 7,002 $ 5,620 $ 88,218 $ 126,905 $ 126,905
Average interest rate 2.54% 2.54% 2.54% 2.54% 2.54% 2.54% 2.54%
Time deposits $ 310,904 $ 51,652 $ 18,583 $ 6,181 $ 4,783 $ 1,517 $ 393,620 $ 394,543
Average interest rate 4.00% 5.90% 5.95% 6.00% 6.43% 2.50% 4.40%
Fixed interest rate borrowings $ 91,867 $ 7,617 $ 0 $ 0 $ 0 $ 19,211 $ 118,695 $ 119,836
Average interest rate 5.41% 6.16% - - - 9.00% 6.04%
Variable interest rate borrowings $ 10,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,000 $ 10,000
Average interest rate 5.69% - - - - - 5.69%
</TABLE>
Comparision of these tables illustrates the growth the Company
experienced during 1998. Increases in time deposits, fixed rate borrowings and
variable rate borrowings reflect the growth of the Company's existing offices,
a significant increase in repurchase agreements which are fixed rate,
short-term variable rate borrowings from the Federal Home Loan Bank and
deposits obtained through branch acquisitions. These increases in funding
sources were used to finance the increases in the loan portfolio and in the
securities portfolios. The increase in loans for 1998 reflect the increases in
commercial loans which are short-term in nature. The increases in securities
reflect the purchases of primarily fixed rate securities during 1998.
28
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -----------------------------------------------------------------------------
The Company's investment portfolios consist of U.S. Treasuries, agencies,
mortgage-backed securities, municipal bonds and corporates. During 1998
purchases primarily consisted of U.S. Treasuries, mortgage-backed securities
and municipal bonds. At December 31, 1998, the Company's investment in
mortgage-backed securities comprised approximately 69 percent of total
securities and consisted of CMOs 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 purchased do not have excessive
price, prepayment, extension and original life risk characteristics. The
Company uses Bloomberg analytics to evaluate and monitor all purchases. At
December 31, 1998, the mortgage securities in the AFS portfolio had a two and
two-thirds year average life, with approximately 11 percent price depreciation
should rates move up 300 basis points and approximately 5 percent price
appreciation should rates move down 300 basis points. As of December 31, 1998,
all mortgage securities were performing in a manner consistent with
management's original expectations.
Capital Management
The Company believes that a strong capital position is vital to long-term
earnings and expansion. Currently the Company 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 Company had Tier I leverage capital, Tier
I risk based capital and Tier II risk based capital ratios of 6.4 percent, 9.6
percent and 10.8 percent at December 31, 1998. All three ratios exceeded 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 14.3 percent, to $55,156,000 as of December 31, 1998, from
$48,256,000 as of December 31, 1997. The 1998 growth resulted from the
retention of net income of $7,888,000, minus cash dividends declared of
$2,002,000, plus the change in the AFS adjustment of $1,163,000, net of tax,
less $149,000 for the purchase of treasury stock. The AFS adjustment reflects
a 114 basis point decrease in two to five year U. S. Treasury rates during
1998. Included in the change in the AFS adjustment is an increase of
$2,495,000 from securities transferred to AFS on October 1, 1998 as permitted
by SFAS No. 133. None of these securities transferred to AFS were sold during
the fourth quarter of 1998. Since the securities portfolio is primarily fixed
rate, a positive equity adjustment should occur whenever interest rates
decrease. 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 1997 growth of $6,213,000 resulted from the retention
of net income of $7,540,000, minus cash dividends declared of $1,741,000, plus
the AFS adjustment of $289,000, net of tax, plus $310,000 from issuing shares
of common stock less $185,000 for the purchase of treasury stock. This 1997
AFS adjustment reflected a 42 basis point decrease in three to five year U. S.
Treasury rates during 1997.
Management is not aware of any known trends, events or uncertainties that
would have a material effect on the Company's liquidity, capital and results
of operations. Nor is management aware of any regulatory recommendations that,
if implemented, would have such an effect.
Allowance for Credit Risk
At December 31, 1998, the allowance for loan losses was $5,510,000 or
1.02 percent of total loans outstanding, compared with $5,308,000 or 1.16
percent of total loans outstanding at December 31, 1997. The process of
identifying credit losses that may occur based upon current circumstances is
subjective. Therefore, the Company 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.
As a result of the methodology in determining the adequacy of the
allowance for loan losses, the provision for loan losses was $480,000 in 1998
as compared to $269,000 in 1997. The increased provision for loan losses was
primarily related to the growth in the loan portfolio, particularly the
commercial and agricultural portfolios. The past due accruing loans (90 days
or more) and nonaccrual loans continued to be at low levels throughout 1998.
At December 31, 1998, loans past due 90 days or more and still accruing were
$227,000 and there were no nonaccrual loans. These trends in non-performing
loans reflect both general economic conditions that have promoted growth and
expansion in the Company's market area, and a credit risk management strategy
that promotes diversification.
The continued low levels of nonperforming loans and net charge-offs have
permitted the Company to provide modest amounts for the provision for loan
losses in recent years. The total provision for loan losses for the last three
years was $869,000, which is slightly higher than the total net charge-offs of
$831,000 for the same three year period.
At December 31, 1998, 50.1 percent of the Company'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 $186 million, or about 48.7
percent, and the concentration of this loan growth in the commercial loan
portfolio. Commercial loans comprised 56.0 percent, 51.7 percent and 53.0
percent of the total loan portfolio at December 31, 1998, 1997 and 1996. With
this type of loan growth and the concentration in commercial loans, management
believes that it is prudent to continue to provide for loan losses at the
current levels, especially 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 Company. In years of high
inflation and high interest rates, intermediate and long-term interest rates
tend to increase, thereby adversely impacting the market values of investment
securities, mortgage loans and other long-term fixed rate loans. In addition,
higher short-term interest rates caused by inflation tend to increase the cost
of funds. In other years, the reverse situation may occur.
29
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
1998 vs 1997
In 1998, the Company achieved record earnings of $7,888,000. This is
approximately a five percent increase over 1997, and represents the eleventh
consecutive year of record earnings. In 1998, total interest income was
$63,667,000, an increase of $10,968,000 or 20.8 percent from 1997. Interest
income is principally effected by the growth in assets, the composition of
assets, the degree of competition and current interest rates. In 1998, both
asset growth of 22.9 percent and loan growth of 17.4 percent contributed
positively to interest income. The composition of the Company's assets was a
major challenge in 1998. In the fourth quarter of 1997 and at the beginning of
1998, the Company had acquired approximately $129.5 million of funding through
branch acquisitions in order to meet the future lending needs of current and
future customers. These funds were temporarily invested in securities until
they are used to fund loan growth. While loan growth was strong in 1998,
resulting in a steady improvement in the loan-to-deposit ratio during the
year, the Company is still aggressively pursuing good quality commercial and
consumer loans to better utilize these funds. A successful effort should
strengthen the interest margin in future years. On a less positive note,
fierce competition, and a 75 basis point decrease in the prime lending rate,
reduced the yield on the loan portfolio by 23 basis points in 1998 versus
1997. With respect to the securities portfolio, a 114 basis point reduction in
two-to-five year treasury rates and a flattening of the yield curve, resulted
in higher prepayment rates on mortgage related securities, and lower
reinvestment rates. The combined impact of this was a 17 basis point reduction
in the securities yield. All of these factors resulted in a 31 basis point
reduction in the overall yield on earning assets. Total interest expense was
$36,091,000 in 1998, an increase of $8,031,000 or 28.6 percent over 1997. The
increase was primarily the result of internal growth and deposits acquired in
branch acquisitions. The impact of low rates and a flat yield curve were most
pronounced on the Company's funding costs. During much of the year, customers
shortened their investment horizon. The Company experienced substantial growth
in short-term deposits and purchased funds. This type of activity typically
reduces average funding costs, since these funds are priced to what is
generally the lower end of the yield curve. However, with a flat yield curve,
these funds are as costly as long-term funds. This combination resulted in
only a three basis point reduction in funding costs. The net impact of these
interest income and interest expense trends resulted in net interest income of
$27,576,000, an increase of $2,937,000 or 11.9 percent. While margin
deterioration is an industry wide phenomenon, economic factors in 1998
accelerated this trend.
Asset quality continued to be very strong. The Company concluded the year
absent any nonaccrual or impaired loans. Delinquency rates continued to be
very low, and net charge-offs for the year were $278,000 or .06 percent of
average daily loans. These quality trends resulted in only a modest amount of
expense to be prudently recognized as a provision for loan losses. This
$480,000 expense, less 1998 net charge-offs, resulted in a $5,510,000
allowance for loan losses at year-end. This represented 1.02 percent of the
loan portfolio. As 1999 begins, loan growth continues to be very strong, and
loan growth is one of many factors that are reviewed when determining the
amount of loan loss provision expense that should be recognized. Future
provisions for loan losses may be increased as the loan portfolios grow or
should asset quality deteriorate.
Noninterest income was a primary focus of management during 1998. As the
interest margin continues to decline, it becomes important to search for new
types of revenue. In 1998, noninterest income totaled $11,209,000. This was a
$3,705,000 or 49.4 percent increase over 1997. The Company experienced an 18.8
percent increase in deposit fees. This increase was primarily related to the
growth in deposits of $126 million in 1998. Higher deposit service fees were
directly related to the growth of transaction accounts. Other exceptional
contributors included insurance income and brokerage income. Another major
contributor was the gains on the sale of mortgages. For the last five years,
the Company has been selling fixed rate mortgages into the secondary market.
These sales allow the Company to meet the fixed rate mortgage needs of the
many small communities served, while not exposing the Company to unacceptable
rate risk. In 1998, thirty-year mortgage rates declined to historically low
levels, which increased the volume in the mortgage area tremendously. The
result was a gain on mortgages sold of $1,467,000, an increase of $922,000 or
169.2 percent over 1997. The Company also sold securities, realizing a
$1,256,000 gain on these sales. The declining rate environment allowed the
Company to recognize these gains while better positioning the portfolio for
future liquidity needs.
A major challenge during 1998 was the completion of a two-year, $4.5
million investment in technology. As the Company has nearly doubled in size
from $497 million in 1994, to $979 million in 1998, investments needed to be
made to provide superior local service to our customers in 14 counties. These
investments included new teller and sales systems, new image capture software
and hardware, a data warehouse system and a new telephone system utilizing
voice over data frame relay. These improvements position the Company for
future growth, and allow any bank location to provide customers with the type
of service and information that they expect from their hometown bank. The cost
of these improvements, and the thirty percent increase in the branch network
in 1998, resulted in a 29.5 percent increase in occupancy and equipment costs
in 1998. The Company also experienced a 24.4 percent increase in salaries and
benefits related to the growth in offices. Also, $942,000 of expense was added
to the growth in other expenses due to the amortization of the intangible
assets relating to the branch purchases in late 1997 and early 1998.
As a result of all these factors, income before income tax expense
increased $354,000 or 3.1 percent to $11,814,000 for 1997, as compared to
$11,460,000 for 1997. Income tax expense was $3,926,000 and $3,920,000 for
1998 and 1997. Income tax expense as a percent of income before taxes was 33.2
percent for 1998 and 34.2 percent for 1997. Net income increased to $7,888,000
for 1998, an increase of $348,000 or 4.6 percent over the net income of
$7,540,000 for 1997. Basic earnings per share for 1998 was $1.36 as compared
to $1.30 for 1997. Net income of $7,888,000 represented a 16.6 percent return
on January 1, 1998 stockholders' equity (excluding the equity adjustment
related to SFAS No. 115) and a .89 percent return on average daily assets.
1997 vs 1996
The growth of existing offices, opening of new offices and the purchase
of offices from other financial institutions brought the Company assets to
record levels in 1997. Total assets were at $796 million at December 31, 1997,
an increase of $139.9 million (including the assets acquired in branch
acquisitions in the fourth quarter of 1997) or 21.3 percent over the assets at
December 31, 1996. Loans increased 20.0 percent, or $76 million, to $458.6
million at year-end 1997. Total deposits increased 23.4 percent, or $116
million (including deposits of $95 million acquired in branch acquisitions in
the fourth quarter of 1997), to $613 million at December 31, 1997. Core
funding, deposits plus securities sold under agreement to repurchase,
increased 16.5 percent, or $96 million, to $678.5 million. Net income totaled
$7,540,000, exceeding 1996 by 17.0 percent. On an average daily basis, gross
earning assets increased by 13.5 percent and total deposits plus purchased
funds increased by 13.8 percent.
Total interest income increased 14.7 percent, or $6,758,000 to
$52,699,000 for the year ended December 31, 1997. This increase was a result
of the increase in daily average earning assets and a 9 basis point increase
in the overall tax equivalent yield on earning assets as compared to the 1996
overall tax equivalent yield. The increase in the tax equivalent yield on
earning assets was reflective of the 17 basis point increase in the average
prime rate during 1997, and the effect this prime rate increase had on the
commercial loan portfolio and the home equity loan portfolio yields.
Nonearning assets of the Company include nonaccrual loans and
investments, other real estate, and repossessions. These nonearning assets
amounted to $1,317,000, $1,097,000 and $1,207,000 as of December 31, 1997,
1996 and 1995. Nonaccrual loans totaled $1,058,000, $384,000 and $532,000 at
the end of the years 1997, 1996 and 1995. Two commercial loans and two
mortgage loans accounted for the majority of the amount in nonaccrual loans
for 1997.
Interest expense for 1997 was $28,060,000. This was an increase of
$4,323,000, or 18.2 percent, over the interest expense for 1996. The increase
in interest expense was attributable to the continued growth in interest
bearing deposit balances and rising interest rates. Average daily balances of
time deposits increased 15.4 percent over the prior year average daily
balances and the average rate paid on time deposits increased 7 basis points.
Average daily balances of total interest bearing deposits increased 12.3
percent and the average rate paid on total interest bearing deposits increased
30
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -----------------------------------------------------------------------------
11 basis points. The average daily balance of total deposits plus purchased
funds increased 13.8 percent, as noted above, and the average rate paid
increased 16 basis points. This increase also included the guaranteed
preferred beneficial interests in the Company's subordinated debentures added
in 1997 and the related interest expense along with additional advances from
the Federal Home Loan Bank.
Net interest income increased $2,435,000 or 11.0 percent, to $24,639,000
in 1997, from $22,204,000 in 1996. Net interest income as a percentage of
earning assets was 3.96 percent for 1997. This was a decrease of 10 basis
points from the 4.06 percentage for 1996. This decrease resulted from the
increase in the rates paid on total deposits and purchased funds being 7 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 additional long-term borrowings during 1997. 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, 1997,
allowance of $5,308,000 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. This allowance did not represent or
result from trends that would materially adversely impact future operating
results, liquidity, or capital resources. Net interest income after provision
for loan losses increased $2,286,000, or 10.4 percent, to $24,370,000 in 1997,
from $22,084,000 in 1996.
Noninterest income for 1997 increased $1,705,000, or 29.4 percent, over
the amount for 1996, totaling $7,504,000 for the year. All major components of
noninterest income increased except for security gains and losses. Trust
income increased 34.8 percent from the amount for 1996 to $1,188,000 for 1997
with major increases in fees for living trusts, testamentary trusts and
employee benefit plans. Service charges on deposit accounts increased 19.9
percent to $3,369,000 for 1997. This increase resulted from the continued
acceptance of the Company's individual deposit accounts paying fees. The
$715,000 increase in other noninterest income resulted from increases in a
variety of income sources including discount brokerage fees and ATM fees. The
increase in gains on sales of real estate mortgages held-for-sale were a
result of continued sales of mortgages to the secondary market. These gains
were $545,000 for 1997 as compared to $412,000 for 1996, an increase of
$133,000. The small security losses recorded in 1997 were primarily the result
of several partial calls.
All components of noninterest expense increased for the year ended
December 31, 1997, as compared to the prior year, with the largest increase
being salaries and employee benefits. Salaries and employee benefit costs for
1997 increased $1,747,000, or 18.3 percent, to $11,317,000. This increase was
attributable to a 21.3 percent increase in full-time equivalent employees
(FTE) in 1997, to 388, along with normal salary increases. The increase
reflected the impact of a full year of salaries and benefits related to the
two offices opened during 1996 along with the three new offices opened during
1997 and the offices acquired from other financial institutions in November
and December, 1997. Net occupancy and equipment costs increased to $3,144,000
in 1997, from $2,955,000 in 1996, an increase of $189,000 or 6.4 percent.
Other expense increased 10.0 percent, or $543,000, to $5,953,000 for 1997.
These increases resulted in noninterest expense for 1997 of $20,414,000, an
increase of 13.8 percent, or $2,479,000, over the amount for 1996.
As a result of all these factors, income before income tax expense
increased $1,512,000, or 15.2 percent, to $11,460,000 from the $9,948,000 for
1996. Income tax expense was $3,920,000 and $3,504,000 in 1997 and 1996, which
represented 34.2 percent and 35.2 percent of income before taxes. Net income
increased to $7,540,000 for 1997 from $6,444,000 for 1996, an increase of
$1,096,000, or 17.0 percent. Net income per share was $1.30 for 1997, as
compared to $1.11 for 1996. Net income of $7,540,000 represented an 18.1
percent return on January 1, 1997, stockholders' equity (excluding the equity
adjustment related to SFAS No. 115), and a 1.10 percent return on average
daily assets.
TABLE 1 - REPRICING OPPORTUNITIES
The table below illustrates the funding gaps for selected maturity
periods as of December 31, 1998, 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.
<TABLE>
<CAPTION>
Repricing or Maturing Within
----------------------------------------------------
6 7-12 1-4
Months Months Years
--------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
Earning Assets
Loans $ 314,793 $ 54,094 $ 102,580
Securities 36,877 36,234 136,347
Short-term investments 15,575 0 0
--------------- ---------------- ----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367,245 90,328 238,927
Deposits and Purchased Funds
Transaction accounts 64,913 0 0
Time deposits 342,527 88,451 68,037
Short-term borrowings 111,868 13,272 10,550
Long-term borrowings 10,001 0 10,089
--------------- ---------------- ----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 529,309 $ 101,723 $ 88,676
--------------- ---------------- ----------------
Interest sensitivity GAP $ (162,064) $ (11,395) $ 150,251
=============== ================ ================
Cumulative interest sensitivity GAP $ (162,064) $ (173,459) $ (23,208)
=============== ================ ================
Cumulative GAP as percentage of earning assets (18.3)% (19.6)% (2.6)%
=============== ================ ================
</TABLE>
YEAR 2000
The Company relies heavily on computer technology to provide its products
and services. Competitive pressures also require the Company to invest in and
utilize current technology. Due to the reliance on this technology, the Year
2000 issue will have a pervasive effect on the Company's products, especially
those with interest calculations, and the services it provides. It will also
have an impact on the items necessary to remain competitive including customer
31
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -----------------------------------------------------------------------------
information, and customer conveniences such as ATM's, telephone banking and
debit cards. In discussing the Year 2000 issue, management will use various
estimates and projections relating to costs, percentages or stages of
completion, possible scenarios and contingency plans. These are only estimates
and projections. Actual costs, percentage or stage of completion and outcomes
may be different from management's estimates and projections. Although
management believes it is taking all the steps necessary to prepare for Year
2000, there are many factors beyond management's control and ability to
foresee that may have a significant impact on future events.
The Company is taking a proactive approach to the Year 2000 issue. A Year
2000 Committee has been formed and is comprised of representatives from all
major departments and includes involvement of an Executive Officer to provide
senior management support and to report periodically to the Board of Directors
on the Year 2000 effort. The committee has developed a plan of action to
ensure the Company addresses the critical Year 2000 issues. A master inventory
of all software and hardware in use by the Company has been compiled. All
software vendors were requested to provide a written statement regarding their
Year 2000 efforts and compliance. FiServ, Pittsburgh, PA, is the primary data
processing vendor the Company uses. FiServ processes all the major
applications for the Company including deposits, loans, and general ledger.
FiServ is one of the leading data processing vendors for the banking industry.
As part of the banking industry, FiServ is periodically examined by regulatory
agencies regarding their Year 2000 efforts to help ensure their systems will
be Year 2000 compliant. FiServ maintains a website on the Internet and
specifically addresses their Year 2000 efforts and have indicated their
systems will be reviewed for Year 2000 compliance by McGladrey and Pullen. In
addition, a Company representative is a member of the FiServ Client Advisory
Board. No material Year 2000 concerns have been brought to management's
attention.
The support and network software the Company uses is purchased from
outside vendors. Any software where the vendor was unable to confirm the
software is Year 2000 compliant, or did not provide a statement on Year 2000
compliance, was evaluated to determine the potential impact of noncompliance
and availability of alternative compliant software. The review of all the
software is complete and Year 2000 compliant software is being installed to
replace software determined to be non-compliant or for which no certification
of compliance was provided. The Company has developed a software testing plan
which was submitted to the regulators in October, 1998. This plan
substantially meets all FFIEC guidelines and the Company is on schedule to
meet all plan deadlines.
The hardware the Company uses primarily consists of personal computers,
ATM's and communications equipment. All personal computers have been tested by
Company personnel for Year 2000 compliance. The vendors of the ATM's and back
room processing equipment used by the Company have been contacted regarding
the compliance of the models used by the Company. The testing of hardware was
approximately 90 percent complete as of December 31, 1998. All hardware
failing the tests or known to be noncompliant was evaluated as to the possible
effect of noncompliance and the need for replacement. Several hardware
purchases were accelerated due to Year 2000 issues. The hardware testing plan
the Company is following was submitted to the regulators in October 1998. This
plan substantially meets all FFIEC guidelines and the Company is on schedule
to meet all plan deadlines.
All purchases of software and hardware are processed through the Network
Services Department of the Company. This is intended to ensure all new
software and hardware or upgrades are compatible with existing systems and are
Year 2000 compliant. All non-compliant hardware and software will be taken out
of service by June 30, 1999. This hardware and software will be replaced as
deemed necessary.
Other electrical and mechanical equipment are also being evaluated as to
reliance on computer software and the possible effect of the Year 2000. Major
components of this equipment include security and HVAC (heating, ventilation
and air conditioning) equipment. The Company's security officer has stated all
security equipment has been tested to determine the reliance on computer
systems and the potential impact of the Year 2000 issue. The Company's
facilities manager is responsible for evaluating the other equipment such as
HVAC and elevators to determine reliance on computer systems and obtain
statements as to Year 2000 compliance from vendors as necessary. The
evaluation of this equipment was completed as of December 31, 1998. No
material items were noted.
The potential financial impact on the Company can be segregated into
three components: software costs, hardware costs, and other electrical and
mechanical equipment costs. For the Company, the potential software costs are
not anticipated to be material. The Company does not develop its own software,
but purchases processing and software from outside vendors. The hardware the
Company uses consists primarily of personal computers, ATM's, telephone
systems, and back room equipment such as document processing and imaging
equipment. In 1997, the Company began updating its wide and local area
networks (WAN/LAN) and its teller platform system as part of its continuing
expansion and commitment to technology. The WAN/LAN and teller platform system
being installed are Year 2000 compliant. The costs for upgrading to Year 2000
compliant hardware, outside the normal cost of business, are not anticipated
to be material based upon the Company's review of its current hardware. The
costs for upgrading other electrical and mechanical equipment, such as
security equipment and HVAC equipment, is not anticipated to be material.
Beginning in 1996, the Company began projects to upgrade its technology and
support systems due to the growth the Company was experiencing and
anticipated. The costs incurred for these projects were $4.5 million. The
costs within these projects specifically related to the Year 2000 issue are
difficult to segregate. However, management estimates approximately 20 percent
of these project costs are combined software, hardware and other equipment
costs related to the Year 2000 issue, including costs of accelerated
purchases. This estimate does not include any personnel costs relating to the
Year 2000 issue. These projects are substantially complete.
Other areas of concern being addressed by the committee include vendors
that exchange information with the Company electronically, forms and documents
that are produced externally, and customers. The Year 2000 compliance could
have a major impact on the financial performance of the Company's customers
which could affect both deposit relationships and the customer's ability to
repay loans. All large corporate lending customers have been contacted
regarding their Year 2000 efforts. Large corporate depositors are also being
contacted regarding their Year 2000 efforts. Other customers will be evaluated
on a case-by-case basis. In addition, the Company has conducted several
seminars for corporate customers regarding the Year 2000 issue. These seminars
have been well attended.
Based upon the Company's initial evaluations, becoming Year 2000
compliant is not anticipated to have a material impact on the Company's
financial statements. Becoming Year 2000 compliant has had an impact on
earnings this year due to additional payroll costs, training costs and
accelerated purchases. Management believes it is taking the necessary steps to
ensure the Company's systems will be Year 2000 compliant in a timely manner.
In January, 1999, the FDIC completed a Phase II examination of the Company's
Year 2000 efforts. The Company continues to meet all published FDIC Year 2000
guidelines.
As a precaution, management is in the process of developing both
bank-wide and functional area contingency plans. The largest risks the Company
has are that FiServ will not be able to process or there will be problems with
communications or power. Regulators have agreed there are certain systems
that, due to the level of reliance on these systems, there is little ability
to establish traditional contingency plans. Management considers FiServ,
communications and power to be these types of systems. Due to the efforts
FiServ has exhibited and the regulatory oversight they are under, management
believes the probability is very small that they will not be ready. A more
likely scenario is that one or more of the support applications will not
function correctly. That would most likely result in a one to two day delay in
posting of customer transactions since the majority of the functions of the
non-FiServ applications could be performed manually. Currently the major
concerns are power and communications since these are provided by outside
sources and the Company has no means to test them. The Company does have a
back-up power system to provide power to key areas in the event of a power
failure and can transport transaction information physically in the event of
communication problems. Both these concerns have been addressed in the
Company's contingency plan. The Year 2000 problem is pervasive and complex and
can potentially affect any computer process. Accordingly, no assurance can be
given the Year 2000 compliance can be achieved without additional
unanticipated expenditures and uncertainties that might affect future
financial results. It is not possible at this time to quantify the estimated
future costs due to possible business disruption caused by vendors, suppliers,
customers, or even the possible loss of electric power or phone service,
however, such costs could be substantial.
32
<PAGE>
<TABLE>
<CAPTION>
LAKE CITY BANK
OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
R. Douglas Grant Chairman Retail Services
Michael L. Kubacki President Dale L. Cramer Vice President
D. Jean Northenor Executive Vice President Thomas P. Frantz Vice President
Paul S. Siebenmorgen Executive Vice President James D. Tague Vice President
Walter L. Weldy Executive Vice President Janet K. Anderson Assistant Vice President
Terry M. White Executive Vice President Barry A. Bailey Assistant Vice President
Dennis E. Dolby Assistant Vice President
Commercial Services J. Bradley Glasson Assistant Vice President
Charles D. Smith Senior Vice President Craig A. Haecker Assistant Vice President
Kelly K. Ayers Vice President T. Larry Mitchell Assistant Vice President
David A. Bickel Vice President W. Randy Yoder Assistant Vice President
James R. Cowan Vice President Glenn A. Goudey Senior Mortgage Underwriter
Drew D. Dunlavy Vice President Tammy L. Snyder Mortgage Underwriter
Michael E. Gavin Vice President Carolyn A. Crabb Mortgage Banking Officer
Kenneth L. Kasamis Vice President April J. Gayton Mortgage Banking Officer
Joseph F. Kessie Vice President Aaron M. Stroup Mortgage Banking Officer
William D. Leedy Vice President Rafael M. Villalon Mortgage Banking Officer
J. Randall Leininger Vice President W. John Pritz Retail Banking Officer
H.A. "Rocky" Meyer Vice President Melanie R. Shipley Retail Banking Officer
Jack E. Mills Vice President Bradley Smith Retail Banking Officer
Thomas G. Stark Vice President Lisa A. Stookey Retail Banking Officer
James C. Stout Vice President
J. Mark Ulrich Vice President Financial
Randal U. Vutech Vice President James J. Nowak Vice President and Controller
Julie W. Whitehead Vice President Teresa A. Bartman Assistant Vice President
Chad D. Brouyette Assistant Vice President and Assistant Controller
Stephanie L. DuBois Assistant Vice President Brian M. Lamb Assistant Vice President
Brent E. Hoffman Assistant Vice President
Kelli S. Robinson Assistant Vice President Operations
Timothy M. Rudge Assistant Vice President Frank A. Soltis Senior Vice President
J. Chad Stoltzfus Assistant Vice President Judy K. Harvey Vice President
Vicki D. Martin Vice President
Trust & Investments Lisa M. Bicknese Assistant Vice President
Dennis E. Cultice Senior Vice President Lisa A. Fulton Assistant Vice President
Dennis A. Reeve Vice President Ruth A. Hutcherson Assistant Vice President
William C. Coleman Vice President Linda A. Owens Assistant Vice President
Jeanine D. Knowles Vice President Angela K. Ritchey Assistant Vice President
Andrew S. Lewis Vice President Lorretta J. Burnworth Operations Officer
Jill A. O'Sullivan Vice President Elizabeth A. Carlson Operations Officer
Judith R. Simcox Vice President Jean A. Ciriello Operations Officer
Larry L. Poyser Assistant Vice President Janice J. Cox Operations Officer
Debra L. Rich Assistant Vice President Joanie L. Foreman Operations Officer
Peggy L. Terhaar Assistant Vice President William L. Hilliard Operations Officer
Patricia L. Culp Trust Officer Scot A. Karbach Operations Officer
Jan R. Martin Operations Officer
Marketing, Human Resources and Facilities Linda L. Swoverland Operations Officer
Allyn P. Decker Vice President
Cathy L. Teghtmeyer Vice President Audit
Jill DeBatty Assistant Vice President Betty L. McHenry Senior Vice President
John W. Gove Assistant Vice President and Auditor
Paul S. Purvis Assistant Vice President Kevin A. Linehan Vice President
Michelle R. Halter Assistant Auditor
Teah D. Wicks Assistant Auditor
</TABLE>
33
<PAGE>
LAKE CITY BANK
OFFICERS
- -----------------------------------------------------------------------------
Office Administration
Kevin L. Deardorff Senior Vice President
Jane E. Miller Vice President
Jeri L. Yoder Vice President
Jeannine P. Cooley Assistant Vice President
Lisa L. Hockemeyer Assistant Vice President
Nanceen P. Briggs Retail Banking Officer
Karin A. Steffensmeier Retail Banking Officer
Offices
Akron L. Jane Murphy Assistant Vice President
Argos Stanley G. Reinholt Assistant Vice President
Bremen Matthew K. Bixel Vice President
Columbia City Donald L. Sexton Vice President
Lynnette E. Berry Retail Banking Officer
Concord Steve Colagrossi Assistant Vice President
Cromwell Jana L. Miller Assistant Office Manager
Elkhart Beardsley Rosalie M. Smith Vice President
Samuel M. Bouie Assistant Office Manager
Elkhart East Debra L. Griggs Office Manager
Elkhart Hubbard Hill Jeffery W. Krusenklaus Office Manager
Elkhart Northwest Kathleen M. Dougherty Office Manager
Fort Wayne North Bruce A. Wright Vice President
Goshen Downtown Jane M. Greene Office Manager
Goshen South Clarence J. "CJ" Yoder Vice President
Granger Daniel E. Hunt Office Manager
Greentown Donna L. Graham Assistant Vice President
Huntington Drew D. Dunlavy Vice President
Kendallville Downtown Mark R. Rensner Assistant Office Manager
Kendallville East L. Duane Smith Vice President
LaGrange Cathy I. Hefty Assistant Vice President
Ligonier Downtown Gaylord A. West Vice President
Lori I. Cunningham Assistant Office Manager
Ligonier South Craig R. Atz Vice President
Logansport Robert L. Baker Vice President
Medaryville Elaine C. Parish Assistant Vice President
Mentone Karen A. Francis Assistant Vice President
Middlebury Shannon D. Schrock Office Manager
Milford Timothy L. Sutton Office Manager
Mishawaka Tammy S. Katona Office Manager
Sandra J. Cencelewski Assistant Office Manager
Nappanee Larry L. Penrod Vice President
Kirtus D. Murray Office Manager
North Webster Jeanne G. Bowen Vice President
Peru Patricia D. Adams Assistant Vice President
Pierceton Lisa S. Fitzgerald Office Manager
Plymouth Michael D. Burroughs Vice President
Carol D. Brown Assistant Office Manager
Roann Merrill A. Templin Assistant Vice President
Rochester Phyllis M. Biddinger Office Manager
Shipshewana John R. Munsell Vice President
Sarah Miller-Bontrager Assistant Office Manager
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 Rosemary K. Baumgardner Office Manager
Warsaw East Pamela F. Messmore Assistant Vice President
Warsaw West Linda M. Riley Office Manager
Winona Lake Allan L. Disbro Vice President
34
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE 12/31/98 FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 45,933
<INT-BEARING-DEPOSITS> 60
<FED-FUNDS-SOLD> 15,515
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 327,658
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 542,496
<ALLOWANCE> 5,510
<TOTAL-ASSETS> 978,909
<DEPOSITS> 739,347
<SHORT-TERM> 135,690
<LIABILITIES-OTHER> 8,092
<LONG-TERM> 40,624
0
0
<COMMON> 1,453
<OTHER-SE> 53,703
<TOTAL-LIABILITIES-AND-EQUITY> 978,909
<INTEREST-LOAN> 44,419
<INTEREST-INVEST> 18,729
<INTEREST-OTHER> 519
<INTEREST-TOTAL> 63,667
<INTEREST-DEPOSIT> 28,154
<INTEREST-EXPENSE> 36,091
<INTEREST-INCOME-NET> 27,576
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 1,256
<EXPENSE-OTHER> 26,491
<INCOME-PRETAX> 11,814
<INCOME-PRE-EXTRAORDINARY> 7,888
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,888
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 3.44
<LOANS-NON> 0
<LOANS-PAST> 227
<LOANS-TROUBLED> 1,281
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,308
<CHARGE-OFFS> 416
<RECOVERIES> 138
<ALLOWANCE-CLOSE> 5,510
<ALLOWANCE-DOMESTIC> 2,752
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,758
</TABLE>
