ITEM 1. BUSINESS
The registrant was incorporated under the laws of the State of Indiana on February 8, 1983. As used herein, the term "Registrant" refers to Lakeland Financial Corporation or, if the context dictates, the Lakeland Financial Corporation and its wholly owned subsidiary, Lake City Bank, Warsaw, Indiana.
GENERAL
Registrant's Business. The Registrant is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended. Registrant owns all of the outstanding stock of Lake City Bank, Warsaw, Indiana, a full service commercial bank organized under Indiana law (the "Bank"). Registrant conducts no business except that incident to its ownership of the outstanding stock of the Bank and the operation of the Bank.
The Bank's deposits are insured by the Federal Deposit Insurance Corporation. The Bank's activities cover all phases of commercial banking, including checking accounts, savings accounts, time deposits, the sale of securities under agreements to repurchase, discount brokerage services, commercial and agricultural lending, direct and indirect consumer lending, real estate mortgage lending, safe deposit box service and trust services.
The Bank's main banking office is located at 202 East Center Street, Warsaw, Indiana. As of December 31, 1996, the Bank had nine branch offices and one drive-up facility in Kosciusko County, eight branch offices in Elkhart County, three branch offices in Noble County, three branch offices in Wabash County, two branch offices in LaGrange County, two branch offices in Marshall County, one branch office in Whitley County and two branch offices and one drive-up facility in Fulton County. The Bank's operations center is located at 113 East Market Street, Warsaw, Indiana.
Supervision and Regulation. The Registrant is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHC Act"). As a bank holding company, the registrant is required to file with the Federal Reserve Board (the "FRB") annual reports and such additional information as the FRB may require. The FRB may also make an examination or inspection of the Registrant.
The BHC Act prohibits a bank holding company from engaging in, or acquiring direct or indirect control of more than five percent of the voting shares of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities deemed by the FRB to be "closely related to banking". Under current regulations, bank holding companies and their subsidiaries may engage in such bank related business ventures as consumer finance, equipment leasing, computer service bureau and software operations and mortgage banking.
The BHC Act also governs banking expansion by bank holding companies. Before a bank holding company acquires more than five percent of the voting shares of any other bank it must receive the prior written approval of the FRB or its delegate. Furthermore, the BHC Act does not permit a bank holding company to acquire a bank located outside the State of Indiana unless the acquisition is specifically authorized by the laws of the State in which such bank is located.
The acquisition of banking subsidiaries by bank holding companies is subject to the jurisdiction of, and requires the prior approval of, the Federal Reserve, and for institutions resident in Indiana, the Indiana Department of Financial Institutions. Bank holding companies located in Indiana are permitted to acquire banking subsidiaries throughout the state, subject to limitations based upon the percentage of total state deposits of the holding company's subsidiary banks. Indiana law permits the Registrant to acquire banks, and be acquired by bank holding
companies, located in any state in the country which permits reciprocal entry by Indiana bank holding companies.
The Registrant is an "affiliate" of the Bank within the meaning of Section 23A of the Federal Reserve Act (as made applicable to the Bank by the Federal Deposit Insurance Act) and Indiana Code 28-1-18.1. As a result, the Bank is restricted in making loans to, investments in, or loans secured by securities of, the Registrant. The BHC Act also prohibits the Registrant and its subsidiaries from imposing "tie-in" requirements in connection with extensions of credit and other services.
Under the provisions of Indiana law, the registrant may not acquire more than twenty-five percent of the voting stock in any banks other than the Bank without the approval of the Indiana Department of Financial Institutions. In any such event, the Registrant would be required to obtain the prior approval of the FRB as described above to purchase interest of five percent or more in another bank.
The Bank is under supervision of and subject to examination by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. Regulation and examination by banking regulatory agencies are primarily for the benefit of depositors and not shareholders.
The earnings of commercial banks are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open-market operations in U.S. Government securities, the discount rate on bank borrowing, setting the reserves that banks must maintain against certain bank deposits and the regulation of interest rates payable by banks on certain time and savings deposits. These policies have a significant effect on the overall growth and distribution of bank loans, investments and deposits. They influence interest rates charged on loans, earned on investments and paid for time and savings deposits. FRB monetary policies have had significant effect on the operating results of commercial banks in the past, and are expected to exert similar influence in the future. The general effect, if any, of such policies upon the future business and earnings of the Registrant and the Bank cannot be reasonably predicted.
MATERIAL CHANGES AND BUSINESS DEVELOPMENTS
From the date of the Registrant's incorporation, February 8, 1983, until October 31, 1983, the Registrant conducted no business and had no assets (except nominal assets necessary to complete the acquisition of the Bank). The Registrant has conducted no business since October 31, 1983, except that incident to its ownership of the stock of the Bank, the collection of dividends from the Bank, and the disbursement of dividends to the Registrant's shareholders. During the period from 1985 to 1987, the Registrant owned all of the outstanding shares of Lakeland Mortgage Corp., a mortgage lending and servicing corporation doing business in Indiana. Lakeland Mortgage Corp. discontinued business operations on December 15, 1987. The Registrant continued to own all of the stock of Lakeland Mortgage Corp. until 1992, during which year, Lakeland Mortgage Corp. was liquidated and all stock was redeemed.
COMPETITION
The Bank was originally organized in 1872 and has continuously operated under the laws of the State of Indiana since its organization. The Bank is a full service bank providing both commercial and personal banking services. Bank products offered include interest and noninterest bearing demand accounts, savings and time deposit accounts, sale of securities under agreements to repurchase, discount brokerage, commercial loans, mortgage loans, consumer loans, letters of credit, and a wide range of trust services. The interest rates for both deposits and loans, as well as the range of services provided, are nearly the same for all banks competing within the Bank's service area.
The Bank's service area is described as all of Kosciusko, Elkhart, LaGrange, Noble and Wabash Counties and portions of Marshall, Fulton, Miami, Huntington and Whitley Counties. In addition to the banks located within its service area, the Bank also competes with savings and loan associations, credit unions, farm credit services, finance companies, personal loan companies, insurance companies, money market funds, and other non-depository financial intermediaries. Also, financial intermediaries such as money market mutual funds and large retailers are not subject to the same regulations and laws that govern the operation of traditional depository institutions and accordingly may have an advantage in competing for funds.
The Bank competes with other major banks for the large commercial deposit and loan accounts. The Bank is presently subject to an aggregate maximum loan limit to any single account in the amount of $7,012,000 pursuant to Indiana law. This maximum prohibits the Bank from providing a full range of banking services to those businesses or personal accounts whose borrowing periodically exceed this amount. In order to retain at least a portion of the bank business of these large borrowers, the Bank maintains correspondent relationships with other financial institutions. The Bank also participates with local and other banks in the placement of large borrowings in excess of its lending limit. The Bank is also a member of the Federal Home Loan Bank of Indianapolis in order to broaden its mortgage lending and investment activities and to provide additional funds, if necessary, to support these activities.
FOREIGN OPERATIONS
The Bank has no investments with any foreign entity other than a nominal demand deposit account which is maintained with a Canadian bank in order to facilitate the clearing of checks drawn on banks located in that country. There are no foreign loans.
EMPLOYEES
At December 31, 1996, the Registrant, including its subsidiary corporation, had approximately 320 full time equivalent employees. Benefit programs include a pension plan, 401(k) plan, group medical insurance, group life insurance and paid vacations. The bank is not a party to any collective bargaining agreement, and employee relations are considered good.
INDUSTRY SEGMENTS
The Registrant and the Bank are engaged in a single industry and perform a single service -- commercial banking. On the pages that follow are tables which set forth selected statistical information relative to the business of the Registrant.
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ANALYSIS OF LOAN PORTFOLIO (cont.) Comments Regarding Nonperforming Assets
PART A - CONSUMER LOANS
Consumer installment loans, except those loans that are secured by real estate, are not placed on a nonaccrual status since these loans are charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. Advances under Mastercard and Visa programs, as well as advances under all other consumer lines of credit programs, are charged-off when collection appears doubtful.
PART B - NONPERFORMING LOANS
When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued and all accrued interest receivable is charged off. It is the policy of the Bank that all unsecured loans (i.e. loans for which the collateral is insufficient to cover all principal and accrued interest) will be reclassified as nonperforming loans to the extent they are unsecured, on or before the loan becomes 90 days delinquent. Thereafter, interest is recognized and included in income only when received.
As of December 31, 1996, loans totaling $384,000 were on nonaccrual status.
PART C - TROUBLED DEBT RESTRUCTURED LOANS
Loans renegotiated as troubled debt restructuring are those loans for which either the contractual interest rate has been reduced and/or other concessions are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan.
Loans renegotiated as troubled debt restructuring totaled $1,284,000 as of December 31, 1996. Interest income of $85,000 was recognized in 1996. Had these loans been performing under the original contract terms, an additional $44,000 would have been reflected in interest income during 1996. The Bank is not committed to lend additional funds to debtors whose loans have been modified.
PART D - OTHER NONPERFORMING ASSETS
The Bank adopted SFAS No. 114 and SFAS No. 118, 'Accounting by Creditors for Impairment of a Loan' at January 1, 1995. Under these standards, loans considered to be impaired are reduced to the present value of future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as bad debt expense. As part of the loan review process, management reviews all loans classified as 'special mention' or below, as well as other loans that might warrant application of SFAS No. 114 and SFAS No. 118. The effect of adopting these accounting standards on January 1, 1995 was immaterial and at December 31, 1996, no loans were considered as impaired.
The management of the Bank is of the opinion that there are no significant foreseeable losses relating to substandard or nonperforming assets, except as discussed above.
PART E - LOAN CONCENTRATIONS
There were no loan concentrations within industries which exceeded ten percent of total assets. It is estimated that over 98% of all the Bank's commercial, industrial, agri-business and agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its basic trade area.
Basis For Determining Allowance For Loan Losses
Management is charged with the responsibility of 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 appropriate reserves for loans not specifically reviewed.
2. Management reviews the current and anticipated economic conditions of its lending market to determine the effects on future loan charge-offs by loan category, in addition to the effects on the loan portfolio as a whole.
3. Management reviews delinquent loan reports to determine risk of future loan charge-offs. High delinquencies are generally indicative of an increase in future loan charge-offs.
Based upon the above described policy and objectives, $120,000, $120,000 and $795,000 were charged to the provision for loan losses and added to the allowance for loan losses in 1996, 1995 and 1994, respectively.
The allocation of the allowance for loan losses to the various lending areas is performed by management in relation to perceived exposure to loss in the various loan portfolios. However, the allowance for loan losses is available in its entirety to absorb losses in any particular loan category.
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As of December 31, 1996, time certificates of deposit in denominations of $100,000 or more will mature as follows:
Within three months $ 54,553
Over three months, within six months 20,170
Over six months, within twelve months 14,012
Over twelve months 9,208 ---------- Total time certificates of deposit in denominations of $100,000 or more $ 97,943 ==========
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, 1996, 1995 and 1994 are as follows:
1996 1995 1994 -------- -------- -------- Percent of net income to: Average daily total assets 1.07 1.05 1.10
Average daily stockholders' equity 16.50 17.06 17.73
Percentage of dividends declared per common share to net income per weighted average number of common shares outstanding (2,896,992 shares in 1996, and 2,876,992 shares in 1995 and 1994) 20.72 18.88 16.57
Percentage of average daily stockholders' equity to average daily total assets 6.46 6.18 6.19
SHORT-TERM BORROWINGS
The following is a schedule of statistical information relating to securities sold under agreement to repurchase maturing within one year and are secured by either U.S. Government agency securities or mortgage-backed securities classified as other debt securities. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of shareholders' equity at the end of the period.
1996 1995 1994 ---------- ---------- ---------- Outstanding at year end $ 85,611 $ 58,151 $ 41,750
Approximate average interest rate at year end 5.11% 5.35% 5.11%
Highest amount outstanding as of any month end during the year $ 89,433 $ 79,334 $ 50,460
Approximate average outstanding during the year $ 73,728 $ 61,398 $ 42,584
Approximate average interest rate during the year 5.33% 5.69% 3.96%
Securities sold under agreement to repurchase include both transactions initiated by the investment division of the Bank, as well as the automatic borrowings from selected demand deposit customers who had excess balances in their accounts.
ITEM 2.

ITEM 2. PROPERTIES
The Bank conducts its operations from the following locations:
Branches/Headquarters - --------------------- Main / Headquarters 202 E. Center St. Warsaw IN Warsaw Drive-up East Center St. Warsaw IN Akron 102 East Rochester Akron IN Argos 100 North Michigan Argos IN Bremen 1600 Indiana State Road 331 Bremen IN Columbia City 507 North Main St. Columbia City IN Concord 4202 Elkhart Road Goshen IN Cromwell 111 North Jefferson St. Cromwell IN Elkhart 864 East Beardsley St. Elkhart IN Elkhart East 22050 State Road 120 Elkhart IN Goshen Downtown 102 North Main St. Goshen IN Goshen South 2513 South Main St. Goshen IN Hubbard Hill 58404 St. Road 19 Elkhart IN Kendallville 631 Professional Way Kendallville IN LaGrange 901 South Detroit LaGrange IN Ligonier 1470 U.S. Highway 33 South Ligonier IN Mentone 202 East Main St. Mentone IN Middlebury 712 Wayne Ave. Middlebury IN Milford Indiana State Road 15 North Milford IN Nappanee 202 West Market St. Nappanee IN North Webster 644 North Main St. North Webster IN Pierceton 202 South First St. Pierceton IN Roann 110 Chippewa St. Roann IN Rochester 507 East 9th St. Rochester IN Shipshewana 895 North Van Buren St. Shipshewana IN Silver Lake 102 Main St. Silver Lake IN Syracuse 502 South Huntington Syracuse IN Wabash North 1004 North Cass St. Wabash IN Wabash South 1940 South Wabash St. Wabash IN Warsaw East 3601 Commerce Dr. Warsaw IN Warsaw West 1221 West Lake St. Warsaw IN Winona Lake 99 Chestnut St. Winona Lake IN
The Bank leases from third parties the real estate and buildings for its offices in Akron and Milford. In addition, the Bank leases the real estate for its Wabash North office and its free-standing ATMs. All the other branch facilities are owned by the Bank. The Bank also owns parking lots in downtown Warsaw for the use and convenience of Bank employees and customers, as well as leasehold improvements, equipment, furniture and fixtures necessary and appropriate to operate the banking facilities.
In addition, the Bank owns a building at 110 South High St., Warsaw, Indiana, which it uses for various offices and a building at 113 East Center St., Warsaw, Indiana, which it uses for office and computer facilities. The Bank also leases from third parties facilities in Warsaw, Indiana, for the storage of supplies and for employee training.
None of the Bank's assets are the subject of any material encumbrances.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary routine litigation incidental to the business to which the Registrant and the Bank are a party or of which any of their property is subject.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders from April 10, 1996 to December 31, 1996.
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PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information relating to the principal market for and the prices of the Registrant's common stock, and information as to dividends declared by the Registrant, are contained under the caption "Stock and Dividend Information" in the 1996 Annual Report and are incorporated herein by reference in response to this item. On December 31, 1996, the Registrant had 976 shareholders, including those employees who participate in the Registrant's 401(K) plan.
On January 9, 1996, Lakeland Financial Corporation sold 10,000 shares of authorized but previously unissued common stock for $41.50 per share. On April 30, 1996, Lakeland Financial Corporation common stock split two-for-one.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
A five year consolidated financial summary, containing the required selected financial data, appears under the caption "Selected Financial Data" in the 1996 Annual Report and is incorporated herein by reference in response to this item.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations appears under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1996 Annual Report and is incorporated herein by reference in response to this item.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements appear in the 1996 Annual Report and are incorporated herein by reference in response to this item.
Consolidated Balance Sheets at December 31, 1996 and 1995. Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Report of Independent Auditors.
ITEM 9.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in the Registrant's definitive Proxy Statement dated March 13, 1997, is incorporated herein by reference in response to this item.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Registrant's definitive Proxy Statement dated March 13, 1997, is incorporated herein by reference in response to this item.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Registrant's definitive Proxy Statement dated March 13, 1997, is incorporated herein by reference in response to this item.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Registrant's definitive Proxy Statement dated March 13, 1997, is incorporated herein by reference in response to this item.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The documents listed below are filed as a part of this report:
(1) Financial Statements.
The following financial statements of the Registrant and its subsidiaries appear in the 1996 Annual Report and are specifically incorporated by reference under Item 8 of this Form 10-K, or are a part of this Form 10-K, as indicated and at the pages set forth below.
Reference --------- 1996 Annual Form 10-K Report --------- ----------- Consolidated Balance Sheets at December 31, 1996 and 1995. 8 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994. 9 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994. 10 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. 11 Notes to Consolidated Financial Statements. 12 - 21 Report of Independent Auditors. 22
(2) Financial Statement Schedules
The financial statement schedules of the Registrant and its subsidiary have been omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
[Intentionally Left Blank]
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 11, 1997 By R Douglas Grant (R. Douglas Grant) President
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 11, 1997 R. Douglas Grant (R. Douglas Grant) Principal Executive Officer and Director
Date: March 11, 1997 Terry M. White (Terry M. White) Principal Financial and Accounting Officer
Date: March 11, 1997 Anna K. Duffin (Anna K. Duffin) Director
Date: March 11, 1997 Eddie Creighton (Eddie Creighton) Director
Date: March 11, 1997 L. Craig Fulmer (L. Craig Fulmer) Director
Date: (Jerry L. Helvey) Director
Date: (Kevin L. Lambright) Director
Date: March 11, 1997 Allan J. Ludwig (Allan J. Ludwig) Director
Date: March 11, 1997 J. Alan Morgan (J. Alan Morgan) Director
Date: March 11, 1997 Richard L. Pletcher (Richard L. Pletcher) Director
Date: (Joseph P. Prout) Director
Date: (Terry L. Tucker) Director
Date: (G.L. White) Director
EXHIBIT INDEX
The following Exhibits are filed as part of this Report and not incorporated by reference from another document:
Exhibit 13 - 1996 Report to Shareholders with Report of Independent Auditors.
Exhibit 21 - Subsidiaries
Exhibit 27 - Financial Data Schedule
EXHIBIT 13
1996 Report to Shareholders with Report of Independent Auditors.
EXHIBIT 21
SUBSIDIARIES. The Registrant has one wholly owned subsidiary, Lake City Bank, Warsaw, Indiana, a banking corporation organized under the laws of the State of Indiana.