UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____________ to ____________ Commission File No. 0-11487 LAKELAND FINANCIAL CORPORATION (exact name of registrant as specified in its charter) INDIANA 35-1559596 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 1-219-267-6144 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: COMMON (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such other period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive Proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] Aggregate market value of the voting stock held by non-affiliates of the registrant, computed solely for the purposes of this requirement on the basis of the book value at February 29, 1996, and assuming solely for the purposes of this calculation that all Directors and executive officers of the Registrant are "affiliates": $35,131,538. Number of shares of common stock outstanding at February 29, 1996: 1,448,496. Cover page 1 of 2 pages DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the Part of 10-K indicated: Part Document I, II & IV Lakeland Financial Corporation's Annual Report to Shareholders for year ended December 31, 1995, parts of which are incorporated into Parts I, II and IV of this Form 10-K. III Proxy statement mailed to Shareholders on March 11, 1996, which is incorporated into Part III of this Form 10-K. Cover page 2 of 2 pages PART I. ITEM 1. BUSINESS The registrant was incorporated under the laws of the State of Indiana on February 8, 1983. As used herein, the term "Registrant" refers to Lakeland Financial Corporation or, if the context dictates, the Lakeland Financial Corporation and its wholly owned subsidiary, Lake City Bank, Warsaw, Indiana. GENERAL REGISTRANT'S BUSINESS. The Registrant is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended. Registrant owns all of the outstanding stock of Lake City Bank, Warsaw, Indiana, a full service commercial bank organized under Indiana law (the "Bank"). Registrant conducts no business except that incident to its ownership of the outstanding stock of the Bank and the operation of the Bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. The Bank's activities cover all phases of commercial banking, including checking accounts, savings accounts, time deposits, the sale of securities under agreements to repurchase, discount brokerage services, commercial and agricultural lending, direct and indirect consumer lending, real estate mortgage lending, safe deposit box service and trust services. The Bank's main banking office is located at 202 East Center Street, Warsaw, Indiana. As of December 31, 1995, the Bank had nine branch offices and one drive-up facility in Kosciusko County, seven branch offices in Elkhart County, three branch offices in Noble County, three branch offices in Wabash County, two branch offices in LaGrange County, two branch offices in Marshall County, one branch office in Whitley County and two branch offices and one drive-up facility in Fulton County. The Bank's operations center is located at 113 East Market Street, Warsaw, Indiana. SUPERVISION AND REGULATION. The Registrant is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHC Act"). As a bank holding company, the registrant is required to file with the Federal Reserve Board (the "FRB") annual reports and such additional information as the FRB may require. The FRB may also make an examination or inspection of the Registrant. The BHC Act prohibits a bank holding company from engaging in, or acquiring direct or indirect control of more than five percent of the voting shares of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities deemed by the FRB to be "closely related to banking". Under current regulations, bank holding companies and their subsidiaries may engage in such bank related business ventures as consumer finance, equipment leasing, computer service bureau and software operations and mortgage banking. The BHC Act also governs banking expansion by bank holding companies. Before a bank holding company acquires more than five percent of the voting shares of any other bank it must receive the prior written approval of the FRB or its delegate. Furthermore, the BHC Act does not permit a bank holding company to acquire a bank located outside the State of Indiana unless the acquisition is specifically authorized by the laws of the State in which such bank is located. 1 The acquisition of banking subsidiaries by bank holding companies is subject to the jurisdiction of, and requires the prior approval of, the Federal Reserve, and for institutions resident in Indiana, the Indiana Department of Financial Institutions. Bank holding companies located in Indiana are permitted to acquire banking subsidiaries throughout the state, subject to limitations based upon the percentage of total state deposits of the holding company's subsidiary banks. Indiana law permits the Registrant to acquire banks, and be acquired by bank holding companies, located in any state in the country which permits reciprocal entry by Indiana bank holding companies. The Registrant is an "affiliate" of the Bank within the meaning of Section 23A of the Federal Reserve Act (as made applicable to the Bank by the Federal Deposit Insurance Act) and Indiana Code 28-1-18.1. As a result, the Bank is restricted in making loans to, investments in, or loans secured by securities of, the Registrant. The BHC Act also prohibits the Registrant and its subsidiaries from imposing "tie-in" requirements in connection with extensions of credit and other services. Under the provisions of Indiana law, the registrant may not acquire more than twenty-five percent of the voting stock in any banks other than the Bank without the approval of the Indiana Department of Financial Institutions. In any such event, the Registrant would be required to obtain the prior approval of the FRB as described above to purchase interest of five percent or more in another bank. The Bank is under supervision of and subject to examination by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. Regulation and examination by banking regulatory agencies are primarily for the benefit of depositors and not shareholders. The earnings of commercial banks are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open-market operations in U.S. Government securities, the discount rate on bank borrowing, setting the reserves that banks must maintain against certain bank deposits and the regulation of interest rates payable by banks on certain time and savings deposits. These policies have a significant effect on the overall growth and distribution of bank loans, investments and deposits. They influence interest rates charged on loans, earned on investments and paid for time and savings deposits. FRB monetary policies have had significant effect on the operating results of commercial banks in the past, and are expected to exert similar influence in the future. The general effect, if any, of such policies upon the future business and earnings of the Registrant and the Bank cannot be reasonably predicted. MATERIAL CHANGES AND BUSINESS DEVELOPMENTS From the date of the Registrant's incorporation, February 8, 1983, until October 31, 1983, the Registrant conducted no business and had no assets (except nominal assets necessary to complete the acquisition of the Bank). The Registrant has conducted no business since October 31, 1983, except that incident to its ownership of the stock of the Bank, the collection of dividends from the Bank, and the disbursement of dividends to the Registrant's shareholders. During the period from 1985 to 1987, the Registrant owned all of the outstanding shares of Lakeland Mortgage Corp., a mortgage lending and servicing corporation doing business in Indiana. Lakeland Mortgage Corp. discontinued business operations on December 15, 1987. The Registrant continued to own all of the stock of Lakeland Mortgage Corp. 2 until 1992, during which year, Lakeland Mortgage Corp. was liquidated and all stock was redeemed. COMPETITION The Bank was originally organized in 1872 and has continuously operated under the laws of the State of Indiana since its organization. The Bank is a full service bank providing both commercial and personal banking services. Bank products offered include interest and noninterest bearing demand accounts, savings and time deposit accounts, sale of securities under agreements to repurchase, discount brokerage, commercial loans, mortgage loans, consumer loans, letters of credit, and a wide range of trust services. The interest rates for both deposits and loans, as well as the range of services provided, are nearly the same for all banks competing within the Bank's service area. The Bank's service area is described as all of Kosciusko, Elkhart, and Wabash Counties and portions of St. Joseph, Marshall, Fulton, Miami, Huntington, Whitley, Noble, and LaGrange Counties. Within this area the Bank competes with 22 other banks, 7 of which are larger than the Bank. Of the 15 which are smaller than the Bank, 2 are members of Bank Holding Companies which are larger than the Registrant. Eight of these institutions have home offices outside the Bank's defined business area but operate branches within this area. In addition to the banks located within its service area, the Bank also competes with savings and loan associations, credit unions, farm credit services, finance companies, personal loan companies, insurance companies, money market funds, and other non-depository financial intermediaries. In addition, financial intermediaries such as money market mutual funds and large retailers are not subject to the same regulations and laws that govern the operation of traditional depository institutions and accordingly may have an advantage in competing for funds. In addition to the banks within its service area, the Bank competes with other major banks for the large commercial deposit and loan accounts. The Bank is presently subject to an aggregate maximum loan limit to any single account in the amount of $6,232,000 pursuant to Indiana law. This maximum prohibits the Bank from providing a full range of banking services to those businesses or personal accounts whose borrowing periodically exceed this amount. In order to retain at least a portion of the bank business of these large borrowers, the Bank maintains correspondent relationships with: Norwest Bank, Indiana, N.A., Fort Wayne, Indiana; NBD, N.A., Indianapolis, Indiana; Northern Trust Company, Chicago, Illinois; Bank One, N.A., Indianapolis, Indiana; and Mellon Bank, N.A., Pittsburgh, Pennsylvania. The Bank also participates with local and other banks in the placement of large borrowings in excess of its lending limit. The Bank is also a member of the Federal Home Loan Bank of Indianapolis in order to broaden its mortgage lending and investment activities and to provide additional funds, if necessary, to support these activities. FOREIGN OPERATIONS The Bank has no investments with any foreign entity other than a nominal demand deposit account which is maintained with a Canadian bank in order to facilitate the clearing of checks drawn on banks located in that country. There are no foreign loans. 3 EMPLOYEES At December 31, 1995, the Registrant, including its subsidiary corporation, had approximately 292 full time equivalent employees. Benefit programs include a pension plan, 401(k) plan, group medical insurance, group life insurance and paid vacations. The bank is not a party to any collective bargaining agreement, and employee relations are considered good. INDUSTRY SEGMENTS The Registrant and the Bank are engaged in a single industry and perform a single service -- commercial banking. On the pages that follow are tables which set forth selected statistical information relative to the business of the Registrant. (Intentionally Left Blank) 4 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (in thousands of dollars) 1995 1994 ------------------------------------ ------------------------------------- Average Interest Average Interest Balance Income Yield* Balance Income Yield* ----------- ----------- ----------- ----------- ----------- ----------- ASSETS Earning assets: Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00% Loans: Taxable ** 305,806 29,859 9.76 267,604 23,658 8.84 Tax Exempt * 3,435 389 11.32 3,787 413 10.91 Investments: Taxable 170,788 10,723 6.28 149,049 8,842 5.93 Tax Exempt * 16,724 1,572 9.40 11,436 1,102 9.64 Short-term investment 3,293 192 5.83 3,551 152 4.28 Interest bearing deposits 108 10 9.26 98 3 3.06 ----------- ----------- ----------- ----------- ----------- ----------- Total Earning Assets $ 500,154 $ 42,745 8.55% $ 435,525 $ 34,170 7.85% =========== =========== Nonearning assets: Cash and due from banks 20,725 0 18,164 0 Premises and equipment 12,386 0 10,104 0 Other assets 7,668 0 7,508 0 Less: allowance for loan losses (5,238) 0 (4,417) 0 ----------- ----------- ----------- ----------- Total assets $ 535,695 $ 42,745 $ 466,884 $ 34,170 =========== =========== =========== =========== <FN> Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1995 and 1994. Tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans. **Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1995, and 1994, are included as taxable loan interest income. </FN> 5 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (cont.) (in thousands of dollars) 1994 1993 -------------------------------------- -------------------------------------- Average Interest Average Interest Balance Income Yield* Balance Income Yield* ----------- ----------- ---------- ----------- ----------- ---------- ASSETS Earning assets: Trading account investments $ 0 $ 0 0.00% $ 72 $ 2 3.31% Loans: Taxable ** 267,604 23,658 8.84 235,352 19,946 8.47 Tax Exempt * 3,787 413 10.91 5,114 529 10.34 Investments: Taxable 149,049 8,842 5.93 100,507 6,459 6.43 Tax Exempt * 11,436 1,102 9.610.26 9,463 971 Short-term investment 3,551 152 4.28 3,111 93 2.99 Interest bearing deposits 98 3 3.06 3,116 92 2.95 ----------- ----------- ---------- ----------- ----------- ---------- Total earning assets $ 435,525 $ 34,170 7.85% $ 356,735 $ 28,092 7.87% ========== ========== Nonearning assets: Cash and due from banks 18,164 0 12,505 0 Premises and equipment 10,104 0 8,119 0 Other assets 7,508 0 8,308 0 Less: allowance for loan losses (4,417) 0 (3,419) 0 ----------- ----------- ----------- ----------- Total assets $ 466,884 $ 34,170 $ 382,248 $ 28,092 =========== =========== =========== =========== <FN> * Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1994 and 1993. Tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans. **Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1994, and 1993, are included as taxable loan interest income. </FN> 6 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (cont.) (in thousands of dollars) 1995 1994 ------------------------------------- ------------------------------------- Average Interest Average Interest Balance Expense Rate Balance Expense Rate ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities Savings deposits $ 46,123 $ 1,069 2.32% $ 55,855 $ 1,517 2.72% Interest bearing checking accounts 55,355 1,333 2.41 58,945 1,394 2.36 Time deposits In denominations under $100,000 177,992 10,035 5.64 148,251 6,837 4.61 In denominations over $100,000 73,449 4,410 6.00 54,389 2,360 4.34 Miscellaneous short-term borrowings 66,610 3,803 5.71 47,220 1,879 3.98 Long-term borrowings 17,432 992 5.69 15,806 900 5.69 Capital notes 0 0 0.00 0 0 0.00 ----------- ----------- ----------- ----------- ----------- ----------- Total interest bearing liabilities $ 436,961 $ 21,642 4.95% $ 380,466 $ 14,887 3.91% =========== =========== Non-interest bearing liabilities and stockholders' equity Demand deposits 60,753 0 52,893 0 Other liabilities 4,897 0 4,606 0 Stockholders' equity 33,084 0 28,919 0 ----------- ----------- ----------- ----------- Total liabilities and stock- holders' equity $ 535,695 $ 21,642 4.04% $ 466,884 $ 14,887 3.19% =========== =========== =========== =========== =========== =========== Net interest differential - yield on average daily earning assets $ 21,103 4.22% $ 19,283 4.43% =========== =========== =========== =========== 7 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (cont.) (in thousands of dollars) 1994 1993 ------------------------------------- ------------------------------------- Average Interest Average Interest Balance Expense Rate Balance Expense Rate ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCK- HOLDERS' EQUITY Interest bearing liabilities Savings deposits $ 55,855 $ 1,517 2.72% $ 38,263 $ 1,059 2.77% Interest bearing checking accounts 58,945 1,394 2.36 54,197 1,380 2.55 Time deposits In denominations under $100,000 148,251 6,837 4.61 128,520 6,074 4.73 In denominations over $100,000 54,389 2,360 4.34 42,458 1,588 3.74 Miscellaneous short-term borrowings 47,220 1,879 3.98 42,919 1,428 3.33 Long-term borrowings 15,806 900 5.69 8,677 493 5.68 Capital notes 0 0 0.00 0 0 0.00 ----------- ----------- ----------- ----------- ----------- ----------- Total interest bearing liabilities $ 380,466 $ 14,887 3.91% $ 315,034 $ 12,022 3.82% =========== =========== Non-interest bearing liabilities and stockholders' equity Demand deposits 52,893 0 37,709 0 Other liabilities 4,606 0 3,847 0 Stockholders' equity 28,919 0 25,658 0 ----------- ----------- ----------- ----------- Total liabilities and stock- holders' equity $ 466,884 $ 14,887 3.19% $ 382,248 $ 12,022 3.15% =========== =========== =========== =========== =========== ========== Net interest differential - yield on average daily earning assets $ 19,283 4.43% $ 16,070 4.50% =========== =========== =========== ========== 8 ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS (Fully Taxable Equivalent Basis) (in thousands of dollars) YEAR ENDED DECEMBER 31, 1995 Over (under) 1994(1) 1994 Over (under) 1993(1) ------------------------------------- ------------------------------------- Volume Rate Total Volume Rate Total ----------- ----------- ----------- ----------- ----------- ----------- INTEREST AND LOAN FEE INCOME(2) Loans: Taxable $ 3,581 $ 2,620 $ 6,201 $ 2,823 $ 889 $ 3,712 Tax exempt (39) 15 (24) (143) 27 (116) Investments: Taxable 1,344 537 1,881 2,912 (529) 2,383 Tax exempt 496 (26) 470 193 (61) 132 Trading account investments 0 0 0 (1) (1) (2) Short-term investment (12) 52 40 14 45 59 Interest bearing deposits 0 7 7 (100) 10 (90) ----------- ----------- ----------- ----------- ----------- ----------- Total interest income 5,370 3,205 8,575 5,698 380 6,078 ----------- ----------- ----------- ----------- ----------- ----------- INTEREST EXPENSE Savings deposits (243) (205) (448) 478 (20) 458 Interest bearing checking accounts (86) 25 (61) 116 (102) 14 Time deposits In denominations under $100,000 1,517 1,681 3,198 914 (150) 764 In denominations over $100,000 979 1,071 2,050 492 280 772 Miscellaneous short-term borrowings 935 989 1,924 152 298 450 Long-term borrowings 93 (1) 92 406 1 407 ----------- ----------- ----------- ----------- ----------- ----------- Total interest expense 3,195 3,560 6,755 2,558 307 2,865 ----------- ----------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN INTEREST DIFFERENTIALS $ 2,175 $ (355) $ 1,820 $ 3,140 $ 73 $ 3,213 =========== =========== =========== =========== =========== =========== <FN> (1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily balances for 1995, 1994 and 1993. The changes in volume represent "changes in volume times the old rate". The changes in rate represent "changes in rate times old volume". The change in rate/volume were also calculated by "change in rate times change in volume" and allocated consistently based upon the relative absolute values of the changes in volume and changes in rate. (2) Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1995, 1994 and 1993. Tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to nondeductible interest expense. </FN> 9 ANALYSIS OF SECURITIES (in thousands of dollars) The amortized cost and the fair value of securities as of December 31, 1995, 1994 and 1993 are as follows: 1995 1994 1993 ------------------------ ------------------------ ------------------------ Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ----------- ----------- ----------- ----------- ----------- ----------- Securities available-for-sale: U.S. Treasury securities $ 27,549 $ 27,844 $ 26,960 $ 25,916 $ 29,701 $ 30,446 Government agencies and corporations 2,150 2,191 1,000 1,000 0 0 Mortgage-backed securities 48,302 48,843 30,734 28,987 26,798 26,810 Obligations of state and political subdivisions 2,076 2,176 887 933 882 975 Other securities 999 1,066 999 1,026 999 1,128 ----------- ----------- ----------- ----------- ----------- ----------- Total debt securities available-for-sale 81,076 82,120 60,580 57,862 58,380 59,359 =========== =========== =========== =========== =========== =========== Securities held-to-maturity: U.S. Treasury securities $ 13,611 $ 13,576 $ 14,714 $ 13,876 $ 10,544 $ 10,559 Government agencies and corporations 2,898 3,033 2,034 2,037 99 99 Mortgage-backed securities 77,319 77,471 78,781 73,673 77,085 77,067 Obligations of state and political subdivisions 19,047 20,077 13,608 13,061 10,825 11,457 Other securities 1,013 1,171 1,015 1,076 1,017 1,195 ----------- ----------- ----------- ----------- ----------- ----------- Total debt securities held-to-maturity 113,888 115,328 110,152 103,723 99,570 100,377 Equity securities 0 0 0 0 0 0 ----------- ----------- ----------- ----------- ----------- ----------- Total securities held to maturity $ 113,888 $ 115,328 $ 110,152 $ 103,723 $ 99,570 $ 100,377 =========== =========== =========== =========== =========== =========== 10 ANALYSIS OF SECURITIES (cont.) (Fully Tax Equivalent Basis) (in thousands of dollars) The maturity distribution (2) and weighted average yields (1) for debt securities portfolio at December 31, 1995, are as follows: After One After Five Within Year Years Over One Within Five Within Ten Ten Year Years Years Years ----------- ----------- ----------- ----------- Securities available-for-sale: U.S. Treasury securities Book value 100 27,449 0 0 Yield 6.56 5.97 Government agencies and corporations Book value 1,000 1,050 100 0 Yield 7.70 7.91 9.02 Mortgage-backed securities Book value 0 5,327 20,577 22,398 Yield 7.11 6.34 6.51 Obligations of state and political subdivisions Book value 0 591 0 1,485 Yield 11.55 8.57 Other debt securities Book value 0 999 0 0 Yield 9.34 ----------- ----------- ----------- ----------- Total debt securities available-for-sale: Book value 1,100 35,416 20,677 23,883 Yield 7.60 6.39 6.35 6.64 =========== =========== =========== =========== Securities held-to-maturity: U.S. Treasury securities Book value 2,549 11,062 0 0 Yield 4.39 5.28 Government agencies and corporations Book value 0 2,598 300 0 Yield 7.52 6.42 Mortgage-backed securities Book value 0 15,050 39,028 23,241 Yield 6.81 6.21 5.67 Obligations of state and political subdivisions Book value 7 586 758 17,696 Yield 4.27 9.92 10.53 9.12 Other debt securities Book value 0 1,013 0 0 Yield 9.73 ----------- ----------- ----------- ----------- Total debt securities held-to-maturity: Book value 2,556 30,309 40,086 40,937 Yield 4.38 6.47 6.30 7.16 =========== =========== =========== =========== <FN> (1) Tax exempt income converted to a fully taxable equivalent basis at a 34% rate. (2) The maturity distribution of mortgage-backed securities is based upon anticipated payments as computed by using the historic average repayment speed from date of issue. (3) There are no investments in securities of any one issuer that exceed 10% of stockholders' equity. </FN> 11 ANALYSIS OF LOAN PORTFOLIO Analysis of Loans Outstanding (in thousands of dollars) The Registrant segregates its loan portfolio into four basic segments: commercial (including agri-business and agricultural loans), real estate mortgages, installment and credit cards (including personal line of credit loans). The loan portfolio as of December 31, 1995, 1994, 1993, 1992, and 1991 is as follows: 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- Commercial loans: Taxable $ 192,359 $ 173,325 $ 144,274 $ 128,268 $ 97,510 Tax exempt 3,636 3,207 4,501 5,594 6,521 Total commercial loans 195,995 176,532 148,775 133,862 104,031 Real estate mortgage loans 55,948 47,296 49,816 50,413 50,697 Installment loans 58,175 48,228 46,914 36,111 33,312 Credit card and line of credit loans 17,499 15,900 14,680 13,816 11,986 ----------- ----------- ----------- ----------- ----------- Total loans 327,617 287,956 260,185 234,202 200,026 Less allowance for loan losses 5,472 4,866 4,010 3,095 2,612 ----------- ----------- ----------- ----------- ----------- Net loans $ 322,145 $ 283,090 $ 256,175 $ 231,107 $ 197,414 =========== =========== =========== =========== =========== <FN> The real estate mortgage loan portfolio includes construction loans totaling $1,224, $426, $223, $1,164, and $885 as of December 31, 1995, 1994, 1993, 1992 and 1991, respectively. The above loan classifications are based on the nature of the loans as of the loan origination date, and are independent as to the use of the funds by the borrower. There are no foreign loans included in the above analysis. </FN> 12 ANALYSIS OF LOAN PORTFOLIO (cont.) Analysis of Loans Outstanding (cont.) (in thousands of dollars) Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules included in the related loan agreements or upon scheduled maturity of each principal payment. The following table indicated the rate sensitivity of the loan portfolio as of December 31, 1995. The table includes the real estate loans held-for-sale and assumes these loans will not be sold during the various time horizons. Credit Card Real and Line Commercial Estate Installment of Credit Total Percent ----------- ----------- ----------- ----------- ----------- ----------- Immediately adjustable interest rates or original maturity of one day $ 155,694 $ 2,071 $ 3,503 $ 14,574 $ 175,842 53.6% Other within one year 8,761 25,515 22,932 0 57,208 17.4 After one year, within five years 25,551 22,753 31,070 2,925 82,299 25.1 Over five years 5,533 5,677 670 0 11,880 3.6 Nonaccrual loans 456 77 0 0 533 0.2 ----------- ----------- ----------- ----------- ----------- ----------- Total loans $ 195,995 $ 56,093 $ 58,175 $ 17,499 $ 327,762 100.0% =========== =========== =========== =========== =========== =========== <FN> A portion of the Bank's loans are short-term maturities. At maturity, credits are reviewed, and if renewed, are renewed at rates and conditions that prevail at the time of maturity. Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 1995 amounted to $76,568 and $109,332 respectively. </FN> 13 ANALYSIS OF LOAN PORTFOLIO (cont.) Review of Nonperforming Loans (in thousands of dollars) The following is a summary of nonperforming loans as of December 31, 1995, 1994, 1993, 1992 and 1991. 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE) Real estate mortgage loans $ 122 $ 0 $ 1 $ 79 $ 27 Commercial and industrial loans 69 16 315 100 1,127 Loans to individuals for household, family and other personal expenditures 18 19 346 42 55 Loans to finance agriculture production and other loans to farmers 0 0 0 0 0 ----------- ----------- ----------- ----------- ----------- Total past due loans 209 35 662 221 1,209 ----------- ----------- ----------- ----------- ----------- PART B - NONACCRUAL LOANS Real estate mortgage loans 76 18 0 0 22 Commercial and industrial loans 456 0 0 0 198 Loans to individuals for household, family and other personal expenditures 0 0 0 0 5 Loans to finance agriculture production and other loans to farmers 0 0 0 0 628 ----------- ----------- ----------- ----------- ----------- Total nonaccrual loans 532 18 0 0 853 ----------- ----------- ----------- ----------- ----------- PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,432 1,484 0 86 4 ----------- ----------- ----------- ----------- ----------- Total nonperforming loans $ 2,173 $ 1,537 $ 662 $ 307 $ 2,066 =========== =========== =========== =========== =========== <FN> Nonearning assets of the Corporation include nonaccrual loans (as indicated above), nonaccrual investments, other real estate, and repossessions which amounted to $1,207 at December 31, 1995. </FN> 14 ANALYSIS OF LOAN PORTFOLIO (cont.) Comments Regarding Nonperforming Assets PART A - CONSUMER LOANS Consumer installment loans, except those loans that are secured by real estate, are not placed on a nonaccrual status since these loans are charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. Advances under Mastercard and Visa programs, as well as advances under all other consumer lines of credit programs, are charged-off when collection appears doubtful. PART B - NONPERFORMING LOANS When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued and all accrued interest receivable is charged off. It is the policy of the Bank that all unsecured loans (i.e. loans for which the collateral is insufficient to cover all principal and accrued interest) will be reclassified as nonperforming loans to the extent they are unsecured, on or before the loan becomes 90 days delinquent. Thereafter, interest is recognized and included in income only when received. As of December 31, 1995, loans totaling $532,000 were on nonaccrual status. PART C - TROUBLED DEBT RESTRUCTURED LOANS Loans renegotiated as troubled debt restructuring are those loans for which either the contractual interest rate has been reduced and/or other concessions are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan. Loans renegotiated as troubled debt restructuring totaled $1,432,000 as of December 31, 1995. Interest income of $96,000 was recognized in 1995. Had these loans been performing under the original contract terms, an additional $53,000 would have been reflected in interest income during 1995. The Bank is not committed to lend additional funds to debtors whose loans have been modified. PART D - OTHER NONPERFORMING ASSETS The Bank adopted SFAS No. 114 and SFAS No. 118, 'Accounting by Creditors for Impairment of a Loan' at January 1, 1995. Under these standards, loans considered to be impaired are reduced to the present value of future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as bad debt expense. As part of the loan review process, management reviews all loans classified as 'special mention' or below, as well as other loans that might warrant application of SFAS No. 114 and SFAS No. 118. The effect of adopting these accounting standards on January 1, 1995 was immaterial and at December 31, 1995, no loans were considered as impaired. The management of the Bank is of the opinion that there are no significant foreseeable losses relating to substandard or nonperforming assets, except as discussed above. 15 PART E - LOAN CONCENTRATIONS There were no loan concentrations within industries which exceeded ten percent of total assets. It is estimated that over 98% of all the Bank's commercial, industrial, agri-business and agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its basic trade area. Basis For Determining Allowance For Loan Losses Management is charged with the responsibility of determining the adequacy of the allowance for loan losses. This responsibility is fulfilled by management in the following ways: 1. Management reviews the larger individual loans for unfavorable collectibility factors and assesses the requirement for specific reserves on such credits. For those loans not subject to specific reviews, management reviews previous loan loss experience to establish historical ratios and trends in charge-offs by loan category. The ratios of net charge-offs to particular types of loans enable management to estimate charge-offs in future periods by loan category and thereby establish appropriate reserves for loans not specifically reviewed. 2. Management reviews the current and anticipated economic conditions of its lending market to determine the effects on future loan charge-offs by loan category, in addition to the effects on the loan portfolio as a whole. 3. Management reviews delinquent loan reports to determine risk of future loan charge-offs. High delinquencies are generally indicative of an increase in future loan charge-offs. Based upon the above described policy and objectives, $120,000, $795,000 and $790,000 were charged to the provision for loan losses and added to the allowance for loan losses in 1995, 1994 and 1993, respectively. The allocation of the allowance for loan losses to the various lending areas is performed by management in relation to perceived exposure to loss in the various loan portfolios. However, the allowance for loan losses is available in its entirety to absorb losses in any particular loan category. (Intentionally Left Blank) 16 ANALYSIS OF LOAN PORTFOLIO (cont.) Summary of Loan Loss (in thousands of dollars) Following is a summary of the loan loss experience for the years ended December 31, 1995, 1994, 1993, 1992, and 1991. 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- Amount of loans outstanding, December 31, $ 327,617 $ 287,956 $ 260,185 $ 234,202 $ 200,026 =========== =========== =========== =========== =========== Average daily loans outstanding during the year ended December 31, $ 309,241 $ 271,391 $ 240,466 $ 213,599 $ 178,619 =========== =========== =========== =========== =========== Allowance for loan losses, January 1, $ 4,866 $ 4,010 $ 3,095 $ 2,612 $ 1,777 ----------- ----------- ----------- ----------- ----------- Loans charged-off Commercial 137 27 99 446 1,016 Real Estate 48 0 4 258 20 Installment 112 93 97 217 221 Credit cards and personal credit lines 58 15 28 39 66 ----------- ----------- ----------- ----------- ----------- Total loans charged-off 355 135 228 960 1,323 ----------- ----------- ----------- ----------- ----------- Recoveries of loans previously charged-off Commercial 26 107 40 11 18 Real Estate 0 1 1 0 0 Installment 63 81 56 85 106 Credit cards and personal credit lines 6 7 6 7 5 ----------- ----------- ----------- ----------- ----------- Total recoveries 95 196 103 103 129 ----------- ----------- ----------- ----------- ----------- Net loans charged-off 260 (61) 125 857 1,194 Purchase loan adjustment 746 0 250 0 59 Provision for loan loss charged to expense 120 795 790 1,340 1,970 ----------- ----------- ----------- ----------- ----------- Balance December 31, $ 5,472 $ 4,866 $ 4,010 $ 3,095 $ 2,612 =========== =========== =========== =========== =========== Ratio of net charge-offs during the period to average daily loans outstanding Commercial 0.03% (0.03)% 0.02% 0.20% 0.56% Real Estate 0.01 0.00 0.00 0.12 0.01 Installment 0.02 0.01 0.02 0.06 0.07 Credit cards and personal credit lines 0.02 0.00 0.01 0.02 0.03 ----------- ----------- ----------- ----------- ----------- Total 0.08% (0.02)% 0.05% 0.40% 0.67% =========== =========== =========== =========== =========== 17 ANALYSIS OF LOAN PORTFOLIO (cont.) Allocation of Allowance for Loan Losses (in thousands of dollars) The following is a summary of the allocation for loan losses as of December 31, 1995, 1994, 1993, 1992 and 1991. 1995 1994 1993 ------------------------ ------------------------ ------------------------ Allowance Loans as Allowance Loans as Allowance Loans as For Percentage For Percentage For Percentage Loan of Gross Loan of Gross Loan of Gross Losses Loans Losses Loans Losses Loans ----------- ----------- ----------- ----------- ----------- ----------- Allocated allowance for loan losses Commercial $ 811 59.82 $ 665 61.31 $ 1,120 57.18 Real Estate 112 17.08 95 16.42 108 19.15 Installment 376 17.76 311 16.75 302 18.04 Credit cards and personal credit lines 112 5.34 101 5.52 95 5.63 ----------- ----------- ----------- ----------- ----------- ----------- Total allocated allowance for loan losses 1,411 100.00 1,172 100.00 1,625 100.00 =========== =========== =========== 4,061 3,694 2,385 ----------- ----------- ----------- Total allowance for loan losses $ 5,472 $ 4,866 $ 4,010 =========== =========== =========== 1992 1991 ------------------------ ------------------------ Allowance Loans as Allowance Loans as For Percentage For Percentage Loan of Gross Loan of Gross Losses Loans Losses Loans ----------- ----------- ----------- ----------- Allocated allowance for loan losses Commercial $ 864 57.16 $ 1,168 52.01 Real Estate 105 21.52 90 25.35 Installment 230 15.42 214 16.65 Credit cards and personal credit lines 87 5.90 76 5.99 ----------- ----------- ----------- ----------- Total allocated allowance for loan losses 1,286 100.00 1,548 100.00 =========== =========== 1,809 1,064 ----------- ----------- Total allowance for loan losses $ 3,095 $ 2,612 =========== =========== 18 ANALYSIS OF DEPOSITS (in thousands of dollars) The average daily deposits for the years ended December 31, 1995, 1994 and 1993, and the average rates paid on those deposits are summarized in the following table: 1995 1994 1993 ------------------------ ------------------------ ----------------------- Average Average Average Average Average Average Daily Rate Daily Rate Daily Rate Balance Paid Balance Paid Balance Paid ----------- ----------- ----------- ----------- ----------- ----------- Demand deposits $ 60,753 0.00 $ 52,893 0.00 $ 37,709 0.00 Savings accounts: Regular savings 46,123 2.32 55,855 2.72 38,263 2.77 Interest bearing checking 55,355 2.41 58,945 2.36 54,197 2.55 Time deposits: Deposits of $100,000 or more 73,449 6.00 54,389 4.34 42,458 3.74 Other time deposits 177,992 5.64 148,251 4.61 128,520 4.73 ----------- ----------- ----------- ----------- ----------- ----------- Total deposits $ 413,672 4.07 $ 370,333 3.27 $ 301,147 3.35 =========== =========== =========== =========== =========== =========== As of December 31, 1995, time certificates of deposit in denominations of $100,000 or more will mature as follows: Within three months $ 33,382 Over three months, within six months 12,922 Over six months, within twelve months 9,237 Over twelve months 6,822 ----------- Total time certificates of deposit in denominations of $100,000 or more $ 62,363 =========== 19 RETURN ON EQUITY AND ASSETS The rates of return on average daily assets and stockholders' equity, the dividend payout ratio, and the average daily stockholders' equity to average daily assets for the years ended December 31, 1995, 1994 and 1993 are as follows: 1995 1994 1993 --------- --------- --------- Percent of net income to: Average daily total assets 1.05 1.10 1.11 Average daily stockholders' equity 17.06 17.73 16.51 Percentage of dividends declared per common share to net income per weighted average number of common shares outstanding (1,438,496 shares in 1995, 1994 and 1993) 18.88 16.57 17.01 Percentage of average daily stockholders' equity to average daily total assets 6.18 6.19 6.71 20 SHORT-TERM BORROWINGS The following is a schedule of statistical information relating to securities sold under agreement to repurchase maturing within one year and are secured by either U.S. Government agency securities or mortgage-backed securities classified as other debt securities. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of shareholders' equity at the end of the period. 1995 1994 1993 --------- --------- --------- Outstanding at year end $ 58,151 $ 41,750 $ 29,372 Approximate average interest rate at year end 5.35 5.11 3.22 Highest amount outstanding as of any month end during the year $ 79,334 $ 50,460 $ 42,485 Approximate average outstanding during the year $ 61,398 $ 42,584 $ 38,299 Approximate average interest rate during the year 5.69 3.96 3.34 Securities sold under agreement to repurchase include both transactions initiated by the investment division of the Bank, as well as the automatic borrowings from selected demand deposit customers who had excess balances in their accounts. 21 ITEM 2. PROPERTIES The Bank conducts its operations from the following locations: Main Office Ligonier 202 E. Center St. 1470 U.S. Highway 33 South Warsaw, IN Ligonier, IN Warsaw Drive-Up Mentone East Center St. 202 East Main St. Warsaw, IN Mentone, IN Akron Middlebury 102 East Rochester 712 Wayne Ave. Akron, IN Middlebury, IN Argos Milford 100 North Michigan Indiana State Road 15 North Argos, IN Milford, IN Bremen Nappanee 1600 Indiana State Rod 331 202 West Market St. Bremen, IN Nappanee, IN Columbia City North Webster 507 North Main St. 644 North Main St. Columbia City, IN North Webster, IN Concord Pierceton 4202 Elkhart Rd. 202 South First St. Goshen, IN Pierceton, IN Cromwell Roann 111 North Jefferson St. 110 Chippewa Cromwell, IN Roann, IN Elkhart Rochester 864 East Beardsley St. 507 East 9th St. Elkhart, IN Rochester, IN Elkhart East Shipshewana 22050 State Road 120 895 North Van Buren St. Elkhart, IN Shipshewana, IN Goshen Downtown Silver Lake 102 North Main St. 102 Main St. Goshen, IN Silver Lake, IN Goshen South Syracuse 2513 South Main St. 502 South Huntington Goshen, IN Syracuse, IN LaGrange Wabash North 901 South Detroit 1004 North Cass St. LaGrange, IN Wasbash, IN 22 Wabash South Winona Lake 1940 South Wabash St. 99 Chestnut St. Wabash, IN Winona Lake, IN Warsaw East Free-standing ATM 3601 Commerce Dr. 2101 East Center St. Warsaw, IN Warsaw, IN Warsaw West 1221 West Lake St. Warsaw, IN The Bank leases from third parties the real estate and buildings for its offices in Akron and Milford. In addition, the Bank leases the real estate for its Wabash North office and its free-standing ATM. All the other branch facilities are owned by the Bank. The Bank also owns parking lots in downtown Warsaw for the use and convenience of Bank employees and customers, as well as leasehold improvements, equipment, furniture and fixtures necessary and appropriate to operate the banking facilities. In addition, the Bank owns a building at 110 South High St., Warsaw, Indiana, which it uses for various offices and a building at 113 East Center St., Warsaw, Indiana, which it uses for office and computer facilities. The Bank also leases from third parties facilities in Warsaw, Indiana, for the storage of supplies and for employee training. None of the Bank's assets are the subject of any material encumbrances. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings other than ordinary routine litigation incidental to the business to which the Registrant and the Bank are a party or of which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders from October 1, 1992 to December 31, 1995. (Intentionally Left Blank) 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Information relating to the principal market for and the prices of the Registrant's common stock, and information as to dividends declared by the Registrant, are contained under the caption "Stock and Dividend Information" in the 1995 Annual Report and are incorporated herein by reference in response to this item. On December 31, 1995, the Registrant had 870 shareholders, including those employees who participate in the Registrant's 401(K) plan. ITEM 6. SELECTED FINANCIAL DATA A five year consolidated financial summary, containing the required selected financial data, appears under the caption "Selected Financial Data" in the 1995 Annual Report and is incorporated herein by reference in response to this item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations appears under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1995 Annual Report and is incorporated herein by reference in response to this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements appear in the 1995 Annual Report and are incorporated herein by reference in response to this item. Consolidated Balance Sheets at December 31, 1995 and 1994. Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. Report of Independent Auditors. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in the Registrant's definitive Proxy Statement dated March 11, 1996, is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the Registrant's definitive Proxy Statement dated March 11, 1996, is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the Registrant's definitive Proxy Statement dated March 11, 1996, is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the Registrant's definitive Proxy Statement dated March 11, 1996, is incorporated herein by reference in response to this item. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The documents listed below are filed as a part of this report: (1) Financial Statements. --------------------- The following financial statements of the Registrant and its subsidiaries appear in the 1995 Annual Report and are specifically incorporated by reference under Item 8 of this Form 10-K, or are a part of this Form 10-K, as indicated and at the pages set forth below. Reference --------- 1995 Annual Form 10-K Report --------- ----------- Consolidated Balance Sheets at December 31, 1995 and 1994. 7 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993. 8 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993. 9 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993. 10 Notes to Consolidated Financial Statements. 11 - 20 Report of Independent Auditors. 20 (2) Financial Statement Schedules ----------------------------- The financial statement schedules of the Registrant and its subsidiary have been omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. [Intentionally Left Blank] 26 SIGNATURES ---------- Pursuant to the requirements of Section 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LAKELAND FINANCIAL CORPORATION Date: March 12, 1996 By R. Douglas Grant (R. Douglas Grant) President Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 12, 1996 R. Douglas Grant (R. Douglas Grant) Principal Executive Officer and Director Date: March 12, 1996 Terry M. White (Terry M. White) Principal Financial and Accounting Officer Date: March 12, 1996 Anna K. Duffin (Anna K. Duffin) Director Date: (Eddie Creighton) Director Date: March 12, 1996 L. Craig Fulmer (L. Craig Fulmer) Director Date: March 12, 1996 Jerry L. Helvey (Jerry L. Helvey) Director Date: March 12, 1996 Homer A. Kent (Dr. Homer A. Kent) Director Date: March 12, 1996 J. Alan Morgan (J. Alan Morgan) Director Date: March 12, 1996 Richard L. Pletcher (Richard L. Pletcher) Director Date: (Joseph P. Prout) Director Date: March 12, 1996 Philip G. Spear (Philip G. Spear) Director Date: (Terry L. Tucker) Director Date: (G.L. White) Director 27 EXHIBIT INDEX The following Exhibits are filed as part of this Report and not incorporated by reference from another document: Exhibit 13 - 1995 Report to Shareholders with Report of Independent Auditors. Exhibit 21 - Subsidiaries 28 EXHIBIT 13 1995 Report to Shareholders with Report of Independent Auditors. 29 EXHIBIT 21 Subsidiaries. The Registrant has one wholly owned subsidiary, Lake City Bank, Warsaw, Indiana, a banking corporation organized under the laws of the State of Indiana. 30