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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ____________________
Commission File No. 0-11487
LAKELAND FINANCIAL CORPORATION
------------------------------
(exact name of Registrant as specified in its charter)
INDIANA 35-1559596
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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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
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 22, 2000, and assuming solely
for the purposes of this calculation that all directors and executive officers
of the Registrant are "affiliates": $79,225,857.
Number of shares of common stock outstanding at February 22, 2000: 5,788,992
Cover page 1 of 2 pages
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
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, 1999,
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, 2000,
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 Company was incorporated under the laws of the State of Indiana
on February 8, 1983. As used herein, the term "Company" refers to Lakeland
Financial Corporation, or if the context dictates, Lakeland Financial
Corporation and its wholly-owned subsidiaries, Lake City Bank, Warsaw,
Indiana, and Lakeland Capital Trust, Warsaw, Indiana.
General
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Company'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"). In trust, the Bank recognizes a wholly-owned subsidiary, LCB
Investments Limited, which manages a portion of the Bank's investment
portfolio. 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, brokerage services, commercial and
agricultural lending, direct and indirect consumer lending, real estate
mortgage lending, safe deposit box service and trust and investment services.
The Bank's main banking office is located at 202 East Center Street,
Warsaw, Indiana. As of December 31, 1999, the Bank had 44 offices in fifteen
counties throughout north central Indiana.
Forward-looking Statements
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When used in this report and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results
to differ materially from historical earnings and those presently anticipated
or projected.
The Company wishes to caution readers not to place undo reliance on any
such forward-looking statements, which speak only as of the date made, and
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
1
Business Developments
- ---------------------
The Company conducts no business except that which is incident to its
ownership of the stock of the Bank, the collection of dividends from the Bank,
and the disbursement of dividends to shareholders.
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's
activities cover all phases of commercial banking, including checking
accounts, savings accounts, time deposits, the sale of securities under
agreements to repurchase, brokerage services, commercial and agricultural
lending, direct and indirect consumer lending, real estate mortgage lending,
safe deposit box services, trust and investment 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
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 $9 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.
2
Foreign Operations
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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
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At December 31, 1999, the Company, including its subsidiaries, had 453
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.
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 Indiana Department of
Financial Institutions (the "DFI"), the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), the Federal Deposit Insurance
Corporation (the "FDIC"), 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, reserves against deposits, 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
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 effect
on the business of the Company and its subsidiaries.
Recent Regulatory Developments
Pending Legislation. On November 12, 1999, President Clinton signed
legislation that will allow bank holding companies to engage in a wider range
of nonbanking activities, including greater authority to engage in securities
and insurance activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank
holding company may engage in any activity that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines by regulation or
order is (i) financial in nature, (ii) incidental to any such financial
3
activity, or (iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions
or the financial system generally. The Act specifies certain activities that
are deemed to be financial in nature, including lending, exchanging,
transferring, investing for others, or safeguarding money or securities;
underwriting and selling insurance; providing financial, investment, or
economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the Federal Reserve under section 4(c)(8) of the Bank Holding Company Act. A
bank holding company may elect to be treated as a financial holding company
only if all depository institution subsidiaries of the holding company are
well-capitalized, well-managed and have at least a satisfactory rating under
the Community Reinvestment Act.
National banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of
the Treasury, in consultation with the Federal Reserve, determines is
financial in nature or incidental to any such financial activity, except (i)
insurance underwriting, (ii) real estate development or real estate investment
activities (unless otherwise permitted by law), (iii) insurance company
portfolio investments and (iv) merchant banking. The authority of a national
bank to invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that
apply to national bank investments in financial subsidiaries.
At this time, it is not possible to predict the impact the Act may have
on the Company. Various bank regulatory agencies have just begun issuing
regulations as mandated by the Act. The Federal Reserve has issued an interim
rule that sets forth procedures by which bank holding companies may become
financial holding companies, the criteria necessary for such a conversion, and
the Federal Reserve's enforcement powers should a holding company fail to
maintain compliance with the criteria. The Office of the Comptroller of the
Currency has issued a final rule discussing the procedures by which national
banks may establish financial subsidiaries, as well as the qualifications and
safeguards that will be required. In addition, in February, 2000, all federal
bank regulatory agencies jointly issued a proposed rule that would implement
the financial privacy provisions of the Act.
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
4
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 operation of a thrift, sales and
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 average 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
5
expected to maintain capital ratios, including tangible capital positions
(i.e., Tier I capital less all intangible assets), well above the minimum
levels.
As of December 31, 1999, the Company had regulatory capital in excess of
the Federal Reserve's minimum requirements, with a risk based ratio of 10.26%
and a leverage ratio of 6.77%.
Dividends. The Federal Reserve has issued a policy statement with regard
to the payment of cash dividends by bank holding companies. The policy
statement provides that a bank holding company should not pay cash dividends
which exceed its net income or which can only be 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 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, 1999, BIF assessments ranged from 0%
of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2000, BIF assessments will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of 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
6
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, 1999, the FICO assessment rate for
SAIF members ranges between approximately 0.0580% of deposits and
approximately 0.0610% of deposits, while the FICO assessment rate for BIF
members ranged between approximately 0.0116% of deposits and approximately
0.0122% of deposits. During the year ended December 31, 1999, the Bank paid
FICO assessments totaling $83,000.
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, 1999, the Bank paid supervisory assessments to the
DFI totaling $69,000.
Capital Requirements. The FDIC has established the following minimum
capital standards for state-chartered insured non-member banks, such as the
Bank: a leverage requirement consisting of a minimum ratio of Tier I capital
to total average 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 adequate
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, 1999, 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, 1999, the Bank exceeded its minimum regulatory
capital requirements with a leverage ratio of 6.72% and a risk-based capital
ratio of 10.01%.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action 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
7
debt; and ultimately, appointing a receiver for the institution. As of
December 31, 1999, the Bank was well-capitalized, as defined by FDIC
regulations.
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 total amount of all
dividends declared by the Bank during the calendar year, including the
proposed dividend, would exceed the sum of the retained net income for the
year to date combined with its retained net income for the previous two years.
Indiana law defines "retained net income" to mean the net income of a
specified period, calculated under the consolidated report of income
instructions, less the total amount of all dividends declared for the
specified period.
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 any 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, 1999. As of December 31, 1999, approximately $15
million was available to be paid as dividends to the Company by the Bank.
Notwithstanding the availability of funds for dividends, however, the FDIC may
prohibit the payment of any dividends by the Bank if the FDIC determines such
payment would constitute an unsafe or unsound practice.
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. Since the fourth quarter of 1998, and through the first quarter of
2000, the federal banking regulators have 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
8
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.
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 the
FDIC determines that 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 $44.3
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $44.3 million, the
reserve requirement is $1.329 million plus 10% of the aggregate amount of
total transaction accounts in excess of $44.3 million. The first $5.0 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.
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 1999 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)
1999 1998
------------------------------------------- -------------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Earning assets:
Loans:
Taxable (2) $ 602,250 $ 51,602 8.57% $ 486,437 $ 44,225 9.09%
Tax exempt (1) 2,920 275 9.42 2,899 295 10.18
Investments: (1)
Available for sale 291,005 18,597 6.39 142,499 9,062 6.36
Held to maturity 0 0 0.00 160,173 10,858 6.78
Short-term investments 5,230 259 4.95 9,545 510 5.34
Interest bearing deposits 308 16 5.19 133 9 6.77
------------- ------------- ------------- ------------- ------------- -------------
Total earning assets 901,713 70,749 7.85% 801,686 64,959 8.10%
============= =============
Nonearning assets:
Cash and due from banks 37,767 0 36,215 0
Premises and equipment 27,248 0 25,198 0
Other nonearning assets 27,784 0 24,324 0
Less: allowance for loan losses (5,958) 0 (5,403) 0
------------- ------------- ------------- -------------
Total assets $ 988,554 $ 70,749 $ 882,020 $ 64,959
============= ============= ============= =============
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 34 percent tax rate for 1999 and 1998. 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, 1999 and
1998 are included as taxable loan interest income.
10
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
1998 1997
------------------------------------------- -------------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Earning assets:
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
============= ============= ============= =============
(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.
11
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
1999 1998
------------------------------------------- -------------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
------------- ------------- ------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 54,562 $ 935 1.71% $ 55,299 $ 1,331 2.41%
Interest bearing checking accounts 56,304 861 1.53 65,895 1,322 2.01
Time Deposits:
In denominations under $100,000 359,700 17,394 4.84 326,123 17,234 5.28
In denominations over $100,000 150,182 7,963 5.30 142,589 8,267 5.80
Miscellaneous short-term borrowings 146,680 7,139 4.87 90,752 4,724 5.21
Long-term borrowings 37,312 2,801 7.51 44,349 3,213 7.24
------------- ------------- ------------- ------------- ------------- -------------
Total interest bearing liabilities 804,740 37,093 4.61% 725,007 36,091 4.98%
============= =============
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 120,808 0 98,957 0
Other liabilities 7,834 0 7,386 0
Stockholders' equity 55,172 0 50,670 0
------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity $ 988,554 $ 37,093 $ 882,020 $ 36,091
============= ============= ============= =============
Net interest differential - yield on
average daily earning assets $ 33,656 3.73% $ 28,868 3.60%
============= ============= ============= =============
12
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 Yield Balance Expense Yield
------------- ------------- ------------- ------------- ------------- -------------
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 1,332 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%
============= =============
Noninterest 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 stockholders'
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%
============= ============= ============= =============
13
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(fully taxable equivalent basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
1999 Over (Under) 1998 (1) 1998 Over (Under) 1997 (1)
------------------------------------------- -------------------------------------------
Volume Rate Total Volume Rate Total
------------- ------------- ------------- ------------- ------------- -------------
INTEREST AND LOAN FEE INCOME (2)
Loans:
Taxable $ 10,041 $ (2,664) $ 7,377 $ 6,896 $ (936) $ 5,960
Tax exempt 2 (115) (113) (35) (15) (50)
Investments:
Available for sale 8,881 (607) 8,274 3,947 (281) 3,666
Held to maturity (10,858) 0 (10,858) 1,597 17 1,614
Short-term investments (215) (37) (252) 228 (2) 226
Interest bearing deposits 10 (3) 7 (7) (3) (10)
------------- ------------- ------------- ------------- ------------- -------------
Total interest income 7,861 (3,426) 4,435 12,626 (1,220) 11,406
------------- ------------- ------------- ------------- ------------- -------------
INTEREST EXPENSE
Savings deposits (18) (378) (396) 244 (65) 179
Interest bearing checking accounts (175) (286) (461) 221 (79) 142
Time deposits
In denominations under $100,000 1,692 (1,532) 160 5,075 (247) 4,828
In denominations over $100,000 426 (730) (304) 1,904 (82) 1,822
Miscellaneous short-term borrowings 2,740 (325) 2,415 36 (233) (197)
Long-term borrowings (525) 113 (412) 1,049 208 1,257
------------- ------------- ------------- ------------- ------------- -------------
Total interest expense 4,140 (3,138) 1,002 8,529 (498) 8,031
------------- ------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 3,721 $ (288) $ 3,433 $ 4,097 $ (722) $ 3,375
------------- ------------- ------------- ------------- ------------- -------------
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 1999, 1998 and 1997. 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 1999, 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 expense.
14
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
-------------------------- -------------------------- --------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------ ------------ ------------ ------------ ------------ ------------
Securities available for sale:
U.S. Treasury securities $ 35,133 $ 34,614 $ 38,938 $ 39,521 $ 28,833 $ 29,286
U.S. Government agencies and corporations 6,693 6,313 1,990 2,030 100 100
Mortgage-backed securities 196,245 192,569 225,741 225,914 52,746 53,309
State and municipal securities 35,432 32,714 56,924 59,112 1,787 1,904
Other debt securities 5,862 5,211 1,005 1,081 0 0
------------ ------------ ------------ ------------ ------------ ------------
Total debt securities available for sale $ 279,365 $ 271,421 $ 324,598 $ 327,658 $ 83,466 $ 84,599
------------ ------------ ------------ ------------ ------------ ------------
Securities held to maturity:
U.S. Treasury securities $ 0 $ 0 $ 0 $ 0 $ 21,170 $ 21,501
U.S. Government agencies and corporations 0 0 0 0 2,176 2,246
Mortgage-backed securities 0 0 0 0 116,788 117,185
State and municipal securities 0 0 0 0 22,418 24,044
Other debt securities 0 0 0 0 1,007 1,103
------------ ------------ ------------ ------------ ------------ ------------
Total debt securities held to maturity $ 0 $ 0 $ 0 $ 0 $ 163,559 $ 166,079
------------ ------------ ------------ ------------ ------------ ------------
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, 1999, were as
follows:
After One After Five
Within Year Years Over
One Within Within Ten Ten
Year Five Years Years Years
------------- ------------- ------------- -------------
Securities available for sale:
U.S. Treasury securities
Book value $ 0 $ 35,133 $ 0 $ 0
Yield 6.37
Government agencies and corporations
Book value 0 9,805 0 0
Yield 5.95
Mortgage-backed securities
Book value 1,053 5,371 91,007 98,552
Yield 6.73 6.11 6.96 7.19
State and municipal securities subdivisions
Book value 9 99 1,379 34,207
Yield 6.00 6.85 5.09 5.03
Other debt securities
Book value 0 0 0 2,750
Yield 8.53
------------- ------------- ------------- -------------
Total debt securities available for sale:
Book value $ 1,062 $ 50,408 $ 92,386 $ 135,509
Yield 6.72 6.26 6.93 6.67
============= ============= ============= =============
(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 payment speed from date of issue.
There were no investments in securities of any one issuer that exceeded 10% of stockholders' equity at December 31, 1999.
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, 1999, 1998, 1997, 1996 and 1995 was as follows:
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Commercial loans:
Taxable $ 419,034 $ 343,858 $ 269,887 $ 226,190 $ 192,359
Tax exempt 3,048 2,867 3,065 3,414 3,636
------------- ------------- ------------- ------------- -------------
Total commercial loans 422,082 346,725 272,952 229,604 195,995
Real estate mortgage loans 46,872 60,555 65,368 60,949 55,948
Installment loans 146,711 100,196 89,107 71,398 58,175
Line of credit and credit card loans 38,233 31,020 31,207 20,314 17,499
------------- ------------- ------------- ------------- -------------
Total loans 653,898 538,496 458,634 382,265 327,617
Less allowance for loan losses 6,522 5,510 5,308 5,306 5,472
------------- ------------- ------------- ------------- -------------
Net loans $ 647,376 $ 532,986 $ 453,326 $ 376,959 $ 322,145
============= ============= ============= ============= =============
The real estate mortgage loan portfolio included construction loans totaling $4,488, $2,975, $3,089, $1,647 and $1,224 as of
December 31, 1999, 1998, 1997, 1996 and 1995. 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.
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, 1999. 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 $ 226,365 $ 0 $ 0 $ 35,124 $ 261,489 40.1%
Other within one year 27,561 29,750 44,140 3,109 104,560 16.0
After one year, within five years 144,775 13,912 99,169 0 257,856 39.4
Over five years 23,052 3,210 3,402 0 29,664 4.5
Nonaccrual loans 329 0 0 0 329 0.0
------------- ------------- ------------- ------------- ------------- -------------
Total loans $ 422,082 $ 46,872 $ 146,711 $ 38,233 $ 653,898 100.0%
============= ============= ============= ============= ============= =============
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, 1999 amounted to $274,124 and $37,778.
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, 1999, 1998, 1997, 1996 and 1995.
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 0 $ 0 $ 0 $ 126 $ 122
Commercial and industrial loans 20 159 236 22 69
Loans to individuals for household, family and
other personal expenditures 151 68 69 68 18
Loans to finance agriculture production and
other loans to farmers 0 0 0 0 0
------------- ------------- ------------- ------------- -------------
Total past due loans 171 227 305 216 209
------------- ------------- ------------- ------------- -------------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 0 0 338 155 76
Commercial and industrial loans 329 0 720 229 456
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 329 0 1,058 384 532
------------- ------------- ------------- ------------- -------------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,179 1,281 1,377 1,284 1,432
------------- ------------- ------------- ------------- -------------
Total nonperforming loans $ 1,679 $ 1,508 $ 2,740 $ 1,884 $ 2,173
============= ============= ============= ============= =============
Nonearning assets of the Company include nonaccrual loans (as indicated above), nonaccrual investments, other real estate and
repossessions, which amounted to $422 at December 31, 1999.
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 all 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, 1999, there were $329,000 of loans on nonaccrual
status, including a $246,000 loan classified as impaired.
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 $1,179,000 as
of December 31, 1999. Interest income of $95,000 was recognized in 1999. Had
these loans been performing under the original contract terms, an additional
$22,000 would have been reflected in interest income during 1999. 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 in Part B - Nonperforming Loans and Part C - Troubled Debt Restructured
Loans.
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 collectability factors and assesses
the requirement for specific reserves on such credits. For those loans not
subject to specific reviews, management reviews previous loan loss experience
to establish historical ratios and trends in charge-offs by loan category. The
ratios of net charge-offs to particular types of loans enable management to
estimate charge-offs in future periods by loan category and thereby establish
appropriate reserves for loans not specifically reviewed.
20
2. Management reviews the current economic conditions of its lending
market to determine the effects on 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 loan
charge-offs. High delinquencies are generally indicative of an increase in
future loan charge-offs.
Based upon these policies and objectives, $1,310,000, $480,000 and
$269,000 were charged to the provision for loan losses and added to the
allowance for loan losses in 1999, 1998 and 1997.
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)
The following is a summary of the loan loss experience for the years ended December 31, 1999, 1998, 1997,
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Amount of loans outstanding, December 31, $ 653,898 $ 538,496 $ 458,634 $ 382,265 $ 327,617
============= ============= ============= ============= =============
Average daily loans outstanding during the year
ended December 31, $ 605,170 $ 489,336 $ 414,033 $ 352,811 $ 309,241
============= ============= ============= ============= =============
Allowance for loan losses, January 1, $ 5,510 $ 5,308 $ 5,306 $ 5,472 $ 4,866
------------- ------------- ------------- ------------- -------------
Loans charged-off
Commercial 147 9 99 171 137
Real estate 6 0 33 0 48
Installment 252 329 190 158 112
Credit cards and personal credit lines 30 78 37 39 58
------------- ------------- ------------- ------------- -------------
Total loans charged-off 435 416 359 368 355
------------- ------------- ------------- ------------- -------------
Recoveries of loans previously charged-off
Commercial 10 44 18 12 26
Real estate 0 0 0 0 0
Installment 114 86 66 54 63
Credit cards and personal credit lines 13 8 8 16 6
------------- ------------- ------------- ------------- -------------
Total recoveries 137 138 92 82 95
------------- ------------- ------------- ------------- -------------
Net loans charged-off 298 278 267 286 260
Purchase loan adjustment 0 0 0 0 746
Provision for loan loss charged to expense 1,310 480 269 120 120
------------- ------------- ------------- ------------- -------------
Balance, December 31, $ 6,522 $ 5,510 $ 5,308 $ 5,306 $ 5,472
============= ============= ============= ============= =============
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial 0.02% (0.01)% 0.02% 0.03% 0.03%
Real estate 0.00 0.00 0.01 0.01 0.01
Installment 0.02 0.05 0.03 0.00 0.02
Credit cards and personal credit lines 0.01 0.02 0.01 0.04 0.02
------------- ------------- ------------- ------------- -------------
Total 0.05% 0.06% 0.07% 0.08% 0.08%
============= ============= ============= ============= =============
Ratio of allowance for loan losses to
Nonperforming assets 368.06% 258.20% 176.99% 204.31% 192.20%
============= ============= ============= ============= =============
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, 1999, 1998, 1997, 1996 and 1995.
1999 1998 1997
-------------------------- -------------------------- --------------------------
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 $ 4,750 64.55% $ 1,647 64.39% $ 1,341 59.52%
Real estate 120 7.17 130 11.24 131 14.25
Installment 1,202 22.43 845 18.61 673 19.43
Credit cards and personal credit lines 185 5.85 130 5.76 103 6.80
------------ ------------ ------------ ------------ ------------ ------------
Total allocated allowance for loan losses 6,257 100.00% 2,752 100.00% 2,248 100.00%
============ ============ ============
Unallocated allowance for loan losses 265 2,758 3,060
------------ ------------ ------------
Total allowance for loan losses $ 6,522 $ 5,510 $ 5,308
============ ============ ============
1996 1995
-------------------------- --------------------------
Allowance Loans as Allowance Loans as
For Percentage For Percentage
Loan of Gross Loan of Gross
Losses Loans Losses Loans
------------ ------------ ------------ ------------
Allocated allowance for loan losses
Commercial $ 1,213 60.07% $ 811 59.82%
Real estate 123 15.94 112 17.08
Installment 530 18.68 376 17.76
Credit cards and personal credit lines 151 5.31 112 5.34
------------ ------------ ------------ ------------
Total allocated allowance for loan losses 2,017 100.00% 1,411 100.00%
============ ============
Unallocated allowance for loan losses 3,289 4,061
------------ ------------
Total allowance for loan losses $ 5,306 $ 5,472
============ ============
In 1999, the Company reviewed and revised the allocation process for the Allowance for Loan Losses. These changes primarily
effected the allocations as they pertain to the commercial loans classified in the Company's internal watch list. These changes
also brought the Company's methodology into closer conformity with regulatory guidance. The Company continues to review the
allocation process and the documentation for the Allowance for Loan Losses, therefore future changes may occur.
23
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 1999, 1998 and 1997, and the average rates paid on those
deposits are summarized in the following table:
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Daily Rate Daily Rate Daily Rate
Balance Paid Balance Paid Balance Paid
------------- ------------- ------------- ------------- ------------- -------------
Demand deposits $ 120,808 0.00% $ 98,957 0.00% $ 77,276 0.00%
Savings accounts:
Regular savings 54,562 1.71 55,299 2.41 45,278 2.54
Interest bearing checking 56,304 1.53 65,895 2.01 55,063 2.14
Time deposits:
Deposits of $100,000 or more 150,182 5.30 142,589 5.80 109,759 5.87
Other time deposits 359,700 4.84 326,123 5.28 230,171 5.39
------------- ------------- ------------- ------------- ------------- -------------
Total deposits $ 741,556 3.66% $ 688,863 4.09% $ 517,547 4.09%
============= ============= ============= ============= ============= =============
As of December 31, 1999, time certificates of deposit in denominations of
$100,000 or more will mature as follows:
Within three months $ 59,825
Over three months, within six months 26,184
Over six months, within twelve months 30,096
Over twelve months 9,814
-------------
Total time certificates of deposit in
denominations of $100,000 or more $ 125,919
=============
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 1999 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 OTHER RATIOS
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, 1999, 1998 and 1997 were as
follows:
1999 1998 1997
----------- ----------- -----------
Percent of net income to:
Average daily total assets 0.84% 0.89% 1.10%
Average daily stockholders' equity 15.08 15.57 16.81
Percentage of dividends declared per
common share to basic earnings per
weighted average number of common
shares outstanding (5,813,984 shares
in 1999, 5,813,984 shares in 1998
and 5,813,162 shares in 1997) 30.77 24.26 23.08
Percentage of average daily
stockholders' equity to average
daily total assets 5.58 5.74 6.51
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.
1999 1998 1997
----------- ----------- -----------
Outstanding at year end $ 121,374 $ 110,163 $ 65,467
Approximate average interest rate at
year end 4.75% 4.78% 4.90%
Highest amount outstanding as of any
month end during the year $ 143,353 $ 10,163 $ 98,917
Approximate average outstanding
during the year $ 120,950 $ 84,157 $ 83,732
Approximate average interest rate
during the year 4.76% 5.19% 5.45%
Securities sold under agreement to repurchase include 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
Fort Wayne North 302 East DuPont Rd. Fort Wayne 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 Downtown 113 N. Main St. Kendallville IN
Kendallville East 631 Proffessional Way 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
27
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 freestanding 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 to operate the banking facilities.
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, a building at 113 East Market St., Warsaw, Indiana, which it
uses for office and computer facilities, a building at 109 South Buffalo St.,
Warsaw, Indiana, which it uses for employee training and undeveloped real
estate at 10429 Illinois Rd., Fort Wayne, Indiana, which it currently intends
to use for a branch facility in the future. The Company also leases from third
parties facilities in Warsaw, Indiana, for the storage of supplies and in
Elkhart, Indiana, for computer facilities.
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 1999.
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 1999 Annual Report to
Shareholders and are incorporated herein by reference. On December 31, 1999,
the Company had approximately 1,850 shareholders of record, including those
employees who participate in the Company's 401(K) plan.
On January 15, 1997, the Company 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 1999 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 - 31 in the 1999
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 - 31 in the 1999 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 1999 Annual
Report to Shareholders and are incorporated herein by reference.
Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Income for the years ended December 31, 1999, 1998
and 1997.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for
the years ended December 31, 1999, 1998 and 1997. 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, 2000, 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, 2000, 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, 2000, 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, 2000, 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 1999 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
---------
1999 Annual
Form 10-K Report
--------- -----------
Consolidated Balance Sheets at December 31,
1999 and 1998. 9
Consolidated Statements of Income for the
years ended December 31, 1999, 1998 and 1997. 10
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997. 11
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997. 12
Notes to Consolidated Financial Statements. 13-25
Report of Independent Auditors. 26
(2) Financial Statement Schedules.
------------------------------
N/A
(3) Schedule of Exhibits.
---------------------
The Exhibit Index, which immediately follows the signature pages to this
Form 10-K is incorporated by reference.
(b) Reports on Form 8-K.
--------------------
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1999.
(c) Exhibits.
---------
The exhibits required to be filed with this Form 10-K are included with
this Form 10-K and are located immediately following the Exhibit Index to this
Form 10-K.
(d) Financial Data Schedule.
------------------------
See Exhibit 27
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 14, 2000 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 14, 2000 Michael L. Kubacki
(Michael L. Kubacki) Principal
Executive Officer and Director
Date: March 14, 2000 Terry M. White
(Terry M. White)Principal Financial
and Accounting Officer
Date: March 14, 2000 R. Douglas Grant
(R. Douglas Grant) Director
Date: March 14, 2000 Anna K. Duffin
(Anna K. Duffin) Director
Date: March 14, 2000 Eddie Creighton
(Eddie Creighton) Director
Date: March 14, 2000 L. Craig Fulmer
(L. Craig Fulmer) Director
Date: March 14, 2000
(Jerry L. Helvey) Director
Date: March 14, 2000 Allan J. Ludwig
(Allan J. Ludwig) Director
Date: March 14, 2000
(Charles E. Niemier) Director
31
Date: March 14, 2000 Richard L. Pletcher
(Richard L. Pletcher) Director
Date: March 14, 2000
(Terry L. Tucker) Director
Date: March 14, 2000 M. Scott Welch
(M. Scott Welch) Director
Date: March 14, 2000 G.L. White
(G.L. White) Director
32
LAKELAND FINANCIAL CORPORATION
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
Incorporated
Herein by Filed
Exhibit No. Description Reference to Herewith
- ----------- ----------------------------- --------------------------- --------
3.1 Amended and Restated Exhibit 4.1 to the
Articles of Incorporation of Company's Form S-8 filed
Lakeland Financial with the Commission on
Corporation April 15, 1998
3.2 Bylaws of Lakeland Exhibit 3(ii) to the
Financial Corporation Company's Form 10-Q
for the quarter ended June
30, 1996
13 Annual Report to X
Shareholders
10.1 Lakeland Financial Exhibit 4.3 to the
Corporation 1997 Share Company's Form S-8 filed
Incentive Plan with the Commission on
April 15, 1998
21 Subsidiaries X
27 Financial Data Schedules X
33
EXHIBIT 13
1999 Report to Shareholders with Report of Independent Auditors.
34
EXHIBIT 21
Subsidiaries
------------
1. Lake City Bank, Warsaw, Indiana, a banking corporation organized under the
laws of the State of Indiana.
2. Lakeland Capital Trust, a statutory business trust formed under Delaware
law.
3. LCB Investments Limited, a subsidiary of Lake City Bank formed under the
laws of Bermuda to manage a portion of the Bank's investment portfolio.
35