UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ____________________
Commission File No. 0-11487
LAKELAND FINANCIAL CORPORATION
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(exact name of Registrant as specified in its charter)
INDIANA 35-1559596
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 1-219-267-6144
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common The Nasdaq Stock Market's National Market
Preferred Securities of Lakeland
Capital Trust The Nasdaq Stock Market's National Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such other period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein and will not be contained,
to the best of the Registrant's knowledge, in definitive Proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ X ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed solely for the purposes of this requirement on the basis
of the Nasdaq closing value at February 28, 1999, and assuming solely for the
purposes of this calculation that all directors and executive officers of the
Registrant are "affiliates": $97,180,974.
Number of shares of common stock outstanding at February 5, 1999:
5,794,743
Cover page 1 of 2 pages
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the following documents are incorporated by reference in the
Parts of the 10-K indicated:
Part Document
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I, II & IV Lakeland Financial Corporation's Annual Report to
Shareholders for the year ended December 31, 1998,
portions of which are incorporated into Parts I,
II and IV of this Form 10-K.
III Proxy statement mailed to shareholders on March
15, 1999, which is incorporated into Part III of
this Form 10-K.
Cover page 2 of 2 pages
PART I.
ITEM 1. BUSINESS
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The Registrant was incorporated under the laws of the State of Indiana on
February 8, 1983. As used herein, the terms "Registrant" and "Company" refer
to Lakeland Financial Corporation, or if the context dictates, the Lakeland
Financial Corporation and its wholly-owned subsidiaries, Lake City Bank,
Warsaw, Indiana, and Lakeland Capital Trust, Warsaw, Indiana.
General
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Registrant's Business. The Company is a bank holding company as defined
in the Bank Holding Company Act of 1956, as amended. The Company owns all of
the outstanding stock of Lake City Bank, Warsaw, Indiana, a full service
commercial bank organized under Indiana law (the "Bank"), and Lakeland Capital
Trust, a statutory business trust formed under Delaware law ("Lakeland
Trust"). The Company conducts no business except that incident to its
ownership of the outstanding stock of the Bank and the operation of the Bank.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation. The Bank's activities cover all phases of commercial banking,
including checking accounts, savings accounts, time deposits, the sale of
securities under agreements to repurchase, discount brokerage services,
commercial and agricultural lending, direct and indirect consumer lending,
real estate mortgage lending, safe deposit box service and trust services.
The Bank's main banking office is located at 202 East Center Street,
Warsaw, Indiana. As of December 31, 1998, the Bank had 42 offices in fourteen
counties throughout north central Indiana.
Supervision and Regulation.
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General
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions
and general economic conditions, but also by the requirements of applicable
state and federal statutes and regulations and the policies of various
governmental regulatory authorities, including the Board of Governors of the
Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Indiana Department of Financial Institutions
(the "DFI"), the Internal Revenue Service and state taxing authorities and the
Securities and Exchange Commission (the "SEC"). The effect of applicable
statutes, regulations and regulatory policies can be significant, and cannot
be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, non-interest earning reserves
against certain deposit accounts, capital levels relative to operations, the
nature and amount of collateral for loans, the establishment of branches,
mergers, consolidations and dividends. The system of supervision and
regulation applicable to the Company and its subsidiaries establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors, rather than shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not
describe all of the statutes, regulations and regulatory policies that apply
to the Company and its subsidiaries, nor does it restate all of the
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requirements of the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety by reference to
the applicable statutes, regulations and regulatory policies. Any change in
applicable law, regulations or regulatory policies may have a material impact
on the business of the Company and its subsidiaries.
Recent Regulatory developments
Pending Legislation. Legislation has been introduced in the Congress that
would allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. The expanded powers generally would be available to a bank holding
company only if the bank holding company and its subsidiaries remain well-
capitalized and well-managed. At this time, the Company is unable to predict
whether the proposed legislation will be enacted and, therefore, is unable to
predict the impact such legislation may have on the Company or the Bank.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank
holding company. As a bank holding company, the Company is registered with,
and is subject to regulation by, the Federal Reserve under the Bank Holding
Company Act, as amended (the"BHCA"). In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances where
the Company might not otherwise do so. Under the BHCA, the Company is subject
to periodic examination by the Federal Reserve. The Company is also required
to file with the Federal Reserve periodic reports of the Company's operations
and such additional information regarding the Company and its subsidiaries as
the Federal Reserve may require. The Company is also subject to regulation by
the DFI under Indiana law.
Investments and Activities. Under the BHCA, a bank holding company must
obtain Federal Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
shares of the other bank or bank holding company (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating with another
bank holding company. Subject to certain conditions (including certain deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state in the United
States without regard to whether the acquisition is prohibited by the law of
the state in which the target bank is located. In approving interstate
acquisitions, however, the Federal Reserve is required to give effect to
applicable state law limitations on the aggregate amount of deposits that may
be held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located
(provided those limits do not discriminate against out-of-state depository
institutions or their holding companies) and state laws which require that the
target bank has been in existence for a minimum period of time (not to exceed
five years) before being acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company which is not a bank and from engaging in any business other than that
of banking, managing and controlling banks or furnishing services to banks and
their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be "so closely related to banking ... as to be a proper
incident thereto." Under current regulations of the Federal Reserve, the
Company and its non-bank subsidiaries are permitted to engage in a variety of
banking-related businesses, including the operations of a thrift, sales and
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consumer finance, equipment leasing, the operation of a computer service
bureau (including software development), mortgage banking and brokerage. The
BHCA generally does not place territorial restrictions on the domestic
activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring "control"
of a bank or a bank holding company without prior notice to the appropriate
federal bank regulator. "Control" is defined in certain cases as the
acquisition of 10% of the outstanding shares of a bank or a bank holding
company.
Capital Requirement. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier I
capital. The leverage requirement consists of a minimum ratio of Tier I
capital to total assets of 3% for the most highly rated companies, with a
minimum requirement of 4% for all others. For purposes of these capital
standards, Tier I capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain mortgage servicing rights and
purchased credit card relationships). Total capital consists primarily of Tier
I capital plus certain other debt and equity instruments which do not qualify
as Tier I capital and a portion of the company's allowance for loan and lease
losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any
banking organization experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions
(i.e., Tier I capital less all intangible assets), well above the minimum
levels.
Under the Federal Reserve's guidelines, the capital standards described
above apply on a consolidated basis to bank holding companies that have more
than $150 million in total consolidated assets, but generally apply on a
bank-only basis to bank holding companies that have less than $150 million in
total assets. As of December 31, 1998, the Company had regulatory capital,
calculated on a consolidated basis, in excess of the Federal Reserve's minimum
requirements, with a risk based ratio of 10.83% and a leverage ratio of 6.39%.
Dividends. The Federal Reserve has issued a policy statement with regard
to the payment of cash dividends by bank holding companies. This policy
statement provides that a bank holding company should not pay cash dividends
which exceed its net income or which can be only funded in ways that weaken
the bank holding company's financial health, such as by borrowing. The Federal
Reserve also possesses enforcement powers over bank holding companies and
their non-bank subsidiaries to prevent or remedy actions that represent unsafe
or unsound practices or violations of applicable statutes or regulations.
Among these powers is the ability to proscribe the payment of dividends by
banks and bank holding companies.
Federal Securities Regulation. The Company's common stock is registered
with the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation, insider trading
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and other restrictions and requirements of the SEC under the Exchange Act.
The Bank
General. The Bank is an Indiana-chartered bank, the deposits of which are
insured by the FDIC's Bank Insurance Fund ("BIF"). As a BIF insured, Indiana-
chartered bank, the Bank is subject to the examination, supervision, reporting
and enforcement requirements of the DFI, as the chartering authority for
Indiana banks, and the FDIC, as administrator of the BIF.
Deposit Insurance. As an FDIC-insured institution, the Bank is required
to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted
a risk-based assessment system under which all insured depository institutions
are placed into one of nine categories and assessed insurance premiums based
upon their respective levels of capital and results of supervisory
evaluations. Institutions classified as well-capitalized (as defined by the
FDIC) and considered healthy pay the lowest premium while institutions that
are less than adequately capitalized (as defined by the FDIC) and considered
of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
During the year ended December 31, 1998, BIF assessments ranged from 0%
of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 1999, BIF assessments will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance on any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an
unsafe or unsound condition to continue operations or (iii) has violated any
applicable law, regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of
insurance if the institution has no tangible capital. Management of the
Company is not aware of any activity or condition that could result in
termination of the deposit insurance of the Bank.
FICO Assessment. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF and
BIF members became subject to assessments to cover interest payments on
outstanding FICO obligations. These FICO assessments are in addition to the
amounts assessed by the FDIC for deposit insurance. Until January 1, 2000, the
FICO assessments made against BIF members may not exceed 20% of the amount of
the FICO assessments made against SAIF members. Between January 1, 2000, and
the final maturity on the FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. During the year ended December 31, 1998, the FICO assessment rate for
SAIF members ranges between approximately 0.061% of deposits and approximately
0.063% of deposits, while the FICO assessment rate for BIF members ranged from
approximately 0.012% of deposits and approximately 0.013% of deposits. During
the year ended December 31, 1998, the Bank paid FICO assessments totaling
approximately $79,000.
Supervisory Assessments. All Indiana banks are required to pay
supervisory assessments to the DFI to fund the operations of the DFI. During
the year ended December 31, 1998, the Bank paid supervisory assessments to the
DFI totaling approximately $58,000.
Capital Requirements. The FDIC has established the following minimum
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capital standards for state-chartered non-member banks, such as the Bank: a
leverage requirement consisting of a minimum ratio of Tier I capital to total
assets of 3% for the most highly rated banks with a minimum requirement of at
least 4% for all others, and a risk-based capital requirement consisting of a
minimum ratio of total capital to risk-weighted assets of 8%, at least
one-half of which must be Tier I capital. For purposes of these capital
standards, Tier I capital and total capital consist of substantially the same
components as Tier I capital and total capital under the Federal Reserve's
capital guidelines for bank holding companies (see "The Company -- Capital
Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances
or risk profiles of individual institutions. For example, the regulations of
the FDIC provide that additional capital may be required to take account of,
among other things, interest rate risk or the risks posed by concentrations of
credit, nontraditional activities or securities trading activities.
During the year ended December 31, 1998, the Bank was not required by the
FDIC to increase its capital to an amount in excess of the minimum regulatory
requirement. As of December 31, 1998, the Bank exceeded its minimum regulatory
capital requirements with a leverage ratio of 6.55% and a risk-based capital
ratio of 10.71%.
Federal law provides the federal banking regulators with broad powers to
take prompt corrective actions to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well-capitalized", "adequately-capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized", in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators'
corrective powers include: requiring the institution to submit a capital
restoration plan; limiting the institution's asset growth and restricting its
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting
transactions between the institution and its affiliates; restricting the
interest rate the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on subordinated
debt; and ultimately, appointing a receiver for the institution. As of
December 31, 1998, the Bank was "well-capitalized".
Dividends. Indiana law prohibits the Bank from paying dividends in an
amount greater than its undivided profits. The Bank is required to obtain the
approval of the DFI for the payment of any dividend if the aggregate amount of
all dividends paid by the Bank during the calendar year, including the
proposed dividend, would exceed the sum of: (i) the total net profits of the
Bank for that year; and (ii) the retained profits of the Bank for the previous
two years. Indiana law defines "net profits" to mean the sum of all earnings
from current operations plus actual recoveries on loans, investments and other
assets, less the sum of all current operating expenses, actual losses, accrued
dividends on preferred stock, if any, and all federal, state, and local taxes.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, the Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 1998. As of December 31, 1998, approximately $17
million was available to be paid as dividends to the Company by the Bank.
Notwithstanding the availablitiy of funds for dividends, however, the FDIC may
prohibit the payments of dividends by the Bank if the FDIC determines such
payment would constitute an unsafe or unsound practice.
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Insider Transactions. The Bank is subject to certain restrictions imposed
by federal law on extensions of credit to the Company and its subsidiaries, on
investments in the stock or other securities of the Company and its
subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by the Bank to
its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company and to "related
interests" of such directors, officers and principal stockholders. In
addition, federal law and regulations may affect the terms upon which any
person becoming a director or officer of the Company or one of its
subsidiaries or a principal stockholder of the Company may obtain credit from
banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In addition, in October, 1998, the federal banking regulators issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing
its own procedure to achieve those goals. If an institution fails to comply
with any of the standards set forth in the guidelines, the institution's
primary federal regulator may require the institution to submit a plan for
achieving and maintaining compliance. If an institution fails to submit an
acceptable compliance plan, or fails in any material respect to implement a
compliance plan that has been accepted by its primary federal regulator, the
regulator is required to issue an order directing the institution to cure the
deficiency. Until the deficiency cited in the regulator's order is cured, the
regulator may restrict the institution's rate of growth, require the
institution to increase its capital, restrict the rate the institution pays on
its deposits or require the institution to take any action the regulator deems
appropriate under the circumstances. Noncompliance with the standards
established by the safety and soundness guidelines may also constitute grounds
for other enforcement action by the federal banking regulators, including
cease and desist orders and civil money penalty assessments.
Branching Authority. Indiana banks, such as the Bank, have the authority
under Indiana law to establish branches anywhere in the State of Indiana,
subject to receipt of all regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the"Riegle-Neal Act"), both state and national banks are allowed to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions, including certain limitations on the aggregate
amount of deposits that may be held by the surviving bank and all of its
insured depository institution affiliates. The establishment of new interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is
allowed by the Riegle-Neal Act only if specifically authorized by state law.
The legislation allowed individual states to "opt-out" of certain provisions
of the Riegle-Neal Act by enacting appropriate legislation prior to June 1,
1997. Indiana has enacted legislation permitting interstate mergers subject to
certain conditions, including a prohibition against interstate mergers
involving Indiana banks that have been in existence and continuous operation
for fewer than five years. Additionally, Indiana law allows out-of-state banks
to acquire individual branch offices in Indiana and to establish new branches
in Indiana subject to certain conditions, including a requirement that the
laws of the state in which the out-of-state bank is headquartered grant
Indiana banks authority to acquire and establish branches in such state.
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State Bank Activities. Under federal law and FDIC regulations, FDIC
insured state banks are prohibited, subject to certain exceptions, from making
or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also
prohibit FDIC insured state banks and their subsidiaries, subject to certain
exceptions, from engaging as principal in any activity that is not permitted
for a national bank or its subsidiary, respectively, unless the bank meets,
and continues to meet, its minimum regulatory capital requirements, and that
the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. These restrictions have
not had, and are not currently expected to have, a material impact on the
operations of the Bank
Federal Reserve System. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular
checking accounts) as follows: for transaction accounts aggregating $46.5
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $46.5 million, the
reserve requirement is $1.395 million plus 10% of the aggregate amount of
total transaction accounts in excess of $46.5 million. The first $4.9 million
of otherwise reservable balances are exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by the Federal
Reserve. The Bank is in compliance with the foregoing requirements.
Forward-looking Statements
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Statements contained in this Report and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases
and in oral statements made with the approval of an authorized executive
officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). There can be no assurance, in light of certain risks and
uncertainties, that such forward-looking statements will in fact transpire.
The following important factors, risks and uncertainties, among others, could
cause actual results to differ materially from such forward-looking
statements:
Credit risk: Approximately 64.4% and 59.5% of the Company's loans at
December 31, 1998 and December 31, 1997, were commercial in nature
(including agri-business and agricultural loans), and, as of both
December 31, 1998 and December 31, 1997, the Company estimates that in
excess of 90% of its commercial, industrial, agri-business and
agricultural real estate mortgage loans, real estate construction
mortgage and consumer loans are made within the Bank's basic trade area.
Changes in local and national economic conditions could adversely affect
credit quality in the Company's loan portfolio.
Interest rate risk: Although the Company actively manages its interest
rate sensitivity, such management is not an exact science. Rapid
increases or decreases in interest rates could adversely impact the
Company's net interest margin if changes in its cost of funds do not
correspond to the changes in income yields.
Competition: The Company's activities involve competition with other
banks as well as other financial institutions and enterprises. Also, the
financial service markets have, and likely will continue to, experience
substantial changes which could significantly change the Company's
competitive environment in the future.
Legislative and regulatory environment: The Company operates in a rapidly
changing legislative and regulatory environment. It cannot be predicted
how or to what extent future developments in these areas will affect the
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Company. These developments could negatively impact the Company through
increased operating expenses for compliance with new laws and
regulations, restricted access to new products and markets, or in other
ways.
General business and economic trends: General business and economic
trends, including the impact of inflation levels, influence the Company's
results in numerous ways, including operating expense levels, deposit and
loan activity, and availability of trained individuals needed for future
growth.
The use of estimates and assumptions: In preparing financial statements
in conformity with generally accepted accounting principles, management
must make estimates and assumptions that affect the amounts reported
therein and the disclosures provided. Actual results could differ from
these estimates.
The foregoing list should not be construed as exhaustive, and the Company
disclaims any obligation to subsequently update or revise any forward-looking
statements contained in this Report after the date of this Report.
Material Changes and Business Developments
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The Company conducts no business except that incident to its ownership of
the stock of the Bank, the collection of dividends from the Bank, and the
disbursement of dividends to shareholders. During the period from 1985 to
1987, the Company owned all of the outstanding shares of Lakeland Mortgage
Corp., a mortgage lending and servicing corporation doing business in Indiana.
Lakeland Mortgage Corp. discontinued business operations on December 15, 1987.
The Company continued to own all of the stock of Lakeland Mortgage Corp. until
1992, during which year, Lakeland Mortgage Corp. was liquidated and all stock
was redeemed.
Lakeland Trust, a statutory business trust, was formed under Delaware law
pursuant to a trust agreement dated July 24, 1997 and a certificate of trust
filed with the Delaware Secretary of State on July 24, 1997. Lakeland Trust
exists for the exclusive purposes of (i) issuing the trust securities
representing undivided beneficial interests in the assets of Lakeland Trust,
(ii) investing the gross proceeds of the trust securities in the subordinated
debentures issued by the Company, and (iii) engaging in only those activities
necessary, advisable, or incidental thereto. The subordinated debentures and
payments thereunder are the only assets of Lakeland Trust, and payments under
the subordinated debentures are the only revenue of Lakeland Trust. Lakeland
Trust has a term of 55 years, but may be terminated earlier as provided in the
trust agreement.
Competition
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The Bank was originally organized in 1872 and has continuously operated
under the laws of the State of Indiana since its organization. The Bank is a
full service bank providing both commercial and personal banking services.
Bank products offered include interest and noninterest bearing demand
accounts, savings and time deposit accounts, sale of securities under
agreements to repurchase, discount brokerage, commercial loans, mortgage
loans, consumer loans, letters of credit, and a wide range of trust services.
The interest rates for both deposits and loans, as well as the range of
services provided, are nearly the same for all banks competing within the
Bank's service area.
The Bank competes for loans principally through the range and quality of
services it provides, interest rates and loan fees. The Bank believes that its
convenience, quality service and hometown approach to banking enhances its
ability to compete favorably in attracting and retaining individual and
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business customers. The Bank actively solicits deposit-related customers and
competes for customers by offering personal attention, professional service
and competitive interest rates.
The Bank's service area is north central Indiana. In addition to the
banks located within its service area, the Bank also competes with savings and
loan associations, credit unions, farm credit services, finance companies,
personal loan companies, insurance companies, money market funds, and other
non-depository financial intermediaries. Also, financial intermediaries such
as money market mutual funds and large retailers are not subject to the same
regulations and laws that govern the operation of traditional depository
institutions and accordingly may have an advantage in competing for funds.
The Bank competes with other major banks for large commercial deposit and
loan accounts. The Bank is presently subject to an aggregate maximum loan
limit to any single account of approximately $10 million pursuant to Indiana
law. This maximum prohibits the Bank from providing a full range of banking
services to those businesses or personal accounts whose borrowings
periodically exceed this amount. In order to retain at least a portion of the
banking business of these large borrowers, the Bank maintains correspondent
relationships with other financial institutions. The Bank also participates
with local and other banks in the placement of large borrowings in excess of
its lending limit. The Bank is also a member of the Federal Home Loan Bank of
Indianapolis in order to broaden its mortgage lending and investment
activities and to provide additional funds, if necessary, to support these
activities.
Foreign Operations
- ------------------
The Company has no investments with any foreign entity other than a
nominal demand deposit account which is maintained with a Canadian bank in
order to facilitate the clearing of checks drawn on banks located in that
country. There are no foreign loans.
Employees
- ---------
At December 31, 1998, the Company, including its subsidiaries, had 435
full- time equivalent employees. Benefit programs include a pension plan,
401(k) plan, group medical insurance, group life insurance and paid vacations.
The Bank is not a party to any collective bargaining agreement, and employee
relations are considered good. The Company also has a stock option plan under
which stock options may be granted to employees and directors.
Industry Segments
- -----------------
The Company is engaged in a single industry and performs a single service
- -- commercial banking. On the pages that follow are tables which set forth
selected statistical information relative to the business of the Company. This
data should be read in conjunction with the consolidated financial statements,
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as set forth in the 1998 Annual Report to
Shareholders herein incorporated by reference (attached hereto as Exhibit 13).
-9-
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
1998 1997
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Income Yield(1) Balance Income Yield(1)
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Earning assets:
Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Loans:
Taxable (2) 486,437 44,225 9.09 410,798 38,265 9.31
Tax exempt (1) 2,899 295 10.18 3,235 345 10.66
Investments:(1)
Available-for-sale 142,499 9,062 6.36 80,627 5,396 6.69
Held-to-maturity 160,173 10,858 6.78 136,618 9,244 6.77
Short-term investments 9,545 510 5.34 5,275 284 5.38
Interest bearing deposits 133 9 6.77 234 19 8.12
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 801,686 64,959 8.10% 636,787 53,553 8.41%
========== ==========
Nonearning assets:
Cash and due from banks 36,215 0 27,479 0
Premises and equipment 25,198 0 17,961 0
Other nonearning assets 24,324 0 11,735 0
Less: allowance for loan losses (5,403) 0 (5,302) 0
---------- ---------- ---------- ----------
Total assets $ 882,020 $ 64,959 $ 688,660 $ 53,553
========== ========== ========== ==========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 1998 and 1997. The tax
equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, included the TEFRA adjustment
applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1998 and
1997, are included as taxable loan interest income.
</FN>
-10-
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
1997 1996
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Income Yield(1) Balance Income Yield(1)
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Earning assets:
Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00%
Loans:
Taxable (2) 410,798 38,265 9.31 349,336 32,724 9.37
Tax exempt (1) 3,235 345 10.66 3,475 373 10.73
Investments:(1)
Available-for-sale 80,627 5,396 6.69 84,145 5,371 6.38
Held-to-maturity 136,618 9,244 6.77 119,892 8,065 6.73
Short-term investments 5,275 284 5.38 4,250 226 5.32
Interest bearing deposits 234 19 8.12 213 19 8.92
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 636,787 53,553 8.41% 561,311 46,778 8.33%
========== ==========
Nonearning assets:
Cash and due from banks 27,479 0 24,533 0
Premises and equipment 17,961 0 14,724 0
Other nonearning assets 11,735 0 9,424 0
Less: allowance for loan losses (5,302) 0 (5,382) 0
---------- ---------- ---------- ----------
Total assets $ 688,660 $ 53,553 $ 604,610 $ 46,778
========== ========== ========== ==========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 1997 and 1996. The tax
equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, included the TEFRA adjustment
applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1997 and
1996, are included as taxable loan interest income.
</FN>
-11-
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
1998 1997
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Expense Rate Balance Expense Rate
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $ 55,299 $ 1,331 2.41% $ 45,278 $ 1,152 2.54%
Interest bearing checking accounts 65,895 1,322 2.01 55,063 1,180 2.14
Time deposits:
In denominations under $100,000 326,123 17,234 5.28 230,171 12,406 5.39
In denominations over $100,000 142,589 8,267 5.80 109,759 6,445 5.87
Miscellaneous short-term borrowings 90,752 4,724 5.21 90,097 4,921 5.46
Long-term borrowings 44,349 3,213 7.24 29,655 1,956 6.60
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 725,007 36,091 4.98% 560,023 28,060 5.01%
========== ===========
Non-interest bearing liabilities
and stockholders' equity:
Demand deposits 98,957 0 77,276 0
Other liabilities 7,386 0 6,498 0
Stockholders' equity 50,670 0 44,863 0
---------- ---------- ---------- ----------
Total liabilities and stock-
holders' equity $ 882,020 $ 36,091 $ 688,660 $ 28,060
========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 28,868 3.60% $ 25,493 4.00%
========== ========= ========== ==========
-12-
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (cont.)
(in thousands of dollars)
1997 1996
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Expense Rate Balance Expense Rate
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $ 45,278 $ 1,152 2.54% $ 43,847 $ 1,118 2.55%
Interest bearing checking accounts 55,063 1,180 2.14 53,625 1,178 2.20
Time deposits:
In denominations under $100,000 230,171 12,406 5.39 208,499 11,229 5.39
In denominations over $100,000 109,759 6,445 5.87 86,137 4,886 5.67
Miscellaneous short-term borrowings 90,097 4,921 5.46 78,823 4,213 5.34
Long-term borrowings 29,655 1,956 6.60 19,624 1,113 5.67
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 560,023 28,060 5.01% 490,555 23,737 4.84%
========== ==========
Non-interest bearing liabilities
and stockholders' equity:
Demand deposits 77,276 0 69,459 0
Other liabilities 6,498 0 5,553 0
Stockholders' equity 44,863 0 39,043 0
---------- ---------- ---------- ----------
Total liabilities and stock-
holders' equity $ 688,660 $ 28,060 $ 604,610 $ 23,737
========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 25,493 4.00% $ 23,041 4.10%
========== ========== ========== ==========
-13-
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(fully taxable equivalent basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
1998 Over (Under) 1997(1) 1997 Over (Under) 1996(1)
------------------------------------ ------------------------------------
Volume Rate Total Volume Rate Total
---------- ---------- ---------- ---------- ---------- ----------
INTEREST AND LOAN FEE INCOME(2)
Loans:
Taxable $ 6,896 $ (936) $ 5,960 $ 5,724 $ (183) $ 5,541
Tax exempt (35) (15) (50) (26) (2) (28)
Investments:
Available-for-sale 3,947 (281) 3,666 (230) 255 25
Held-to-maturity 1,597 17 1,614 1,131 48 1,179
Short-term investments 228 (2) 226 1 57 58
Interest bearing deposits (7) (3) (10) 1 (1) 0
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 12,626 (1,220) 11,406 6,601 174 6,775
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE
Savings deposits 244 (65) 179 35 (1) 34
Interest bearing checking accounts 221 (79) 142 31 (29) 2
Time deposits
In denominations under $100,000 5,075 (247) 4,828 1,168 9 1,177
In denominations over $100,000 1,904 (82) 1,822 1,382 177 1,559
Miscellaneous short-term borrowings 36 (233) (197) 614 94 708
Long-term borrowings 1,049 208 1,257 640 203 843
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 8,529 (498) 8,031 3,870 453 4,323
---------- ---------- ---------- ---------- ---------- ----------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 4,097 $ (722) $ 3,375 $ 2,731 $ (279) $ 2,452
========== ========== ========== ========== ========== ==========
<FN>
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 1998, 1997 and 1996. The changes in volume represent "changes in volume times the old rate". The changes in rate
represent "changes in rate times old volume". The changes in rate/volume were also calculated by "change in rate times change
in volume" and allocated consistently based upon the relative absolute values of the changes in volume and changes in rate.
(2) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 1998, 1997 and 1996. The
tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, included the TEFRA
adjustment applicable to nondeductible interest expense.
</FN>
-14-
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996
----------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
Securities available-for-sale:
U.S. Treasury securities $ 38,938 $ 39,521 $ 28,833 $ 29,286 $ 31,604 $ 31,804
U.S. Government agencies and corporations 1,990 2,030 100 100 500 507
Mortgage-backed securities 225,741 225,914 52,746 53,309 46,002 46,332
Obligations of state and political
subdivisions 56,924 59,112 1,787 1,904 2,081 2,167
Other debt securities 1,005 1,081 0 0 1,000 1,032
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities available-for-sale $ 324,598 $ 327,658 $ 83,466 $ 84,599 $ 81,187 $ 81,842
========== ========== ========== ========== ========== ==========
Securities held-to-maturity:
U.S. Treasury securities $ 0 $ 0 $ 21,170 $ 21,501 $ 17,020 $ 17,077
U.S. Government agencies and corporations 0 0 2,176 2,246 2,262 2,362
Mortgage-backed securities 0 0 116,788 117,185 83,811 83,719
Obligations of state and political
subdivisions 0 0 22,418 24,044 21,172 22,095
Other debt securities 0 0 1,007 1,103 1,009 1,120
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities held-to-maturity $ 0 $ 0 $ 163,559 $ 166,079 $ 125,274 $ 126,373
========== ========== ========== ========== ========== ==========
-15-
ANALYSIS OF SECURITIES (cont.)
(Fully Tax Equivalent Basis)
(in thousands of dollars)
The weighted average yields (1) and maturity distribution (2) for debt securities portfolio at December 31, 1998, were as
follows:
After One After Five
Within Year Years Over
One Within Five Within Ten Ten
Year Years Years Years
------------ ------------ ------------ ------------
Securities available-for-sale:
U.S. Treasury securities
Book value $ 5,000 $ 33,938 $ 0 $ 0
Yield 5.85% 6.36%
Government agencies and corporations
Book value 1,990 0 0 0
Yield 7.18
Mortgage-backed securities
Book value 2,501 10,871 112,608 99,761
Yield 7.60 7.17 7.03 7.78
Obligations of state and political
subdivisions
Book value 220 344 5,968 50,392
Yield 6.64 6.79 5.71 5.23
Other debt securities
Book value 0 1,005 0 0
Yield 10.13
------------ ------------ ------------ ------------
Total debt securities available-for-sale:
Book value $ 9,711 $ 46,158 $ 118,576 $ 150,153
Yield 6.59% 6.64% 6.96% 6.92%
============ ============ ============ ============
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34% rate.
(2) The maturity distribution of mortgage-backed securities was based upon anticipated payments as computed by using the historic
average repayment speed from date of issue.
There were no investments in securities of any one issuer that exceed 10% of stockholders' equity at December 31, 1998.
</FN>
-16-
ANALYSIS OF LOAN PORTFOLIO
Analysis of Loans Outstanding
(in thousands of dollars)
The Company segregates its loan portfolio into four basic segments: commercial (including agri-business and agricultural
loans), real estate mortgages, installment and personal line of credit loans (including credit card loans). The loan portfolio as
of December 31, 1998, 1997, 1996, 1995 and 1994 was as follows:
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Commercial loans:
Taxable $ 343,858 $ 269,887 $ 226,190 $ 192,359 $ 173,325
Tax exempt 2,867 3,065 3,414 3,636 3,207
---------- ---------- ---------- ---------- ----------
Total commercial loans 346,725 272,952 229,604 195,995 176,532
Real estate mortgage loans 60,555 65,368 60,949 55,948 47,296
Installment loans 100,196 89,107 71,398 58,175 48,228
Line of credit and credit card loans 31,020 31,207 20,314 17,499 15,900
---------- ---------- ---------- ---------- ----------
Total loans 538,496 458,634 382,265 327,617 287,956
Less allowance for loan losses 5,510 5,308 5,306 5,472 4,866
---------- ---------- ---------- ---------- ----------
Net loans $ 532,986 $ 453,326 $ 376,959 $ 322,145 $ 283,090
========== ========== ========== ========== ==========
<FN>
The real estate mortgage loan portfolio included construction loans totaling $2,975, $3,089, $1,647, $1,224, and $426 as of
December 31, 1998, 1997, 1996, 1995 and 1994. The loan classifications are based on the nature of the loans as of the loan
origination date. There were no foreign loans included in the loan portfolio for the periods presented.
</FN>
-17-
ANALYSIS OF LOAN PORTFOLIO (cont.)
Analysis of Loans Outstanding (cont.)
(in thousands of dollars)
Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules included in
the related loan agreements or upon scheduled maturity of each principal payment. The following table indicates the rate
sensitivity of the loan portfolio as of December 31, 1998. The table includes the real estate loans held-for-sale and assumes
these loans will not be sold during the various time horizons.
Line of
Credit
and
Real Credit
Commercial Estate Installment Card Total Percent
------------ ------------ ------------ ------------ ------------ ------------
Immediately adjustable interest rates
or original maturity of one day $ 211,701 $ 0 $ 0 $ 28,040 $ 239,741 44.2%
Other within one year 26,079 43,980 33,619 2,980 106,658 19.7
After one year, within five years 88,708 13,522 63,629 0 165,859 30.6
Over five years 20,237 6,849 2,948 0 30,034 5.5
Nonaccrual loans 0 0 0 0 0 0.0
------------ ------------ ------------ ------------ ------------ ------------
Total loans $ 346,725 $ 64,351 $ 100,196 $ 31,020 $ 542,292 100.0%
============ ============ ============ ============ ============ ============
<FN>
A portion of the loans are short-term maturities. At maturity, credits are reviewed, and if renewed, are renewed at rates and
conditions that prevail at the time of maturity.
Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or
adjustable interest rates as of December 31, 1998 amounted to $179,000 and $48,703.
</FN>
-18-
ANALYSIS OF LOAN PORTFOLIO (cont.)
Review of Nonperforming Loans
(in thousands of dollars)
The following is a summary of nonperforming loans as of December 31, 1998, 1997, 1996, 1995 and 1994.
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 0 $ 0 $ 126 $ 122 $ 0
Commercial and industrial loans 159 236 22 69 16
Loans to individuals for household,
family and other personal expenditures 68 69 68 18 19
Loans to finance agriculture production
and other loans to farmers 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total past due loans 227 305 216 209 35
---------- ---------- ---------- ---------- ----------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 0 337 155 76 18
Commercial and industrial loans 0 720 229 456 0
Loans to individuals for household,
family and other personal expenditures 0 0 0 0 0
Loans to finance agriculture production
and other loans to farmers 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans 0 1,057 384 532 18
---------- ---------- ---------- ---------- ----------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,281 1,377 1,284 1,432 1,484
---------- ---------- ---------- ---------- ----------
Total nonperforming loans $ 1,508 $ 2,739 $ 1,884 $ 2,173 $ 1,537
========== ========== ========== ========== ==========
<FN>
Nonearning assets of the Company include nonaccrual loans (as indicated above), nonaccrual investments, other real estate,
and repossessions, which amounted to $626 at December 31, 1998.
</FN>
-19-
ANALYSIS OF LOAN PORTFOLIO (cont.)
Comments Regarding Nonperforming Assets
PART A - CONSUMER LOANS
- -----------------------
Consumer installment loans, except those loans that are secured by real
estate, are not placed on a nonaccrual status since these loans are
charged-off when they have been delinquent from 90 to 180 days, and when the
related collateral, if any, is not sufficient to offset the indebtedness.
Advances under Mastercard and Visa programs, as well as advances under all
other consumer line of credit programs, are charged-off when collection
appears doubtful.
PART B - NONPERFORMING LOANS
- ----------------------------
When a loan is classified as a nonaccrual loan, interest on the loan is
no longer accrued and all accrued interest receivable is charged off. It is
the policy of the Bank that loans for which the collateral is insufficient to
cover all principal and accrued interest will be reclassified as nonperforming
loans to the extent they are unsecured, on or before the date when the loan
becomes 90 days delinquent. Thereafter, interest is recognized and included in
income only when received.
As of December 31, 1998, there were no loans on nonaccrual status.
PART C - TROUBLED DEBT RESTRUCTURED LOANS
- -----------------------------------------
Loans renegotiated as troubled debt restructurings are those loans for
which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the terms of the loan.
Loans renegotiated as troubled debt restructurings totaled $1,281,000 as
of December 31, 1998. Interest income of $84,000 was recognized in 1998. Had
these loans been performing under the original contract terms, an additional
$47,000 would have been reflected in interest income during 1998. The Company
is not committed to lend additional funds to debtors whose loans have been
modified.
PART D - OTHER NONPERFORMING ASSETS
- -----------------------------------
Management is of the opinion that there are no significant foreseeable
losses relating to substandard or nonperforming assets, except as discussed
above.
PART E - LOAN CONCENTRATIONS
- ----------------------------
There were no loan concentrations within industries which exceeded ten
percent of total assets. It is estimated that over 90% of all the Bank's
commercial, industrial, agri-business and agricultural real estate mortgage,
real estate construction mortgage and consumer loans are made within its basic
trade area.
Basis For Determining Allowance For Loan Losses
Management is responsible for determining the adequacy of the allowance
for loan losses. This responsibility is fulfilled by management in the
following ways:
1. Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectibility factors and assesses
the requirement for specific reserves on such credits. For those loans not
subject to specific reviews, management reviews previous loan loss experience
to establish historical ratios and trends in charge-offs by loan category. The
ratios of net charge-offs to particular types of loans enable management to
estimate charge-offs in future periods by loan category and thereby establish
-20-
appropriate reserves for loans not specifically reviewed.
2. Management reviews the current and anticipated economic conditions of
its lending market to determine the effects on future loan charge-offs by loan
category, in addition to the effects on the loan portfolio as a whole.
3. Management reviews delinquent loan reports to determine risk of future
loan charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Based upon these policies and objectives, $480,000, $269,000 and $120,000
were charged to the provision for loan losses and added to the allowance for
loan losses in 1998, 1997 and 1996.
The allocation of the allowance for loan losses to the various lending
areas is performed by management in relation to perceived exposure to loss in
the various loan portfolios. However, the allowance for loan losses is
available in its entirety to absorb losses in any particular loan category.
-21-
ANALYSIS OF LOAN PORTFOLIO (cont.)
Summary of Loan Loss
(in thousands of dollars)
Following is a summary of the loan loss experience for the years ended December 31, 1998, 1997, 1996, 1995 and 1994.
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Amount of loans outstanding, December 31, $ 538,496 $ 458,634 $ 382,265 $ 327,617 $ 287,956
========== ========== ========== ========== ==========
Average daily loans outstanding during the
year ended December 31, $ 489,336 $ 414,033 $ 352,811 $ 309,241 $ 271,391
========== ========== ========== ========== ==========
Allowance for loan losses, January 1, $ 5,308 $ 5,306 $ 5,472 $ 4,866 $ 4,010
---------- ---------- ---------- ---------- ----------
Loans charged-off
Commercial 9 99 171 137 27
Real estate 0 33 0 48 0
Installment 329 190 158 112 93
Credit cards and personal credit lines 78 37 39 58 15
---------- ---------- ---------- ---------- ----------
Total loans charged-off 416 359 368 355 135
---------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged-off
Commercial 44 18 12 26 107
Real estate 0 0 0 0 1
Installment 86 66 54 63 81
Credit cards and personal credit lines 8 8 16 6 7
---------- ---------- ---------- ---------- ----------
Total recoveries 138 92 82 95 196
---------- ---------- ---------- ---------- ----------
Net loans charged-off 278 267 286 260 (61)
Purchase loan adjustment 0 0 0 746 0
Provision for loan loss charged to expense 480 269 120 120 795
---------- ---------- ---------- ---------- ----------
Balance, December 31, $ 5,510 $ 5,308 $ 5,306 $ 5,472 $ 4,866
========== ========== ========== ========== ==========
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial (0.01)% 0.02% 0.03% 0.03% (0.03)%
Real estate 0.00 0.01 0.01 0.01 0.00
Installment 0.05 0.03 0.00 0.02 0.01
Credit cards and personal credit lines 0.02 0.01 0.04 0.02 0.00
---------- ---------- ---------- ---------- ----------
Total 0.06% 0.07% 0.08% 0.08% (0.02)%
========== ========== ========== ========== ==========
Ratio of allowance for loan losses to
nonperforming assets 258.20% 176.99% 204.31% 192.20% 208.48%
========== ========== ========== ========== ==========
-22-
ANALYSIS OF LOAN PORTFOLIO (cont.)
Allocation of Allowance for Loan Losses
(in thousands of dollars)
The following is a summary of the allocation for loan losses as of December 31, 1998, 1997, 1996, 1995 and 1994.
1998 1997 1996
----------------------- ----------------------- -----------------------
Allowance Loans as Allowance Loans as Allowance Loans as
For Percentage For Percentage For Percentage
Loan of Gross Loan of Gross Loan of Gross
Losses Loans Losses Loans Losses Loans
---------- ---------- ---------- ---------- ---------- ----------
Allocated allowance for loan losses
Commercial $ 1,647 64.39 $ 1,341 59.52 $ 1,213 60.07
Real estate 130 11.24 131 14.25 123 15.94
Installment 845 18.61 673 19.43 530 18.68
Credit cards and personal credit lines 130 5.76 103 6.80 151 5.31
---------- ---------- ---------- ---------- ---------- ----------
Total allocated allowance for loan losses 2,752 100.00 2,248 100.00 2,017 100.00
========== ========== ==========
Unallocated allowance for loan losses 2,758 3,060 3,289
---------- ---------- ----------
Total allowance for loan losses $ 5,510 $ 5,308 $ 5,306
========== ========== ==========
1995 1994
----------------------- -----------------------
Allowance Loans as Allowance Loans as
For Percentage For Percentage
Loan of Gross Loan of Gross
Losses Loans Losses Loans
---------- ---------- ---------- ----------
Allocated allowance for loan losses
Commercial $ 811 59.82 $ 665 61.31
Real estate 112 17.08 95 16.42
Installment 376 17.76 311 16.75
Credit cards and personal credit lines 112 5.34 101 5.52
---------- ---------- ---------- ----------
Total allocated allowance for loan losses 1,411 100.00 1,172 100.00
========== ==========
Unallocated allowance for loan losses 4,061 3,694
---------- ----------
Total allowance for loan losses $ 5,472 $ 4,866
========== ==========
-23-
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 1998, 1997 and 1996, and the average rates paid on those deposits
are summarized in the following table:
1998 1997 1996
----------------------- ----------------------- -----------------------
Average Average Average Average Average Average
Daily Rate Daily Rate Daily Rate
Balance Paid Balance Paid Balance Paid
---------- ---------- ---------- ---------- ---------- ----------
Demand deposits $ 98,957 0.00 $ 77,276 0.00 $ 69,459 0.00
Savings accounts:
Regular savings 55,299 2.41 45,278 2.54 43,847 2.55
Interest bearing checking 65,895 2.01 55,063 2.14 53,625 2.20
Time deposits:
Deposits of $100,000 or more 142,589 5.80 109,759 5.87 86,137 5.67
Other time deposits 326,123 5.28 230,171 5.39 208,499 5.39
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 688,863 4.09 $ 517,547 4.09 $ 461,567 3.99
========== ========== ========== ========== ========== ==========
As of December 31, 1998, time certificates of deposit in denominations of
$100,000 or more will mature a as follows:
Within three months $ 71,117
Over three months, within six months 51,027
Over six months, within twelve months 21,711
Over twelve months 10,136
----------
Total time certificates of deposit in
denominations of $100,000 or more $ 153,991
==========
-24-
QUALITATIVE MARKET RISK DISCLOSURE
Management's market risk disclosure appears under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1998 Annual Report to Shareholders and is incorporated
herein by reference in response to this item. The Company's primary market
risk exposure is interest rate risk. The Company does not have a material
exposure to foreign currency exchange rate risk, does not own any derivative
financial instruments and does not maintain a trading portfolio.
RETURN ON EQUITY AND ASSETS
The rates of return on average daily assets and stockholders' equity, the
dividend payout ratio, and the average daily stockholders' equity to average
daily assets for the years ended December 31, 1998, 1997 and 1996 were as
follows:
1998 1997 1996
--------- --------- ---------
Percent of net income to:
Average daily total assets 0.89% 1.10% 1.07%
Average daily stockholders' equity 15.57 16.81 16.50
Percentage of dividends declared per
common share to net income per weighted
average number of common shares
outstanding (5,813,984 shares in 1998,
5,813,162 shares in 1997, and 5,792,825
shares in 1996) 24.26 23.08 20.72
Percentage of average daily
stockholders' equity to average
daily total assets 5.74 6.51 6.46
-25-
SHORT-TERM BORROWINGS
(in thousands of dollars)
The following is a schedule, at the end of the year indicated, of
statistical information relating to securities sold under agreement to
repurchase maturing within one year and secured by either U.S. Government
agency securities or mortgage-backed securities classified as other debt
securities. There were no other categories of short-term borrowings for which
the average balance outstanding during the period was 30 percent or more of
stockholders' equity at the end of each period.
1998 1997 1996
---------- ---------- ----------
Outstanding at year end $ 110,163 $ 65,467 $ 85,611
Approximate average interest rate at
year end 4.78% 4.90% 5.11%
Highest amount outstanding as of any
month end during the year $ 110,163 $ 98,917 $ 89,433
Approximate average outstanding
during the year $ 84,157 $ 83,732 $ 73,728
Approximate average interest rate
during the year 5.19% 5.45% 5.33%
Securities sold under agreement to repurchase include both fixed rate,
term transactions initiated by the investment department of the Bank, as well
as corporate sweep accounts.
-26-
ITEM 2. PROPERTIES
- ------------------
The Company conducts its operations from the following locations:
Branches/Headquarters
Main / Headquarters 202 E. Center St. Warsaw IN
Warsaw Drive-up East Center St. Warsaw IN
Akron 102 East Rochester Akron IN
Argos 100 North Michigan Argos IN
Bremen 1600 Indiana State Road 331 Bremen IN
Columbia City 601 Countryside Dr. Columbia City IN
Concord 4202 Elkhart Road Goshen IN
Cromwell 111 North Jefferson St. Cromwell IN
Elkhart Beardsley 864 East Beardsley St. Elkhart IN
Elkhart East 22050 State Road 120 Elkhart IN
Elkhart Hubbard Hill 58404 State Road 19 Elkhart IN
Elkhart Northwest 1208 N. Nappanee St. Elkhart IN
Goshen Downtown 102 North Main St. Goshen IN
Goshen South 2513 South Main St. Goshen IN
Granger 12830 State Road 23 Granger IN
Greentown 520 W. Main Greentown IN
Huntington 1501 N. Jefferson St. Huntington IN
Kendallville East 631 Professional Way Kendallville IN
Kendallville Downtown 113 N. Main St. Kendallville IN
LaGrange 901 South Detroit LaGrange IN
Ligonier Downtown 222 S. Calvin St. Ligonier IN
Ligonier South 1470 U.S. Highway 33 South Ligonier IN
Logansport 3900 Highway 24 East Logansport IN
Medaryville Main St. Medaryville IN
Mentone 202 East Main St. Mentone IN
Middlebury 712 Wayne Ave. Middlebury IN
Milford Indiana State Road 15 North Milford IN
Mishawaka 5015 N. Main St. Mishawaka IN
Nappanee 202 West Market St. Nappanee IN
North Webster 644 North Main St. North Webster IN
Peru 2 N. Broadway Peru IN
Pierceton 202 South First St. Pierceton IN
Plymouth 862 E. Jefferson St. Plymouth IN
Roann 110 Chippewa St. Roann IN
Rochester 507 East 9th St. Rochester IN
Shipshewana 895 North Van Buren St. Shipshewana IN
Silver Lake 102 Main St. Silver Lake IN
Syracuse 502 South Huntington Syracuse IN
Wabash North 1004 North Cass St. Wabash IN
Wabash South 1940 South Wabash St. Wabash IN
Warsaw East 3601 Commerce Dr. Warsaw IN
Warsaw West 1221 West Lake St. Warsaw IN
Winona Lake 99 Chestnut St. Winona Lake IN
The Company leases from third parties the real estate and buildings for
its offices in Akron and Milford. In addition, the Company leases the real
estate for its Wabash North office and its free-standing ATMs. All the other
branch facilities are owned by the Company. The Company also owns parking lots
in downtown Warsaw for the use and convenience of Company employees and
customers, as well as leasehold improvements, equipment, furniture and
fixtures necessary and appropriate to operate the banking facilities.
-27-
In addition, the Company owns buildings at 110 South High St., Warsaw,
Indiana, and 114-118 East Market St., Warsaw, Indiana, which it uses for
various offices and a building at 113 East Market St., Warsaw, Indiana, which
it uses for office and computer facilities. The Company also leases from third
parties facilities in Warsaw, Indiana, for the storage of supplies and for
employee training.
None of the Company's assets are the subject of any material
encumbrances.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Company and the
Bank are a party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- ------------------------------------------------------------------------------
Information relating to the principal market for and the prices of the
Company's common stock, and information as to dividends are contained under
the caption "Stock and Dividend Information" in the 1998 Annual Report to
Shareholders and are incorporated herein by reference. On December 31, 1998,
the Registrant had 1,536 shareholders of record, including those employees who
participate in the Company's 401(K) plan.
On January 9, 1996, the Company sold 40,000 shares of authorized but
previously unissued common stock for $10.38 per share (as adjusted for all
subsequent stock splits). On April 30, 1996, the common stock split
two-for-one.
On January 15, 1997, Lakeland Financial Corporation sold 20,000 shares of
authorized but previously unissued common stock for $15.50 per share (split
adjusted).
In August, 1997, the common stock of the Company and the preferred stock
of its wholly-owned subsidiary, Lakeland Trust, began trading on The Nasdaq
Stock Market under the symbols LKFN and LKFNP.
At the annual meeting of shareholders on April 14, 1998, the shareholders
approved the Lakeland Financial Corporation 1997 Share Incentive Plan. This
plan reserves 600,000 shares of common stock (split adjusted) for which
incentive share options and non-qualified share options may be granted to
directors and employees of the Company and its subsidiaries.
On April 30, 1998, the common stock split two-for-one.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
A five year consolidated financial summary, containing the required
selected financial data, appears under the caption "Selected Financial Data"
on page 7 in the 1998 Annual Report to Shareholders and is incorporated herein
by reference.
-28-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations appears under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 27 - 32 in the 1998
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------------
Quantitative and qualitative disclosures about market risk appear under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 27 - 32 in the 1998 Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following consolidated financial statements appear in the 1998 Annual
Report to Shareholders and are incorporated herein by reference.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information appearing in the definitive Proxy Statement dated March
15, 1999, is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information appearing in the definitive Proxy Statement dated March
15, 1999, is incorporated herein by reference in response to this item. The
sections in the Proxy Statement marked "Report of the Compensation Committee
on Executive Compensation" and "Stock Price Performance" are furnished for the
information of the Commission and are not deemed to be "filed" as part of the
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information appearing in the definitive Proxy Statement dated March
15, 1999, is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information appearing in the definitive Proxy Statement dated March
15, 1999, is incorporated herein by reference in response to this item.
-29-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) The documents listed below are filed as a part of this report:
(1) Financial Statements.
---------------------
The following financial statements appear in the 1998 Annual Report to
Shareholders and are specifically incorporated by reference under Item 8 of
this Form 10-K, or are a part of this Form 10-K, as indicated and at the pages
set forth below.
Reference
---------
1998 Annual
Form 10-K Report
--------- ------------
Consolidated Balance Sheets at December 31,
1998 and 1997. 9
Consolidated Statements of Income for the
years ended December 31, 1998, 1997 and 1996. 10
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996. 11
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996. 12
Notes to Consolidated Financial Statements. 13 - 24
Report of Independent Auditors. 26
(2) Financial Statement Schedules.
------------------------------
Financial statement schedules have been omitted because of the absence of
conditions under which they are required or because the required information
is given in the financial statements or notes thereto.
-30-
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
Date: March 9, 1999 By R. Douglas Grant
(R. Douglas Grant) Chairman
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 9, 1999 Michael L. Kubacki
(Michael L. Kubacki) Principal
Executive Officer and Director
Date: March 9, 1999 Terry M. White
(Terry M. White) Principal Financial
and Accounting Officer
Date: March 9, 1999 R. Douglas Grant
(R. Douglas Grant) Director
Date:
(Anna K. Duffin) Director
Date: March 9, 1999 Eddie Creighton
(Eddie Creighton) Director
Date: March 9, 1999 L. Craig Fulmer
(L. Craig Fulmer) Director
Date: March 9, 1999 Jerry L. Helvey
(Jerry L. Helvey) Director
Date:
(Allan J. Ludwig) Director
Date: March 9, 1999 Charles E. Niermier
(Charles E. Niemier) Director
-31-
Date: March 9, 1999 Richard L. Pletcher
(Richard L. Pletcher) Director
Date: March 9, 1999 Terry L. Tucker
(Terry L. Tucker) Director
Date:
(M. Scott Welch) Director
Date: March 9, 1999 G. L. White
(G. L. White) Director
-32-
EXHIBIT INDEX
The following Exhibits are filed as part of this Report and not
incorporated by reference from another document:
Exhibit 13 - 1998 Report to Shareholders with Report of Independent
Auditors.
Exhibit 21 - Subsidiaries
Exhibit 27 - Financial Data Schedule
-33-
EXHIBIT 13
1998 Report to Shareholders with Report of Independent Auditors.
-34-
EXHIBIT 21
Subsidiaries. The Registrant has two wholly-owned subsidiaries, Lake City
Bank, Warsaw, Indiana, a banking corporation organized under the laws of the
State of Indiana, and Lakeland Capital Trust, a statutory business trust
formed under Delaware law.
-35-