UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____________ to ____________________ Commission File No. 0-11487 LAKELAND FINANCIAL CORPORATION (exact name of registrant as specified in its charter) INDIANA 35-1559596 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 1-219-267-6144 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: COMMON (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such other period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive Proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] Aggregate market value of the voting stock held by non-affiliates of the registrant, computed solely for the purposes of this requirement on the basis of the book value at February 28, 1997, and assuming solely for the purposes of this calculation that all Directors and executive officers of the Registrant are "affiliates": $40,422,606. Number of shares of common stock outstanding at February 28, 1997: 2,903,799 Cover page 1 of 2 pages DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the Part of 10-K indicated: Part Document I, II & IV Lakeland Financial Corporation's Annual Report to Shareholders for year ended December 31, 1996, parts of which are incorporated into Parts I, II and IV of this Form 10-K. III Proxy statement mailed to Shareholders on March 13, 1997, which is incorporated into Part III of this Form 10-K. Cover page 2 of 2 pages PART I. ITEM 1. BUSINESS The registrant was incorporated under the laws of the State of Indiana on February 8, 1983. As used herein, the term "Registrant" refers to Lakeland Financial Corporation or, if the context dictates, the Lakeland Financial Corporation and its wholly owned subsidiary, Lake City Bank, Warsaw, Indiana. GENERAL Registrant's Business. The Registrant is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended. Registrant owns all of the outstanding stock of Lake City Bank, Warsaw, Indiana, a full service commercial bank organized under Indiana law (the "Bank"). Registrant conducts no business except that incident to its ownership of the outstanding stock of the Bank and the operation of the Bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. The Bank's activities cover all phases of commercial banking, including checking accounts, savings accounts, time deposits, the sale of securities under agreements to repurchase, discount brokerage services, commercial and agricultural lending, direct and indirect consumer lending, real estate mortgage lending, safe deposit box service and trust services. The Bank's main banking office is located at 202 East Center Street, Warsaw, Indiana. As of December 31, 1996, the Bank had nine branch offices and one drive-up facility in Kosciusko County, eight branch offices in Elkhart County, three branch offices in Noble County, three branch offices in Wabash County, two branch offices in LaGrange County, two branch offices in Marshall County, one branch office in Whitley County and two branch offices and one drive-up facility in Fulton County. The Bank's operations center is located at 113 East Market Street, Warsaw, Indiana. Supervision and Regulation. The Registrant is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHC Act"). As a bank holding company, the registrant is required to file with the Federal Reserve Board (the "FRB") annual reports and such additional information as the FRB may require. The FRB may also make an examination or inspection of the Registrant. The BHC Act prohibits a bank holding company from engaging in, or acquiring direct or indirect control of more than five percent of the voting shares of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities deemed by the FRB to be "closely related to banking". Under current regulations, bank holding companies and their subsidiaries may engage in such bank related business ventures as consumer finance, equipment leasing, computer service bureau and software operations and mortgage banking. The BHC Act also governs banking expansion by bank holding companies. Before a bank holding company acquires more than five percent of the voting shares of any other bank it must receive the prior written approval of the FRB or its delegate. Furthermore, the BHC Act does not permit a bank holding company to acquire a bank located outside the State of Indiana unless the acquisition is specifically authorized by the laws of the State in which such bank is located. The acquisition of banking subsidiaries by bank holding companies is subject to the jurisdiction of, and requires the prior approval of, the Federal Reserve, and for institutions resident in Indiana, the Indiana Department of Financial Institutions. Bank holding companies located in Indiana are permitted to acquire banking subsidiaries throughout the state, subject to limitations based upon the percentage of total state deposits of the holding company's subsidiary banks. Indiana law permits the Registrant to acquire banks, and be acquired by bank holding -1- companies, located in any state in the country which permits reciprocal entry by Indiana bank holding companies. The Registrant is an "affiliate" of the Bank within the meaning of Section 23A of the Federal Reserve Act (as made applicable to the Bank by the Federal Deposit Insurance Act) and Indiana Code 28-1-18.1. As a result, the Bank is restricted in making loans to, investments in, or loans secured by securities of, the Registrant. The BHC Act also prohibits the Registrant and its subsidiaries from imposing "tie-in" requirements in connection with extensions of credit and other services. Under the provisions of Indiana law, the registrant may not acquire more than twenty-five percent of the voting stock in any banks other than the Bank without the approval of the Indiana Department of Financial Institutions. In any such event, the Registrant would be required to obtain the prior approval of the FRB as described above to purchase interest of five percent or more in another bank. The Bank is under supervision of and subject to examination by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. Regulation and examination by banking regulatory agencies are primarily for the benefit of depositors and not shareholders. The earnings of commercial banks are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open-market operations in U.S. Government securities, the discount rate on bank borrowing, setting the reserves that banks must maintain against certain bank deposits and the regulation of interest rates payable by banks on certain time and savings deposits. These policies have a significant effect on the overall growth and distribution of bank loans, investments and deposits. They influence interest rates charged on loans, earned on investments and paid for time and savings deposits. FRB monetary policies have had significant effect on the operating results of commercial banks in the past, and are expected to exert similar influence in the future. The general effect, if any, of such policies upon the future business and earnings of the Registrant and the Bank cannot be reasonably predicted. MATERIAL CHANGES AND BUSINESS DEVELOPMENTS From the date of the Registrant's incorporation, February 8, 1983, until October 31, 1983, the Registrant conducted no business and had no assets (except nominal assets necessary to complete the acquisition of the Bank). The Registrant has conducted no business since October 31, 1983, except that incident to its ownership of the stock of the Bank, the collection of dividends from the Bank, and the disbursement of dividends to the Registrant's shareholders. During the period from 1985 to 1987, the Registrant owned all of the outstanding shares of Lakeland Mortgage Corp., a mortgage lending and servicing corporation doing business in Indiana. Lakeland Mortgage Corp. discontinued business operations on December 15, 1987. The Registrant continued to own all of the stock of Lakeland Mortgage Corp. until 1992, during which year, Lakeland Mortgage Corp. was liquidated and all stock was redeemed. COMPETITION The Bank was originally organized in 1872 and has continuously operated under the laws of the State of Indiana since its organization. The Bank is a full service bank providing both commercial and personal banking services. Bank products offered include interest and noninterest bearing demand accounts, savings and time deposit accounts, sale of securities under agreements to repurchase, discount brokerage, commercial loans, mortgage loans, consumer loans, letters of credit, and a wide range of trust services. The interest rates for both deposits and loans, as well as the range of services provided, are nearly the same for all banks competing within the Bank's service area. -2- The Bank's service area is described as all of Kosciusko, Elkhart, LaGrange, Noble and Wabash Counties and portions of Marshall, Fulton, Miami, Huntington and Whitley Counties. In addition to the banks located within its service area, the Bank also competes with savings and loan associations, credit unions, farm credit services, finance companies, personal loan companies, insurance companies, money market funds, and other non-depository financial intermediaries. Also, financial intermediaries such as money market mutual funds and large retailers are not subject to the same regulations and laws that govern the operation of traditional depository institutions and accordingly may have an advantage in competing for funds. The Bank competes with other major banks for the large commercial deposit and loan accounts. The Bank is presently subject to an aggregate maximum loan limit to any single account in the amount of $7,012,000 pursuant to Indiana law. This maximum prohibits the Bank from providing a full range of banking services to those businesses or personal accounts whose borrowing periodically exceed this amount. In order to retain at least a portion of the bank business of these large borrowers, the Bank maintains correspondent relationships with other financial institutions. The Bank also participates with local and other banks in the placement of large borrowings in excess of its lending limit. The Bank is also a member of the Federal Home Loan Bank of Indianapolis in order to broaden its mortgage lending and investment activities and to provide additional funds, if necessary, to support these activities. FOREIGN OPERATIONS The Bank has no investments with any foreign entity other than a nominal demand deposit account which is maintained with a Canadian bank in order to facilitate the clearing of checks drawn on banks located in that country. There are no foreign loans. EMPLOYEES At December 31, 1996, the Registrant, including its subsidiary corporation, had approximately 320 full time equivalent employees. Benefit programs include a pension plan, 401(k) plan, group medical insurance, group life insurance and paid vacations. The bank is not a party to any collective bargaining agreement, and employee relations are considered good. INDUSTRY SEGMENTS The Registrant and the Bank are engaged in a single industry and perform a single service -- commercial banking. On the pages that follow are tables which set forth selected statistical information relative to the business of the Registrant. (Intentionally Left Blank) -3- DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (in thousands of dollars) 1996 1995 ------------------------------------ ------------------------------------ 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 ** 349,336 32,724 9.37 305,806 29,859 9.76 Tax Exempt * 3,475 373 10.73 3,435 389 11.32 Investments: Taxable 181,411 11,348 6.26 170,788 10,723 6.28 Tax Exempt * 22,626 2,088 9.23 16,724 1,572 9.40 Short-term investment 4,250 226 5.32 3,293 192 5.83 Interest bearing deposits 213 19 8.92 108 10 9.26 ---------- ---------- ---------- ---------- ---------- ---------- Total Earning Assets $ 561,311 $ 46,778 8.33% $ 500,154 $ 42,745 8.55% ========== ========== Nonearning assets: Cash and due from banks 24,533 0 20,725 0 Premises and equipment 14,724 0 12,386 0 Other assets 9,424 0 7,668 0 Less: allowance for loan losses (5,382) 0 (5,238) 0 ---------- ---------- ---------- ---------- Total assets $ 604,610 $ 46,778 $ 535,695 $ 42,745 ========== ========== ========== ========== <FN> * Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1996 and 1995. Tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans. **Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1996, and 1995, are included as taxable loan interest income. </FN> -4- DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (cont.) (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) 1996 1995 ------------------------------------ ------------------------------------ Average Interest Average Interest Balance Expense Rate Balance Expense Rate ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities Savings deposits $ 43,847 $ 1,118 2.55% $ 46,123 $ 1,069 2.32% Interest bearing checking accounts 53,625 1,178 2.20 55,355 1,333 2.41 Time deposits In denominations under $100,000 208,499 11,229 5.39 177,992 10,035 5.64 In denominations over $100,000 86,137 4,886 5.67 73,449 4,410 6.00 Miscellaneous short-term borrowings 78,823 4,213 5.34 66,610 3,803 5.71 Long-term borrowings 19,624 1,113 5.67 17,432 992 5.69 ---------- ---------- ---------- ---------- ---------- ---------- Total interest bearing liabilities $ 490,555 $ 23,737 4.84% $ 436,961 $ 21,642 4.95% ========== ========== Non-interest bearing liabilities and stockholders' equity Demand deposits 69,459 0 60,753 0 Other liabilities 5,553 0 4,897 0 Stockholders' equity 39,043 0 33,084 0 ---------- ---------- ---------- ---------- Total liabilities and stock- holders' equity $ 604,610 $ 23,737 3.93% $ 535,695 $ 21,642 4.04% ========== ========== ========== ========== ========== ========== Net interest differential - yield on average daily earning assets $ 23,041 4.10% $ 21,103 4.22% ========== ========== ========== ========== -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 STOCK- HOLDERS' EQUITY Interest bearing liabilities Savings deposits $ 46,123 $ 1,069 2.32% $ 55,855 $ 1,517 2.72% Interest bearing checking accounts 55,355 1,333 2.41 58,945 1,394 2.36 Time deposits In denominations under $100,000 177,992 10,035 5.64 148,251 6,837 4.61 In denominations over $100,000 73,449 4,410 6.00 54,389 2,360 4.34 Miscellaneous short-term borrowings 66,610 3,803 5.71 47,220 1,879 3.98 Long-term borrowings 17,432 992 5.69 15,806 900 5.69 ---------- ---------- ---------- ---------- ---------- ---------- Total interest bearing liabilities $ 436,961 $ 21,642 4.95% $ 380,466 $ 14,887 3.91% ========= ========== Non-interest bearing liabilities and stockholders' equity Demand deposits 60,753 0 52,893 0 Other liabilities 4,897 0 4,606 0 Stockholders' equity 33,084 0 28,919 0 ---------- ---------- ---------- ---------- Total liabilities and stock- holders' equity $ 535,695 $ 21,642 4.04% $ 466,884 $ 14,887 3.19% ========== ========== ========== ========== ========== ========== Net interest differential - yield on average daily earning assets $ 21,103 4.22% $ 19,283 4.43% ========== ========== ========== ========== -7- ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS (Fully Taxable Equivalent Basis) (in thousands of dollars) YEAR ENDED DECEMBER 31, 1996 Over (under) 1995(1) 1995 Over (under) 1994(1) ------------------------------------ ------------------------------------ Volume Rate Total Volume Rate Total ---------- ---------- ---------- ---------- ---------- ---------- INTEREST AND LOAN FEE INCOME(2) Loans: Taxable $ 4,009 $ (1,144) $ 2,865 $ 3,581 $ 2,620 $ 6,201 Tax exempt 5 (21) (16) (39) 15 (24) Investments: Taxable 665 (40) 625 1,344 537 1,881 Tax exempt 544 (28) 516 496 (26) 470 Short-term investment 49 (15) 34 (12) 52 40 Interest bearing deposits 9 0 9 0 7 7 ---------- ---------- ---------- ---------- ---------- ---------- Total interest income 5,281 (1,248) 4,033 5,370 3,205 8,575 ---------- ---------- ---------- ---------- ---------- ---------- INTEREST EXPENSE Savings deposits (48) 97 49 (243) (205) (448) Interest bearing checking accounts (41) (114) (155) (86) 25 (61) Time deposits In denominations under $100,000 1,616 (422) 1,194 1,517 1,681 3,198 In denominations over $100,000 700 (224) 476 979 1,071 2,050 Miscellaneous short-term borrowings 629 (219) 410 935 989 1,924 Long-term borrowings 124 (3) 121 93 (1) 92 ---------- ---------- ---------- ---------- ---------- ---------- Total interest expense 2,980 (885) 2,095 3,195 3,560 6,755 ---------- ---------- ---------- ---------- ---------- ---------- INCREASE (DECREASE) IN INTEREST DIFFERENTIALS $ 2,301 $ (363) $ 1,938 $ 2,175 $ (355) $ 1,820 ========== ========== ========== ========== ========== ========== <FN> (1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily balances for 1996, 1995 and 1994. The changes in volume represent "changes in volume times the old rate". The changes in rate represent "changes in rate times old volume". The change in rate/volume were also calculated by "change in rate times change in volume" and allocated consistently based upon the relative absolute values of the changes in volume and changes in rate. (2) Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1996, 1995 and 1994. Tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to nondeductible interest expense. </FN> -8- ANALYSIS OF SECURITIES (in thousands of dollars) The amortized cost and the fair value of securities as of December 31, 1996, 1995 and 1994 are as follows: 1996 1995 1994 ----------------------- ---------------------- ------------------------ Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ---------- ---------- ---------- ---------- ---------- ---------- Securities available-for-sale: U.S. Treasury securities $ 31,604 $ 31,804 $ 27,549 $ 27,844 $ 26,960 $ 25,916 U.S. Government agencies and corporations 500 507 2,150 2,191 1,000 1,000 Mortgage-backed securities 46,002 46,332 48,302 48,843 30,734 28,987 Obligations of state and political subdivisions 2,081 2,167 2,076 2,176 887 933 Other debt securities 1,000 1,032 999 1,066 999 1,026 ---------- ---------- ---------- ---------- ---------- ---------- Total debt securities available-for-sale 81,187 81,842 81,076 82,120 60,580 57,862 ========== ========== ========== ========== ========== ========== Securities held-to-maturity: U.S. Treasury securities $ 17,020 $ 17,077 $ 13,611 $ 13,576 $ 14,714 $ 13,876 U.S. Government agencies and corporations 2,262 2,362 2,898 3,033 2,034 2,037 Mortgage-backed securities 83,811 83,719 77,319 77,471 78,781 73,673 Obligations of state and political subdivisions 21,172 22,095 19,047 20,077 13,608 13,061 Other debt securities 1,009 1,120 1,013 1,171 1,015 1,076 ---------- ---------- ---------- ---------- ---------- ---------- Total debt securities held-to-maturity 125,274 126,373 113,888 115,328 110,152 103,723 Equity securities 0 0 0 0 0 0 ---------- ---------- ---------- ---------- ---------- ---------- Total securities held to maturity $ 125,274 $ 126,373 $ 113,888 $ 115,328 $ 110,152 $ 103,723 ========== ========== ========== ========== ========== ========== -9- ANALYSIS OF SECURITIES (cont.) (Fully Tax Equivalent Basis) (in thousands of dollars) The maturity distribution (2) and weighted average yields (1) for debt securities portfolio at December 31, 1996, are as follows: 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 10,829 20,775 0 0 Yield 5.90 6.06 U.S. Government agencies and corporations Book value 200 300 0 0 Yield 7.47 7.78 Mortgage-backed securities Book value 0 10,568 25,065 10,369 Yield 6.74 6.72 6.90 Obligations of state and political subdivisions Book value 298 296 0 1,487 Yield 11.36 11.74 8.57 Other debt securities Book value 1,000 0 0 0 Yield 9.39 ------------ ------------ ------------ ------------ Total debt securities available-for-sale: Book value 12,327 31,939 25,065 11,856 Yield 6.34 6.39 6.72 7.11 ============ ============ ============ ============ Securities held-to-maturity: U.S. Treasury securities Book value 6,017 11,003 0 0 Yield 5.48 5.86 U.S. Government agencies and corporations Book value 100 2,162 0 0 Yield 5.75 7.98 Mortgage-backed securities Book value 402 19,984 36,955 26,470 Yield 5.63 7.02 6.20 6.03 Obligations of state and political subdivisions Book value 48 1,574 976 18,574 Yield 6.56 10.35 8.48 9.03 Other debt securities Book value 0 1,009 0 0 Yield 9.73 ------------ ------------ ------------ ------------ Total debt securities held-to-maturity: Book value 6,567 35,732 37,931 45,044 Yield 5.51 6.90 6.24 7.30 ============ ============ ============ ============ <FN> (1) Tax exempt income converted to a fully taxable equivalent basis at a 34% rate. (2) The maturity distribution of mortgage-backed securities is based upon anticipated payments as computed by using the historic average repayment speed from date of issue. (3) There are no investments in securities of any one issuer that exceed 10% of stockholders' equity. </FN> -10- ANALYSIS OF LOAN PORTFOLIO Analysis of Loans Outstanding (in thousands of dollars) The Registrant segregates its loan portfolio into four basic segments: commercial (including agri-business and agricultural loans), real estate mortgages, installment and credit cards (including personal line of credit loans). The loan portfolio as of December 31, 1996, 1995, 1994, 1993, and 1992 is as follows: 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Commercial loans: Taxable $ 226,190 $ 192,359 $ 173,325 $ 144,274 $ 128,268 Tax exempt 3,414 3,636 3,207 4,501 5,594 Total commercial loans 229,604 195,995 176,532 148,775 133,862 Real estate mortgage loans 60,949 55,948 47,296 49,816 50,413 Installment loans 71,398 58,175 48,228 46,914 36,111 Credit card and line of credit loans 20,314 17,499 15,900 14,680 13,816 ---------- ---------- ---------- ---------- ---------- Total loans 382,265 327,617 287,956 260,185 234,202 Less allowance for loan losses 5,306 5,472 4,866 4,010 3,095 ---------- ---------- ---------- ---------- ---------- Net loans $ 376,959 $ 322,145 $ 283,090 $ 256,175 $ 231,107 ========== ========== ========== ========== ========== <FN> The real estate mortgage loan portfolio includes construction loans totaling $1,647, $1,224, $426, $223, and $1,164 as of December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The above loan classifications are based on the nature of the loans as of the loan origination date, and are independent as to the use of the funds by the borrower. There are no foreign loans included in the above analysis. </FN> -11- ANALYSIS OF LOAN PORTFOLIO (cont.) Analysis of Loans Outstanding (cont.) (in thousands of dollars) Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules included in the related loan agreements or upon scheduled maturity of each principal payment. The following table indicated the rate sensitivity of the loan portfolio as of December 31, 1996. The table includes the real estate loans held-for-sale and assumes these loans will not be sold during the various time horizons. Credit Card Real and Line Commercial Estate Installment of Credit Total Percent ---------- ---------- ----------- ---------- ---------- ---------- Immediately adjustable interest rates or original maturity of one day $ 169,986 $ 2,091 $ 7,298 $ 17,317 $ 196,692 51.3% Other within one year 17,267 24,834 23,731 0 65,832 17.2 After one year, within five years 38,357 21,737 39,584 2,997 102,675 26.8 Over five years 3,676 13,116 785 0 17,577 4.6 Nonaccrual loans 318 66 0 0 384 0.1 ---------- ---------- ----------- ---------- ---------- ---------- Total loans $ 229,604 $ 61,844 $ 71,398 $ 20,314 $ 383,160 100.0% ========== ========== =========== ========== ========== ========== <FN> A portion of the Bank's loans are short-term maturities. At maturity, credits are reviewed, and if renewed, are renewed at rates and conditions that prevail at the time of maturity. Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 1996 amounted to $96,032 and $122,760 respectively. </FN> -12- ANALYSIS OF LOAN PORTFOLIO (cont.) Review of Nonperforming Loans (in thousands of dollars) The following is a summary of nonperforming loans as of December 31, 1996, 1995, 1994, 1993 and 1992. 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE) Real estate mortgage loans $ 126 $ 122 $ 0 $ 1 $ 79 Commercial and industrial loans 22 69 16 315 100 Loans to individuals for household, family and other personal expenditures 68 18 19 346 42 Loans to finance agriculture production and other loans to farmers 0 0 0 0 0 ---------- ---------- ---------- ---------- ---------- Total past due loans 216 209 35 662 221 ---------- ---------- ---------- ---------- ---------- PART B - NONACCRUAL LOANS Real estate mortgage loans 155 76 18 0 0 Commercial and industrial loans 229 456 0 0 0 Loans to individuals for household, family and other personal expenditures 0 0 0 0 0 Loans to finance agriculture production and other loans to farmers 0 0 0 0 0 ---------- ---------- ---------- ---------- ---------- Total nonaccrual loans 384 532 18 0 0 ---------- ---------- ---------- ---------- ---------- PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,284 1,432 1,484 0 86 ---------- ---------- ---------- ---------- ---------- Total nonperforming loans $ 1,884 $ 2,173 $ 1,537 $ 662 $ 307 ========== ========== ========== ========== ========== <FN> Nonearning assets of the Corporation include nonaccrual loans (as indicated above), nonaccrual investments, other real estate, and repossessions which amounted to $1,097 at December 31, 1996. </FN> -13- ANALYSIS OF LOAN PORTFOLIO (cont.) Comments Regarding Nonperforming Assets PART A - CONSUMER LOANS Consumer installment loans, except those loans that are secured by real estate, are not placed on a nonaccrual status since these loans are charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. Advances under Mastercard and Visa programs, as well as advances under all other consumer lines of credit programs, are charged-off when collection appears doubtful. PART B - NONPERFORMING LOANS When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued and all accrued interest receivable is charged off. It is the policy of the Bank that all unsecured loans (i.e. loans for which the collateral is insufficient to cover all principal and accrued interest) will be reclassified as nonperforming loans to the extent they are unsecured, on or before the loan becomes 90 days delinquent. Thereafter, interest is recognized and included in income only when received. As of December 31, 1996, loans totaling $384,000 were on nonaccrual status. PART C - TROUBLED DEBT RESTRUCTURED LOANS Loans renegotiated as troubled debt restructuring are those loans for which either the contractual interest rate has been reduced and/or other concessions are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan. Loans renegotiated as troubled debt restructuring totaled $1,284,000 as of December 31, 1996. Interest income of $85,000 was recognized in 1996. Had these loans been performing under the original contract terms, an additional $44,000 would have been reflected in interest income during 1996. The Bank is not committed to lend additional funds to debtors whose loans have been modified. PART D - OTHER NONPERFORMING ASSETS The Bank adopted SFAS No. 114 and SFAS No. 118, 'Accounting by Creditors for Impairment of a Loan' at January 1, 1995. Under these standards, loans considered to be impaired are reduced to the present value of future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as bad debt expense. As part of the loan review process, management reviews all loans classified as 'special mention' or below, as well as other loans that might warrant application of SFAS No. 114 and SFAS No. 118. The effect of adopting these accounting standards on January 1, 1995 was immaterial and at December 31, 1996, no loans were considered as impaired. The management of the Bank is of the opinion that there are no significant foreseeable losses relating to substandard or nonperforming assets, except as discussed above. -14- PART E - LOAN CONCENTRATIONS There were no loan concentrations within industries which exceeded ten percent of total assets. It is estimated that over 98% of all the Bank's commercial, industrial, agri-business and agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its basic trade area. Basis For Determining Allowance For Loan Losses Management is charged with the responsibility of determining the adequacy of the allowance for loan losses. This responsibility is fulfilled by management in the following ways: 1. Management reviews the larger individual loans (primarily in the commercial loan portfolio) for unfavorable collectibility factors and assesses the requirement for specific reserves on such credits. For those loans not subject to specific reviews, management reviews previous loan loss experience to establish historical ratios and trends in charge-offs by loan category. The ratios of net charge-offs to particular types of loans enable management to estimate charge-offs in future periods by loan category and thereby establish appropriate reserves for loans not specifically reviewed. 2. Management reviews the current and anticipated economic conditions of its lending market to determine the effects on future loan charge-offs by loan category, in addition to the effects on the loan portfolio as a whole. 3. Management reviews delinquent loan reports to determine risk of future loan charge-offs. High delinquencies are generally indicative of an increase in future loan charge-offs. Based upon the above described policy and objectives, $120,000, $120,000 and $795,000 were charged to the provision for loan losses and added to the allowance for loan losses in 1996, 1995 and 1994, respectively. The allocation of the allowance for loan losses to the various lending areas is performed by management in relation to perceived exposure to loss in the various loan portfolios. However, the allowance for loan losses is available in its entirety to absorb losses in any particular loan category. (Intentionally Left Blank) -15- ANALYSIS OF LOAN PORTFOLIO (cont.) Summary of Loan Loss (in thousands of dollars) Following is a summary of the loan loss experience for the years ended December 31, 1996, 1995, 1994, 1993, and 1992. 1996 1995 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- Amount of loans outstanding, December 31, $ 382,265 $ 327,617 $ 287,956 $ 260,185 $ 234,202 ========== ========== ========== ========== ========== Average daily loans outstanding during the year ended December 31, $ 352,811 $ 309,241 $ 271,391 $ 240,466 $ 213,599 ========== ========== ========== ========== ========== Allowance for loan losses, January 1, $ 5,472 $ 4,866 $ 4,010 $ 3,095 $ 2,612 ---------- ---------- ---------- ---------- ---------- Loans charged-off Commercial 171 137 27 99 446 Real Estate 0 48 0 4 258 Installment 158 112 93 97 217 Credit cards and personal credit lines 39 58 15 28 39 ---------- ---------- ---------- ---------- ---------- Total loans charged-off 368 355 135 228 960 ---------- ---------- ---------- ---------- ---------- Recoveries of loans previously charged-off Commercial 12 26 107 40 11 Real Estate 0 0 1 1 0 Installment 54 63 81 56 85 Credit cards and personal credit lines 16 6 7 6 7 ---------- ---------- ---------- ---------- ---------- Total recoveries 82 95 196 103 103 ---------- ---------- ---------- ---------- ---------- Net loans charged-off 286 260 (61) 125 857 Purchase loan adjustment 0 746 0 250 0 Provision for loan loss charged to expense 120 120 795 790 1,340 ---------- ---------- ---------- ---------- ---------- Balance December 31, $ 5,306 $ 5,472 $ 4,866 $ 4,010 $ 3,095 ========== ========== ========== ========== ========== Ratio of net charge-offs during the period to average daily loans outstanding Commercial 0.03% 0.03% (0.03)% 0.02% 0.20% Real Estate 0.01 0.01 0.00 0.00 0.12 Installment 0.00 0.02 0.01 0.02 0.06 Credit cards and personal credit lines 0.04 0.02 0.00 0.01 0.02 ---------- ---------- ---------- ---------- ---------- Total 0.08% 0.08% (0.02)% 0.05% 0.40% ========== ========== ========== ========== ========== -16- ANALYSIS OF LOAN PORTFOLIO (cont.) Allocation of Allowance for Loan Losses (in thousands of dollars) The following is a summary of the allocation for loan losses as of December 31, 1996, 1995, 1994, 1993 and 1992. 1996 1995 1994 ----------------------- ----------------------- ----------------------- Allowance Loans as Allowance Loans as Allowance Loans as For Percentage For Percentage For Percentage Loan of Gross Loan of Gross Loan of Gross Losses Loans Losses Loans Losses Loans ---------- ---------- ---------- ---------- ---------- ---------- Allocated allowance for loan losses Commercial $ 1,213 60.07 $ 811 59.82 $ 665 61.31 Real Estate 123 15.94 112 17.08 95 16.42 Installment 530 18.68 376 17.76 311 16.75 Credit cards and personal credit lines 151 5.31 112 5.34 101 5.52 ---------- ---------- ---------- ---------- ---------- ---------- Total allocated allowance for loan losses 2,017 100.00 1,411 100.00 1,172 100.00 ========== ========== ========== 3,289 4,061 3,694 ---------- ---------- ---------- Total allowance for loan losses $ 5,306 $ 5,472 $ 4,866 ========== ========== ========== 1993 1992 ----------------------- ----------------------- 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 $ 1,120 57.18 $ 864 57.16 Real Estate 108 19.15 105 21.52 Installment 302 18.04 230 15.42 Credit cards and personal credit lines 95 5.63 87 5.90 ---------- ---------- ---------- ---------- Total allocated allowance for loan losses 1,625 100.00 1,286 100.00 ========== ========== 2,385 1,809 ---------- ---------- Total allowance for loan losses $ 4,010 $ 3,095 ========== ========== -17- ANALYSIS OF DEPOSITS (in thousands of dollars) The average daily deposits for the years ended December 31, 1996, 1995 and 1994, and the average rates paid on those deposits are summarized in the following table: 1996 1995 1994 ----------------------- ----------------------- ----------------------- Average Average Average Average Average Average Daily Rate Daily Rate Daily Rate Balance Paid Balance Paid Balance Paid ---------- ---------- ---------- ---------- ---------- ---------- Demand deposits $ 69,459 0.00 $ 60,753 0.00 $ 52,893 0.00 Savings accounts: Regular savings 43,847 2.55 46,123 2.32 55,855 2.72 Interest bearing checking 53,625 2.20 55,355 2.41 58,945 2.36 Time deposits: Deposits of $100,000 or more 86,137 5.67 73,449 6.00 54,389 4.34 Other time deposits 208,499 5.39 177,992 5.64 148,251 4.61 ---------- ---------- ---------- ---------- ---------- ---------- Total deposits $ 461,567 3.99 $ 413,672 4.07 $ 370,333 3.27 ========== ========== ========== ========== ========== ========== As of December 31, 1996, time certificates of deposit in denominations of $100,000 or more will mature as follows: Within three months $ 54,553 Over three months, within six months 20,170 Over six months, within twelve months 14,012 Over twelve months 9,208 ---------- Total time certificates of deposit in denominations of $100,000 or more $ 97,943 ========== -18- RETURN ON EQUITY AND ASSETS The rates of return on average daily assets and stockholders' equity, the dividend payout ratio, and the average daily stockholders' equity to average daily assets for the years ended December 31, 1996, 1995 and 1994 are as follows: 1996 1995 1994 -------- -------- -------- Percent of net income to: Average daily total assets 1.07 1.05 1.10 Average daily stockholders' equity 16.50 17.06 17.73 Percentage of dividends declared per common share to net income per weighted average number of common shares outstanding (2,896,992 shares in 1996, and 2,876,992 shares in 1995 and 1994) 20.72 18.88 16.57 Percentage of average daily stockholders' equity to average daily total assets 6.46 6.18 6.19 -19- SHORT-TERM BORROWINGS The following is a schedule of statistical information relating to securities sold under agreement to repurchase maturing within one year and are secured by either U.S. Government agency securities or mortgage-backed securities classified as other debt securities. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of shareholders' equity at the end of the period. 1996 1995 1994 ---------- ---------- ---------- Outstanding at year end $ 85,611 $ 58,151 $ 41,750 Approximate average interest rate at year end 5.11% 5.35% 5.11% Highest amount outstanding as of any month end during the year $ 89,433 $ 79,334 $ 50,460 Approximate average outstanding during the year $ 73,728 $ 61,398 $ 42,584 Approximate average interest rate during the year 5.33% 5.69% 3.96% Securities sold under agreement to repurchase include both transactions initiated by the investment division of the Bank, as well as the automatic borrowings from selected demand deposit customers who had excess balances in their accounts. -20- ITEM 2. PROPERTIES The Bank conducts its operations from the following locations: Branches/Headquarters - --------------------- Main / Headquarters 202 E. Center St. Warsaw IN Warsaw Drive-up East Center St. Warsaw IN Akron 102 East Rochester Akron IN Argos 100 North Michigan Argos IN Bremen 1600 Indiana State Road 331 Bremen IN Columbia City 507 North Main St. Columbia City IN Concord 4202 Elkhart Road Goshen IN Cromwell 111 North Jefferson St. Cromwell IN Elkhart 864 East Beardsley St. Elkhart IN Elkhart East 22050 State Road 120 Elkhart IN Goshen Downtown 102 North Main St. Goshen IN Goshen South 2513 South Main St. Goshen IN Hubbard Hill 58404 St. Road 19 Elkhart IN Kendallville 631 Professional Way Kendallville IN LaGrange 901 South Detroit LaGrange IN Ligonier 1470 U.S. Highway 33 South Ligonier IN Mentone 202 East Main St. Mentone IN Middlebury 712 Wayne Ave. Middlebury IN Milford Indiana State Road 15 North Milford IN Nappanee 202 West Market St. Nappanee IN North Webster 644 North Main St. North Webster IN Pierceton 202 South First St. Pierceton IN Roann 110 Chippewa St. Roann IN Rochester 507 East 9th St. Rochester IN Shipshewana 895 North Van Buren St. Shipshewana IN Silver Lake 102 Main St. Silver Lake IN Syracuse 502 South Huntington Syracuse IN Wabash North 1004 North Cass St. Wabash IN Wabash South 1940 South Wabash St. Wabash IN Warsaw East 3601 Commerce Dr. Warsaw IN Warsaw West 1221 West Lake St. Warsaw IN Winona Lake 99 Chestnut St. Winona Lake IN The Bank leases from third parties the real estate and buildings for its offices in Akron and Milford. In addition, the Bank leases the real estate for its Wabash North office and its free-standing ATMs. All the other branch facilities are owned by the Bank. The Bank also owns parking lots in downtown Warsaw for the use and convenience of Bank employees and customers, as well as leasehold improvements, equipment, furniture and fixtures necessary and appropriate to operate the banking facilities. In addition, the Bank owns a building at 110 South High St., Warsaw, Indiana, which it uses for various offices and a building at 113 East Center St., Warsaw, Indiana, which it uses for office and computer facilities. The Bank also leases from third parties facilities in Warsaw, Indiana, for the storage of supplies and for employee training. -21- None of the Bank's assets are the subject of any material encumbrances. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings other than ordinary routine litigation incidental to the business to which the Registrant and the Bank are a party or of which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders from April 10, 1996 to December 31, 1996. (Intentionally Left Blank) -22- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Information relating to the principal market for and the prices of the Registrant's common stock, and information as to dividends declared by the Registrant, are contained under the caption "Stock and Dividend Information" in the 1996 Annual Report and are incorporated herein by reference in response to this item. On December 31, 1996, the Registrant had 976 shareholders, including those employees who participate in the Registrant's 401(K) plan. On January 9, 1996, Lakeland Financial Corporation sold 10,000 shares of authorized but previously unissued common stock for $41.50 per share. On April 30, 1996, Lakeland Financial Corporation common stock split two-for-one. ITEM 6. SELECTED FINANCIAL DATA A five year consolidated financial summary, containing the required selected financial data, appears under the caption "Selected Financial Data" in the 1996 Annual Report and is incorporated herein by reference in response to this item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations appears under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1996 Annual Report and is incorporated herein by reference in response to this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements appear in the 1996 Annual Report and are incorporated herein by reference in response to this item. Consolidated Balance Sheets at December 31, 1996 and 1995. Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Report of Independent Auditors. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -23- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in the Registrant's definitive Proxy Statement dated March 13, 1997, is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the Registrant's definitive Proxy Statement dated March 13, 1997, is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the Registrant's definitive Proxy Statement dated March 13, 1997, is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the Registrant's definitive Proxy Statement dated March 13, 1997, is incorporated herein by reference in response to this item. -24- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The documents listed below are filed as a part of this report: (1) Financial Statements. The following financial statements of the Registrant and its subsidiaries appear in the 1996 Annual Report and are specifically incorporated by reference under Item 8 of this Form 10-K, or are a part of this Form 10-K, as indicated and at the pages set forth below. Reference --------- 1996 Annual Form 10-K Report --------- ----------- Consolidated Balance Sheets at December 31, 1996 and 1995. 8 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994. 9 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994. 10 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. 11 Notes to Consolidated Financial Statements. 12 - 21 Report of Independent Auditors. 22 (2) Financial Statement Schedules The financial statement schedules of the Registrant and its subsidiary have been omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. [Intentionally Left Blank] -25- SIGNATURES Pursuant to the requirements of Section 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LAKELAND FINANCIAL CORPORATION Date: March 11, 1997 By R Douglas Grant (R. Douglas Grant) President Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 11, 1997 R. Douglas Grant (R. Douglas Grant) Principal Executive Officer and Director Date: March 11, 1997 Terry M. White (Terry M. White) Principal Financial and Accounting Officer Date: March 11, 1997 Anna K. Duffin (Anna K. Duffin) Director Date: March 11, 1997 Eddie Creighton (Eddie Creighton) Director Date: March 11, 1997 L. Craig Fulmer (L. Craig Fulmer) Director Date: (Jerry L. Helvey) Director Date: (Kevin L. Lambright) Director Date: March 11, 1997 Allan J. Ludwig (Allan J. Ludwig) Director Date: March 11, 1997 J. Alan Morgan (J. Alan Morgan) Director Date: March 11, 1997 Richard L. Pletcher (Richard L. Pletcher) Director Date: (Joseph P. Prout) Director Date: (Terry L. Tucker) Director Date: (G.L. White) Director -26- EXHIBIT INDEX The following Exhibits are filed as part of this Report and not incorporated by reference from another document: Exhibit 13 - 1996 Report to Shareholders with Report of Independent Auditors. Exhibit 21 - Subsidiaries Exhibit 27 - Financial Data Schedule -27- EXHIBIT 13 1996 Report to Shareholders with Report of Independent Auditors. -28- EXHIBIT 21 SUBSIDIARIES. The Registrant has one wholly owned subsidiary, Lake City Bank, Warsaw, Indiana, a banking corporation organized under the laws of the State of Indiana. -29-