UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ____________________
Commission File No. 0-11487
LAKELAND FINANCIAL CORPORATION
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(exact name of registrant as specified in its charter)
INDIANA 35-1559596
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 1-219-267-6144
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common The Nasdaq Stock Market's National Market
Preferred Securities of Lakeland
Capital Trust The Nasdaq Stock Market's National Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such other period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein and will not be contained,
to the best of the Registrant's knowledge, in definitive Proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant, computed solely for the purposes of this requirement on the basis
of the Nasdaq closing value at February 28, 1998, and assuming solely for the
purposes of this calculation that all Directors and executive officers of the
Registrant are "affiliates": $124,705,335.
Number of shares of common stock outstanding at February 20, 1998:
2,899,495
Cover page 1 of 2 pages
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the following documents are incorporated by reference in the
Parts of the 10-K indicated:
Part Document
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I, II & IV Lakeland Financial Corporation's Annual Report to
Shareholders for year ended December 31, 1997, parts
of which are incorporated into Parts I, II and IV of
this Form 10-K.
III Proxy statement mailed to Shareholders on March 16,
1998, which is incorporated into Part III of this Form
10-K.
Cover page 2 of 2 pages
PART I.
ITEM 1. BUSINESS
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The registrant was incorporated under the laws of the State of Indiana on
February 8, 1983. As used herein, the terms "Registrant" and "Company" refer
to Lakeland Financial Corporation or, if the context dictates, the Lakeland
Financial Corporation and its wholly-owned subsidiaries, Lake City Bank,
Warsaw, Indiana, and Lakeland Capital Trust, Warsaw, Indiana.
General
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REGISTRANT'S BUSINESS. The Registrant is a bank holding company as
defined in the Bank Holding Company Act of 1956, as amended. Registrant owns
all of the outstanding stock of Lake City Bank, Warsaw, Indiana, a full
service commercial bank organized under Indiana law (the "Bank"), and Lakeland
Capital Trust, a statutory business trust formed under Delaware law (Lakeland
Trust). Registrant conducts no business except that incident to its ownership
of the outstanding stock of the Bank and the operation of the Bank.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation. The Bank's activities cover all phases of commercial banking,
including checking accounts, savings accounts, time deposits, the sale of
securities under agreements to repurchase, discount brokerage services,
commercial and agricultural lending, direct and indirect consumer lending,
real estate mortgage lending, safe deposit box service and trust services.
The Bank's main banking office is located at 202 East Center Street,
Warsaw, Indiana. As of December 31, 1997, the Bank had nine branch offices and
one drive-up facility in Kosciusko County, nine branch offices in Elkhart
County, five branch offices in Noble County, three branch offices in Wabash
County, two branch offices in LaGrange County, two branch offices in Marshall
County, two branch offices in St. Joseph County, two branch offices and one
drive-up facility in Fulton County, one branch office in Cass County, one
branch office in Huntington County, one branch office in Pulaski County and
one branch office in Whitley County. The Bank's operations center is located
at 113 East Market Street, Warsaw, Indiana.
SUPERVISION AND REGULATION. The Company and the Bank are extensively
regulated under federal and state law. These laws and regulations are intended
to protect depositors, not shareholders. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in
its entirety by reference to the particular statutory and regulatory
provisions. Any change in applicable laws or regulations may have a material
effect on the business and prospects of the Company, and the operations of the
Company may be affected by legislative changes and by the policies of various
regulatory authorities. The Company is unable to predict the nature or the
extent of the effects on its business and earnings that fiscal or monetary
policies, economic controls or new federal or state legislation may have in
the future.
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"), and, as such, is subject to
regulation, supervision and examination by the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). The Company is required to
file annual reports with the Federal Reserve and to provide the Federal
Reserve such additional information as it may require.
The Bank, as an Indiana state bank, is supervised by the Indiana
Department of Financial Institutions (the "DFI") and the Federal Deposit
Insurance Corporation ("FDIC"). As such, the Bank is regularly examined by,
and is subject to regulations promulgated by, the DFI and the FDIC.
1
Recent and Pending Legislation
The enactment of the legislation described below has significantly
affected the banking industry generally and will have an ongoing effect on the
Company and the Bank in the future.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") reorganized and reformed the regulatory structure applicable to
financial institutions generally. FIRREA, among other things, enhanced the
supervisory and enforcement powers for the federal bank regulatory agencies,
required insured financial institutions to guaranty repayment of losses
incurred by the FDIC in connection with the failure of an affiliated financial
institution, required financial institutions to provide their primary federal
regulator with notice (under certain circumstances) of changes in senior
management and broadened authority for bank holding companies to acquire
savings institutions.
Under FIRREA, federal banking regulators have greater flexibility to
bring enforcement actions against insured institutions and
institution-affiliated parties, including cease and desist orders, prohibition
orders, civil money penalties, termination of insurance and the imposition of
operating restrictions and capital plan requirements. These enforcement
actions, in general, may be initiated for violations of laws and regulations
and unsafe or unsound practices. FIRREA also requires, except under certain
circumstances, public disclosure of final enforcement actions by the federal
banking agencies.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
adopted to recapitalize the FDIC's Bank Insurance Fund ("BIF"), which in
general insures the deposits of commercial banks such as the Bank, and imposes
certain supervisory and regulatory reforms on insured depository institutions.
FDICIA includes provisions, among others, to (i) increase the FDIC's line of
credit with the U.S. Treasury in order to provide the FDIC with additional
funds to cover the losses of federally insured banks, (ii) reform the deposit
insurance system, including the implementation of risk-based deposit insurance
premiums, (iii) establish a format for closer monitoring of financial
institutions to enable prompt corrective action by banking regulators when a
financial institution begins to experience financial difficulty and create
five capital levels for financial institutions ("well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized") that would impose more scrutiny and
restrictions on less capitalized institutions, (iv) require the federal
banking regulators to set operational and managerial standards for all insured
depository institutions and their holding companies, including limits on
excessive compensation to executive officers, directors, employees and
principal shareholders, and establish standards for loans secured by real
estate, (v) adopt certain accounting reforms, including the authority of
banking regulators to require independent audits of banks and thrifts, and
require on-site examinations of federally insured institutions within
specified timeframes, (vi) revise risk-based capital standards to ensure that
they (a) take adequate account of interest-rate changes, concentration of
credit risk and the risks of nontraditional activities, and (b) reflect the
actual performance and expected risk of loss of multi-family mortgages, and
(vii) restrict state-chartered banks from engaging in activities not permitted
for national banks unless they are adequately capitalized and have FDIC
approval. FDICIA also permits the FDIC to make special assessments on insured
depository institutions, in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or for any other purpose the FDIC deems necessary
and grants authority to the FDIC to establish semiannual assessment rates on
financial institutions that are members of either the BIF or the Savings
Association Insurance Fund ("SAIF"), which in general insures the deposits of
thrifts, in order to maintain these funds at the designated reserve ratios.
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FDICIA also contained the Truth in Savings Act, which requires clear and
uniform disclosure of the rates of interest payable on deposit accounts by
depository institutions, and the fees assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims
of financial institutions with regard to deposit accounts and products.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Act") in September 1994. Beginning in September
1995, bank holding companies have the right to expand, by acquiring existing
banks, into all states, even those which had theretofore restricted entry. The
legislation also provides that holding companies have the right, starting on
June 1, 1997, to convert the banks that they own in different states to
branches of a single bank. A state was permitted to "opt out" of this law but
was not permitted to "opt out" of the law allowing bank holding companies from
other states to enter the state. A state may also determine, at its option, to
permit interstate branching through the establishment of de novo branches by
out-of-state banks. The State of Indiana did not "opt out" of the interstate
branching provisions of the Interstate Act and has authorized the
establishment of de novo branches of out-of-state banks. The Interstate Act
also establishes limits on acquisitions by large banking organizations by
providing that no acquisition may be undertaken if it would result in the
organization having deposits exceeding either 10% of all bank deposits in the
United States or 30% of the bank deposits in the state in which the
acquisition would occur.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "EGRPRA")
was signed into law on September 30, 1996. EGRPRA streamlined the non-banking
activities application process for well-capitalized and well-managed bank
holding companies. Under EGRPRA, qualified bank holding companies may commence
a regulatorily approved non-banking activity without prior notice to the
Federal Reserve; written notice is required within 10 days after commencing
the activity. Under EGRPRA, the prior notice period is reduced to 12 days in
the event of any non-banking acquisition or share purchase, assuming the size
of the acquisition does not exceed 10% of risk-weighted assets of the
acquiring bank holding company and the consideration does not exceed 15% of
Tier 1 capital. EGRPRA also provided for the recapitalization of the SAIF in
order to bring it into parity with the BIF.
Pending Legislation. Because of concerns relating to competitiveness and
the safety and soundness of the banking industry, Congress is considering a
number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. It cannot be
predicted whether or in what form any of these proposals will be adopted or
the extent to which the business of the Company may be affected thereby.
Bank and Bank Holding Company Regulation
As noted above, both the Company and the Bank are subject to extensive
regulation and supervision.
Bank Holding Company Act. Under the BHCA, the activities of a bank
holding company, such as the Company, are limited to business so closely
related to banking, managing or controlling banks as to be a proper incident
thereto. The Company is also subject to capital requirements applied on a
consolidated basis in a form substantially similar to those required of the
Bank. The BHCA requires a bank holding company to obtain approval from the
Federal Reserve before (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless
it already owns or controls the majority of such shares), (ii) acquiring all
or substantially all of the assets of another bank or bank holding company, or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve will not approve any acquisition, merger or consolidation that would
3
have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served.
The Federal Reserve also considers capital adequacy and other financial and
managerial factors in reviewing acquisitions or mergers.
The BHCA also prohibits a bank holding company, with certain limited
exceptions, (i) from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a
bank or bank holding company, or (ii) from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by
Federal Reserve regulation or order, have been identified as activities
closely related to the business of banking or of managing or controlling
banks. The Federal Reserve, in making such determination, considers whether
the performance of such activities by a bank holding company can be expected
to produce benefits to the public such as greater convenience, increased
competition or gains in efficiency in resources, which can be expected to
outweigh the risks of possible adverse effects such as decreased or unfair
competition, conflicts of interest or unsound banking practices.
Insurance of Accounts. The FDIC provides insurance, through the BIF, to
deposit accounts at the Bank to a maximum of $100,000 for each insured
depositor. On January 1, 1996, the FDIC adopted an amendment to its BIF
risk-based assessment schedule which effectively eliminated deposit insurance
assessments for most commercial banks and other depository institutions with
deposits insured by the BIF only. Following enactment of EGRPRA, the overall
assessment rate for 1997 for institutions in the lowest risk-based premium
category was revised to equal 1.29 cents for each $100 of BIF-assessable
deposits. Deposits insured by the SAIF continue to be assessed at a higher
rate. At this time, the BIF deposit insurance assessment rate for institutions
in the lowest risk-based premium category is zero, and the additional
assessments paid by institutions in this category are used to service debt
issued by the Financing Corporation, a federal agency established to finance
the recapitalization of the former Federal Savings and Loan Insurance
Corporation.
Regulations Governing Capital Adequacy. The federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation
of bank holding companies and banks. If the capital falls below the minimum
levels established by these guidelines, the bank holding company or bank may
be denied approval to acquire or establish additional banks or nonbank
businesses or to open facilities.
The Federal Reserve and the FDIC adopted risk-based capital guidelines
for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items are assigned to broad risk categories, each with appropriate weights.
The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items. Under these guidelines, all
bank holding companies and federally regulated banks must maintain a minimum
risk-based total capital ratio equal to 8%, of which at least one-half must be
Tier 1 capital.
The Federal Reserve also has implemented a leverage ratio, which is Tier
1 capital to total assets, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding company may leverage
its equity capital base. The Federal Reserve requires a minimum leverage ratio
of 3%. For all but the most highly-rated bank holding companies and for bank
holding companies seeking to expand, however, the Federal Reserve expects that
additional capital sufficient to increase the ratio by at least 100 to 200
basis points will be maintained.
4
Management of the Company believes that the risk-weighting of assets and
the risk-based capital guidelines do not have a material adverse impact on the
Company's operations or on the operations of the Bank.
Community Reinvestment Act. The Community Reinvestment Act of 1977
requires that, in connection with examinations of financial institutions
within their jurisdiction, the federal banking regulators must evaluate the
record of the financial institutions in meeting the credit needs of their
local communities, including low and moderate income neighborhoods, consistent
with the safe and sound operation of those banks. These factors are also
considered in evaluating mergers, acquisitions and applications to open a
branch or facility.
Regulations Governing Extensions of Credit. The Bank is subject to
certain restrictions imposed by the Federal Reserve Act on extensions of
credit to the bank holding company or its subsidiaries, or investments in
their securities and on the use of their securities as collateral for loans to
any borrowers. These regulations and restrictions may limit the ability of the
Company to obtain funds from the Bank for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses.
Further, under the BHCA and certain regulations of the Federal Reserve, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tying arrangements in connection with any extension of credit, lease or sale
of property or furnishing of services.
The Bank is also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors,
principal shareholders or any related interest of such persons. Extensions of
credit (i) must be made on substantially the same terms, including
interest-rates and collateral as, and following credit underwriting procedures
that are not less stringent than, those prevailing at the time for comparable
transactions with persons not covered above and who are not employees, and
(ii) must not involve more than the normal risk of repayment or present other
unfavorable features. The Bank is also subject to certain lending limits and
restrictions on overdrafts to such persons.
Reserve Requirements. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time deposits. Reserves of 3% must be maintained against total
transaction accounts of $49.3 million or less (subject to adjustment by the
Federal Reserve) and an initial reserve of $1,479,000 plus 10% (subject to
adjustment by the Federal Reserve to a level between 8% and 14%) must be
maintained against that portion of total transaction accounts in excess of
such amount. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve may be used to satisfy liquidity requirements.
Dividends. The ability of the Bank to pay dividends and management fees
is limited by various state and federal laws, by the regulations promulgated
by its primary regulators and by the principles of prudent bank management.
Monetary Policy and Economic Control. The commercial banking business in
which the Company engages is affected not only by general economic conditions,
but also by the monetary policies of the Federal Reserve. Changes in the
discount rate on member bank borrowing, availability of borrowing at the
"discount window," open market operations, the imposition of changes in
reserve requirements against member banks deposits and assets of foreign
branches, and the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates are some of the instruments
of monetary policy available to the Federal Reserve. These monetary policies
are used in varying combinations to influence overall growth and distributions
of bank loans, investments and deposits, and such use may affect interest
rates charged on loans or paid on deposits. The monetary policies of the
Federal Reserve have had a significant effect on the operating results of
commercial banks and are expected to do so in the future. The monetary
policies of the Federal Reserve are influenced by various factors, including
inflation, unemployment, short-term and long-term changes in the international
trade balance and in the fiscal policies of the U.S. Government. Future
5
monetary policies and the effect of such policies on the future business and
earnings of the Company and the Bank cannot be predicted.
Forward-looking Statements
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Statements contained in this Report and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases
and in oral statements made with the approval of an authorized executive
officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). There can be no assurance, in light of certain risks and
uncertainties, that such forward-looking statements will in fact transpire.
The following important factors, risks and uncertainties, among others, could
cause actual results to differ materially from such forward-looking
statements:
Credit risk: Approximately 59.5% and 60.1% of the Company's loans at
December 31, 1997 and December 31, 1996, respectively, were
commercial in nature (including agri-business and agricultural
loans), and, as of both December 31, 1997 and December 31, 1996, the
Company estimates that in excess of 90% of the Bank's commercial,
industrial, agri-business and agricultural real estate mortgage
loans, real estate construction mortgage and consumer loans are made
within the Bank's basic trade area. Changes in local and national
economic conditions could adversely affect credit quality in the
Company's loan portfolio.
Interest rate risk: Although the Company actively manages its
interest rate sensitivity, such management is not an exact science.
Rapid increases or decreases in interest rates could adversely
impact the Company's net interest margin if changes in its cost of
funds do not correspond to the changes in income yields.
Competition: The Company's activities involve competition with other
banks as well as other financial institutions and enterprises. Also,
the financial service markets have and likely will continue to
experience substantial changes, which could significantly change the
Company's competitive environment in the future.
Legislative and regulatory environment: The Company operates in a
rapidly changing legislative and regulatory environment. It cannot
be predicted how or to what extent future developments in these
areas will affect the Company. These developments could negatively
impact the Company through increased operating expenses for
compliance with new laws and regulations, restricted access to new
products and markets, or in other ways.
General business and economic trends: General business and economic
trends, including the impact of inflation levels, influence the
Company's results in numerous ways, including operating expense
levels, deposit and loan activity, and availability of trained
individuals needed for future growth.
The use of estimates and assumptions: In preparing financial
statements in conformity with generally accepted accounting
principles, management must make estimates and assumptions that
affect the amounts reported therein and the disclosures provided.
Actual results could differ from these estimates.
The foregoing list should not be construed as exhaustive and the Company
disclaims any obligation to subsequently update or revise any forward-looking
6
statements after the date of this Report.
Material Changes and Business Developments
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From the date of the Registrant's incorporation, February 8, 1983, until
October 31, 1983, the Registrant conducted no business and had no assets
(except nominal assets necessary to complete the acquisition of the Bank). The
Registrant has conducted no business since October 31, 1983, except that
incident to its ownership of the stock of the Bank, the collection of
dividends from the Bank, and the disbursement of dividends to the Registrant's
shareholders. During the period from 1985 to 1987, the Registrant owned all of
the outstanding shares of Lakeland Mortgage Corp., a mortgage lending and
servicing corporation doing business in Indiana. Lakeland Mortgage Corp.
discontinued business operations on December 15, 1987. The Registrant
continued to own all of the stock of Lakeland Mortgage Corp. until 1992,
during which year, Lakeland Mortgage Corp. was liquidated and all stock was
redeemed.
Lakeland Trust, a statutory business trust, was formed under Delaware law
pursuant to a trust agreement dated July 24, 1997 and a certificate of trust
filed with the Delaware Secretary of State on July 24, 1997. Lakeland Trust
exists for the exclusive purposes of (i) issuing the Trust Securities
representing undivided beneficial interests in the assets of Lakeland Trust,
(ii) investing the gross proceeds of the Trust Securities in the Subordinated
Debentures issued by the Company, and (iii) engaging in only those activities
necessary, advisable, or incidental thereto. The Subordinated Debentures and
payments thereunder are the only assets of Lakeland Trust, and payments under
the Subordinated Debentures are the only revenue of Lakeland Trust. Lakeland
Trust has a term of 55 years, but may be terminated earlier as provided in the
trust agreement.
Competition
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The Bank was originally organized in 1872 and has continuously operated
under the laws of the State of Indiana since its organization. The Bank is a
full service bank providing both commercial and personal banking services.
Bank products offered include interest and noninterest bearing demand
accounts, savings and time deposit accounts, sale of securities under
agreements to repurchase, discount brokerage, commercial loans, mortgage
loans, consumer loans, letters of credit, and a wide range of trust services.
The interest rates for both deposits and loans, as well as the range of
services provided, are nearly the same for all banks competing within the
Bank's service area.
The Bank's service area is north central Indiana. In addition to the
banks located within its service area, the Bank also competes with savings and
loan associations, credit unions, farm credit services, finance companies,
personal loan companies, insurance companies, money market funds, and other
non-depository financial intermediaries. Also, financial intermediaries such
as money market mutual funds and large retailers are not subject to the same
regulations and laws that govern the operation of traditional depository
institutions and accordingly may have an advantage in competing for funds.
The Bank competes with other major banks for the large commercial deposit
and loan accounts. The Bank is presently subject to an aggregate maximum loan
limit to any single account in the amount of $9,141,000 pursuant to Indiana
law. This maximum prohibits the Bank from providing a full range of banking
services to those businesses or personal accounts whose borrowing periodically
exceed this amount. In order to retain at least a portion of the bank business
of these large borrowers, the Bank maintains correspondent relationships with
other financial institutions. The Bank also participates with local and other
banks in the placement of large borrowings in excess of its lending limit. The
Bank is also a member of the Federal Home Loan Bank of Indianapolis in order
to broaden its mortgage lending and investment activities and to provide
additional funds, if necessary, to support these activities.
7
Foreign Operations
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The Bank has no investments with any foreign entity other than a nominal
demand deposit account which is maintained with a Canadian bank in order to
facilitate the clearing of checks drawn on banks located in that country.
There are no foreign loans.
Employees
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At December 31, 1997, the Registrant, including its subsidiary
corporation, had 388 full-time equivalent employees. Benefit programs include
a pension plan, 401(k) plan, group medical insurance, group life insurance and
paid vacations. The bank is not a party to any collective bargaining
agreement, and employee relations are considered good.
Industry Segments
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The Registrant and the Bank are engaged in a single industry and perform
a single service -- commercial banking. On the pages that follow are tables
which set forth selected statistical information relative to the business of
the Registrant.
Year 2000 Issues
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The Company relies heavily on computer technology to provide its products
and services. Competitive pressures also require the Company to invest in and
utilize current technology. Due to the reliance on this technology, the Year
2000 issue will have a pervasive effect on the Company's products, especially
those with interest calculations, and the services it provides. It will also
have a significant impact on the items necessary to remain competitive
including internal management reports, customer information, and customer
conveniences such as ATM's, telephone banking and debit cards.
The potential financial impact on the Company can be segregated into
three components; software costs, hardware costs, and other electrical and
mechanical equipment costs. For the Company, the potential software costs are
not anticipated to be material. The Company does not develop its own software
but purchases processing and software from outside vendors. The hardware the
Company uses consists primarily of personal computers, ATM's, telephone
systems, and back room equipment such as document processing and imaging
equipment. Recently the Company began updating its wide and local area
networks (WAN/LAN)and its teller platform system as part of its continuing
expansion and commitment to technology. The WAN/LAN and teller platform system
being installed are Year 2000 compliant. The costs for upgrading to Year 2000
compliant hardware, outside the normal cost of business, are not anticipated
to be material based upon the Company's initial review of its current
hardware. The costs for upgrading other electrical and mechanical equipment,
such as security equipment and HVAC (heating, ventilation, and air
conditioning) equipment, has not been determined.
The Company is taking a proactive approach to the Year 2000 issue. A Year
2000 Task Force has been formed and is comprised of representatives from all
major departments and includes involvement of an Executive Officer to provide
senior management support and to report periodically to the Board of Directors
on the Year 2000 effort. The task force has developed a general plan of action
to ensure the Company addresses the critical Year 2000 issues. A master
inventory of all software and hardware in use by the Company is being
compiled. All software vendors are being requested to provide a written
statement regarding their Year 2000 efforts and compliance. This statement has
been requested to be received no later than the end of the second quarter of
1998. FiServ, Pittsburgh, PA, is the primary data processing vendor the
Company uses. FiServ processes all the major applications for the Company
including deposits, loans, and general ledger. FiServ is one of the leading
data processing vendors for the banking industry and has indicated a
commitment to being Year 2000 compliant by December, 1998. They issue a
quarterly newsletter specifically on the Year 2000 efforts and have indicated
their systems will be audited for Year 2000 compliance by McGladrey and
Pullen.
8
The support and network software the Company uses is purchased from
outside vendors. Any software where the vendor is unable to confirm the
software is Year 2000 compliant, or does not provide a statement on Year 2000
compliance, will be evaluated to determine the potential impact of
noncompliance and availability of alternative compliant software.
As previously indicated, the hardware the Company uses primarily consists
of personal computers, ATM's and various other equipment. The majority of the
personal computers the Company uses have been purchased during the last two
years and therefore have a high probability of being Year 2000 compliant.
However, all personal computers are being tested for Year 2000 compliance. The
vendors of the ATM's and back room processing equipment used by the Company
have been contacted regarding the compliance of the models used by the
Company. All hardware failing the tests or known to be noncompliant will be
evaluated as to the possible effect of noncompliance and the need for
replacement.
All purchases of software and hardware are processed through the
MIS/Network Services Department of the Company. This is intended to ensure all
new software and hardware or upgrades are compatible with existing systems and
are Year 2000 compliant.
Other electrical and mechanical equipment will also be evaluated as to
reliance on computer software and the possible effect of the year 2000. Major
components of this equipment include security and HVAC equipment. The
Company's security officer is to review all security equipment before the end
of the third quarter, 1998 to determine the reliance on computer systems and
the potential impact of the Year 2000 issue. The Company's facilities manager
is to evaluate the other equipment such as HVAC and elevators to determine
reliance on computer systems and obtain statements as to Year 2000 compliance
from vendors as necessary.
Other areas of concern being addressed by the task force include vendors
that exchange information with the Company electronically, forms and documents
that are produced externally, and customers. The Year 2000 compliance could
have a major impact on the financial performance of the Company's customers
which could affect both deposit relationships and the customer's ability to
repay loans. All large corporate customers are being contacted regarding their
Year 2000 efforts. Other customers will be evaluated on a case-by-case basis.
Based upon the Company's initial evaluations, becoming Year 2000
compliant is not anticipated to have a material impact on the Company's
financial statements. In addition, management believes it is taking the
necessary steps to ensure the Company's systems will be Year 2000 compliant in
a timely manner. On February 24, 1998, the FDIC reviewed the Company's Year
2000 efforts. No significant concerns were brought to management's attention
during the review.
(Intentionally left blank)
9
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
1997 1996
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Income Yield* Balance Income Yield*
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Earning assets:
Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Loans:
Taxable ** 410,798 38,265 9.31 349,336 32,724 9.37
Tax Exempt * 3,235 345 10.66 3,475 373 10.73
Investments:*
Available-for-sale 80,627 5,396 6.69 84,145 5,371 6.38
Held-to-maturity 136,618 9,244 6.77 119,892 8,065 6.73
Short-term investments 5,275 284 5.38 4,250 226 5.32
Interest bearing deposits 234 19 8.12 213 19 8.92
---------- ---------- ---------- ----------
Total Earning Assets 636,787 53,553 8.41% 561,311 46,778 8.33%
========== ==========
Nonearning assets:
Cash and due from banks 27,479 0 24,533 0
Premises and equipment 17,961 0 14,724 0
Other assets 11,735 0 9,424 0
Less: allowance for loan losses (5,302) 0 (5,382) 0
---------- ----------
Total assets $ 688,660 $ 53,553 $ 604,610 $ 46,778
========== ========== ========== ==========
<FN>
* Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1997 and 1996. Tax equivalent rate
for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to
nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
**Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1997, and
1996, are included as taxable loan interest income.
</FN>
10
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
1996 1995
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Income Yield* Balance Income Yield*
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Earning assets:
Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Loans:
Taxable ** 349,336 32,724 9.37 305,806 29,859 9.76
Tax Exempt * 3,475 373 10.73 3,435 389 11.32
Investments:*
Available-for-sale 84,145 5,371 6.38 67,230 4,223 6.28
Held-to-maturity 119,892 8,065 6.73 120,282 8,072 6.71
Short-term investments 4,250 226 5.32 3,293 192 5.83
Interest bearing deposits 213 19 8.92 108 10 9.26
---------- ---------- ---------- ----------
Total earning assets 561,311 46,778 8.33% 500,154 42,745 8.55%
========== ==========
Nonearning assets:
Cash and due from banks 24,533 0 20,725 0
Premises and equipment 14,724 0 12,386 0
Other assets 9,424 0 7,668 0
Less: allowance for loan losses (5,382) 0 (5,238) 0
---------- ----------- ---------- ----------
Total assets $ 604,610 $ 46,778 $ 535,695 $ 42,745
========== =========== ========== ==========
<FN>
* Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1996 and 1995. Tax equivalent rate
for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to
nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
**Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1996, and
1995, are included as taxable loan interest income.
</FN>
11
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
1997 1996
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Expense Rate Balance Expense Rate
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Savings deposits $ 45,278 $ 1,152 2.54% $ 43,847 $ 1,118 2.55%
Interest bearing checking accounts 55,063 1,180 2.14 53,625 1,178 2.20
Time deposits
In denominations under $100,000 230,171 12,406 5.39 208,499 11,229 5.39
In denominations over $100,000 109,759 6,445 5.87 86,137 4,886 5.67
Miscellaneous short-term borrowings 90,097 4,921 5.46 78,823 4,213 5.34
Long-term borrowings 29,655 1,956 6.60 19,624 1,113 5.67
--------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 560,023 28,060 5.01% 490,555 23,737 4.84%
========== ==========
Non-interest bearing liabilities
and stockholders' equity
Demand deposits 77,276 0 69,459 0
Other liabilities 6,418 0 5,553 0
Stockholders' equity 44,863 0 39,043 0
---------- ---------- ---------- ----------
Total liabilities and stock-
holders' equity $ 688,580 $ 28,060 4.08% $ 604,610 $ 23,737 3.93%
========== ========== ========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 25,493 4.00% $ 23,041 4.10%
========== ========== ========== ==========
12
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
1996 1995
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Expense Rate Balance Expense Rate
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Savings deposits $ 43,847 $ 1,118 2.55% $ 46,123 $ 1,069 2.32%
Interest bearing checking accounts 53,625 1,178 2.20 55,355 1,333 2.41
Time deposits
In denominations under $100,000 208,499 11,229 5.39 177,992 10,035 5.64
In denominations over $100,000 86,137 4,886 5.67 73,449 4,410 6.00
Miscellaneous short-term borrowings 78,823 4,213 5.34 66,610 3,803 5.71
Long-term borrowings 19,624 1,113 5.67 17,432 992 5.69
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 490,555 23,737 4.84% 436,961 21,642 4.95%
========== ==========
Non-interest bearing liabilities
and stockholders' equity
Demand deposits 69,459 0 60,753 0
Other liabilities 5,553 0 4,897 0
Stockholders' equity 39,043 0 33,084 0
---------- ---------- ---------- ----------
Total liabilities and stock-
holders' equity $ 604,610 $ 23,737 3.93% $ 535,695 $ 21,642 4.04%
========== ========== ========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 23,041 4.10% $ 21,103 4.22%
========== ========== ========== ==========
13
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(Fully Taxable Equivalent Basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
1997 Over (under) 1996(1) 1996 Over (under) 1995(1)
------------------------------------ ------------------------------------
Volume Rate Total Volume Rate Total
---------- ---------- ---------- ---------- ---------- ----------
INTEREST AND LOAN FEE INCOME(2)
Loans:
Taxable $ 5,724 $ (183) $ 5,541 $ 4,009 $ (1,144) $ 2,865
Tax exempt (26) (2) (28) 5 (21) (16)
Investments:
Available-for-sale (230) 255 25 1,079 69 1,148
Held-to-maturity 1,131 48 1,179 (26) 19 (7)
Short-term investments 1 57 58 49 (15) 34
Interest bearing deposits 1 (1) 0 9 0 9
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 6,601 174 6,775 5,125 (1,092) 4,033
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE
Savings deposits 35 (1) 34 (48) 97 49
Interest bearing checking accounts 31 (29) 2 (41) (114) (155)
Time deposits
In denominations under $100,000 1,168 9 1,177 1,616 (422) 1,194
In denominations over $100,000 1,382 177 1,559 700 (224) 476
Miscellaneous short-term borrowings 614 94 708 629 (219) 410
Long-term borrowings 640 203 843 124 (3) 121
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 3,870 453 4,323 2,980 (885) 2,095
---------- ---------- ---------- ---------- ---------- ----------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 2,801 $ (349) $ 2,452 $ 2,145 $ (207) $ 1,938
========== ========== ========== ========== ========== ==========
<FN>
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 1997, 1996 and 1995. The changes in volume represent "changes in volume times the old rate". The changes in rate
represent "changes in rate times old volume". The changes in rate/volume were also calculated by "change in rate times change
in volume" and allocated consistently based upon the relative absolute values of the changes in volume and changes in rate.
(2) Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1997, 1996 and 1995. Tax
equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment
applicable to nondeductible interest expense.
</FN>
14
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
----------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
Securities available-for-sale:
U.S. Treasury securities $ 28,833 $ 29,286 $ 31,604 $ 31,804 $ 27,549 $ 27,844
U.S. Government agencies and corporations 100 100 500 507 2,150 2,191
Mortgage-backed securities 52,746 53,309 46,002 46,332 48,302 48,843
Obligations of state and political
subdivisions 1,787 1,904 2,081 2,167 2,076 2,176
Other debt securities 0 0 1,000 1,032 999 1,066
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities available-for-sale $ 83,466 $ 4,599 $ 81,187 $ 81,842 $ 81,076 $ 82,120
========== ========== ========== ========== ========== ==========
Securities held-to-maturity:
U.S. Treasury securities $ 21,170 $ 21,501 $ 17,020 $ 17,077 $ 13,611 $ 13,576
U.S. Government agencies and corporations 2,176 2,246 2,262 2,362 2,898 3,033
Mortgage-backed securities 116,788 117,185 83,811 83,719 77,319 77,471
Obligations of state and political
subdivisions 22,418 24,044 21,172 22,095 19,047 20,077
Other debt securities 1,007 1,103 1,009 1,120 1,013 1,171
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities held-to-maturity $ 163,559 $ 166,079 $ 125,274 $ 126,373 $ 113,888 $ 115,328
========== ========== ========== ========== ========== ==========
15
ANALYSIS OF SECURITIES (cont.)
(Fully Tax Equivalent Basis)
(in thousands of dollars)
The maturity distribution (2) and weighted average yields (1) for debt securities portfolio at December 31, 1997, are as
follows:
After One After Five
Within Year Years Over
One Within Five Within Ten Ten
Year Years Years Years
---------- ---------- ---------- ----------
Securities available-for-sale:
U.S. Treasury securities
Book value $ 5,509 $ 23,324 $ 0 $ 0
Yield 4.83% 6.63%
Government agencies and corporations
Book value 0 100 0 0
Yield 7.22
Mortgage-backed securities
Book value 0 6,819 36,736 9,191
Yield 7.08 6.98 6.50
Obligations of state and political
subdivisions
Book value 298 0 1,489 0
Yield 11.22 8.86
Other debt securities
Book value 0 0 0 0
Yield
---------- ---------- ---------- ----------
Total debt securities available-for-sale:
Book value $ 5,807 $ 30,243 $ 38,225 $ 9,191
Yield 5.16% 6.73% 7.04% 6.50%
========== ========== ========== ==========
Securities held-to-maturity:
U.S. Treasury securities
Book value $ 5,002 $ 16,168 $ 0 $ 0
Yield 4.99% 6.37%
Government agencies and corporations
Book value 100 2,076 0 0
Yield 9.32 7.71
Mortgage-backed securities
Book value 309 18,943 78,339 19,197
Yield 5.42 7.11 6.53 6.33
Obligations of state and political
subdivisions
Book value 8 851 1,737 19,822
Yield 4.76 10.26 8.61 8.77
Other debt securities
Book value 0 1,007 0 0
Yield 9.62
---------- ---------- ---------- ----------
Total debt securities held-to-maturity:
Book value $ 5,419 $ 39,045 $ 80,076 $ 39,019
Yield 5.10% 7.30% 6.57% 7.57%
========== ========== ========== ==========
<FN>
(1) Tax exempt income converted to a fully taxable equivalent basis at a 34% rate.
(2) The maturity distribution of mortgage-backed securities is based upon anticipated payments as computed by using the historic
average repayment speed from date of issue.
(3) There are no investments in securities of any one issuer that exceed 10% of stockholders' equity.
</FN>
16
ANALYSIS OF LOAN PORTFOLIO
Analysis of Loans Outstanding
(in thousands of dollars)
The Registrant segregates its loan portfolio into four basic segments: commercial (including agri-business and agricultural
loans), real estate mortgages, installment and credit cards (including personal line of credit loans). The loan portfolio as of
December 31, 1997, 1996, 1995, 1994 and 1993 is as follows:
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Commercial loans:
Taxable $ 269,887 $ 226,190 $ 192,359 $ 173,325 $ 144,274
Tax exempt 3,065 3,414 3,636 3,207 4,501
---------- ---------- ---------- ---------- ----------
Total commercial loans 272,952 229,604 195,995 176,532 148,775
Real estate mortgage loans 65,368 60,949 55,948 47,296 49,816
Installment loans 89,107 71,398 58,175 48,228 46,914
Credit card and line of credit loans 31,207 20,314 17,499 15,900 14,680
---------- ---------- ---------- ---------- ----------
Total loans 458,634 382,265 327,617 287,956 260,185
Less allowance for loan losses 5,308 5,306 5,472 4,866 4,010
---------- ---------- ---------- ---------- ----------
Net loans $ 453,326 $ 376,959 $ 322,145 $ 283,090 $ 256,175
========== ========== ========== ========== ==========
<FN>
The real estate mortgage loan portfolio includes construction loans totaling $3,089, $1,647, $1,224, $426 and $223 as of
December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The above loan classifications are based on the nature of the loans as
of the loan origination date, and are independent as to the use of the funds by the borrower. There are no foreign loans included
in the loan portfolio.
</FN>
17
ANALYSIS OF LOAN PORTFOLIO (cont.)
Analysis of Loans Outstanding (cont.)
(in thousands of dollars)
Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules included in
the related loan agreements or upon scheduled maturity of each principal payment. The following table indicates the rate
sensitivity of the loan portfolio as of December 31, 1997. The table includes the real estate loans held-for-sale and assumes
these loans will not be sold during the various time horizons.
Credit
Card
Real and Line
Commercial Estate Installment of Credit Total Percent
---------- ---------- ----------- ---------- ---------- ----------
Immediately adjustable interest rates
or original maturity of one day $ 193,365 $ 5,730 $ 9,171 $ 31,207 $ 239,473 52.0%
Other within one year 28,298 41,895 25,619 0 95,812 20.8
After one year, within five years 37,216 11,180 48,105 0 96,501 21.0
Over five years 13,353 7,741 6,212 0 27,306 6.0
Nonaccrual loans 720 338 0 0 1,058 0.2
---------- ---------- ----------- ---------- ---------- ----------
Total loans $ 272,952 $ 66,884 $ 89,107 $ 31,207 $ 460,150 100.0%
========== ========== =========== ========== ========== ==========
<FN>
A portion of the Bank's loans are short-term maturities. At maturity, credits are reviewed, and if renewed, are renewed at
rates and conditions that prevail at the time of maturity.
Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or
adjustable interest rates as of December 31, 1997 amounted to $114,002 and $106,048 respectively.
</FN>
18
ANALYSIS OF LOAN PORTFOLIO (cont.)
Review of Nonperforming Loans
(in thousands of dollars)
The following is a summary of nonperforming loans as of December 31, 1997, 1996, 1995, 1994 and 1993.
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 0 $ 126 $ 122 $ 0 $ 1
Commercial and industrial loans 236 22 69 16 315
Loans to individuals for household,
family and other personal expenditures 69 68 18 19 346
Loans to finance agriculture production
and other loans to farmers 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total past due loans 305 216 209 35 662
---------- ---------- ---------- ---------- ----------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 337 155 76 18 0
Commercial and industrial loans 720 229 456 0 0
Loans to individuals for household,
family and other personal expenditures 0 0 0 0 0
Loans to finance agriculture production
and other loans to farmers 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans 1,057 384 532 18 0
---------- ---------- ---------- ---------- ----------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,377 1,284 1,432 1,484 0
---------- ---------- ---------- ---------- ----------
Total nonperforming loans $ 2,739 $ 1,884 $ 2,173 $ 1,537 $ 662
========== ========== ========== ========== ==========
<FN>
Nonearning assets of the Corporation include nonaccrual loans (as indicated above), nonaccrual investments, other real
estate, and repossessions which amounted to $1,317 at December 31, 1997.
</FN>
19
ANALYSIS OF LOAN PORTFOLIO (cont.)
Comments Regarding Nonperforming Assets
PART A - CONSUMER LOANS
- -----------------------
Consumer installment loans, except those loans that are secured by real
estate, are not placed on a nonaccrual status since these loans are
charged-off when they have been delinquent from 90 to 180 days, and when the
related collateral, if any, is not sufficient to offset the indebtedness.
Advances under Mastercard and Visa programs, as well as advances under all
other consumer lines of credit programs, are charged-off when collection
appears doubtful.
PART B - NONPERFORMING LOANS
- ----------------------------
When a loan is classified as a nonaccrual loan, interest on the loan is
no longer accrued and all accrued interest receivable is charged off. It is
the policy of the Bank that all unsecured loans (i.e. loans for which the
collateral is insufficient to cover all principal and accrued interest) will
be reclassified as nonperforming loans to the extent they are unsecured, on or
before the date when the loan becomes 90 days delinquent. Thereafter, interest
is recognized and included in income only when received.
As of December 31, 1997, loans totaling $1,058,000 were on nonaccrual
status.
PART C - TROUBLED DEBT RESTRUCTURED LOANS
- -----------------------------------------
Loans renegotiated as troubled debt restructuring are those loans for
which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the terms of the loan.
Loans renegotiated as troubled debt restructurings totaled $1,377,000 as
of December 31, 1997. Interest income of $92,000 was recognized in 1997. Had
these loans been performing under the original contract terms, an additional
$50,000 would have been reflected in interest income during 1997. The Bank is
not committed to lend additional funds to debtors whose loans have been
modified.
PART D - OTHER NONPERFORMING ASSETS
- -----------------------------------
The management of the Bank is of the opinion that there are no
significant foreseeable losses relating to substandard or nonperforming
assets, except as discussed above.
PART E - LOAN CONCENTRATIONS
- ----------------------------
There were no loan concentrations within industries which exceeded ten
percent of total assets. It is estimated that over 90% of all the Bank's
commercial, industrial, agri-business and agricultural real estate mortgage,
real estate construction mortgage and consumer loans are made within its basic
trade area.
Basis For Determining Allowance For Loan Losses
Management is responsible for determining the adequacy of the allowance
for loan losses. This responsibility is fulfilled by management in the
following ways:
1. Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectibility factors and assesses
the requirement for specific reserves on such credits. For those loans not
subject to specific reviews, management reviews previous loan loss experience
to establish historical ratios and trends in charge-offs by loan category. The
ratios of net charge-offs to particular types of loans enable management to
20
estimate charge-offs in future periods by loan category and thereby establish
appropriate reserves for loans not specifically reviewed.
2. Management reviews the current and anticipated economic conditions of
its lending market to determine the effects on future loan charge-offs by loan
category, in addition to the effects on the loan portfolio as a whole.
3. Management reviews delinquent loan reports to determine risk of future
loan charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Based upon the above described policy and objectives, $269,000, $120,000
and $120,000 were charged to the provision for loan losses and added to the
allowance for loan losses in 1997, 1996 and 1995, respectively.
The allocation of the allowance for loan losses to the various lending
areas is performed by management in relation to perceived exposure to loss in
the various loan portfolios. However, the allowance for loan losses is
available in its entirety to absorb losses in any particular loan category.
(Intentionally Left Blank)
21
ANALYSIS OF LOAN PORTFOLIO (cont.)
Summary of Loan Loss (in thousands of dollars)
Following is a summary of the loan loss experience for the years ended December 31, 1997, 1996, 1995, 1994 and 1993.
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Amount of loans outstanding, December 31, $ 458,634 $ 382,265 $ 327,617 $ 287,956 $ 260,185
========== ========== ========== ========== ==========
Average daily loans outstanding during the
year ended December 31, $ 414,033 $ 352,811 $ 309,241 $ 271,391 $ 240,466
========== ========== ========== ========== ==========
Allowance for loan losses, January 1, $ 5,306 $ 5,472 $ 4,866 $ 4,010 $ 3,095
---------- ---------- ---------- ---------- ----------
Loans charged-off
Commercial 99 171 137 27 99
Real Estate 33 0 48 0 4
Installment 190 158 112 93 97
Credit cards and personal credit lines 37 39 58 15 28
---------- ---------- ---------- ---------- ----------
Total loans charged-off 359 368 355 135 228
---------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged-off
Commercial 18 12 26 107 40
Real Estate 0 0 0 1 1
Installment 66 54 63 81 56
Credit cards and personal credit lines 8 16 6 7 6
---------- ---------- ---------- ---------- ----------
Total recoveries 92 82 95 196 103
---------- ---------- ---------- ---------- ----------
Net loans charged-off 267 286 260 (61) 125
Purchase loan adjustment 0 0 746 0 250
Provision for loan loss charged to expense 269 120 120 795 790
---------- ---------- ---------- ---------- ----------
Balance December 31, $ 5,308 $ 5,306 $ 5,472 $ 4,866 $ 4,010
========== ========== ========== ========== ==========
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial 0.02% 0.03% 0.03% (0.03)% 0.02%
Real Estate 0.01 0.01 0.01 0.00 0.00
Installment 0.03 0.00 0.02 0.01 0.02
Credit cards and personal credit lines 0.01 0.04 0.02 0.00 0.01
---------- ---------- ---------- ---------- ----------
Total 0.07% 0.08% 0.08% (0.02)% 0.05%
========== ========== ========== ========== ==========
Ratio of allowance for loan losses to
nonperforming assets 176.99% 204.31% 192.20% 208.48% 131.86%
========== ========== ========== ========== ==========
22
ANALYSIS OF LOAN PORTFOLIO (cont.)
Allocation of Allowance for Loan Losses
(in thousands of dollars)
The following is a summary of the allocation for loan losses as of December 31, 1997, 1996, 1995, 1994 and 1993.
1997 1996 1995
----------------------- ----------------------- -----------------------
Allowance Loans as Allowance Loans as Allowance Loans as
For Percentage For Percentage For Percentage
Loan of Gross Loan of Gross Loan of Gross
Losses Loans Losses Loans Losses Loans
---------- ---------- ---------- ---------- ---------- ----------
Allocated allowance for loan losses
Commercial $ 1,341 59.52 $ 1,213 60.07 $ 811 59.82
Real Estate 131 14.25 123 15.94 112 17.08
Installment 673 19.43 530 18.68 376 17.76
Credit cards and personal credit lines 103 6.80 151 5.31 112 5.34
---------- ---------- ---------- ---------- ---------- ----------
Total allocated allowance for loan losses 2,248 100.00 2,017 100.00 1,411 100.00
========== ========== ==========
3,060 3,289 4,061
---------- ---------- ----------
Total allowance for loan losses $ 5,308 $ 5,306 $ 5,472
========== ========== ==========
1994 1993
----------------------- -----------------------
Allowance Loans as Allowance Loans as
For Percentage For Percentage
Loan of Gross Loan of Gross
Losses Loans Losses Loans
---------- ---------- ---------- ----------
Allocated allowance for loan losses
Commercial $ 665 61.31 $ 1,120 57.18
Real Estate 95 16.42 108 19.15
Installment 311 16.75 302 18.04
Credit cards and personal credit lines 101 5.52 95 5.63
---------- ---------- ---------- ----------
Total allocated allowance for loan losses 1,172 100.00 1,625 100.00
========== ==========
3,694 2,385
---------- ----------
Total allowance for loan losses $ 4,866 $ 4,010
========== ==========
23
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 1997, 1996 and 1995, and the average rates paid on those deposits
are summarized in the following table:
1997 1996 1995
----------------------- ----------------------- -----------------------
Average Average Average Average Average Average
Daily Rate Daily Rate Daily Rate
Balance Paid Balance Paid Balance Paid
---------- ---------- ---------- ---------- ---------- ----------
Demand deposits $ 77,276 0.00 $ 69,459 0.00 $ 60,753 0.00
Savings accounts:
Regular savings 45,278 2.54 43,847 2.55 46,123 2.32
Interest bearing checking 55,063 2.14 53,625 2.20 55,355 2.41
Time deposits:
Deposits of $100,000 or more 109,759 5.87 86,137 5.67 73,449 6.00
Other time deposits 230,171 5.39 208,499 5.39 177,992 5.64
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 517,547 4.09 $ 461,567 3.99 $ 413,672 4.07
========== ========== ========== ========== ========== ==========
As of December 31, 1997 time certificates of deposit in denominations of $100,000 or more will mature as follows:
Within three months $ 64,990
Over three months, within six months 19,329
Over six months, within twelve months 14,348
Over twelve months 9,830
----------
Total time certificates of deposit in
denominations of $100,000 or more $ 108,497
==========
24
QUALITATIVE MARKET RISK DISCLOSURE
Management's Discussion and Analysis of Financial Condition and Results
of Operations appears under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the 1997 Annual Report
and is incorporated herein by reference in response to this item. The
Registrant's primary market risk exposure is interest rate risk. The
Registrant does not have a material exposure to foreign currency exchange rate
risk, does not own any derivative financial instruments and does not maintain
a trading portfolio.
(Intentionally Left Blank)
25
QUANTITATIVE MARKET RISK DISCLOSURE
The following table provides information about the Company's financial instruments used for purposes other than trading that
are sensitive to changes in interest rates. For loans, securities, and liabilities with contractual maturities, the table presents
principal cash flows and related weighted-average interest rates by contractual maturities as well as the Company's historical
experience of the impact of interest-rate fluctuations on the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits (demand deposits, interest-bearing checking, savings and money market deposits) that have no
contractual maturity, the table presents principal cash flows and, as applicable, related weighted-average interest rates based
upon the Company's historical experience, management's judgment and statistical analysis, as applicable, concerning their most
likely withdrawal behaviors. Weighted-average variable rates are based upon rates existing at the reporting date.
Principal/Notional Amount Maturing in:
(Dollars in thousands) Fair
--------------------------------------------------------------------------- Value
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
--------- --------- --------- --------- --------- --------- --------- ---------
Rate-sensitive assets:
Fixed interest rate loans $ 85,734 $ 38,579 $ 33,630 $ 20,674 $ 17,971 $ 20,309 $ 216,897 $ 215,592
Average interest rate 9.38% 9.10% 8.98% 8.87% 8.77% 8.53% 9.09%
Variable interest rate loans $ 102,472 $ 24,403 $ 20,135 $ 22,491 $ 15,970 $ 57,782 $ 243,253 $ 241,791
Average interest rate 9.30% 9.40% 9.51% 9.25% 9.28% 8.15% 9.05%
Fixed interest rate securities $ 64,455 $ 37,132 $ 33,906 $ 39,637 $ 25,595 $ 41,049 $ 241,774 $ 245,614
Average interest rate 5.84% 6.46% 6.84% 6.83% 6.63% 6.26% 6.39%
Variable interest rate securities $ 5,251 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,251 $ 5,064
Average interest rate 6.73% - - - - - 6.73%
Other interest-bearing assets $ 4,445 $ 0 $ 0 $ 0 $ 0 $ 0 $ 4,445 $ 4,445
Average interest rate 5.57% - - - - - 5.57%
Rate sensitive liabilities:
Non-interest bearing checking $ 4,802 $ 4,294 $ 774 $ 742 $ 1,080 $ 80,775 $ 92,467 $ 92,467
Average interest rate - - - - - - -
Savings & interest bearing checking $ 9,647 $ 8,715 $ 7,703 $ 7,002 $ 5,620 $ 88,218 $ 126,905 $ 126,905
Average interest rate 2.54% 2.54% 2.54% 2.54% 2.54% 2.54% 2.54%
Time deposits $ 310,904 $ 51,652 $ 18,583 $ 6,181 $ 4,783 $ 1,517 $ 393,620 $ 394,543
Average interest rate 4.00% 5.90% 5.95% 6.00% 6.43% 2.50% 4.40%
Fixed interest rate borrowings $ 91,867 $ 7,617 $ 0 $ 0 $ 0 $ 19,211 $ 118,695 $ 119,836
Average interest rate 5.41% 6.16% - - - 9.00% 6.04%
Variable interest rate borrowings $ 10,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,000 $ 10,000
Average interest rate 5.69% - - - - - 5.69%
26
RETURN ON EQUITY AND ASSETS
The rates of return on average daily assets and stockholders' equity, the
dividend payout ratio, and the average daily stockholders' equity to average
daily assets for the years ended December 31, 1997, 1996 and 1995 are as
follows:
1997 1996 1995
---------- ---------- ----------
Percent of net income to:
Average daily total assets 1.10 1.07 1.05
Average daily stockholders' equity 16.81 16.50 17.06
Percentage of dividends declared per
common share to net income per
weighted average number of common
shares outstanding (2,902,530 shares
in 1997, 2,896,992 shares in 1996,
and 2,876,992 shares in 1995) 23.08 20.72 18.88
Percentage of average daily
stockholders' equity to average
daily total assets 6.51 6.46 6.18
27
SHORT-TERM BORROWINGS
The following is a schedule of statistical information relating to
securities sold under agreement to repurchase maturing within one year and are
secured by either U.S. Government agency securities or mortgage-backed
securities classified as other debt securities. There were no other categories
of short-term borrowings for which the average balance outstanding during the
period was 30 percent or more of stockholders' equity at the end of the
period.
1997 1996 1995
---------- ---------- ----------
Outstanding at year end $ 65,467 $ 85,611 $ 58,151
Approximate average interest rate at
year end 4.90% 5.11% 5.35%
Highest amount outstanding as of any
month end during the year $ 98,917 $ 89,433 $ 79,334
Approximate average outstanding
during the year $ 83,732 $ 73,728 $ 61,398
Approximate average interest rate
during the year 5.45% 5.33% 5.69%
Securities sold under agreement to repurchase include both transactions
initiated by the investment division of the Bank, as well as the automatic
borrowings from selected demand deposit customers who had excess balances in
their accounts.
28
ITEM 2. PROPERTIES
- ------------------
The Bank conducts its operations from the following locations:
Branches/Headquarters
- ---------------------
Main / Headquarters 202 E. Center St. Warsaw IN
Warsaw Drive-up East Center St. Warsaw IN
Akron 102 East Rochester Akron IN
Argos 100 North Michigan Argos IN
Bremen 1600 Indiana State Road 331 Bremen IN
Columbia City 601 Countryside Dr. Columbia City IN
Concord 4202 Elkhart Road Goshen IN
Cromwell 111 North Jefferson St. Cromwell IN
Elkhart Beardsley 864 East Beardsley St. Elkhart IN
Elkhart East 22050 State Road 120 Elkhart IN
Elkhart Hubbard Hill 58404 State Road 19 Elkhart IN
Elkhart Northwest 1208 N. Nappanee St. Elkhart IN
Goshen Downtown 102 North Main St. Goshen IN
Goshen South 2513 South Main St. Goshen IN
Granger 12830 State Road 23 Granger IN
Huntington 1501 N. Jefferson St. Huntington IN
Kendallville East 631 Professional Way Kendallville IN
Kendallville Downtown 113 N. Main St. Kendallville IN
LaGrange 901 South Detroit LaGrange IN
Ligonier Downtown 222 S. Calvin St. Ligonier IN
Ligonier South 1470 U.S. Highway 33 South Ligonier IN
Logansport 3900 Highway 24 East Logansport IN
Medaryville Main St. Medaryville IN
Mentone 202 East Main St. Mentone IN
Middlebury 712 Wayne Ave. Middlebury IN
Milford Indiana State Road 15 North Milford IN
Mishawaka 5015 N. Main St. Mishawaka IN
Nappanee 202 West Market St. Nappanee IN
North Webster 644 North Main St. North Webster IN
Pierceton 202 South First St. Pierceton IN
Roann 110 Chippewa St. Roann IN
Rochester 507 East 9th St. Rochester IN
Shipshewana 895 North Van Buren St. Shipshewana IN
Silver Lake 102 Main St. Silver Lake IN
Syracuse 502 South Huntington Syracuse IN
Wabash North 1004 North Cass St. Wabash IN
Wabash South 1940 South Wabash St. Wabash IN
Warsaw East 3601 Commerce Dr. Warsaw IN
Warsaw West 1221 West Lake St. Warsaw IN
Winona Lake 99 Chestnut St. Winona Lake IN
The Bank leases from third parties the real estate and buildings for its
offices in Akron and Milford. In addition, the Bank leases the real estate for
its Wabash North office and its free-standing ATMs. All the other branch
facilities are owned by the Bank. The Bank also owns parking lots in downtown
Warsaw for the use and convenience of Bank employees and customers, as well as
leasehold improvements, equipment, furniture and fixtures necessary and
appropriate to operate the banking facilities.
In addition, the Bank owns buildings at 110 South High St., Warsaw,
Indiana, and 114-118 East Market St., Warsaw, Indiana, which it uses for
29
various offices and a building at 113 East Market St., Warsaw, Indiana, which
it uses for office and computer facilities. The Bank also leases from third
parties facilities in Warsaw, Indiana, for the storage of supplies and for
employee training.
None of the Bank's assets are the subject of any material encumbrances.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Registrant and the
Bank are a party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matter was submitted to a vote of security holders from October 1,
1997 to December 31, 1997.
(Intentionally Left Blank)
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
-----------------------------------------------------------------------------
Information relating to the principal market for and the prices of the
Registrant's common stock, and information as to dividends declared by the
Registrant, are contained under the caption "Stock and Dividend Information"
in the 1997 Annual Report and are incorporated herein by reference in response
to this item. On December 31, 1997, the Registrant had 1,136 shareholders,
including those employees who participate in the Registrant's 401(K) plan.
On January 9, 1996, Lakeland Financial Corporation sold 10,000 shares of
authorized but previously unissued common stock for $41.50 per share. On April
30, 1996, Lakeland Financial Corporation common stock split two-for-one.
On January 15, 1997, Lakeland Financial Corporation sold 10,000 shares of
authorized but previously unissued common stock for $31.00 per share.
In August, 1997, the common stock of Lakeland Financial Corporation and
the preferred stock of its wholly-owned subsidiary, Lakeland Capital Trust,
began trading on The Nasdaq Stock Market under the symbols LKFN and LKFNP,
respectively.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
A five year consolidated financial summary, containing the required
selected financial data, appears under the caption "Selected Financial Data"
in the 1997 Annual Report and is incorporated herein by reference in response
to this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations appears under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the 1997 Annual Report
and is incorporated herein by reference in response to this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The following consolidated financial statements appear in the 1997 Annual
Report and are incorporated herein by reference in response to this item.
Consolidated Balance Sheets at December 31, 1997 and 1996. Consolidated
Statements of Income for the years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996 and 1995. Notes to Consolidated
Financial Statements. Report of Independent Auditors.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information appearing in the Registrant's definitive Proxy Statement
dated March 16, 1998, is incorporated herein by reference in response to this
item.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information appearing in the Registrant's definitive Proxy Statement
dated March 16, 1998, is incorporated herein by reference in response to this
item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information appearing in the Registrant's definitive Proxy Statement
dated March 16, 1998, is incorporated herein by reference in response to this
item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information appearing in the Registrant's definitive Proxy Statement
dated March 16, 1998, is incorporated herein by reference in response to this
item.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) The documents listed below are filed as a part of this report:
(1) Financial Statements.
---------------------
The following financial statements of the Registrant and its
subsidiaries appear in the 1997 Annual Report and are specifically incorporated
by reference under Item 8 of this Form 10-K, or are a part of this Form 10-K,
as indicated and at the pages set forth below.
Reference
---------
1997 Annual
Form 10-K Report
--------- -----------
Consolidated Balance Sheets at December 31,
1997 and 1996. 8
Consolidated Statements of Income for the
years ended December 31, 1997, 1996 and 1995. 9
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995. 10
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995. 11
Notes to Consolidated Financial Statements. 12-22
Report of Independent Auditors. 23
(2) Financial Statement Schedules
-----------------------------
The financial statement schedules of the Registrant and its
subsidiary have been omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto.
[Intentionally Left Blank]
33
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
Date: March 10, 1998 By R. Douglas Grant
(R. Douglas Grant) President
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 10, 1998 R. Douglas Grant
(R. Douglas Grant) Principal Executive
Officer and Director
Date: March 10, 1998 Terry M. White
(Terry M. White) Principal Financial
and Accounting Officer
Date: March 10, 1998 Anna K. Duffin
(Anna K. Duffin) Director
Date: March 10, 1998 Eddie Creighton
(Eddie Creighton) Director
Date: March 10, 1998 L. Craig Fulmer
(L. Craig Fulmer) Director
Date: March 10, 1998 Jerry L. Helvey
(Jerry L. Helvey) Director
Date: March 10, 1998 Allan J. Ludwig
(Allan J. Ludwig) Director
Date:
(J. Alan Morgan) Director
Date: March 10, 1998 Richard L. Pletcher
(Richard L. Pletcher) Director
Date:
(Joseph P. Prout) Director
Date: March 10, 1998 Terry L. Tucker
(Terry L. Tucker) Director
Date: March 10, 1998 G.L. White
(G.L. White) Director
34
EXHIBIT INDEX
The following Exhibits are filed as part of this Report and not
incorporated by reference from another document:
Exhibit 13 - 1997 Report to Shareholders with Report of Independent
Auditors.
Exhibit 21 - Subsidiaries
Exhibit 27 - Financial Data Schedule
35
EXHIBIT 13
1997 Report to Shareholders with Report of Independent Auditors.
36
EXHIBIT 21
SUBSIDIARIES. The Registrant has two wholly-owned subsidiaries, Lake City
Bank, Warsaw, Indiana, a banking corporation organized under the laws of the
State of Indiana, and Lakeland Capital Trust, a statutory business trust
formed under Delaware law.
37