Stock and Dividend Information
-------------------------------------------------------------------------------------------------------------------------------
The table below lists the range of the bid-ask prices of common stock of Lakeland Financial Corporation and the
dividend information on a quarterly basis over the last two calendar years. Roney & Company (P.O. Box 130, Elkhart,
Indiana, 46515, telephone 219-293-7585 or 1-800-43-Roney) and McDonald and Company Securities, Inc. (214
South Main Street, Elkhart, Indiana, 46516, telephone 219-294-2526) have advised the Corporation that they are serving
as "market makers" for the common stock of the Corporation. Edward D. Jones & Co. (117 W. Center Street, Suite
B, Warsaw, Indiana 46580, telephone 219-267-2914 or 1-800-441-2914) is a trader in the stock of Lakeland Financial
Corporation. These companies have reported to the Corporation the bid-ask prices for the common stock of the Corporation
as set forth in the table below. Such bid-ask prices are not a definite indication that sales transactions occurred at the
quoted prices or that sales transactions did not occur outside of the quoted prices. The trading volume of the Corporation's
stock continues to be limited; as a result, these quotations do not necessarily reflect the price at which the Corporation's
stock would trade in a more active market.
Quarters
--------------------------------------------------------
1st 2nd 3rd 4th
----------- ----------- ----------- -----------
Trading Range:*
1993 $19.00-$22.00 $21.00-$25.50 $24.00-$26.00 $24.00-$26.00
1994 $26.00-$29.00 $29.50-$31.50 $31.00-$32.50 $32.50-$34.50
Dividends Declared:
1993 $.12 $.12 $.12 $.14
1994 $.14 $.14 $.14 $.17
<FN>
* Based upon information supplied by the firms listed above.
</FN>
Annual Meeting
- -----------------------------------------------------------------------------
The annual meeting of the shareholders of Lakeland Financial Corporation
will be held at noon, April 11, 1995 at the Shrine Building, Kosciusko County
Fair Grounds, Warsaw, Indiana. As of December 31, 1994, there were 738
shareholders.
Special Notice: Form 10-K Available
- -----------------------------------------------------------------------------
The Corporation will provide without charge to each shareholder, Lakeland
Financial Corporation's Annual Report on Form 10-K, including Financial
Statements and schedules thereto required to be filed with the Securities and
Exchange Commission for the Corporation's most recent fiscal year upon written
request of Mr. Terry M. White, Secretary and Treasurer, P.O. Box 1387, Warsaw,
Indiana 46581-1387.
Registrar and Transfer Agent
- -----------------------------------------------------------------------------
Lake City Bank
Trust Department
P.O. Box 1387
Warsaw, Indiana 46581-1387
Selected Financial Data (In Thousands Except for Share and Per Share Data)
- --------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
Interest income $33,655 $27,607 $27,683 $28,245 $25,286
Interest expense 14,887 12,022 13,622 16,408 15,287
----------- ----------- ----------- ----------- -----------
Net interest income 18,768 15,585 14,061 11,837 9,999
Provision for loan losses 795 790 1,340 1,970 360
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 17,973 14,795 12,721 9,867 9,639
Other noninterest income 4,099 2,813 2,735 1,866 1,749
Net gains on the sale of real estate
mortgages held for sale 177 676 176 174 5
Net trading gains (losses) 0 0 (2) 36 0
Net securities gains (losses) (7) 175 323 1,283 2
Noninterest expense (14,092) (12,378) (10,832) (9,238) (7,907)
----------- ----------- ----------- ----------- -----------
Income before income tax expense and cumulative
effect of change in accounting principle 8,150 6,081 5,121 3,988 3,488
Income tax expense 3,024 2,171 1,762 1,281 1,081
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle 5,126 3,910 3,359 2,707 2,407
Cumulative effect of adopting SFAS No. 109 0 325 0 0 0
----------- ----------- ----------- ----------- -----------
Net income $5,126 $4,235 $3,359 $2,707 $2,407
=========== =========== =========== =========== ===========
Average shares outstanding* 1,438,496 1,438,496 1,438,496 1,438,496 1,438,496
Per average common share outstanding:*
Income before cumulative effect of change
in accounting principle $3.56 $2.72 $2.34 $1.88 $1.67
=========== =========== =========== =========== ===========
Net income $3.56 $2.94 $2.34 $1.88 $1.67
=========== =========== =========== =========== ===========
Cash dividends declared $0.590 $0.500 $0.416 $0.374 $0.364
=========== =========== =========== =========== ===========
Balances at December 31:
Total assets $496,963 $449,954 $362,497 $339,458 $286,548
=========== =========== =========== =========== ===========
Total deposits $396,740 $370,032 $284,308 $265,524 $244,108
=========== =========== =========== =========== ===========
Long term debt $17,432 $9,300 $8,000 $0 $373
=========== =========== =========== =========== ===========
Total stockholders' equity $29,889 $27,912 $23,750 $20,991 $18,820
=========== =========== =========== =========== ===========
<FN>
* Adjusted for a 10 percent stock dividend (Note 1)
</FN>
Consolidated Balance Sheets
-------------------------------------------------------------------------------------------------------------------------------
December 31
--------------------------
1994 1993
------------ ------------
ASSETS
Cash and due from banks $21,346,000 $11,960,000
Short term investments 2,801,000 909,000
------------ ------------
Total cash and cash equivalents 24,147,000 12,869,000
Securities available for sale (Note 2) (carried at fair value) 59,600,000 61,133,000
Securities held to maturity (Note 2) (market value of $103,723,000 at 1994
and $100,377,000 at 1993) 110,152,000 99,570,000
Real estate mortgages held for sale 175,000 2,191,000
Total loans (Note 3) 287,956,000 260,185,000
Less allowance for loan losses (Note 4) 4,866,000 4,010,000
------------ ------------
Net loans 283,090,000 256,175,000
Land, premises and equipment, net (Note 5) 11,295,000 9,734,000
Accrued income receivable 3,464,000 2,858,000
Other assets 5,040,000 5,424,000
------------ ------------
Total assets $496,963,000 $449,954,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $62,830,000 $46,719,000
Interest bearing deposits (Note 6) 333,910,000 323,313,000
------------ ------------
Total deposits 396,740,000 370,032,000
Short-term borrowings
Federal funds purchased 4,000,000 1,450,000
Securities sold under agreements to repurchase (Note 7) 41,750,000 29,372,000
U.S. Treasury demand notes 2,573,000 7,115,000
------------ -----------
Total short-term borrowings 48,323,000 37,937,000
Accrued expenses payable 3,280,000 3,022,000
Other liabilities 1,299,000 1,751,000
Long-term debt (Note 8) 17,432,000 9,300,000
------------ ------------
Total liabilities 467,074,000 422,042,000
============ ============
Commitments, off-balance sheet risks and contingencies (Note 14)
STOCKHOLDERS' EQUITY
Common stock: $1.00 stated value, 2,750,000 shares authorized, 1,438,496
shares outstanding as of December 31, 1994 and 1993 (Note 1) 1,438,000 1,438,000
Additional paid-in capital (Note 1) 7,827,000 7,827,000
Retained earnings 22,279,000 18,001,000
Unrealized net gain (loss) on securities available for sale (Note 1) (1,655,000) 646,000
------------ ------------
Total stockholders' equity 29,889,000 27,912,000
----------- -----------
Total liabilities and stockholders' equity $496,963,000 $449,954,000
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
---------------------------------------
1994 1993 1992
----------- ----------- -----------
NET INTEREST INCOME
Interest and fees on loans
Taxable $23,658,000 $19,946,000 $18,762,000
Tax exempt 273,000 371,000 435,000
Interest and dividends on securities
Taxable 8,842,000 6,459,000 7,801,000
Tax exempt 727,000 644,000 483,000
Interest on short-term investments 155,000 185,000 188,000
Interest on trading account securities 0 2,000 14,000
----------- ----------- -----------
Total interest income 33,655,000 27,607,000 27,683,000
----------- ----------- -----------
Interest on deposits 12,108,000 10,101,000 11,784,000
Interest on borrowings 2,779,000 1,921,000 1,838,000
----------- ----------- -----------
Total interest expense 14,887,000 12,022,000 13,622,000
----------- ----------- -----------
NET INTEREST INCOME 18,768,000 15,585,000 14,061,000
Provision for loan losses (Note 4) 795,000 790,000 1,340,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,973,000 14,795,000 12,721,000
----------- ----------- -----------
NONINTEREST INCOME
Trust income 609,000 524,000 420,000
Service charges on deposit accounts 2,078,000 1,775,000 1,546,000
Other income 1,412,000 514,000 769,000
Net gains on the sale of real estate mortgages held for sale 177,000 676,000 176,000
Net trading account securities losses 0 0 (2,000)
Net securities gains (losses) (Note 2) (7,000) 175,000 323,000
----------- ----------- -----------
Total noninterest income 4,269,000 3,664,000 3,232,000
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits (Note 9) 7,278,000 6,236,000 5,318,000
Net occupancy expense 1,057,000 996,000 887,000
Equipment costs 1,001,000 780,000 728,000
Other expense (Note 10) 4,756,000 4,366,000 3,899,000
----------- ----------- -----------
Total noninterest expense 14,092,000 12,378,000 10,832,000
----------- ----------- -----------
Income before income tax expense and cumulative effect
of change in accounting principle 8,150,000 6,081,000 5,121,000
Income tax expense (Notes 1 and 11) 3,024,000 2,171,000 1,762,000
----------- ----------- -----------
Income before cumulative effect of change in accounting principle 5,126,000 3,910,000 3,359,000
Cumulative effect of adopting SFAS No. 109 (Notes 1 and 11) 0 325,000 0
----------- ----------- -----------
NET INCOME $5,126,000 $4,235,000 $3,359,000
=========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING (Note 1) 1,438,496 1,438,496 1,438,496
=========== =========== ===========
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER COMMON SHARE (Notes 1 and 11) $3.56 $2.72 $2.34
=========== =========== ===========
CUMULATIVE EFFECT OF ADOPTING SFAS No.109
PER COMMON SHARE (Notes 1 and 11) $0.00 $0.22 $0.00
=========== =========== ===========
NET INCOME PER COMMON SHARE (Note 1) $3.56 $2.94 $2.34
=========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------------------
Unrealized
Net Gain (Loss)
Common Stock Additional on Securities Total
------------------------- Paid-in Retained Available Stockholders'
Shares Amount Capital Earnings for Sale Equity
----------- ----------- ----------- ----------- ----------- -----------
Balances, January 1, 1992 1,307,844 $1,308,000 $5,475,000 $14,208,000 $0 $20,991,000
10% Common Stock Dividend (Note 1) 130,652 130,000 2,352,000 (2,485,000) (3,000)
Net income for 1992 3,359,000 3,359,000
Cash dividends declared
($.416 per share) (Note 1) (597,000) (597,000)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1992 1,438,496 1,438,000 7,827,000 14,485,000 0 23,750,000
Net income for 1993 4,235,000 4,235,000
Net change in unrealized net gain (loss) on
securities available for sale (Note 1) 646,000 646,000
Cash dividends declared
($.50 per share) (Note 1) (719,000) (719,000)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1993 1,438,496 1,438,000 7,827,000 18,001,000 646,000 27,912,000
Net income for 1994 5,126,000 5,126,000
Net change in unrealized net gain (loss) on
securities available for sale (Note 1) (2,301,000) (2,301,000)
Cash dividends declared
($.59 per share) (Note 1) (848,000) (848,000)
----------- ----------- ----------- ---------- ----------- -----------
Balances, December 31, 1994 1,438,496 $1,438,000 $7,827,000 $22,279,000 ($1,655,000) $29,889,000
=========== =========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
----------------------------------------
1994 1993 1992
------------ ------------ ------------
Cash flows from operating activities
Net income $5,126,000 $4,235,000 $3,359,000
------------ ------------ ------------
Adjustments to reconcile net income to
net cash from operating activities:
Cumulative effect of change in accounting principle 0 325,000 0
Depreciation 928,000 797,000 706,000
Provision for loan loss 795,000 790,000 1,340,000
Write down of other real estate owned 0 262,000 85,000
Loans originated for sale (9,426,000) (20,810,000) 0
Net gain on sale of loans (177,000) (676,000) (176,000)
Proceeds from sale of loans 11,619,000 23,509,000 5,064,000
Net loss on sale of premises and equipment 1,000 6,000 0
Purchases of trading account securities 0 (485,000) 0
Proceeds from sales of trading account securities 0 487,000 1,377,000
Net loss on sale of trading account securities 0 0 2,000
Net (gain) on sale of securities available for sale 0 (53,000) 0
Net (gain) loss on sale of securities held to maturity 7,000 (122,000) (323,000)
Net investment amortization (accretion) 444,000 369,000 (153,000)
(Increase) decrease in market value, securities held for sale 0 0 18,000
Increase (decrease) in taxes payable (15,000) (969,000) (431,000)
(Increase) decrease in income receivable (606,000) (541,000) 406,000
Increase (decrease) in accrued expenses payable 340,000 434,000 (139,000)
(Increase) decrease in other assets 1,735,000 (94,000) (827,000)
Increase (decrease) in other liabilities (495,000) 246,000 (80,000)
------------ ------------ ------------
Total adjustments 5,150,000 3,475,000 6,869,000
------------ ------------ ------------
Net cash from operating activities 10,276,000 7,710,000 10,228,000
------------ ------------ ------------
Cash flows from investing activities
Proceeds from sale of securities held to maturity 0 6,588,000 16,460,000
Proceeds from sale of securities held for sale 0 1,613,000 31,817,000
Proceeds from maturities and calls of securities held to maturity 8,899,000 17,683,000 50,353,000
Proceeds from maturities and calls of securities available for sale 6,409,000 1,123,000 2,856,000
Purchases of securities available for sale (9,033,000) 0 0
Purchases of securities held to maturity (19,494,000) (84,976,000) (88,178,000)
Net (increase) decrease in total loans (27,709,000) (8,240,000) (44,135,000)
Purchases of new premises and equipment (2,490,000) (1,602,000) (1,869,000)
Net proceeds from branch acquisitions (Note 12) 0 29,839,000 0
------------ ------------ ------------
Net cash from investing activities (43,418,000) (37,972,000) (32,696,000)
------------ ------------ ------------
Cash flows from financing activities
Net increase in total deposits 26,708,000 37,569,000 18,784,000
Proceeds from short-term borrowings 395,939,000 327,360,000 336,881,000
Payments on short-term borrowings (385,553,000) (332,700,000) (343,901,000)
Proceeds from long-term borrowings 8,132,000 1,300,000 8,000,000
Dividends paid (806,000) (676,000) (579,000)
------------ ------------ ------------
Net cash from financing activities 44,420,000 32,853,000 19,185,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 11,278,000 2,591,000 (3,283,000)
Cash and cash equivalents at beginning of year 12,869,000 10,278,000 13,561,000
------------ ------------ ------------
Cash and cash equivalents at end of year $24,147,000 $12,869,000 $10,278,000
============ ============ ============
Cash paid during the year for:
Interest $14,496,000 $12,254,000 $14,114,000
============ ============ ============
Income taxes $3,038,000 $2,490,000 $2,160,000
============ ============ ============
Investment securities transferred to securities held for sale $0 $0 $26,808,000
============ ============ ============
Loans transferred to real estate mortgages held for sale $0 $0 $9,204,000
============ ============ ============
In-substance foreclosure transferred to loans $1,100,000 $0 $0
============ ============ ============
Loans transferred to other real estate $107,000 $420,000 $3,050,000
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include Lakeland Financial
Corporation (the Corporation) and its wholly-owned subsidiary, Lake City Bank
(the Bank). All significant intercompany balances and transactions are
eliminated in consolidation.
Securities:
On December 31, 1993, the Corporation elected to adopt the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The Corporation now
classifies securities into held to maturity, available for sale and trading
categories. Held to maturity securities are those which the Corporation has the
positive intent and ability to hold to maturity, and are reported at amortized
cost. Available for sale securities are those the Corporation may decide to sell
if needed for liquidity, asset-liability management or other reasons. Available
for sale securities are reported at fair value, with unrealized gains and losses
included as a separate component of equity, net of tax. Trading securities are
bought principally for sale in the near term, and are reported at fair value
with unrealized gains and losses included in earnings. Prior to December 31,
1993, securities were reported at amortized cost except for securities held for
sale, which were reported at the lower of cost or market. This reclassification
increased equity by $646,000 at December 31, 1993. Realized gains and losses
resulting from the sale of securities are computed by the specific
identification method. Interest and dividend income, adjusted by amortization of
purchase premium or discount, is included in earnings.
Real Estate Mortgages Held for Sale:
Real estate mortgages classified as held for sale in the secondary market
are carried at the lower of aggregate cost or estimated fair value. Net
unrealized losses are recognized in a valuation allowance by charges to income.
Gains and losses on sales of mortgages are recognized on the settlement date.
Gains and losses are determined by the difference between sales proceeds and the
carrying value of the mortgages.
Interest Income on Loans:
Interest is accrued over the loan term based upon the principal balances
outstanding. Loans are placed on nonaccrual when interest collection becomes
doubtful. Loan fees and related costs are netted and deferred. The deferral is
included in loans and recognized in interest income over the loan term on the
level yield method.
Concentration of Credit:
The Bank is a full service bank with headquarters in Warsaw, Indiana with
offices in 20 cities and towns located within Kosciusko and contiguous counties.
It is estimated that over 98% of all the Bank's commercial, industrial,
agri-business and agricultural real estate mortgage, real estate construction
mortgage and consumer loans are made within its basic trade area. This area
generally lies within a radius of 10 miles or less from any of its existing
offices. The loan portfolios are well diversified and are secured to the extent
deemed appropriate by management. Mortgage-backed securities are collateralized
by mortgages located throughout the United States. Substantially all
mortgage-backed securities are insured directly or indirectly by the U. S.
Government.
Allowance for Loan Losses:
The allowance is judgmentally determined by management and is maintained at
a level considered adequate to cover possible losses currently anticipated based
on past loss experience, general national and local economic conditions,
information about specific borrower situations, including their financial
position and collateral values, and other factors and estimates which may change
over time. While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for any
loan charge-off that might occur. A loan is charged-off as a loss when deemed
uncollectible, although collection efforts continue and future recoveries may
occur. Increases to the allowance are recorded by a charge to expense and are
based upon subjective judgments.
The Corporation will adopt SFAS No. 114 and SFAS No. 118 at January 1,
1995. Under these standards, loans considered to be impaired are reduced to the
present value of future cash flows or to the fair value of collateral, by
allocating a portion of the allowance for loan losses to such loans. If these
allocations cause the allowance for loan losses to require increase, such
increase is reported as bad debt expense. The effect of adopting this accounting
standard on January 1, 1995 will not be material.
Land, Premises and Equipment:
Land, premises, and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed on both straight-line and
declining-balance methods based on estimated useful lives of the assets.
Other Real Estate Owned:
Other real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of acquisition. Any
reduction to fair value from the carrying value of the related loan at the time
of acquisition is accounted for as a loan loss and charged against the allowance
for loan losses. After acquisition, a valuation allowance is recorded through a
charge to income for the amount of estimated selling costs. Valuations are
periodically performed by management, and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
Income Taxes:
The Corporation files annual consolidated federal income tax returns. Prior
to 1993, income tax expense was based upon the liability method under SFAS No.
96. Beginning in 1993, the Corporation adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The
Corporation records income tax expense based on the amount of taxes due on its
tax return plus deferred taxes computed based on the expected future tax
consequences of temporary differences between carrying amounts and tax bases of
assets and liabilities, using enacted tax rates. The effect of the adoption of
SFAS No. 109, as of January 1, 1993 is shown as the cumulative effect of an
accounting change in the 1993 income statement.
Stock Dividend:
A 10% stock dividend was declared payable as of July 31, 1992. The market
value of shares issued was transferred from retained earnings to common and
additional paid-in capital. Cash payments were made in lieu of issuing
fractional shares.
Dividend Restriction:
The Bank is subject to banking regulations which require the maintenance of
certain capital levels and which may limit the amount of dividends which may be
paid to the Corporation. At December 31, 1994, approximately $4,136,000 of the
Bank's retained earnings is available for distribution to the Corporation
without prior regulatory approval.
Earnings Per Share:
Earnings per common share are based upon the weighted average number of
common shares outstanding, with prior periods adjusted to reflect the 10 percent
stock dividend in 1992.
Pension Plan:
A noncontributory defined benefit pension plan covers substantially all
employees. Funding of the plan equals or exceeds the minimum funding requirement
determined by the actuary. The projected unit credit cost method is used to
determine expense. Benefits are based on years of service and compensation
levels.
Statement of Cash Flows:
Cash and cash equivalents include cash on hand, demand deposits in other
institutions and short-term investments with maturities of 90 days or less.
Reclassifications:
Certain amounts appearing in the financial statements and notes thereto for
the years ended December 31, 1993 and 1992 have been reclassified to conform
with the December 31, 1994, presentation.
NOTE 2 - SECURITIES
Information related to the amortized cost and fair value of securities at December 31 is provided in the table below.
Unrealized Unrealized
Amortized Gross Gross Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Securities Available for Sale at December 31, 1994:
U.S. Treasury securities $26,960,000 $2,000 ($1,046,000) $25,916,000
U.S. Government agencies and corporations 1,000,000 0 0 1,000,000
Mortgage-backed securities 30,734,000 1,000 (1,748,000) 28,987,000
State and municipal securities 887,000 46,000 0 933,000
Other debt securities 999,000 27,000 0 1,026,000
----------- ----------- ----------- -----------
Total debt securities 60,580,000 76,000 (2,794,000) 57,862,000
Equity securities 1,760,000 0 (22,000) 1,738,000
----------- ----------- ----------- -----------
Total securities available for sale at December 31, 1994 $62,340,000 $76,000 ($2,816,000) $59,600,000
=========== =========== =========== ===========
Securities Held to Maturity at December 31, 1994:
U.S. Treasury securities $14,714,000 $0 ($838,000) $13,876,000
U.S. Government agencies and corporations 2,034,000 4,000 (1,000) 2,037,000
Mortgage-backed securities 78,781,000 22,000 (5,130,000) 73,673,000
State and municipal securities 13,608,000 73,000 (620,000) 13,061,000
Other debt securities 1,015,000 61,000 0 1,076,000
----------- ----------- ----------- -----------
Total securities held to maturity at December 31, 1994 $110,152,000 $160,000 ($6,589,000) $103,723,000
=========== =========== =========== ===========
Securities Available for Sale at December 31, 1993:
U.S. Treasury securities $29,701,000 $818,000 ($73,000) $30,446,000
Mortgage-backed securities 26,798,000 142,000 (130,000) 26,810,000
State and municipal securities 882,000 93,000 0 975,000
Other debt securities 999,000 129,000 0 1,128,000
----------- ----------- ----------- -----------
Total debt securities 58,380,000 1,182,000 (203,000) 59,359,000
Equity securities 1,774,000 0 0 1,774,000
----------- ----------- ----------- -----------
Total securities available for sale at December 31, 1993 $60,154,000 $1,182,000 ($203,000) $61,133,000
=========== =========== =========== ===========
Securities Held to Maturity at December 31, 1993:
U.S. Treasury securities $10,544,000 $27,000 ($12,000) $10,559,000
U.S. Government agencies and corporations 99,000 0 0 99,000
Mortgage-backed securities 77,085,000 613,000 (631,000) 77,067,000
State and municipal securities 10,825,000 651,000 0 1,195,000
----------- ----------- ----------- -----------
Total securities held to maturity at December 31, 1993 $99,570,000 $1,469,000 ($662,000) $100,377,000
=========== =========== =========== ===========
Information regarding the amortized cost and fair value of debt securities by maturity as of December 31, 1994 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.
Available for Sale Held to Maturity
December 31, 1994 December 31, 1994
-------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Due in one year or less $3,317,000 $3,325,000 $342,000 $343,000
Due after one year through five years 26,529,000 25,550,000 17,032,000 16,205,000
Due after five years through ten years 0 0 3,386,000 3,369,000
Due after ten years 0 0 10,611,000 10,133,000
----------- ----------- ----------- -----------
29,846,000 28,875,000 31,371,000 30,050,000
Mortgage-backed securities 30,734,000 28,987,000 78,781,000 73,673,000
----------- ----------- ----------- -----------
Total debt securities $60,580,000 $57,862,000 $110,152,000 $103,723,000
=========== =========== =========== ===========
<FN>
There were no sales of securities in 1994. During 1994, the proceeds from the call of securities held to maturity amounted to
$249,000, with gross gains of $10,000 and gross losses of $17,000. In 1993, proceeds from the sales of securities held for sale
amounted to $1,613,000 with gross gains of $53,000 and gross losses of $0 and proceeds from sales of securities held to maturity
amounted to $6,588,000 with gross gains of $149,000 and gross losses of $27,000. Securities with a carrying value of $81,206,000
were pledged as of December 31, 1994 as collateral for deposits of public funds, securities sold under agreements to repurchase
and for and for other purposes as permitted or required by law.
</FN>
NOTE 3 - TOTAL LOANS
Total loans outstanding as of December 31, 1994 and 1993 consist of the following:
1994 1993
------------ ------------
Commercial and industrial loans $154,326,000 $127,839,000
Agri-business and agricultural loans 22,206,000 20,936,000
Real estate mortgage loans 46,870,000 49,593,000
Real estate construction loans 426,000 223,000
Installment loans and credit cards 64,128,000 61,594,000
------------ ------------
Total loans $287,956,000 $260,185,000
============ ============
<FN>
Loans aggregating $60,000 or more with executive officers and directors (including their associates) amounted to $7,109,000
and $5,862,000 as of December 31, 1994 and 1993, respectively. During 1994, new loans or advances were $16,111,000, loan
repayments were $14,864,000 and other changes were $0.
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid
principal balances of these loans at December 31 are summarized as follows:
</FN>
1994 1993
----------- -----------
Mortgage loan portfolios serviced for:
FHLMC $28,909,000 $23,372,000
Other investors 1,456,000 2,050,000
----------- -----------
Total mortgage loan portfolios serviced $30,365,000 $25,422,000
=========== ===========
<FN>
Income earned for loan servicing was $68,000 and $41,000 for 1994 and 1993, respectively.
</FN>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for 1994, 1993 and 1992:
1994 1993 1992
----------- ----------- -----------
Balance, January 1 $4,010,000 $3,095,000 $2,612,000
Allowance related to assets acquired 0 250,000 0
Provision for loan losses 795,000 790,000 1,340,000
Less: Loans charged-off (recovered) (net of recoveries of $196,000 in 1994;
$103,000 in 1993; and $103,000 in 1992) (61,000) 125,000 857,000
----------- ----------- -----------
Balance, December 31 $4,866,000 $4,010,000 $3,095,000
=========== =========== ===========
<FN>
Nonaccrual loans at December 31, 1994, 1993 and 1992 totaled $18,000,$0, and $0, respectively. 1994 nonaccrual loans
consisted of one mortgage loan of $18,000. Loans renegotiated as troubled debt restructuring totaled $1,406,000 as of
December 31, 1994. Interest income of $82,000 was recognized in 1994. Had these loans been performing under the original contract
terms, an additional $31,000 would have been reflected in interest income during 1994. The Bank is not committed to lend
additional funds to debtors whose loans have been modified. Amounts for restructured loans in periods prior to 1994 were not
material.
</FN>
NOTE 5 - LAND, PREMISES AND EQUIPMENT
Land, premises and equipment and related accumulated depreciation were as follows at December 31:
1994 1993
----------- -----------
Land $2,872,000 $2,520,000
Buildings 8,824,000 7,940,000
Equipment 6,117,000 4,881,000
----------- -----------
Total Cost 17,813,000 15,341,000
Less accumulated depreciation 6,518,000 5,607,000
----------- -----------
Land, premises and equipment, net $11,295,000 $9,734,000
=========== ===========
NOTE 6 - INTEREST BEARING DEPOSITS
The following is an analysis of interest bearing deposits as of December 31:
1994 1993
------------ ------------
Super NOW $44,335,000 $46,343,000
Insured money market 17,993,000 18,935,000
Savings 52,091,000 56,971,000
Time: In denominations under $100,000 162,732,000 143,871,000
In denominations of $100,000 or more 56,759,000 57,193,000
------------ ------------
Total interest bearing deposits $333,910,000 $323,313,000
============ ============
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repo accounts) represent collateralized borrowings with customers
located primarily within the Bank's trade area. Liabilities and the related collateral consisting of U.S. Treasury
securities and mortgage-backed securities, as of December 31, 1994 were as follows:
Collateral Value
Weighted -----------------------------------------------------
Average U.S. Treasury Securities Mortgage-backed Securities
Repurchase Interest ------------------------- -------------------------
TERM Liability Rate Book Fair Value Book Fair Value
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
On demand $10,487,000 3.75% $0 $0 $12,467,000 $11,352,000
Less than 90 days 19,091,000 5.67% 1,885,000 1,794,000 20,773,000 19,347,000
Over 90 days 12,172,000 5.28% 12,067,000 11,444,000 1,724,000 1,633,000
----------- ----------- ----------- ----------- ----------- -----------
Total $41,750,000 5.11% $13,952,000 $13,238,000 $34,964,000 $32,332,000
=========== =========== =========== =========== =========== ===========
<FN>
As indicated in Note 2, securities are pledged to meet both current and potential collateral requirements applicable to
deposits of public funds, securities sold under agreements to repurchase and for other purposes permitted or required by law.
The Bank 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, 1994, there
were no material amounts of assets at risk with any one customer.
</FN>
NOTE 8 - LONG-TERM DEBT
Long-term debt at December 31 consisted of: 1994 1993
----------- -----------
Federal Home Loan Bank of Indianapolis Notes, 5.55%, Due January 2, 1996 $8,000,000 $8,000,000
Federal Home Loan Bank of Indianapolis Notes, 5.59%, Due January 14, 1997 8,132,000 0
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 1,300,000 1,300,000
----------- -----------
Total $17,432,000 $9,300,000
=========== ===========
<FN>
All notes require monthly interest payments and are secured by residential real estate loans with a carrying value of
$27,217,000 at December 31, 1994.
</FN>
NOTE 9 - EMPLOYEE BENEFIT PLANS
Information as to the Corporation's pension plan at December 31 is as follows:
1994 1993
----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $640,000 for 1994 and $626,000 for 1993 $719,000 $673,000
=========== ===========
Projected benefit obligation for service rendered to date $949,000 $973,000
Plan assets at fair value (primarily money market funds
and equity and fixed income investments) (893,000) (686,000)
Unrecognized gains 193,000 27,000
Unrecognized prior service cost 33,000 (24,000)
----------- -----------
Accrued balance sheet pension liability $282,000 $290,000
=========== ===========
Net pension expense includes the following: 1994 1993 1992
----------- ----------- -----------
Service cost for benefits earned $119,000 $113,000 $91,000
Interest cost 66,000 58,000 49,000
Actual return on plan assets (56,000) (52,000) (35,000)
Net amortization and deferrals (3,000) 4,000 (10,000)
----------- ----------- -----------
Net pension expense $126,000 $123,000 $95,000
=========== =========== ===========
The following assumptions were used in calculating the net pension cost.
Weighted average discount rate 8.00% 6.75% 7.75%
Rate of increase in future compensation 4.50% 4.50% 4.75%
Expected long-term rate of return 8.00% 8.00% 8.00%
<FN>
Under a 401(k) profit sharing plan, Corporation contributions are based upon the rate of return on January 1st
stockholders' equity. Expense recognized was $370,000, $332,000 and $248,000 in 1994, 1993 and 1992, respectively.
</FN>
NOTE 10 - OTHER EXPENSE
Other expense for the years ended December 31, were as follows:
1994 1993 1992
----------- ----------- -----------
Regulatory fees and FDIC insurance $904,000 $783,000 $715,000
Data processing fees and supplies 769,000 873,000 694,000
Office supplies 519,000 440,000 431,000
Telephone and postage 535,000 466,000 419,000
Miscellaneous 2,029,000 1,804,000 1,640,000
----------- ----------- -----------
Total other expense $4,756,000 $4,366,000 $3,899,000
=========== =========== ===========
NOTE 11 - INCOME TAXES
Effective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. The adjustment of $325,000 to apply the new accounting method is included in income for the year ended
December 31, 1993. The change in method had no affect on income before cumulative effect of the change in accounting principle
in 1993.
Income tax expense consists of the following: 1994 1993 1992
----------- ----------- -----------
Current federal income tax expense $2,301,000 $1,831,000 $1,580,000
Deferred federal income tax expense (credit) 11,000 (158,000) (283,000)
Current state income tax expense 673,000 600,000 529,000
Deferred state income tax expense (credit) 39,000 (102,000) (64,000)
----------- ----------- -----------
Total income tax expense $3,024,000 $2,171,000 $1,762,000
=========== =========== ===========
<FN>
Income tax expense (credit) included $(34,000), $58,000 and $75,000 applicable to security transactions for 1994, 1993 and
1992, respectively. The differences between financial statement tax expense and amounts computed by applying the statutory
federal income tax rate of 34% for all three years to income before income taxes are as follows:
</FN>
1994 1993 1992
----------- ----------- -----------
Income taxes at statutory federal rate $2,771,000 $2,068,000 $1,741,000
Increase (decrease) in taxes resulting from:
Tax exempt income (338,000) (339,000) (310,000)
Nondeductible expense 73,000 45,000 43,000
State income tax, net of federal tax effect 471,000 328,000 307,000
Other 47,000 69,000 (19,000)
----------- ----------- -----------
Total income tax expense $3,024,000 $2,171,000 $1,762,000
=========== =========== ===========
The components of the net deferred tax asset recorded in the balance sheet as of December 31, are as follows:
1994 1993
----------- -----------
Total deferred federal tax assets $1,850,000 $1,545,000
Total deferred federal tax liabilities (745,000) (429,000)
Total deferred state tax assets 542,000 455,000
Total deferred state tax liabilities (201,000) (75,000)
Total valuation allowance 0 0
----------- -----------
Net deferred tax asset $1,446,000 $1,496,000
=========== ===========
<FN>
The deferred federal tax asset in 1994 consists of the following: bad debts of $1,247,000, ORE of $194,000, pension and
deferred compensation liability of $255,000, deferred loan fees of $144,000 and other of $10,000. The deferred federal tax
liability consists of: depreciation of $243,000, state taxes of $146,000 and other of $356,000.
The deferred federal tax asset in 1993 consisted of the following: bad debts of $885,000, ORE of $274,000, pension and
deferred compensation liability of $217,000, deferred loan fees of $151,000 and other of $18,000. The deferred federal tax
liability consisted of: depreciation of $203,000 and other of $226,000.
The deferred state tax asset in 1994 consists of the following: bad debts of $392,000, ORE of $48,000, pension and deferred
compensation liability of $64,000, deferred loan fees of $36,000 and other of $2,000. The deferred state tax liability consists
of: depreciation of $61,000 and other of $140,000.
The deferred state tax asset in 1993 consisted of the following: bad debts of $290,000, ORE of $68,000, pension and
deferred compensation liability of $54,000, deferred loan fees of $38,000 and other of $5,000. The deferred state tax liability
consisted of: depreciation of $51,000 and other of $24,000.
In addition to the net deferred tax assets included above, income taxes (credits) allocated to the unrealized net gain
(loss) account included in equity were ($1,085,000) and $333,000 for 1994 and 1993, respectively.
</FN>
NOTE 12 - NET PROCEEDS, BRANCH ACQUISITION
On November 20, 1993, the Bank acquired the Cromwell, Ligonier and Elkhart offices of another financial institution,
purchasing certain assets and assuming certain liabilities associated with those offices:
Liabilities assumed (including deposits of $48,155,000) $49,074,000
Less: Assets purchased at fair value:
Loans, net of allowance for loan losses 17,618,000
Fixed assets ($1,193,000), covenants and other assets 1,617,000
-----------
Net proceeds, branch acquisitions $29,839,000
===========
<FN>
Subsequent to this transaction, the Elkhart office operations were transferred to an existing office.
</FN>
NOTE 13 - PARENT COMPANY STATEMENTS
The Corporation operates primarily in the banking industry, which accounts for more than 90 percent of its revenues,
operating income, and assets. Presented below are parent only financial statements:
CONDENSED BALANCE SHEETS
December 31
-------------------------
1994 1993
----------- -----------
ASSETS
Deposits with Lake City Bank $15,000 $24,000
Investment in subsidiary 30,085,000 27,979,000
Other assets 12,000 110,000
----------- -----------
Total assets $30,112,000 $28,113,000
=========== ===========
LIABILITIES
Dividends payable and other liabilities $223,000 $201,000
STOCKHOLDERS' EQUITY 29,889,000 27,912,000
----------- -----------
Total liabilities and stockholders' equity $30,112,000 $28,113,000
=========== ===========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
---------------------------------------
1994 1993 1992
----------- ----------- -----------
Dividends from Lake City Bank $982,000 $458,000 $567,000
Interest on deposits and repurchase agreements, Lake City Bank 3,000 0 4,000
Security gains 0 0 35,000
Miscellaneous income 22,000 (10,000) 0
Equity in undistributed income of subsidiary 4,168,000 3,782,000 2,740,000
Miscellaneous expense (credit) 68,000 (2,000) (4,000)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,107,000 4,232,000 3,350,000
Income tax expense (credit) (19,000) (3,000) (9,000)
----------- ----------- -----------
NET INCOME $5,126,000 $4,235,000 $3,359,000
=========== =========== ===========
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
---------------------------------------
1994 1993 1992
----------- ----------- -----------
Cash flows from operating activities
Net income $5,126,000 $4,235,000 $3,359,000
Adjustments to net cash from operating activities
Equity in undistributed earnings of subsidiary (4,168,000) (3,782,000) (2,740,000)
Other changes 18,000 36,000 23,000
----------- ---------- -----------
Net cash from operating activities 976,000 489,000 642,000
Cash flows from investing activities (137,000) 0 59,000
Cash flows from financing activities (848,000) (716,000) (598,000)
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents (9,000) (227,000) 103,000
Cash and cash equivalents at beginning of year 24,000 251,000 148,000
----------- ---------- -----------
Cash and cash equivalents at end of year $15,000 $24,000 $251,000
=========== =========== ===========
NOTE 14 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
During the normal course of business, the Bank 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, 1994 were as follows:
Fixed Variable
Rate Rate Total
----------- ----------- ------------
Commercial loan lines of credit $3,267,000 $71,075,000 $74,342,000
Commercial loan standby letters of credit 0 6,807,000 6,807,000
Real estate mortgage loans 0 485,000 485,000
Real estate construction mortgage loans 0 460,000 460,000
Credit card open-ended revolving lines 4,444,000 0 4,444,000
Home equity mortgage open-ended revolving lines 0 11,317,000 11,317,000
Consumer loan open-ended revolving lines 0 2,384,000 2,384,000
----------- ----------- ------------
Total $7,711,000 $92,528,000 $100,239,000
=========== =========== ============
<FN>
At December 31, 1994, the range of interest rates for commercial loan commitments with a fixed rate was 6.99 to 9.50 percent.
The range of interest rates for commercial loan commitments with variable rates was 8.50 to 13.50 percent. The index on variable
rate commercial loan commitments is primarily the prime 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 Bank 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 Bank's exposure to credit
losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any
losses as a result of these commitments. There are presently no lawsuits which, in the opinion of management and legal counsel,
would have a material affect on the financial statements.
</FN>
NOTE 15 - FAIR VALUE ACCOUNTING
The SFAS No. 107 requires management to estimate the fair value of its financial instruments. The following table contains
these values and the related carrying values at December 31, 1994 and 1993. Items which are not financial instruments are not
included.
1994 1993
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
Cash and cash equivalents $24,147,000 $24,147,000 $12,869,000 $12,869,000
Real estate mortgages held for sale 175,000 179,000 2,191,000 2,253,000
Securities available for sale 59,600,000 59,600,000 61,133,000 61,133,000
Securities held to maturity 110,152,000 103,723,000 99,570,000 100,377,000
Loans, net 283,090,000 279,035,000 256,175,000 260,000,000
Accrued income receivable 3,464,000 3,464,000 2,858,000 2,858,000
Certificates of deposit (219,491,000) (218,739,000) (201,064,000) (203,121,000)
All other deposits (177,249,000) (177,249,000) (168,968,000) (168,968,000)
Securities sold under agreements to repurchase (41,750,000) (41,833,000) (29,372,000) (29,416,000)
Other short-term debt (6,573,000) (6,573,000) (8,737,000) (8,737,000)
Long-term debt (17,432,000) (16,337,000) (9,300,000) (9,448,000)
Accrued expenses payable (3,280,000) (3,280,000) (3,022,000) (3,022,000)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1994 and 1993. The estimated
fair value for cash, cash equivalents and accruals is considered to approximate
cost. Real estate mortgages held for sale are based upon either the actual
contracted price for those loans sold but not yet delivered, or the current
FHLMC price for normal delivery of mortgages with similar coupons and maturities
at year-end. The estimated fair value for securities is based on quoted market
rates for individual securities or for equivalent quality, coupon and maturity
securities. The estimated fair value of loans is based on estimates of the rate
the Bank would charge for similar such loans at December 31, 1994 and 1993,
applied for the time period until estimated repayment. 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 Bank would pay on such deposits or borrowings at December 31, 1994
and 1993, applied for the time period until maturity. The estimated fair value
of short-term borrowed funds is considered to approximate cost. 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 Bank to have
disposed of such items at December 31, 1994 and 1993, 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, 1994 and 1993, should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Bank 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
loan servicing rights, the earnings potential of the Bank's trust department,
the trained work force, customer goodwill and similar items.
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Lakeland Financial Corporation
Warsaw, Indiana
We have audited the accompanying consolidated balance sheets of Lakeland
Financial Corporation and subsidiary as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1994, 1993 and 1992. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lakeland
Financial Corporation and subsidiary as of December 31, 1994 and 1993, and the
results of its operations and its cash flows for the years ended December 31,
1994, 1993 and 1992, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 11, the Corporation changed its method of
accounting for income taxes in 1993, and as discussed in Notes 1 and 2, the
Corporation elected to classify its securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115 at December 31, 1993.
CROWE, CHIZEK AND COMPANY
South Bend, Indiana
January 27, 1995
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Corporation's
consolidated financial statements and related information appearing in this
annual report. Management believes that the consolidated financial statements
fairly reflect the form and substance of transactions and that the financial
statements reasonably present the Corporation's financial position and results
of operations and were prepared in conformity with generally accepted accounting
principles. Management also has included in the Corporation's financial
statements, amounts that are based on estimates and judgments which it believes
are reasonable under the circumstances.
The independent auditors have audited the Corporation's consolidated
financial statements in accordance with generally accepted auditing standards
and provide an objective, independent review of the fairness of the reported
operating results and financial position.
The Board of Directors of the Corporation has an Audit Review Committee
composed of five non-management Directors. The Committee meets periodically with
the internal auditors and the independent auditors.
FINANCIAL CONDITION
Liquidity
The Corporation manages its primary liquidity position to provide funding
at the lowest possible cost for anticipated loan demand and/or deposit run-off
that occurs in the regular course of business. Such sources of liquidity are:
federal fund lines with correspondent banks, advances from the Federal Home Loan
Bank, repurchase agreements with local bank customers and cash flow from the
securities portfolio. This cash flow from the securities portfolio could total
approximately $18,700,000 in 1995, given current prepayment assumptions.
Additionally, continuous growth into new markets in northern Indiana has
diversified the retail deposit base, reducing volatility that might occur in one
geographical location. Kosciusko county provides less than 50 percent of the
Corporation's funding today, as compared to nearly 90 percent only five years
ago.
The Corporation manages a secondary liquidity position to provide funding
in the event of unanticipated loan demand and/or deposit run-off. Management has
designated approximately 35 percent of its investment portfolio as available for
sale (AFS). This designation provides the liquidity to fund abnormal loan
demand, or to manage the loss of deposits. The Corporation's securities are all
very high quality and easily marketable, with 89 percent either U.S. Treasuries,
federal agency securities or mortgage-backed securities directly or indirectly
guaranteed by the Federal government.
The following is a brief description of the sources and uses of funds for the
indicated periods:
During the year ended December 31, 1994, there was a net increase of $11.3
million in cash and cash equivalents. The major uses of cash during the period
included the funding of a $27.7 million increase in loans and the purchase of
securities totaling $28.5 million. Major sources of funds were: a net increase
in cash from operating activities of $10.3 million, maturing securities of $15.3
million, an increase in deposits of $26.7 million and an $18.5 million increase
in total borrowings.
During the year ended December 31, 1993, there was a net increase of $2.6
million in cash and cash equivalents. The major uses of cash during the period
included the funding of a $8.2 million increase in loans and the purchase of
securities totaling $85.0 million. Major sources of funds were: a net increase
in cash from operating activities of $7.7 million, proceeds from the sale or
maturity of securities totaling $27.0 million, an increase in deposits of $37.6
million, and proceeds from branch acquisitions of $29.8 million.
During the year ended December 31, 1992, there was a net decrease of $3.3
million in cash and cash equivalents. The major uses of cash during the period
included the funding of a $44.1 million increase in loans and the purchase of
securities totaling $88.2 million. Major sources of funds were: a net increase
in cash from operating activities of $10.2 million, proceeds from the sale or
maturity of securities totaling $101.6 million and an increase in deposits of
$18.8 million.
Asset/Liability Management (ALCO)
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 protect the Corporation from excessive net income volatility that
could result from changing interest rates. The Corporation uses a GAP report,
which details the relative mismatch of asset and liability cash flows occurring
in specified time horizons, as a rough estimate of the current rate sensitivity
position. In 1993 the Corporation began using a computer program to test the
balance sheet's performance under a wide variety of interest rate scenarios.
This model quantifies the impact on income of such things as: changes in
customer preference for bank products, basis risk between the Bank's assets and
the funds supporting them and the risk inherent in different yield curves. The
ALCO committee reviews these possible outcomes and makes loan, investment and
deposit decisions that maintain reasonable balance sheet structure in light of
potential interest rate movements. After the committee has specified a maximum
risk tolerance for dollar margin volatility, the committee develops guidelines
for the GAP ratios. As indicated in Table 1, the Corporation's GAP ratio at
December 31, 1994, for the next 12 months is a negative 7.4 percent of total
assets. This ratio indicates that the interest margin could be somewhat lower if
interest rates rise, as compared to flat or falling interest rate environments.
The computer model also produces this result. The computer generated forecast
indicates that the percentage margin would decline only modestly if rates rose
approximately 200 basis points. Both measures are well within policy limits.
Capital Management
The Corporation believes that a strong capital position is vital to
long-term earnings and expansion. Currently the Bank maintains capital levels in
excess of "well-capitalized" levels as defined by the FDIC. Bank regulatory
agencies have recently ruled that the market value adjustment created by SFAS
No. 115 (AFS adjustment) should be excluded from capital adequacy calculations.
Therefore, excluding this market valuation adjustment from the calculation, the
Bank attained tier I leverage capital, tier I risk based capital and tier II
risk based capital ratios of 6.3 percent, 10.1 percent and 11.3 percent,
respectively at December 31, 1994. All three ratios are well above 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 are a
function of net income growth and a prudent dividend policy. Total stockholders'
equity increased by 7.1 percent, to $29,889,000 as of December 31, 1994, from
$27,912,000 as of December 31, 1993. Total stockholders' equity increased by
25.8 percent or $6,139,000 from $23,750,000 as of December 31, 1992. The 1994
growth of $1,977,000 resulted from the retention of net income of $5,126,000,
minus cash dividends declared of $848,000 and change in the AFS adjustment of
$2,301,000. The 1993 growth of $4,162,000 resulted from the retention of net
income of $4,235,000, minus cash dividends declared of $719,000 plus the AFS
adjustment of $646,000.
Inflation
For a financial institution, the effects of price changes and inflation can
vary substantially. Inflation affects the growth of total assets, but it is
difficult to assess its impact since neither the timing nor the magnitude of the
changes in the consumer price index (CPI) coincides with changes in interest
rates. The price of one or more of the important components of the CPI may
fluctuate considerably and thereby influence the overall CPI without having a
corresponding affect on interest rates or upon the cost of those goods and
services normally purchased by the Corporation. In years of high inflation and
high interest rates, intermediate and long-term interest rates tend to increase,
thereby adversely impacting the market values of investment securities, mortgage
loans and other long-term fixed rate loans. In addition, higher short-term
interest rates caused by inflation tend to increase the cost of funds. In other
years, the reverse situation may occur.
Growth and Expansion
The assets of the Corporation increased 10.5 percent, or $47,009,000, to
$496,963,000 as of December 31, 1994, from $449,954,000 as of December 31, 1993.
Assets at December 31, 1994, increased 37.1 percent, or $134,466,000, from
$362,497,000 as of December 31, 1992. The Corporation has been pursuing
expansion into contiguous markets since 1990. Most recently, the Corporation
purchased two offices from Prime Bank in Noble county (see Note 12 to the
Consolidated Financial Statements), and opened an additional office in Elkhart
county in 1993. In 1994, another office was opened in Elkhart county and the
Corporation opened its first location in LaGrange county in Shipshewana,
Indiana. Plans call for additional expansion in Elkhart county in 1995. Although
growth continues to be strong in the traditional markets served by the Bank,
clearly the ability to grow earnings at a rate that will maximize the value of
the Corporation's stock depends on the ability to access new markets. Expansion
has opened new markets for the Corporation's loan and deposit products in
Elkhart, Fulton, LaGrange, Marshall, Noble and Whitley counties. Further,
diversifying the retail deposit base continues to be a key long-term liquidity
and ALCO management objective, since these funds are typically less volatile,
and less costly, than purchased funds. However, the Corporation continues to
protect its traditional markets by modifying its existing market coverage by
adding new products, offices and ATM's in areas where the demographic trends
dictate. All of these factors have contributed significantly to net income in
recent years.
Changes in Accounting Methods
At December 31, 1993, the Corporation elected to adopt the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115. This deals with the
accounting for certain debt and equity securities. Stockholders' equity includes
the impact of this accounting standard. During the first quarter of 1993, the
Corporation adopted the provisions of SFAS No. 109, Accounting for Income Taxes.
Net income in 1993 includes the cumulative impact of this change in accounting
standard. Effective January 1, 1995, the Corporation will adopt SFAS No. 114,
and SFAS No. 118, Accounting by Creditors for Impairment of a Loan. The affect
on the Corporation of the adoption of these accounting standards will not be
material.
RESULTS OF OPERATIONS
1994 versus 1993
Record assets and earnings characterized 1994. Loans increased 10.7
percent, or $27,771,000, to $287,956,000 at year-end 1994. Total deposits
increased 7.2 percent, or $26,708,000, to $396,740,000 at December 31, 1994,
while deposits and securities sold under agreement to repurchase increased 9.8
percent, or $39,086,000, to $438,490,000. Net income totaled $5,126,000,
surpassing 1993 results by 21.0 percent. On an average daily basis, gross
earning assets increased by 22.1 percent and total deposits and purchased funds
increased by 22.9 percent. The Prime Bank offices added in late 1993 account for
approximately two-thirds of this average daily earning asset growth.
Total interest income increased 21.9 percent, or $6,048,000 to $33,655,000
for the year ended December 31, 1994. The 22.1 percent growth in average daily
earning assets was solely responsible for this increase, as the overall tax
equivalent yield of 7.70 percent on average earning assets in 1994 was unchanged
from 1993.
Nonearning assets of the Corporation include non-accrual loans and
investments, other real estate, and repossessions, and amounted to $815,000,
$2,379,000 and $3,132,000 as of December 31, 1994, 1993 and 1992, respectively.
There was one $18,000 nonaccrual loan at year-end 1994.
Interest expense totaled $14,887,000 in 1994, a 23.8 percent, or $2,865,000
increase over 1993. Average daily deposits and purchased funds increased by 22.9
percent in 1994, and rising interest rates during the year increased the average
rate paid on interest bearing liabilities by 3 basis points to 3.44 percent for
the year. As interest rates rose during 1994, Bank customers have returned to
fixed rate certificates of deposit. This shift in mix modestly increased the
Bank's overall cost of funds during 1994.
Net interest income increased 20.4 percent, or $3,183,000, to $18,768,000
in 1994, from $15,585,000 in 1993. Net interest income as a percentage of
average earning assets was 4.41 percent in 1994. This represents an 8 basis
point decline from 4.49 percent in 1993. This reduction is due in equal measure
to the modest increase in the cost of funds and a lower level of loan fees. The
Corporation expects net interest income growth to be comparable to the growth of
earning assets in 1995.
As indicated in Notes 1 and 4 to the Consolidated Financial Statements,
management maintains the allowance for loan losses at an appropriate level given
many different factors. The December 31, 1994, allowance for loan losses of
$4,866,000 is believed by management to be adequate to absorb all potential
inherent risk applicable to the classification of loans as loss, doubtful,
substandard or special mention. This allowance does not represent or result from
trends that will materially adversely impact future operating results, liquidity
or capital resources. Net interest income after provision for loan losses
increased 21.5 percent, or $3,178,000, to $17,973,000 in 1994, from $14,795,000
in 1993.
Trust income and service charges on deposit accounts, two large components
of noninterest income, increased 16.9 percent, or $388,000 to $2,687,000 in
1994, from $2,299,000 in 1993. Trust income totaled $609,000, an increase of
16.2 percent from 1993. This reflects increased corporate trust business.
Service charges on deposit accounts increased by 17.1 percent, to $2,078,000 in
1994, reflecting the growth in individual and corporate deposit accounts paying
fees. Other income increased $898,000 to $1,412,000 in 1994. A portion of this
growth reflects the reversal of certain other real estate valuation allowances
totaling $404,000 that were related to two large loans. These situations were
resolved in 1994 and the reserves were no longer necessary. Other components of
other income such as wire transfer fees, credit card fees and mortgage service
fees increased 15.0 percent in 1994.
The Corporation continues its program of originating and selling real
estate mortgages in the secondary market. During the course of 1994, the Bank
sold approximately $8,800,000 of mortgages through the FHLMC Gold program. Gains
on the sale of these loans totaled $177,000, a decrease of $499,000 over 1993.
This decrease represents the higher rate environment that substantially reduced
the level of home refinancing during the year.
Net investment securities losses totaled $(7,000) in 1994, as compared to
net investment security gains of $175,000 in 1993. The ALCO committee reviews
the portfolio monthly and makes investment decisions based upon the projected
balance sheet needs. During 1994, there were no securities sold from either the
AFS or HTM portfolios. The small security losses experienced during 1994 were
the result of several partial calls on zero coupon bonds. It is difficult to
predict the level of future sales of securities.
Salaries and employee benefit costs increased 16.7 percent in 1994, to
$7,278,000 from $6,236,000. This increase reflects an 10.8 percent increase in
full-time equivalent employees (FTE) in 1994, to 278, and normal annual salary
increases. This increase in FTE relates to the full year impact of the offices
added in Noble county in late 1993 and the two new offices added in 1994. There
has also been an increase in fringe benefit costs and indirect payroll costs, as
some of these programs reflect corporate performance that has been at record
levels.
Another component of other expense that is growing due to expansion is net
occupancy expense of premises and equipment costs. These expenses totaled
$2,058,000 in 1994, an increase of 15.9 percent over 1993. Again, the additional
offices added in 1994, as well as, a full year of expense on the offices added
in Elkhart and Noble counties in 1993 contributed to this increase.
As indicated in Note 10 to the Consolidated Financial Statements, all major
components of other expense contributed to the 8.9 percent, or $390,000 increase
to $4,756,000 for 1994, from $4,366,000 in 1993. Regulatory and FDIC insurance
premiums are the largest component of other expense, totaling $904,000 in 1994.
This is an increase of $121,000, or 15.5 percent from 1993. This increase
reflects the overall growth in deposits. Data processing and supplies are the
second largest component of other expense, totaling $766,000 in 1994. This
represents a decrease of 11.9 percent, or $104,000 from 1993. Included in the
1993 amount were certain non-recurring expenses related to the acquisition of
the branches of Prime Bank.
As a result of all of these factors, income before income tax and
cumulative effect of change in accounting principle totaled $8,150,000, an
increase of 34.0 percent, or $2,069,000 from the $6,081,000 reported in 1993.
Income before cumulative change in accounting principle was $5,126,000, an
increase of 31.1 percent, or $1,216,000 over 1993. In the first quarter of 1993,
the Corporation applied the provisions of SFAS No. 109, Accounting for Income
Taxes. Included in 1993 income is the cumulative adjustment of $325,000 to apply
this new accounting method. Net income totaled $5,126,000 in 1994, an increase
of 21.0 percent, or $891,000, from $4,235,000 in 1993. On a per share basis,
income before cumulative change in accounting principle was $3.56 in 1994, as
compared to $2.72 in 1993. Also on a per share basis, net income was $3.56 in
1994, as compared to $2.94 in 1993. Net income of $5,126,000 represents a 18.8
percent return on January 1, 1994, stockholders' equity (excluding the equity
adjustment related to SFAS No. 115), and a 1.10 percent return on average daily
assets.
RESULTS OF OPERATIONS
1993 VERSUS 1992
Record breaking growth and earnings characterized 1993. Loans increased
11.1 percent, or $25,983,000, to $260,185,000 at year-end 1993. Total deposits
increased 30.2 percent, or $85,724,000, to $370,032,000 at December 31,1993,
while deposits and securities sold under agreement to repurchase increased 26.6
percent, or $84,038,000, to $399,404,000. Net income totaled $4,235,000,
surpassing 1992 results by 26.1 percent. On an average daily basis, gross
earning assets increased by 9.2 percent and total deposits and purchased funds
increased by 9.4 percent. Without the acquisition of the Prime Bank offices,
growth in average daily gross earning assets would have been approximately 7.4
percent.
Total interest income decreased .3 percent, or $76,000 to $27,607,000 for
the year ended December 31, 1993. The 9.2 percent growth in average daily
earning assets was more than offset by the decline in the overall yield of
earning assets in 1993. The decline in average daily tax equivalent yields was
91 basis points. This decrease resulted from the reinvestment of cash flow in
lower yielding assets as rates remained at historically low levels in 1993, and
from the assumption of the deposits of Prime Bank, a portion of which were
invested in lower yielding short-term investments.
Nonearning assets of the Corporation include nonaccrual loans and
investments, other real estate, in substance foreclosure accounts and
repossessions, and amounted to $2,379,000, $3,132,000 and $2,731,000 as of
December 31, 1993, 1992 and 1991, respectively. There were no nonaccrual loans
at year-end 1993.
The slight decline in interest income was more than offset by the decline
in interest expense. Interest expense totaled $12,022,000 in 1993, an 11.7
percent, or $1,600,000 decrease from $13,622,000 experienced in 1992. Average
daily deposits and purchased funds increased by 9.4 percent in 1993, but the
decline in interest rates more than offset this growth. During 1993, the Bank's
interest expense decreased for a variety of reasons. To the extent that
customers renewed or purchased time deposits in 1993, these funds were generally
at lower rates than the time deposits that matured. The low rate environment
also encouraged the growth of transaction accounts as Bank customers were
hesitant to extend the maturities of their deposits. Transaction accounts are
generally the lowest cost sources of funds for the Bank since they earn rates at
the lowest end of the yield curve. Finally, the Bank benefited from the growth
in demand deposit accounts that are interest free. These last two reasons for
the decline in interest expense are temporary, as they are customer driven by
the low rate environment. The Bank expects that as rates increase, these funds
will at some point return to time deposits thus increasing interest expense to a
greater degree than if these funds stayed strictly in transaction accounts.
Net interest income increased 10.8 percent, or $1,524,000, to $15,585,000
in 1993, from $14,061,000 in 1992. Net interest income as a percent of average
earning assets was 4.48 percent in 1993. Management anticipates that this
percentage will decline somewhat in 1994. Two factors will contribute to this:
the loan-to-deposit ratio will be lower in 1994, as it will take time to
generate loan volume to employ the deposits assumed from Prime Bank, and the
cost of funds has probably reached its low point in this economic cycle. In
dollar terms, the Bank expects to generate a reasonable increase in net interest
income in 1994, as the Bank anticipates earning on an average asset base
approximately 20 percent larger than in 1993.
As indicated in Notes 1 and 4 to the Consolidated Financial Statements, the
allowance for loan losses is maintained at a level deemed appropriate by
management. The December 31, 1993, allowance for loan losses of $4,010,000 is
believed by management to be adequate to absorb all potential inherent risk
applicable to the classification of loans as loss, doubtful, substandard or
special mention. It does not represent or result from trends that will
materially adversely impact future operating results, liquidity or capital
resources. Net interest income after provision for loan losses increased 16.3
percent, or $2,074,000, to $14,795,000 in 1993, from $12,721,000 in 1992.
Trust income and service charges on deposit accounts, two large components
of noninterest income, increased 16.9 percent, or $333,000 to $2,299,000 in
1993, from $1,966,000 in 1992. Trust income totaled $524,000, an increase of
24.8 percent, from 1992. This reflects increased business in corporate trust
accounts such as employee benefit plans. As reported last year, it is a major
long-term strategy to increase these recurring sources of trust income in order
to provide for a stable and growing source of noninterest income. Service
charges of deposit accounts increased by 14.8 percent, to $1,775,000 in 1993,
reflecting the growth in individual and corporate deposit accounts paying fees,
and adjustments made to the fee schedules in 1992 and 1993. Other income
declined $255,000 to $514,000 in 1993. The 1993 results reflect the net
write-down of the carrying value of other real estate totaling $262,000. Other
components of other income such as wire transfer fees, mortgage service fees and
mortgage loan fees increased 12.0 percent in 1993.
The Bank instituted a formal policy for the origination and sale of real
estate mortgages in the secondary market in 1993. During the course of the year,
the Bank sold mortgage loans totaling approximately $19,700,000 through the
FHLMC Gold program. Gains on the sale of these loans totaled $676,000, an
increase of $500,000 over 1992. This increase represents a full year of sales
and the high level of home refinancing during the year due to the low interest
rate environment.
Net investment securities gains totaled $175,000 in 1993, as compared to
$323,000 in 1992. The ALCO committee reviews the portfolio monthly and makes
investment decisions based upon the projected balance sheet needs. During 1993,
investment activity included the sale of selected securities in anticipation of
SFAS No. 115, and the anticipation that certain adjustable rate securities tied
to the 11th District Cost of Funds (COFI) would not perform well under the
anticipated rate environment.
Salaries and employee benefit costs increased 17.3 percent in 1993, to
$6,236,000 from $5,318,000. This increase reflects a 15.7 percent increase in
full-time equivalent employees (FTE) in 1993, to 251, and normal annual salary
increases. The increase in FTE relates to the addition of the two acquired
offices in Noble county and the new Elkhart location. There has also been an
increase in fringe benefit costs and indirect payroll costs, as some of these
programs depend on corporate performance that has been running at record levels.
Another component of other expense that is growing due to expansion is net
occupancy expense and equipment costs. These expenses totaled $1,776,000 in
1993, an increase of 10.0 percent over 1992. Again, the additional office in
Elkhart, the new drive-up in Akron and the Noble county locations contributed to
this increase. The full impact of these expenses will be reflected in 1994,
since these additions occurred late in 1993.
As indicated in Note 10 to the Consolidated Financial Statements, all major
components of other expense contributed to the 12.0 percent, or $467,000
increase to $4,366,000 for 1993, from $3,899,000 in 1992. Data processing and
supplies are the largest component of other expense, totaling $873,000 in 1993.
This represents an increase of 25.8 percent, or $179,000 from 1992. Included in
this amount are certain non-recurring expenses related to the acquisition of the
offices of Prime Bank. Regulatory and FDIC insurance premiums are the second
largest component of other expense, totaling $783,000 in 1993. This is an
increase of $68,000, or 9.5 percent from 1992. This increase reflects the
overall growth in deposits, as there was no change in the Bank's FDIC insurance
rate during 1993.
As a result of all of these factors, income before income tax and
cumulative effect of change in accounting principle totaled $6,081,000, an
increase of 18.7 percent, or $960,000 from $5,121,000 reported in 1992. Income
before cumulative change in accounting principle was $3,910,000, an increase of
16.4 percent, or $551,000 over 1992. In the first quarter of 1993, the
Corporation applied the provisions of SFAS No. 109, Accounting for Income Taxes.
Included in 1993 net income is the cumulative adjustment of $325,000 to apply
this new accounting method. Net income totaled $4,235,000 in 1993, an increase
of 26.1 percent, or $876,000, from $3,359,000 in 1992. On a per share basis,
income before cumulative change in accounting principle was $2.72 in 1993, as
compared to $2.34 in 1992. Also on a per share basis, net income was $2.94 in
1993, as compared to $2.34 in 1992. Net income of $4,235,000 represents a 17.8
percent return on January 1, 1993 stockholders' equity, and a 1.11 percent
return on average daily assets.
TABLE 1 - REPRICING OPPORTUNITIES (In Thousands)
The table below illustrates the funding gaps for selected maturity periods as of December 31, 1994. Repricing opportunities
for fixed rate loans and mortgage-backed securities are based upon anticipated prepayment speeds. Demand deposit accounts and
savings accounts are classified as having maturities beyond twenty-four months. The effect of the current rate sensitivity
position is to make the Corporation's earnings slightly vulnerable to rising rates.
Repricing or Maturing Within
---------------------------------------
Six Twelve Twenty-four
Months Months Months
----------- ----------- -----------
Rate Sensitive Assets:
Overnight Investments $2,841 $2,841 $2,841
Loans 190,199 212,788 240,427
Securities 16,026 18,697 40,024
----------- ----------- -----------
Total 209,066 234,326 283,292
----------- ----------- -----------
Rate Sensitive Liabilities:
Deposits 189,963 225,689 264,824
Borrowings 39,190 45,353 55,434
----------- ----------- -----------
Total 229,153 271,042 320,258
----------- ----------- -----------
Rate sensitive assets under rate sensitive liabilities ($20,087) ($36,716) ($36,966)
=========== =========== ===========
Rate sensitive assets under rate sensitive liabilities
as a percent of total assets (4.0)% (7.4)% (7.4)%
=========== =========== ===========
TABLE 2 - CAPITAL RATIOS
Regulatory agencies specifically exclude the equity adjustment associated with SFAS No. 115 from the calculation of capital
adequacy. The following table presents the Bank's current capital adequacy ratios, as well as the FDIC defined levels to be
considered well-capitalized" and the Bank's current excess capital position in relation to these "well-capitalized" levels.
Regulatory Capital Ratio
---------------------------------------
December 31, Well- Excess
1994 Capitalized Capital
----------- ----------- -----------
Ratio
Tier I leverage 6.27% 5.00% $6,351,000
Tier I risk based 10.07% 6.00% $12,709,000
Tier II risk based 11.33% 10.00% $4,136,000