Annual Meeting
- -------------------------------------------------------------------------------
The annual meeting of the shareholders of Lakeland Financial Corporation
will be held at noon, April 14, 1998, at the Shrine Building, Kosciusko County
Fair Grounds, Warsaw, Indiana. As of December 31, 1997, there were 1,136
shareholders.
Special Notice: Form 10-K Available
- -------------------------------------------------------------------------------
The Company 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 Company'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
- -------------------------------------------------------------------------------
Lake City Bank
Trust Department
P.O. Box 1387
Warsaw, Indiana 46581-1387
Stock and Dividend Information
- -------------------------------------------------------------------------------
The following companies are market makers in Lakeland Financial
Corporation stock and have reported the 1996 bid-ask prices for the Company's
stock as set forth in the Selected Quarterly Data. The 1997 bid-ask prices as
set forth in the Selected Quarterly Data were obtained from the Bloomberg
Business News service.
Roney & Company, P.O. Box 130, Elkhart, Indiana, 46515
McDonald and Company Securities, Inc., 214 South Main Street,
Elkhart, Indiana, 46516
Stifel, Nicolaus & Company, Inc., 500 North Broadway,
St. Louis, Missouri, 63102
As of August 25, 1997, the Company's common stock and the preferred
stock of its wholly-owned subsidiary, Lakeland Capital Trust, began trading on
The Nasdaq Stock MarketSM under the symbols LKFN and LKFNP, respectively. "The
Nasdaq Stock Market" or "Nasdaq" is a highly-regulated electronic securities
market comprised of competing Market Makers whose trading is supported by a
communications network linking them to quotation dissemination, trade
reporting, and order execution systems. This market also provides specialized
automation services for screen-based negotiations of transactions, on-line
comparison of transactions, and a range of informational services tailored to
the needs of the securities industry, investors and issuers. The Nasdaq Stock
Market is operated by The Nasdaq Stock Market, Inc., a wholly-owned subsidiary
of the National Association of Securities Dealers, Inc.
President's Letter
- -----------------------------------------------------------------------------
I am happy to report that your Corporation experienced a terrific year in
1997. These results confirm that our basic business philosophy of providing
local, hometown banking services to north central Indiana communities is
working well. This continued market acceptance produced record net income,
asset growth, and stock price performance.
In 1997, the financial services industry continued to evolve rapidly with
many mergers among large banks looking for a national presence. There are now
several national banking companies striving to be the "WalMart" of financial
services, where price and centralized decision-making are paramount. While
these types of banks have their place, we view our Corporation as a niche
bank; one that feels convenience, personal service, flexibility, and local
knowledge are important factors in serving customers and generating above
average returns to investors. As a result of this merger activity, many
communities are deemed too small or not profitable enough to be served by
large banks. Consequently, offices are being offered for sale, and we had the
opportunity to purchase some of these in northern Indiana. We evaluated many
locations, and ultimately purchased several offices of First Chicago/NBD and
KeyCorp. The acquisitions opened new markets to the Corporation in Huntington,
Logansport and Medaryville and strengthened our market position in Ligonier,
Kendallville, Columbia City and Rochester. In February 1998, we will complete
the purchase of National City Bank offices in Peru and Greentown. These are
all great communities that we feel will be receptive to our hometown style of
banking.
To accomplish the purchases, we issued $20 million of Trust Preferred
Securities through a subsidiary company, Lakeland Capital Trust. These
securities are unique to the banking industry. They have the characteristics
of long-term debt, but under Federal banking law, provide the regulatory
capital the Corporation needs to grow. From your perspective as a common
stockholder, this funding allowed us to grow the Bank without diluting your
ownership share in the Corporation. This preferred stock issue was extremely
well received in the market.
This acquisition activity required substantial resources and time
commitment. We continued to compete successfully for loans and deposits in
communities that we have served for many years. The Corporation's asset growth
was about 21 percent in 1997. Branch purchases comprised about 14 percent of
this growth, but we are pleased with asset growth of about 7 percent in
existing markets. Loan growth continued strong in 1997, with loans increasing
$76 million, or 20 percent. While we did purchase about $24 million of loans
from KeyCorp, our loan generation during the year was principally the result
of hard work by our officers throughout existing markets. We were also pleased
with deposit growth of about $116 million, or 23 percent in 1997.
1
President's Letter (continued)
- -----------------------------------------------------------------------------
Successful growth must be accompanied by improved profitability, and in
1997 the Corporation achieved record earnings for the tenth consecutive year.
Net income totaled $7,540,000, or 17 percent more than in 1996. Interest
margin pressures are being felt throughout the industry, and we are no
exception. The spread, or difference, between what we earn on our assets, and
the cost of the funds we use to support these assets, continued to decline
during the year. We expect that this trend will continue in 1998, which will
continue to challenge the Corporation to pursue profitable geographic
expansion, generate quality loans, increase fee income, control operating
expense and maintain good asset quality. We had strong growth in noninterest
income, which increased 29 percent over 1996, totaling $7.5 million for 1997.
All major components of noninterest income, including trust fees, deposit
fees, other service fees, and the gains on the sale of real estate mortgages,
achieved record levels in 1997. Noninterest expense, or operating expenses,
increased about 14 percent in 1997 to $20.4 million. The largest component of
this increase was the hiring and training of the high quality people needed to
manage our large office network. At year-end 1997, the Corporation employed
438 people, a 19 percent increase over 1996. Asset quality remained strong in
1997, which allowed the expense for the provision for loan losses to remain at
a relatively low level of $269,000. We remain optimistic about the economic
vitality of the markets we serve, and the positive effect this has on asset
quality.
Financial performance is ultimately reflected in the return on
stockholder equity and in market capitalization. The Corporation did very well
in 1997 with a return on beginning stockholder equity of 18.1 percent. This
type of return performance ranks comfortably in the top 25 percent of all
banks in America. Financial performance is also reflected in the stock price,
which closed the year at about $48.25 per share, an increase from $30.00 at
year-end 1996. The dividends declared in 1997 totaled $.60 per share,
representing a 30 percent increase over the dividends declared in 1996. The
combination of stock price appreciation and an increased dividend resulted in
a total return on your investment of 63 percent in 1997. The stock market now
values the Corporation at about $140 million. During the year, we listed the
common stock on the NASDAQ stock exchange, trading under the symbol LKFN.
Price and corporation information is now readily available through NASDAQ, and
from any of our three market makers. We also listed the trust preferred stock
on NASDAQ, trading under the symbol LKFNP.
Technology initiatives continued in 1997. As our offices expand into
fourteen counties, we have designed and implemented a communication network
that will provide the resources the Corporation needs to grow and operate
effectively. This project will be complete in late 1998. At the close of 1997,
we began implementation of new teller and customer sales software and
hardware. This investment will provide a state-of-the-art platform to deliver
our services into the next century. This project will also be completed in
late 1998. We are developing a data
2
President's Letter (continued)
- -----------------------------------------------------------------------------
warehouse system that will allow us to know our customers even better. Banking
has become an information industry, and this warehouse of information is vital
to successful management in the future. Development continues on Internet
banking, as we design the electronic products that customers want, without
sacrificing the security of customer information. Technology evaluation and
implementation have become a very big part of banking today, and these current
projects are investments in proven technology that are vital to our long-term
success.
Customer interest in our trust services is strong for estate and
financial planning, employee retirement plans, personal trust administration,
living trusts, corporate trust, and individual asset management. Trust assets
under management and income increased 41 percent and 35 percent in 1997,
respectively.
Our trust and investment professionals make the difference by providing
quality, responsive personal service, and by building long-term relationships
with customers and their families. We sponsored a Valentine Party for our
retired friends, a Leading Ladies Luncheon, several professional receptions in
Elkhart, and an Estate and Financial Planning Seminar in Shipshewana. The
Leading Ladies is a highly successful program designed and tailored to provide
an innovative financial program for the bank's female customers.
Brokerage services are used by customers who want to buy or sell stocks,
bonds and other non-insured investments. Income from this area was up
significantly in 1997.
Commercial loan outstandings grew 19 percent to $273 million from $230
million at year-end 1996. Delinquencies and charge-offs were below industry
averages. These successes were possible largely through knowledgeable,
professional, service oriented commercial officers who care about and
understand their customers needs. We also hosted several well-attended
3
President's Letter (continued)
- -----------------------------------------------------------------------------
seminars to assist and provide specialized education for our business and
agri-business customers.
Installment loans increased $17.8 million, up 25 percent over 1996. The
Corporation entered into a captive reinsurance arrangement to take advantage
of underwriting gains on the sales of credit life and disability insurance on
these loans.
We closed $44 million in mortgages, an increase of 10 percent over 1996.
Fee income increased through strong gains in mortgage sales and brokerage fees
on FHA/VA and "Sub-Prime" mortgage loans. The Corporation was recognized by
the Federal Home Loan Bank for assisting communities in affordable housing.
During the year a fourth Elkhart location was opened on the northwest
side. The Granger office opened in June and Mishawaka in November. The
Plymouth office opening is scheduled for early 1998. The former Kline's
building in downtown Warsaw is currently being remodeled into office space for
needed expansion. Trust, Investments, Brokerage and other staff departments
will move into that building this summer.
Terry M. White was promoted to Executive Vice President, with principal
responsibilities in the finance and operations areas. He has been with the
Corporation for five years and has eighteen years of banking experience.
As a Corporation and through the individual efforts of our people, we are
associated with a wide range of civic and charitable organizations, offering
not only strong financial support but also thousands of hours of volunteer
service. From economic development and housing, to education and arts, our
people give of their energy and expertise to serve on boards and commissions
that further strengthen and enhance the communities we serve.
As we celebrate our 125th year of service, your Corporation grows in
recognition in its position as a locally owned and managed independent
community bank. We are uniquely positioned for future growth, continued
profitability, and success. We welcome the challenges and opportunities that
lie ahead.
/s/ R. Douglas Grant
R. Douglas Grant
President
Lakeland Financial Corporation and Lake City Bank Board of Directors
- -----------------------------------------------------------------------------
Picture Picture Picture Picture
Eddie Creighton Anna K. Duffin L. Craig Fulmer R. Douglas Grant
Partner and Civic Leader Chairman, Chairman and
General Manager, Heritage Financial President, Lakeland
Creighton Brothers Group, Inc. FinancialCorporation
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 President,
Helvey & of Zimmer USA and Pletcher
Associates, Inc. Bristol Myers Co. Enterprises, Inc.
Picture Picture Picture
Joseph P. Prout Terry L. Tucker G.L. White
President, President, Former President,
Owen's Maple Leaf Farms, Inc. United Telephone
Supermarkets, Inc. 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 ................. Executive Vice President
Secretary and Treasurer
James J. Nowak ................. Assistant Secretary and Treasurer
5
Selected Financial Data (in thousands except for share and per share data)
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Interest income $ 52,699 $ 45,941 $ 41,944 $ 33,556 $ 27,463
Interest expense 28,060 23,737 21,642 14,887 12,022
- --------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income 24,639 22,204 20,302 18,669 15,441
Provision for loan losses 269 120 120 795 79
- --------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 24,370 22,084 20,182 17,874 14,651
Other noninterest income 6,978 5,396 4,297 4,198 2,957
Net gains on sale of real estate
mortgages held-for-sale 545 412 159 177 676
Net securities gains (losses) (19) (9) 315 (7) 175
Noninterest expense (20,414) (17,935) (16,244) (14,092) (12,378)
- --------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Income before income tax expense and cumulative
effect of change in accounting principle 11,460 9,948 8,709 8,150 6,081
Income tax expense 3,920 3,504 3,064 3,024 2,171
- --------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle 7,540 6,444 5,645 5,126 3,910
Cumulative effect of adopting SFAS No. 109 0 0 0 0 325
- --------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net income $ 7,540 $ 6,444 $ 5,645 $ 5,126 $ 4,235
========================================================= =========== =========== =========== =========== ===========
Average shares outstanding* 2,902,530 2,896,992 2,876,992 2,876,992 2,876,992
========================================================= =========== =========== =========== =========== ===========
Per average common share outstanding:*
Income before cumulative effect of change
in accounting principle $ 2.60 $ 2.22 $ 1.96 $ 1.78 $ 1.36
========================================================= =========== =========== =========== =========== ===========
Basic earnings $ 2.60 $ 2.22 $ 1.96 $ 1.78 $ 1.47
========================================================= =========== =========== =========== =========== ===========
Cash dividends declared $ 0.60 $ 0.46 $ 0.37 $ 0.30 $ 0.25
========================================================= =========== =========== =========== =========== ===========
Balances at December 31:
=========================================================
Total assets $ 796,478 $ 656,551 $ 568,579 $ 496,963 $ 449,954
Total deposits $ 612,992 $ 496,553 $ 431,934 $ 396,740 $ 370,032
Long-term borrowings $ 25,367 $ 23,531 $ 17,432 $ 17,432 $ 9,300
Guaranteed preferred beneficial interests in
Company's subordinated debentures $ 19,211 $ 0 $ 0 $ 0 $ 0
Total stockholders' equity $ 48,256 $ 42,043 $ 36,754 $ 29,889 $ 27,912
<FN>
* Adjusted for a 2-for-1 stock split April 30, 1996.
</FN>
6
Selected Quarterly Data (in thousands except for per share data) (unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st
1997 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------- ----------- ----------- ----------- -----------
Interest income $ 13,775 $ 13,344 $ 13,180 $ 12,400
Interest expense 7,574 7,240 6,832 6,414
- ----------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net interest income 6,201 6,104 6,348 5,986
Provision for loan losses 89 60 60 60
Noninterest income 2,003 2,016 1,886 1,599
Noninterest expense 5,777 5,156 4,825 4,656
Income tax expense 695 1,034 1,149 1,042
- ----------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net income $ 1,643 $ 1,870 $ 2,200 $ 1,827
======================================================================= =========== =========== =========== ===========
Basic earnings per common share $ 0.57 $ 0.64 $ 0.76 $ 0.63
======================================================================= =========== =========== =========== ===========
Stock and Dividend Information
- ------------------------------
Trading range (per share) *
Bid $ 46.00 $ 35.50 $ 33.75 $ 30.75
Ask $ 49.00 $ 49.00 $ 35.75 $ 35.00
Dividends declared (per share) $ 0.15 $ 0.15 $ 0.15 $ 0.15
4th 3rd 2nd 1st
1996 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
======================================================================= =========== =========== =========== ===========
Basic earnings 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
<FN>
* The trading range for the fourth quarter of 1997 is the high and low as reported by Bloomberg Business News. The fourth
quarter of 1997 is the first full quarter the Company's common stock was traded on Nasdaq.
** Adjusted for a 2-for-1 stock split April 30, 1996.
</FN>
7
Consolidated Balance Sheets (in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------------------------- ----------- -----------
ASSETS
Cash and due from banks $ 45,317 $ 41,190
Short-term investments 4,445 3,689
- --------------------------------------------------------------------------------------------------- ----------- -----------
Total cash and cash equivalents 49,762 44,879
Securities available-for-sale (carried at fair value) 84,599 81,842
Securities held-to-maturity (fair value of $166,079 at 1997
and $126,373 at 1996) 163,559 125,274
Real estate mortgages held-for-sale 1,516 895
Total loans 458,634 382,265
Less allowance for loan losses 5,308 5,306
- --------------------------------------------------------------------------------------------------- ----------- -----------
Net loans 453,326 376,959
Land, premises and equipment, net 23,108 16,014
Accrued income receivable 4,915 4,254
Intangible assets 9,649 0
Other assets 6,044 6,434
- --------------------------------------------------------------------------------------------------- ----------- -----------
Total assets $ 796,478 $ 656,551
=================================================================================================== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 92,467 $ 77,664
Interest bearing deposits 520,525 418,889
- --------------------------------------------------------------------------------------------------- ----------- -----------
Total deposits 612,992 496,553
Short-term borrowings
Federal funds purchased 14,650 0
Securities sold under agreements to repurchase 65,467 85,611
U.S. Treasury demand notes 4,000 2,769
- --------------------------------------------------------------------------------------------------- ----------- -----------
Total short-term borrowings 84,117 88,380
Accrued expenses payable 5,040 5,033
Other liabilities 1,495 1,011
Long-term borrowings 25,367 23,531
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,211 0
- --------------------------------------------------------------------------------------------------- ----------- -----------
Total liabilities 748,222 614,508
Commitments, off-balance sheet risks and contingencies
STOCKHOLDERS' EQUITY
Common stock: $.50 stated value, 10,000,000 shares authorized,
2,906,992 shares issued, 2,901,616 outstanding as of December 31, 1997;
2,896,992 shares issued and outstanding as of December 31, 1996 1,453 1,448
Additional paid-in capital 8,537 8,232
Retained earnings 37,766 31,967
Unrealized net gain on securities available-for-sale 685 396
Treasury stock, at cost (185) 0
- --------------------------------------------------------------------------------------------------- ----------- -----------
Total stockholders' equity 48,256 42,043
- --------------------------------------------------------------------------------------------------- ----------- -----------
Total liabilities and stockholders' equity $ 796,478 $ 656,551
=================================================================================================== =========== ===========
<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)
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------- ----------- ----------- -----------
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 38,265 $ 32,724 $ 29,859
Tax-exempt 228 246 257
Interest and dividends on securities
Taxable 12,472 11,348 10,588
Tax-exempt 1,431 1,378 1,038
Interest on short-term investments 303 245 202
- ------------------------------------------------------------------------------------- ----------- ----------- -----------
Total interest income 52,699 45,941 41,944
Interest on deposits 21,183 18,411 16,847
Interest on borrowings
Short-term 4,921 4,213 3,803
Long-term 1,956 1,113 992
- ------------------------------------------------------------------------------------- ----------- ----------- -----------
Total interest expense 28,060 23,737 21,642
- ------------------------------------------------------------------------------------- ----------- ----------- -----------
NET INTEREST INCOME 24,639 22,204 20,302
Provision for loan losses 269 120 120
- ------------------------------------------------------------------------------------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 24,370 22,084 20,182
NONINTEREST INCOME
Trust income 1,188 881 709
Service charges on deposits 3,369 2,809 2,262
Other income 2,421 1,706 1,326
Net gains on the sale of real estate mortgages held-for-sale 545 412 159
Net securities gains (losses) (19) (9) 315
- ------------------------------------------------------------------------------------- ----------- ----------- -----------
Total noninterest income 7,504 5,799 4,771
NONINTEREST EXPENSE
Salaries and employee benefits 11,317 9,570 8,521
Net occupancy expense 1,397 1,339 1,229
Equipment costs 1,747 1,616 1,375
Other expense 5,953 5,410 5,119
- ------------------------------------------------------------------------------------- ----------- ----------- -----------
Total noninterest expense 20,414 17,935 16,244
- ------------------------------------------------------------------------------------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 11,460 9,948 8,709
Income tax expense 3,920 3,504 3,064
- ------------------------------------------------------------------------------------- ----------- ----------- -----------
NET INCOME $ 7,540 $ 6,444 $ 5,645
===================================================================================== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING 2,902,530 2,896,992 2,876,992
===================================================================================== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $ 2.60 $ 2.22 $ 1.96
===================================================================================== =========== =========== ===========
<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
Common Stock Net Gain (Loss)
----------------------- Additional on Securities Total
Outstanding Paid-in Retained Available- Treasury Stockholders'
Shares Amount Capital Earnings for-Sale Stock Equity
- ----------------------------------- ----------- ---------- ----------- ---------- --------------- --------- ------------
Balances, January 1, 1995 1,438,496 $ 1,438 $ 7,827 $ 22,279 $ (1,655) $ 0 $ 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
($.37 per share) (1,066) (1,066)
- ----------------------------------- ----------- ---------- ----------- ---------- --------------- --------- ------------
Balances, December 31, 1995 1,438,496 1,438 7,827 26,858 631 0 36,754
Net income for 1996 6,444 6,444
Net change in unrealized gain (loss)
on securities available-for-sale (235) (235)
Issued 10,000 shares 10,000 10 405 415
Shares issued in 2-for-1 stock split 1,448,496
Cash dividend declared
($.46 per share) (1,335) (1,335)
- ----------------------------------- ----------- ---------- ----------- ---------- --------------- --------- ------------
Balances, December 31, 1996 2,896,992 1,448 8,232 31,967 396 0 42,043
Net income for 1997 7,540 7,540
Net change in unrealized gain (loss)
on securities available-for-sale 289 289
Issued 10,000 shares 10,000 5 305 310
Treasury stock acquired (5,376) (185) (185)
Cash dividend declared
($.60 per share) (1,741) (1,741)
- ----------------------------------- ----------- ---------- ----------- ---------- --------------- --------- ------------
Balances, December 31, 1997 2,901,616 $ 1,453 $ 8,537 $ 37,766 $ 685 $ (185) $ 48,256
=================================== =========== ========== =========== ========== =============== ========= ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
10
Consolidated Statements of Cash Flows (in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
Cash flows from operating activities
Net income $ 7,540 $ 6,444 $ 5,645
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 1,393 1,277 1,209
Provision for loan losses 269 120 120
Write down of other real estate owned 19 20 0
Amortization of intangible assets 26 0 0
Loans originated for sale (27,426) (27,599) (29,679)
Net (gain) loss on sale of loans (545) (412) (159)
Proceeds from sale of loans 27,350 27,261 29,868
Net (gain) loss on sale of premises and equipment 11 3 0
Net (gain) loss on sale of securities available-for-sale 0 0 (331)
Net (gain) loss on calls of securities held-to-maturity 19 9 16
Net securities amortization 23 256 180
Increase (decrease) in taxes payable (217) 237 (822)
(Increase) decrease in income receivable (661) (251) (539)
Increase (decrease) in accrued expenses payable 224 360 1,227
(Increase) decrease in other assets 459 (698) 411
Increase (decrease) in other liabilities 427 164 888
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
Total adjustments 1,371 747 2,389
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
Net cash from operating activities 8,911 7,191 8,034
Cash flows from investing activities
Proceeds from sale of securities available-for-sale 0 0 7,563
Proceeds from maturities and calls of securities held-to-maturity 14,557 8,784 6,268
Proceeds from maturities and calls of securities available-for-sale 26,100 14,130 5,022
Purchases of securities available-for-sale (28,315) (14,429) (20,014)
Purchases of securities held-to-maturity (52,946) (20,247) (22,900)
Net (increase) decrease in total loans (53,286) (54,934) (39,174)
Purchases of land, premises and equipment (5,464) (3,558) (3,650)
Net proceeds (payments) from acquisitions 58,889 0 (1,380)
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
Net cash from investing activities (40,465) (70,254) (68,265)
Cash flows from financing activities
Net increase in total deposits 21,257 64,619 35,194
Proceeds from short-term borrowings 889,826 849,944 522,102
Payments on short-term borrowings (894,089) (838,695) (493,294)
Proceeds from long-term borrowings 10,000 14,118 0
Payments on long-term borrowings (8,163) (8,019) 0
Dividends paid (1,741) (1,335) (1,023)
Proceeds from sale of common stock 310 415 0
Net proceeds from issuance of guaranteed preferred beneficial interests in Company's
subordinated debentures 19,222 0 0
Purchase of treasury stock (185) 0 0
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
Net cash from financing activities 36,437 81,047 62,979
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 4,883 17,984 2,748
Cash and cash equivalents at beginning of the year 44,879 26,895 24,147
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 49,762 $ 44,879 $ 26,895
====================================================================================== =========== =========== ===========
Cash paid during the year for:
Interest $ 27,921 $ 23,239 $ 21,052
Income taxes $ 3,918 $ 3,420 $ 3,116
Securities transferred from held-to-maturity to available-for-sale $ 0 $ 0 $ 12,918
Loans transferred to other real estate $ 284 $ 334 $ 0
<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 Company) is a bank holding company
as defined in the Bank Holding Company Act of 1956. The Company owns all of
the outstanding stock of Lake City Bank (the Bank), a full service commercial
bank organized under Indiana law, and Lakeland Capital Trust (Lakeland Trust),
a statutory business trust formed under Delaware law. The Company conducts no
business except that incident to its ownership of the Bank and Lakeland Trust.
The Bank is headquartered in Warsaw, Indiana, and has 39 branch offices in
twelve 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 Company'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 and the fair value of mortgage servicing rights.
Principles of Consolidation:
The consolidated financial statements include Lakeland Financial
Corporation and its wholly-owned subsidiaries, Lake City Bank and Lakeland
Capital Trust. All significant intercompany balances and transactions are
eliminated in consolidation.
Securities:
The Company classifies securities into held-to-maturity,
available-for-sale and trading categories. Held-to-maturity securities are
those which the Company has the positive intent and ability to hold to
maturity, and are reported at amortized cost. Available-for-sale securities
are those the Company 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 Company 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 Company originates mortgage loans for sale to the secondary market,
and sells the loans with servicing retained. Effective January 1, 1996, the
Company 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, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation allowance. Estimates
of fair value include assumptions about prepayment, default and interest
rates, and other factors which are subject to change over time.
Loans and Loan Income:
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 29 cities and towns located within twelve counties in northern
Indiana. The Bank makes commercial, industrial, agri-business and agricultural
real estate mortgage, real estate construction mortgage, residential real
estate mortgage and consumer loans throughout these cities and counties. 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.
12
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
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.
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 consideration. 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 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 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 Company premises, amounted
to $426,000, net of a $224,000 valuation allowance and $917,000, net of a
$285,000 valuation allowance at December 31, 1997 and 1996, respectively, and
is included in other assets in the consolidated balance sheets.
Intangible Assets:
Intangible assets consist of goodwill and core deposit intangibles.
Goodwill is amortized on a straight line basis over 15 years. Core deposit
intangibles are amortized using an accelerated method over 12 years.
Intangible assets are reviewed for possible impairment when events or changed
circumstances may affect the underlying basis of the assets.
Income Taxes:
The Company files annual consolidated federal income tax returns. The
Company 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.
Loss Contingencies:
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood
of loss is probable and an amount or range of loss can be reasonably
estimated.
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 Company. At December 31, 1997, the Bank could distribute
approximately $10,461,000 of retained earnings to the Company and continue to
meet the minimum capital ratios required to be well capitalized under prompt
corrective action regulations.
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 Common Share:
Basic and diluted earnings per common share are computed under a new
accounting standard effective in the quarter ended December 31, 1997. Adoption
of the standard did not change the earnings per share amounts previously
reported. Basic earnings per share is based upon net income divided by the
weighted average number of shares outstanding during the period. At December
31, 1997, there were no potential common shares.
Basic and diluted earnings per common share are restated to reflect any stock
dividends or splits.
13
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 Flow Reporting:
Cash and cash equivalents include cash on hand, demand deposits in other
institutions and short-term investments with maturities of 90 days or less.
Cash flows are reported net for customer loan and deposit transactions.
Reclassifications:
Certain amounts appearing in the financial statements and notes thereto
for prior periods have been reclassified to conform with the current
presentation. The reclassifications had no effect on net income or
stockholders' equity as previously reported.
NOTE 2 - PENDING ACCOUNTING CHANGES
SFAS Nos. 130 and 131 were issued by the Financial Accounting Standards
Board during 1997. SFAS No. 130, Reporting Comprehensive Income, establishes
standards for reporting and displaying comprehensive income and its components
in general-purpose financial statements. It is effective for fiscal years
beginning after December 15, 1997. Adoption of this SFAS could effect how the
results of operations are displayed in the consolidated financial statements.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires the presentation of disaggregated information about
segments of a business and is effective for financial statements for periods
beginning after December 15, 1997. The effect on the consolidated financial
statements has not yet been determined.
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, 1997
U.S. Treasury securities $ 28,833 $ 468 $ (15) $ 29,286
U.S. Government agencies and corporations 100 0 0 100
Mortgage-backed securities 52,746 734 (171) 53,309
State and municipal securities 1,787 117 0 1,904
----------- ----------- ----------- -----------
Total securities available-for-sale at December 31, 1997 $ 83,466 $ 1,319 $ (186) $ 84,599
=========== =========== =========== ===========
Securities held-to-maturity at December 31, 1997
U.S. Treasury securities $ 21,170 $ 344 $ (13) $ 21,501
U.S. Government agencies and corporations 2,176 70 0 2,246
Mortgage-backed securities 116,788 713 (316) 117,185
State and municipal securities 22,418 1,628 (2) 24,044
Other debt securities 1,007 96 0 1,103
----------- ----------- ----------- -----------
Total securities held-to-maturity at December 31, 1997 $ 163,559 $ 2,851 $ (331) $ 166,079
=========== =========== =========== ===========
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
=========== =========== =========== ===========
14
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 3 - SECURITIES (continued)
Information regarding the amortized cost and fair value of debt
securities by maturity as of December 31, 1997, 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, 1997 December 31, 1997
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
(in thousands)
Due in one year or less $ 5,807 $ 5,802 $ 5,110 $ 5,100
Due after one year through five years 23,424 23,892 20,102 20,615
Due after five years through ten years 1,489 1,596 1,737 1,838
Due after ten years 0 0 19,822 21,341
----------- ----------- ----------- -----------
30,720 31,290 46,771 48,894
Mortgage-backed securities 52,746 53,309 116,788 117,185
----------- ----------- ----------- -----------
Total debt securities $ 83,466 $ 84,599 $ 163,559 $ 166,079
=========== =========== =========== ===========
Security proceeds, gross gains and gross losses for 1997, 1996 and 1995
were as follows:
1997 1996 1995
----------- ----------- -----------
(in thousands)
Sales and calls of securities available-for-sale
Proceeds $ 100 $ 650 $ 7,563
Gross gains 0 0 348
Gross losses 0 0 17
Calls of securities held-to-maturity
Proceeds $ 638 $ 802 $ 414
Gross gains 0 0 0
Gross losses 19 9 16
Securities with carrying values of $122,482,000 and $121,109,000 were
pledged as of December 31, 1997 and 1996, 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, 1997 and 1996, consist of the
following:
1997 1996
----------- -----------
(in thousands)
Commercial and industrial loans $ 237,132 $ 202,532
Agri-business and agricultural loans 35,820 27,072
Real estate mortgage loans 62,279 59,302
Real estate construction loans 3,089 1,647
Installment loans and credit cards 120,314 91,712
----------- -----------
Total loans $ 458,634 $ 382,265
=========== ===========
Loans aggregating $60,000 or more with executive officers and directors
(including their associates) amounted to $18,378,000 and $12,789,000 as of
December 31, 1997 and 1996, respectively. During 1997, new loans or advances
were $34,077,000, and loan repayments were $28,488,000.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
$68,028,000 and $51,802,000 at December 31, 1997 and 1996, respectively.
Income earned for loan servicing was $98,000, $96,000 and $82,000 for 1997,
1996 and 1995, respectively. Information on mortgage servicing rights follows:
1997 1996
----------- -----------
(in thousands)
Beginning of year $ 205 $ 0
Originations 268 220
Amortization (48) (15)
----------- -----------
End of year $ 425 $ 205
=========== ===========
15
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for 1997,
1996 and 1995:
1997 1996 1995
----------- ----------- -----------
(in thousands)
Balance, January 1 $ 5,306 $ 5,472 $ 4,866
Allowance related to acquisitions 0 0 746
Provision for loan losses 269 120 120
Loans charged-off 359 368 355
Recoveries 92 82 95
----------- ----------- -----------
Net loans charged-off 267 286 260
----------- ----------- -----------
Balance, December 31 $ 5,308 $ 5,306 $ 5,472
=========== =========== ===========
Nonaccrual loans at December 31, 1997, 1996 and 1995, totaled
$1,058,000, $384,000 and $532,000, respectively. Interest lost on nonaccrual
loans was approximately $44,000, $35,000 and $29,000 for 1997, 1996 and 1995,
respectively. Loans renegotiated as troubled debt restructuring totaled
$1,377,000 and $1,284,000 as of December 31, 1997 and 1996, respectively.
Interest income of $92,000, $85,000 and $96,000 was recognized in 1997, 1996
and 1995. Had these loans been performing under the original contract terms,
an additional $50,000 would have been reflected in interest income during
1997, $44,000 in 1996 and $53,000 in 1995. The Company is not committed to
lend additional funds to debtors whose loans have been modified. During 1997,
1996 and 1995 the Company had no loans meeting the definition of impaired.
NOTE 6 - LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation were
as follows at December 31:
1997 1996
----------- -----------
(in thousands)
Land $ 5,953 $ 4,344
Premises 15,915 12,356
Equipment 11,227 8,001
----------- -----------
Total cost 33,095 24,701
Less accumulated depreciation 9,987 8,687
----------- -----------
Land, premises and equipment, net $ 23,108 $ 16,014
=========== ===========
NOTE 7 - DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination
of $100,000, was approximately $108,497,000 and $97,943,000 at December 31,
1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
Amount
------------
(in thousands)
Maturing in 1998 $ 310,904
Maturing in 1999 51,652
Maturing in 2000 18,583
Maturing in 2001 6,181
Maturing in 2002 4,783
Thereafter 1,517
------------
Total time deposits $ 393,620
============
Deposits of executive officers and directors (including their
associates) totaled $7,852,000 and $3,652,000 at December 31, 1997 and 1996,
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
Company's trade area. Repo accounts are not covered by federal deposit
insurance and are secured by securities owned. Information on these
liabilities and the related collateral for 1997 and 1996 is as follows:
1997 1996
----------- -----------
(in thousands)
Average balance during the year $ 83,732 $ 73,728
Average interest rate during the year 5.45% 5.33%
Maximum month-end balance during the year $ 98,917 $ 89,433
Securities underlying the agreements at year-end
Amortized cost $ 66,183 $ 87,817
Fair value $ 67,258 $ 88,004
16
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (continued)
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 $ 39,941 4.15% $ 0 $ 0 $ 39,859 $ 40,261
1 to 30 days 2,570 5.80 1,320 1,354 1,306 1,337
31 to 90 days 3,943 5.93 1,158 1,183 2,947 3,002
Over 90 days 19,013 6.15 15,975 16,415 3,618 3,706
------------ --------------- ------------ ------------ ------------ ------------
Total $ 65,467 4.90% $ 18,453 $ 18,952 $ 47,730 $ 48,306
============ =============== ============ ============ ============ ============
The Company 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, 1997, there were no material amounts of securities at risk with
any one customer. The Company maintains control of these securities through
the use of third-party safekeeping arrangements.
NOTE 9 - LONG -TERM BORROWINGS
Long-term borrowings at December 31 consisted of:
1997 1996
----------- -----------
(in thousands)
Federal Home Loan Bank of Indianapolis Notes, 5.59%, Due January 14, 1997 $ 0 $ 8,132
Federal Home Loan Bank of Indianapolis Notes, LIBOR 5.99%, Due April 27, 1998 10,000 0
Federal Home Loan Bank of Indianapolis Notes, 5.92%, Due December 7, 1998 4,000 4,000
Federal Home Loan Bank of Indianapolis Notes, 5.50%, Due December 28, 1998 10,000 10,000
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 1,300 1,300
Capital Leases 67 99
----------- -----------
Total $ 25,367 $ 23,531
=========== ===========
All notes require monthly interest payments and are secured by
residential real estate loans with a carrying value of $45,458,000 at December
31, 1997. The capital leases had original terms of approximately three years
and require monthly payments.
NOTE 10 - GUARANTEED PREFERRED BENEFICIAL INTERESTS
In September 1997, Lakeland Trust completed a public offering of 2
million shares of cumulative trust preferred securities ("Preferred
Securities") with a liquidation preference of $10 per security. The proceeds
of the offering were loaned to the Company in exchange for subordinated
debentures with terms similar to the Preferred Securities. The sole assets of
Lakeland Trust are the subordinated debentures of the Company and payments
thereunder. The subordinated debentures and the back-up obligations, in the
aggregate, constitute a full and unconditional guarantee by the Company of the
obligations of Lakeland Trust under the Preferred Securities. Distributions on
the securities are payable quarterly at the annual rate of 9% of the
liquidation preference and are included in interest expense in the
consolidated financial statements. These securities are considered as Tier I
capital (with certain limitations applicable) under current regulatory
guidelines. As of December 31, 1997, the outstanding principal balance of the
subordinated debentures was $20,619,000. The principal balance of the
subordinated debentures less the unamortized issuance costs constitute the
guaranteed preferred beneficial interests in the Company's subordinated
debentures in the financial statements.
The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the subordinated debentures at maturity or their
earlier redemption at the liquidation preference. Subject to the Company
having received prior approval of the Federal Reserve if then required, the
subordinated debentures are redeemable prior to the maturity date of September
30, 2027 at the option of the Company on or after September 30, 2002, or upon
occurrence of specific events defined within the trust indenture. The Company
has the option to defer distributions on the subordinated debentures from time
to time for a period not to exceed 20 consecutive quarters.
NOTE 11 - EMPLOYEE BENEFIT PLANS
Information as to the Company's pension plan at December 31 is as
follows:
1997 1996
----------- -----------
Actuarial present value of benefit obligations: (in thousands)
Accumulated benefit obligation, including vested benefits
of $1,415,000 for 1997 and $1,107,000 for 1996 $ 1,533 $ 1,214
=========== ===========
Projected benefit obligation for service rendered to date $ 1,949 $ 1,544
Plan assets at fair value (primarily money market funds
and equity and fixed income investments) (1,911) (1,401)
Unrecognized gains (losses) (1) (27)
Unrecognized prior service cost 27 28
----------- -----------
Accrued balance sheet pension liability $ 64 $ 144
=========== ===========
17
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (continued) Net pension expense includes the
following:
1997 1996 1995
----------- ----------- -----------
(in thousands)
Service cost for benefits earned $ 178 $ 162 $ 116
Interest cost 120 105 77
Actual return on plan assets (306) (90) (97)
Net amortization and deferrals 197 (9) 19
----------- ----------- -----------
Net pension expense $ 189 $ 168 $ 115
============ ============ ============
The following assumptions were used in calculating the net pension cost:
Weighted average discount rate 7.25% 7.75% 7.50%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 8.00% 8.00% 8.00%
The Company maintains a 401(k) profit sharing plan for all employees
meeting age and service requirements. The Company contributions are based upon
the rate of return on January 1 stockholders' equity. The expense recognized
was $393,000, $532,000 and $455,000 in 1997, 1996 and 1995, respectively.
The Board of Directors of the Company has established a qualified stock
incentive plan subject to the approval of the shareholders at the 1998 annual
meeting. Under the terms of this plan, the number of shares of common stock of
the Company that may be granted may not exceed 300,000 shares.
NOTE 12 - OTHER EXPENSE
Other expense for the years ended December 31, were as follows:
1997 1996 1995
----------- ----------- -----------
(in thousands)
Data processing fees and supplies $ 1,151 $ 1,098 $ 913
Corporate and business development 1,034 932 825
Office supplies 633 641 632
Telephone and postage 833 729 616
Regulatory fees and FDIC insurance 122 57 616
Miscellaneous 2,180 1,953 1,517
----------- ----------- -----------
Total other expense $ 5,953 $ 5,410 $ 5,119
=========== =========== ===========
NOTE 13 - INCOME TAXES
Income tax expense consists of the following:
1997 1996 1995
----------- ----------- -----------
(in thousands)
Current federal income tax expense $ 2,881 $ 2,503 $ 2,297
Deferred federal income tax expense 100 107 5
Current state income tax expense 906 808 734
Deferred state income tax expense 33 86 28
----------- ----------- -----------
Total income tax expense $ 3,920 $ 3,504 $ 3,064
=========== =========== ===========
Income tax expense (credit) included $(8,000), $(3,000) and $114,000
applicable to security transactions for 1997, 1996 and 1995, 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:
1997 1996 1995
----------- ----------- -----------
(in thousands)
Income taxes at statutory federal rate $ 3,896 $ 3,382 $ 2,961
Increase (decrease) in taxes resulting from:
Tax exempt income (554) (540) (433)
Nondeductible expense 135 140 119
State income tax, net of federal tax effect 661 590 503
Net operating loss, Gateway (29) (29) (29)
Tax credits (23) (22) (30)
Other (166) (17) (27)
----------- ----------- -----------
Total income tax expense $ 3,920 $ 3,504 $ 3,064
=========== =========== ===========
18
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (continued)
The components of the net deferred tax asset recorded in the
consolidated balance sheets at December 31 consist of the following:
1997 1996
------------------------- ------------------------
Federal State Federal State
----------- ----------- ----------- -----------
(in thousands)
Deferred tax assets
Bad debts $ 1,528 $ 430 $ 1,383 $ 430
ORE 97 24 98 24
Pension and deferred compensation liability 440 110 315 79
Net operating loss carryforward 346 0 375 0
Other 75 20 158 24
----------- ----------- ----------- -----------
2,486 584 2,329 557
Deferred tax liabilities
Accretion 148 37 92 23
Depreciation 284 71 258 65
Mortgage servicing rights 145 36 70 18
State taxes 128 0 139 0
Leases 169 42 107 27
Deferred loan fees 82 20 17 5
Other 5 1 35 9
----------- ----------- ----------- -----------
961 207 718 147
Valuation allowance 172 0 158 0
----------- ----------- ----------- -----------
Net deferred tax asset $ 1,353 $ 377 $ 1,453 $ 410
=========== =========== =========== ===========
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 $450,000 and $259,000 for 1997 and 1996, respectively.
NOTE 14 - ACQUISITIONS
On November 3, 1997, the Company acquired the Huntington, Indiana office
of 1st Chicago/NBD. On December 8, 1997, the Company acquired Indiana offices
in Columbia City, Kendallville, Ligonier, Logansport, Medaryville and
Rochester from KeyCorp. Subsequent to the acquisitions, the Company closed the
Rochester office acquired from KeyCorp and the Company's previously existing
office in Columbia City. These acquisitions were accounted for using the
purchase method of accounting. The results of the operations of the acquired
offices are included in the income statement of the Company beginning as of
the respective purchase dates.
The branch acquisitions were not considered to be acquisitions of a
business since, among other things, approximately 62% of the $95,235,000 in
assets received were in the form of cash and only a relatively small portion
of the assets were in the form of loans. The future earnings from the assets
acquired will be primarily dependent on the effective use of the cash and,
thus, historical operating results of the branches acquired would not be
indicative of future results. Accordingly, only summary information regarding
the effect of the acquisitions on the balance sheet is presented below:
Assets (in thousands)
------------
Cash and due from banks $ 58,889
Loans 23,591
Land, premises and equipment 3,076
Intangible assets 9,675
Other assets 4
Liabilities
Deposits $ 95,181
Other liabilities 54
On July 15, 1995, the Company acquired Gateway Bank ("Gateway"),
LaGrange, Indiana. The Company 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:
Assets (in thousands)
------------
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 Company beginning as of the purchase date.
19
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 14 - ACQUISITIONS (continued)
The Company has entered into an agreement to purchase selected assets
and assume all deposits of the Greentown, Indiana and Peru, Indiana offices of
National City Bank. This purchase is scheduled to close during the first
quarter of 1998 and is expected to add approximately $40 million in deposits.
NOTE 15 - PARENT COMPANY STATEMENTS
The Company 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
-------------------------
1997 1996
----------- -----------
(in thousands)
ASSETS
Deposits with Lake City Bank $ 1,420 $ 15
Investment in subsidiaries 67,013 42,356
Other assets 577 8
----------- -----------
Total assets $ 69,010 $ 42,379
=========== ===========
LIABILITIES
Dividends payable and other liabilities $ 135 $ 336
Subordinated debt 20,619 0
STOCKHOLDERS' EQUITY 48,256 42,043
----------- -----------
Total liabilities and stockholders' equity $ 69,010 $ 42,379
=========== ===========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(in thousands)
Dividends from Lake City Bank $ 982 $ 1,091 $ 928
Interest on deposits and repurchase agreements, Lake City Bank 24 24 6
Miscellaneous income 0 0 10
Equity in undistributed income of subsidiaries 7,085 5,353 4,719
Interest expense on subordinated debt 655 0 0
Miscellaneous expense 242 17 14
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 7,194 6,451 5,649
Income tax expense (benefit) (346) 7 4
----------- ----------- -----------
NET INCOME $ 7,540 $ 6,444 $ 5,645
=========== =========== ===========
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(in thousands)
Cash flows from operating activities
Net income $ 7,540 $ 6,444 $ 5,645
Adjustments to net cash from operating activities
Equity in undistributed income of subsidiaries (7,085) (5,353) (4,719)
Other changes (770) 70 3
----------- ----------- -----------
Net cash from operating activities (315) 1,161 929
Cash flows from investing activities (17,283) (251) 104
Cash flows from financing activities 19,003 (920) (1,023)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,405 (10) 10
Cash and cash equivalents at beginning of the year 15 25 15
----------- ----------- -----------
Cash and cash equivalents at end of the year $ 1,420 $ 15 $ 25
=========== =========== ===========
20
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table contains the estimated fair values and the related
carrying values of the Company's financial instruments at December 31, 1997
and 1996. Items which are not financial instruments are not included.
1997 1996
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
(in thousands)
Assets:
Cash and cash equivalents $ 49,762 $ 49,762 $ 44,879 $ 44,879
Real estate mortgages held-for-sale 1,516 1,533 895 907
Securities available-for-sale 84,599 84,599 81,842 81,842
Securities held-to-maturity 163,559 166,079 125,274 126,373
Loans, net 453,326 450,542 376,959 376,086
Accrued income receivable 4,915 4,915 4,254 4,254
Mortgage servicing rights 425 425 205 205
Liabilities:
Certificates of deposit (393,620) (394,543) (308,543) (309,997)
All other deposits (219,372) (219,372) (188,010) (188,010)
Securities sold under agreements to repurchase (65,467) (65,557) (85,611) (85,717)
Other short-term borrowings (18,650) (18,650) (2,769) (2,769)
Long-term debt (25,367) (25,442) (23,531) (23,466)
Guaranteed preferred beneficial interests in Company's
subordinated debentures 19,211 20,187 0 0
Accrued expenses payable (5,040) (5,040) (5,033) (5,033)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1997 and 1996. 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 and guaranteed
preferred beneficial interests in Company's subordinated debentures are 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 Company would charge for similar loans at December
31, 1997 and 1996, 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 Company would pay on such deposits or borrowings at December 31, 1997
and 1996, 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 Company
to have disposed of such items at December 31, 1997 and 1996, 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, 1997 and 1996, should not necessarily be considered to
apply at subsequent dates.
In addition, other assets and liabilities of the Company 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 Company's trust department, the trained work force, customer
goodwill and similar items.
NOTE 17 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
During the normal course of business, the Company 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, 1997 and 1996, were as follows:
1997 1996
------------------------- -------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
----------- ----------- ----------- -----------
(in thousands)
Commercial loan lines of credit $ 6,503 $ 102,822 $ 13,063 $ 98,155
Commercial loan standby letters of credit 0 11,959 0 7,865
Real estate mortgage loans 1,185 586 941 532
Real estate construction mortgage loans 0 2,211 0 1,997
Credit card open-ended revolving lines 5,161 0 4,947 0
Home equity mortgage open-ended revolving lines 0 26,548 0 16,743
Consumer loan open-ended revolving lines 0 3,877 0 2,835
----------- ----------- ----------- -----------
Total $ 12,849 $ 148,003 $ 18,951 $ 128,127
=========== =========== =========== ===========
21
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES (continued)
At December 31, 1997 and 1996, the range of interest rates for
commercial loan commitments with a fixed rate was 7.86% to 12.50% and 7.86% to
12.00%, respectively. The range of interest rates for commercial loan
commitments with variable rates was 7.50% to 12.50% and 7.75% to 12.25% at
December 31, 1997 and 1996, 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 Company 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 Company'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 18 - REGULATORY MATTERS
The Company and Bank are 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 financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and
Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The 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 Company and Bank 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, 1997 and 1996, the Company and Bank meet all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the federal
regulators categorized the Company and Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company and Bank 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 Company's or Bank's category.
Minimum Required To
Minimum Required Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
---------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ----------- --------- ----------- ---------
(amounts in thousands)
As of December 31, 1997
Total Capital (to Risk Weighted Assets)
Consolidated $ 63,188 12.42% >=$ 40,710 >= 8.00% >=$ 50,887 >= 10.00%
Bank $ 61,326 12.06% >=$ 40,692 >= 8.00% >=$ 50,865 >= 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 53,736 10.56% >=$ 20,355 >= 4.00% >=$ 30,532 >= 6.00%
Bank $ 56,017 11.01% >=$ 20,346 >= 4.00% >=$ 30,519 >= 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 53,736 7.41% >=$ 28,994 >= 4.00% >=$ 36,243 >= 5.00%
Bank $ 56,017 7.73% >=$ 29,000 >= 4.00% >=$ 36,249 >= 5.00%
As of December 31, 1996
Total Capital (to Risk Weighted Assets)
Consolidated $ 46,863 11.19% >=$ 33,506 >= 8.00% >=$ 41,882 >= 10.00%
Bank $ 46,840 11.18% >=$ 33,506 >= 8.00% >=$ 41,882 >= 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 41,627 9.94% >=$ 16,753 >= 4.00% >=$ 25,129 >= 6.00%
Bank $ 41,603 9.93% >=$ 16,753 >= 4.00% >=$ 25,129 >= 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 41,627 6.53% >=$ 25,503 >= 4.00% >=$ 31,879 >= 5.00%
Bank $ 41,603 6.52% >=$ 25,510 >= 4.00% >=$ 31,888 >= 5.00%
22
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 subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended December 31, 1997, 1996 and 1995. These
financial statements are the responsibility of the Company'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 subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years ended
December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company adopted new accounting guidance for
mortgage servicing rights in 1996.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 16, 1998
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Management is responsible for the preparation of the Company'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 Company's financial position and results of
operations and were prepared in conformity with generally accepted accounting
principles. Management also has included in the Company's financial
statements, amounts that are based on estimates and judgments which it
believes are reasonable under the circumstances.
The Company 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 Company
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 Company's
system provides the appropriate balance between costs of controls and the
related benefits.
The independent auditors have audited the Company'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
Company has an Audit Review Committee composed of five non-management
Directors. The Committee meets periodically with the internal auditors and the
independent auditors.
23
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------------
FINANCIAL CONDITION
Liquidity
The Company 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 $71.5 million in 1998, 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 Company manages a secondary liquidity position to provide funding in
the event of unanticipated loan demand and/or deposit run-off. Management has
designated approximately 33.8 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 Company's
securities are all very high quality and easily marketable, with 89.8 percent
of the total securities portfolio 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, 1997, there was a net increase of
$4.9 million in cash and cash equivalents. The major uses of cash during the
period included the funding of a $53.3 million increase in loans, the purchase
of securities totaling $81.3 million and the purchase of new premises and
equipment of $5.5 million. Major sources of funds were: a net increase in cash
from operating activities of $8.9 million, maturities and calls of securities
totaling $40.7 million, an increase in deposits of $21.3 million, proceeds
from acquisitions of $58.9 million, and net proceeds from issuance of
guaranteed preferred beneficial interests in Company's subordinated debentures
of $19.2 million.
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.
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 Company from excessive net income volatility
that could result from changing interest rates. The Company 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
Company's cumulative GAP ratio at December 31, 1997, for the next 12 months is
a negative 10.8 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 Company is exposed to falling rates. That is, the
interest margin could be lower if rates fall. The degree of this exposure is
within policy limits.
The Company's investment portfolios consist of U.S. Treasuries,
agencies, mortgage-backed securities, municipal bonds and corporates. During
1997 purchases have been primarily U.S. Treasuries, mortgage-backed securities
and municipal bonds. At December 31, 1997, the Company's investment in
mortgage-backed securities comprised approximately 69 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 Company uses Bloomberg analytics to evaluate and monitor all purchases. At
December 31, 1997, the mortgage securities in the AFS portfolio had a one and
three-quarter year average life, with approximately 7 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 held-to-maturity (HTM) portfolio had a two and one-half year
average life and the potential for approximately 9 percent price depreciation
should rates increase 300 basis points and approximately 5 percent price
appreciation should rates move down 300 basis points. As of December 31, 1997,
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 Company believes that a strong capital position is vital to
long-term earnings and expansion. Currently the Company 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 Company attained Tier I leverage
capital, Tier I risk based capital and Tier II risk based capital ratios of
7.4 percent, 10.6 percent and 12.4 percent, respectively at December 31, 1997.
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 14.8 percent, to $48,256,000 as of December 31, 1997, from
$42,043,000 as of December 31, 1996. Total stockholders' equity increased by
31.3 percent or $11,502,000 from $36,754,000 as of December 31, 1995. The 1997
growth resulted from the retention of net income of $7,540,000, minus cash
dividends declared of $1,741,000 plus the change in the AFS adjustment of
$289,000, net of tax, plus $310,000 from issuing shares of common stock, less
$185,000 for the purchase of treasury stock. The AFS adjustment reflects a 42
basis point decrease in three to five year
24
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -------------------------------------------------------------------------------
U. S. Treasury rates during 1997. Since the securities portfolio is primarily
fixed rate, a positive equity adjustment should occur whenever interest rates
decrease. 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 1996 growth of $5,289,000 resulted from the retention
of net income of $6,444,000, minus cash dividends declared of $1,335,000, less
the AFS adjustment of $235,000, net of tax, plus $415,000 from issuing shares
of common stock. This 1996 AFS adjustment reflected an 82 basis point decrease
in three to five year U. S. Treasury rates during 1996.
Management is not aware of any known trends, events or uncertainties
that would have a material effect on the Company'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, 1997, the allowance for loan losses was $5,308,000 or
1.16 percent of total loans outstanding, compared with $5,306,000 or 1.39
percent of total loans outstanding at December 31, 1996. The process of
identifying credit losses that may occur based upon current circumstances is
subjective. Therefore, the Company 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 remained relatively low for 1997. This
level reflects the amount in past due accruing loans (90 days or more) which
continued to be at low levels throughout 1997. It also reflects the low level
of nonaccrual loans during the same period. These trends in non-performing
loans reflect both general economic conditions that have promoted growth and
expansion in the Company's market area, and a credit risk management strategy
that promotes diversification.
At December 31, 1997, 57.7 percent of the Company'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 $171 million, or about 59.3
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 Company. 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 Company increased 21.3 percent, or $139,927,000, to
$796,478,000 as of December 31, 1997, from $656,551,000 as of December 31,
1996. Assets at December 31, 1996, increased 15.5 percent, or $87,972,000,
from $568,579,000 as of December 31, 1995. The Company has been pursuing
expansion into contiguous markets since 1990. Most recently, the Company
opened three new offices and acquired seven offices from other financial
institutions during 1997. Plans call for expansion in Howard and Miami
counties through the previously announced acquisition of the Greentown and
Peru offices of National City Bank. This acquisition is scheduled to close
during the first quarter of 1998. Although growth continues to be strong in
the traditional markets served by the Company, much of the growth experienced
in 1997 was in the new markets served by the Company. The Company's market
area now includes the following counties in Indiana: Cass, Elkhart, Fulton,
Huntington, Kosciusko, LaGrange, Marshall, Noble, Pulaski, St. Joseph, Wabash
and Whitley. As in the past, the Company 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.
RESULTS OF OPERATIONS
1997 vs 1996
The growth of existing offices, opening of new offices and the purchase
of offices from other financial institutions brought the Company assets to
record levels in 1997. Total assets were at $796,478,000 at December 31, 1997,
an increase of $139,927,000 (including the assets acquired in branch
acquisitions in the fourth quarter of 1997) or 21.3 percent over the assets at
December 31, 1996. Loans increased 20.0 percent, or $76,369,000, to
$458,634,000 at year-end 1997. Total deposits increased 23.4 percent, or
$116,439,000 (including deposits of $95,181,000 acquired in branch
acquisitions in the fourth quarter of 1997), to $612,992,000 at December 31,
1997. Core funding, deposits plus securities sold under agreement to
repurchase, increased 16.5 percent, or $96,295,000, to $678,459,000. Net
income totaled $7,540,000, exceeding 1996 by 17.0 percent. On an average daily
basis, gross earning assets increased by 13.5 percent and total deposits plus
purchased funds increased by 13.8 percent.
Total interest income increased 14.7 percent, or $6,758,000 to
$52,699,000 for the year ended December 31, 1997. This increase was a result
of the increase in daily average earning assets and a 9 basis point increase
in the overall tax equivalent yield on earning assets as compared to the 1996
25
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -------------------------------------------------------------------------------
overall tax equivalent yield. The increase in the tax equivalent yield on
earning assets is reflective of the 17 basis point increase in the average
prime rate during 1997, and the effect this prime rate increase had on the
commercial loan portfolio and the home equity loan portfolio yields.
Nonearning assets of the Company include nonaccrual loans and
investments, other real estate, and repossessions. These nonearning assets
amounted to $1,317,000, $1,097,000 and $1,207,000 as of December 31, 1997,
1996 and 1995, respectively. Nonaccrual loans totaled $1,058,000, $384,000 and
$532,000, respectively, at the end of the years 1997, 1996 and 1995. Two
commercial loans and two mortgage loans account for the majority of the amount
in nonaccrual loans for 1997.
Interest expense for 1997 was $28,060,000. This is an increase of
$4,323,000, or 18.2 percent, over the interest expense for 1996. The increase
in interest expense is attributable to the continued growth in interest
bearing deposit balances and rising interest rates. Average daily balances of
time deposits increased 15.4 percent over the prior year average daily
balances and the average rate paid on time deposits increased 7 basis points.
Average daily balances of total interest bearing deposits increased 12.3
percent and the average rate paid on total interest bearing deposits increased
11 basis points. The average daily balance of total deposits plus purchased
funds increased 13.8 percent, as noted above, and the average rate paid
increased 16 basis points. This increase also includes the guaranteed
preferred beneficial interests in the Company's subordinated debentures added
in 1997 and the related interest expense along with the additional advances
from the Federal Home Loan Bank.
Net interest income increased $2,435,000 or 11.0 percent, to $24,639,000
in 1997, from $22,204,000 in 1996. Net interest income as a percentage of
earning assets was 3.96 percent for 1997. This is a decrease of 10 basis
points from the 4.06 percentage for 1996. This decrease resulted from the
increase in the rates paid on total deposits and purchased funds being 7 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 additional long-term borrowings during 1997.
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,
1997, allowance of $5,308,000 is believed by management to be 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 provision
for loan losses increased $2,286,000, or 10.4 percent, to $24,370,000 in 1997,
from $22,084,000 in 1996.
Noninterest income for 1997 increased $1,705,000, or 29.4 percent, over
the amount for 1996, totaling $7,504,000 for the year. All major components of
noninterest income increased except for security gains and losses. Trust
income increased 34.8 percent from the amount for 1996 to $1,188,000 for 1997
with major increases in fees for living trusts, testamentary trusts and
employee benefit plans. Service charges on deposit accounts increased 19.9
percent to $3,369,000 for 1997. This increase resulted from the continued
acceptance of the Company's individual deposit accounts paying fees. The
$715,000 increase in other noninterest income resulted from increases in a
variety of income sources including discount brokerage fees and ATM fees. The
increase in gains on sales of real estate mortgages held-for-sale were a
result of continued sales of mortgages to the secondary market. These gains
were $545,000 for 1997 as compared to $412,000 for 1996, an increase of
$133,000. The small security losses recorded in 1997 were primarily the result
of several partial calls.
All components of noninterest expense increased for the year ended
December 31, 1997, as compared to the prior year, with the largest increase
being salaries and employee benefits. Salaries and employee benefit costs for
1997 increased $1,747,000, or 18.3 percent, to $11,317,000. This increase was
attributable to a 21.3 percent increase in full-time equivalent employees
(FTE) in 1997, to 388, along with normal salary increases. The increase
reflects the impact of a full year of salaries and benefits related to the two
offices opened during 1996 along with the three new offices opened during 1997
and the offices acquired from other financial institutions in November and
December, 1997. Net occupancy and equipment costs increased to $3,144,000 in
1997, from $2,955,000 in 1996, an increase of $189,000 or 6.4 percent. Other
expense increased 10.0 percent, or $543,000, to $5,953,000 for 1997. These
increases resulted in noninterest expense for 1997 of $20,414,000, an increase
of 13.8 percent, or $2,479,000, over the amount for 1996.
As a result of all these factors, income before income tax expense
increased $1,512,000, or 15.2 percent, to $11,460,000 from the $9,948,000 for
1996. Income tax expense was $3,920,000 and $3,504,000 in 1997 and 1996,
respectively, which represents 34.2 percent and 35.2 percent of income before
taxes. Net income increased to $7,540,000 for 1997 from $6,444,000 for 1996,
an increase of $1,096,000, or 17.0 percent. Net income per share was $2.60 for
1997, as compared to $2.22 for 1996. Net income of $7,540,000 represents an
18.1 percent return on January 1, 1997, stockholders' equity (excluding the
equity adjustment related to SFAS No. 115), and a 1.10 percent return on
average daily assets.
1996 vs 1995
Continued growth and expansion brought Company assets and earnings to
record levels in 1996. Total assets of the Company 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 was 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, an increase of
$3,997,000 or 9.5 percent from the prior year. This was 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 reflected 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.
Nonearning assets of the Company 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 reflected 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 reflected 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 was adequate to absorb
all potential risk applicable to the classification of loans as loss,
doubtful, substandard or special mention. This allowance did not
26
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -------------------------------------------------------------------------------
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 Company'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 was 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 reflected 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 reflected the
additional offices. The increase of $241,000 in equipment costs reflected 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 was
primarily due to the reduced premium rates on FDIC insurance for 1996 as
compared to 1995.
As a result of all those 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 represented a 17.9
percent return on January 1, 1996 stockholders' equity (excluding the equity
adjustment related to SFAS No. 115) and a 1.07 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, 1997, 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 $ 285,223 $ 49,684 $ 96,474
Securities 45,523 24,410 110,985
Short-term investments 4,247 198 0
----------- ----------- -----------
Total 334,993 74,292 207,459
----------- ----------- -----------
Deposits and Purchased Funds
Transaction accounts 73,321 0 0
Time deposits 248,874 62,030 76,416
Short-term borrowings 69,783 8,084 6,250
Long-term borrowings 10,000 14,000 1,367
----------- ----------- -----------
Total 401,978 84,114 84,033
----------- ----------- -----------
Interest sensitivity GAP $ (66,985) $ (9,822) $ 123,426
=========== =========== ===========
Cumulative interest sensitivity GAP $ (66,985) $ (76,807) $ 46,619
=========== =========== ===========
Cumulative GAP as percent of earning assets (9.4)% (10.8)% 6.6%
=========== =========== ===========
27
LAKE CITY BANK OFFICERS
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R. Douglas Grant President RETAIL SERVICES
Paul S. Siebenmorgen Executive Vice President Kevin L. Deardorff Senior Vice President
Walter L. Weldy Executive Vice President Dale L. Cramer Vice President
Terry M. White Executive Vice President Thomas P. Frantz Vice President
Janet K. Anderson Assistant Vice President
COMMERCIAL SERVICES Barry A. Bailey Assistant Vice President
Charles D. Smith Senior Vice President Dennis E. Dolby Assistant Vice President
Kelly K. Ayers Vice President Craig A. Haecker Assistant Vice President
David A. Bickel Vice President T. Larry Mitchell Assistant Vice President
James R. Cowan Vice President W. Randy Yoder Assistant Vice President
Drew D. Dunlavy Vice President Glenn A. Goudey Senior Mortgage Underwriter
Michael E. Gavin Vice President Tammy L. Snyder Mortgage Underwriter
Joseph F. Kessie Vice President Carolyn A. Crabb Mortgage Banking Officer
William D. Leedy Vice President April J. Gayton Mortgage Banking Officer
J. Randall Leininger Vice President Aaron M. Stroup Mortgage Banking Officer
H.A. "Rocky" Meyer Vice President Rafael M. Villalon Mortgage Banking Officer
Jack E. Mills Vice President Sarah Miller-Bontrager Retail Banking Officer
Thomas G. Stark Vice President Todd M. Sandbakken Retail Banking Officer
James C. Stout Vice President Melanie R. Shipley Retail Banking Officer
Randal U. Vutech Vice President Lisa A. Stookey Retail Banking Officer
Chad D. Brouyette Assistant Vice President
Stephanie L. DuBois Assistant Vice President FINANCIAL & OPERATIONS
Brent E. Hoffman Assistant Vice President Terry M. White Executive Vice President
Kelli S. Robinson Assistant Vice President Frank A. Soltis Senior Vice President and
Timothy M. Rudge Assistant Vice President Operations Manager
J. Chad Stoltzfus Assistant Vice President James J. Nowak Vice President and Controller
Michael A. Zimmerman Commercial Banking Teresa A. Bartman Assistant Vice President
Officer and Assistant Controller
Debera D. Bragg Cash Management Judy K. Harvey Vice President
Officer Vicki D. Martin Vice President
Lisa M. Bicknese Assistant Vice President
TRUST & INVESTMENTS Ruth A. Hutcherson Assistant Vice President
Dennis E. Cultice Senior Vice President Linda A. Owens Assistant Vice President
Dennis A. Reeve Vice President and Lorretta J. Burnworth Operations Officer
Brokerage Services Mgr. Elizabeth A. Carlson Operations Officer
Anne M. Bailey Vice President Jean A. Ciriello Operations Officer
William C. Coleman Vice President Janice J. Cox Operations Officer
Jeanine D. Knowles Vice President Joanie L. Foreman Operations Officer
Andrew S. Lewis Vice President William L. Hilliard Operations Officer
Max A. Mock Vice President Jan R. Martin Operations Officer
Judith R. Simcox Vice President Angela K. Ritchey Operations Officer
Jill A. O'Sullivan Assistant Vice President Linda L. Swoverland Operations Officer
Connie S. Miller Trust Officer
AUDIT
MARKETING, HUMAN RESOURCES AND FACILITIES Betty L. McHenry Senior Vice President
D. Jean Northenor Senior Vice President and Auditor
Allyn P. Decker Vice President Teah D. Wicks Assistant Auditor
27
LAKE CITY BANK OFFICERS
- -----------------------
OFFICE ADMINISTRATION
Walter L. Weldy Executive Vice President
Kevin L. Deardorff Senior Vice President
M. Sue Creighton Vice President
Jane E. Miller Vice President
Jeannine P. Cooley Assistant Vice President
Lisa L. Hockemeyer Assistant Vice President
Karin A. Steffensmeier Retail Banking Officer
OFFICES
Akron L. Jane Murphy Assistant Vice President
Argos Stanley G. Reinholt Assistant Vice President
Bremen Matthew K. Bixel Vice President
Columbia City Donald L. Sexton Vice President
Lynnette E. Berry Retail Banking Officer
Concord Jeri L. Yoder Assistant Vice President
Cromwell Jerry L. Stoner Office Manager
Elkhart Beardsley Rosalie M. Smith Vice President
Samuel M. Bouie Assistant Office Manager
Elkhart East Debra L. Griggs Office Manager
Elkhart Hubbard Hill Thomas P. Walker Assistant Vice President
Elkhart Northwest Kathleen M. Dougherty Office Manager
Goshen Downtown Jane M. Greene Office Manager
Goshen South Clarence J. "CJ" Yoder Vice President
Granger Sandra J. Cencelewski Office Manager
Greentown Donna L. Graham Assistant Vice President
Huntington Judy A. Harshman Assistant Vice President
Kendallville East L. Duane Smith Vice President
Kendallville Downtown L. Duane Smith Vice President
LaGrange Cathy I. Hefty Assistant Vice President
Ligonier South Craig R. Atz Vice President
Jerry L. Stoner Office Manager
Ligonier Downtown Gaylord A. West Vice President
Nanceen P. Briggs Retail Banking Officer
Logansport Robert L. Baker Vice President
Medaryville Elaine C. Parish Assistant Vice President
Mentone Karen A. Francis Assistant Vice President
Middlebury Shannon D. Schrock Office Manager
Milford Timothy L. Sutton Vice President
Mishawaka Tammy S. Katona Retail Banking Officer
Office Manager
Nappanee Larry L. Penrod Vice President
Kirtus D. Murray Office Manager
North Webster Jeanne G. Bowen Vice President
Peru Patricia D. Adams Assistant Vice President
Pierceton Lisa S. Fitzgerald Office Manager
Plymouth Michael D. Burroughs Vice President
Roann Merrill A. Templin Assistant Vice President
Rochester Phyllis M. Biddinger Office Manager
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 Rosemary K. Baumgardner Office Manager
Warsaw East Pamela F. Messmore Assistant Vice President
Warsaw West Linda M. Riley Office Manager
Winona Lake Allan L. Disbro Vice President
28