Annual Meeting
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The annual meeting of the shareholders of Lakeland Financial Corporation
will be held at noon, April 8, 1997, at the Shrine Building, Kosciusko County
Fair Grounds, Warsaw, Indiana. As of December 31, 1996, there were 976
shareholders.
Special Notice: Form 10-K Available
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The Corporation will provide without charge to each shareholder, Lakeland
Financial Corporation's Annual Report on Form 10-K, including financial
statements and schedules thereto required to be filed with the Securities and
Exchange Commission for the Corporation's most recent fiscal year upon written
request of Mr. Terry M. White, Secretary and Treasurer, P.O. Box 1387, Warsaw,
Indiana 46581-1387. The Form 10-K and related exhibits are also available on
the Internet at www.sec.gov.
Registrar and Transfer Agent
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Lake City Bank
Trust Department
P.O. Box 1387
Warsaw, Indiana 46581-1387
Stock and Dividend Information
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The following companies have indicated they are active in trading
Lakeland Financial Corporation stock and have reported the bid-ask prices for
the Corporation's stock as set forth in the Selected Quarterly Data. Such
bid-ask prices are not a definite indication that sales transactions occurred
at these prices or that sales did not occur outside of these prices. The
trading volume of the Corporation's stock continues to be limited, as a
result, these quotations do not necessarily reflect the price at which the
Corporation's stock would trade in a more active market.
Roney & Company, P.O. Box 130, Elkhart, Indiana, 46515, 1-800-43-Roney
McDonald and Company Securities, Inc., 214 South Main Street, Elkhart,
Indiana, 46516, 219-294-2526
Edward D. Jones & Co. , P.O. Box 1097, Warsaw, Indiana, 46581,
1-800-441-2914
President's Letter
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The year 1996 was a productive year for your Corporation. Despite
interest margin pressures experienced by all banks and the continued
restructuring within the industry, we are pleased to report record earnings
for the ninth consecutive year. In 1996, your Corporation earned $6,444,000,
which is an increase of 14 percent over 1995. Per share earnings were $2.22 in
1996 compared to $1.96 the year earlier.
At year-end 1995, the Corporation's stock price, adjusted for the stock
split during 1996, was $20.75 per share. At year-end 1996, the Corporation's
stock was being sold for $31.00 per share, an increase of $10.25 or 49 percent
over year-end 1995. This increase reflects the continued strong financial
performance of the Corporation. With these results, the Board of Directors
increased the annual dividend rate by 20 percent during 1996 to $.48 per
share.
During 1996, we continued to seek opportunities to profitably invest our
capital. This resulted in the opening of two new offices during the year,
increasing our total to 31 offices serving Kosciusko and surrounding counties.
This expansion and growth resulted in a record level of assets, $657 million
at year-end, an increase of $88 million over 1995. This expansion and growth
is also evident in total loans which increased $55 million, or about 17
percent, ending the year at $382 million. The increase in loans was funded by
increases in both deposits and repurchase agreements. Total deposits and
repurchase agreements, commonly referred to as core funding, increased $92
million, or approximately 19 percent.
Net interest income is a primary component of profitability. One would
expect that as the Corporation's assets grow, so would net interest income
dollars. This was indeed the case in 1996 as net interest income was $22.1
million, an increase of $1.9 million over 1995. However, throughout the
banking industry there is continued pressure on the net interest margin. This
means that the profit we generate on each dollar that the Corporation lends or
invests today is less than in prior years. For your Corporation this slight
reduction in the margin is primarily due to the competitive pressures found
within the markets we serve, and is an indication of the strong vibrant
economies where we do business. Strong economies promote profitability by
generating deposits and creating strong loan demand. The loan demand quality
has been excellent and thus the quality of the Corporation's assets remained
good in 1996. This resulted in a relatively low provision for loan losses of
$120,000 in 1996.
Another strong area of performance was noninterest income. Fees related
to trust services, loan and deposit accounts, and new electronic bank products
like the 24 Hour Bank card all contributed. The total increase in these
components, along with a $253,000 increase in the gains on the sale of real
estate mortgages, resulted in total noninterest income of $5.8 million in
1996, an increase of $1.0 million over 1995. The increase in the gain on the
sale of real estate mortgages reflects the sale of approximately $20 million
of real estate mortgages.
Noninterest expense increased $1.7 million, or 10 percent. Increases in
salaries, employee benefits and equipment costs were a result of expenses
related to the five new offices added during the past 18 months, and the
technology costs necessary to continue providing the highest level of customer
service. It is our expectation that these expenses will continue to increase
in future years as we pursue a strategy of expanding into profitable new
locations while continuing to streamline and centralize back-room operations.
1
President's Letter (continued)
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Electronic services are enhancing our position as a leader in the
financial community. Bill Payment Service facilitates automatic payments
through the computer or telephone. This feature is innovative and responsive
to present day customers who expect technology from their financial
institutions to expedite their transactions quickly and securely. Bill Payment
Service is the payment alternative that takes just minutes to learn.
We are developing a Home Page on the Internet to be more responsive to
the ever-growing population of techno-savvy customers that expect self-service
options in their banking relationships. Establishment of our domain name,
lakecitybank.com will be a convenient address for customers. In 1997, this
secure site will provide E-mail capabilities. Future site enhancements will
include account information and funds transfer.
In 1995, value was added to our checking accounts with the introduction
of the 24 Hour Visa Check Card. Customers enjoy the convenience of making
purchases without writing a check or carrying large amounts of cash. In 1996,
24 Hour Visa Check Card activity increased by 94 percent and bank income from
this product increased by 103 percent.
Direct Deposit is a convenience used by many customers. Payroll and
Social Security checks are deposited electronically from the employer's or
government's account directly into the customer's checking or savings account
each payday. The customer benefits include safety without lost or stolen
checks, convenience of money put directly into the account without effort, no
worry as to when the money is credited to the account, ability to write checks
and earn interest without delay, and the flexibility for the customer to
direct amounts into more than one account.
The introduction of our Direct Banking Center provides an efficient way
of conducting business quickly and privately from the convenience of home or
office. With the Direct Banking Center, customers can turn the telephone into
their personal Lake City Bank office. Information regarding products, new
account services, loan applications, investment opportunities, customer
assistance, and a medley of other services is available 20 hours a day. For
rotary telephone calls, voice recognition or a customer service representative
2
President's Letter (continued)
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is available. Lake City Bank is committed to serving customers with the local,
personal touch while continuing to offer advanced technology that saves time,
money and accommodates today's busy lifestyles.
Key to the success of the Mortgage Loan area is the expertise of the
local officers and staff. With the addition of two originators, the "Loan
Prospector" automated underwriting with electronic data interchange
capabilities, and the streamlined processing of the mortgage pipeline, the
result has been even quicker more efficient service. Mortgage loan volume
increased substantially, and while we sold mortgage loans into the secondary
market, we retained the servicing so that the customer continues to deal only
with us.
Customer interest in trust services continues strong, particularly for
estate planning, employee retirement plans, personal trust administration,
charitable foundations, corporate trust, and individual asset management. Our
trust and investment professionals provide quality, responsive, personal
service in building long-term relationships with our customers and their
families. Trust assets and income both increased over 24 percent in 1996.
Allan J. Ludwig was elected to the Lakeland Financial Corporation Board
of Directors this fall. Mr. Ludwig lives near Bristol and is a local
entrepreneur and industrial developer. He is a graduate of Loras College in
Iowa where he now serves as a trustee. He filled a vacancy created when Dr.
Homer Kent, former President of Grace College retired. Dr. Kent had joined the
Board in 1983. We welcome Mr. Ludwig to the Board and will greatly miss Dr.
Kent's advice and counsel.
3
President's Letter (continued)
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Walter L. Weldy was promoted to Executive Vice President with principal
responsibilities in the retail area. He has been with the Corporation for 6
years and has over 30 years of banking experience, including the presidency of
a local bank. He has also served as President of Bethel College.
Senior Vice President Dennis Cultice was named manager of the Trust
Department in addition to his duties heading up the Investment Department.
Dennis holds a Bachelor of Science degree in Business Administration from
Manchester College and has been with the bank for 12 years.
We opened an office in Kendallville in May on the east side of town. A
third Elkhart location south on State Road 19 near Hubbard Hill was opened in
the fall. A new free standing 24 Hour Teller is located near downtown Goshen
in the Linway Plaza, bringing the total ATM's in our system to 24.
Construction has started on an Elkhart office at North Nappanee and Bristol
Streets. A full service office on State Road 23 in the middle of Granger will
open later this year. Real estate has been purchased on North Main Street in
Mishawaka with a late 1997 office opening planned. We also purchased the
former Kline's building in downtown Warsaw for future possible expansion of
back-room operations.
1996 was another record year for your Corporation. To our customers who
are the reason for our existence, and to the employees who serve them
efficiently and professionally, we owe sincere gratitude. You, as shareholders
deserve the best we can offer. As the Corporation enters its 125th year of
service, we are dedicated to continuing this effort.
R. Douglas Grant
President
4
LAKELAND FINANCIAL CORPORATION AND LAKE CITY BANK BOARD OF DIRECTORS
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Picture Picture Picture Picture
Eddie Creighton Anna K. Duffin L. Craig Fulmer R. Douglas Grant
Partner and Civic Leader Chairman, Chairman and President,
General Manager, Heritage Financial Lakeland Financial
Creighton Brothers Group, Inc. Corporation and Lake
City Bank
Picture Picture Picture Picture
Jerry L. Helvey Allan J. Ludwig J. Alan Morgan Richard L. Pletcher
President, Industrial Developer Former President of President,
Helvey & Associates, Inc Zimmer USA and Pletcher Enterprises, Inc.
Vice President of
Bristol Myers Co.
Picture Picture Picture Picture
Joseph P. Prout Philip G. Spear Terry L. Tucker G.L. White
President, Former President, President, Former President,
Owens Supermarket, Inc. W.R. Thomas Stores, Inc. Maple Leaf Farms, Inc. United Telephone
Company of Indiana
LAKELAND FINANCIAL CORPORATION OFFICERS
R. Douglas Grant .............................Chairman and President
Paul S. Siebenmorgen .........................Executive Vice President
Walter L. Weldy ..............................Executive Vice President
Terry M. White ...............................Secretary and Treasurer
James J. Nowak ...............................Assistant Secretary and Treasurer
5
Selected Financial Data (in thousands except for share and per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
Interest income $ 45,941 $ 41,944 $ 33,556 $ 27,463 $ 27,500
Interest expense 23,737 21,642 14,887 12,022 13,622
------------ ------------ ------------ ------------ ------------
Net interest income 22,204 20,302 18,669 15,441 13,878
Provision for loan losses 120 120 795 790 1,340
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 22,084 20,182 17,874 14,651 12,538
Other noninterest income 5,396 4,297 4,198 2,957 2,918
Net gains on sale of real estate
mortgages held-for-sale 412 159 177 676 176
Net trading gains (losses) 0 0 0 0 (2)
Net securities gains (losses) (9) 315 (7) 175 323
Noninterest expense (17,935) (16,244) (14,092) (12,378) (10,832)
------------ ------------ ------------ ------------ ------------
Income before income tax expense and cumulative
effect of change in accounting principle 9,948 8,709 8,150 6,081 5,121
Income tax expense 3,504 3,064 3,024 2,171 1,762
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of change
in accounting principle 6,444 5,645 5,126 3,910 3,359
Cumulative effect of adopting SFAS No. 109 0 0 0 325 0
------------ ------------ ------------ ------------ ------------
Net income $ 6,444 $ 5,645 $ 5,126 $ 4,235 $ 3,359
============ ============ ============ ============ ============
Average shares outstanding* 2,896,992 2,876,992 2,876,992 2,876,992 2,876,992
============ ============ ============ ============ ============
Per average common share outstanding:*
Income before cumulative effect of change
in accounting principle $ 2.22 $ 1.96 $ 1.78 $ 1.36 $ 1.17
============ ============ ============ ============ ============
Net income $ 2.22 $ 1.96 $ 1.78 $ 1.47 $ 1.17
============ ============ ============ ============ ============
Cash dividends declared $ 0.46 $ 0.37 $ 0.30 $ 0.25 $ 0.21
============ ============ ============ ============ ============
Balances at December 31:
Total assets $ 656,551 $ 568,579 $ 496,963 $ 449,954 $ 362,497
============ ============ ============ ============ ============
Total deposits $ 496,553 $ 431,934 $ 396,740 $ 370,032 $ 284,308
============ ============ ============ ============ ============
Long-term debt $ 23,531 $ 17,432 $ 17,432 $ 9,300 $ 8,000
============ ============ ============ ============ ============
Total stockholders' equity $ 42,043 $ 36,754 $ 29,889 $ 27,912 $ 23,750
============ ============ ============ ============ ============
* Adjusted for a 2-for-1 stock split April 30, 1996.
6
Selected Quarterly Data (in thousands except for per share data) (unaudited)
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1996
---------------------------------------------------------
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Interest income $ 12,032 $ 11,708 $ 11,267 $ 10,934
Interest expense 6,212 6,076 5,754 5,695
------------ ------------ ------------ ------------
Net interest income 5,820 5,632 5,513 5,239
Provision for loan losses 30 30 30 30
Noninterest income 1,491 1,477 1,477 1,354
Noninterest expense 4,777 4,661 4,273 4,224
Income tax expense 889 807 973 835
------------ ------------ ------------ ------------
Net income $ 1,615 $ 1,611 $ 1,714 $ 1,504
============ ============ ============ ============
Net income per common share * $ 0.56 $ 0.55 $ 0.59 $ 0.52
============ ============ ============ ============
Stock and Dividend Information
Trading range (per share)*
Bid $ 26.75 $ 25.50 $ 22.25 $ 20.75
Ask $ 31.00 $ 27.00 $ 26.75 $ 23.00
Dividends declared (per share)* $ 0.12 $ 0.12 $ 0.12 $ 0.10
- ----------------------------------------------------------------------------------------------------------------------------------
1995
---------------------------------------------------------
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Interest income $ 11,102 $ 10,928 $ 10,256 $ 9,658
Interest expense 5,796 5,805 5,232 4,809
------------ ------------ ------------ ------------
Net interest income 5,306 5,123 5,024 4,849
Provision for loan losses 30 30 30 30
Noninterest income 1,456 1,177 1,088 1,050
Noninterest expense 4,315 4,016 4,087 3,826
Income tax expense 865 814 648 737
------------ ------------ ------------ ------------
Net income $ 1,552 $ 1,440 $ 1,347 $ 1,306
============ ============ ============ ============
Net income per common share * $ 0.54 $ 0.50 $ 0.47 $ 0.45
============ ============ ============ ============
Stock and Dividend Information
Trading range (per share)*
Bid $ 19.75 $ 18.00 $ 17.00 $ 16.50
Ask $ 20.75 $ 19.75 $ 18.75 $ 17.75
Dividends declared (per share)* $ 0.10 $ 0.10 $ 0.09 $ 0.08
<FN>
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* Adjusted for a 2-for-1 stock split April 30, 1996.
</FN>
7
Consolidated Balance Sheets (in thousands)
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December 31
---------------------------
1996 1995
------------ ------------
ASSETS
Cash and due from banks $ 41,190 $ 26,185
Short-term investments 3,689 710
------------ ------------
Total cash and cash equivalents 44,879 26,895
Securities available-for-sale (carried at fair value) 81,842 82,120
Securities held-to-maturity (fair value of $126,373 at 1996
and $115,328 at 1995) 125,274 113,888
Real estate mortgages held-for-sale 895 145
Total loans 382,265 327,617
Less allowance for loan losses 5,306 5,472
------------ ------------
Net loans 376,959 322,145
Land, premises and equipment, net 16,014 13,736
Accrued income receivable 4,254 4,003
Other assets 6,434 5,647
------------ ------------
Total assets $ 656,551 $ 568,579
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 77,664 $ 67,856
Interest bearing deposits 418,889 364,078
------------ ------------
Total deposits 496,553 431,934
Short-term borrowings
Federal funds purchased 0 17,100
Securities sold under agreements to repurchase 85,611 58,151
U.S. Treasury demand notes 2,769 1,880
------------ ------------
Total short-term borrowings 88,380 77,131
Accrued expenses payable 5,033 4,481
Other liabilities 1,011 847
Long-term debt 23,531 17,432
------------ ------------
Total liabilities 614,508 531,825
Commitments, off-balance sheet risks and contingencies
STOCKHOLDERS' EQUITY
Common stock: $.50 stated value, 10,000,000 shares authorized, 2,896,992
shares issued and outstanding as of December 31, 1996; $1.00 stated
value, 2,750,000 shares authorized, 1,438,496
shares issued and outstanding as of December 31, 1995 1,448 1,438
Additional paid-in capital 8,232 7,827
Retained earnings 31,967 26,858
Unrealized net gain (loss) on securities available-for-sale 396 631
------------ ------------
Total stockholders' equity 42,043 36,754
------------ ------------
Total liabilities and stockholders' equity $ 656,551 $ 568,579
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
8
Consolidated Statements of Income (in thousands except for share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 32,724 $ 29,859 $ 23,658
Tax-exempt 246 257 273
Interest and dividends on securities
Taxable 11,348 10,588 8,743
Tax-exempt 1,378 1,038 727
Interest on short-term investments 245 202 155
------------ ------------ ------------
Total interest income 45,941 41,944 33,556
Interest on deposits 18,411 16,847 12,108
Interest on borrowings
Short-term 4,213 3,803 1,879
Long-term 1,113 992 900
------------ ------------ ------------
Total interest expense 23,737 21,642 14,887
NET INTEREST INCOME 22,204 20,302 18,669
Provision for loan losses 120 120 795
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,084 20,182 17,874
NONINTEREST INCOME
Trust income 881 709 609
Service charges on deposits 2,809 2,262 2,078
Other income 1,706 1,326 1,511
Net gains on the sale of real estate mortgages held-for-sale 412 159 177
Net securities gains (losses) (9) 315 (7)
------------ ------------ ------------
Total noninterest income 5,799 4,771 4,368
NONINTEREST EXPENSE
Salaries and employee benefits 9,570 8,521 7,278
Net occupancy expense 1,339 1,229 1,057
Equipment costs 1,616 1,375 1,001
Other expense 5,410 5,119 4,756
------------ ------------ ------------
Total noninterest expense 17,935 16,244 14,092
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 9,948 8,709 8,150
Income tax expense 3,504 3,064 3,024
------------ ------------ ------------
NET INCOME $ 6,444 $ 5,645 $ 5,126
============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING 2,896,992 2,876,992 2,876,992
============ ============ ============
NET INCOME PER COMMON SHARE $ 2.22 $ 1.96 $ 1.78
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
9
Consolidated Statements of Changes in Stockholders' Equity (in thousands except for share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Net Gain (Loss)
Common Stock Additional on Securities Total
-------------------------- Paid-in Retained Available- Stockholders'
Shares Amount Capital Earnings for-Sale Equity
------------ ------------ ------------ ------------ ---------------- --------------
Balances, January 1, 1994 1,438,496 $ 1,438 $ 7,827 $ 18,001 $ 646 $ 27,912
Net income for 1994 5,126 5,126
Net change in unrealized gain (loss)
on securities available-for-sale (2,301) (2,301)
Cash dividend declared
($.30 per share) (848) (848)
------------ ------------ ------------ ------------ ---------------- --------------
Balances, December 31, 1994 1,438,496 1,438 7,827 22,279 (1,655) 29,889
Net income for 1995 5,645 5,645
Net change in unrealized gain (loss)
on securities available-for-sale 2,286 2,286
Cash dividend declared
($.37 per share) (1,066) (1,066)
------------ ------------ ------------ ------------ ---------------- --------------
Balances, December 31, 1995 1,438,496 1,438 7,827 26,858 631 36,754
Net income for 1996 6,444 6,444
Net change in unrealized gain (loss)
on securities available-for-sale (235) (235)
Issued 10,000 shares 10,000 10 405 415
Shares issued in 2-for-1 stock split 1,448,496
Cash dividend declared
($.46 per share) (1,335) (1,335)
------------ ------------ ------------ ------------ ---------------- --------------
Balances, December 31, 1996 2,896,992 $ 1,448 $ 8,232 $ 31,967 $ 396 $ 42,043
============ ============ ============ ============ ================ ==============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
10
Consolidated Statements of Cash Flows (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities
Net income $ 6,444 $ 5,645 $ 5,126
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 1,277 1,209 928
Provision for loan losses 120 120 795
Write down of other real estate owned 20 0 0
Loans originated for sale (27,599) (29,679) (9,426)
Net (gain) loss on sale of loans (412) (159) (177)
Proceeds from sale of loans 27,261 29,868 11,619
Net (gain) loss on sale of premises and equipment 3 0 1
Net (gain) loss on sale of securities available-for-sale 0 (331) 0
Net (gain) loss on calls of securities held-to-maturity 9 16 7
Net securities amortization 256 180 444
Increase (decrease) in taxes payable 237 (822) (15)
(Increase) decrease in income receivable (251) (539) (606)
Increase (decrease) in accrued expenses payable 360 1,227 340
(Increase) decrease in other assets (698) 411 1,735
Increase (decrease) in other liabilities 164 888 (495)
------------ ------------ ------------
Total adjustments 747 2,389 5,150
------------ ------------ ------------
Net cash from operating activities 7,191 8,034 10,276
Cash flows from investing activities
Proceeds from sale of securities available-for-sale 0 7,563 0
Proceeds from maturities and calls of securities held-to-maturity 8,784 6,268 8,899
Proceeds from maturities and calls of securities available-for-sale 14,130 5,022 6,409
Purchases of securities available-for-sale (14,429) (20,014) (9,033)
Purchases of securities held-to-maturity (20,247) (22,900) (19,494)
Net (increase) decrease in total loans (54,934) (39,174) (27,709)
Purchases of land, premises and equipment (3,558) (3,650) (2,490)
Net proceeds (payments) from acquisitions 0 (1,380) 0
------------ ------------ ------------
Net cash from investing activities (70,254) (68,265) (43,418)
Cash flows from financing activities
Net increase in total deposits 64,619 35,194 26,708
Proceeds from short-term borrowings 849,944 522,102 395,939
Payments on short-term borrowings (838,695) (493,294) (385,553)
Proceeds from long-term borrowings 14,000 0 8,132
Payments on long-term borrowings (8,000) 0 0
Proceeds under capital lease obligations 118 0 0
Payments under capital lease obligations (19) 0 0
Dividends paid (1,335) (1,023) (806)
Proceeds from sale of common stock 415 0 0
------------ ------------ ------------
Net cash from financing activities 81,047 62,979 44,420
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 17,984 2,748 11,278
Cash and cash equivalents at beginning of the year 26,895 24,147 12,869
------------ ------------ ------------
Cash and cash equivalents at end of year $ 44,879 $ 26,895 $ 24,147
============ ============ ============
Cash paid during the year for:
Interest $ 23,239 $ 21,052 $ 14,496
============ ============ ============
Income taxes $ 3,420 $ 3,116 $ 3,038
============ ============ ============
Securities transferred from held-to-maturity to available-for-sale $ 0 $ 12,918 $ 0
============ ============ ============
Loans transferred to other real estate $ 334 $ 0 $ 107
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
11
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations:
Lakeland Financial Corporation (the Corporation) is a bank holding
company as defined in the Bank Holding Company Act of 1956. The Corporation
owns all of the outstanding stock of Lake City Bank (the Bank), a full service
commercial bank organized under Indiana law, and conducts no business except
that incident to its ownership of the Bank. The Bank is headquartered in
Warsaw, Indiana, and has 31 branch offices in eight counties in northern
Indiana.
Use of Estimates:
In preparing financial statements in conformity with generally accepted
accounting principles, management must make estimates and assumptions. These
estimates and assumptions affect the amounts reported therein and the
disclosures provided. Actual results could differ from these estimates.
Areas involving the use of management's estimates and assumptions include
the allowance for loan losses, the fair value of mortgage servicing rights,
the realization of deferred tax assets, fair values of certain securities, the
determination and carrying value of impaired loans, the carrying value of
loans held-for-sale, the carrying value of other real estate, the
determination of other-than-temporary reductions in the fair value of
securities, recognition and measurement of loss contingencies, depreciation of
premises and equipment, the carrying value and amortization of intangibles,
the actuarial present value of pension benefit obligations, and net periodic
pension expense and accrued pension costs recognized in the Corporation's
financial statements. Estimates that are more susceptible to change in the
near term include the allowance for loan losses, the fair value of financial
instruments, the fair value of mortgage servicing rights and the realization
of deferred tax assets.
Principles of Consolidation:
The consolidated financial statements include Lakeland Financial
Corporation and its wholly-owned subsidiary, Lake City Bank. All significant
intercompany balances and transactions are eliminated in consolidation.
Securities:
The Corporation classifies securities into held-to-maturity,
available-for-sale and trading categories. Held-to-maturity securities are
those which the Corporation has the positive intent and ability to hold to
maturity, and are reported at amortized cost. Available-for-sale securities
are those the Corporation may decide to sell if needed for liquidity,
asset-liability management or other reasons. Available-for-sale securities are
reported at fair value, with unrealized gains and losses included as a
separate component of equity, net of tax. Trading securities are bought
principally for sale in the near term, and are reported at fair value with
unrealized gains and losses included in earnings. Realized gains and losses
resulting from the sale of securities are computed by the specific
identification method. Premiums and discounts are recognized in interest
income using the interest method over the period to maturity.
In November 1995, the Financial Accounting Standards Board issued its
Special Report 'A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities' (Guide). As permitted by
the Guide, on December 4, 1995, the Corporation made a one-time reassessment
and transferred securities from the held-to-maturity portfolio to the
available-for-sale portfolio. At the date of the transfer, these securities
had an amortized cost of $12,918,000 and increased the unrealized gain on
securities available-for-sale in stockholders' equity by $446,000, net of tax.
Real Estate Mortgages Held-for-Sale:
Real estate mortgages classified as held-for-sale to the secondary market
are carried at the lower of aggregate cost or estimated fair value. Net
unrealized losses are recognized in a valuation allowance by charges to
income. Gains and losses on sales of mortgages are recognized on the
settlement date. Gains and losses are determined by the difference between
sales proceeds and the carrying value of the mortgages.
Mortgage Servicing Rights:
The Corporation originates mortgage loans for sale to the secondary
market, and sells the loans with servicing retained. Effective January 1,
1996, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 122 on accounting for mortgage servicing rights, which requires
capitalizing the rights to service originated mortgage loans sold. The total
cost of mortgage loans originated with the intent to sell is allocated between
the mortgage servicing right and the mortgage loan without servicing, based
upon the relative fair values. The capitalized cost of mortgage servicing
rights is amortized in proportion to, and over the period of, estimated net
servicing revenue.
Impairment of mortgage servicing rights is assessed based upon the fair
value of those rights. For purposes of measuring impairment, the rights are
stratified based upon loan type, term and note rate. The amount of impairment
is the amount by which the capitalized mortgage servicing rights for a stratum
exceeds their fair value. Fair values for individual stratum are based upon
the present value of estimated future cash flows using a discount commensurate
with the risks involved. Estimates of fair value include assumptions about
prepayment, default and interest rates, and other factors which are subject to
change over time.
Loans:
Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses, and charge-offs. Interest
is accrued over the loan term based upon the principal balances outstanding.
Loan fees and related costs are netted and deferred. The deferral is included
in loans and recognized in interest income over the loan term on the level
yield method. Loans are placed on nonaccrual when interest collection becomes
doubtful. All unpaid accrued interest is reversed and interest income is
subsequently recognized only to the extent cash payments are received.
Concentration of Credit:
The Bank is a full service bank with headquarters in Warsaw, Indiana with
offices in 25 cities and towns located within Kosciusko and contiguous
counties. It is estimated that over 98% of all the Bank's commercial,
industrial, agri-business and agricultural real estate mortgage, real estate
construction mortgage and consumer loans are made within its basic trade area.
This area generally lies within a radius of 10 miles or less from any of its
existing offices. The loan portfolios are well diversified and are secured to
the extent deemed appropriate by management. Mortgage-backed securities are
collateralized by mortgages located throughout the United States.
Substantially all mortgage-backed securities are insured directly or
indirectly by the U. S. Government.
Allowance for Loan Losses:
The allowance is judgmentally determined by management and is maintained
at a level considered adequate to cover losses currently anticipated based on
past loss experience, general national and local economic conditions,
information about specific borrower situations, including their financial
12
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
position and collateral values, and other factors and estimates which may
change over time. While management may periodically allocate portions of the
allowance for specific problem loan situations, the whole allowance is
available for any loan charge-off that might occur. A loan is charged-off as a
loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur. Increases to the allowance are recorded by a
charge to expense and are based upon subjective judgments.
The Corporation adopted SFAS No. 114 and SFAS No. 118 on 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 provision for loan losses. As part of the loan review
process, management reviews all loans classified as 'special mention' or below
for impairment, as well as other loans that might warrant application of SFAS
No. 114. Smaller-balance homogeneous loans are evaluated for impairment in
total. Such loans include residential first mortgage loans secured by
one-to-four family residences, residential construction loans, automobile,
home equity and second mortgage loans. The effect of adopting this accounting
standard on January 1, 1995, was not material.
The carrying values of impaired loans are periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and increases
in the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash
payments are reported as reductions in carrying value, while increases or
decreases due to changes in estimates of future payments and due to the
passage of time are reported as provision for loan losses.
Land, Premises and Equipment:
Land, premises, and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed on both straight-line and
declining-balance methods based on estimated useful lives of the assets. These
assets are reviewed for impairment under SFAS No. 121 when events indicate the
carrying amount may not be recoverable.
Other Real Estate Owned:
Other real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of acquisition.
Any reduction to fair value from the carrying value of the related loan at the
time of acquisition is accounted for as a loan loss and charged against the
allowance for loan losses. After acquisition, a valuation allowance is
recorded through a charge to income for the amount of estimated selling costs.
Valuations are periodically performed by management, and valuation allowances
are adjusted through a charge to income for changes in fair value or estimated
selling costs. Other real estate owned, other than Corporate premises,
amounted to $917,000, net of a $285,000 valuation allowance and $1,109,000,
net of a $415,000 valuation allowance at December 31, 1996 and 1995,
respectively, and is included in other assets in the consolidated balance
sheets.
Income Taxes:
The Corporation files annual consolidated federal income tax returns. The
Corporation records income tax expense based on the amount of taxes due on its
tax return plus deferred taxes computed based on the expected future tax
consequences of temporary differences between carrying amounts and tax bases
of assets and liabilities, using enacted tax rates.
Dividend Restriction:
The Bank is subject to banking regulations which require the maintenance
of certain capital levels and which may limit the amount of dividends which
may be paid to the Corporation. At December 31, 1996, approximately $4,984,000
of the Bank's retained earnings is available for distribution to the
Corporation without prior regulatory approval.
Fair Values of Financial Instruments:
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed separately. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
The fair value estimates of existing on- and off-balance sheet financial
instruments do not include the value of anticipated future business or the
values of assets and liabilities not considered financial instruments.
Earnings Per Share:
Earnings per common share are based upon the weighted average number of
common shares outstanding and are restated to reflect any stock dividends or
splits.
Pension Plan:
A noncontributory defined benefit pension plan covers substantially all
employees. Funding of the plan equals or exceeds the minimum funding
requirement determined by the actuary. The projected unit credit cost method
is used to determine expense. Benefits are based on years of service and
compensation levels.
Cash Equivalents:
Cash and cash equivalents include cash on hand, demand deposits in other
institutions and short-term investments with maturities of 90 days or less.
Reclassifications:
Certain amounts appearing in the financial statements and notes thereto
for prior periods have been reclassified to conform with the current
presentation.
NOTE 2 - PENDING ACCOUNTING CHANGES
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities, was issued by the Financial Accounting
Standards Board in 1996. It revises the accounting for transfers of financial
assets, such as loans and securities, and for distinguishing between sales and
secured borrowings. It is effective for some transactions in 1997 and others
in 1998. The effect on the consolidated financial statements has not yet been
determined.
13
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 3 - SECURITIES
Information related to the amortized cost and fair value of securities at December 31 is provided in the table below.
Unrealized Unrealized
Amortized Gross Gross Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
(in thousands)
Securities available-for-sale at December 31, 1996
U.S. Treasury securities $ 31,604 $ 261 $ (61) $ 31,804
U.S. Government agencies and corporations 500 7 0 507
Mortgage-backed securities 46,002 502 (172) 46,332
State and municipal securities 2,081 86 0 2,167
Other debt securities 1,000 32 0 1,032
------------ ------------ ------------ ------------
Total securities available-for-sale at December 31, 1996 $ 81,187 $ 888 $ (233) $ 81,842
============ ============ ============ ============
Securities held-to-maturity at December 31, 1996
U.S. Treasury securities $ 17,020 $ 113 $ (56) $ 17,077
U.S. Government agencies and corporations 2,262 101 (1) 2,362
Mortgage-backed securities 83,811 545 (637) 83,719
State and municipal securities 21,172 946 (23) 22,095
Other debt securities 1,009 111 0 1,120
------------ ------------ ------------ ------------
Total securities held-to-maturity at December 31, 1996 $ 125,274 $ 1,816 $ (717) $ 126,373
============ ============ ============ ============
Securities available-for-sale at December 31, 1995
U.S. Treasury securities $ 27,549 $ 378 $ (83) $ 27,844
U.S. Government agencies and corporations 2,150 41 0 2,191
Mortgage-backed securities 48,302 785 (244) 48,843
State and municipal securities 2,076 100 0 2,176
Other debt securities 999 67 0 1,066
------------ ------------ ------------ ------------
Total securities available-for-sale at December 31, 1995 $ 81,076 $ 1,371 $ (327) $ 82,120
============ ============ ============ ============
Securities held-to-maturity at December 31, 1995
U.S. Treasury securities $ 13,611 $ 34 $ (69) $ 13,576
U.S. Government agencies and corporations 2,898 141 (6) 3,033
Mortgage-backed securities 77,319 878 (726) 77,471
State and municipal securities 19,047 1,066 (36) 20,077
Other debt securities 1,013 158 0 1,171
------------ ------------ ------------ ------------
Total securities held-to-maturity at December 31, 1995 $ 113,888 $ 2,277 $ (837) $ 115,328
============ ============ ============ ============
Information regarding the amortized cost and fair value of debt
securities by maturity as of December 31, 1996, is presented below. Maturity
information is based on contractual maturity for all securities other than
mortgage-backed securities. Actual maturities of securities may differ from
contractual maturities because borrowers may have the right to prepay the
obligation without prepayment penalty.
Available-for-Sale Held-to-Maturity
December 31, 1996 December 31, 1996
-------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
(in thousands)
Due in one year or less $ 12,327 $ 12,397 $ 6,165 $ 6,158
Due after one year through five years 21,371 21,569 15,748 16,051
Due after five years through ten years 0 0 976 1,000
Due after ten years 1,487 1,544 18,574 19,445
------------ ------------ ------------ ------------
35,185 35,510 41,463 42,654
Mortgage-backed securities 46,002 46,332 83,811 83,719
------------ ------------ ------------ ------------
Total debt securities $ 81,187 $ 81,842 $ 125,274 $ 126,373
============ ============ ============ ============
14
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 3 - SECURITIES (continued)
Security proceeds, gross gains and gross losses for 1996, 1995 and 1994 were as follows:
1996 1995 1994
----------- ------------ ------------
(in thousands)
Sales and calls of securities available-for-sale
Proceeds $ 650 $ 7,563 $ 0
Gross gains 0 348 0
Gross losses 0 17 0
Calls of securities held-to-maturity
Proceeds $ 802 $ 414 $ 249
Gross gains 0 0 10
Gross losses 9 16 17
Securities with carrying values of $121,109,000 and $100,572,000 were
pledged as of December 31, 1996 and 1995, respectively, as collateral for
deposits of public funds, securities sold under agreements to repurchase and
for other purposes as permitted or required by law.
NOTE 4 - TOTAL LOANS
Total loans outstanding as of December 31, 1996 and 1995, consist of the
following:
1996 1995
------------ ------------
(in thousands)
Commercial and industrial loans $ 202,532 $ 173,368
Agri-business and agricultural loans 27,072 22,627
Real estate mortgage loans 59,302 54,724
Real estate construction loans 1,647 1,224
Installment loans and credit cards 91,712 75,674
------------ ------------
Total loans $ 382,265 $ 327,617
============ ============
Loans aggregating $60,000 or more with executive officers and directors
(including their associates) amounted to $12,789,000 and $6,028,000 as of
December 31, 1996 and 1995, respectively. During 1996, new loans or advances
were $34,017,000, loan repayments were $32,762,000 and other changes were
$5,506,000.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
$51,802,000 and $37,117,000 at December 31, 1996 and 1995, respectively. The
balance of loans serviced for others related to servicing rights that have
been capitalized was $19,537,000 at December 31, 1996. The remaining balance
of loans serviced for others also have servicing rights associated with them,
however, these servicing rights arose prior to adoption of SFAS 122, and
accordingly have not been capitalized on the balance sheet. Income earned for
loan servicing was $96,000, $82,000 and $68,000 for 1996, 1995 and 1994,
respectively. Mortgage servicing rights of $220,000 were capitalized in 1996.
Amortization of mortgage servicing rights included in income earned for loan
servicing was $15,000 in 1996.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for 1996, 1995 and 1994:
1996 1995 1994
------------ ------------ ------------
(in thousands)
Balance, January 1 $ 5,472 $ 4,866 $ 4,010
Allowance related to acquisitions 0 746 0
Provision for loan losses 120 120 795
Loans charged-off 368 355 135
Recoveries 82 95 196
------------ ------------ ------------
Net loans charged-off (recoveries) 286 260 (61)
------------ ------------ ------------
Balance, December 31 $ 5,306 $ 5,472 $ 4,866
============ ============ ============
Nonaccrual loans at December 31, 1996, 1995 and 1994, totaled $384,000,
$532,000 and $18,000, respectively. Interest lost on nonaccrual loans was
approximately $35,000 and $29,000 for 1996 and 1995, respectively. The amount
of interest lost for 1994 was not material. Loans renegotiated as troubled
debt restructuring totaled $1,284,000 and $1,432,000 as of December 31, 1996
and 1995, respectively. Interest income of $85,000, $96,000 and $82,000 was
recognized in 1996, 1995 and 1994. Had these loans been performing under the
original contract terms, an additional $44,000 would have been reflected in
interest income during 1996, $53,000 in 1995 and $31,000 in 1994. The
Corporation is not committed to lend additional funds to debtors whose loans
have been modified. During 1996 and 1995, the Corporation had no loans meeting
the definition of impaired under SFAS No. 114.
15
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 6 - LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation were as
follows at December 31:
1996 1995
------------ ------------
(in thousands)
Land $ 4,344 $ 3,648
Buildings 12,356 10,568
Equipment 8,001 7,069
------------ ------------
Total cost 24,701 21,285
Less accumulated depreciation 8,687 7,549
------------ ------------
Land, premises and equipment, net $ 16,014 $ 13,736
============ ============
NOTE 7 - DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination
of $100,000, was approximately $97,943,000 and $62,363,000 at December 31,
1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
Amount
------------
(in thousands)
Maturing in 1997 $ 229,858
Maturing in 1998 35,173
Maturing in 1999 16,751
Maturing in 2000 6,299
Maturing in 2001 3,368
Thereafter 17,094
------------
Total time deposits $ 308,543
============
Deposits of executive officers and directors (including their associates)
totalled $3,652,000 and $3,352,000 at December 31, 1996 and 1995,
respectively.
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repo accounts) represent
collateralized borrowings with customers located primarily within the
Corporation's trade area. Information on these liabilities and the related
collateral for 1996 and 1995 is as follows:
1996 1995
------------ ------------
(in thousands)
Average balance during the year $ 73,728 $ 61,398
Average interest rate during the year 5.33% 5.69%
Maximum month-end balance during the year $ 89,433 $ 79,419
Securities underlying the agreements at year-end
Amortized cost $ 87,817 $ 59,934
Fair Value $ 88,004 $ 60,458
Collateral Value
------------------------------------------------------
U.S. Treasury Mortgage-backed
Weighted Securities Securities
Average -------------------------- --------------------------
Repurchase Interest Amortized Fair Amortized Fair
Term Liability Rate Cost Value Cost Value
- -------------------------------------------- ------------ --------------- ------------ ------------ ------------ ------------
(in thousands) (in thousands)
On demand $ 32,730 4.18% $ 0 $ 0 $ 32,939 $ 32,982
1 to 30 days 9,707 5.39 1,571 1,531 8,669 8,697
31 to 90 days 21,732 5.56 2,453 2,479 19,415 19,419
Over 90 days 21,442 5.95 12,625 12,700 10,145 10,196
------------ --------------- ------------ ------------ ------------ ------------
Total $ 85,611 5.11% $ 16,649 $ 16,710 $ 71,168 $ 71,294
============ =============== ============ ============ ============ ============
The Corporation retains the right to substitute similar type securities,
and has the right to withdraw all collateral applicable to repo accounts
whenever the collateral values are in excess of the related repurchase
liabilities. At December 31, 1996, there were no material amounts of
securities at risk with any one customer. The Corporation maintains control of
these securities through the use of third-party safekeeping arrangements.
16
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 9 - LONG -TERM DEBT
Long-term debt at December 31 consisted of:
1996 1995
------------ ------------
(in thousands)
Federal Home Loan Bank of Indianapolis Notes, 5.55%, Due January 2, 1996 $ 0 $ 8,000
Federal Home Loan Bank of Indianapolis Notes, 5.59%, Due January 14, 1997 8,132 8,132
Federal Home Loan Bank of Indianapolis Notes, 5.92% Due December 7, 1998 4,000 0
Federal Home Loan Bank of Indianapolis Notes, 5.50% Due December 28, 1998 10,000 0
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 1,300 1,300
Capital Leases 99 0
------------ ------------
Total $ 23,531 $ 17,432
============ ============
All notes require monthly interest payments and are secured by
residential real estate loans with a carrying value of $30,432,000 at December
31, 1996. The capital leases had original terms of approximately three years
and require monthly payments.
NOTE 10 - EMPLOYEE BENEFIT PLANS
Information as to the Corporation's pension plan at December 31 is as follows:
1996 1995
------------ ------------
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $1,107,000 for 1996 and $949,000 for 1995 $ 1,214 $ 1,060
============ ============
Projected benefit obligation for service rendered to date $ 1,544 $ 1,355
Plan assets at fair value (primarily money market funds
and equity and fixed income investments) (1,151) (1,131)
Unrecognized gains (losses) (27) (29)
Unrecognized prior service cost 28 31
------------ ------------
Accrued balance sheet pension liability $ 394 $ 226
============ ============
Net pension expense includes the following:
1996 1995 1994
------------ ------------ ------------
(in thousands)
Service cost for benefits earned $ 162 $ 116 $ 119
Interest cost 105 77 66
Actual return on plan assets (90) (97) (56)
Net amortization and deferrals (9) 19 (3)
------------ ------------ ------------
Net pension expense $ 168 $ 115 $ 126
============ ============ ============
The following assumptions were used in calculating the net pension cost:
Weighted average discount rate 7.75% 7.50% 8.00%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 8.00% 8.00% 8.00%
Under a 401(k) profit sharing plan, the Corporation contributions are
based upon the rate of return on January 1 stockholders' equity. The expense
recognized was $532,000, $455,000 and $370,000 in 1996, 1995 and 1994,
respectively.
NOTE 11 - OTHER EXPENSE
Other expense for the years ended December 31, were as follows:
1996 1995 1994
------------ ------------ ------------
(in thousands)
Regulatory fees and FDIC insurance $ 57 $ 616 $ 904
Data processing fees and supplies 1,098 913 769
Office supplies 641 632 519
Telephone and postage 729 616 535
Miscellaneous 2,885 2,342 2,029
------------ ------------ ------------
Total other expense $ 5,410 $ 5,119 $ 4,756
============ ============ ============
17
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES
Income tax expense consists of the following:
1996 1995 1994
------------ ------------ ------------
(in thousands)
Current federal income tax expense $ 2,503 $ 2,297 $ 2,301
Deferred federal income tax expense 107 5 11
Current state income tax expense 808 734 673
Deferred state income tax expense 86 28 39
------------ ------------ ------------
Total income tax expense $ 3,504 $ 3,064 $ 3,024
============ ============ ============
Income tax expense (credit) included $(3,000), $114,000 and $(34,000)
applicable to security transactions for 1996, 1995 and 1994, respectively. The
differences between financial statement tax expense and amounts computed by
applying the statutory federal income tax rate of 34% for all three years to
income before income taxes are as follows:
1996 1995 1994
------------ ------------ ------------
(in thousands)
Income taxes at statutory federal rate $ 3,382 $ 2,961 $ 2,771
Increase (decrease) in taxes resulting from:
Tax exempt income (540) (433) (338)
Nondeductible expense 140 119 73
State income tax, net of federal tax effect 590 503 471
Net operating loss, Gateway (29) (29) 0
Tax credits (22) (30) 0
Other (17) (27) 47
------------ ------------ ------------
Total income tax expense $ 3,504 $ 3,064 $ 3,024
============ ============ ============
The components of the net deferred tax asset recorded in the consolidated balance sheets at December 31 consist of the
following:
1996 1995
--------------------------- --------------------------
Federal State Federal State
------------- ------------- ------------ ------------
(in thousands)
Deferred tax assets
Bad debts $ 1,237 $ 395 $ 1,344 $ 445
ORE 86 18 142 35
Pension and deferred compensation liability 281 59 289 72
Deferred loan fees 0 0 83 21
Net operating loss carryforward 335 0 385 0
Other 41 17 98 23
------------- ------------- ------------ ------------
1,980 489 2,341 596
Deferred tax liabilities
Depreciation 232 49 409 102
Mortgage servicing rights 58 12 0 0
State taxes 154 0 190 0
Leases 96 20 0 0
Deferred loan fees 15 3 0 0
Other 110 23 320 26
------------- ------------- ------------ ------------
665 107 919 128
Valuation allowance 158 0 158 0
------------- ------------- ------------ ------------
Net deferred tax asset $ 1,157 $ 382 $ 1,264 $ 468
============= ============= ============ ============
For tax purposes, the acquisition of Gateway Bank (see Note 13) was
structured such that its tax basis of assets and liabilities carried over to
the Corporation. Therefore, Gateway Bank's net operating loss carryforward of
approximately $1,339,000 is available to the Corporation. However, due to the
ownership change, the Internal Revenue Service has certain limitations on the
amount of net operating loss carryforward that can be utilized by the
Corporation. As a result, at the date of acquisition the Corporation recorded
a deferred tax asset of approximately $385,000 and an offsetting valuation
reserve of approximately $158,000.
In addition to the net deferred tax assets included above, income taxes
(credits) allocated to the unrealized net gain (loss) account included in
equity were $259,000 and $414,000 for 1996 and 1995, respectively.
18
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 13 - ACQUISITIONS
On July 15, 1995, the Bank acquired Gateway Bank ("Gateway"), LaGrange,
Indiana. The Bank paid $1,380,000 for all the issued and outstanding shares of
Gateway common stock. The transaction was accounted for using the purchase
method of accounting. The acquisition added the following assets and
liabilities to the Bank:
(in thousands)
Assets ----------------
Cash and due from banks $ 292
Securities 10,307
Gross loans 9,073
Allowance for loan losses (746)
Other assets 1,636
Liabilities
Deposits $ 18,528
Other liabilities 102
As of the date of the acquisition, the former Gateway Bank became an
office of Lake City Bank. Gateway's results of operations are included in the
income statement of the Corporation beginning as of the purchase date.
NOTE 14 - PARENT COMPANY STATEMENTS
The Corporation operates primarily in the banking industry, which accounts for more than 90 percent of its revenues,
operating income, and assets. Presented below are parent only financial statements:
CONDENSED BALANCE SHEETS
December 31
--------------------------
1996 1995
------------ ------------
(in thousands)
ASSETS
Deposits with Lake City Bank $ 15 $ 25
Investment in subsidiary 42,356 36,987
Other assets 8 11
------------ ------------
Total assets $ 42,379 $ 37,023
============ ============
LIABILITIES
Dividends payable and other liabilities $ 336 $ 269
STOCKHOLDERS' EQUITY 42,043 36,754
------------ ------------
Total liabilities and stockholders' equity $ 42,379 $ 37,023
============ ============
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(in thousands)
Dividends from Lake City Bank $ 1,091 $ 928 $ 982
Interest on deposits and repurchase agreements, Lake City Bank 24 6 3
Miscellaneous income 0 10 22
Equity in undistributed income of subsidiary 5,353 4,719 4,168
Miscellaneous expense 17 14 68
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 6,451 5,649 5,107
Income tax expense (credit) 7 4 (19)
------------ ------------ ------------
NET INCOME $ 6,444 $ 5,645 $ 5,126
============ ============ ============
19
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(in thousands)
Cash flows from operating activities
Net income $ 6,444 $ 5,645 $ 5,126
Adjustments to net cash from operating activities
Equity in undistributed income of subsidiary (5,353) (4,719) (4,168)
Other changes 70 3 18
------------ ------------ ------------
Net cash from operating activities 1,161 929 976
Cash flows from investing activities (251) 104 (137)
Cash flows from financing activities (920) (1,023) (848)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (10) 10 (9)
Cash and cash equivalents at beginning of the year 25 15 24
------------ ------------ ------------
Cash and cash equivalents at end of the year $ 15 $ 25 $ 15
============ ============ ============
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table contains the estimated fair values and the related carrying values of the Corporation's financial
instruments at December 31, 1996 and 1995. Items which are not financial instruments are not included.
1996 1995
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
(in thousands)
Cash and cash equivalents $ 44,879 $ 44,879 $ 26,895 $ 26,895
Real estate mortgages held-for-sale 895 907 145 147
Securities available-for-sale 81,842 81,842 82,120 82,120
Securities held-to-maturity 125,274 126,373 113,888 115,328
Loans, net 376,959 376,086 322,145 322,692
Accrued income receivable 4,254 4,254 4,003 4,003
Mortgage servicing rights 205 205 0 0
Certificates of deposit (308,543) (309,997) (265,038) (266,600)
All other deposits (188,010) (188,010) (166,896) (166,896)
Securities sold under agreements to repurchase (85,611) (85,717) (58,151) (58,496)
Other short-term borrowings (2,769) (2,769) (18,980) (18,980)
Long-term debt (23,531) (23,466) (17,432) (17,505)
Accrued expenses payable (5,033) (5,033) (4,481) (4,481)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1996 and 1995. The
estimated fair value for cash, cash equivalents and accruals is considered to
approximate cost. Real estate mortgages held-for-sale are based upon either
the actual contracted price for those loans sold but not yet delivered, or the
current FHLMC price for normal delivery of mortgages with similar coupons and
maturities at year-end. The estimated fair value for securities is based on
quoted market rates for individual securities or for equivalent quality,
coupon and maturity securities. The estimated fair value of loans is based on
estimates of the rate the Corporation would charge for similar loans at
December 31, 1996 and 1995, applied for the time period until estimated
repayment. The estimated fair value of mortgage servicing rights is based upon
valuation methodology which considers current market conditions and historical
performance of the loans being serviced. The estimated fair value for demand
and savings deposits is based on their carrying value. The estimated fair
value for certificates of deposit and borrowings is based on estimates of the
rate the Corporation would pay on such deposits or borrowings at December 31,
1996 and 1995, applied for the time period until maturity. The estimated fair
value of short-term borrowed funds is considered to approximate carrying
value. The estimated fair value of other financial instruments and off-balance
sheet loan commitments approximate cost and are not considered significant to
this presentation.
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that were the Corporation
to have disposed of such items at December 31, 1996 and 1995, the estimated
fair values would necessarily have been achieved at that date, since market
values may differ depending on various circumstances. The estimated fair
values at December 31, 1996 and 1995, should not necessarily be considered to
apply at subsequent dates.
In addition, other assets and liabilities of the Corporation that are not
defined as financial instruments are not included in the above disclosures,
such as land, premises and equipment. Also, non-financial instruments
typically not recognized in financial statements nevertheless may have value
but are not included in the above disclosures. These include, among other
items, the estimated earnings power of core deposit accounts, the earnings
potential of the Corporation's trust department, the trained work force,
customer goodwill and similar items.
20
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
NOTE 16 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
During the normal course of business, the Corporation becomes a party to financial instruments with off-balance sheet risk in
order to meet the financing needs of its customers. These financial instruments include commitments to make loans and open-ended
revolving lines of credit. Amounts as of December 31, 1996 and 1995, were as follows:
1996 1995
-------------------------- --------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------------ ------------ ------------ ------------
(in thousands)
Commercial loan lines of credit $ 13,063 $ 98,155 $ 2,558 $ 100,033
Commercial loan standby letters of credit 0 7,865 0 4,608
Real estate mortgage loans 941 532 699 199
Real estate construction mortgage loans 0 1,997 0 963
Credit card open-ended revolving lines 4,947 0 4,153 0
Home equity mortgage open-ended revolving lines 0 16,743 0 13,955
Consumer loan open-ended revolving lines 0 2,835 0 2,556
------------ ------------ ------------ ------------
Total $ 18,951 $ 128,127 $ 7,410 $ 122,314
============ ============ ============ ============
At December 31, 1996 and 1995, the range of interest rates for commercial
loan commitments with a fixed rate was 7.86% to 12.00% and 6.99% to 12.00%,
respectively. The range of interest rates for commercial loan commitments with
variable rates was 7.75% to 12.25% and 6.84% to 12.50% at December 31, 1996
and 1995, respectively. The index on variable rate commercial loan commitments
is principally the Bank's base rate.
Commitments, excluding open-ended revolving lines, generally have fixed
expiration dates of one year or less. Credit card open-ended revolving lines
of credit are normally reviewed bi-annually and other personal lines of credit
are normally reviewed annually. Since many commitments expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. The Corporation follows the same credit policy (including
requiring collateral, if deemed appropriate) to make such commitments as is
followed for those loans that are recorded in its financial statements.
The Corporation's exposure to credit losses in the event of
nonperformance is represented by the contractual amount of the commitments.
Management does not expect any losses as a result of these commitments.
There are presently no lawsuits which, in the opinion of management and
legal counsel, would have a material affect on the financial statements.
NOTE 17 - REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly discretionary,
actions by regulators that, if undertaken, could have a direct material effect
on the Corporation's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Corporation
must meet specific capital guidelines that involve quantitative measures of
the Corporation's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996 and 1995, the Corporation meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the federal
regulators categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Corporation's category.
Minimum Required To Be
Minimum Required Well Capitalized Under
For Capital Prompt Corrective Action
Actual Adequacy Purposes Regulations
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ------------ --------- ------------- ---------
(amounts in thousands)
As of December 31, 1996
Total Capital (to Risk Weighted Assets) $ 46,860 11.19% >=$ 33,501 >= 8.00% >=$ 41,876 >= 10.00%
Tier I Capital (to Risk Weighted Assets) $ 41,624 9.94% >=$ 16,750 >= 4.00% >=$ 25,125 >= 6.00%
Tier I Capital (to Average Assets) $ 41,624 6.29% >=$ 26,469 >= 4.00% >=$ 33,087 >= 5.00%
As of December 31, 1995
Total Capital (to Risk Weighted Assets) $ 40,709 11.38% >=$ 28,61 >= 8.00% >=$ 35,772 >= 10.00%
Tier I Capital (to Risk Weighted Assets) $ 36,224 10.13% >=$ 14,30 >= 4.00% >=$ 21,455 >= 6.00%
Tier I Capital (to Average Assets) $ 36,224 6.31% >=$ 22,96 >= 4.00% >=$ 28,703 >= 5.00%
21
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- ------------------------------------------------------------------------------
Stockholders and Board of Directors
Lakeland Financial Corporation
Warsaw, Indiana
We have audited the accompanying consolidated balance sheets of Lakeland
Financial Corporation and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1996, 1995 and 1994. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lakeland
Financial Corporation and subsidiary as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years ended December 31,
1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1, the Corporation adopted new accounting guidance
for impaired loans in 1995 and new accounting guidance for mortgage servicing
rights in 1996.
CROWE, CHIZEK AND COMPANY LLP
South Bend, Indiana
January 16, 1997
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Management is responsible for the preparation of the Corporation's
consolidated financial statements and related information appearing in this
annual report. Management believes that the consolidated financial statements
fairly reflect the form and substance of transactions and that the financial
statements reasonably present the Corporation's financial position and results
of operations and were prepared in conformity with generally accepted
accounting principles. Management also has included in the Corporation's
financial statements, amounts that are based on estimates and judgments which
it believes are reasonable under the circumstances.
The Corporation maintains a system of internal controls designed to
provide reasonable assurance that all assets are safeguarded, financial
records are reliable for preparing Consolidated Financial Statements and the
Corporation complies with laws and regulations relating to safety and
soundness which are designated by the FDIC and other appropriate federal
banking agencies. The selection and training of qualified personnel and the
establishment and communication of accounting and administrative policies and
procedures are elements of this control system. The effectiveness of the
internal control system is monitored by a program of internal audit and by
independent certified public accountants ('independent auditors'). Management
recognizes that the cost of a system of internal controls should not exceed
the benefits derived and that there are inherent limitations to be considered
in the potential effectiveness of any system. Management believes the
Corporation's system provides the appropriate balance between costs of
controls and the related benefits.
The independent auditors have audited the Corporation's consolidated
financial statements in accordance with generally accepted auditing standards
and provide an objective, independent review of the fairness of the reported
operating results and financial position. The Board of Directors of the
Corporation has an Audit Review Committee composed of five non-management
Directors. The Committee meets periodically with the internal auditors and the
independent auditors.
22
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- ------------------------------------------------------------------------------
FINANCIAL CONDITION
Liquidity
The Corporation manages its primary liquidity position to provide funding
at the lowest possible cost, for anticipated loan demand and/or deposit
run-off that occurs in the regular course of business. Such sources of
liquidity are: Federal fund lines with correspondent banks, advances from the
Federal Home Loan Bank, repurchase agreements with local customers and cash
flow from the securities portfolio. This cash flow from the securities
portfolio could total approximately $49.6 million in 1997, given current
prepayment assumptions. Additionally, continuous growth into new markets in
northern Indiana has diversified the retail deposit base, reducing volatility
that might occur in one geographical location.
The Corporation manages a secondary liquidity position to provide funding
in the event of unanticipated loan demand and/or deposit run-off. Management
has designated approximately 39.3 percent of its investment portfolio as
available-for-sale (AFS). This designation provides the liquidity to fund
abnormal loan demand, or to manage the loss of deposits. The Corporation's
securities are all very high quality and easily marketable, with 87.8 percent
either U.S. Treasuries, Federal agency securities or mortgage-backed
securities directly or indirectly guaranteed by the Federal government.
The following is a brief description of the sources and uses of funds for
the indicated periods:
During the year ended December 31, 1996, there was a net increase of
$18.0 million in cash and cash equivalents. The major uses of cash during the
period included the funding of a $54.9 million increase in loans, the purchase
of securities totaling $34.7 million and the purchase of new premises and
equipment of $3.6 million. Major sources of funds were: a net increase in cash
from operating activities of $7.2 million, maturities and calls of securities
totaling $22.9 million, an increase in deposits of $64.6 million and a $17.3
million increase in total borrowings.
During the year ended December 31, 1995, there was a net increase of 2.7
million in cash and cash equivalents. The major uses of cash during the period
included the funding of a $39.2 million increase in loans, the purchase of
securities totaling $42.9 million and the purchase of new premises and
equipment of $3.7 million. Major sources of funds were: a net increase in cash
from operating activities of $8.1 million, maturities and sales of securities
totaling $18.9 million, an increase in deposits of $35.2 million and a $28.8
million increase in total borrowings.
During the year ended December 31, 1994, there was a net increase of
$11.3 million in cash and cash equivalents. The major uses of cash during the
period included the funding of a $27.7 million increase in loans and the
purchase of securities totaling $28.5 million. Major sources of funds were: a
net increase in cash from operating activities of $10.3 million, maturing
securities of $15.3 million, an increase in deposits of $26.7 million and an
$18.5 million increase in total borrowings.
Asset/Liability Management (ALCO) and Securities
The Board of Directors annually reviews and approves the ALCO policy used
to manage interest rate risk. This policy sets guidelines for balance sheet
structure that protects the Corporation from excessive net income volatility
that could result from changing interest rates. The Corporation uses a GAP
report, which details the relative mismatch of asset and liability cash flows
occurring in specified time horizons, and a computer program to stress test
the balance sheet under a wide variety of interest rate scenarios. This model
quantifies the impact on income of such things as: changes in customer
preference for products, basis risk between the assets and the funds
supporting them and the risk inherent in different yield curves. The ALCO
committee reviews these possible outcomes and makes loan, investment and
deposit decisions that maintain reasonable balance sheet structure in light of
potential interest rate movements. After the committee has specified a maximum
risk tolerance for dollar margin volatility, the committee develops guidelines
for the GAP ratios. As indicated in Table 1 - Repricing Opportunities, the
Corporation's cumulative GAP ratio at December 31, 1996, for the next 12
months is a negative 17.6 percent of total assets. This ratio indicates that
the interest margin could be slightly lower if interest rates rise, as
compared to flat or falling interest rate environments. The computer model
produces a slightly different result, and highlights one of the major problems
with GAP analysis. While GAP may provide a basic guide to rate risk exposure
in certain rate environments, it cannot effectively provide a dollar margin
impact since it ignores the rates on maturing assets and liabilities, the
different indices used to price products and the changes in customer
preference that occur whenever interest rates change. Factoring all of these
things into the computer simulation, the Corporation is exposed to falling
rates. That is, the interest margin could be slightly lower if rates fall. The
degree of this exposure is within policy limits.
The Corporation's investment portfolios consist of U.S. Treasuries,
agencies, mortgage-backed securities, municipal bonds and corporates. During
1996, purchases have been primarily U.S. Treasuries, mortgage-backed ecurities
and municipal bonds. At December 31, 1996, the Corporation's investment in
mortgage-backed securities comprised approximately 63 percent of total
securities and consisted of CMO's and mortgage pools issued by GNMA, FNMA and
FHLMC. As such, these securities are backed directly or indirectly by the
Federal government. All mortgage securities are purchased to conform to the
FFIEC high risk standards which prohibit the purchase of securities that have
excessive price, prepayment, extension and original life risk characteristics.
The Corporation uses Bloomberg analytics to evaluate and monitor all
purchases. At December 31, 1996, the mortgage securities in the AFS portfolio
had a one and one-half year average life, with approximately 6 percent price
depreciation should rates move up 300 basis points and approximately 4 percent
price appreciation should rates move down 300 basis points. The mortgage
securities in the HTM portfolio had a three year average life and the
potential for approximately 9 percent price depreciation should rates increase
300 basis points and approximately 7 percent price appreciation should rates
move down 300 basis points. As of December 31, 1996, all mortgage securities
continue to be in compliance with FFIEC guidelines, and are performing in a
manner consistent with management's original expectations.
Capital Management
The Corporation believes that a strong capital position is vital to
long-term earnings and expansion. Currently the Corporation maintains capital
levels in excess of "well-capitalized" levels as defined by the FDIC. Bank
regulatory agencies exclude the market value adjustment created by SFAS No.
115 (AFS adjustment) from capital adequacy calculations. Therefore, excluding
this adjustment from the calculation, the Corporation attained tier I leverage
capital, tier I risk based capital and tier II risk based capital ratios of
6.3 percent, 9.9 percent and 11.2 percent, respectively at December 31, 1996.
All three ratios exceed the "well-capitalized" minimums of 5.0 percent, 6.0
percent and 10.0 percent, respectively.
The ability to maintain these ratios at these levels is a function of net
income growth and a prudent dividend policy. Total stockholders' equity
increased by 14.4 percent, to $42,043,000 as of December 31, 1996, from
$36,754,000 as of December 31, 1995. Total stockholders' equity increased by
40.7 percent or $12,154,000 from $29,889,000 as of December 31, 1994. The 1996
growth resulted from the retention of net income of $6,444,000, minus cash
dividends declared of $1,335,000 less the change in the AFS adjustment of
$235,000, net of tax, plus $415,000 from issuing shares of common stock. The
AFS adjustment reflects an 82 basis point increase in three to five year U. S.
Treasury rates during 1996. Since the securities portfolio is primarily fixed
rate, a negative equity adjustment should occur whenever interest rates
increase. Management has factored this into the determination of the size of
the AFS portfolio, to assure that stockholders' equity is adequate under
various scenarios. The 1995 growth of $6,865,000 resulted from the retention
of net income of $5,645,000, minus cash dividends declared of $1,066,000, plus
the AFS adjustment of $2,286,000, net of tax. This 1996 AFS adjustment
reflected a 250 basis point decrease in three to five year U. S. Treasury
rates during 1995.
23
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
Management is not aware of any known trends, events or uncertainties that
would have a material effect on the Corporation's liquidity, capital and
results of operations. Nor is management aware of any regulatory
recommendations that, if implemented, would have such an effect.
Allowance for Credit Risk
At December 31, 1996, the allowance for loan losses was $5,306,000 or
1.39 percent of total loans outstanding, compared with $5,472,000 or 1.67
percent of total loans outstanding at December 31, 1995. The process of
identifying credit losses that may occur based upon current circumstances is
subjective. Therefore, the Corporation maintains a general allowance to cover
all credit losses within the entire portfolio. The methodology management uses
to determine the adequacy of the loan loss reserve is as follows:
1.Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectibility factors
(including impairment) and assesses the requirement for specific reserves
on such credits. For those loans not subject to specific reviews,
management reviews previous loan loss experience to establish historical
ratios and trends in charge-offs by loan category. The ratios of net
charge-offs to particular types of loans enables management to establish
charge-offs in future periods by loan category and thereby establish
appropriate reserves for loans not specifically reviewed.
2.Management reviews the current and anticipated economic conditions of
its lending market to determine the effects on future loan charge-offs by
loan category, in addition to the effects on the loan portfolio as a
whole.
3.Management reviews delinquent loan reports to determine risk of future
charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Given this methodology for determining the adequacy of the loan loss
reserve, the provision for loan losses was substantially lower in 1996 and
1995 as compared to prior periods. This reduction reflects the trend in past
due accruing loans (90 days or more) which are currently at historically low
levels. It also reflects the immaterial level of nonaccrual loans over the
same period. These trends in non-performing loans reflect both general
economic conditions that have promoted growth and expansion in the
Corporation's market area, and a credit risk management strategy that promotes
diversification.
At December 31, 1996, 62.0 percent of the Corporation's allowance for
loan losses was classified as unallocated. To a large extent, this reflects
the growth in total loans over the last three years of $122 million, or about
46.9 percent, and the concentration of this loan growth in the commercial loan
portfolio. With this type of commercial loan growth, management believes that
it is prudent to continue to provide for loan losses, due to the inherent risk
associated with commercial loans.
Inflation
For a financial institution, the effects of price changes and inflation
can vary substantially. Inflation affects the growth of total assets, but it
is difficult to assess its impact since neither the timing nor the magnitude
of the changes in the consumer price index (CPI) coincides with changes in
interest rates. The price of one or more of the important components of the
CPI may fluctuate considerably and thereby influence the overall CPI without
having a corresponding affect on interest rates or upon the cost of those
goods and services normally purchased by the Corporation. In years of high
inflation and high interest rates, intermediate and long-term interest rates
tend to increase, thereby adversely impacting the market values of investment
securities, mortgage loans and other long-term fixed rate loans. In addition,
higher short-term interest rates caused by inflation tend to increase the cost
of funds. In other years, the reverse situation may occur.
Growth and Expansion
The assets of the Corporation increased 15.5 percent, or $87,972,000, to
$656,551,000 as of December 31, 1996, from $568,579,000 as of December 31,
1995. Assets at December 31, 1995, increased 14.4 percent, or $71,616,000,
from $496,963,000 as of December 31, 1994. The Corporation has been pursuing
expansion into contiguous markets since 1990. Most recently, the Corporation
opened two additional offices and one free-standing ATM during 1996. Plans
call for additional expansion in Elkhart and St. Joseph counties in 1997.
Although growth continues to be strong in the traditional markets served by
the Corporation, much of the growth experienced in 1996 was in the new markets
served by the Corporation. The Corporation's market area now includes:
Elkhart, Fulton, Kosciusko, LaGrange, Marshall, Noble and Whitley counties. As
in the past, the Corporation expects to continue to serve its market by adding
new products, offices and ATM's in areas where the demographic trends dictate.
This activity will contribute to net income in future years.
Changes in Accounting Methods
Effective January 1, 1995, the Corporation adopted SFAS No. 114, and SFAS
No. 118, Accounting by Creditors for Impairment of a Loan. The effect on the
Corporation of the adoption of this accounting standard was not material.
On January 1, 1996, the Corporation adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights", which requires recognition of an asset when
servicing rights are retained on in-house originated loans that are sold.
Adopting SFAS No. 122 did not have a significant impact on the financial
condition and operations for 1996. The impact in subsequent years is difficult
to predict.
RESULTS OF OPERATIONS
1996 vs 1995
Continued growth and expansion have brought Corporation assets and
earnings to record levels again in 1996. Total assets of the Corporation were
$656,551,000 at December 31, 1996, an increase of $87,972,000 or 15.5 percent
over the assets at December 31, 1995. Total loans at December 31, 1996
increased to $382,265,000. That is an increase of $54,648,000 or 16.7 percent
over the balance at December 31, 1995. Total deposits increased to
$496,553,000 at December 31, 1996, an increase of $64,619,000 or 15.1 percent
while core funding, deposits plus securities sold under agreements to
repurchase, increased $92,079,000 or 18.8 percent to $582,164,000. On an
average daily basis, gross earning assets increased 12.6 percent and deposits
plus purchased funds increased 12.5 percent.
For 1996, total interest income was $45,941,000 which is an increase of
$3,997,000 or 9.5 percent from the prior year. This is a result of the
increased earning assets offset by a 24 basis point decrease in the earning
asset yield. The decrease in the earning asset yield reflects the 56 basis
point reduction in the average prime rate for 1996, as compared to 1995 and
its effect on the commercial loan portfolio yield.
24
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
Nonearning assets of the Corporation include nonaccrual loans and
investments, other real estate, and repossessions. These nonearning assets
were $1,097,000, $1,207,000 and $815,000 as of December 31, 1996, 1995 and
1994, respectively. Nonaccrual loans totaled $384,000, $532,000 and $18,000,
respectively at the end of the years 1996, 1995 and 1994.
Interest expense was $23,737,000 for 1996, an increase of $2,095,000 or
9.7 percent over the amount for 1995. This reflects a $62,299,000 increase in
the average daily balance of deposits and purchased funds offset by an 11
basis point decrease in the average rate paid on these funds. The largest
increase was in the average daily balance of time deposits which increased
$43,195,000 for 1996, as compared to 1995.
Net interest income for 1996 was $22,204,000 as compared to $20,302,000
for 1995, an increase of $1,902,000 or 9.4 percent. As a percentage of average
earning assets it was 4.06 percent for 1996, a 12 basis point decrease from
the percentage for 1995. This reflects the decrease in the average rate paid
on deposits and purchased funds being 13 basis points less than the decrease
in the average yield on earning assets and the continued shift of deposits to
the higher cost time deposits.
As indicated in the Notes to Consolidated Financial Statements and the
discussion of financial condition, management maintains the allowance for loan
losses at an appropriate level given many different factors. Management
believes the December 31, 1996 allowance of $5,306,000 is adequate to absorb
all potential risk applicable to the classification of loans as loss,
doubtful, substandard or special mention. This allowance does not represent or
result from trends that will materially adversely impact future operating
results, liquidity, or capital resources. Net interest income after the
provision for loan losses was $22,084,000 for 1996, an increase of $1,902,000
or 9.4 percent over the amount for 1995.
Noninterest income for 1996 increased $1,028,000 over the amount for
1995, totaling $5,799,000 for the year. All major components of noninterest
income increased except for security gains and losses. Trust income increased
24.3 percent from the amount for 1995 to $881,000 for 1996. Service charges on
deposit accounts increased 24.2 percent to $2,809,000 for 1996. This increase
resulted from the continued acceptance of the Corporation's individual deposit
accounts paying fees and adjustments to the schedule of deposit fees. The
$380,000 increase in other noninterest income resulted from increases in a
variety of income sources including discount brokerage fees, wire transfer
fees, and gains on sales of other real estate. The increase in gains on sales
of real estate mortgages held-for-sale are a result of continued sales of
mortgages to the secondary market and the adoption of SFAS No. 122. These
gains were $412,000 for 1996 as compared to $159,000 for 1995, an increase of
$253,000. Approximately $205,000 of these gains were a result of adopting SFAS
No. 122. The small security losses recorded in 1996 were primarily the result
of several partial calls. During 1995, sales of securities available-for-sale
and calls of securities held-to-maturity accounted for the gain of $315,000.
Noninterest expense was $17,935,000 for the year ended December 31, 1996,
an increase of $1,691,000 or 10.4 percent over the amount for 1995. All
components of noninterest expense increased with the largest increase being
salaries and employee benefits which increased $1, 049,000 or 12.3 percent.
The increase in salaries and employee benefits reflects the normal salary
increases along with the increases in staff related to the 5 new offices
opened during the last 18 months. The number of full-time equivalent employees
increased to 320 at December 31, 1996, as compared to 292 at December 31,
1995. The $110,000 increase in net occupancy expense also reflect the
additional offices. The increase of $241,000 in equipment costs reflects both
the additional offices and investments necessary to stay current with
technology. As indicated in the Notes to Consolidated Financial Statements,
all components of other expense increased except for the regulatory fees and
FDIC insurance. The decrease in regulatory fees and FDIC insurance is
primarily due to the reduced premium rates on FDIC insurance for 1996 as
compared to 1995.
As a result of all these factors, income before income tax expense
increased $1,239,000 or 14.2 percent to $9,948,000 for 1996, as compared to
$8,709,000 for 1995. Income tax expense was $3,504,000 and $3,064,000 for 1996
and 1995, respectively. For both 1996 and 1995, the income tax expense as a
percentage of income before tax remained at 35.2 percent. Net income increased
to $6,444,000 for 1996, an increase of $799,000 or 14.2 percent over the net
income of $5,645,000 for 1995. Net income per share for 1996 was $2.22 as
compared to $1.96 for 1995. Net income of $6,444,000 represents a 17.9 percent
return on January 1, 1996 stockholder's equity (excluding the equity
adjustment related to SFAS No. 115) and a 1.07 percent return on average daily
assets.
1995 vs 1994
Corporation assets and earnings were at record levels in 1995. Total
assets were at $568,579,000 at December 31, 1995, an increase of $71,616,000
or 14.4 percent over the assets at December 31, 1994. Loans increased 13.8
percent, or $39,661,000, to $327,617,000 at year-end 1995. Total deposits
increased 8.9 percent, or $35,194,000, to $431,934,000 at December 31, 1995.
Core funding, deposits plus securities sold under agreement to repurchase,
increased 11.8 percent, or $51,595,000, to $490,085,000. Net income totaled
$5,645,000, exceeding 1994 by 10.1 percent. On an average daily basis, gross
earning assets increased by 14.8 percent and total deposits and purchased
funds increased by 14.3 percent. The Gateway Bank office added in July, 1995
accounted for approximately one-third of this average daily earning asset
growth.
Total interest income increased 25.0 percent, or $8,424,000 to
$42,079,000 for the year ended December 31, 1995. This increase was a result
of the increase in daily average earning assets and a 97 basis point increase
in the overall tax equivalent yield on earning assets as compared to the 1994
overall tax equivalent yield. The increase in the tax equivalent yield on
earning assets is reflective of the 168 basis point increase in the average
prime rate during 1995, and the effect this prime rate increase had on the
commercial loan portfolio yield.
Nonearning assets of the Corporation include nonaccrual loans and
investments, other real estate, and repossessions. These nonearning assets
amounted to $1,207,000, $815,000 and $2,379,000 as of December 31, 1995, 1994
and 1993, respectively. Nonaccrual loans totaled $532,000, $18,000 and $0,
respectively at the end of the years 1995, 1994 and 1993. Four mortgage loans
acquired from Gateway account for the majority of the amount in nonaccrual
loans for 1995.
Interest expense for 1995 was $21,642,000. This is an increase of
$6,755,000, or 45.4 percent, over the interest expense for 1994. The increase
in interest expense is attributable to the continued growth in time deposit
balances and rising interest rates. Average daily balances of time deposits
increased 24.1 percent over the prior year average daily balances and the
average rate paid on time deposits increased 161 basis points.
Net interest income increased $1,669,000 or 8.9 percent, to $20,437,000
in 1995, from $18,768,000 in 1994. Net interest income as a percentage of
earning assets was 4.18 percent for 1995. This is a decrease of 23 basis
points from the 4.41 percentage for 1994. This decrease resulted from the
increase in the rates paid on deposits and purchased funds being 25 basis
points higher than the increase in the rates for earning assets. The increase
in rates paid on deposits and purchased funds reflected both the effects of
competition and the shift of balances from savings and money market funds to
higher cost time deposits.
As indicated in the Notes to Consolidated Financial Statements and the
discussion of financial condition, management maintains the allowance for loan
losses at an appropriate level given many different factors. The December 31,
1995, allowance of $5,472,000 was believed by management to be adequate to
absorb all potential risk applicable to the classification of loans as loss,
doubtful, substandard or special mention. Net interest income after provision
for loan losses increased $2,344,000, or 13.0 percent, to $20,317,000 in 1995,
from $17,973,000 in 1994.
Trust income and service charges on deposit accounts, two major
components of noninterest income, increased 10.6 percent, or $284,000 in 1995
to $2,971,000 in 1995, from $2,687,000 in 1994. Trust income increased to
$709,000 for 1995, as compared to $609,000 for 1994, an increase of 16.4
25
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- ------------------------------------------------------------------------------
percent. Service charges on deposit accounts increased 8.9 percent to
$2,262,000 in 1995. This increase is reflective of the continued acceptance of
the Corporation's individual deposit accounts paying fees. Other income
decreased by $221,000 when compared to 1994. Other income in 1994 included a
one-time event relating to the reversal of certain other real estate valuation
allowances that contributed $404,000 to other income. Without that one-time
event in 1994, the other income for 1995 would have increased $183,000 over
the amount for 1994.
The Corporation continued its program of originating mortgages for sale
on the secondary market. Loans originated for sale in 1995 were $10,878,000 as
compared to $9,426,000 originated for sale in 1994. Gains on the sales of
these loans totaled $159,000 a decrease of $18,000 from the gains recorded in
1994.
The ALCO committee reviews the portfolio monthly and makes investment
decisions based upon the projected balance sheet needs. During 1995, there
were sales of securities available-for-sale which resulted in net gains of
$331,000 and there were calls of securities held-to-maturity which resulted in
losses of $16,000. The net of these activities resulted in security gains of
$315,000 for 1995 as compared to net security losses of $7,000 in 1994. The
small security losses in 1994 were the result of several partial calls on zero
coupon bonds.
The result of the changes in all components of noninterest income was an
increase in total noninterest income of $367,000, or 8.6 percent, over the
amounts recorded for 1994.
Salaries and employee benefit costs for 1995 increased $1,243,000, or
17.1 percent, to $8,521,000. This increase was attributable to a 5.0 percent
increase in full-time equivalent employees (FTE) in 1995, to 292, along with
normal salary increases. The increase in FTE was a result of the opening of
three new offices and the acquisition of Gateway Bank during 1995.
Additionally, the increase in salaries and employee benefits reflected the
increased cost of fringe benefit and indirect payroll programs which are tied
to Corporate performance.
Net occupancy and equipment costs increased to $2,604,000 in 1995, from
$2,058,000 in 1994, an increase of $546,000 or 26.5 percent. This increase was
also due to the new offices added during 1995 as well as having the expenses
for the full year for the two offices opened in the fourth quarter of 1994.
This increase was also a result of investments in the equipment needed to stay
current with technology.
Other expense increased 7.6 percent, or $363,000, to $5,119,000 for 1995.
As indicated in the Notes to Consolidated Financial Statements, all components
of other expense increased from 1994 to 1995 except for Regulatory Fees and
FDIC Insurance. During 1995, the FDIC announced that the Bank Insurance Fund
reached its capitalization target in May. As a result, the FDIC refunded
excess premiums that banks paid from June to September and reduced the FDIC
premium rates. This refund and the reduction in FDIC premiums resulted in the
$288,000 decrease in Regulatory Fees and FDIC Insurance for 1995 as compared
to 1994.
As a result of all these factors, income before income tax expense
increased $559,000, or 6.9 percent, to $8,709,000 from the $8,150,000 for
1994. Income tax expense was $3,064,000 and $3,024,000 in 1995 and 1994,
respectively, which represent 35.2 percent and 37.1 percent of income before
taxes. The reduction in the average tax rate is due to a higher level of tax
exempt income, the net operating loss carryforward related to the Gateway
acquisition and an increase in Federal and State tax credits. Net income
increased to $5,645,000 for 1995 from $5,126,000 for 1994, an increase of
$519,000, or 10.1 percent. Net income per share was $3.92 for 1995, as
compared to $3.56 for 1994. Net income of $5,645,000 represents a 17.9 percent
return on January 1, 1995, stockholders' equity (excluding the equity
adjustment related to SFAS No. 115), and a 1.05 percent return on average
daily assets.
TABLE 1 - REPRICING OPPORTUNITIES
- ----------------------------------------------------------------------------------------------------------------------------------
The table below illustrates the funding gaps for selected maturity periods as of December 31, 1996, for Lake City Bank only.
Repricing opportunities for fixed rate loans and mortgage-backed securities are based upon anticipated prepayment speeds. Demand
deposit accounts and savings accounts are classified as having maturities beyond four years.
Repricing or Maturing Within
----------------------------------------------------
6 7-12 1-4
Months Months Years
--------------- ---------------- ----------------
(in thousands)
Earning Assets
Loans $ 228,759 $ 29,007 $ 93,006
Securities 25,996 9,921 119,924
Short-term investments 3,491 0 198
--------------- ---------------- ----------------
Total 258,246 38,928 213,128
--------------- ---------------- ----------------
Deposits and Purchased Funds
Transaction accounts 66,601 0 0
Time deposits 186,019 58,171 58,446
Short-term borrowings 70,582 12,023 5,775
Long-term borrowings 8,135 0 14,096
--------------- ---------------- ----------------
Total 331,337 70,194 78,317
--------------- ---------------- ----------------
Interest sensitivity GAP $ (73,091) $ (31,266) $ 134,811
=============== ================ ================
Cumulative interest sensitivity GAP $ (73,091) $ (104,357) $ 30,454
=============== ================ ================
Cumulative GAP as percent of earning assets (12.3)% (17.6)% 5.1%
=============== ================ ================
26
LAKE CITY BANK OFFICERS
R. Douglas Grant President
Paul S. Siebenmorgen Executive Vice President Retail Services
Walter L. Weldy Executive Vice President Kevin L. Deardorff Senior Vice President
Craig R. Atz Vice President
Dale L. Cramer Vice President
Commercial Services Thomas P. Frantz Vice President
Charles D. Smith Senior Vice President Janet K. Anderson Assistant Vice President
David A. Bickel Vice President Barry A. Bailey Assistant Vice President
James R. Cowan Vice President Dennis E. Dolby Assistant Vice President
Michael E. Gavin Vice President Craig A. Haecker Assistant Vice President
William D. Leedy Vice President W. Randy Yoder Assistant Vice President
J. Randall Leininger Vice President Glenn A. Goudey Senior Mtg. Underwriter
H.A. "Rocky" Meyer Vice President Rick A. Spicer Mortgage Underwriter
Willard N. Schieler Vice President April J. Gayton Mortgage Banking Officer
Thomas G. Stark Vice President Linda A. Rodriguez Mtg. Loan Originator
James C. Stout Vice President Melanie R. Shipley Retail Banking Officer
Randal U. Vutech Vice President Lisa A. Stookey Retail Banking Officer
Edward D. Jarrett Assistant Vice President
J. Chad Stoltzfus Assistant Vice President
Chad D. Broyette Commercial Banking Financial & Operations
Officer Terry M. White Senior Vice President
Brent E. Hoffman Commercial Banking James J. Nowak Vice President
Officer and Controller
Michael A. Zimmerman Commercial Banking Teresa A. Bartman Assistant Vice President
Officer and Assistant Controller
Dennis L. Huff Vice President and M.I.S.
Judy K. Harvey Vice President
Trust & Investments Lisa M. Bicknese Assistant Vice President
Dennis E. Cultice Senior Vice President Vicki D. Martin Assistant Vice President
Coral G. Amspaugh Vice President Rebecca M. Siery Assistant Vice President
Jeanine D. Knowles Vice President Lorretta J. Burnworth Operations Officer
Max A. Mock Vice President Jean A. Ciriello Operations Officer
Anne M. Bailey Assistant Vice President Joanie L. Foreman Operations Officer
Jill A. Hester Assistant Vice President William L. Hilliard Operations Officer
Connie S. Miller Trust Officer Jan R. Martin Operations Officer
Shelley A. Moore Trust Operations Officer Elizabeth A. Neves Operations Officer
Linda A. Owens Operations Officer
Angela K. Ritchey Operations Officer
Marketing, Human Resources and Linda L. Swoverland Operations Officer
Facilities
D. Jean Northenor
Gregory D. Lawrence Vice President
Cathy L. Teghtmeyer Vice President Audit
Paul S. Purvis Assistant Vice President Betty L. McHenry Senior Vice President
Bettie S. Moore Assistant Human and Auditor
Resources Officer Ryan B. Weaver Assistant Vice President
John W. Gove Facilities Manager Teah D. Wicks Assistant Auditor
27
Office Administration
Walter L. Weldy Executive Vice President
E. Ray Younce Senior Vice President
Peggy A. Guyas Vice President
Jane E. Miller Vice President
Timothy L. Sutton Vice President
Jeannine P. Cooley Assistant Vice President
Ruth A. Hutcherson Assistant Vice President
Nancy L. Hofer Retail Banking Officer
Sarah Miller-Bontrager Retail Banking Officer
Offices
Akron Jane Murphy Assistant Vice President
Argos Michael D. Burroughs Vice President
Bremen Matthew K. Bixel Vice President
Columbia City Lisa A. Hockemeyer Assistant Vice President
Concord Jeri L. Yoder Assistant Vice President
Cromwell Jerry L. Stoner Office Manager
Elkhart Rosalie M. Smith Vice President
Debra L. Griggs Assistant Office Manager
Elkhart East Mervin "Bud" Hammon Vice President
Elkhart Hubbard Hill Thomas Walker Assistant Vice President
Elkhart Northwest Kathleen Dougherty Office Manager
Goshen Downtown Jane Greene Assistant Office Manager
Goshen South Clarence J. "CJ" Yoder Vice President
Kendallville Duane Smith Vice President
LaGrange Shannon Schrock Office Manager
Ligonier Jerry L. Stoner Office Manager
Mentone Karen A. Francis Assistant Vice President
Middlebury Jerry S. Troyer Vice President
Milford Jack A. Heeter Assistant Vice President
Nappanee Larry L. Penrod Vice President
North Webster Jeanne G. Bowen Vice President
Pierceton Pamela F. Messmore Office Manager
Roann Merrill Templin Assistant Vice President
Rochester Gail D. Law Assistant Vice President
Shipshewana John R. Munsell Vice President
Silver Lake Deborah A. Lotz Assistant Vice President
Syracuse Donna J. Beck Assistant Vice President
Wabash North T.F. "Bob" Fuller Vice President
Wabash South Jody A. Slacian Office Manager
Warsaw Downtown Traci Dahlinger Office Manager
Warsaw East Pamela F. Messmore Office Manager
Warsaw West Linda M. Riley Assistant Office Manager
Winona Lake Allan L. Disbro Vice President
28