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, 1996
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, 1996
Common Stock, $1 Stated Value 1,448,496
<PAGE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 1996 and December 31, 1995
(in thousands)
(Unaudited)
(Page 1 of 2)
March 31, December 31,
1996 1995
---------- -----------
ASSETS
- ------
Cash and cash equivalents
Cash and due from banks $ 22,806 $ 26,185
Short-term investments 358 710
----------- -----------
Total cash and cash equivalents 23,164 26,895
Securities available-for-sale
U. S. Treasury securities 27,571 27,844
Mortgage-backed securities 51,132 51,034
State and municipal securities 2,142 2,176
Other debt securities 2,675 1,066
----------- -----------
Total securities available-for-sale
(carried at fair value at March 31, 1996
and December 31, 1995) 83,520 82,120
Securities held-to-maturity
U. S. Treasury securities 13,580 13,611
Mortgage-backed securities 76,957 80,217
State and municipal securities 19,971 19,047
Other debt securities 3,713 1,013
----------- -----------
Total securities held-to-maturity
(fair value of $114,265,000 at
March 31, 1996, and $115,328,000
at December 31, 1995) 114,221 113,888
Real estate mortgages held-for-sale 492 145
Loans:
Total loans 337,028 327,617
Less: Allowance for loan losses 5,378 5,472
----------- -----------
Net loans 331,650 322,145
Land, premises and equipment, net 13,803 13,736
Accrued income receivable 3,812 4,003
Other assets 5,653 5,647
----------- -----------
Total assets $ 576,315 $ 568,579
=========== ===========
(Continued)
-1-
<PAGE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 1996 and December 31, 1995
(in thousands)
(Unaudited)
(Page 2 of 2)
March 31, December 31,
1996 1995
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Deposits:
Noninterest bearing deposits $ 65,554 $ 67,856
Interest bearing deposits 385,465 364,078
----------- -----------
Total deposits 451,019 431,934
Short-term borrowings
Federal funds purchased 1,600 17,100
U.S. Treasury demand notes 2,481 1,880
Securities sold under agreements
to repurchase 58,583 58,151
----------- -----------
Total short-term borrowings 62,664 77,131
Accrued expenses payable 4,581 4,481
Other liabilities 738 847
Long-term debt 19,432 17,432
----------- -----------
Total liabilities 538,434 531,825
Commitments, off-balance sheet risks
and contingencies
STOCKHOLDERS' EQUITY
- --------------------
Common stock: $1.00 stated value, 2,750,000
shares authorized, 1,448,496 shares issued and
outstanding as of March 31, 1996 and 1,438,496
shares issued and outstanding at December 31, 1995 1,448 1,438
Additional paid-in capital 8,232 7,827
Retained earnings 28,071 26,858
Unrealized net gain (loss) on securities
available-for-sale 130 631
----------- -----------
Total stockholders' equity 37,881 36,754
Total liabilities and stockholders' equity $ 576,315 $ 568,579
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1996 and 1995
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended
March 31,
-------------------------
1996 1995
----------- -----------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 7,788 $ 6,817
Tax exempt 61 65
----------- -----------
Total loan income 7,849 6,882
Short-term investments 33 65
Securities:
U.S. Treasury and Government agency securities 633 599
Mortgage-backed securities 1,988 1,785
Obligations of state and political subdivisions 340 226
Other debt securities 91 101
----------- -----------
Total interest and dividend income 10,934 9,658
INTEREST EXPENSE
- ----------------
Interest on deposits 4,548 3,732
Interest on short-term borrowings 875 832
Interest on long-term debt 272 245
----------- -----------
Total interest expense 5,695 4,809
----------- -----------
NET INTEREST INCOME 5,239 4,849
- -------------------
Provision for loan losses 30 30
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,209 4,819
- ------------------------- ----------- -----------
NONINTEREST INCOME
- ------------------
Trust fees 286 225
Service charges on deposit accounts 578 522
Other income (net) 392 302
Net gains on the sale of real estate mortgages
held-for-sale 100 17
Net investment securities gains (losses) (2) (16)
----------- -----------
Total noninterest income 1,354 1,050
(Continued)
-3-
<PAGE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1996 and 1995
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended
March 31,
-------------------------
1996 1995
----------- -----------
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 2,237 1,965
Occupancy and equipment expenses 723 620
Other expenses 1,264 1,241
----------- -----------
Total noninterest expense 4,224 3,826
INCOME BEFORE INCOME TAX EXPENSE 2,339 2,043
- --------------------------------
Income tax expense 835 737
----------- -----------
NET INCOME $ 1,504 $ 1,306
- ---------- =========== ===========
AVERAGE COMMON SHARES OUTSTANDING (Note 3) 2,896,992 2,876,992
EARNINGS PER COMMON SHARE
- -------------------------
Net Income (Note 3) $ 0.52 $ 0.45
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1996 and 1995
(in thousands except for shares)
(Unaudited)
<CAPTION>
Unrealized
Net Gain (Loss)
Common Stock on Securities Total
------------------------ Paid in Retained Available- Stockholders'
Shares Amount Capital Earnings For-Sale Equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 1,438,496 $ 1,438 $ 7,827 $ 22,279 ($ 1,655) $ 29,889
Net income for three months
ended March 31, 1995 1,306 1,306
Net change in unrealized net gain (loss)
on securities available-for-sale 910 910
Cash dividends declared -
$.17 per share (246) (246)
----------- ----------- ----------- ----------- ----------- -----------
Balances, March 31, 1995 1,438,496 $ 1,438 $ 7,827 $ 23,339 ($ 745) $ 31,859
=========== =========== =========== =========== =========== ===========
Balances, January 1, 1996 1,438,496 $ 1,438 $ 7,827 $ 26,858 $ 631 $ 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 $ 37,881
=========== =========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
(in thousands)
(Unaudited)
(Page 1 of 2)
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,504 $ 1,306
----------- -----------
Adjustments to reconcile net income to net cash
from operating activites:
Depreciation 317 283
Provision for loan losses 30 30
Loans originated for sale (8,605) (3,067)
Net (gain) loss on sale of loans (100) (17)
Proceeds from sale of loans 7,948 3,023
Net (gain) loss on sale of premises and equipment 1 0
Net (gain) loss on sale of securities available-for-sale 0 16
Net (gain) loss on calls of securities held-to-maturity 2 0
Net investment amortization (accretion) 80 66
Increase (decrease) in taxes payable 983 612
(Increase) decrease in income receivable 191 (312)
Increase (decrease) in accrued expenses payable (555) (29)
(Increase) decrease in other assets (7) 7
Increase (decrease) in other liabilities (109) (471)
----------- -----------
Total adjustments 176 141
----------- -----------
Net cash from operating activities 1,680 1,447
----------- -----------
Cash flows from investing activities:
Proceeds from maturities and calls of securities held-to-maturity 2,051 1,461
Proceeds from maturities and calls of securities available-for-sale 1,176 207
Purchases of securities available-for-sale (3,472) (959)
Purchases of securities held-to-maturity (2,398) (9,900)
Proceeds from sales of securities available-for-sale 0 337
Net (increase) decrease in total loans (9,125) (4,170)
Purchases of premises and equipment (385) (536)
----------- -----------
Net cash from investing activities (12,153) (13,560)
----------- -----------
(Continued)
</TABLE>
-6-
<PAGE>
<TABLE>
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
(in thousands)
(Unaudited)
(Page 2 of 2)
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in total deposits $ 19,086 $ (825)
Proceeds from short-term borrowings 144,802 126,592
Payments on short-term borrowings (159,269) (111,525)
Proceeds from long-term borrowings 2,000 0
Dividends paid (292) (246)
Proceeds from issuance of common stock 415 0
----------- -----------
Net cash from financing activities 6,742 13,996
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,731) 1,883
Cash and cash equivalents at beginning of the period 26,895 24,147
----------- -----------
Cash and cash equivalents at end of the period $ 23,164 $ 26,030
=========== ===========
Cash paid during the period for:
Interest $ 5,410 $ 4,408
=========== ===========
Income taxes $ 180 $ 175
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
-7-
<PAGE>
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(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. CHANGES IN ACCOUNTING
The Bank originates mortgage loans for sale to the secondary market, and
sells the loans with servicing retained. Effective January 1, 1996, the Bank
adopted Statement of Financial Accounting Standards No. 122 (SFAS 122) on
accounting for mortgage servicing rights, which requires capitalizing the
rights to service originated mortgage loans. Prior to adoption of SFAS 122,
only purchased mortgage service rights were capitalized. Beginning in 1996,
the total cost of mortgage loans purchased or originated with the intent to
sell is allocated between the loan servicing right and the mortgage loan
without servicing, based upon their relative fair values. The capitalized cost
of loan servicing rights is amortized in proportion to, and over the period
of, estimated net future servicing revenue.
Mortgage servicing rights are periodically evaluated for impairment by
stratifying them based upon predominate risk characteristics of the underlying
-8-
<PAGE>
serviced loans, such as loan type, term, and note rate. Impairment represents
the excess of cost of an individual mortgage servicing rights stratum over its
fair value, and is recognized through a valuation allowance.
Fair values for individual stratum are based on quoted market prices.
Estimates of fair value include assumptions about prepayment, default and
interest rates, and other factors which are subject to change over time.
Changes in these underlying assumptions could cause the fair value of loan
servicing rights, and the related valuation allowance, to change significantly
in the future.
Other information relating to mortgage servicing rights is not material
for disclosure purposes.
NOTE 3. EARNINGS PER SHARE
The average common shares outstanding and the net income per share for
the three months ended March 31, 1995 and 1996, have been restated to reflect
a declared two for one stock split. The record date for the stock split is
April 30, 1996, with new shares being issued on May 15, 1996.
(Intentionally left blank)
-9-
<PAGE>
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
March 31, 1996
FINANCIAL CONDITION
The financial statements reflect the Corporation's continued growth
within the Bank's traditional markets, and expansion into contiguous market
areas. Construction of the Bank's Kendallville, Indiana, office continues and
it is anticipated this office will open during the second quarter of 1996. The
Bank has received regulatory approval to open an office at 58404 State Road
19, Elkhart, Indiana. This office will be called the Hubbard Hill office and
construction is due to start during the second quarter of 1996. The Bank is
also installing a free-standing ATM in the Linwood Plaza, 614 W. Lincoln
Avenue, Goshen, Indiana. Construction on this facility is in process.
Total assets of the Corporation totaled $576,315,000 as of March 31,
1996. This is an increase of $7,736,000 or 1.4 percent from $568,579,000
reported at December 31, 1995. Total loans were $337,028,000 at March 31,
1996. This is an increase of $9,411,000 or 2.9 percent from balances at
December 31, 1995. Total securities (including available-for-sale (AFS) and
held-to-maturity (HTM)) increased $1,733,000 or 0.9 percent to $197,741,000 as
of March 31, 1996, from $196,008,000 at December 31, 1995. Earning assets
increased to $530,241,000 at March 31, 1996. This is an increase of
$11,233,000 or 2.2 percent from the December 31, 1995, total of $519,008,000.
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. At March 31, 1996, these funds totaled $509,602,000. This
represented a $19,517,000 or 4.0 percent increase from December 31, 1995. The
growth has been primarily in time deposits and repurchase agreements. Time
deposits increased $23,863,000 or 9.0 percent from the balance at December 31,
1995. The repurchase agreement balance increased $432,000 or .7 percent from
the balance at December 31, 1995. 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
-10-
<PAGE>
sources, the Bank borrows modestly through the Treasury, Tax and 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 $533,115,000 at March 31,
1996. This is a $6,618,000 or 1.3 percent increase from $526,497,000 reported
at December 31, 1995.
On an average daily basis, total earning assets increased 14.6 percent
for the three month period ended March 31, 1996, as compared to similar period
ended March 31, 1995. On an average daily basis, total deposits and purchased
funds increased 13.4 percent for the three month period ended March 31, 1996,
as compared to the three month period ended March 31, 1995.
The Bank's investment portfolio consists of U.S. Treasuries, agencies,
mortgage-backed securities, municipal bonds, and corporates. During 1996, new
investments have been primarily municipal bonds and mortgage-backed
securities. At March 31, 1996, and December 31, 1995, the Bank's investment in
mortgage-backed securities comprised approximately 64.8 and 67.0 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, 1996, the mortgage-backed
securities in the HTM portfolio had a three year average life, with
approximately 9 percent price volatility should rates move up or 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, 1996, 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, 1996, the AFS portfolio constituted 42.2
percent of the total investment security portfolio. During the first three
months of 1995, purchases for the HTM and AFS portfolios were $2,398,000 and
$3,472,000 respectively. At March 31, 1996, the net after-tax unrealized gain
in the AFS portfolio included in stockholders' equity was $130,000, a
reduction of $501,000 from the unrealized gain included in stockholders'
-11-
<PAGE>
equity at December 31, 1995. Since the securities portfolio is primarily fixed
rate, a negative equity adjustment should occur whenever interest rates
increase. Future investment activity is difficult to predict, as it is
dependent upon loan and deposit trends. All mortgage-backed securities are
purchased in compliance with the FFIEC high risk security tests.
As previously indicated, total loans increased $9,411,000 to $337,028,000
as of March 31, 1996, from $327,617,000 at December 31, 1995. Loan growth is
net of loans reclassified to other real estate. The Bank continues to
experience good commercial loan demand, particularly in Elkhart and LaGrange
Counties. Commercial loans at March 31, 1996, increased 4.4 percent from the
level at December 31, 1995. Retail loans at March 31, 1996, increased 3.2
percent from December 31, 1995. Real estate loans (excluding mortgages
held-for-sale) decreased 2.8 percent from December 31, 1995. 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 60.7 percent of its loans concentrated in commercial loans
at March 31, 1996, and 59.8 percent at December 31, 1995. 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 $4,000,000.
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, 1996, 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.
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<PAGE>
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 1996, $4,463,000 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
restructuring totaled $1,418,000 at March 31, 1996, as compared to $1,432,000
at December 31, 1995. The loans classified as troubled debt restructuring at
March 31, 1996, are performing in accordance with the modified terms. At March
31, 1996, 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, 1996, legal loan limit was approximately
$6,464,000. The legal loan limit will continue to increase as the Bank's
combined equity and allowance for loan losses continues to increase. At its
January 9, 1996, meeting, the Bank's Board of Directors modestly increased the
Bank's policy limit by $500,000, to $4,000,000 for any one borrower. With a
relatively low administrative loan limit of $4,000,000, 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 1996, deposits have been
growing faster than loans. Demand deposits and other transaction accounts have
decreased $2,302,000 and $2,476,000 respectively, while time deposits have
increased $23,863,00 for a net increase of $19,085,000. During this same
period loans have increased $9,411,000. As a result of these loan and deposit
trends, the Bank's average daily loans/deposits ratio amounted to 74.7
percentat March 31, 1996, a decrease from 75.8 percent at year-end 1995. The
Bank's average daily loans/total deposits and repurchase agreements ratio
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<PAGE>
amounted to 68.2 percent at March 31, 1996. This is an increase from 67.8
percent at year-end 1995.
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, 1996, the Bank's GAP/Total Assets ratios were
(1.9) percent, (7.4) percent, and (9.7) 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, 1995, three, six, and twelve month GAP ratios
were (5.2) percent, (11.7) percent, and (12.8) 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, 1996, 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, 1995.
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. The Bank first borrowed under this program in December, 1992. This
advance was $8,000,000 payable in three years and was paid as agreed in
January, 1996. The Bank's second advance was made on June 25, 1993. This
advance was $1,300,000 to be paid June 24, 2003. Another borrowing was
$8,132,000 made in March, 1994, to be paid January 14, 1997. The most recent
advance was $10,000,000 made in January, 1996, to be paid December 18, 1998.
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<PAGE>
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 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 current
investment in FHLB stock totals $1,902,500.
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, 1996, the Bank's ratios were 6.4 percent, 10.2 percent and 11.4
percent respectively, excluding the SFAS No. 115 adjustment. These are
comparable to the ratios of 6.3 percent, 10.1 percent and 11.4 percent
reported at December 31, 1995, and ratios of 6.3 percent, 10.2 percent and
11.4 percent reported at March 31, 1995. Including the SFAS No. 115 equity
adjustment at March 31, 1996, results in Tier I leverage ratio, Tier I risk
based capital and Tier II risk based capital ratios of 6.5 percent, 10.2
percent and 11.5 percent. All ratios continue to be above "well capitalized"
regardless of whether SFAS No. 115 is included or excluded from the
calculation.
The Bank was examined by the Indiana Department of Financial Institutions
(DFI) as of March 31, 1995, in June, 1995. The Bank was also examined by the
FDIC as of March 31, 1994, in June, 1994, and is scheduled for examination in
May, 1996, as of March 31, 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 $1,127,000 or 3.1 percent from
December 31, 1995 to $37,881,000 at March 31, 1996. Net income of $1,504,000,
less cash dividends paid of $291,000, less the decrease in the unrealized net
gain on securities available-for-sale of $501,000 plus the issuance of 10,000
shares of common stock at $41.50 per share were responsible for this overall
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 $291,236,000 at March 31,
1991, to $576,315,000 at March 31, 1996. This is an increase of $285,079,000
or 97.9 percent which equates to a 14.0 percent rate of growth per year.
Stockholders' equity has increased from $19,289,000 to $37,881,000 for the
-15-
<PAGE>
same time period. That is an increase of $18,592,000 or 96.4 percent which
equates to a 14.5 percent rate of growth per year. Net income for the three
months ended March 31, 1991, compared to the net income for the same period of
1996, increased $808,000 or 116.1 percent from $696,000 to $1,504,000. From
March 31, 1991, to March 31, 1996, the number of Lake City Bank offices
increased from 18 to 30. 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,
should the need arise, the Corporation would have the ability to issue
additional stock as a means of pursuing growth.
(Intentionally left blank)
-16-
<PAGE>
RESULTS OF OPERATIONS
Net Interest Income
For the three month period ended March 31, 1996, total interest and
dividend income increased $1,276,000 or 13.2 percent to $10,934,000, from
$9,658,000 during the first quarter of 1995. Daily average earning assets for
the first quarter of 1996 increased to $533,396,000, a 14.6 percent increase
over the same period in 1995. As indicated earlier, the growth in earning
assets was primarily in loans, with the majority of loan growth in the
commercial and retail portfolios. The tax equivalent yields on average earning
assets decreased by 11 basis points for the three month period ended March 31,
1996, when compared to the same respective period of 1995.
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 only a 2 basis point reduction in yield between the
first quarter of 1996 and the first quarter of 1995. 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
average prime rate was 49 basis points lower during the first three months of
1996 when compared to the same period of 1995. This resulted in a 20 basis
point reduction in the overall tax equivalent yield on loans for the first
quarter of 1996 as compared to the first quarter of 1995. Offsetting this
yield reduction was good loan demand. Strong local economies, combined with
lower interest rates, produced growth in average daily loan balances of 15.9
percent between the first quarter of 1996 and the same period of 1995. This
growth in loan balances, coupled with the small decline in average yield,
resulted in a 14.1 percent increase in total loan income to $7,849,000 during
the first three months of 1996, from $6,882,000 reported for the first three
months of 1995.
Total investment income from all security portfolios amounted to
$3,052,000 for the three month period ended March 31, 1996. This compares to
the $2,711,000 recorded for the same period in 1995. This $341,000 increase in
income reflects an increase in average daily balances of 14.1 percent. The
investment income tax equivalent yields remained relatively unchanged,
decreasing only 2 basis points when comparing the yields for the three months
ending March 31, 1996, and March 31, 1995.
Income from short-term investments amounted to $33,000 for the three
month period ended March 31, 1996. This compares to $65,000 for the same
period in 1995. This decrease is the result of lower balances being maintained
-17-
<PAGE>
in short-term instruments plus an 8 basis point decrease in the average daily
tax equivalent yield during the first three months of 1996, as compared to the
similar period in 1995.
Total interest expense increased $886,000 or 18.4 percent to $5,695,000
for the three month period ended March 31, 1996, from $4,809,000 for the three
month period ended March 31, 1995. 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 14.6 percent for the three
month period ended March 31, 1996, as compared to the similar period ended
March 31, 1995. When comparing these same periods, the average daily balances
of the demand deposit accounts rose $6,830,000, while the average daily
balances of savings and transaction accounts declined $6,077,000 and
$1,436,000 respectively. The average daily balance of time deposits, which pay
a higher rate of interest as compared to demand deposit and transaction
accounts, increased $57,386,000. On an average daily basis, total deposits
(including demand deposits) and purchased funds increased 13.4 percent for the
three month period ended March 31, 1996, as compared to the three month period
ended March 31, 1995. The Corporation's daily cost of funds during the three
month period ended March 31, 1996, increased 18 basis points, as compared to
the same period of 1995.
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, 1996, net interest income totaled
$5,239,000, an increase of 8.0 percent or $390,000 over the first three months
of 1995.
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
-18-
<PAGE>
reflected in the financial statements in a timely manner. The adherence to
this policy has resulted 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 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 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 was the same in 1996 as compared to
1995. The provision amounted to $30,000 for each of the three month periods
ended March 31, 1996 and 1995. 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.
-19-
<PAGE>
At March 31, 1996, 73.4 percent of the Bank's allowance for loan losses
was classified as unallocated as compared to 74.2 percent classified as
unallocated at December 31, 1995. 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, 1996, loans delinquent 30 days or more that were included
in the accompanying financial statements as accrual loans totaled
approximately $1,336,000. At March 31, 1996, there were loans totaling
$659,000 on nonaccrual. At December 31, 1995, there was $737,000 in loans
delinquent 30 days or more included as accruing loans in the financial
statements and $532,000 in nonaccrual loans.
Following is a summary of the loan loss experience for the three months
ending March 31, 1996, and the year ending December 31, 1995.
March 31, December 31,
1996 1995
----------- -----------
(in thousands)
Amount of loans outstanding $ 337,028 $ 327,617
----------- -----------
Average daily loans outstanding for the
period $ 333,139 $ 309,241
----------- -----------
Allowance for loan losses at the
beginning of the period $ 5,472 $ 4,866
Charge-offs
Commercial 120 137
Real estate 0 48
Installment 14 112
Credit card and personal lines of credit 7 58
----------- -----------
Total charge-offs 141 355
-20-
<PAGE>
Recoveries
Commercial 1 26
Real estate 0 0
Installment 15 63
Credit card and personal lines of credit 1 6
----------- -----------
Total recoveries 17 95
----------- -----------
Net charge-offs (recoveries) 124 260
Purchase loan adjustment 0 746
Provision charged to expense 30 120
----------- -----------
Allowance for loan losses at the end of
the period $ 5,378 $ 5,472
=========== ===========
Ratio of net charge-offs during the period
to average daily loans during the period
Commercial 0.04% 0.03%
Real estate 0.00% 0.01%
Installment 0.00% 0.02%
Credit card and personal credit lines 0.00% 0.02%
----------- -----------
Total 0.04% 0.08%
=========== ===========
The purchase loan adjustment was the result of the acquisition of Gateway
Bank in July, 1995.
Net interest income after provision for loan losses totaled $5,209,000
for the three month period ended March 31, 1996. This represents an increase
of 8.1 percent over the same period ended March 31, 1995.
Noninterest Income
Total noninterest income increased $304,000 or 29.0 percent to $1,354,000
for the three month period ended March 31, 1996, from $1,050,000 recorded for
the three month period ended March 31, 1995.
Trust fees, which represent basic recurring service fee income, increased
$61,000 or 27.1 percent to $286,000 for the three month period ended March 31,
-21-
<PAGE>
1996, as compared to $225,000 for the first three months of 1995. The major
fee increases were in stock transfer fees and testamentary trust fees.
Service charges on deposit accounts increased 10.7 percent or $56,000
during the three month period ended March 31, 1996, totaling $578,000, as
compared to the same period in 1995. The fees on the LCB Club account (the
Bank's low cost checking account service) and savings account fees increased
12.8 percent and 15.5 percent respectively, during the three month period
ended March 31, 1996, as compared to the same period in 1995.
Other income (net) consists of normal recurring fee income, as well as
other income that management classifies as nonrecurring. Other income (net)
increased 29.8 percent or $90,000 to $392,000 for the three month period ended
March 31, 1996, as compared to the same period in 1995. Recurring components
of other income increased 11.4 percent during the first three months of 1996,
as compared to the first three months of 1995. Major increases were in
discount brokerage fees and wire transfer fees.
The profits from the sale of mortgages during the three month period
ended March 31, 1996, totaled $100,000, as compared to $17,000 during the same
period in 1995. This increase from the prior period is a reflection of the
lower rate environment which has increased the volume of mortgages originated
and the adoption of SFAS No. 122. The impact of adopting SFAS No. 122 was to
increase the profits on the sale of mortgages during 1996 by approximately
$53,000.
Net investment security gains (losses) amounted to $(2,000) for the three
month period ended March 31, 1996, as compared to $(16,000) for the three
month period ended March 31, 1995. In the first three months of 1996 and 1995,
special calls of zero coupon bonds were responsible for these small losses.
Additional calls are expected in future periods.
Noninterest Expense
Noninterest expense increased $398,000 or 10.4 percent to $4,224,000 for
the three month period ended March 31, 1996, as compared to the first three
months of 1995.
For the three months ended March 31, 1996, salaries and employee benefits
increased to $2,237,000, a $272,000 increase or 13.8 percent as compared to
the first three months of 1995. These increases reflect the staffing of the
Middlebury, LaGrange, Elkhart Concord and Rochester locations opened during
-22-
<PAGE>
1995, as well as normal salary increases. Full-time equivalent employees
increased to 292 at March 31, 1996, from 267 at March 31, 1995.
For the three month period ended March 31, 1996, occupancy and equipment
expenses were $723,000, a $103,000 increase or 16.6 percent from the same
period 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 1995. These expenses
are expected to continue to increase in 1996 with the Bank's continued growth
and expansion.
For the three month period ended March 31, 1996, other expenses totaled
$1,264,000 as compared to $1,241,000 during the same period in 1995. This is
an increase of 1.9 percent or $23,000. Increases in business development, data
processing and telephone, supplies and postage expense were offset by a
decline in professional and regulatory fees. Business development fees
increased $68,000 or 30.5 percent, data processing fees increased $55,000 or
24.8 percent, telephone, supplies and postage increased $32,000 or 24.3
percent while professional and regulatory fees decreased $219,000 or 61.4
percent when comparing the first three months of 1996 to the same period of
1995. The significant factor in the reduction of professional and regulatory
fees was the reduction in FDIC fees.
Income Before Income Tax Expense
As a result of the above factors, income before income tax expense
increased to $2,339,000 for the first three months of 1996, as compared to
$2,043,000 for the same period in 1994. This is an increase of $296,000 or
14.5 percent.
Income Tax Expense
Income tax expense increased to $835,000 for the first three months of
1996, as compared to $737,000 for the same period in 1995. This is a $98,000
or 13.3 percent increase.
The combined State franchise tax expense and the Federal income tax
expense as a percent of income before income tax expense decreased to 35.7
percent during the first three months of 1996, as compared to 36.1 percent
during the same period in 1995. Currently the State franchise tax rate is 8.5
percent and is a deductible expense for computing Federal income tax.
-23-
<PAGE>
Net Income
As a result of all factors indicated above, net income increased to
$1,504,000 for the first three months of 1996, an increase of $198,000 or 15.2
percent from the $1,306,000 recorded over the same period in 1995. After
restatement for the two for one stock split effective May 15, 1996, earnings
per share for the first three months of 1996 were $.52 per share as compared
to $.45 per share for the first three months of 1995.
-24-
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 1996
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, 1996.
At the annual meeting of shareholders held on April 9, 1996, the
shareholders voted on a proposal to increase the capital stock of the
Corporation from 2,750,000 shares to 10,000,000 shares. The Articles of
Incorporation of Lakeland Financial Corporation require an affirmative vote of
two-thirds of the issued and outstanding shares of the Corporation in order to
increase the capital stock. At the annual meeting there were 1,138,676 votes
for the increase and 56,411 against. All abstentions and non-votes were
treated as no vote. In order for the proposal to pass there needed to be
965,664 shares voted for the proposal. There being more than the required
two-thirds vote for the proposal to increase the capital stock, the proposal
passed.
-25-
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 1996
Part II - Other Information
Item 5 - Other Information
Subsequent to the shareholder approval to increase the common stock of
the Corporation, the Board of Directors of the Corporation declared a two for
one stock split at their regularly scheduled meeting. The record date for the
split will be April 30, 1996, with new certificates being issued on May 15,
1996.
-26-
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 1996
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 3, 1996 R. Douglas Grant
-----------------------------------------
R. Douglas Grant - President
Date: May 3, 1996 Terry M. White
-----------------------------------------
Terry M. White - Secretary/Treasurer
-27-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 22,806
<INT-BEARING-DEPOSITS> 244
<FED-FUNDS-SOLD> 114
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,520
<INVESTMENTS-CARRYING> 114,221
<INVESTMENTS-MARKET> 114,265
<LOANS> 337,520
<ALLOWANCE> 5,378
<TOTAL-ASSETS> 576,315
<DEPOSITS> 451,019
<SHORT-TERM> 62,664
<LIABILITIES-OTHER> 5,319
<LONG-TERM> 19,432
0
0
<COMMON> 1,448
<OTHER-SE> 36,433
<TOTAL-LIABILITIES-AND-EQUITY> 576,315
<INTEREST-LOAN> 7,849
<INTEREST-INVEST> 3,052
<INTEREST-OTHER> 33
<INTEREST-TOTAL> 10,934
<INTEREST-DEPOSIT> 4,548
<INTEREST-EXPENSE> 5,695
<INTEREST-INCOME-NET> 5,239
<LOAN-LOSSES> 30
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 4,224
<INCOME-PRETAX> 2,339
<INCOME-PRE-EXTRAORDINARY> 1,504
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,504
<EPS-PRIMARY> .52<F1>
<EPS-DILUTED> .52<F1>
<YIELD-ACTUAL> 3.98
<LOANS-NON> 659
<LOANS-PAST> 71
<LOANS-TROUBLED> 1,418
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,472
<CHARGE-OFFS> 141
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 5,378
<ALLOWANCE-DOMESTIC> 1,429
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,949
<FN>
<F1>The earnings per share have been restated to reflect a two for one stock
split effective May 15, 1996.
</FN>
</TABLE>
