View:
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-11487
LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1559596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
202 East Center Street
P.O. Box 1387, Warsaw, Indiana 46581-1387
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219)267-6144
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 shorter 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at March 31, 1997
Common Stock, $.50 Stated Value 2,902,502
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 1997 and December 31, 1996
(in thousands)
(Unaudited)
(Page 1 of 2)
March 31, December 31,
1997 1996
----------- -----------
ASSETS
- ------
Cash and cash equivalents
Cash and due from banks $ 32,621 $ 41,190
Short-term investments 898 3,689
----------- -----------
Total cash and cash equivalents 33,519 44,879
Securities available-for-sale
U. S. Treasury securities 28,833 31,804
Mortgage-backed securities 49,029 46,839
State and municipal securities 2,131 2,167
Other debt securities 1,426 1,032
----------- -----------
Total securities available-for-sale
(carried at fair value) 81,419 81,842
Securities held-to-maturity
U. S. Treasury securities 21,666 17,020
Mortgage-backed securities 84,508 86,073
State and municipal securities 20,869 21,172
Other debt securities 3,175 1,009
----------- -----------
Total securities held-to-maturity
(fair value of $129,937 at
March 31, 1997, and $126,373
at December 31, 1996) 130,218 125,274
Real estate mortgages held-for-sale 248 895
Loans:
Total loans 400,686 382,265
Less: Allowance for loan losses 5,291 5,306
----------- -----------
Net loans 395,395 376,959
Land, premises and equipment, net 16,555 16,014
Accrued income receivable 4,251 4,254
Other assets 6,320 6,434
----------- -----------
Total assets $ 667,925 $ 656,551
=========== ===========
(Continued)
-2-
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 1997 and December 31, 1996
(in thousands)
(Unaudited)
(Page 2 of 2)
March 31, December 31,
1997 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Deposits:
Noninterest bearing deposits $ 82,898 $ 77,664
Interest bearing deposits 414,335 418,889
----------- -----------
Total deposits 497,233 496,553
Short-term borrowings
Federal funds purchased 17,200 0
U.S. Treasury demand notes 3,065 2,769
Securities sold under agreements
to repurchase 85,576 85,611
----------- -----------
Total short-term borrowings 105,841 88,380
Accrued expenses payable 5,322 5,033
Other liabilities 1,032 1,011
Long-term debt 15,391 23,531
----------- -----------
Total liabilities 624,819 614,508
Commitments, off-balance sheet risks
and contingencies
STOCKHOLDERS' EQUITY
- --------------------
Common stock: $.50 stated value, 10,000,000 shares
authorized, 2,902,502 shares issued and outstanding
as of March 31, 1997, and 2,896,992 shares issued and
outstanding at December 31, 1996 1,453 1,448
Additional paid-in capital 8,537 8,232
Retained earnings 33,358 31,967
Unrealized net gain (loss) on securities available-for-sale (99) 396
Treasury stock (143) 0
----------- -----------
Total stockholders' equity 43,106 42,043
----------- -----------
Total liabilities and stockholders' equity $ 667,925 $ 656,551
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
-3-
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1997 and 1996
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended
March 31,
--------------------------
1997 1996
----------- -----------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 8,956 $ 7,788
Tax exempt 58 61
----------- -----------
Total loan income 9,014 7,849
Short-term investments 86 33
Securities:
U.S. Treasury and Government agency securities 763 633
Mortgage-backed securities 2,116 1,988
Obligations of state and political subdivisions 347 340
Other debt securities 74 91
----------- -----------
Total interest and dividend income 12,400 10,934
INTEREST EXPENSE
- -----------------
Interest on deposits 4,867 4,548
Interest on short-term borrowings 1,313 875
Interest on long-term debt 234 272
----------- -----------
Total interest expense 6,414 5,695
----------- -----------
NET INTEREST INCOME 5,986 5,239
- -------------------
Provision for loan losses 60 30
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,926 5,209
- ------------------------- ----------- -----------
NONINTEREST INCOME
- ------------------
Trust fees 359 286
Service charges on deposit accounts 739 578
Other income (net) 397 392
Net gains on the sale of real estate mortgages held-for-sale 104 100
Net securities gains (losses) 0 (2)
----------- -----------
Total noninterest income 1,599 1,354
(Continued)
-4-
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1997 and 1996
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended
March 31,
--------------------------
1997 1996
----------- -----------
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 2,540 2,237
Occupancy and equipment expenses 783 723
Other expenses 1,333 1,264
----------- -----------
Total noninterest expense 4,656 4,224
INCOME BEFORE INCOME TAX EXPENSE 2,869 2,339
- --------------------------------
Income tax expense 1,042 835
----------- -----------
NET INCOME $ 1,827 $ 1,504
- ---------- =========== ===========
AVERAGE COMMON SHARES OUTSTANDING (Note 2) 2,903,563 2,896,992
EARNINGS PER COMMON SHARE
- -------------------------
Net Income (Note 2) $ 0.63 $ 0.52
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
-5-
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1997 and 1996
(in thousands except for shares)
(Unaudited)
Unrealized
Net Gain (Loss)
Common Stock on Securities Total
--------------------- Paid-in Retained Available- Treasury Stockholders'
Shares Amount Capital Earnings For-Sale Stock Equity
--------- --------- --------- ---------- ------------ --------- ------------
Balances, January 1, 1996 1,438,496 $ 1,438 $ 7,827 $ 26,858 $ 631 $ 0 $ 36,754
Net income for three months
ended March 31, 1996 1,504 1,504
Net change in unrealized net gain (loss)
on securities available-for-sale (501) (501)
Issued 10,000 shares of previously
authorized, unissued shares. 10,000 10 405 415
Cash dividends declared -
$.20 per share (291) (291)
--------- --------- --------- ---------- ------------ --------- ------------
Balances, March 31, 1996 1,448,496 $ 1,448 $ 8,232 $ 28,071 $ 130 $ 0 $ 37,881
========= ========= ========= ========== ============ ========= ============
Balances, January 1, 1997 2,896,992 $ 1,448 $ 8,232 $ 31,967 $ 396 $ 0 $ 42,043
Net income for three months
ended March 31, 1997 1,827 1,827
Net change in unrealized net gain (loss)
on securities available-for-sale (495) (495)
Issued 10,000 shares of previously
authorized, unissued shares. 10,000 5 305 310
Acquired 4,490 shares of treasury stock (4,490) (143) (143)
Cash dividends declared -
$.15 per share (436) (436)
--------- --------- --------- ---------- ------------ --------- ------------
Balances, March 31, 1997 2,902,502 $ 1,453 $ 8,537 $ 33,358 $ (99) $ (143) $ 43,106
========= ========= ========= ========== ============ ========= ============
The accompanying notes are an integral part of these consolidated financial statements.
-6-
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1996
(in thousands)
(Unaudited)
(Page 1 of 2)
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 1,827 $ 1,504
----------- -----------
Adjustments to reconcile net income to net cash
from operating activites:
Depreciation 331 317
Provision for loan losses 60 30
Loans originated for sale (4,398) (8,605)
Net (gain) loss on sale of loans (104) (100)
Proceeds from sale of loans 5,149 7,948
Net (gain) loss on sale of premises and equipment 1 1
Net (gain) loss on sale of securities available-for-sale 0 0
Net (gain) loss on calls of securities held-to-maturity 0 2
Net securities amortization (accretion) 14 80
Increase (decrease) in taxes payable 1,077 983
(Increase) decrease in income receivable 3 191
Increase (decrease) in accrued expenses payable (313) (555)
(Increase) decrease in other assets (90) (7)
Increase (decrease) in other liabilities 74 (109)
----------- -----------
Total adjustments 1,804 176
----------- -----------
Net cash from operating activities 3,631 1,680
----------- -----------
Cash flows from investing activities:
Proceeds from maturities and calls of securities held-to-maturity 4,255 2,051
Proceeds from maturities and calls of securities available-for-sale 6,634 1,176
Purchases of securities available-for-sale (9,213) (3,472)
Purchases of securities held-to-maturity (7,030) (2,398)
Proceeds from sales of securities available-for-sale 0 0
Net (increase) decrease in total loans (18,496) (9,125)
Purchases of land, premises and equipment (873) (385)
----------- -----------
Net cash from investing activities (24,723) (12,153)
----------- -----------
(Continued)
-7-
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1996
(in thousands)
(Unaudited)
(Page 2 of 2)
1997 1996
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in total deposits $ 680 $ 19,086
Proceeds from short-term borrowings 223,141 144,802
Payments on short-term borrowings (205,680) (159,269)
Proceeds from long-term borrowings 0 2,000
Payments on long-term borrowings (8,140) 0
Dividends paid (436) (292)
Proceeds from sale of common stock 310 415
Purchase of treasury stock (143) 0
----------- -----------
Net cash from financing activities 9,732 6,742
----------- -----------
Net increase (decrease) in cash and cash equivalents (11,360) (3,731)
Cash and cash equivalents at beginning of the period 44,879 26,895
----------- -----------
Cash and cash equivalents at end of the period $ 33,519 $ 23,164
=========== ===========
Cash paid during the period for:
Interest $ 5,987 $ 5,410
=========== ===========
Income taxes $ 225 $ 180
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
-8-
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This report is filed for Lakeland Financial Corporation (the Corporation)
and its wholly owned subsidiary, Lake City Bank (the Bank). All significant
intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements included herein have been
prepared by the Corporation, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. The Corporation believes
that the disclosures are adequate and do not make the information presented
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Corporation's latest annual report and Form 10-K. In
the opinion of management, all adjustments which are necessary for a fair
statement of the results for interim periods are reflected in the quarterly
statements included herein.
NOTE 2. EARNINGS PER SHARE
The average common shares outstanding and the net income per share for
the three months ended March 31, 1996, have been restated to reflect a
two-for-one stock split. The record date for the stock split was April 30,
1996, with new shares issued on May 15, 1996. The average common shares
outstanding for the first quarter of 1997 also reflect the acquisition of
4,490 shares of Lakeland Financial Corporation common stock to offset a
liability for a director's deferred compensation plan. This stock is
classified as treasury stock for financial reporting purposes.
NOTE 3. ACCOUNTING CHANGES
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities, was issued by the Financial Accounting
Standards Board in 1996. It revised the accounting for transfers of financial
-9-
assets, such as loans and securities, and for distinguishing between sales and
secured borrowings. It is effective for some transactions in 1997 and others
in 1998. The effect on the consolidated financial statements will not be
material.
(Intentionally left blank)
-10-
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
March 31, 1997
FINANCIAL CONDITION
The financial statements reflect the Corporation's continued growth
within the Bank's traditional markets and expansion into contiguous market
areas. The Bank's Elkhart Northwest office at 1206 N. Nappanee St., Elkhart,
Indiana and the Granger office at 12830 State Road 23, Granger, Indiana are
scheduled to open during the second quarter of 1997. The Bank has received
regulatory approval to open an office at 5015 N. Main Street, Mishawaka,
Indiana. This office will be called the Mishawaka office and construction is
due to start during the second quarter of 1997.
Total assets of the Corporation were $667,925,000 as of March 31, 1997.
This is an increase of $11,374,000 or 1.7 percent from $656,551,000 reported
at December 31, 1996. Total loans were $400,686,000 at March 31, 1997. This is
an increase of $18,421,000 or 4.8 percent from balances at December 31, 1996.
Total securities (including available-for-sale (AFS) and held-to-maturity
(HTM)) increased $4,521,000 or 2.2 percent to $211,637,000 as of March 31,
1997, from $207,116,000 at December 31, 1996. Earning assets increased to
$608,178,000 at March 31, 1997. This is an increase of $19,519,000 or 3.3
percent from the December 31, 1996, total of $588,659,000.
Total deposits and securities sold under agreements to repurchase
(repurchase agreements) consist primarily of funds generated within the Bank's
primary market area as defined by its Community Reinvestment Act (CRA)
statement. These funds remained basically unchanged from December 31, 1996 to
March 31, 1997, only increasing $645,000 to $582,809,000. Demand deposits,
which are noninterest bearing, increased $5,234,000 or 6.7 percent to
$82,898,000 at March 31, 1997 from the balance at December 31, 1996. Time
deposits increased $7,655,000 or 2.5 percent from the balance at December 31,
1996. The repurchase agreement balance decreased $35,000 or less than .1
percent from the balance at December 31, 1996. The repurchase agreement
balance is a combination of fixed rate contracts and excess cash management
accounts, a variable rate repurchase agreement product. In addition to these
local funding sources, the Bank borrows modestly through the Treasury, Tax and
-11-
Loan program, occasionally through federal fund lines with correspondent banks
and through term advances from the Federal Home Loan Bank of Indianapolis
(FHLB). Including these non-local sources, funding totaled $618,465,000 at
March 31, 1997. This is a $10,001,000 or 1.6 percent increase from
$608,464,000 reported at December 31, 1996.
On an average daily basis, total earning assets increased 14.2 percent
for the three month period ended March 31, 1997, as compared to the similar
period ended March 31, 1996. On an average daily basis, total deposits and
purchased funds increased 14.6 percent for the three month period ended March
31, 1997, as compared to the three month period ended March 31, 1996.
The Bank's investment portfolio consists of U.S. Treasuries, agencies,
mortgage-backed securities, municipal bonds, and corporates. During 1997, new
investments have been primarily U.S. Treasuries and mortgage-backed
securities. At March 31, 1997, and December 31, 1996, the Bank's investment in
mortgage-backed securities comprised approximately 63.1 and 64.2 percent,
respectively, of the total securities and consisted mainly of CMO's and
mortgage pools issued by GNMA, FNMA and FHLMC. As such, these securities are
backed directly or indirectly by the Federal Government. All mortgage-backed
securities purchased conform to the FFIEC high risk standards which prohibit
the purchase of securities that have excessive price, prepayment, extension
and original life risk characteristics. The Bank uses Bloomberg analytics to
evaluate and monitor all purchases. At March 31, 1997, the mortgage-backed
securities in the HTM portfolio had a three year average life, with a
potential for approximately 9 percent price depreciation should rates move up
300 basis points and approximately 7 percent price appreciation should rates
move down 300 basis points. The mortgage-backed securities in the AFS
portfolio had a two year average life and a potential for approximately 6
percent price depreciation should rates increase 300 basis points and
approximately 4 percent price appreciation should rates move down 300 basis
points. As of March 31, 1997, all mortgage-backed securities continue to be in
compliance with FFIEC guidelines and are performing in a manner consistent
with management's original expectations.
The Bank's AFS portfolio is managed with consideration given to factors
such as the Bank's capital levels, growth prospects, asset/liability structure
and liquidity needs. At March 31, 1997, the AFS portfolio constituted 38.5
percent of the total investment security portfolio. During the first three
months of 1997, purchases for the HTM and AFS portfolios were $7,030,000 and
$9,213,000 respectively. At March 31, 1997, the net after-tax unrealized loss
-12-
in the AFS portfolio included in stockholders' equity was $99,000, a reduction
of $495,000 from the unrealized gain included in stockholders' equity at
December 31, 1996. Since the securities portfolio is primarily fixed rate, a
negative equity adjustment should occur whenever interest rates increase. The
negative equity adjustment resulted from the increase in rates from December
31, 1996 to March 31, 1997. Future investment activity is difficult to
predict, as it is dependent upon loan and deposit trends.
As previously indicated, total loans increased $18,421,000 to
$400,686,000 as of March 31, 1997, from $382,265,000 at December 31, 1996.
Loan growth is net of loans reclassified to other real estate. The Bank
continues to experience good loan demand, especially in commercial loans.
Commercial loans at March 31, 1997, increased $16,962,000 or 7.4 percent from
the level at December 31, 1996. Retail loans at March 31, 1997, increased 1.7
percent from December 31, 1996. Real estate loans (excluding mortgages
held-for-sale) decreased less than .5 percent from December 31, 1996. The
balances in the real estate loan portfolio are impacted by the sale of real
estate mortgages in the secondary market and the level of refinance and new
mortgage activity in the existing rate environment.
The Bank had 61.5 percent of its loans concentrated in commercial loans
at March 31, 1997, and 60.1 percent at December 31, 1996. Traditionally, this
type of lending may have more credit risk than other types of lending. This is
attributed to the fact that individual commercial loans are generally larger
than residential real estate and retail loans, and because the type of
borrower and purpose of commercial loans are not as homogeneous as with
residential and retail customers. The Bank manages this risk by pricing to the
perceived risk of each individual credit, and by diversifying the portfolio by
customer, product, industry and geography. Customer diversification is
accomplished through a relatively low administrative loan limit of $4,500,000.
Product diversification is accomplished by offering a wide variety of
financing options. Management reviews the loan portfolios to ensure loans are
diversified by industry. The loan portfolios are distributed throughout the
Bank's principal trade area, which encompasses eight counties in Indiana.
Other than loans disclosed elsewhere in this filing as past-due, nonaccrual or
restructured, the Bank is not aware of any loans classified for regulatory
purposes at March 31, 1997, that are expected to have a material impact on the
Bank's future operating results, liquidity or capital resources. The Bank is
not aware of any material credits in which there is serious doubt as to the
borrower's ability to comply with the loan repayment terms, other than those
disclosed as past due, nonaccrual or restructured.
-13-
The Bank continues to actively serve the mortgage needs of its CRA
defined market area by originating both conforming and nonconforming real
estate mortgages. During the first three months of 1997, $4,398,000 of real
estate loans were originated and sold in the secondary market. This program of
mortgage sales continues to produce the liquidity needed to meet the mortgage
needs of the markets served by the Bank, and to generate a long-term
servicing portfolio. As a part of the CRA commitment to making real estate
financing available in all markets, the Bank continues to originate
non-conforming loans which are held-to-maturity or prepayment.
Loans renegotiated as troubled debt restructuring are those loans for
which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the terms of the loan. Loans renegotiated as troubled debt
restructurings totaled $1,239,000 at March 31, 1997, as compared to $1,284,000
at December 31, 1996. The loans classified as troubled debt restructurings at
March 31, 1997, are performing in accordance with the modified terms. At March
31, 1997, there were no loans that would be considered impaired as defined in
SFAS Nos. 114 and 118.
The Indiana State legislature has enacted laws relating to a state
chartered bank's legal lending limit, by adopting the basic regulations
applied by the Office of the Comptroller of the Currency (OCC) to national
banks. These guidelines set overall limits on lending activity, but actual
bank limits are subject to Board of Director approval. Based upon these
regulations, the Bank's March 31, 1997, legal loan limit was approximately
$7,235,000. The legal loan limit will continue to increase as the Bank's
combined equity and allowance for loan losses continues to increase. At its
February 11, 1997, meeting, the Bank's Board of Directors modestly increased
the Bank's policy limit by $500,000, to $4,500,000 for any one borrower. With
a relatively low administrative loan limit of $4,500,000, it appears that the
Bank's loan portfolios consist primarily of loans to consumers and small
businesses.
As noted above, for the first three months of 1997, loans have been
growing faster than deposits. Demand deposits have increased $5,234,000, other
transaction accounts have decreased $12,209,000 and time deposits have
increased $7,655,00 for a net increase of $680,000. During this same period,
total loans have increased $18,421,000. As a result of these loan and deposit
trends, the Bank's average daily loans/deposits ratio amounted to 81.5 percent
at March 31, 1997, an increase from 78.8 percent at year-end 1996. The Bank's
-14-
average daily loans/total deposits and repurchase agreements ratio amounted to
71.4 percent at March 31, 1997. This is an increase from 70.0 percent at
year-end 1996.
The Bank, through its Asset/Liability Committee (ALCO), manages interest
rate risk by monitoring both its GAP position and the computer simulated
earnings impact of various rate scenarios. The Bank then modifies its
long-term risk by attempting to generate the type of loans, investments, and
deposits that currently fit ALCO needs. The current long-term guideline
approved by the Board of Directors defines a neutral rate sensitivity ratio
(GAP/Total Assets) as plus or minus 20 percent. However, the ALCO is
authorized to manage this ratio outside these limits on a short term basis, as
the committee's expectation of interest rates dictates. Management has
estimated that, as of March 31, 1997, the Bank's GAP/Total Assets ratios were
(5.4) percent, (11.1) percent, and (12.0) percent for the three, six, and
twelve month time periods, respectively. For this analysis, savings accounts
and demand deposit accounts have been assumed to be repriceable beyond twelve
months, and therefore are not included as repriceable liabilities in each of
these ratios. The December 31, 1996, three, six, and twelve month GAP ratios
were (5.9) percent, (11.2) percent, and (16.0) percent, respectively.
Management supplements the GAP analysis with a computer simulation
approach to manage the interest rate risk of the Bank. This computer
simulation analysis measures the net interest income impact of a 300 basis
point change, both up and down, in interest rates during the next 12 months.
If the change in net interest income under either scenario is less than 3
percent of primary capital, the balance sheet structure is considered to be
within acceptable risk levels. At March 31, 1997, the Bank's potential pretax
exposure was well within the Bank's policy limit. This policy was last
reviewed and approved by the Board of Directors in May, 1996.
The Bank is a member of the FHLB of Indianapolis. Membership has enabled
the Bank to participate in the housing programs sponsored by the FHLB, thereby
enhancing the Bank's ability to offer additional programs throughout its trade
area. At its meeting in March, 1996, the Board of Directors of the Bank passed
a resolution authorizing the Bank to borrow up to $50 million under the FHLB
program. As of March 31, 1997, the borrowings from the FHLB totaled
$15,300,000 with $4,000,000 due December 7, 1998, $10,000,000 due December 28,
1998, and $1,300,000 due June 24, 2003. All borrowings are collateralized by
residential real estate mortgages. Membership in the FHLB requires an equity
investment in FHLB stock. The amount required is computed annually, and is
-15-
based upon a formula which considers the Bank's total investment in
residential real estate loans, mortgage-backed securities and any FHLB
advances outstanding at year-end. The Bank's investment in FHLB stock at March
31, 1997, was $2,333,000.
The Federal Deposit Insurance Corporation's (FDIC) risk based capital
regulations require that all banks maintain an 8.0 percent Tier II risk based
capital ratio. The FDIC has also established definitions of "well capitalized"
as a 5.0 percent Tier I leverage capital ratio, a 6.0 percent Tier I risk
based capital ratio and a 10.0 percent Tier II risk based capital ratio. As of
March 31, 1997, the Bank's ratios were 6.4 percent, 9.9 percent and 11.1
percent, respectively, excluding the SFAS No. 115 adjustment. These are
comparable to the ratios of 6.3 percent, 9.9 percent and 11.2 percent reported
at December 31, 1996, and ratios of 6.4 percent, 10.2 percent and 11.4 percent
reported at March 31, 1996.
The Bank was examined by the Indiana Department of Financial Institutions
(DFI) as of March 31, 1995, in June, 1995, and is scheduled for examination in
May, 1997. The Bank was also examined by the FDIC as of March 31, 1996, in
September, 1996. Management is not aware of any regulatory recommendations
that if implemented would have a material effect on liquidity, capital or
results of operations.
Total stockholders' equity increased $1,063,000 or 2.5 percent from
December 31, 1996 to $43,106,000 at March 31, 1997. Net income of $1,827,000,
less cash dividends paid of $436,000, less the decrease in the unrealized net
gain on securities available-for-sale of $495,000, plus the issuance of 10,000
shares of common stock at $31.00 per share, less the cost of the treasury
stock acquired of $143,000, comprised this increase.
Over the last five years the Bank has been growing at an approximate rate
of 14 percent per year. Total assets have grown from $343,460,000 at March 31,
1992, to $667,925,000 at March 31, 1997. This is an increase of $324,465,000
or 94.5 percent which equates to a 14.2 percent rate of growth per year.
Stockholders' equity has increased from $21,550,000 to $43,106,000 for the
same time period. That is an increase of $21,556,000 or 100.0 percent which
equates to a 14.9 percent rate of growth per year. Net income for the three
months ended March 31, 1992, compared to the net income for the same period of
1997, increased $1,131,000 or 162.5 percent from $696,000 to $1,827,000. From
March 31, 1992, to March 31, 1997, the number of Lake City Bank offices
increased from 19 to 31. This growth has been funded through results of
operation and existing capital. Management anticipates the Bank will continue
to fund its growth from current capital and results of operations. However,
-16-
should the need arise, the Corporation would have the ability to issue
additional stock as a means of pursuing growth.
(Intentionally left blank)
-17-
RESULTS OF OPERATIONS
Net Interest Income
For the three month period ended March 31, 1997, total interest and
dividend income increased $1,466,000 or 13.4 percent to $12,400,000, from
$10,934,000 during the first quarter of 1996. Daily average earning assets for
the first quarter of 1997 increased to $609,208,000, a 14.2 percent increase
over the same period in 1996. As indicated earlier, the growth in earning
assets was primarily in loans, with the majority of loan growth in the
commercial portfolio. The tax equivalent yields on average earning assets
decreased by 10 basis points for the three month period ended March 31, 1997,
when compared to the same respective period of 1996.
The decline in the yield on average earning assets was mainly due to
declining interest rates. The Bank's investment portfolio, which is primarily
fixed rate, experienced a 14 basis point reduction in yield between the first
quarter of 1997 and the first quarter of 1996. However, the Bank's home equity
portfolio and most of the commercial portfolio are variable rate and are tied
to the Bank's base rate which is based upon the prime rate. The prime rate
dropped 25 basis points on February 1, 1996. This resulted in a 32 basis point
reduction in the overall tax equivalent yield on loans for the first quarter
of 1997 as compared to the first quarter of 1996. Offsetting this yield
reduction was good loan demand. Strong local economies, combined with lower
interest rates, produced growth in average daily loan balances of 18.1 percent
between the first quarter of 1997 and the same period of 1996. This growth in
loan balances, offset by the decline in average yield, resulted in a 14.8
percent increase in total loan income to $9,014,000 during the first three
months of 1997, from $7,849,000 reported for the first three months of 1996.
Total investment income from all security portfolios amounted to
$3,300,000 for the three month period ended March 31, 1997. This compares to
the $3,052,000 recorded for the same period in 1996. This $248,000 increase in
income reflects an increase in average daily balances of 5.5 percent. The
investment income tax equivalent yields increased 14 basis points when
comparing the yields for the three months ending March 31, 1997, to March 31,
1996.
Income from short-term investments amounted to $86,000 for the three
month period ended March 31, 1997. This compares to $33,000 for the same
period in 1996. This increase is the result of higher balances being
maintained in short-term instruments offset by a 55 basis point decrease in
-18-
the average daily tax equivalent yield during the first three months of 1997,
as compared to the similar period in 1996.
Total interest expense increased $719,000 or 12.6 percent to $6,414,000
for the three month period ended March 31, 1997, from $5,695,000 for the three
month period ended March 31, 1996. This is a result of the overall growth of
deposits and the change in the deposit mix. On an average daily basis, total
deposits (including demand deposits) increased 10.1 percent for the three
month period ended March 31, 1997, as compared to the similar period ended
March 31, 1996. When comparing these same periods, the average daily balances
of the demand deposit accounts rose $9,671,000, while the average daily
balances of savings and transaction accounts increased $768,000 and
$1,906,000, respectively. The average daily balance of time deposits, which
pay a higher rate of interest as compared to demand deposit and transaction
accounts, increased $32,792,000. On an average daily basis, total deposits
(including demand deposits) and purchased funds increased 14.6 percent for the
three month period ended March 31, 1997, as compared to the three month period
ended March 31, 1996. The Corporation's daily cost of funds during the three
month period ended March 31, 1997, decreased 7 basis points, as compared to
the same period of 1996.
The net effect of all factors affecting total interest and dividend
income and total interest expense was to increase net interest income. For the
three month period ended March 31, 1997, net interest income totaled
$5,986,000, an increase of 14.3 percent or $747,000 over the first three
months of 1996.
The variation in net interest income reflects both local and national
market conditions as well as the ALCO's efforts to manage the interest margin
and asset growth.
Provision for Loan Losses
It is the policy of the Bank to maintain the allowance for loan losses at
a level that is deemed appropriate based upon loan loss experience, the nature
of the portfolio, the growth expected for the portfolio and the evaluation of
the economic outlook for the current year and subsequent years. Special
consideration is given to nonperforming and nonaccrual loans as well as
factors that management feels deserve recognition during the entire life of
the portfolio. For several years, the Bank has maintained a quarterly loan
review program designed to provide reasonable assurance that the allowance is
maintained at an appropriate level and that changes in the status of loans are
reflected in the financial statements in a timely manner. The adherence to
-19-
this policy may result in fluctuations in the provision for loan losses.
Consequently, the increase in net interest income before provision for loan
losses, discussed above, may not necessarily flow through to the net interest
income after provision for loan losses.
The process of identifying credit losses that may occur based upon
current circumstances is subjective. Therefore, management maintains a general
allowance to cover all credit losses within the entire portfolio. The
methodology management uses to determine the adequacy of the loan loss reserve
is as follows:
1. Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectibility factors (including
impairment) and assesses the requirement for specific reserves on such
credits. For those loans not subject to specific reviews, management reviews
previous loan loss experience to establish historical ratios and trends in
charge-offs by loan category. The ratios of net charge-offs to particular
types of loans enables management to establish charge-offs in future periods
by loan category and thereby establish appropriate reserves for loans not
specifically reviewed.
2. Management reviews the current and anticipated economic conditions of
its lending market to determine the effects on future loan charge-offs by loan
category, in addition to the effects on the loan portfolio as a whole.
3. Management reviews delinquent loan reports to determine risk of future
loan charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Given this methodology for determining the adequacy of the loan loss
reserve, the provision for loan losses amounted to $60,000 for the three month
period ended March 31, 1997, and $30,000 for the three month period ended
March 31, 1996. These provisions reflect the levels of past due accruing loans
(90 days or more). They also reflect the immaterial levels of nonaccrual loans
over the same periods. These levels of non-performing loans reflect both the
general economic conditions that have promoted growth and expansion in the
Bank's trade area during the last several years, and a credit risk management
strategy that promotes diversification.
At March 31, 1997, 65.0 percent of the Bank's allowance for loan losses
was classified as unallocated as compared to 62.0 percent classified as
-20-
unallocated at December 31, 1996. To a large extent, this reflects the growth
in total loans with the concentration of growth in the commercial loan
portfolio. With the commercial loan growth and the expansion into new markets,
management believes that it is prudent to continue to provide for loan losses,
due to the inherent credit risk involved with the commercial loan portfolio.
As of March 31, 1997, loans delinquent 30 days or more that were included
in the accompanying financial statements as accrual loans totaled
approximately $1,763,000. At March 31, 1997, there were loans totaling
$327,000 on nonaccrual. At December 31, 1996, there were $2,373,000 in loans
delinquent 30 days or more included as accruing loans in the financial
statements and $384,000 in nonaccrual loans.
As part of the loan review process, management also 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, `Accounting by Creditors
for Impairment of a Loan'. As of March 31, 1997, no loans were considered
impaired.
Following is a summary of the loan loss experience for the three months
ending March 31, 1997, and the year ending December 31, 1996.
March 31, December 31,
1997 1996
------------- -------------
(in thousands)
Amount of loans outstanding $ 400,686 $ 382,265
------------- -------------
Average daily loans outstanding for the
period $ 393,583 $ 352,811
------------- -------------
Allowance for loan losses at the
beginning of the period $ 5,306 $ 5,472
Charge-offs
Commercial 30 171
Real estate 0 0
Installment 50 158
Credit card and personal lines of credit 11 39
------------- -------------
Total charge-offs 91 368
-21-
Recoveries
Commercial 1 12
Real estate 0 0
Installment 14 54
Credit card and personal lines of credit 1 16
------------- -------------
Total recoveries 16 82
------------- -------------
Net charge-offs (recoveries) 75 286
Provision charged to expense 60 120
------------- -------------
Allowance for loan losses at the end of
the period $ 5,291 $ 5,306
============= =============
Ratio of annualized net charge-offs during the period to average daily loans
during the period:
Commercial 0.03% 0.04%
Real estate 0.00% 0.00%
Installment 0.04% 0.03%
Credit card and personal credit lines 0.01% 0.01%
------------- -------------
Total 0.08% 0.08%
============= =============
Net interest income after provision for loan losses totaled $5,926,000
for the three month period ended March 31, 1997. This represents an increase
of 13.8 percent over the same period ended March 31, 1996.
Noninterest Income
Total noninterest income increased $245,000 or 18.1 percent to $1,599,000
for the three month period ended March 31, 1997, from $1,354,000 recorded for
the three month period ended March 31, 1996.
Trust fees, which represent basic recurring service fee income, increased
$73,000 or 25.5 percent to $359,000 for the three month period ended March 31,
1997, as compared to $286,000 for the first three months of 1996. The major
fee increases were in stock transfer fees and employee benefit plan fees.
-22-
Service charges on deposit accounts increased 27.9 percent or $161,000
during the three month period ended March 31, 1997, totaling $739,000, as
compared to the same period in 1996. Increases in fees on the LCB Club account
(the Bank's low cost checking account service), business checking account fees
and overdraft fees comprised the majority of the increase, and reflected both
growth and the adjustments to the schedule of deposit account fees implemented
in 1996.
Other income (net) consists of normal recurring fee income, as well as
other income that management classifies as nonrecurring. Other income (net)
increased 1.3 percent or $5,000 to $397,000 for the three month period ended
March 31, 1997, as compared to the same period in 1996.
The profits from the sale of mortgages during the three month period
ended March 31, 1997, totaled $104,000, as compared to $100,000 during the
same period in 1996. This increase from the prior period is a reflection of
the small increase in the volume of mortgages sold during the first three
months of 1997 as compared to the first three months of 1996. During the first
three months of 1997 mortgages totaling $5,045,000 were sold on the secondary
market and during the first three months of 1996 mortgages totaling $4,720,000
were sold.
For the three month period ended March 31, 1997, there were no security
gains (losses) as compared to $(2,000) for the three month period ended March
31, 1996. In the first three months of 1996 special calls of zero coupon bonds
were responsible for these small losses. Additional calls are expected in
future periods.
Noninterest Expense
Noninterest expense increased $432,000 or 10.2 percent to $4,656,000 for
the three month period ended March 31, 1997, as compared to $4,224,000 for the
first three months of 1996.
For the three months ended March 31, 1997, salaries and employee benefits
increased to $2,540,000, a $303,000 increase or 13.5 percent as compared to
the first three months of 1996. These increases reflect the staffing of the
Hubbard Hill and Kendallville offices opened during 1996, as well as normal
salary increases. Full-time equivalent employees increased to 340 at March 31,
1997, from 292 at March 31, 1996.
For the three month period ended March 31, 1997, occupancy and equipment
expenses were $783,000, a $60,000 increase or 8.3 percent from the same period
-23-
one year ago. This three month performance reflects the ordinary timing
differences incurred with these types of expenses, as well as additional
occupancy expense related to the new locations added in 1996. These expenses
are expected to continue to increase in 1997 with the Bank=s continued growth
and expansion.
For the three month period ended March 31, 1997, other expenses totaled
$1,333,000 as compared to $1,264,000 during the same period in 1996. This is
an increase of 5.5 percent or $69,000. Increases in professional and
regulatory, data processing and telephone, supplies and postage expense were
offset by a decline in business development fees. Business development fees
decreased $12,000 or 4.7 percent, while professional and regulatory fees
increased $10,000 or 7.6 percent, data processing fees increased $23,000 or
8.6 percent, and telephone, supplies and postage increased $28,000 or 9.1
percent when comparing the first three months of 1997 to the same period of
1996.
Income Before Income Tax Expense
As a result of the above factors, income before income tax expense
increased to $2,869,000 for the first three months of 1997, as compared to
$2,339,000 for the same period in 1996. This is an increase of $530,000 or
22.7 percent.
Income Tax Expense
Income tax expense increased to $1,042,000 for the first three months of
1997, as compared to $835,000 for the same period in 1996. This is a $207,000
or 24.8 percent increase.
The combined State franchise tax expense and the Federal income tax
expense as a percent of income before income tax expense increased to 36.3
percent during the first three months of 1997, as compared to 35.7 percent
during the same period in 1996. Currently the State franchise tax rate is 8.5
percent and is a deductible expense for computing Federal income tax.
Net Income
As a result of all factors indicated above, net income increased to
$1,827,000 for the first three months of 1997, an increase of $323,000 or 21.5
percent from the $1,504,000 recorded over the same period in 1996. After
restatement for the two for one stock split effective May 15, 1996, earnings
-24-
per share for the first three months of 1996 were $.52 per share as compared
to $.63 per share for the first three months of 1997.
-25-
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 1997
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
There were no submissions of matters to a vote by security holders during
the quarter ended March 31, 1997.
At the annual meeting of shareholders held on April 8, 1997, the
shareholders voted on a proposal to amend the Articles of Incorporation. The
proposed amendment reduces the required vote to amend the Articles of
Incorporation to a simple majority of those shares voted in person or by proxy
at the annual or special meeting of the shareholders of the Corporation. The
Articles of Incorporation of Lakeland Financial Corporation currently require
an affirmative vote of two-thirds of the issued and outstanding shares of the
Corporation in order to amend the Articles of Incorporation. There were
2,903,799 votes entitled to be cast. At the annual meeting there were
2,194,751 votes for the proposal, and 56,991 votes against the proposal. All
abstentions and non-votes were treated as no vote. In order for the proposal
to pass there needed to be 1,935,866 shares voted for the proposal. There
being more than the required two-thirds vote for the proposal, the proposal
passed.
-26-
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 1997
Part II - Other Information
Item 5 - Other Information
Mr. Kevin Lambright was appointed to the Board of Directors of Lakeland
Financial Corporation and the Board of Directors of Lake City Bank to fulfill
the term of Mr. Philip Spear who retired from both boards.
-27-
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 1997
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the
quarter ending March 31, 1997.
-28-
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 1997
Part II - Other Information
Signatures
Pursuant to the requirements of the Securities 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
(Registrant)
Date: May 6, 1997 R. Douglas Grant
R. Douglas Grant - President
Date: May 6, 1997 Terry M. White
Terry M. White - Secretary/Treasurer
-29-
9 1,000 3-MOS DEC-31-1997 MAR-31-1997 32,621 271 627 0 81,419 130,218 129,937 400,934 5,291 667,925 497,233 105,841 6,354 15,391 0 0 1,453 41,653 667,925 9,014 3,300 86 12,400 4,867 6,414 5,986 60 0 4,656 2,869 1,827 0 0 1,827 .63 .63 3.94 327 342 1,239 0 5,306 91 16 5,291 1,852 0 3,439