SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File
September 30, 1995 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 close of the period covered by this report.
Class Outstanding at September 30, 1995
Common Stock, $1 Stated Value 1,438,496
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
As of September 30, 1995 and December 31, 1994
(Unaudited)
(Page 1 of 2)
September 30, December 31,
1995 1994
------------- -------------
ASSETS
- ------
Cash and cash equivalents:
Cash and due from banks $ 16,907,000 $ 21,346,000
Short-term investments 429,000 2,801,000
------------- -------------
Total cash and cash equivalents 17,336,000 24,147,000
Securities available for sale:
U. S. Treasury securities 27,710,000 25,916,000
Mortgage-backed securities 37,174,000 29,987,000
State and municipal securities 2,145,000 933,000
Other debt securities 3,448,000 1,026,000
Equity securities 1,724,000 1,738,000
------------- -------------
Total securities available for sale
(carried at fair value at September 30, 1995
and December 31, 1994) 72,201,000 59,600,000
Securities held to maturity:
U. S. Treasury securities 15,635,000 14,714,000
Mortgage-backed securities 89,822,000 80,815,000
State and municipal securities 17,666,000 13,608,000
Other debt securities 4,107,000 1,015,000
------------- -------------
Total securities held to maturity
(fair value of $127,691,000 at
September 30, 1995 and $103,723,000
at December 31, 1994) 127,230,000 110,152,000
Real estate mortgages held for sale 472,000 175,000
Loans:
Total loans 324,356,000 287,956,000
Less: Allowance for loan losses 5,650,000 4,866,000
------------- -------------
Net loans 318,706,000 283,090,000
Land, premises and equipment, net 13,277,000 11,295,000
Accrued income receivable 3,697,000 3,464,000
Other assets 3,881,000 5,040,000
------------- -------------
Total assets $ 556,800,000 $ 496,963,000
============= =============
<FN>
(Continued)
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
As of September 30, 1995 and December 31, 1994
(Unaudited)
(Page 2 of 2)
September 30, December 31,
1995 1994
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------
Deposits:
Noninterest bearing deposits $ 65,664,000 $ 62,830,000
Interest bearing deposits 364,180,000 333,910,000
------------- -------------
Total deposits 429,844,000 396,740,000
Short-term borrowings:
Federal funds purchased 3,425,000 4,000,000
U.S. Treasury demand notes 3,222,000 2,573,000
Securities sold under agreements
to repurchase 63,034,000 41,750,000
------------- -------------
Total short-term borrowings 69,681,000 48,323,000
Accrued expenses payable 3,963,000 3,280,000
Other liabilities 1,101,000 1,299,000
Long-term debt 17,432,000 17,432,000
------------- -------------
Total liabilities 522,021,000 467,074,000
Commitments, off-balance sheet risks
and contingencies
STOCKHOLDERS' EQUITY
--------------------
Common stock: $1.00 stated value, 2,750,000 shares
authorized, 1,438,496 shares issued and outstanding
as of September 30, 1995 and December 31, 1994 1,438,000 1,438,000
Additional paid-in capital 7,827,000 7,827,000
Retained earnings 25,594,000 22,279,000
Unrealized net gain (loss) on securities available for sale (80,000) (1,655,000)
------------- -------------
Total stockholders' equity 34,779,000 29,889,000
Total liabilities and stockholders' equity $ 556,800,000 $ 496,963,000
============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
For the Three Months and Nine Months Ended September 30, 1995, and 1994
(Unaudited)
(Page 1 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1995 1994 1995 1994
----------- ----------- ------------ ------------
INTEREST AND DIVIDEND INCOME
----------------------------
Interest and fees on loans: Taxable $ 7,774,000 $ 6,084,000 $ 21,963,000 $ 17,128,000
Tax exempt 68,000 70,000 189,000 212,000
----------- ----------- ------------ ------------
Total loan income 7,842,000 6,154,000 22,152,000 17,340,000
Short-term investments 71,000 52,000 161,000 125,000
Securities:
U.S. Treasury and Government agency securities 677,000 597,000 1,886,000 1,657,000
Mortgage-backed securities 1,967,000 1,595,000 5,621,000 4,586,000
Obligations of state and political subdivisions 274,000 176,000 727,000 542,000
Other debt securities 96,000 48,000 294,000 144,000
Equity investments 34,000 25,000 100,000 69,000
----------- ----------- ------------ ------------
Total interest and dividend income 10,961,000 8,647,000 30,941,000 24,463,000
INTEREST EXPENSE
-----------------
Interest on deposits 4,543,000 3,129,000 12,363,000 8,710,000
Interest on short-term borrowings 1,012,000 541,000 2,738,000 1,304,000
Interest on long-term debt 250,000 250,000 745,000 653,000
----------- ----------- ------------ ------------
Total interest expense 5,805,000 3,920,000 15,846,000 10,667,000
----------- ----------- ------------ ------------
NET INTEREST INCOME 5,156,000 4,727,000 15,095,000 13,796,000
-------------------
Provision for loan losses 30,000 270,000 90,000 615,000
----------- ----------- ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,126,000 4,457,000 15,005,000 13,181,000
------------------------- ----------- ----------- ------------ ------------
NONINTEREST INCOME
------------------
Trust fees 192,000 149,000 584,000 510,000
Service charges on deposit accounts 579,000 554,000 1,678,000 1,537,000
Other income (net) 330,000 256,000 882,000 1,174,000
Net gains on the sale of real estate mortgages held for sale 47,000 16,000 99,000 140,000
Net investment securities gains (losses) (4,000) (6,000) (27,000) (3,000)
----------- ----------- ------------ ------------
Total noninterest income 1,144,000 969,000 3,216,000 3,358,000
NONINTEREST EXPENSE
-------------------
Salaries and employee benefits 2,181,000 1,751,000 6,206,000 5,301,000
Occupancy and equipment expenses 644,000 502,000 1,896,000 1,495,000
Other expenses 1,191,000 1,197,000 3,827,000 3,370,000
----------- ----------- ------------ ------------
Total noninterest expense 4,016,000 3,450,000 11,929,000 10,166,000
<FN>
(Continued)
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
For the Three Months and Nine Months Ended September 30, 1995, and 1994
(Unaudited)
(Page 2 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1995 1994 1995 1994
----------- ----------- ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 2,254,000 1,976,000 6,292,000 6,373,000
----------------------------------
Income tax expense 814,000 724,000 2,199,000 2,371,000
----------- ----------- ------------ ------------
NET INCOME $ 1,440,000 $ 1,252,000 $ 4,093,000 $ 4,002,000
---------- =========== =========== ============ ============
AVERAGE COMMON SHARES OUTSTANDING 1,438,496 1,438,496 1,438,496 1,438,496
EARNINGS PER COMMON SHARE
-------------------------
Net Income $ 1.00 $ 0.87 $ 2.85 $ 2.78
=========== =========== ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1995 and 1994
(Unaudited)
Unrealized
Net Gain (Loss)
Common Stock on Securities Total
------------------------ Paid in Retained Available Stockholders'
Shares Amount Capital Earnings For Sale Equity
----------- ------------ ------------ ------------ -------------- --------------
Balances, January 1, 1994 1,438,496 $ 1,438,000 $ 7,827,000 $ 18,001,000 $ 646,000 $ 27,912,000
Net income for nine months
ended September 30, 1994 4,002,000 4,002,000
Net change in unrealized net gain (loss)
on securities available for sale (1,543,000) (1,543,000)
Cash dividends declared -
$.42 per share (604,000) (604,000)
----------- ------------ ------------ ------------ -------------- --------------
Balances, September 30, 1994 1,438,496 $ 1,438,000 $ 7,827,000 $ 21,399,000 $ (897,000) $ 29,767,000
=========== ============ ============ ============ ============== ==============
Balances, January 1, 1995 1,438,496 $ 1,438,000 $ 7,827,000 $ 22,279,000 $ (1,655,000) $ 29,889,000
Net income for nine months
ended September 30, 1995 4,093,000 4,093,000
Net change in unrealized net gain (loss)
on securities available for sale 1,575,000 1,575,000
Cash dividends declared -
$.54 per share (778,000) (778,000)
----------- ------------ ------------ ------------ -------------- --------------
Balances, September 30, 1995 1,438,496 $ 1,438,000 $ 7,827,000 $ 25,594,000 $ (80,000) $ 34,779,000
=========== ============ ============ ============ ============== ==============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1995 and 1994
(Unaudited)
(Page 1 of 2)
1995 1994
------------- -------------
Cash flows from operating activities
Net Income $ 4,093,000 $ 4,002,000
------------- -------------
Adjustments to reconcile net income to net cash
from operating activites
Depreciation 852,000 776,000
Provision for loan losses 90,000 615,000
Loans originated for sale (18,190,000) (8,875,000)
Net (gain) loss on sale of loans (99,000) (140,000)
Proceeds from sale of loans 17,993,000 10,375,000
Net (gain) loss on sale of premises and equipment 0 1,000
Net (gain) loss on sale of securities available for sale 13,000 0
Net (gain) loss on calls of securities held to maturity 14,000 3,000
Net investment amortization (accretion) 146,000 361,000
Increase (decrease) in income taxes payable 75,000 120,000
Increase (decrease) in deferred taxes payable (382,000) 68,000
(Increase) decrease in income receivable (233,000) (565,000)
Increase (decrease) in accrued expenses payable 608,000 17,000
(Increase) decrease in other assets 506,000 1,386,000
Increase (decrease) in other liabilities (198,000) (334,000)
------------- -------------
Total adjustments 1,195,000 3,808,000
------------- -------------
Net cash from operating activities 5,288,000 7,810,000
------------- -------------
Cash flows from investing activities
Proceeds from maturities and calls of securities held to maturity 4,430,000 7,355,000
Proceeds from maturities and calls of securities available for sale 4,231,000 1,218,000
Purchases of securities available for sale (14,747,000) (5,560,000)
Purchases of securities held to maturity (21,493,000) (10,634,000)
Proceeds from sales of securities available for sale 336,000 0
Net (increase) decrease in total loans (35,706,000) (18,051,000)
Proceeds from sale of premises and equipment 249,000 83,000
Purchases of premises and equipment (3,083,000) (1,323,000)
------------- -------------
Net cash from investing activities (65,783,000) (26,912,000)
------------- -------------
<FN>
(Continued)
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1995 and 1994
(Unaudited)
(Page 2 of 2)
1995 1994
------------- -------------
Cash flows from financing activities
Net increase (decrease) in total deposits $ 33,104,000 $ 5,978,000
Proceeds from short-term borrowings 362,850,000 298,428,000
Payments on short-term borrowings (341,492,000) (282,192,000)
Proceeds from long-term borrowings 0 8,132,000
Dividends declared (778,000) (604,000)
------------- -------------
Net cash from financing activities 53,684,000 29,742,000
------------- -------------
Net increase (decrease) in cash and cash equivalents (6,811,000) 10,640,000
Cash and cash equivalents at beginning of the period 24,147,000 12,869,000
------------- -------------
Cash and cash equivalents at end of the period $ 17,336,000 $ 23,509,000
============= =============
Cash paid during the period for:
Interest $ 14,999,000 $ 10,439,000
============= =============
Income taxes $ 2,226,000 $ 2,183,000
============= =============
Loans transferred to other real estate $ 0 $ 107,000
============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
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 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
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. All such
adjustments are of a normal and recurring nature.
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
September 30, 1995
FINANCIAL CONDITION
The financial statements reflect the Corporation's continued growth
within the Bank's traditional markets and expansion into new market areas.
The former Gateway Bank opened as the LaGrange Office of Lake City Bank on
July 17, 1995. The acquisition of Gateway Bank added approximately
$19,000,000 of deposits, $9,000,000 of loans and $9,000,000 of investments
to the Corporation. On September 19, 1995, the Elkhart Concord Office of
Lake City Bank opened. Remodeling of a building in Rochester, Indiana
continues and this office is scheduled to open in the fourth quarter of
1995. The Bank has also purchased property at 631 Professional Way,
Kendallville, Indiana. The appropriate regulatory applications have been
filed and it is anticipated this office will open in the Spring, 1996.
Total assets of the Corporation totaled $556,800,000 as of September
30, 1995. This is an increase of $59,837,000 or 12.0 percent from
$496,963,000 reported at December 31, 1994. Total loans were $324,356,000
at September 30, 1995. This is an increase of $36,400,000 or 12.6 percent
from December 31, 1994 balance. Total securities, including available for
sale (AFS) and held to maturity (HTM), increased $29,679,000 or 17.5
percent to $199,431,000 as of September 30, 1995, from $169,752,000 at
December 31, 1994. Earning assets increased to $524,688,000 at September
30, 1995. This is an increase of $64,004,000 or 13.9 percent from the
December 31, 1994 total of $460,684,000.
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 September 30, 1995 these funds totaled $492,878,000.
This represented a $54,388,000 or 12.4 percent increase from December 31,
1994. The growth has been primarily in certificates of deposit and
repurchase agreements, partially offset by decreases in savings and
transaction accounts. Certificates of deposit increased $48,566,000 or 22.1
percent from the balance at December 31, 1994. The repurchase agreement
balance increased $21,284,000 or 51.0 percent from the balance at December
31, 1994. The repurchase agreement balance is a combination of fixed rate
contracts and excess cash management accounts, a variable rate repurchase
agreement product. In addition to these local funding sources, the Bank
borrows periodically 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 $516,957,000 at September 30, 1995. This
is a $54,462,000 or 11.8 percent increase from $462,495,000 reported at
December 31, 1994.
On an average daily basis, total earning assets increased 18.0 percent
and 14.1 percent for the three month period and the nine month period ended
September 30, 1995 respectively, as compared to similar periods ended
September 30, 1994. On an average daily basis, total deposits and purchased
funds increased 14.4 percent and 17.6 percent for the three month period
and nine month period ended September 30, 1995, as compared to the three
month period and nine month period ended September 30, 1994. These
increases are a result of the growth in existing Bank offices and the
opening of five new offices; Elkhart East and Shipshewana in November,
1994, Middlebury in March, 1995, LaGrange in July, 1995 and Elkhart Concord
in September, 1995.
The Bank's investment portfolio consists of U.S. Treasuries, agencies,
mortgage-backed securities, municipal bonds, corporates and FHLB stock.
During 1995, new investments have been primarily municipal bonds and
mortgage-backed securities. At September 30, 1995, and December 31, 1994,
the Bank's investment in mortgage-backed securities comprised approximately
63.7 and 65.3 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 September 30, 1995, the mortgage-backed securities in the
AFS portfolio had a two year average life, with approximately 5 to 6
percent price volatility should rates move up or down 300 basis points. The
mortgage-backed securities in the HTM portfolio had a four year average
life and a potential for approximately 8 percent price depreciation should
rates increase 300 basis points and approximately 12 percent price
appreciation should rates move down 300 basis points. As of September 30,
1995, 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 September 30, 1995 the
AFS portfolio constituted 36.2 percent of the total investment security
portfolio. During the first nine months of 1995 purchases for the HTM and
AFS portfolios were $21,493,000 and $14,747,000 respectively. At September
30, 1995, the net after-tax unrealized loss in the AFS portfolio included
in stockholders' equity was $80,000, a decrease of $1,575,000 from the
unrealized loss included in stockholders' equity at December 31, 1994.
Future investment activity is difficult to predict, as it is dependent upon
loan and deposit trends; but the Bank anticipates activity in both the AFS
and HTM portfolios.
As previously indicated, total loans increased $36,400,000 to
$324,356,000 as of September 30, 1995, from $287,956,000 at December 31,
1994. Loan growth is net of loans reclassified to other real estate. The
Bank continues to experience good loan demand. Commercial loans at
September 30, 1995 increased 9.9 percent from the level at December 31,
1994. Retail loans at September 30, 1995 increased 15.4 percent from
December 31, 1994. Real estate loans (excluding mortgages held for sale)
increased 19.2 percent from December 31, 1994. The increase in the loan
portfolios also reflects the loans added with the acquisition of Gateway
Bank in July, 1995. The acquisition of Gateway Bank added approximately
$9,000,000 of loans, or 3.1 percent of the increase from December 31, 1994
balances. The increase in commercial loans attributable to the Gateway
acquisition was .7 percent. For real estate loans, the percent increase
attributable to the Gateway acquisition was 14.3 percent, and for retail
loans it was 1.6 percent.
The Bank had 59.8 percent of its loans concentrated in commercial
loans at September 30, 1995, and 61.3 percent at December 31, 1994.
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 $3,500,000. Product diversification is
accomplished by offering a wide variety of financing options. It is
estimated that 98 percent of the Bank's loans are within its 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
September 30, 1995 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.
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 nine months of 1995, the Bank originated
mortgages for sale totaling $18,190,000. 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 make 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 $1,446,000 at September 30, 1995 as compared to
$1,460,000 at December 31, 1994. The loans classified as troubled debt
restructuring at September 30, 1995 are performing in accordance with the
modified terms and there are no commitments to extend additional funds.
At January 1, 1995, the Bank adopted SFAS Nos. 114 and 118,
'Accounting by Creditors for Impairment of a Loan'. As part of the loan
review process, management reviews all loans classified as special
mention or below, as well as other loans that might warrant application of
SFAS No. 114. At September 30, 1995 no loans were considered as impaired.
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 new
regulations, the Bank's September 30, 1995 legal loan limit was
approximately $6,064,000. 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 10, 1995 meeting, the Bank's Board of Directors
modestly increased the Bank's policy limit by $250,000, to $3,500,000 for
any one borrower. With a relatively low administrative loan limit of
$3,500,000, most of the Bank's loan portfolios consist primarily of loans
to consumers and small businesses, and management believes the Bank's
lending practices and policies support national economic policies.
As a result of the loan and deposit trends, the Bank's average daily
loans/deposits ratio amounted to 74.3 percent at September 30, 1995, an
increase from 72.6 percent at year-end 1994. The Bank's average daily
loans/total deposits and repurchase agreements ratio amounted to 66.9
percent at September 30, 1995. This is a decrease from 67.3 percent at
year-end 1994.
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 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 September 30, 1995, the Bank's
GAP/Total Assets ratios were (3.8) percent, (9.7) percent, and (12.7)
percent for the three, nine, and twelve month time periods, respectively.
For this analysis, savings and demand deposit accounts have been assumed to
be repriceable after five years, and therefore are not included as
repriceable liabilities in these ratios. Mortgage-backed security cash flow
is classified according to anticipated prepayment speeds. The December 31,
1994, three, nine, and twelve month GAP ratios were (10.5) percent, (14.5)
percent, and (18.2) 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 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
September 30, 1995, the Bank's potential pre-tax 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. The Bank first borrowed under this program in
December, 1992. This advance was $8,000,000 payable in three years. The
Bank's second advance was made on June 25, 1993. This advance was
$1,300,000 to be paid June 24, 2003. The last borrowing was $8,132,000 in
March, 1994, to be paid January 14, 1997. 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 is $1,724,000.
The Federal Deposit Insurance Corporation's (FDIC) risk based capital
regulations require that all banks maintain an 8.0 percent Tier II risk
based capital ratio. The FDIC has also established definitions of "well
capitalized" as a 5.0 percent Tier I leverage capital ratio, a 6.0 percent
Tier I risk based capital ratio and a 10.0 percent Tier II risk based
capital ratio. As of September 30, 1995, the Bank's ratios were 6.2
percent, 9.9 percent and 11.2 percent, respectively, excluding the SFAS No.
115 adjustment. These are comparable to the ratios of 6.3 percent, 10.1
percent and 11.3 percent reported at December 31, 1994, and ratios of 6.3
percent, 10.1 percent and 11.4 percent reported at September 30, 1994. With
the SFAS No. 115 equity adjustment at September 30, 1995, the Tier I
leverage ratio, Tier I risk based capital and Tier II risk based capital
ratios were 6.2 percent, 9.9 percent and 11.2 percent. All ratios continue
to be above the ratios defined as "well capitalized" by the FDIC.
The Bank was examined by the FDIC as of March 31, 1994 in June, 1994.
The Bank was also examined by the Indiana Department of Financial
Institutions (DFI) as of March 31, 1995 in June, 1995. 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 $4,890,000 or 16.4 percent from
December 31, 1994 to $34,779,000 at September 30, 1995. Net income of
$4,093,000, less cash dividends declared of $778,000, plus the change in
the unrealized net gain (loss) on securities available for sale of
$1,575,000 comprise this overall increase. At September 30, 1995, the
change in stockholders' equity reflected an AFS adjustment that increased
equity by $1,575,000, as compared to December 31, 1994.The yield on two to
five year Treasury securities has declined by approximately 175 basis
points during the first nine months of 1995. The Bank's investment
portfolio has an average life in this range and is primarily fixed rate.
With this portfolio, a positive equity adjustment normally occurs as rates
decline. Management has factored this into the determination of the size of
the AFS portfolio to assure that stockholders' equity is adequate under all
likely rate scenarios.
(Intentionally left blank)
RESULTS OF OPERATIONS
Net Interest Income
For the nine month period ended September 30, 1995, total interest and
dividend income increased $6,478,000 or 26.5 percent to $30,941,000, from
$24,463,000 during the same nine months of 1994. The interest and dividend
income increased $2,314,000 or 26.8 percent for the three month period
ended September 30, 1995, as compared to the three month period ended
September 30, 1994. Daily average earning assets for the first three
quarters of 1995 increased to $490,749,000, a 14.1 percent increase over
the same period in 1994. For the third quarter alone, the daily average
earning assets increased to $521,394,000 or 18.0 percent as compared to the
daily average earning assets of the third quarter of 1994. The tax
equivalent yields on average earning assets increased by 88 basis points
for the nine month period ended September 30, 1995 when compared to the
same period of 1994. For the three month period ended September 30, 1995,
this yield increased 62 basis points over the yield for the three month
period ended September 30, 1994.
The nine month tax equivalent yield comparison reflects the interest
rate environment experienced during 1995 and 1994. In 1994, interest rates
in general, and the prime rate in particular, increased substantially. The
increase in the tax equivalent yield when compared to prior periods will be
less as the prime rate and interest rates in general have been declining.
Local lending activity and demand for the Bank's deposit products have
impacted the composition of earning assets and the related interest and
dividend income. Total loan income amounted to $22,152,000 and $7,842,000
for the nine month and three month periods ended September 30, 1995, as
compared to $17,340,000 and 6,154,000 for the same periods in 1994. These
are increases of 27.8 percent and 27.4 percent. Comparing average daily
loan balances during the first three quarters of 1995 to the same period in
1994 indicates a 13.6 percent increase in loan balances. The higher rate of
growth in loan income as compared to growth in loan balances, reflects
increased yields on the predominately prime rate based commercial
portfolio.
Total investment income from all security accounts amounted to
$8,628,000 for the nine month period ended September 30, 1995 and
$3,048,000 for the three month period ended September 30, 1995. This
compares to the $6,998,000 and $2,441,000 recorded for the same periods in
1994. These increases in income reflect increases in average daily balances
of 16.0 percent and 19.2 percent, respectively. The positive impact of the
growth in average daily securities was enhanced by increases in the
investment income tax equivalent yields in 1995, as compared to 1994, which
increased 40 and 33 basis points for the nine and three month periods ended
September 30.
The yield on equity investments is the result of the dividend paid on
the FHLB stock. The dividend rate was 5.0 percent for the first quarter of
1994, 5.25 percent for the second quarter of 1994, and 5.75 percent for the
third quarter of 1994. The dividend rate rose consistently during 1994 and
was 7.75 percent for the first and second quarters of 1995, and 8.00
percent for the third quarter of 1995.
Income from short-term investments amounted to $161,000 for the nine
month period ended September 30, 1995 and $71,000 for the three month
period ended September 30, 1995. This compares to $125,000 and $52,000 for
the same periods in 1994. The differences in the short-term investment
income are a result of higher balances being maintained in short-term
investments during the first quarter of 1995 and lower balances being
maintained during the second and third quarters of 1995 as compared to the
same periods of 1994, plus a 181 basis point increase in the average daily
tax equivalent yield during the first nine months of 1995 as compared to
the first nine months of 1994.
Total interest expense increased $5,179,000 or 48.6 percent to
$15,846,000 for the nine month period ended September 30, 1995, from
$10,667,000 for the nine month period ended September 30, 1994. For the
three month period ended September 30, 1995, as compared to the same period
of 1994, total interest expense increased $1,885,000 or 48.1 percent. The
Corporation's daily cost of funds during the nine month period ended
September 30, 1995 increased 99 basis points, as compared to the same
period of 1994. For the three month period ended September 30, 1995 versus
the same period in 1994, the increase was 92 basis points.
The increase in the average daily cost of funds was accompanied by an
increase in total deposit and purchased funds. On an average daily basis,
total deposits (including demand deposits) and purchased funds increased
14.4 percent for the nine month period ended September 30, 1995, as
compared to the similar period ended September 30, 1994. Total deposits and
purchased funds increased 17.6 percent for the three month period ended
September 30, 1995 when compared to the same period in 1994.
The net effect of all factors affecting total interest and dividend
income and total interest expense was to increase net interest income. For
the nine month period ended September 30, 1995, net interest income totaled
$15,095,000, an increase of 9.4 percent or $1,299,000 over the first nine
months of 1994. For the three month period ended September 30, 1995, the
increase was $429,000 or 9.1 percent when compared to the same three months
in 1994.
The variation in net interest income reflects both local and national
market conditions as well as the ALCO's efforts to manage the margin and
asset growth.
Provision for Loan Losses
It is the policy of the Bank to maintain the allowance for loan losses
at a level that is deemed appropriate based upon loan loss experience, the
nature of the portfolio, the growth expected for the portfolio and the
evaluation of the economic outlook for the current year and subsequent
years. Special consideration is given to nonperforming and nonaccrual loans
as well as factors that management feels deserve recognition during the
entire life of the portfolio. For several years, the Bank has maintained a
quarterly loan review program designed to provide reasonable assurance that
the allowance is maintained at an appropriate level and that changes in the
status of loans are reflected in the financial statements in a timely
manner. The adherence to 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 substantially lower in 1995 as
compared to 1994. The provision amounted to $90,000 and $30,000 for the
nine and three month periods ended September 30, 1995, as compared to
$615,000 and $270,000 for the similar periods of 1994. These reductions
mirror the trends in past due accruing loans (90 days or more) which have
been declining steadily over the last three years and are currently at
historically low levels. It also reflects the immaterial level of
nonaccrual loans over the same period. These trends in non-performing loans
reflect both the general economic conditions that have promoted growth and
expansion in the Bank's trade area during the last several years, and a
credit risk management strategy that promotes diversification.
At September 30, 1995, 76.5 percent of the Bank's allowance for loan
losses was classified as unallocated as compared to 75.9 percent classified
as unallocated at December 31, 1994. 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, despite the fact that typically these new loans receive little
specific allocation of the loan loss reserve.
As of September 30, 1995, loans delinquent 30 days or more that were
included in the accompanying financial statements as accrual loans totaled
approximately $1,997,000. At September 30, 1995, there were loans totaling
$428,000 on nonaccrual. At December 31, 1994, there was $2,802,000 in loans
delinquent 30 days or more included as accruing loans in the financial
statements and $18,000 in nonaccrual loans.
Following is a summary of the loan loss experience for the nine months
ending September 30, 1995 and the year ending December 31, 1994.
September 30, December 31,
1995 1994
------------- -------------
Amount of loans outstanding $ 324,356,000 $ 287,956,000
------------- -------------
Average daily loans outstanding for the
period $ 303,299,000 $ 271,391,000
------------- -------------
Allowance for loan losses at the
beginning of the period $ 4,866,000 $ 4,010,000
Charge-offs
Commercial 0 27,000
Real estate 0 0
Installment 81,000 93,000
Credit card and personal lines of credit 47,000 15,000
------------- -------------
Total charge-offs 128,000 135,000
Recoveries
Commercial 25,000 107,000
Real estate 0 1,000
Installment 46,000 81,000
Credit card and personal lines of credit 5,000 7,000
------------- -------------
Total recoveries 76,000 196,000
------------- -------------
Net charge-offs (recoveries) 52,000 (61,000)
Allowance related to assets acquired 746,000 0
Provision charged to expense 90,000 795,000
------------- -------------
Allowance for loan losses at the end of
the period $ 5,650,000 $ 4,866,000
============= =============
Ratio of net charge-offs during the period
to average daily loans during the period
Commercial (0.01%) (0.03%)
Real estate 0.00% 0.00%
Installment 0.01% 0.01%
Credit card and personal credit lines 0.02% 0.00%
------------- -------------
Total 0.02% (0.02%)
============= =============
The allowance related to assets acquired was the result of the
acquisition of Gateway Bank in July, 1995.
Net interest income after provision for loan losses totaled
$15,005,000 for the nine month period ended September 30, 1995 and
$5,126,000 for the three month period ended September 30, 1995. This
represents increases of 13.8 percent and 15.0 percent, respectively, over
the same periods ended September 30, 1994.
Noninterest Income
Total noninterest income decreased $142,000 or 4.2 percent to
$3,216,000 for the nine month period ended September 30, 1995, from
$3,358,000 recorded for the nine month period ended September 30, 1994.
Total noninterest income for the three month period ended September 30,
1995 was $1,144,000 which was $175,000 or 18.1 percent higher than the
noninterest income for the three months ended September 30, 1994.
Trust fees, which represent basic recurring service fee income,
increased $74,000 or 14.5 percent to $584,000 for the nine month period
ended September 30, 1995, as compared to $510,000 for the first nine months
of 1994. For the three month period ended September 30, 1995, trust fees
were $192,000, an increase of $43,000 over the fees for the same period in
1994. The major fee increases were in employee benefit plans, investment
services fees and testamentary fees.
Service charges on deposit accounts totaled $1,678,000 for the nine
months ending September 30, 1995, an increase of 9.2 percent or $141,000
when compared to the same period in 1994. These service charges increased
$25,000 for the three month period ended September 30, 1995, over the
amount recorded for the three month period ended September 30, 1994. The
fees on the LCB Club account (the Bank's low cost checking account service)
increased 29.9 percent during the nine month period ended September 30,
1995, as compared to the same period in 1994.
Other income (net) consists of normal recurring fee income, as well as
other income that management considers as nonrecurring. Other income (net)
decreased 24.9 percent or $292,000 to $882,000 for the nine month period
ended September 30, 1995, as compared to the same period in 1994. It
increased $74,000 or 28.9 percent for the three months ended September 30,
1995, as compared to the same period in 1994. Recurring components of other
income increased 17.1 percent during the first nine months of 1995, as
compared to the first nine months of 1994 and increased 16.8 percent for
the third quarter of 1995, as compared to the third quarter of 1994. The
major increases for the first nine months were in safe deposit rent,
mortgage service fees, loan insurance income and credit card fees.
The nonrecurring components of other income decreased $406,000 or 82.0
percent as compared to the same period in 1994. In the first quarter of
1994 ORE gains amounted to $404,000. The majority of this was related to
the reversal of previously established valuation reserves and accrued
liquidation reserves which were established to reflect the estimated
disposition cost of assets classified as ORE. No transactions of the same
magnitude occurred in 1995 resulting in the decrease in the nonrecurring
other income.
The profits from the sale of mortgages during the nine month period
ended September 30, 1995 totaled $99,000, as compared to $140,000 during
the same period in 1994. For the third quarter of 1995 only, these profits
were $47,000 as compared to $16,000 for the same period in 1994.
Net investment security gains (losses) amounted to $(27,000) and
$(4,000) for the nine and three month periods ended September 30, 1995, as
compared to $(3,000) and $(6,000) for the nine and three month periods
ended September 30, 1994. In the first nine months of 1995 and 1994,
special calls of zero coupon bonds were responsible for these small gains
and losses. Additional calls are expected in future periods. Also, in the
first three months of 1995 there were sales of municipal securities which
were approaching maturity from the available for sale portfolio.
Noninterest Expense
Noninterest expense increased $1,763,000 or 17.3 percent to
$11,929,000 for the nine month period ended September 30, 1995, as compared
to the first nine months of 1994. Noninterest expense increased $566,000 or
16.4 percent when comparing the three months ended September 30, 1995 to
the three months ended September 30, 1994.
For the nine months ended September 30, 1995, salaries and employee
benefits increased to $6,206,000, a $905,000 increase or 17.1 percent as
compared to the first nine months of 1994. When comparing the three months
ended September 30, 1995, to the same period in 1994, the increase was
$430,000 or 24.6 percent. These increases reflect the additions of the
Elkhart East, Shipshewana, Middlebury, LaGrange and Elkhart Concord
locations, as well as normal salary increases. Full-time equivalent
employees increased to 294 at September 30, 1995, from 272 at September 30,
1994.
For the nine and three month periods ended September 30, 1995,
occupancy and equipment expenses were $1,896,000 and $644,000 respectively,
a $401,000 increase or 26.8 percent and $142,000 or 28.3 percent from the
same periods one year ago. This increase reflects the additional occupancy
expense related to the new locations added in 1995 and 1994, and imaging
technology equipment added during 1995. These expenses are expected to
continue to increase in 1995 and 1996 with the openings of the Rochester
and Kendallville locations and further enhancements of technological
equipment.
For the nine month period ended September 30, 1995, other expenses
totaled $3,827,000 as compared to $3,370,000 during the same period in
1994. This is an increase of 13.6 percent or $457,000. For the third
quarter of 1995 as compared to the third quarter of 1994 there was a
decrease of $6,000 or .5 percent. The addition of the new locations in 1994
and 1995 has had an impact on noninterest expense and has resulted in
increases in business development and telephone, postage, and supplies
expenses. Business development expense increased $196,000 and telephone,
postage, and supplies expense increased $167,000 for the nine months ended
September 30, 1995, as compared to the nine months ended September 30,
1994. Data processing fees increased $107,000 when comparing these same
periods. When comparing the three months of the third quarter of 1995 to
the same period in 1994, the business development expenses increased
$40,000, telephone, postage and supplies expense increased $68,000 and data
processing fees increased $15,000. Professional and regulatory fees
decreased $55,000 and $142,000 for the nine and three month periods ended
September 30, 1995 as compared to the same periods in 1994. The significant
factor in these decreases was the retroactive reduction in the rate for the
FDIC fees and the related refund of previously paid FDIC assessment fees.
This rate reduction should continue to have a favorable impact in future
periods.
Income Before Income Tax Expense
As a result of the above factors, income before income tax expense
decreased to $6,292,000 for the first nine months of 1995, as compared to
$6,373,000 for the same period in 1994. This is a decrease of $81,000 or
1.3 percent. For the three months ended September 30, 1995, as compared to
the three months ended September 30, 1994, there was an increase in income
before income tax expense of $278,000 or 14.1 percent.
Income Tax Expense
Income tax expense decreased to $2,199,000 for the first nine months
of 1995, as compared to $2,371,000 for the same period in 1994. This is a
$172,000 or 7.3 percent decrease. Income tax expense for the third quarter
of 1995 increased $90,000 or 12.4 percent as compared to the third quarter
of 1994.
The combined State franchise tax expense and the Federal income tax
expense as a percent of income before income tax expense decreased to 34.9
percent during the first nine months of 1995, as compared to 37.2 percent
during the same period in 1994. It decreased to 36.1 percent for the three
months ended September 30, 1995, as compared to 36.6 percent for the same
three months in 1994. Currently the State franchise tax rate is 8.5 percent
and is a deductible expense for computing Federal income tax.
Net Income
As a result of all factors indicated above, net income increased to
$4,093,000 for the first nine months of 1995, an increase of $91,000 or 2.3
percent from the $4,002,000 recorded over the same period in 1994. Earnings
per share for the first nine months of 1995 were $2.85 per share as
compared to $2.78 per share for the first nine months of 1994. For the
three months ended September 30, 1995, net income was $1,440,000 as
compared to $1,252,000 for the three months ended September 30, 1994, an
increase of $188,000 or 15.0 percent.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 1995
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 September 30, 1995.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 1995
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: November 10, 1995 R. Douglas Grant
R. Douglas Grant - President
Date: November 10, 1995 Terry M. White
Terry M. White - Secretary/Treasurer