Annual Meeting
- ------------------------------------------------------------------------------
The annual meeting of the shareholders of Lakeland Financial Corporation will
be held at noon, April 11, 2000, at the Shrine Building, Kosciusko County Fair
Grounds, Warsaw, Indiana. As of December 31, 1999, there were approximately
1,850 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.
Stifel, Nicolaus & Company, Inc., 500 North Broadway, St. Louis, Missouri,
63102
Raymond James & Associates, Inc., 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 for 1998 and 1999 were obtained from The Nasdaq Stock
Market.
Forward-Looking Statements
When used in this report and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results
to differ materially from historical earnings and those presently anticipated
or projected.
The Company wishes to caution readers not to place undo reliance on any
such forward-looking statements, which speak only as of the date made, and
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
President's Letter
- ------------------------------------------------------------------------------
All of us at Lake City Bank are happy to report on our accomplishments in
1999. Most importantly, we achieved record net earnings of $8.3 million; our
eleventh consecutive year of increased income. We also ended the year with
record assets of just over $1 billion. The $1 billion asset mark is a real
milestone for us, in that it is the result of the successful strategy of
providing high quality, hometown banking services to the communities
throughout our market area. At the same time, though, we understand that size
alone does not improve our ability to serve customers well. The goal is to
continue to focus on maintaining the highest quality staff we can have,
increasing business with our customers, and growing earnings for shareholders.
Progress was made in a number of key areas in 1999.
The Commercial Banking Division had another excellent year serving their
current commercial clients as well as adding over 350 new banking
relationships. Commercial loan outstandings increased $75 million to $422
million at year-end compared to $347 million at the previous year-end. With
over 470 combined years of experience the lenders provide extensive knowledge,
personalized service, and understanding of the business trends of our market
areas. That knowledge coupled with local decision making cannot be matched by
our larger competitors. This experience is also evident in the continued
excellent asset quality of the commercial portfolio.
Business development continues to play a vital role in our organization.
The new calling officers are oriented through extensive training to explore
and sharpen their communication and customer service skills before beginning
their calling responsibilities. Our calling officers made almost 9,000 calls
during the year selling products and services throughout our 15 county market
area.
Consumer loans grew 41 percent in 1999, to $185 million. The Bank
experienced strong growth in both the direct and indirect areas. Home equity
lines of credit, a key account in establishing long-term relationships with
our borrowers, achieved 25 percent growth in balances outstanding. Fee income
associated with consumer lending experienced significant gains over 1998, due
to a 29 percent increase in net commission income from the sale of credit life
insurance, as well as other services and processing fees. Credit quality
remained very high, with net losses of less than 0.1 percent of balances
outstanding at year-end.
Nearly $61 million of mortgage loans were originated by the Bank in 1999.
With relatively low market rates, the vast majority of these loans were fixed
rate, and sold into the secondary markets. These sales generated over $1.3
million in gains, and protected the Bank from undue rate risk should interest
rates continue to rise. We retain the servicing on sold mortgages to maintain
contact with our customers and to be certain that those customers receive the
best possible service. An additional commissioned originator was hired to
generate mortgage loans in the Fort Wayne market area.
1
President's Letter (continued)
- ------------------------------------------------------------------------------
We worked closely with the NAACP of Elkhart County, and two nonprofit
housing associations, LaCasa of Goshen and Elkhart Housing Partnership, to
establish a loan pool with other area lenders for low income home buyers. Lake
City Bank has agreed to act as the servicing bank for this program, and
continues to investigate other avenues to serve the low income and minority
populations within its market area. A new product that achieves this goal is
the Community Saver Loan. Loan proceeds are deposited into a Lake City Bank
certificate of deposit, which is then held as collateral. Repayment of the
loan creates savings for the purchase of a home or car, and establishes a
credit history for our customer.
Trust and Investment revenues, including Brokerage, increased 6 percent
to $1.7 million from $1.6 million at the 1998 year-end. Conversion of both
personal and corporate trust technology systems were completed this year.
These state of the art systems support the staff to further enhance customer
service. Several highly successful client seminars were held emphasizing the
service available to our customers from our dedicated professional staff.
Our Corporate Cash Management Services and Products continue to be well
received and in demand within our market place. We provide customized and
tailored Cash Management Services specifically designed to meet the individual
business customers needs. We introduced two new products in 1999: CD-ROM and
Lockbox Service. The CD-ROM product is a way for our business customers to
receive images of their monthly paid checks. This allows our business
customers to retrieve, modify, and reconcile the monthly statement as well as
maintain check records. They also have quicker access to paid items, improved
recordkeeping, decreased storage costs and added security.
Our new Corporate Lockbox Service intercepts our business customers'
mailed payments, processes and deposits them into their account and reports
those deposits back to the customer quickly and accurately. This valuable
service also frees the company of the time-consuming task of handling
payments. Our Lockbox Service benefits include: reduction of processing time
and costs, postal pick-ups, efficient check processing network, dedicated
processing site and improved cash management. It also provides a complete
audit trail and improved exception research.
Our Internet Web site, www.lakecitybank.com was officially released on
July 1, 1999. We ended the year with over 1,200 Internet Banking customers. We
released a second look in 1999 and added Trust Online to our online services
as well as updating the product content to over 120 pages. In 2000, we will
introduce Brokerage Online and our new Corporate Management online services.
2
President's Letter (continued)
- ------------------------------------------------------------------------------
The Investor's Weekly, one of our core deposit products, had another
great year with nearly 3,000 accounts on record. Total deposits in this
account were $155 million at the end of 1999 as compared to $123 million at
the 1998 year-end, representing a 25 percent growth.
Operationally, this year we were dedicated to identifying and improving
various internal functions. After a year long planning and implementation
schedule, the Item Processing area was expanded to support a remote capture
site in Elkhart. This area processes approximately 37 percent of all MICR
documents handled by the Bank. This capture site also provides us with a
totally redundant image capture processing center for disaster recovery and
contingency purposes.
Staff development programs, extensive training, and the employee review
process took on a new feel this year with managers and supervisors working
with new processes to improve productivity and staff retention.
This year saw tremendous changes in the technology area as well, due to
new projects and Y2K. The project management team oversaw nine new projects
that ranged from implementing a new trust accounting system to AFS image file
folder system. We currently have nine additional projects in the pipeline for
the year 2000.
The Network Services staff reviewed hardware, software and systems for
Y2K compliance throughout the year. They reviewed 128 individual processes,
upgraded 19 systems and replaced 23 non-compliant systems. The individual
application managers were then responsible for testing 13 critical dates
associated with the upcoming millennium. The end result was that Y2K was a
non-event at Lake City Bank.
Our efforts to focus on quality customer service and delivering high
touch technology to each employee's workstation, as well as our customers,
have been extremely successful. Our customers saw new ATM's, improved
telephone banking functionality, Internet Banking and mortgage loan production
software that decreased loan turnaround times. Employees saw enhanced call
center software, faster teller software, improved telephone systems, and check
images at their desktop.
Lake City Bank introduced an Employee PC Purchase Program for all team
members in 1999 to encourage the purchase of PCs for employees' use at home.
The objective was to better prepare them for the direction we are all moving -
that is to the Internet and online financial services technology. Nearly 100
employees participated in this program.
Bank employees were busy sharpening their skills in 1999. In-house
training was provided on a number of levels, with all employees meeting once
per quarter in Warsaw for Corporate Training. Four sessions are held over two
days so all can attend to hear management and various departments update the
team on product changes, compliance issues, and other news that affect
employees and customers. Since moving into our new Training Center at 109 S.
Buffalo, "Corporate Training" has a permanent home complete with audio visual
equipment and comfortable decor. A small PC lab/classroom found on the upper
level facilitates computer training.
3
President's Letter (continued)
- ------------------------------------------------------------------------------
Thirty-four supervisors completed the Supervisor I series in 1999.
Various topics were discussed, including interviewing new candidates, building
effective teams, performance management, maintaining discipline and managing
resources. A series II is planned for summer of 2000.
Teller and CSR training is an ongoing process, designed to equip new
hires with the practical and technological skills they will need to
efficiently and professionally serve our customers.
In an effort to increase effectiveness and provide accountability all
training efforts were consolidated near year-end. Plans for future training
and development include expanding supervisory/leadership training, developing
end-user computer technology courses, and stepping up sales training for
tellers and CSRs. All of these training endeavors are aimed at improving
customer relations, increasing overall sales, and heightening operational
efficiency in an extremely dynamic banking environment. We also believe that
an internal commitment to training increases job satisfaction and employee
retention.
The Marketing department hosted numerous events featuring educational,
motivational and interesting subjects for our customers. The intimate setting
of meeting with 10 -12 current and potential customers allowed for ease in
discussion and for guests to be specific in the nature of their questions.
Additionally, the Trust and Investment Management team was host to several
legal and accounting firms. The camaraderie established through these events
solidifies our referral relationships with them. The popular and well-attended
annual Egg Breakfast, co hosted with Creighton Brothers, celebrated its 29th
year. Nearly 1,000 people enjoy this morning treat. Celebrating with our
retired friends was a bright spot as we hosted a Valentine party for Grace
Village in Winona Lake and a Spring celebration at Hubbard Hill in Elkhart.
The business community benefits from our Spring and Fall Economic Briefings
which include an economic forecast from noted IUSB professors and a local
business leader presenting an overview of their company.
As with any organization our size, there is a certain amount of change in
our family of employees over the course of a year. Among the many hirings,
promotions and retirements in 1999, one name stands out, R. Douglas Grant.
Doug retired as Chief Executive Officer at the end of June. In his 19 years at
Lake City Bank, Doug's skill, instinct and dedication have been the thrust
behind our growth. For that we are grateful. He continues to contribute his
knowledge and expertise as Chairman of the Board of Directors.
After 20 years of service to your Bank, Executive Vice President Paul
Siebenmorgen retired. Paul contributed greatly to our success in the
commercial lending area and we wish him well.
4
President's Letter (continued)
- ------------------------------------------------------------------------------
Robert C. Condon joined your Bank early this year as Executive Vice
President with principal responsibilities in the Trust and Brokerage areas. He
is a graduate of Denison University and holds a Juris Doctor Degree from the
University of Illinois. He has over 10 years of Trust and Brokerage management
experience and most recently was Managing Director of Northern Trust's
Northern California office.
The Fort Wayne North office opened in June and has exceeded our
expectations both in loan volume and deposits. Construction has begun on a
second office on the Southwest side of that city. It will open by early
summer. We are constantly exploring other opportunities for expansion as we
continue to take advantage of the geographic growth opportunities available to
us.
Lake City Bank is composed of four different, equally important,
inseparable components; shareholders, customers, employees and communities.
Our commitment to each is to conduct business with uncompromising dignity,
integrity and professionalism. To that end, we endeavor to increase
shareholder value, create innovative products to positively impact customers'
daily lives and offer comprehensive training to employees to enhance their
ability to serve those customers even more effectively. We encourage each
employee to lend expertise in enriching the communities we serve through the
donation of their time and talent.
We will continue to operate as an independent, locally owned community
bank, providing business and individual customers with the necessary tools to
assist them in reaching their financial goals. We will do this through
enhanced products, state of the art technology, professional, knowledgeable
staff and convenient locations. This strategy has sustained Lake City Bank
since 1872 and we anticipate it will carry us far into the future.
To all shareholders, customers and employees - thank you for your support
in 1999. Your combined effort is the consistency that makes Lake City Bank the
bank that provides "Banking Like It Ought To Be".
Michael L. Kubacki
5
Lakeland Financial Corporation and Lake City Bank Board of Directors
- ----------------------------------------------------------------------------------------------------------------------------------
Eddie Creighton Anna K. Duffin L. Craig Fulmer R. Douglas Grant
Former Partner and Civic Leader Chairman, Chairman,
General Manager, Heritage Financial Lakeland Financial
Creighton Brothers Group, Inc. Corporation and Lake
City Bank
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
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
LAKELAND FINANCIAL CORPORATION OFFICERS
R. Douglas Grant ...................Chairman
Michael L. Kubacki .................President and Chief Executive Officer
Robert C. Condon ...................Executive Vice President
D. Jean Northenor ..................Executive Vice President
Charles D. Smith ...................Executive Vice President
Walter L. Weldy ....................Executive Vice President
Terry M. White .....................Executive Vice President and Secretary
James J. Nowak .....................Vice President and Treasurer
6
Selected Financial Data (in thousands except share and per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Interest income $ 69,395 $ 63,667 $ 52,699 $ 45,941 $ 41,944
Interest expense 37,093 36,091 28,060 23,737 21,642
------------- ------------- ------------- ------------- -------------
Net interest income . . . . . . . . . . . . . . . . . . 32,302 27,576 24,639 22,204 20,302
Provision for loan losses 1,310 480 269 120 120
------------- ------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 30,992 27,096 24,370 22,084 20,182
Other noninterest income 9,311 8,486 6,978 5,396 4,297
Net gains on sale of real estate
mortgages held for sale 1,302 1,467 545 412 159
Net securities gains (losses) 1,340 1,256 (19) (9) 315
Noninterest expense (30,541) (26,491) (20,414) (17,935) (16,244)
------------- ------------- ------------- ------------- -------------
Income before income tax expense . . . . . . . . . . . . 12,404 11,814 11,460 9,948 8,709
Income tax expense 4,085 3,926 3,920 3,504 3,064
------------- ------------- ------------- ------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 8,319 $ 7,888 $ 7,540 $ 6,444 $ 5,645
============= ============= ============= ============= =============
Average shares outstanding* 5,813,984 5,813,984 5,813,162 5,792,825 5,753,984
============= ============= ============= ============= =============
Basic earnings per common share* $ 1.43 $ 1.36 $ 1.30 $ 1.11 $ 0.98
============= ============= ============= ============= =============
Diluted earnings per common share* $ 1.43 $ 1.36 $ 1.30 $ 1.11 $ 0.98
============= ============= ============= ============= =============
Cash dividends declared* $ 0.44 $ 0.33 $ 0.30 $ 0.23 $ 0.19
============= ============= ============= ============= =============
Balances at December 31:
- ------------------------
Total assets $ 1,039,843 $ 978,909 $ 796,478 $ 656,551 $ 568,579
Total deposits $ 748,243 $ 739,347 $ 612,992 $ 496,553 $ 431,934
Long-term borrowings $ 16,473 $ 21,386 $ 25,367 $ 23,531 $ 17,432
Guaranteed preferred beneficial interests in
Company's subordinated debentures $ 19,264 $ 19,238 $ 19,211 $ 0 $ 0
Total stockholders' equity $ 54,194 $ 55,156 $ 48,256 $ 42,043 $ 36,754
* Adjusted for 2-for-1 stock splits on April 30, 1996 and April 30, 1998.
7
Selected Quarterly Data (in thousands except per share data) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st
1999 Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
Interest income $ 18,215 $ 17,689 $ 17,075 $ 16,416
Interest expense 9,737 9,260 9,126 8,970
------------- ------------- ------------- -------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . 8,478 8,429 7,949 7,446
Provision for loan losses 260 550 275 225
Noninterest income 2,495 3,288 3,146 3,024
Noninterest expense 7,882 7,947 7,571 7,141
Income tax expense 833 1,128 1,090 1,034
------------- ------------- ------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,998 $ 2,092 $ 2,159 $ 2,070
============= ============= ============= =============
Basic earnings per common share $ 0.34 $ 0.36 $ 0.37 $ 0.36
============= ============= ============= =============
Diluted earnings per common share $ 0.34 $ 0.36 $ 0.37 $ 0.36
============= ============= ============= =============
Stock and Dividend Information
- ------------------------------
Trading range (per share)*
Low $ 13.75 $ 16.00 $ 17.06 $ 17.75
High $ 18.00 $ 19.88 $ 18.50 $ 19.88
Dividends declared (per share) $ 0.11 $ 0.11 $ 0.11 $ 0.11
- ----------------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st
1998 Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
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
<FN>
* The trading ranges 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>
8
Consolidated Balance Sheets (in thousands except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1999 1998
------------- -------------
ASSETS
Cash and due from banks $ 59,321 $ 45,933
Short-term investments 3,783 15,575
------------- -------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,104 61,508
Securities available for sale (carried at fair value) 271,421 327,658
Real estate mortgages held for sale 862 3,796
Total loans 653,898 538,496
Less allowance for loan losses 6,522 5,510
------------- -------------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 647,376 532,986
Land, premises and equipment, net 27,808 26,370
Accrued income receivable 5,420 5,669
Intangible assets 10,522 11,453
Other assets 13,330 9,469
------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,039,843 $ 978,909
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 136,595 $ 118,361
Interest bearing deposits 611,648 620,986
------------- -------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748,243 739,347
Short-term borrowings
Federal funds purchased 15,000 0
Securities sold under agreements to repurchase 121,374 110,163
U.S. Treasury demand notes 4,000 1,527
Other short-term borrowings 55,000 24,000
------------- -------------
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,374 135,690
Accrued expenses payable 4,760 6,503
Other liabilities 1,535 1,589
Long-term borrowings 16,473 21,386
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,264 19,238
------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 985,649 923,753
Commitments, off-balance sheet risks and contingencies
STOCKHOLDERS' EQUITY
Common stock: 90,000,000 shares authorized, no par value,
5,813,984 shares issued, 5,792,182 outstanding as of December 31, 1999;
5,813,984 shares issued, 5,796,918 outstanding as of December 31, 1998 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 49,422 43,652
Accumulated other comprehensive income (4,797) 1,848
Treasury stock, at cost (421) (334)
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,194 55,156
------------- -------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,039,843 $ 978,909
============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
9
Consolidated Statements of Income (in thousands except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
------------- ------------- -------------
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 51,602 $ 44,225 $ 38,265
Tax-exempt 182 194 228
Interest and dividends on securities
Taxable 14,888 16,416 12,472
Tax-exempt 2,448 2,313 1,431
Interest on short-term investments 275 519 303
------------- ------------- -------------
Total interest income 69,395 63,667 52,699
Interest on deposits 27,153 28,154 21,183
Interest on borrowings
Short-term 7,139 4,724 4,921
Long-term 2,801 3,213 1,956
------------- ------------- -------------
Total interest expense 37,093 36,091 28,060
------------- ------------- -------------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,302 27,576 24,639
Provision for loan losses 1,310 480 269
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . 30,992 27,096 24,370
NONINTEREST INCOME
Trust income 1,149 1,205 1,188
Service charges on deposits 4,321 4,004 3,369
Other income 3,841 3,277 2,421
Net gains on the sale of real estate mortgages held for sale 1,302 1,467 545
Net securities gains (losses) 1,340 1,256 (19)
------------- ------------- -------------
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,953 11,209 7,504
NONINTEREST EXPENSE
Salaries and employee benefits 15,911 14,076 11,317
Net occupancy expense 2,148 1,866 1,397
Equipment costs 3,167 2,205 1,747
Other expense 9,315 8,344 5,953
------------- ------------- -------------
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,541 26,491 20,414
------------- ------------- -------------
INCOME BEFORE INCOME TAX EXPENSE 12,404 11,814 11,460
Income tax expense 4,085 3,926 3,920
------------- ------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,319 $ 7,888 $ 7,540
============= ============= =============
AVERAGE COMMON SHARES OUTSTANDING 5,813,984 5,813,984 5,813,162
============= ============= =============
BASIC EARNINGS PER COMMON SHARE $ 1.43 $ 1.36 $ 1.30
============= ============= =============
DILUTED EARNINGS PER COMMON SHARE $ 1.43 $ 1.36 $ 1.30
============= ============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
10
Consolidated Statements of Changes in Stockholders' Equity (in thousands except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
------------------------- ------------------------- -------------------------
COMMON STOCK
Balance at beginning of the period $ 1,453 $ 1,453 $ 1,448
Issued shares of previously
authorized, unissued stock
(10,000 - 1997) 0 0 5
----------- ----------- -----------
Balance at end of the period . . . . . . . . . . 1,453 1,453 1,453
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of the period 8,537 8,537 8,232
Issued shares of previously
authorized, unissued stock
(10,000 - 1997) 0 0 305
----------- ----------- -----------
Balance at end of the period . . . . . . . . . . 8,537 8,537 8,537
RETAINED EARNINGS
Balance at beginning of the period 43,652 37,766 31,967
Net income 8,319 $ 8,319 7,888 $ 7,888 7,540 $ 7,540
Cash dividends declared ($.44, $.33 and $.30)
per share (2,549) (2,002) (1,741)
----------- ----------- -----------
Balance at end of the period . . . . . . . . . . 49,422 43,652 37,766
ACCUMULATED OTHER
COMPREHENSIVE INCOME
Balance at beginning of the period 1,848 685 396
Unrealized gain (loss) on available for sale
securities arising during the period (5,836) (573) 289
Reclassification adjustments for accumulated
(gains) losses included in net income (809) (759) 0
Cumulative effect of adopting SFAS No. 133 0 2,495 0
----------- ----------- -----------
Other comprehensive income
(net of taxes $(4,359), $762 and $190) (6,645) (6,645) 1,163 1,163 289 289
----------- ----------- ----------- ----------- ----------- ------------
Balance at end of the period . . . . . . . . . . (4,797) 1,848 685
Total comprehensive income . . . . . . . . . . . $ 1,674 $ 9,051 $ 7,829
=========== =========== ============
TREASURY STOCK
Balance at beginning of the period (334) (185) 0
Acquisition of treasury stock (87) (149) (185)
----------- ----------- -----------
Balance at end of the period . . . . . . . . . . (421) (334) (185)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . $ 54,194 $ 55,156 $ 48,256
=========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
11
Consolidated Statements of Cash Flows (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
-------------- ------------- -------------
Cash flows from operating activities
Net income $ 8,319 $ 7,888 $ 7,540
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 2,373 1,782 1,393
Provision for loan losses 1,310 480 269
Write down of other real estate owned 0 0 19
Amortization of intangible assets 957 942 26
Amortization of mortgage servicing rights 265 171 48
Loans originated for sale (79,276) (65,425) (27,426)
Net gain on sale of loans (1,302) (1,467) (545)
Proceeds from sale of loans 82,796 64,612 27,350
Net (gain) loss on sale of premises and equipment 26 (40) 11
Net gain on sale of securities available for sale (1,340) (1,257) 0
Net loss on calls of securities held to maturity 0 1 19
Net securities amortization 1,935 1,379 23
Increase (decrease) in taxes payable 1,078 (1,207) (217)
(Increase) decrease in income receivable 249 (754) (661)
Increase in accrued expenses payable 102 949 224
(Increase) decrease in other assets (1,789) (1,940) 411
Increase (decrease) in other liabilities (54) 62 427
------------- ------------- -------------
Total adjustments 7,330 (1,712) 1,371
-------------- ------------- -------------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . 15,649 6,176 8,911
Cash flows from investing activities
Proceeds from sale of securities available for sale 44,428 65,404 0
Proceeds from maturities and calls of securities held to maturity 0 45,787 14,557
Proceeds from maturities and calls of securities available for sale 65,695 32,980 26,100
Purchases of securities available for sale (65,485) (89,948) (28,315)
Purchases of securities held to maturity 0 (131,919) (52,946)
Net increase in total loans (115,885) (80,809) (53,286)
Proceeds from sales of land, premises and equipment 82 530 0
Purchases of land, premises and equipment (3,919) (3,950) (5,464)
Net proceeds (payments) from acquisitions 0 30,020 58,889
-------------- ------------- -------------
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . (75,084) (131,905) (40,465)
Cash flows from financing activities
Net increase in total deposits 8,896 92,034 21,257
Proceeds from short-term borrowings 21,877,999 4,740,920 889,826
Payments on short-term borrowings (21,818,315) (4,689,347) (894,089)
Proceeds from long-term borrowings 5,124 20,050 10,000
Payments on long-term borrowings (10,037) (24,031) (8,163)
Dividends paid (2,549) (2,002) (1,741)
Proceeds from sale of common stock 0 0 310
Net proceeds from issuance of guaranteed preferred beneficial interests in
Company's subordinated debentures 0 0 19,222
Purchase of treasury stock (87) (149) (185)
------------- ------------- -------------
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . 61,031 137,475 36,437
-------------- ------------- -------------
Net increase in cash and cash equivalents 1,596 11,746 4,883
Cash and cash equivalents at beginning of the year 61,508 49,762 44,879
-------------- ------------- -------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . $ 63,104 $ 61,508 $ 49,762
============== ============= =============
Cash paid during the year for:
Interest $ 37,459 $ 35,228 $ 27,921
Income taxes $ 4,139 $ 3,610 $ 3,918
Securities transferred from held to maturity to available for sale $ 0 $ 249,087 $ 0
Loans transferred to other real estate $ 185 $ 683 $ 284
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
12
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". Included in the
consolidated financial statements is LCB Investments Limited, a wholly-owned
subsidiary of Lake City Bank. All 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 44 branch offices in
fifteen 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 in other
assets.
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. Accrued status is resumed when all
contractually due payments are brought current and future payments are
reasonably assured.
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. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available or as future events change. 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. Long-term assets are reviewed for
impairment when events indicate the carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts.
13
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Fair value is determined using prices for
similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions.
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. Goodwill is reported net of accumulated amortization of
$1,330,000 and $663,000 at year end 1999 and 1998. Core deposit is reported
net of accumulated amortization of $561,000 and $297,000.
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. Such financial
instruments are recorded when they are funded.
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 21,802 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.
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.
Restrictions on Cash:
The Company was required to have $50,000 and $615,000 of cash on hand or
on deposit with the Federal Reserve Bank to meet regulatory reserve and
clearing requirements at year end 1999 and 1998. These balances do not earn
interest.
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.
14
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
NOTE 2 - SECURITIES
Information related to the fair value of securities and the total gains
and losses for securities with net gains and losses in accumulated other
comprehensive income at December 31 is provided in the table below.
Fair
Value Gains Losses
----------- ----------- -----------
(in thousands)
Securities available for sale at December 31, 1999
U.S. Treasury securities $ 34,614 $ 60 $ (579)
U.S. Government agencies and corporations 6,313 0 (380)
Mortgage-backed securities 192,569 51 (3,727)
State and municipal securities 32,714 37 (2,755)
Other debt securities 5,211 0 (651)
----------- ----------- -----------
Total securities available for sale at December 31, 1999 . . . . . . . . . . . . . . . $ 271,421 $ 148 $ (8,092)
=========== =========== ===========
Securities available for sale at December 31, 1998
U.S. Treasury securities $ 39,521 $ 751 $ (168)
U.S. Government agencies and corporations 2,030 40 0
Mortgage-backed securities 225,914 1,086 (913)
State and municipal securities 59,112 2,312 (124)
Other debt securities 1,081 76 0
----------- ----------- -----------
Total securities available for sale at December 31, 1998 . . . . . . . . . . . . . . . $ 327,658 $ 4,265 $ (1,205)
=========== =========== ===========
Information regarding the fair value of available for sale debt
securities by maturity as of December 31, 1999, 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.
Fair
Value
-----------
(in thousands)
Due in one year or less $ 9
Due after one year through five years 43,995
Due after five years through ten years 2,163
Due after ten years 32,685
-----------
78,852
Mortgage-backed securities 192,569
-----------
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 271,421
===========
Security proceeds, gross gains and gross losses for 1999, 1998 and 1997
were as follows:
1999 1998 1997
----------- ----------- -----------
(in thousands)
Sales and calls of securities available for sale
Proceeds $ 46,350 $ 66,197 $ 100
Gross gains 1,340 1,257 0
Gross losses 0 0 0
Calls of securities held to maturity
Proceeds $ 0 $ 1,532 $ 638
Gross gains 0 0 0
Gross losses 0 1 19
Securities with carrying values of $194,316,000 and $143,450,000 were
pledged as of December 31, 1999 and 1998, as collateral for deposits of public
funds, securities sold under agreements to repurchase and for other purposes
as permitted or required by law.
15
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 3 - LOANS
Total loans outstanding as of year end consisted of the following:
1999 1998
----------- -----------
(in thousands)
Commercial and industrial loans $ 375,421 $ 301,682
Agri-business and agricultural loans 46,661 45,043
Real estate mortgage loans 42,384 57,580
Real estate construction loans 4,488 2,975
Installment loans and credit cards 184,944 131,216
----------- -----------
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 653,898 $ 538,496
=========== ===========
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for 1999,
1998 and 1997:
1999 1998 1997
----------- ----------- -----------
(in thousands)
Balance, January 1 $ 5,510 $ 5,308 $ 5,306
Provision for loan losses 1,310 480 269
Loans charged-off 435 416 359
Recoveries 137 138 92
Net loans charged-off 298 278 267
----------- ----------- -----------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,522 $ 5,510 $ 5,308
=========== =========== ===========
Nonaccrual loans at December 31, 1999, 1998 and 1997, totaled $329,000,
$0 and $1,058,000. Interest lost on nonaccrual loans was approximately
$26,000, $42,000 and $44,000 for 1999, 1998 and 1997. Loans renegotiated as
troubled debt restructuring totaled $1,179,000 and $1,281,000 as of December
31, 1999 and 1998. Interest income of $95,000, $84,000 and $92,000 was
recognized in 1999, 1998 and 1997. Had these loans been performing under the
original contract terms, an additional $22,000 would have been reflected in
interest income during 1999, $47,000 in 1998 and $50,000 in 1997. The Company
is not committed to lend additional funds to debtors whose loans have been
modified. At December 31, 1999, the Company had one loan meeting the
definition of impaired totaling $246,000, which was included in the total of
nonaccrual loans. At December 31, 1998 and 1997, 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. Loans past due over 90 days and still
acccruing interest were $171,000 and $227,000 at year end 1999 and 1998.
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
$147,932,000 and $106,392,000 at December 31, 1999 and 1998, respectively. Net
loan servicing income was $57,000, $11,000 and $98,000 for 1999, 1998 and
1997. Information on mortgage servicing rights follows:
1999 1998
----------- -----------
(in thousands)
Beginning of year $ 1,008 $ 425
Originations 716 754
Amortization (265) (171)
----------- -----------
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,459 $ 1,008
============ ===========
At year end 1999 and 1998, there was no valuation allowance required
NOTE 6 - LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation were
as follows at December 31:
1999 1998
----------- -----------
(in thousands)
Land $ 6,717 $ 6,274
Premises 19,639 18,269
Equipment 14,551 13,059
----------- -----------
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,907 37,602
Less accumulated depreciation 13,099 11,232
----------- -----------
Land, premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,808 $ 26,370
=========== ===========
16
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination
of $100,000, was approximately $125,919,000 and $153,991,000 at December 31,
1999 and 1998.
At December 31, 1999, the scheduled maturities of time deposits were as
follows:
Amount
-----------
(in thousands)
Maturing in 2000 $ 414,773
Maturing in 2001 61,477
Maturing in 2002 11,922
Maturing in 2003 5,623
Maturing in 2004 3,069
Thereafter 1,656
-----------
Total time deposits . . . . . . . . . . . . . . . . . . . . . . $ 498,520
===========
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 1999 and 1998 is as follows:
1999 1998
----------- -----------
(in thousands)
Average balance during the year $ 120,950 $ 84,157
Average interest rate during the year 4.76% 5.19%
Maximum month-end balance during the year $ 143,353 $ 110,163
Securities underlying the agreements at year-end
Amortized cost $ 123,388 $ 112,301
Fair value $ 121,494 $ 113,078
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)
On demand $ 94,440 4.48% $ 0 $ 0 $ 95,883 $ 94,277
1 to 30 days 2,942 5.21 845 840 2,129 2,107
31 to 90 days 4,300 5.24 1,845 1,845 2,554 2,554
Over 90 days 19,692 5.86 2,605 2,530 17,527 17,341
----------- ----------- ----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 121,374 4.75% $ 5,295 $ 5,215 $ 118,093 $ 116,279
=========== =========== =========== =========== =========== ===========
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, 1999, 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.
NOTE 9 - LONG -TERM BORROWINGS
Long-term borrowings at December 31 consisted of:
1999 1998
----------- -----------
(in thousands)
Federal Home Loan Bank of Indianapolis Notes, Variable Rate, Due April 27, 1999 $ 0 $ 10,000
Federal Home Loan Bank of Indianapolis Notes, Variable Rate, Due April 28, 2000 5,000 0
Federal Home Loan Bank of Indianapolis Notes, 5.25%, Due December 28, 2001 10,000 10,000
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 49 50
Capital Leases 124 36
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,473 $ 21,386
=========== ===========
All notes require monthly interest payments and were secured by
residential real estate loans and securities with a carrying value of
$83,517,000 at December 31, 1999. At December 31, 1999, the Company owned
$3,567,500 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.
17
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 9 - LONG TERM BORROWINGS (continued)
In addition to the long-term borrowings, the Company has $45 million in
variable rate notes and $10 million in fixed rate notes with the FHLB. These
notes mature at various times between January 31, 2000 and June 20, 2000.
These notes are classified as short-term borrowings 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, 1999, 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:
1999 1998
----------- -----------
(in thousands)
Change in benefit obligation:
Beginning benefit obligation $ 2,408 $ 1,949
Service cost 284 177
Interest cost 171 149
Actuarial gain (93) 276
Benefits paid (131) (143)
----------- -----------
Ending benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,639 2,408
Change in plan assets (primarily money market funds and equity and fixed
income investments), at fair value:
Beginning plan assets 1,964 1,640
Actual return 408 (68)
Employer contribution 228 535
Benefits paid (131) (143)
----------- -----------
Ending plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,469 1,964
Funded status (170) (444)
Unrecognized net actuarial loss 133 466
Unrecognized prior service cost (22) (24)
----------- -----------
Accrued benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (59) $ (2)
=========== ===========
18
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (continued)
Net pension expense includes the following:
1999 1998 1997
----------- ----------- -----------
(in thousands)
Service cost $ 284 $ 190 $ 178
Interest cost 171 144 120
Expected return on plan assets (192) (133) (306)
Recognized net actuarial (gain) loss 23 2 197
----------- ----------- -----------
Net pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 286 $ 203 $ 189
=========== =========== ===========
The following assumptions were used in calculating the net pension expense:
Weighted average discount rate 7.50% 6.75% 7.25%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 10.00% 8.00% 8.00%
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 $344,000, $401,000 and $393,000 in 1999, 1998 and 1997.
NOTE 12 - OTHER EXPENSE
Other expense for the years ended December 31, was as follows:
1999 1998 1997
----------- ----------- -----------
(in thousands)
Data processing fees and supplies $ 2,036 $ 1,605 $ 1,151
Corporate and business development 861 750 687
Advertising 436 422 347
Office supplies 687 488 633
Telephone and postage 1,375 1,377 833
Regulatory fees and FDIC insurance 160 138 122
Amortization of intangible assets 957 942 26
Miscellaneous 2,803 2,622 2,154
----------- ----------- -----------
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,315 $ 8,344 $ 5,953
=========== =========== ===========
NOTE 13 - INCOME TAXES
Income tax expense consisted of the following:
1999 1998 1997
----------- ----------- -----------
(in thousands)
Current federal $ 2,998 $ 2,829 $ 2,881
Deferred federal 120 54 100
Current state 933 982 906
Deferred state 34 61 33
----------- ----------- -----------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,085 $ 3,926 $ 3,920
=========== =========== ===========
Income tax expense (credit) included $531,000, $498,000 and $(8,000)
applicable to security transactions for 1999, 1998 and 1997. 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:
1999 1998 1997
----------- ----------- -----------
(in thousands)
Income taxes at statutory federal rate $ 4,217 $ 4,017 $ 3,896
Increase (decrease) in taxes resulting from:
Tax exempt income (884) (839) (554)
Nondeductible expense 198 192 135
State income tax, net of federal tax effect 638 688 661
Net operating loss, Gateway (29) (29) (29)
Tax credits (48) (33) (23)
Other (7) (70) (166)
----------- ----------- -----------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,085 $ 3,926 $ 3,920
=========== =========== ===========
19
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:
1999 1998
------------------------ ------------------------
Federal State Federal State
----------- ----------- ----------- -----------
Deferred tax assets (in thousands)
Bad debts $ 2,153 $ 538 $ 1,809 $ 452
Pension and deferred compensation liability 535 134 460 115
Net operating loss carryforward 288 0 317 0
Other 190 48 161 41
----------- ----------- ----------- -----------
3,166 720 2,747 608
Deferred tax liabilities
Accretion 24 6 103 26
Depreciation 467 117 372 93
Mortgage servicing rights 496 124 343 86
State taxes 96 0 107 0
Leases 301 75 165 41
Deferred loan fees 465 116 186 46
Other 0 0 0 0
----------- ----------- ----------- -----------
1,849 438 1,276 292
Valuation allowance 138 0 172 0
----------- ----------- ----------- -----------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,179 $ 282 $ 1,299 $ 316
=========== =========== =========== ===========
In addition to the net deferred tax assets included above, the deferred
income tax asset (liability) allocated to the unrealized net gain (loss) on
securities available for sale included in equity was $3,147,000 and
$(1,212,000) for 1999 and 1998.
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:
Assets (in thousands)
-----------
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:
Assets (in thousands)
-----------
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
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 15 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 1999
were as follows:
(in thousands)
-----------
Beginning balance $ 21,004
New loans and advances 112,516
Effect of changes in related parties 11
Repayments (108,813)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,718
===========
Deposits from principal officers, directors, and their affiliates at
year-end 1999 and 1998 were $7,422,000 and $9,579,000.
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:
1999 1998
------------------------ ------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- -----------
Outstanding at beginning of the year 188,935 $ 24.60 0 $ 0.00
Granted 113,910 19.33 195,145 24.60
Exercised 0 0.00 0 0.00
Forfeited 12,575 23.49 6,210 24.38
----------- ----------- ----------- -----------
Outstanding at end of the year . . . . . . . . . . . . . . . . . . . . . . . . 290,270 $ 22.58 188,935 $ 24.60
=========== =========== =========== ===========
Options exercisable at end of the year 0 $ 0.00 925 $ 28.00
Weighted-average fair value of options granted
during the year $ 7.46 $ 9.80
Options outstanding at year-end 1999 were as follows:
Outstanding Exercisable
------------------------ ------------------------
Weighted-
Average Weighted-
Remaining Average
Contractual Exercise
Number Life Number Price
----------- ----------- ----------- -----------
Range of exercise prices
$14.01 - $16.80 1,000 9.9 0 $ 0.00
$16.81 - $19.60 110,160 9.1 0 $ 0.00
$22.40 - $25.20 158,760 8.3 0 $ 0.00
$25.21 - $28.00 20,350 8.4 0 $ 0.00
----------- ----------- ----------- -----------
Outstanding at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,270 8.6 0 $ 0.00
=========== =========== =========== ===========
Options outstanding at year-end 1998 were as follows:
Outstanding Exercisable
------------------------ ------------------------
Weighted-
Average Weighted-
Remaining Average
Contractual Exercise
Number Life Number Price
----------- ----------- ----------- -----------
Range of exercise prices
$22.40 - $25.20 167,660 9.3 0 $ 0.00
$25.21 - $28.00 21,275 9.0 925 $ 28.00
----------- ----------- ----------- -----------
Outstanding at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,935 9.3 925 $ 28.00
=========== =========== =========== ===========
21
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 16 - STOCK OPTIONS (continued)
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.
1999 1998
----------- -----------
Net income (in thousands) as reported $ 8,319 $ 7,888
Pro forma net income (in thousands) $ 7,799 $ 7,752
Basic earnings per common share as reported $ 1.43 $ 1.36
Pro forma basic earnings per common share $ 1.34 $ 1.33
Diluted earnings per common share as reported $ 1.43 $ 1.36
Pro forma diluted earnings per common share $ 1.34 $ 1.33
The pro forma effects are computed with option pricing models, using the
following weighted-average assumptions as of the grant date:
1999 1998
----------- -----------
Risk-free interest rate 5.26% 5.53%
Expected option life 4.94 years 4.91 years
Expected price volatility 44.00% 40.75%
Dividend yield 1.47% 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, 1999 and 1998, that the Company and Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1999, 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.
Minimum Required To Be
Minimum Required Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
As of December 31, 1999 (in thousands)
Total Capital (to Risk Weighted Assets)
Consolidated $ 74,844 10.26% $ 58,330 8.00% $ 72,913 10.00%
Bank $ 73,980 10.01% $ 59,144 8.00% $ 73,298 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 67,986 9.32% $ 29,165 4.00% $ 43,748 6.00%
Bank $ 67,458 9.12% $ 29,572 4.00% $ 44,358 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 67,986 6.77% $ 40,167 4.00% $ 50,208 5.00%
Bank $ 67,458 6.72% $ 40,183 4.00% $ 50,228 5.00%
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%
22
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, 1999
and 1998. Items which are not financial instruments are not included.
1999 1998
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
(in thousands)
Assets:
Cash and cash equivalents $ 63,104 $ 63,104 $ 61,508 $ 61,508
Real estate mortgages held for sale 862 862 3,796 3,796
Securities available for sale 271,421 271,421 327,658 327,658
Loans, net 647,376 638,331 532,986 537,223
Accrued interest income receivable 5,402 5,402 5,653 5,653
Mortgage servicing rights 1,459 1,459 1,008 1,008
Liabilities:
Certificates of deposit (498,520) (498,654) (500,157) (502,823)
All other deposits (249,723) (249,723) (239,190) (239,190)
Securities sold under agreements to repurchase (121,374) (122,189) (110,163) (111,311)
Other short-term borrowings (74,000) (74,000) (25,527) (25,527)
Long-term debt (16,473) (16,213) (21,386) (21,568)
Guaranteed preferred beneficial interests in Company's subordinated (19,264) (18,500) (19,238) (22,500)
debentures
Accrued interest expenses payable (3,391) (3,391) (3,639) (3,639)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1999 and 1998. The
estimated fair value for cash, cash equivalents and accrued interest is
considered to approximate cost. Real estate mortgages held for sale are based
upon 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 the 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, 1999 and 1998, 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, 1999 and 1998, 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, 1999 and 1998, 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, 1999 and 1998, 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, 1999 and 1998, were as follows:
1999 1998
------------------------ ------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
----------- ----------- ----------- -----------
(in thousands)
Commercial loan lines of credit $ 30,797 $ 179,986 $ 16,783 $ 124,975
Commercial loan standby letters of credit 0 6,783 0 14,186
Real estate mortgage loans 2,424 1,030 4,473 908
Real estate construction mortgage loans 0 1,762 0 2,237
Credit card open-ended revolving lines 6,584 0 5,514 0
Home equity mortgage open-ended revolving lines 0 31,521 0 29,178
Consumer loan open-ended revolving lines 0 4,626 0 4,185
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,805 $ 225,708 $ 26,770 $ 175,669
=========== =========== =========== ===========
23
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 19 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES (continued)
At December 31, 1999 and 1998, the range of interest rates for
commercial loan commitments with a fixed rate was 4.92% to 12.50%. The range
of interest rates for commercial loan commitments with variable rates was
6.93% to 12.50% and 7.00% to 11.75% at December 31, 1999 and 1998. 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 significant losses as a result of these commitments.
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:
CONDENSED BALANCE SHEETS
December 31
------------------------
1999 1998
----------- -----------
(in thousands)
ASSETS
Deposits with Lake City Bank $ 466 $ 113
Investment in subsidiaries 73,948 75,045
Other assets 1,705 1,108
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,119 $ 76,266
=========== ===========
LIABILITIES
Dividends payable and other liabilities $ 1,306 $ 491
Subordinated debt 20,619 20,619
STOCKHOLDERS' EQUITY 54,194 55,156
----------- -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,119 $ 76,266
=========== ===========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
-------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
Dividends from Lake City Bank $ 3,928 $ 2,182 $ 982
Interest on deposits and repurchase agreements, Lake City Bank 5 6 24
Equity in undistributed income of subsidiaries 5,547 6,870 7,085
Interest expense on subordinated debt 1,800 1,800 655
Miscellaneous expense 120 134 242
----------- ----------- -----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,560 7,124 7,194
Income tax benefit 759 764 346
----------- ----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,319 $ 7,888 $ 7,540
=========== =========== ===========
24
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 20 - PARENT COMPANY STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
-------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
Cash flows from operating activities
Net income $ 8,319 $ 7,888 $ 7,540
Adjustments to net cash from operating activities
Equity in undistributed income of subsidiaries (5,547) (6,870) (7,085)
Other changes 218 (175) (770)
----------- ----------- -----------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . 2,990 843 (315)
Cash flows from investing activities 0 0 (17,283)
Cash flows from financing activities (2,637) (2,150) 19,003
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . 353 (1,307) 1,405
Cash and cash equivalents at beginning of the year 113 1,420 15
----------- ----------- -----------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . . $ 466 $ 113 $ 1,420
=========== =========== ===========
NOTE 21 - EARNINGS PER SHARE
Following are the factors used in the earnings per share computations:
1999 1998 1997
----------- ----------- -----------
Basic earnings per common share
Net income $ 8,319,000 $ 7,888,000 $ 7,540,000
Weighted-average common shares outstanding 5,813,984 5,813,984 5,813,162
Basic earnings per common share $ 1.43 $ 1.36 $ 1.30
Diluted earnings per common share
Net income $ 8,319,000 $ 7,888,000 $ 7,540,000
Weighted-average common shares outstanding for
basic earnings per common share 5,813,984 5,813,984 5,813,162
Add: Dilutive effect of assumed exercises of stock options 8 0 0
Average shares and dilutive potential common shares 5,813,992 5,813,984 5,813,162
Diluted earnings per common share $ 1.43 $ 1.36 $ 1.30
Stock options for 290,262 and 188,935 shares of common stock were not
considered in computing diluted earnings per common share for 1999 and 1998
because they were antidilutive. The stock option plan was adopted in 1998.
25
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, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998, and
the results of their operations and their cash flows for the years ended
December 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 14, 2000
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
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- ------------------------------------------------------------------------------
FINANCIAL CONDITION
Growth and Expansion
The Company continued to grow in 1999, adding two new offices and
expanding its primary market area. Over the last five years, the Company has
added nineteen new offices. The Company now has 44 offices servicing 15
counties across north central Indiana. This growth was evident in the total
assets of the Company, which were $1,039,843,000 at December 31, 1999, an
increase of 6.2 percent over 1998. The Company opened its first office in
Allen County, the second largest market in the state of Indiana. This office
was well received and grew steadily during the seven months it was open. The
Company will open its second office in Allen County in 2000. Bank
consolidation has been very rapid in Allen County, and we expect that customer
acceptance of our Company will continue to be positive over the next several
years. The Company also added a satellite office to supplement its current
location in Winona Lake, Indiana. 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 $43.3 million in 2000.
In addition to the primary sources of funds, management can draw upon
several secondary sources to meet any unusual demands. The Company has $84
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 of high quality and are easily marketable.
Approximately 85.9 percent of this portfolio is comprised of 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 1999, cash and cash equivalents increased $1.6 million to
$63,104,000 at December 31, 1999. Low interest rates continued to prevail
throughout much of 1999 keeping the demand high for residential real estate
loans. Proceeds from the sale of loans was $83 million for 1999. Other sources
of funds came from sales, calls and maturities of securities of $110 million.
The sales of loans and securities also contributed $2.6 million to pre-tax
income. The major uses of funds were for the increase in loans, purchases of
securities, and purchases of fixed assets. Loans increased approximately $116
million, which was net of approximately $80 million of loans originated and
sold during 1999. Purchases of securities were $65 million and purchases of
land, premises and equipment were $4 million.
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.
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. Although management
does not consider GAP ratios in its planning, this information can be used in
a general fashion to look at asset and liability mismatches. The Company's
cumulative GAP ratio at December 31, 1999, for the next 12 months is a
negative 30.1 percent of earning assets.
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 present 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 present 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
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
1999
Principal/Notional Amount Maturing in:
-----------------------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------------------
Fair
Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/99
--------- --------- --------- --------- --------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 78,484 $ 56,049 $ 49,134 $ 58,882 $ 80,464 $ 29,188 $ 352,201 $ 343,652
Average interest rate 8.65% 8.69% 8.66% 8.29% 7.97% 7.98% 8.39%
Variable interest rate loans $ 264,375 $ 1,657 $ 1,442 $ 1,300 $ 1,142 $ 32,643 $ 302,559 $ 302,062
Average interest rate 8.93% 10.25% 10.18% 10.26% 10.80% 8.98% 8.96%
Fixed interest rate securities $ 18,233 $ 47,209 $ 22,150 $ 26,985 $ 21,305 $ 139,405 $ 275,287 $ 267,414
Average interest rate 6.54% 5.65% 6.42% 6.10% 6.38% 6.11% 6.10%
Variable interest rate securities $ 209 $ 206 $ 218 $ 231 $ 245 $ 2,968 $ 4,077 $ 4,007
Average interest rate 6.36% 6.69% 6.69% 6.69% 6.69% 6.98% 6.88%
Other interest-bearing assets $ 3,783 - - - - - $ 3,783 $ 3,783
Average interest rate 5.50% - - - - - 5.50%
Rate sensitive liabilities:
Noninterest bearing checking $ 7,103 $ 6,338 $ 1,147 $ 1,093 $ 1,598 $ 119,316 $ 136,595 $ 136,595
Average interest rate - - - - - - -
Savings & interest bearing checking $ 4,669 $ 4,216 $ 3,744 $ 3,401 $ 2,727 $ 94,371 $ 113,128 $ 113,128
Average interest rate 1.82% 1.82% 1.82% 1.82% 1.82% 1.67% 1.69%
Time deposits $ 414,773 $ 61,477 $ 11,922 $ 5,623 $ 3,069 $ 1,656 $ 498,520 $ 498,654
Average interest rate 5.13% 5.71% 5.75% 5.38% 5.46% 5.55% 5.22%
Fixed interest rate borrowings $ 129,574 $ 20,800 $ - 1,473 $ - $ 19,264 $ 171,111 $ 170,902
Average interest rate 4.60% 5.58% - 6.15% - 9.00% 5.23%
Variable interest rate borrowings $ 60,000 - - - - - $ 60,000 $ 60,000
Average interest rate 5.42% - - - - - 5.42%
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
--------- --------- --------- --------- --------- ---------- ---------- ----------
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%
Comparison of these tables illustrates the growth the Company
experienced during 1999. Increases in fixed rate loans, variable loans, fixed
rate borrowings and variable rate borrowings reflect the growth of the
Company's existing offices. The increase in loans for 1999 was in commercial
and consumer loans. Significant increases were seen in excess cash investments
and fed fund purchases, which are fixed rate, and in short-term variable rate
borrowings from the Federal Home Loan Bank. These increases in funding sources
were used to finance the increase in the loan portfolio.
During 1999, LCB Investments Limited was formed to manage part of the
Company's investment portfolio. LCB Investments Limited, located in Bermuda,
is a subsidiary of Lake City Bank and is included in the consolidation of the
Company's financial statements.
28
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
1999, purchases primarily consisted of U.S. Treasuries, mortgage-backed
securities and municipal bonds. At December 31, 1999, the Company's investment
in mortgage-backed securities comprised approximately 70 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 are within risk
tolerances for price, prepayment, extension and original life risk
characteristics contained in the Company's investment policy. The Company uses
Bloomberg analytics to evaluate and monitor all purchases. At December 31,
1999, the mortgage securities in the AFS portfolio had a three and two-thirds
year average life, with approximately 11 percent price depreciation should
rates move up 300 basis points and approximately 8 percent price appreciation
should rates move down 300 basis points. As of December 31, 1999, all mortgage
securities were performing in a manner consistent with management's original
expectations.
Capital Management
The Company believes that a strong, but aggressively managed, 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 6.8 percent, 9.3 percent and 10.3 percent at December 31,
1999. All three ratios met or 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
decreased by 1.7 percent, to $54,194,000 as of December 31, 1999, from
$55,156,000 as of December 31, 1998. The 1999 decrease resulted from the
retention of net income of $8,319,000, minus cash dividends declared of
$2,549,000, less the change in the AFS adjustment of $6,645,000, net of tax,
less $87,000 for the purchase of treasury stock. The AFS adjustment reflects a
350 basis point increase in two to five year U. S. Treasury rates during 1999.
Since the securities portfolio is primarily fixed rate, a negative equity
adjustment should occur whenever interest rates increase. Management has
factored this into the determination of the size of the AFS portfolio, to
assure that stockholders' equity is adequate under various scenarios. The 1998
growth of $6,900,000 resulted from the retention of net income of $7,888,000,
minus cash dividends declared of $2,002,000, plus the AFS adjustment of
$1,163,000, net of tax, less $149,000 for the purchase of treasury stock. This
1998 AFS adjustment reflected a 114 basis point decrease in two to five year
U. S. Treasury rates during 1998. Included in the change in the AFS adjustment
was an increase of $2,495,000 from securities transferred to AFS on October 1,
1998 as permitted by the early adoption of SFAS No. 133. None of the
securities transferred to AFS were sold during the fourth quarter of 1998.
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, 1999, the allowance for loan losses was $6,522,000 or
1.00 percent of total loans outstanding, compared with $5,510,000 or 1.02
percent of total loans outstanding at December 31, 1998. 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 includes the following:
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 probable losses 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 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 loss.
High delinquencies are generally indicative of an increase in loan
losses.
As a result of the methodology in determining the adequacy of the
allowance for loan losses, the provision for loan losses was $1,310,000 in
1999 as compared to $480,000 in 1998. The increased provision for loan losses
was primarily related to the growth in the loan portfolio, particularly the
commercial and consumer portfolios. The past due accruing loans (90 days or
more) and nonaccrual loans continued to be at low levels throughout 1999. At
December 31, 1999, loans past due 90 days or more and still accruing were
$171,000 and nonaccrual loans were $329,000, which included one impaired loan
of $246,000. 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. Due to the increase in the loan portfolio, it was
necessary to provide a larger provision in 1999 compared to 1998 and 1997. The
total provision for loan losses and the total net charge-offs for the two
years prior to 1999 combined were $749,000 and $545,000. The total provision
for loan losses and the total net charge-offs for 1999 were $1,310,000 and
$298,000.
The Company has experienced growth in total loans over the last three
years of $195 million, or about 42.6 percent, and the concentration of this
loan growth was in the commercial loan portfolio. Commercial loans comprised
57.4 percent, 56.0 percent and 51.7 percent of the total loan portfolio at
December 31, 1999, 1998 and 1997. With this type of loan growth, management
believes that it is prudent to continue to provide for loan losses at the
current levels.
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
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1999 vs 1998
The Company reached a milestone in 1999, as total assets exceeded $1
billion for the first time, totaling $1,039,843,000 at December 31, 1999. This
was an increase of $60,934,000 or 6.2 percent over December 31, 1998. The
lending areas had a terrific year, as total loans increased 21.4 percent to
$653,898,000 at December 31, 1999. Total securities decreased 17.2 percent to
271,421,000 at December 31, 1999. This change in the asset mix was a result of
management's work to more profitably employ the funding received from the
branch acquisitions late in 1997 and early in 1998 that was originally
invested into securities until it could be used to fund loan growth. The
Company also employed a more aggressive funding strategy in 1999. Emphasis was
placed on growth in relationship type accounts. Therefore, while total
deposits were up a modest one percent, growth in checking accounts and the
Investor Weekly product were 15.4 and 25.4 percent, respectively. We also
emphasized the sale of cash management accounts during the year, which
resulted in a 40.2 percent increase in overnight repurchase agreements. This
growth, combined with a greater use of short-term FHLB borrowings, resulted in
an increase in short-term borrowings of 44.0 percent, to $195,374,000 at
December 31, 1999.
The Company also had another record year of earnings with net income at
$8,319,000 for 1999. This was an increase of $431,000 or 5.5 percent over
1998. Interest income in 1999 was $69,395,000, an increase of $5,728,000 or
9.0 percent over 1998. This was a result of the success the Company had during
1999 in moving many of the securities purchased with the funds from the
acquisitions of late 1997 and early 1998 to higher yielding loans. The loan to
deposit ratio increased from 72.8 percent at December 31, 1998 to 87.4 percent
at year-end 1999. Interest and fees on loans increased $7,365,000 or 16.6
percent while interest and dividends on securities decreased $1,393,000 or 7.4
percent. Total interest expense was $37,093,000 for 1999, an increase of
$1,002,000 or 2.8 percent over 1998. An emphasis on controlling the Company's
funding costs during the year contributed to this modest increase. The net
result of the above factors was net interest income of $32,302,000 for 1999, a
17.1 percent increase over 1998. The impact to the interest margin was an
increase of 12 basis points to 3.7 percent when comparing 1999 to 1998. The
Company plans to continue growing the loan portfolio, as well as continuing
the relationship funding strategy implemented during 1999. The prime rate was
on the rise during the second half of 1999, increasing 75 basis points by the
end of the year, but most of the increase, 50 basis points, occurred in the
last two months of the year. The effect of this increase was not significant.
As the Company continued to emphasize loan growth, asset quality
remained a top priority throughout 1999. Nonaccrual loans were $329,000 at
year-end, or .05 percent of total loans. This included one loan totaling
$246,000, which was recognized as impaired in 1999. Net charge-offs were
$298,000 or .05 percent of average daily loans. Although asset quality
remained high, the growth in the loan portfolio made it necessary to recognize
provision for loan loss expense of $1,310,000. The allowance for loan losses
at December 31, 1999 was $6,522,000, which represented 1.00 percent of the
loan portfolio. The Company's management continues to monitor the adequacy of
the provision based on loan levels, asset quality and the economic outlook
among other factors.
Noninterest income was good in 1999, however slowing mortgage loan
demand reduced the contribution from this area as compared to 1998.
Noninterest income for 1999 was $11,953,000, an increase of $744,000 or 6.6
percent over 1998. Deposit fees increased $317,000 or 7.9 percent, with other
major increases in brokerage income, which was up $159,000 or 37.7 percent,
insurance and credit card fees. Mortgage originations decreased 3.6 percent
comparing year end 1998 to year end 1999. The gains on sale of mortgage loans
were therefore down 11.2 percent due to rising rates and lower refinance
activity. Security gains for 1999 increased 6.6 percent over 1998.
Noninterest expense for 1999 was $30,541,000, an increase of $4,050,000
or 15.3 percent over 1998. Salaries and employee benefits increased $1,835,000
or 13.0 percent reflecting normal salary increases, additions to staff and
increased health care costs. Occupancy and equipment expenses increased
$1,244,000 or 30.6 percent. This reflected the investments in equipment and
technology as part of our commitment to provide our customers with the highest
degree of customer service and to prepare the Company for the year 2000. Other
expense increased $971,000 or 11.6 percent with the largest increase seen in
data processing fees, up $431,000 or 26.9 percent. This reflected both a
change in our trust accounting system and year 2000 preparations.
As a result of all those factors, income before income tax expense
increased $590,000 or 5.0 percent, to $12,404,000 for 1999, as compared to
$11,814,000 for 1998. Income tax expense was $4,085,000 for 1999 and
$3,926,000 for 1998. Income tax as a percent of income before tax was 32.9
percent for 1999 and 33.2 percent for 1998. Net income increased $431,000 or
5.5 percent, to $8,319,000 for 1999, as compared to $7,888,000 for 1998. Basic
earnings per share for 1999 was $1.43, as compared to $1.36 for 1998. Net
income of $8,319,000 represented a 15.6 percent return on January 1, 1999,
stockholders' equity (excluding the equity adjustment related to SFAS No.
115), and a .84 percent return on average daily assets.
1998 vs 1997
In 1998, the Company reported earnings of $7,888,000. This was
approximately a five percent increase over 1997, and represented 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 was 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 were 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 was still aggressively pursuing good quality commercial and
consumer loans to better utilize these funds. 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 began, loan growth continued 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.
30
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
Noninterest income was a primary focus of management during 1998. As the
interest margin continued to decline, it became 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 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 positioned the Company for
future growth, and allowed 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.
YEAR 2000
The Company had a successful year 2000 rollover. At this point, the
Company has not experienced any Year 2000 issues as a result of the rollover,
and is not aware of any customers that have experienced any material Year 2000
issues. This success can be attributed to the two years of planning and
preparation for the year 2000. Part of the preparation was evaluating,
upgrading and/or replacing all hardware, software, and electrical and
mechanical equipment that was not year 2000 compliant. Through this evaluation
process, systems that were identified as not Year 2000 ready were either
upgraded or retired. The Company upgraded 19 systems and retired 23 systems
based on the results of the evaluation process. As part of the preparation the
Company contacted all vendors, corporate depositors, and all large corporate
lending customers to access their Year 2000 efforts. While the rollover went
smoothly, year 2000 monitoring will continue for much of the year to assure
that all Year 2000 issues have been addressed.
31
LAKE CITY BANK OFFICERS
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Michael L. Kubacki President Operations
Robert C. Condon Executive Vice President Frank A. Soltis Senior Vice President
D. Jean Northenor Executive Vice President Vicki D. Martin Vice President
Charles D. Smith Executive Vice President Angela K. Ritchey Vice President
Walter L. Weldy Executive Vice President Lisa M. Bicknese Assistant Vice President
Terry M. White Executive Vice President Jean A. Ciriello Assistant Vice President
Kirk B. Davis Assistant Vice President
Audit Joanie L. Foreman Assistant Vice President
Betty L. McHenry Senior Vice President Lisa A. Fulton Assistant Vice President
and Auditor Ruth A. Hutcherson Assistant Vice President
Kevin A. Linehan Vice President Linda A. Owens Assistant Vice President
Michelle R. Halter Assistant Vice President Lorretta J. Burnworth Operations Officer
Teah D. O'Dell Assistant Auditor Janice J. Cox Operations Officer
William L. Hilliard Operations Officer
Commercial Services Scot A. Karbach Operations Officer
Kelly K. Ayers Vice President Jan R. Martin Operations Officer
David A. Bickel Vice President Linda L. Swoverland Operations Officer
James R. Cowan Vice President
Drew D. Dunlavy Vice President Retail Services
Michael E. Gavin Vice President Kevin L. Deardorff Senior Vice President
Kenneth L. Kasamis Vice President Dale L. Cramer Vice President
Joseph F. Kessie Vice President Thomas P. Frantz Vice President
William D. Leedy Vice President James D. Tague Vice President
J. Randall Leininger Vice President Janet K. Anderson Assistant Vice President
H.A. "Rocky" Meyer Vice President Barry A. Bailey Assistant Vice President
Jack E. Mills Vice President Dennis E. Dolby Assistant Vice President
Eric H. Ottinger Vice President Craig A. Haecker Assistant Vice President
Larry L. Penrod Vice President T. Larry Mitchell Assistant Vice President
Thomas G. Stark Vice President Jenifer L. Rafferty Assistant Vice President
James C. Stout Vice President Sue L. Sands Assistant Vice President
J. Mark Ulrich Vice President W. Randy Yoder Assistant Vice President
Randal U. Vutech Vice President Glenn A. Goudey Senior Mortgage Underwriter
Chad D. Brouyette Assistant Vice President Lisa A. Stookey Merchant Services Officer
Stephanie L. DuBois Assistant Vice President Carolyn A. Crabb Mortgage Banking Officer
Brent E. Hoffman Assistant Vice President Aaron M. Stroup Mortgage Banking Officer
Kelli S. Robinson Assistant Vice President Rafael M. Villalon Mortgage Banking Officer
Timothy M. Rudge Assistant Vice President W. John Pritz Retail Banking Officer
J. Chad Stoltzfus Assistant Vice President Melanie R. Shipley Retail Banking Officer
Corporate Cash Management Trust & Investments
Dennis E. Cultice Senior Vice President William C. Coleman Vice President
Julie W. Whitehead Vice President Patricia L. Culp Vice President
Abbe S. Muta Cash Management Officer Keith E. Davis Vice President
Jeanine D. Knowles Vice President
Financial Dennis A. Reeve Vice President
Teresa A. Bartman Vice President and Controller Judith R. Simcox Vice President
James J. Nowak Vice President and Treasurer Alan S. Duff Assistant Vice President
Brian M. Lamb Assistant Vice President Larry L. Poyser Assistant Vice President
Kevin M. Reed Assistant Vice President
Marketing, Human Resources and Facilities Debra L. Rich Assistant Vice President
Jill DeBatty Vice President Sarah A. Richardson Assistant Vice President
Allyn P. Decker Vice President Peggy L. Terhaar Assistant Vice President
Cathy L. Teghtmeyer Vice President Marjorie E. Kurtz Trust Administrator
John W. Gove Assistant Vice President
Paul S. Purvis Assistant Vice President
Aimee C. Morgan Human Resource Officer
32
LAKE CITY BANK OFFICERS (continued)
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Office Administration
Jane E. Miller Vice President
Jeri L. Yoder Vice President
Jeannine P. Cooley Assistant Vice President
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
Concord Steve Colagrossi Assistant Vice President
Cromwell Jana L. Miller Office Manager
Elkhart Beardsley Rosalie M. Smith Vice President
Elkhart East Kathleen M. Dougherty Office Manager
Elkhart Hubbard Hill Samuel M. Bouie Office Manager
Elkhart Northwest Don A. Brincefeild Vice President
Fort Wayne North Bruce A. Wright Vice President
Fort Wayne South Robert J. Savage Vice President
Goshen Downtown Jane M. Greene Assistant Vice President
Goshen South Clarence J. "CJ" Yoder Vice President
Granger Daniel E. Hunt Office Manager
Greentown Donna L. Graham Assistant Vice President
Huntington Joseph E. Blomeke Vice President
Kendallville East L. Duane Smith Vice President
Mark R. Rensner Assistant Office Manager
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
Nanceen P. Briggs Office Manager
Logansport J. Bradley Glasson Assistant 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 Robert J. DeCola Vice President
Nappanee Jeffery W. Krusenklaus Office Manager
North Webster Jeanne G. Bowen Vice President
Peru Linda L. Rodgers Assistant Vice President
Pierceton Lisa L. Hockemeyer Assistant Vice President
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 Michele D. Grimm Office Manager
Sarah Miller-Bontrager Assistant Office Manager
Silver Lake Deborah A. Lotz Assistant Vice President
Syracuse Amanda Russell Office Manager
Wabash North Merrill A. Templin Assistant Vice President
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
Winona Lake East Lana M. Shepherd Assistant Office Manager
33