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, 1999
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 May 7, 1999
Common Stock, No Par Value 5,794,615
<PAGE>
LAKELAND FINANCIAL CORPORATION
Form 10-Q Quarterly Report
Table of Contents
PART I.
Page Number
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 8
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 30
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 30
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 30
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 30
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 30
Form 10-Q Signature Page . . . . . . . . . . . . . . . . . . . . . . . . 31
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 1999 and December 31, 1998
(in thousands)
(Page 1 of 2)
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 34,005 $ 45,933
Short-term investments 1,122 15,575
------------ ------------
Total cash and cash equivalents 35,127 61,508
Securities available-for-sale:
U. S. Treasury securities 35,837 39,521
Mortgage-backed securities 203,715 227,944
State and municipal securities 54,800 59,112
Other debt securities 12,746 1,081
---------- ------------
Total securities available-for-sale
(carried at fair value) 307,098 327,658
Securities held-to-maturity:
U. S. Treasury securities 0 0
Mortgage-backed securities 0 0
State and municipal securities 0 0
Other debt securities 0 0
---------- ------------
Total securities held-to-maturity
(fair value of $0 at
March 31, 1999, and $0
at December 31, 1998) 0 0
Real estate mortgages held-for-sale 713 3,796
Loans:
Total loans 569,128 538,496
Less: Allowance for loan losses 5,715 5,510
---------- ------------
Net loans 563,413 532,986
Land, premises and equipment, net 26,933 26,370
Accrued income receivable 5,991 5,669
Intangible assets 11,220 11,453
Other assets 9,626 9,469
---------- ------------
Total assets $ 960,121 $ 978,909
============ ============
(Continued)
</TABLE>
-1-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 1999 and December 31, 1998
(in thousands)
(Page 2 of 2)
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 106,937 $ 118,361
Interest bearing deposits 620,490 620,986
------------ ------------
Total deposits 727,427 739,347
Short-term borrowings:
Federal funds purchased 13,225 0
U.S. Treasury demand notes 2,382 1,527
Securities sold under agreements
to repurchase 112,903 110,163
Other short-term borrowings 0 24,000
------------ ------------
Total short-term borrowings 128,510 135,690
Accrued expenses payable 6,507 6,503
Other liabilities 1,533 1,589
Other debt 21,490 21,386
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,245 19,238
------------ ------------
Total liabilities 904,712 923,753
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,813,984 shares issued and 5,794,615 outstanding as of
March 31, 1999, and 5,813,984 shares issued and 5,796,918
outstanding at December 31, 1998 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 45,124 43,652
Unrealized net gain (loss) on securities available-for-sale 674 1,848
Treasury stock, at cost (379) (334)
------------ ------------
Total stockholders' equity 55,409 55,156
------------ ------------
Total liabilities and stockholders' equity $ 960,121 $ 978,909
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-2-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 11,565 $ 10,524
Tax exempt 44 51
------------ ------------
Total loan income 11,609 10,575
Short-term investments 137 114
Securities:
U.S. Treasury and government agency securities 604 772
Mortgage-backed securities 3,242 3,084
State and municipal securities 753 350
Other debt securities 71 51
------------ ------------
Total interest and dividend income 16,416 14,946
INTEREST EXPENSE
- -----------------
Interest on deposits 6,729 6,594
Interest on short-term borrowings 1,510 950
Interest on long-term debt 731 812
------------ ------------
Total interest expense 8,970 8,356
------------ ------------
NET INTEREST INCOME 7,446 6,590
- -------------------
Provision for loan losses 225 120
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,221 6,470
- ------------------------- ------------ ------------
NONINTEREST INCOME
- ------------------
Trust fees 289 315
Service charges on deposit accounts 1,013 887
Other income (net) 811 810
Net gains on the sale of real estate mortgages held-for-sale 460 175
Net securities gains (losses) 451 253
------------ ------------
Total noninterest income 3,024 2,440
(Continued)
</TABLE>
-3-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 3,801 3,299
Occupancy and equipment expense 1,272 878
Other expense 2,068 1,857
------------ ------------
Total noninterest expense 7,141 6,034
INCOME BEFORE INCOME TAX EXPENSE 3,104 2,876
- ----------------------------------
Income tax expense 1,034 874
------------ ------------
NET INCOME $ 2,070 $ 2,002
- ---------- ============ ============
AVERAGE COMMON SHARES OUTSTANDING (Note 2) 5,813,984 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.36 $ 0.34
- ------------------------------- ============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.36 $ 0.34
- --------------------------------- ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999 and 1998
(in thousands)
(unaudited)
<CAPTION>
For the Three Months Ended
March 31,
---------------------------------------------------------
1999 1998
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Common Stock
Balance at beginning of the period $ 1,453 $ 1,453
------------ ------------
Balance at end of the period 1,453 1,453
Paid-in Capital
Balance at beginning of the period 8,537 8,537
------------ ------------
Balance at end of the period 8,537 8,537
Retained Earnings
Balance at beginning of the period 43,652 37,766
Net Income 2,070 $ 2,070 2,002 $ 2,002
Cash dividends declared ($.15 and $.075
per share) (598) (435)
------------ ------------
Balance at end of the period 45,124 39,333
Accumulated Other Comprehensive Income
Balance at beginning of the period 1,848 685
Unrealized gain (loss) on available-for-
sale securities arising during the period (901) (40)
Reclassification adjustments for
accumulated (gains) losses included
in net income (273) (153)
------------ ------------
Other comprehensive income
(net of taxes $[770] and $[126]) (1,174) (1,174) (193) (193)
------------ ------------ ------------ ------------
Total comprehensive income $ 896 $ 1,809
Balance at end of the period 674 ============ 492 ============
Treasury Stock
Balance at beginning of the period (334) (185)
Acquisition of treasury stock (45) (101)
------------ ------------
Balance at end of the period (379) (286)
------------ ------------
Total Stockholders' Equity $ 55,409 $ 49,529
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
(in thousands)
(Unaudited)
(Page 1 of 2)
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,070 $ 2,002
------------ ------------
Adjustments to reconcile net income to net cash
from operating activites:
Depreciation 579 396
Provision for loan losses 225 120
Amortization of intangible assets 239 215
Loans originated for sale (14,799) (12,589)
Net (gain) loss on sale of loans (460) (175)
Proceeds from sale of loans 18,342 10,142
Net (gain) loss on sale of premises and equipment 13 (63)
Net (gain) loss on sale of securities available-for-sale (451) (253)
Net securities amortization (accretion) 611 130
Increase (decrease) in taxes payable 776 725
(Increase) decrease in income receivable (322) 197
Increase (decrease) in accrued expenses payable (2) (339)
(Increase) decrease in other assets (157) (1,394)
Increase (decrease) in other liabilities (56) (325)
------------ ------------
Total adjustments 4,538 (3,213)
------------ ------------
Net cash from operating activities 6,608 (1,211)
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities held-to-maturity 0 11,455
Proceeds from maturities and calls of securities available-for-sale 21,669 3,882
Purchases of securities available-for-sale (9,858) 0
Purchases of securities held-to-maturity 0 (53,846)
Proceeds from sales of securities available-for-sale 6,645 11,183
Net (increase) decrease in total loans (30,652) (12,129)
Proceeds from sale of premises and equipment 50 0
Purchases of land, premises and equipment (1,205) (438)
Net proceeds (payments) from acquisitions 0 30,020
------------ ------------
Net cash from investing activities (13,351) (9,873)
------------ ------------
(Continued)
</TABLE>
-6-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
(in thousands)
(Unaudited)
(Page 2 of 2)
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in total deposits $ (11,920) $ 23,304
Proceeds from short-term borrowings 4,339,734 171,820
Payments on short-term borrowings (4,346,914) (181,756)
Proceeds from long-term borrowings 111 50
Payments on long-term borrowings (6) (8)
Dividends paid (598) (435)
Purchase of treasury stock (45) (101)
------------ ------------
Net cash from financing activities (19,638) 12,874
------------ ------------
Net increase (decrease) in cash and cash equivalents (26,381) 1,790
Cash and cash equivalents at beginning of the period 61,508 49,762
------------ ------------
Cash and cash equivalents at end of the period $ 35,127 $ 51,552
============ ============
Cash paid during the period for:
Interest $ 9,074 $ 7,967
============ ============
Income taxes $ 241 $ 275
============ ============
Loans transferred to other real estate $ 0 $ 52
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-7-
<PAGE>
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This report is filed for Lakeland Financial Corporation (the Company) and
its wholly owned subsidiaries, Lake City Bank (the Bank) and Lakeland Capital
Trust (Lakeland Trust). All significant intercompany balances and transactions
have been eliminated in consolidation.
The Company formed Lakeland Trust on July 24, 1997. Lakeland Trust issued
$20 million of 9% Cumulative Trust Preferred Securities (Preferred
Securities). The Preferred Securities issued by Lakeland Trust are presented
as a separate line item as long-term debt in the consolidated balance sheets
of the Company under the caption "Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures" and the Company records distributions
payable on the Preferred Securities as an expense in its consolidated
statements of income.
The condensed consolidated financial statements included herein have been
prepared by the Company, 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 Company 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
Company's latest annual report to shareholders and Form 10-K. In preparing
financial statements in conformity with generally accepted accounting
principles, management must make estimates and assumptions. These estimates
and assumptions affect the amounts reported and the disclosures provided.
Results for the period ended March 31, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair statement of the results for
interim periods are reflected in the quarterly statements.
NOTE 2. EARNINGS PER SHARE
Basic earnings per common share is based upon weighted-average common
shares outstanding. Diluted earnings per common share shows the dilutive
effect of additional common shares issueable.
-8-
<PAGE>
The common shares outstanding for the Stockholders' Equity section of the
Balance Sheet reflect the acquisition of 19,369 shares of Lakeland Financial
Corporation common stock to offset a liability for a directors' deferred
compensation plan. These shares are treated as outstanding when computing the
weighted-average common shares outstanding for the calculation of both basic
earnings per share and diluted earnings per share.
A reconciliation of the numerators and denominators of the basic earnings
per common share and the diluted earnings per common share for the periods
ended March 31, 1999 and 1998 is presented below. All dollar amounts other
than earnings per share are in thousands.
For the three months ended March 31,
----------------------------------------
1999 1998
------------------ ------------------
Basic earnings per common share
Net income available to
common shareholders $ 2,070 $ 2,002
Weighted-average common
shares outstanding 5,813,984 5,813,984
Basic earnings per
common share $ .36 $ .34
Earnings per common share
assuming dilution
Net income available to
common shareholders $ 2,070 $ 2,002
Weighted-average common
shares outstanding 5,813,984 5,813,984
Add: dilutive effects
of exercises of stock
options 2 0
Weighted-average common
and diluted potential
common shares
outstanding 5,813,986 5,813,984
Diluted earnings per
common share $ .36 $ .34
-9-
<PAGE>
NOTE 3. STOCK OPTIONS
The Lakeland Financial Corporation 1997 Share Incentive Plan reserves
600,000 shares of common stock for which Incentive Share Options (ISO) and
Non-Qualified Share Options (NQSO) may be granted to employees of the Company
and its subsidiaries, and NQSOs which may be granted to directors of the
Company. Most options granted under this plan were issued for 10-year periods
with full vesting five years from the date the option was granted. Information
about options granted, exercised and forfeited during 1999 follows:
Number Risk- Stock Fair
of Exercise Free Price Value of
Options Price Rate Volatility Grants
--------- --------- --------- ----------- ---------
Outstanding 1/1/99 188,935
Granted 2/9/99 107,310 $ 19.44 4.79% 44.00% $ 7.50
Granted 3/10/99 600 18.75 5.12% 44.00% 7.28
Granted 3/31/99 5,000 18.00 5.10% 44.00% 6.94
Exercised 0
Forfeited 500
Outstanding 3/31/99 301,345
The fair values of the options were estimated using an expected life of 5
years and expected dividends of $.11 per quarter. There were 925 options
exerciseable as of March 31, 1999.
The Company accounts for the stock options under APB 25. Statement of
Financial Accounting Standards (SFAS) No. 123 requires pro forma disclosures
for companies that do not adopt its fair value accounting method for
stock-based compensation. The following pro forma information presents net
income, basic earnings per common share and diluted earnings per common share
had the fair value method been used to measure compensation cost for stock
option plans. No compensation cost was actually recognized for stock options
in 1999 or 1998.
-10-
<PAGE>
For the three months ended March 31,
----------------------------------------
1999 1998
------------------ ------------------
Net income as reported $ 2,070 $ 2,002
Pro forma net income $ 1,968 $ 2,002
Basic earnings per common
share as reported $ .36 $ .34
Diluted earnings per
common share as reported $ .36 $ .34
Pro forma basic earnings
per common share $ .34 $ .34
Pro forma diluted earnings
per common share $ .34 $ .34
-11-
<PAGE>
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
March 31, 1999
FINANCIAL CONDITION
Assets
Total assets of the Company were $960,121,000 as of March 31, 1999. This
was a decrease of $18,788,000 or 1.9 percent from $978,909,000 reported at
December 31, 1998. Total loans were $569,128,000 at March 31, 1999. This was
an increase of $30,632,000 or 5.7 percent from the December 31, 1998 balance.
Total securities decreased $20,560,000 or 6.3 percent to $307,098,000 as of
March 31, 1999, from $327,658,000 at December 31, 1998. During the first
quarter of 1999, management has continued to attempt to shift its asset mix
from securities to higher yielding loans. Earning assets decreased to
$872,346,000 at March 31, 1999. This was a decrease of $7,669,000 or 0.9
percent from the December 31, 1998, total of $880,015,000.
Funding
Total deposits and securities sold under agreements to repurchase
(repurchase agreements) consist primarily of funds generated within the
Company's primary market area. At March 31, 1999, these funds totaled
$840,330,000. This represented a $9,180,000 or 1.1 percent decrease from
December 31, 1998. The decrease was primarily in noninterest-bearing demand
accounts which decreased $11,424,000 or 9.7 percent from the balance at
December 31, 1998, and savings accounts plus interest-bearing demand accounts
which decreased $9,874,000 or 8.2 percent. Time deposits increased $9,378,000
or 1.9 percent from the balance at December 31, 1998, and repurchase
agreements increased $2,740,000 or 2.5 percent. The repurchase agreements are
a combination of fixed rate contracts and cash management accounts, a variable
rate repurchase agreement product.
In addition to these local funding sources, the Company borrows through
the Treasury, Tax and Loan program, 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
$877,427,000 at March 31, 1999. This is an $18,996,000 or 2.1 percent decrease
from $896,423,000 reported at December 31, 1998.
-12-
<PAGE>
Earning Assets
On an average daily basis, total earning assets increased 19.3 percent
for the three-month period ended March 31, 1999, as compared to the first
quarter of 1998. On an average daily basis, total deposits and purchased funds
increased 18.1 percent for the three-month period ended March 31, 1999, as
compared to the three-month period ended March 31, 1998.
Investment Portfolio
The Company's investment portfolio consists of U.S. Treasuries, agencies,
mortgage-backed securities, municipal bonds, and corporates. During 1999, new
investments have been primarily agencies and corporates. At March 31, 1999,
and December 31, 1998, the Company's investment in mortgage-backed securities
comprised approximately 66.3 and 69.6 percent of the total securities and
consisted mainly of CMOs and mortgage pools issued by GNMA, FNMA and FHLMC. As
such, these securities are backed directly or indirectly by the Federal
government. The Company uses Bloomberg analytics to evaluate and monitor all
purchases. At March 31, 1999, the securities in the available-for-sale
portfolio had a three year average life and a potential for approximately 11
percent price depreciation should rates move up 300 basis points and
approximately 6 percent price appreciation should rates move down 300 basis
points. As of March 31, 1999, all mortgage-backed securities were performing
in a manner consistent with management's original expectations.
The Company's available-for-sale portfolio is managed with consideration
given to factors such as the Company's capital levels, growth prospects,
asset/liability structure and liquidity needs. At March 31, 1999, the
available-for-sale portfolio constituted 100.0 percent of the total security
portfolio. During the first three months of 1999, purchases for the
available-for-sale portfolio were $9,858,000 and sales totaled $6,194,000. The
securities sold from the available-for-sale portfolio were primarily municipal
bonds and mortgage-backed securities and were due to opportunities related to
the current rate environment. At March 31, 1999, the net after-tax unrealized
gain in the available-for-sale portfolio included in stockholders' equity was
$674,000, a decrease of $1,174,000 from the unrealized gain included in
stockholders' equity at December 31, 1998. Future investment activity is
difficult to predict, as it is dependent upon loan and deposit trends and
other factors.
Loans
Total loans increased $30,632,000 to $569,128,000 as of March 31, 1999,
from $538,496,000 at December 31, 1998. Loan growth is net of loans
reclassified to other real estate and loans sold. The Company continues to
experience good loan demand. Commercial loans at March 31, 1999, increased
$19,293,000 or 5.6 percent from the level at December 31, 1998. Retail loans
at March 31, 1999, increased $14,183,000 or 10.8 percent from December 31,
-13-
<PAGE>
1998. Real estate loans (excluding mortgages held-for-sale) decreased
$2,844,000 or 4.7 percent from December 31, 1998. 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. During the first quarter of 1999, mortgages
totaling $17,882,000 were sold on the secondary market compared to $9,967,000
sold during the same period of 1998. During these two periods, loans totaling
$14,799,000 and $12,589,000 were originated for sale. This program of mortgage
sales continues to produce the liquidity needed to meet the mortgage needs of
the markets served by the Company, and to generate a long-term servicing
portfolio. As a part of the Community Reinvestment Act commitment to making
real estate financing available to a variety of customers, the Company
continues to originate non-conforming loans that are held to maturity or
prepayment.
The Company had 64.3 percent of its loans concentrated in commercial
loans at March 31, 1999, and 64.4 percent at December 31, 1998. Traditionally,
this type of lending may have more credit risk than other types of lending
because of the size and diversity of the credits. The Company manages this
risk by adjusting its 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 an administrative
loan limit of $8,500,000. Based upon state banking regulations, the Company's
legal loan limit at March 31, 1999, was approximately $10,279,000. Product
diversification is accomplished by offering a wide variety of financing
options. Management reviews the loan portfolio to ensure loans are diversified
by industry. The loan portfolios are distributed throughout the Company's
principal trade area, which encompasses fourteen counties in Indiana.
Loans renegotiated as troubled debt restructurings are those loans for
which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the original terms of the loan. Loans renegotiated as
troubled debt restructurings totaled $1,256,000 at March 31, 1999, as compared
to $1,281,000 at December 31, 1998. The loans classified as troubled debt
restructurings at March 31, 1999 were performing in accordance with the
modified terms.
Over the past year, one of management's goals has been to increase the
loan to deposit ratio. The desired effect of this strategy has been to create
a positive impact on the interest margin, which had declined as a result of
increases in deposits due to acquisitions and growth of existing offices.
Acquisitions by the Company in the fourth quarter of 1997 and the first
quarter of 1998 primarily consisted of assumptions of deposits with only small
amounts of loans acquired. As a result, the loan to deposit ratio was reduced.
For the first three months of 1999, loans increased faster than deposits, even
though almost $18,000,000 of mortgage loans were sold in the secondary market.
-14-
<PAGE>
During this three-month period, loans increased $30,632,000 or 5.7 percent.
Demand accounts, which are noninterest-bearing, decreased $11,424,000 during
the first three months of 1999, and other transaction accounts decreased
$9,874,000 during the same period. During the quarter, time deposits grew by
$9,378,000 or 1.9 percent. As a result of these loan and deposit trends, the
Company's average daily loan to deposit ratio amounted to 75.9 percent at
March 31, 1999, which is an increase from 72.6 percent at year-end 1998.
Market Risk
The Company's primary market risk exposure is interest rate risk. The
Company does not have a material exposure to foreign currency exchange risk,
does not own any derivative financial instruments and does not maintain a
trading portfolio. The Company, 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 Company then
modifies its long-term risk parameters 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, 1999, the Company's GAP/Total Assets
ratios were (18.9) percent, (24.8) percent, and (29.0) percent for the three,
six, and twelve-month time periods. For this analysis, savings 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,
1998, three, six, and twelve-month GAP ratios were (13.2) percent, (18.0)
percent, and (19.1) percent. The change in the GAP percentages reflect the
shortening of the liabilities as might be expected in a low rate environment.
Management supplements the GAP analysis with a computer simulation
approach to manage the interest rate risk of the Company. This computer
simulation analysis measures the net interest income impact of a 300 basis
point change in interest rates during the next 12 months. If the change in net
interest income is less than 3 percent of primary capital, the balance sheet
structure is considered to be within acceptable risk levels. At March 31,
1999, the Company's potential pretax exposure was within the Company's policy
limit. This policy was last reviewed and approved by the Board of Directors in
May, 1998.
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For loans, securities, and liabilities with contractual
maturities, the table presents principal cash flows and related
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weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest-rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits (demand deposits, interest-bearing checking,
savings and money market deposits) that have no contractual maturity, the
table presents principal cash flows and, as applicable, related
weighted-average interest rates based upon the Company's historical
experience, management's judgment and statistical analysis, as applicable,
concerning their most likely withdrawal behaviors. Weighted-average variable
rates are based upon rates existing at the reporting date.
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<TABLE>
QUANTITATIVE MARKET RISK DISCLOSURE
<CAPTION>
Principal/Notional Amount Maturing in:
(Dollars in thousands) Fair
---------------------------------------------------------------------------- Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 3/31/99
--------- --------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $ 63,331 $ 40,176 $ 48,082 $ 27,677 $ 59,594 $ 25,177 $ 264,037 $ 265,744
Average interest rate 8.61% 8.62% 8.33% 8.43% 8.00% 7.97% 8.35%
Variable interest rate loans $ 257,928 $ 2,689 $ 2,001 $ 1,655 $ 1,559 $ 39,972 $ 305,804 $ 306,073
Average interest rate 8.34% 9.31% 9.81% 10.04% 9.96% 7.61% 8.28%
Fixed interest rate securities $ 23,782 $ 20,731 $ 47,691 $ 23,697 $ 23,719 $ 161,512 $ 301,132 $ 302,492
Average interest rate 6.50% 6.67% 5.64% 6.25% 6.14% 5.95% 6.04%
Variable interest rate securities $ 220 $ 213 $ 226 $ 240 $ 255 $ 3,697 $ 4,851 $ 4,606
Average interest rate 5.01% 4.66% 4.66% 4.66% 4.66% 4.65% 4.67%
Other interest-bearing assets $ 1,122 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,122 $ 1,122
Average interest rate 4.51% 4.35%
Rate sensitive liabilities:
Non-interest bearing checking $5,561 $ 4,962 $ 898 $ 856 $ 1,251 $ 93,409 $ 106,937 $ 106,937
Average interest rate
Savings & interest bearing checking $ 8,455 $ 7,634 $ 6,779 $ 6,158 $ 4,938 $ 76,993 $ 110,957 $ 110,956
Average interest rate 1.55% 1.55% 1.55% 1.55% 1.55% 1.69% 1.65%
Time deposits $ 443,542 $ 40,267 $ 14,163 $ 6,040 $ 3,890 $ 1,631 $ 509,533 $ 512,038
Average interest rate 4.87% 5.43% 5.65% 5.82% 5.28% 5.90% 4.95%
Fixed interest rate borrowings $ 117,660 $ 10,850 $ 0 $ 10,082 $ 1,408 $ 19,245 $ 159,245 $ 165,176
Average interest rate 4.06% 5.71% 0.00% 5.25% 6.15% 8.96% 4.86%
Variable interest rate borrowings $ 10,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,000 $ 10,000
Average interest rate 5.38% 5.38%
</TABLE>
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<PAGE>
Borrowings
The Company is a member of the FHLB of Indianapolis. Membership has
enabled the Company to participate in the housing programs sponsored by the
FHLB, thereby enhancing the Company's ability to offer additional programs
throughout its trade area. The Company is authorized to borrow up to $100
million under the FHLB program. As of March 31, 1999, the borrowings from the
FHLB totaled $21,349,000, with $10,000,000 due April 27, 1999, $10,000,000 due
December 28, 2001, $1,300,000 due June 24, 2003, and $49,000 with annual
payments maturing on January 15, 2018. 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 Company's total investment in
residential real estate loans, mortgage-backed securities and any FHLB
advances outstanding at year-end. The Company's investment in FHLB stock at
March 31, 1999, was $2,844,000.
Capital and Stockholders' Equity
The Federal Deposit Insurance Corporation's (FDIC) risk based capital
regulations require that all banks maintain an 8.0 percent total 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 total risk based capital ratio. As of
March 31, 1999, the Company's ratios were 6.4 percent, 9.5 percent and 10.7
percent, excluding the SFAS No. 115 adjustment. The ratios reported at
December 31, 1998 were 6.4 percent, 9.6 percent and 10.8 percent and ratios
reported at March 31, 1998 were 6.3 percent, 10.0 percent and 11.7 percent.
The ratios include the maximum amount of the trust preferred securities
allowed by regulations. Current regulations limit the amount of trust
preferred securities included in Tier I capital to the greater of the amount
of the trust preferred securities or 25 percent of the total Tier I capital.
All ratios continue to be above "well capitalized" levels.
Total stockholders' equity increased $253,000 or 0.5 percent from
December 31, 1998, to $55,409,000 at March 31, 1999. Net income of $2,070,000,
less dividends of $598,000, less the decrease in the accumulated other
comprehensive income of $1,174,000, less $45,000 for the cost of treasury
stock acquired comprised this increase.
Five Year Growth
Total Company assets have grown from $444,571,000 at March 31, 1994, to
$960,121,000 at March 31, 1999. This is an increase of $515,550,000 or 116.0
percent which equates to a 16.6 percent rate of growth per year. Stockholders'
equity has increased from $28,514,000 to $55,409,000 for the same time period.
That is an increase of $26,895,000 or 94.3 percent which equates to a 14.2
percent rate of growth per year. Net income for the three months ended March
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<PAGE>
31, 1994, compared to the net income for the same period of 1999, increased
$665,000 or 47.3 percent from $1,405,000 to $2,070,000. From March 31, 1994,
to March 31, 1999, the number of Lake City Bank offices increased from 23 to
43. This growth has been funded through results of operation, issuance of
trust preferred securities and existing capital. It should be noted that past
rates of growth may not be indicative of growth in future periods.
RESULTS OF OPERATIONS
Net Income
Net income increased to $2,070,000 for the first three months of 1999, an
increase of $68,000 from the $2,002,000 recorded over the same period in 1998.
Basic earnings per share for the first three months of 1999 were $.36 per
share, which was an increase over the $.34 per share for the first three
months of 1998. Diluted earnings per share reflects the potential diluted
impact of stock options granted during the first quarter of 1999 and during
1998 under an employee stock option plan approved by the shareholders in
April, 1998. The stock options did not have a significant impact on earnings
per share as diluted earnings per share was the same as basic earnings per
share for the three-month period ended March 31, 1999.
Net Interest Income
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, 1999, net interest income totaled
$7,446,000, an increase of 13.0 percent or $856,000 over the first three
months of 1998. This increase occurred in part because of the efforts to
improve the loan to deposit ratio. Management plans to continue its efforts in
growing the loan portfolio, as well as implementing a more aggressive
short-term funding strategy to continue this positive trend.
Interest and dividend income increased $1,470,000 or 9.8 percent for the
three-month period ending March 31, 1999, as compared to the three-month
period ending March 31, 1998. Daily average earning assets for the first
quarter of 1999 increased to $880,417,000, a 19.3 percent increase over the
same period in 1998. The tax equivalent yields on average earning assets
decreased by 57 basis points for the three-month period ending March 31, 1999,
when compared to the same period of 1998.
The decrease in the yield on average earning assets reflected reductions
in the yields on both loans and securities and the higher level of average
daily securities to average daily earning assets. The decrease in yields
reflects the current low-rate environment along with the level of competition
in the markets served. The yield on securities is historically lower than the
yield on loans, and increasing the ratio of securities to total earning assets
will normally lower the yield on earning assets. The ratio of average daily
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<PAGE>
securities to average earning assets for the first quarter of 1999 was 36.5
percent compared to 36.0 percent for the same period of 1998. Approximately
53.0 percent of the securities sales for the first quarter of 1999 were during
the month of March. Therefore, due to the timing of the securities sales, the
ratio of the average daily balance of securities to average earning assets was
higher, while the month-end ratio of securities to earning assets was lower,
35.2 percent at March 31, 1999, to 36.3 percent at the same date of 1998. In
addition, the overall tax equivalent yield on loans decreased 63 basis points
when comparing the three-month periods ending March 31, 1999 and 1998. The
yield on securities decreased 42 basis points for the same respective period.
Loan yields decreased during the first three months of 1999, but were
offset by an increase in loan balances. The average daily loan balances for
the first three months of 1999 increased 18.1 percent over the average daily
loan balances for the same period of 1998. The loan growth was funded by the
deposits assumed in prior year acquisitions and sales of securities. The
increase in loan income of $1,034,000 or 9.8 percent for the period March 31,
1999, over March 31, 1998, resulted from this loan growth.
Income from securities totaled $4,670,000 for the first three months of
1999, an increase of $413,000 or 9.7 percent over the amount for the same
period of 1998. This gain was the result of the increase in the average daily
balances of securities offset by the decrease in the yields on securities. The
average daily balances of securities for the three-month period ending March
31, 1999 increased $35,145,000 when compared to the same period of the prior
year.
Income from short-term investments amounted to $137,000 for the
three-month period ended March 31, 1999. This compares to $114,000 for the
same period in 1998. This increase of $23,000 resulted from an increase of
$3,044,000 or 35.1 percent in short-term investments for the three-month
period ending March 31, 1999 over the three-month period ending March 31,
1998, offset by a 57 basis point reduction in the tax equivalent yield.
Total interest expense increased $614,000 or 7.3 percent to $8,970,000
for the three-month period ended March 31, 1999, from $8,356,000 for the
three-month period ended March 31, 1998. This was a result of the overall
growth of deposits in existing offices and changes in the deposit mix offset
by a 40 basis point reduction in the Company's daily cost of funds. On an
average daily basis, total deposits (including demand deposits) increased 13.2
percent for the three-month period ended March 31, 1999, as compared to the
similar period ended March 31, 1998. When comparing these periods, the average
daily balances of the demand deposit accounts rose $17,879,000 while the
average daily balances of savings and transaction accounts combined declined
$4,377,000. The average daily balance of time deposits, which pay a higher
rate of interest as compared to demand deposit and transaction accounts,
increased $71,950,000 for the three months ended March 31, 1999, compared to
the three months ended March 31, 1998. On an average daily basis, total
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<PAGE>
deposits (including demand deposits) and purchased funds increased 18.1
percent for the three-month period ended March 31, 1999, as compared to the
three-month period ended March 31, 1998.
Provision for Loan Losses
It is the policy of the Company 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 of the portfolio and the evaluation of the
economic outlook. Special consideration is given to nonperforming and
nonaccrual loans as well as factors that management feels deserve recognition.
The Company maintains 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 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 provision amounted to $225,000 and $120,000 for the three-month
periods ended March 31, 1999 and 1998. These provisions reflected the growth
of the loan portfolio, as well as the levels of past due accruing loans (90
days or more) and 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 Company's trade area during the last
several years, and a credit risk management strategy that promotes
diversification.
As of March 31, 1999, loans delinquent 90 days or more that were included
in the accompanying financial statements as accrual loans totaled
approximately $156,000. At March 31, 1999, there were loans totaling $37,000
on nonaccrual. At December 31, 1998, there were $227,000 in loans delinquent
90 days or more included as accruing loans in the financial statements and
there were no nonaccrual loans.
The ratio of the allowance for loan losses to total loans has remained
fairly constant since year end. At March 31, 1999, the ratio was 1.00 percent
as compared to 1.02 percent at December 31, 1998. At March 31, 1999, 46.7
percent of the Company's allowance for loan losses was classified as
unallocated as compared to 50.1 percent classified as unallocated at December
31, 1998.
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 as amended by SFAS No. 118, `Accounting by
Creditors for Impairment of a Loan'. As of March 31, 1999 and December 31,
1998, no loans were classified as impaired.
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<PAGE>
Following is a summary of the loan loss experience for the three months
ending March 31, 1999, and the year ending December 31, 1998.
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<PAGE>
March 31, December 31,
1999 1998
------------- -------------
(in thousands)
Amount of loans outstanding $ 569,128 $ 538,496
------------- -------------
Average daily loans outstanding for $ 546,118 $ 489,336
------------- -------------
Allowance for loan losses at the
beginning of the period $ 5,510 $ 5,308
Charge-offs
Commercial 0 9
Real estate 6 0
Installment 39 329
Credit card and personal credit lines 4 78
------------- ------------
Total charge-offs 49 416
Recoveries
Commercial 2 44
Real estate 0 0
Installment 20 86
Credit card and personal credit lines 7 8
------------- ------------
Total recoveries 29 138
------------- ------------
Net charge-offs 20 278
Provision charged to expense 225 480
------------- ------------
Allowance for loan losses at the end of
the period $ 5,715 $ 5,510
============= ============
Ratio of annualized net charge-offs during
the period to average daily loans during
the period:
Commercial 0.00% (0.01)%
Real estate 0.00% 0.00%
Installment 0.01% 0.05%
Credit card and personal credit lines 0.00% 0.02%
------------- ------------
Total 0.01% 0.06%
============= ============
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<PAGE>
Net interest income after provision for loan losses totaled $7,221,000
for the three-month period ended March 31, 1999. This represents an increase
of 11.6 percent over the same period ended March 31, 1998.
Noninterest Income
Total noninterest income increased $584,000 or 23.9 percent to $3,024,000
for the three-month period ended March 31, 1999, from $2,440,000 recorded for
the three-month period ended March 31, 1998.
Trust fees, which represent basic recurring service fee income, decreased
$26,000 or 8.3 percent to $289,000 for the three-month period ended March 31,
1999, as compared to $315,000 for the first three months of 1998. Increases in
living trust fees, employee benefit plan fees and agency fees were offset by
declines in testamentary trust fees, stock transfer fees and executorship
fees.
Service charges on deposit accounts increased 14.2 percent or $126,000
during the three-month period ended March 31, 1999, totaling $1,013,000, as
compared to the same period in 1998. Fees on the LCB Club account (the
Company's low cost checking account service), individual checking account fees
and overdraft fees were the primary sources for the increase.
Other income (net) consists of normal recurring fee income, as well as
other income that management classifies as nonrecurring. Other income (net)
remained stable at $811,000. Increases in commercial and other fees, insurance
income, and credit card fees were offset by decreases in brokerage income,
mortgage service fees, and miscellaneous income. March 31, 1998 miscellaneous
income included the gain on sale of an office in the first quarter of 1998.
The profits from the sale of mortgages during the three-month period
ended March 31, 1999, totaled $460,000, as compared to $175,000 during the
same period in 1998. This increase reflected the increase in the volume of
mortgages sold during the first three months of 1999, as compared to the sales
during the first three months of 1998.
Net investment securities gains (losses) amounted to $451,000 for the
three-month period ended March 31, 1999, as compared to $253,000 for the
three-month period ended March 31, 1998. In the first three months of 1999 and
1998, the securities gains primarily resulted from the sales of securities
from the available-for-sale portfolio. The increase year to year was the
effect of management taking advantage of the current rate environment to fund
the increases in the loan portfolios.
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<PAGE>
Noninterest Expense
Noninterest expense increased $1,107,000 or 18.3 percent to $7,141,000
for the three-month period ended March 31, 1999, as compared to the first
three months of 1998.
For the three months ended March 31, 1999, salaries and employee benefits
increased to $3,801,000, a $502,000 increase or 15.2 percent as compared to
the first three months of 1998. This increase reflected normal salary
increases and additions to staff. Total employees increased to 474 at March
31, 1999, from 454 at March 31, 1998. The increase in total employees included
increases in branch personnel along with increases in clerical and
administrative staff relating to the growth of the Company.
For the three-month period ended March 31, 1999, occupancy and equipment
expenses were $1,272,000, a $394,000 or 44.9 percent increase from the same
period one year ago. This performance reflected the ordinary timing
differences incurred with these types of expenses, as well as additional
expense related to the new locations added during 1998 along with investments
in equipment and technology necessary to remain competitive. These expenses
are expected to continue to increase as the Company continues to grow.
For the three-month period ended March 31, 1999, other expenses totaled
$2,068,000 as compared to $1,857,000 during the same period in 1998. This is
an increase of 11.4 percent or $211,000. When comparing the first three months
of 1999 to the same period of 1998, significant increases were noted in data
processing fees (up $93,000 or 26.5 percent) and supplies, postage and phone
(up $123,000 or 31.7 percent).
Income Before Income Tax Expense
As a result of the above factors, income before income tax expense
increased $228,000 or 7.9 percent to $3,104,000 for the first three months of
1999, as compared to $2,876,000 for the same period in 1998. Again, this was
due primarily to the loan growth and the increase in noninterest income offset
by the added overhead expenses resulting from growth and acquisitions.
Income Tax Expense
Income tax expense increased to $1,034,000 for the first three months of
1999, as compared to $874,000 for the same period in 1998. This $160,000 or
18.3 percent increase was a result of higher income before taxes, adjustments
in deferred tax assets and tax reductions from additional municipal income.
The combined State franchise tax expense and the Federal income tax
expense as a percentage of income before income tax expense increased to 33.3
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percent during the first three months of 1999, as compared to 30.4 percent
during the same period in 1998. Currently the State franchise tax rate is 8.5
percent and is a deductible expense for computing Federal income tax.
YEAR 2000
The Company relies heavily on computer technology to provide its products
and services. Competitive pressures also require the Company to invest in and
utilize current technology. Due to the reliance on this technology, the Year
2000 issue will have a pervasive effect on the Company's products, especially
those with interest calculations, and the services it provides. It will also
have an impact on the items necessary to remain competitive including customer
information, and customer conveniences such as ATM's, telephone banking and
debit cards. In discussing the Year 2000 issue, management will use various
estimates and projections relating to costs, percentages or stages of
completion, possible scenarios and contingency plans. These are only estimates
and projections. Actual costs, percentage or stage of completion and outcomes
may be different from management's estimates and projections. Although
management believes it is taking all the steps necessary to prepare for Year
2000, there are many factors beyond management's control and ability to
foresee that may have a significant impact on future events.
The Company is taking a proactive approach to the Year 2000 issue. A Year
2000 Committee was formed and is comprised of representatives from all major
departments and includes involvement of an executive officer to provide senior
management support and to report periodically to the Board of Directors on the
Year 2000 effort. The committee developed a plan of action that is being
followed to ensure the Company addresses the critical Year 2000 issues. A
master inventory of all software and hardware in use by the Company was
compiled. All software vendors were requested to provide a written statement
regarding their Year 2000 efforts and compliance. FiServ, Pittsburgh, PA, is
the primary data processing vendor the Company uses. FiServ processes all the
major applications for the Company including deposits, loans, and general
ledger. FiServ is one of the leading data processing vendors for the banking
industry. As a result, FiServ is periodically examined by bank regulatory
agencies regarding its Year 2000 efforts to help ensure its systems will be
Year 2000 compliant. FiServ maintains a website on the Internet and
specifically addresses its Year 2000 efforts. FiServ's systems are being
reviewed for Year 2000 compliance by the accounting firm McGladrey and Pullen.
Periodic reports are received from McGladrey and Pullen regarding their
reviews. In addition, a Company representative is a member of the FiServ
Client Advisory Board. No material Year 2000 concerns have been brought to the
attention of the Company.
The support and network software the Company uses is purchased from
outside vendors. Any software where the vendor was unable to confirm the
software as being Year 2000 compliant, or did not provide a statement on Year
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<PAGE>
2000 compliance, was evaluated to determine the potential impact of
noncompliance and availability of alternative compliant software. The review
of all the software is complete, and Year 2000 compliant software is being
installed to replace software determined to be non-compliant or for which no
certification of compliance was provided. The Company has developed a
software-testing plan which was submitted to bank regulators in October, 1998.
This plan substantially meets all FFIEC guidelines and the Company is on
schedule to meet all plan deadlines.
The hardware the Company uses primarily consists of personal computers,
ATMs and communications equipment. The hardware-testing plan the Company is
following was submitted to the regulators in October 1998. This plan
substantially meets all FFIEC guidelines and the Company is on schedule to
meet all plan deadlines. All personal computers have been tested by Company
personnel for Year 2000 compliance. The vendors of the ATMs and backroom
processing equipment used by the Company have been contacted regarding the
compliance of the models used by the Company. All hardware failing the tests
or known to be noncompliant was evaluated as to the possible effect of
noncompliance and the need for replacement. Several hardware purchases were
accelerated due to Year 2000 issues.
All purchases of software and hardware are processed through the Network
Services Department of the Company. This is intended to ensure all new
software and hardware or upgrades are compatible with existing systems and are
Year 2000 compliant. All non-compliant hardware and software will be taken out
of service by June 30, 1999. This hardware and software will be replaced as
deemed necessary.
Other electrical and mechanical equipment is also being evaluated as to
reliance on computer software and the possible effect of the Year 2000. Major
components of this equipment include security and HVAC (heating, ventilation
and air conditioning) equipment. The Company's security officer has determined
that all security equipment has been tested to determine the reliance on
computer systems and the potential impact of the Year 2000 issue. The
Company's facilities manager is responsible for evaluating the other equipment
such as HVAC and elevators to determine reliance on computer systems and to
obtain statements as to Year 2000 compliance from vendors as necessary. The
evaluation of this equipment was completed as of December 31, 1998. No
material items were noted.
For the Company, the potential software, hardware, and other electrical
and mechanical equipment costs are not anticipated to be material. The Company
does not develop its own software, but purchases processing and software from
outside vendors. The hardware the Company uses consists primarily of personal
computers, ATMs, telephone systems, and back room equipment such as document
processing and imaging equipment. In 1997, the Company began updating its wide
and local area networks (WAN/LAN) and its teller platform system as part of
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<PAGE>
its continuing expansion and commitment to technology. The WAN/LAN and teller
platform system being installed is Year 2000 compliant.
Beginning in 1996, the Company began projects to upgrade its technology
and support systems due to the growth the Company was experiencing and
anticipated. The costs incurred for these projects were $4.5 million. The
costs within these projects specifically related to the Year 2000 issue are
difficult to segregate. However, management estimates approximately 20 percent
of these project costs were combined software, hardware and other equipment
costs related to the Year 2000 issue, including costs of accelerated
purchases. This estimate does not include any personnel costs relating to the
Year 2000 issue. These projects are substantially complete.
Other areas of concern being addressed by the committee include vendors
that exchange information with the Company electronically, forms and documents
that are produced externally, and customers. The Year 2000 compliance could
have a major impact on the financial performance of the Company's customers
which could affect both deposit relationships and the customer's ability to
repay loans. All large corporate lending customers have been contacted
regarding their Year 2000 efforts. Large corporate depositors are also being
contacted regarding their Year 2000 efforts. Other customers will be evaluated
on a case-by-case basis. In addition, the Company has conducted several
seminars for corporate customers regarding the Year 2000 issue. These seminars
have been well attended.
Based upon internal evaluations, becoming Year 2000 compliant for the
Company is not anticipated to have a material impact on the financial
statements. Becoming Year 2000 compliant has had an impact on 1998 and 1999
earnings due to additional payroll costs, training costs and accelerated
purchases. Management believes it is taking the necessary steps to ensure the
Company's systems will be Year 2000 compliant in a timely manner. In January,
1999, the FDIC completed a Phase II examination of the Company's Year 2000
efforts. The Company continues to meet all published FDIC Year 2000
guidelines.
As a precaution, management is in the process of developing both
bank-wide and functional area contingency plans. The largest risks the Company
has are that FiServ will not be able to process or there will be problems with
communications or power. Regulators have agreed there are certain systems
that, due to the level of reliance on these systems, there is little ability
to establish traditional contingency plans. Management considers FiServ,
communications and power to be these types of systems. Through various
communications, FiServ has indicated to the Company that substantial progress
has been made with regard to FiServ's Year 2000 readiness. A more likely
scenario is that one or more of the support applications will not function
correctly. That would most likely result in a one to two day delay in posting
of customer transactions since the majority of the functions of the non-FiServ
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<PAGE>
applications could be performed manually. Currently the major concerns are
power and communications since these are provided by outside sources and the
Company has no means to test them. The Company does have a back-up power
system to provide power to key areas in the event of a power failure and can
transport transaction information physically in the event of communication
problems. Both these concerns have been addressed in the Company's contingency
plan. The Year 2000 problem is pervasive and complex and can potentially
affect any computer process. Accordingly, no assurance can be given that the
Year 2000 compliance can be achieved without additional unanticipated
expenditures and uncertainties that might affect future financial results. It
is not possible at this time to quantify the estimated future costs due to
possible business disruption caused by vendors, suppliers, customers, or even
the possible loss of electric power or phone service, however, such costs
could be substantial.
Forward-looking Statements
Statements contained in this Report and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases
and in oral statements made with the approval of an authorized executive
officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). There can be no assurance, in light of certain risks and
uncertainties, that such forward-looking statements will in fact transpire.
The Company disclaims any obligation to subsequently update or revise any
forward-looking statements contained in this report after the date of this
report.
-29-
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 1999
Part II - Other Information
Item 1. Legal proceedings
-----------------
There are no material pending legal proceedings to which the Company
or its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
27 Financial Data Schedule
b. Reports
None
-30-
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 1999
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 12, 1999 Michael L. Kubacki
----------------------------------------
Michael L. Kubacki - President and Chief
Executive Officer
Date: May 12, 1999 Terry M. White
------------------------------------------
Terry M. White - Secretary and Chief
Financial Officer
-31-
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
------- ------------------------------------------- -----
27 Financial Data Schedule (EDGAR filing only)
-32-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 34,005
<INT-BEARING-DEPOSITS> 58
<FED-FUNDS-SOLD> 1,064
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 307,098
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 569,841
<ALLOWANCE> 5,715
<TOTAL-ASSETS> 960,121
<DEPOSITS> 727,427
<SHORT-TERM> 128,510
<LIABILITIES-OTHER> 8,040
<LONG-TERM> 40,735
0
0
<COMMON> 1,453
<OTHER-SE> 53,956
<TOTAL-LIABILITIES-AND-EQUITY> 960,121
<INTEREST-LOAN> 11,609
<INTEREST-INVEST> 4,670
<INTEREST-OTHER> 137
<INTEREST-TOTAL> 16,416
<INTEREST-DEPOSIT> 6,729
<INTEREST-EXPENSE> 8,970
<INTEREST-INCOME-NET> 7,446
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 451
<EXPENSE-OTHER> 7,141
<INCOME-PRETAX> 3,104
<INCOME-PRE-EXTRAORDINARY> 2,070
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,070
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.43
<LOANS-NON> 37
<LOANS-PAST> 156
<LOANS-TROUBLED> 1,256
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,510
<CHARGE-OFFS> 49
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 5,715
<ALLOWANCE-DOMESTIC> 3,048
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,667
</TABLE>
