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 June 30, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-11487
LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1559596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
202 East Center Street
P.O. Box 1387, Warsaw, Indiana 46581-1387
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219)267-6144
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
NO [ ] YES [x]
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 June 30, 1996
Common Stock, $.50 Stated Value 2,896,992
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 1996 and December 31, 1995
(in thousands)
(Unaudited)
(Page 1 of 2)
June 30, December 31,
1996 1995
----------- -----------
ASSETS
- ------
Cash and cash equivalents
Cash and due from banks $ 40,248 $ 26,185
Short-term investments 409 710
----------- -----------
Total cash and cash equivalents 40,657 26,895
Securities available-for-sale
U. S. Treasury securities 29,252 27,844
Mortgage-backed securities 49,122 51,034
State and municipal securities 2,115 2,176
Other debt securities 2,656 1,066
----------- -----------
Total securities available-for-sale
(carried at fair value) 83,145 82,120
Securities held-to-maturity
U. S. Treasury securities 17,543 13,611
Mortgage-backed securities 78,828 80,217
State and municipal securities 20,728 19,047
Other debt securities 3,266 1,013
----------- -----------
Total securities held-to-maturity
(fair value of $118,830,000 at
June 30, 1996, and $115,328,000
at December 31, 1995) 120,365 113,888
Real estate mortgages held-for-sale 424 145
Loans:
Total loans 349,516 327,617
Less: Allowance for loan losses 5,365 5,472
----------- -----------
Net loans 344,151 322,145
Land, premises and equipment, net 14,479 13,736
Accrued income receivable 4,161 4,003
Other assets 6,445 5,647
----------- -----------
Total assets $ 613,827 $ 568,579
=========== ===========
(Continued)
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 1996 and December 31, 1995
(in thousands)
(Unaudited)
(Page 2 of 2)
June 30, December 31,
1996 1995
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Deposits:
Noninterest bearing deposits $ 70,667 $ 67,856
Interest bearing deposits 397,616 364,078
----------- -----------
Total deposits 468,283 431,934
Short-term borrowings
Federal funds purchased 4,800 17,100
U.S. Treasury demand notes 3,535 1,880
Securities sold under agreements
to repurchase 73,579 58,151
----------- -----------
Total short-term borrowings 81,914 77,131
Accrued expenses payable 4,776 4,481
Other liabilities 413 847
Long-term debt 19,432 17,432
----------- -----------
Total liabilities 574,818 531,825
Commitments, off-balance sheet risks
and contingencies
STOCKHOLDERS' EQUITY
- --------------------
Common stock: $.50 stated value, 10,000,000 shares
authorized, 2,896,992 shares issued and outstanding
as of June 30, 1996; $1.00 stated value, 2,750,000
shares authorized, 1,438,496 shares issued and outstanding
as of December 31, 1995 1,448 1,438
Additional paid-in capital 8,232 7,827
Retained earnings 29,437 26,858
Unrealized net gain (loss) on securities available-for-sale (108) 631
----------- -----------
Total stockholders' equity 39,009 36,754
Total liabilities and stockholders' equity $ 613,827 $ 568,579
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 1996, and 1995
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1996 1995 1996 1995
------------ ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 8,033 $ 7,372 $ 15,821 $ 14,189
Tax exempt 60 56 121 121
----------- ----------- ----------- -----------
Total loan income 8,093 7,428 15,942 14,310
Short-term investments 27 25 60 90
Securities:
U.S. Treasury and Government agency securities 696 610 1,329 1,209
Mortgage-backed securities 2,026 1,869 4,014 3,654
Obligations of state and political subdivisions 346 227 686 453
Other debt securities 79 97 170 198
----------- ----------- ----------- -----------
Total interest and dividend income 11,267 10,256 22,201 19,914
INTEREST EXPENSE
- ----------------
Interest on deposits 4,485 4,088 9,033 7,820
Interest on short-term borrowings 992 894 1,867 1,726
Interest on long-term debt 277 250 549 495
----------- ----------- ----------- -----------
Total interest expense 5,754 5,232 11,449 10,041
----------- ----------- ----------- -----------
NET INTEREST INCOME 5,513 5,024 10,752 9,873
- -------------------
Provision for loan losses 30 30 60 60
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,483 4,994 10,692 9,813
- ------------------------- ----------- ----------- ----------- -----------
NONINTEREST INCOME
- ------------------
Trust fees 213 167 499 392
Service charges on deposit accounts 692 577 1,270 1,099
Other income (net) 455 316 847 618
Net gains on the sale of real estate mortgages held-for-sale 121 35 221 52
Net investment securities gains (losses) (4) (7) (6) (23)
----------- ----------- ----------- -----------
Total noninterest income 1,477 1,088 2,831 2,138
(Continued)
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 1996, and 1995
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 2,381 2,060 4,618 4,025
Occupancy and equipment expense 690 632 1,413 1,252
Other expense 1,202 1,395 2,466 2,636
----------- ----------- ----------- -----------
Total noninterest expense 4,273 4,087 8,497 7,913
INCOME BEFORE INCOME TAX EXPENSE 2,687 1,995 5,026 4,038
- --------------------------------
Income tax expense 973 648 1,808 1,385
----------- ----------- ----------- -----------
NET INCOME $ 1,714 $ 1,347 $ 3,218 $ 2,653
- ---------- =========== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING (Note 2) 2,896,992 2,896,992 2,896,992 2,896,992
EARNINGS PER COMMON SHARE
- -------------------------
Net Income (Note 2) $ 0.59 $ 0.47 $ 1.11 $ 0.92
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1996 and 1995
(in thousands except for shares)
(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, 1995 1,438,496 $ 1,438 $ 7,827 $ 22,279 $ (1,655) $ 29,889
Net income for six months
ended June 30, 1995 2,653 2,653
Net change in unrealized net gain (loss)
on securities available-for-sale 1,726 1,726
Cash dividends declared -
$.17 per share (490) (490)
----------- ----------- ----------- ----------- ------------- ------------
Balances, June 30, 1995 1,438,496 $ 1,438 $ 7,827 $ 24,442 $ 71 $ 33,778
=========== =========== =========== =========== ============= ============
Balances, January 1, 1996 1,438,496 $ 1,438 $ 7,827 $ 26,858 $ 631 $ 36,754
Net income for six months
ended June 30, 1996 3,218 3,218
Net change in unrealized net gain (loss)
on securities available-for-sale (739) (739)
Issued 10,000 shares of previously
authorized, unissued shares 10,000 10 405 415
Shares issued in 2-for-1 stock split 1,448,496
Cash dividends declared -
$.22 per share (639) (639)
----------- ----------- ----------- ----------- ------------- ------------
Balances, June 30, 1996 2,896,992 $ 1,448 $ 8,232 $ 29,437 $ (108) $ 39,009
=========== =========== =========== =========== ============= ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1995
(in thousands)
(Unaudited)
(Page 1 of 2)
1996 1995
----------- -----------
Cash flows from operating activities
Net Income $ 3,218 $ 2,653
----------- -----------
Adjustments to reconcile net income to net cash
from operating activites
Depreciation 625 560
Provision for loan losses 60 60
Loans originated for sale (17,076) (8,921)
Net (gain) loss on sale of loans (221) (52)
Proceeds from sale of loans 17,019 8,588
Net (gain) loss on sale of premises and equipment 21 0
Net (gain) loss on sale of securities available-for-sale 0 13
Net (gain) loss on calls of securities held-to-maturity 6 10
Net investment amortization (accretion) 166 99
Increase (decrease) in taxes payable 536 169
(Increase) decrease in income receivable (159) (322)
Increase (decrease) in accrued expenses payable (291) (491)
(Increase) decrease in other assets (728) 404
Increase (decrease) in other liabilities 29 (196)
----------- -----------
Total adjustments (13) (79)
----------- -----------
Net cash from operating activities 3,205 2,574
----------- -----------
Cash flows from investing activities
Proceeds from maturities and calls of securities held-to-maturity 3,818 2,713
Proceeds from maturities and calls of securities available-for-sale 5,940 3,537
Purchases of securities available-for-sale (8,311) (7,493)
Purchases of securities held-to-maturity (10,343) (10,746)
Proceeds from sales of securities available-for-sale 0 336
Net (increase) decrease in total loans (22,066) (18,601)
Purchases of premises and equipment (1,389) (1,156)
----------- -----------
Net cash from investing activities (32,351) (31,410)
----------- -----------
(Continued)
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1995
(in thousands)
(Unaudited)
(Page 2 of 2)
1996 1995
----------- -----------
Cash flows from financing activities
Net increase (decrease) in total deposits $ 36,349 $ 13,393
Proceeds from short-term borrowings 389,963 243,765
Payments on short-term borrowings (385,180) (224,390)
Proceeds from long-term borrowings 2,000 0
Proceeds from issuance of common stock 415 0
Dividends paid (639) (490)
----------- -----------
Net cash from financing activities 42,908 32,278
----------- -----------
Net increase (decrease) in cash and cash equivalents 13,762 3,442
Cash and cash equivalents at beginning of the period 26,895 24,147
----------- -----------
Cash and cash equivalents at end of the period $ 40,657 $ 27,589
=========== ===========
Cash paid during the period for:
Interest $ 11,190 $ 9,625
=========== ===========
Income taxes $ 1,685 $ 1,690
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This report is filed for Lakeland Financial Corporation (the
Corporation) and its wholly owned subsidiary, Lake City Bank (the Bank). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The condensed consolidated financial statements included herein have
been prepared by the Corporation, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. The Corporation believes
that the disclosures are adequate and do not make the information presented
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Corporation's latest annual report and Form 10-K. In
the opinion of management, all adjustments which are necessary for a fair
statement of the results for interim periods are reflected in the quarterly
statements included herein.
NOTE 2. EARNINGS PER SHARE
The average common shares outstanding and the net income per share
for the three months and six months ended June 30, 1996 and 1995, have been
restated to reflect a two-for-one stock split. The record date for the stock
split was April 30, 1996, and the new shares were issued May 15, 1996.
(Intentionally left blank)
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
June 30, 1996
FINANCIAL CONDITION
The financial statements reflect the Corporation's continued growth
within the Bank's traditional markets and expansion into new market areas. The
Kendallville office of the Bank was opened on May 29, 1996, and a
free-standing ATM in the Linwood Plaza, Goshen, Indiana, was opened on July
16, 1996. Construction continues on the Hubbard Hill office and it is
anticipated this office will open during the third quarter of 1996. The Bank
has also purchased property at 1208 N. Nappanee Street, Elkhart, Indiana, with
the intent of establishing a full-service branch at that location.
Total assets of the Corporation were $613,827,000 as of June 30, 1996.
This is an increase of $45,248,000 or 8.0 percent from $568,579,000 reported
at December 31, 1995. Total loans were $349,516,000 at June 30, 1996. This is
an increase of $21,899,000 or 6.7 percent from the December 31, 1995, balance.
Total securities (including available-for-sale (AFS) and held-to-maturity
(HTM)) increased $7,502,000 or 3.8 percent to $203,510,000 as of June 30,
1996, from $196,008,000 at December 31, 1995. Earning assets increased to
$548,494,000 at June 30, 1996. This is an increase of $29,486,000 or 5.7
percent from the December 31, 1995, total of $519,008,000.
Total deposits and securities sold under agreements to repurchase
(repurchase agreements) consist primarily of funds generated within the Bank's
primary market area as defined by its Community Reinvestment Act (CRA)
statement. At June 30, 1996, these funds totaled $541,862,000. This
represented a $51,777,000 or 10.6 percent increase from December 31, 1995. The
growth has been primarily in certificates of deposit and repurchase
agreements. Certificates of deposit increased $37,460,000 or 14.1 percent from
the balance at December 31, 1995. The repurchase agreement balance increased
$15,428,000 or 26.5 percent from the balance at December 31, 1995. The
repurchase agreement balance is a combination of fixed rate contracts and a
variable rate repurchase agreement product. In addition to these local funding
sources, the Bank borrows modestly through the Treasury, Tax and Loan program,
occasionally through federal fund lines with correspondent banks and through
term advances from the Federal Home Loan Bank of Indianapolis (FHLB).
Including these non-local sources, funding totaled $569,629,000 at June 30,
1996. This is a $43,132,000 or 8.2 percent increase from $526,497,000 reported
at December 31, 1995.
On an average daily basis, total earning assets increased 14.5 percent
and 14.5 percent for the three month period and the six month period ended
June 30, 1996, respectively, as compared to similar periods ended June 30,
1995. On an average daily basis, total deposits and purchased funds increased
14.5 percent and 14.0 percent for the three month period and six month period
ended June 30, 1996, as compared to the three month period and six month
period ended June 30, 1995.
The Bank's investment portfolio consists of U.S. Treasuries, agencies,
mortgage-backed securities, municipal bonds, and corporates. During 1996, new
investments have been primarily U.S. Treasuries, municipal bonds and
mortgage-backed securities. At June 30, 1996, and December 31, 1995, the
Bank's investment in mortgage-backed securities comprised approximately 62.9
and 67.0 percent, respectively, of the total securities and consisted mainly
of CMO's and mortgage pools issued by GNMA, FNMA and FHLMC. As such, these
securities are backed directly or indirectly by the Federal Government. All
mortgage-backed securities purchased conform to the FFIEC high risk standards
which prohibit the purchase of securities that have excessive price,
prepayment, extension and original life risk characteristics. The Bank uses
Bloomberg analytics to evaluate and monitor all purchases. At June 30, 1996,
the mortgage-backed securities in the HTM portfolio had a three year average
life, with approximately 9 percent price volatility should rates move up or
down 300 basis points. The mortgage-backed securities in the AFS portfolio had
a two year average life and a potential for approximately 6 percent price
depreciation should rates increase 300 basis points and approximately 4
percent price appreciation should rates move down 300 basis points. As of June
30, 1996, all mortgage-backed securities continue to be in compliance with
FFIEC guidelines and are performing in a manner consistent with management's
original expectations.
The Bank's AFS portfolio is managed with consideration given to factors
such as the Bank's capital levels, growth prospects, asset/liability structure
and liquidity needs. At June 30, 1996, the AFS portfolio constituted 40.9
percent of the total security portfolio. During the first six months of 1996
purchases for the HTM and AFS portfolios were $10,343,000 and $8,311,000,
respectively. At June 30, 1996, the net after-tax unrealized loss in the AFS
portfolio included in stockholders' equity was $108,000, a decrease of
$739,000 from the unrealized gain included in stockholders' equity at December
31, 1995. Since the securities portfolio is primarily fixed rate, a negative
equity adjustment is anticipated whenever interest rates increase. Future
investment activity is difficult to predict, as it is dependent upon loan and
deposit trends.
As previously indicated, total loans increased $21,899,000 to
$349,516,000 as of June 30, 1996, from $327,617,000 at December 31, 1995. Loan
growth is net of loans reclassified to other real estate. The Bank continues
to experience good loan demand. Commercial loans at June 30, 1996, increased
7.2 percent from the level at December 31, 1995. Retail loans at June 30,
1996, increased 10.7 percent from December 31, 1995. Real estate loans
(excluding mortgages held-for-sale) decreased less than one percent from
December 31, 1995. The balances in the real estate loan portfolio are impacted
by the sale of real estate mortgages in the secondary market and the level of
refinance and new mortgage activity in the existing rate environment.
The Bank had 60.1 percent of its loans concentrated in commercial loans
at June 30, 1996, and 59.8 percent at December 31, 1995. Traditionally, this
type of lending may have more credit risk than other types of lending. This is
attributed to the fact that individual commercial loans are generally larger
than residential real estate and retail loans, and because the type of
borrower and purpose of commercial loans are not as homogeneous as with
residential and retail customers. The Bank manages this risk by pricing to the
perceived risk of each individual credit, and by diversifying the portfolio by
customer, product, industry and geography. Customer diversification is
accomplished through a relatively low administrative loan limit of $4,000,000.
Product diversification is accomplished by offering a wide variety of
financing options. Management reviews the loan portfolio to ensure loans are
diversified by industry. The loan portfolios are distributed throughout the
Bank's principal trade area, which encompasses eight counties in Indiana.
Other than loans disclosed elsewhere in this filing as past-due, nonaccrual or
restructured, the Bank is not aware of any loans classified for regulatory
purposes at June 30, 1996, that are expected to have a material impact on the
Bank's future operating results, liquidity or capital resources. The Bank is
not aware of any material credits in which there is serious doubt as to the
borrower's ability to comply with the loan repayment terms, other than those
disclosed as past due, nonaccrual or restructured.
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 six months of 1996 the Bank originated
mortgages for sale totaling $11,784,000 as compared to $4,043,000 during the
first six months of 1995. This program of mortgage sales continues to produce
the liquidity needed to meet the mortgage needs of the markets served by the
Bank, and to generate a long-term servicing portfolio. As a part of the CRA
commitment to making real estate financing available in all markets, the Bank
continues to originate non-conforming loans which are held to maturity or
prepayment. The Bank also meets the mortgage needs of low and moderate income
families by originating mortgages for sale to the FHLMC Affordable Gold
program.
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 $1,404,000 at June 30, 1996, as compared to $1,432,000
at December 31, 1995. The loans classified as troubled debt restructuring at
June 30, 1996, are performing in accordance with the modified terms.
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 June 30, 1996 legal loan limit was approximately
$6,600,000. The legal loan limit will continue to increase as the Bank's
combined equity and allowance for loan losses continues to increase. At its
January 9, 1996 meeting, the Bank's Board of Directors modestly increased the
Bank's policy limit by $500,000, to $4,000,000 for any one borrower. With a
relatively low administrative loan limit of $4,000,000, the Bank's loan
portfolios consist primarily of loans to consumers and small businesses.
For the first six months of 1996, deposits have been increasing faster
than loans. However, the increase in loans is affected by the sale of mortgage
loans in the secondary market as discussed earlier. While demand accounts have
increased $2,811,000 during the first six months of 1996, other transaction
accounts have decreased $3,922,000 during the same period. During this period
there has been significant increases in time deposits and in repurchase
agreements which increased $37,460,000 or 14.1 percent and $15,428,000 or 26.5
percent respectively, reflecting consumer preferences and the current rate
environment. During this six month period, loans increased $21,899,000 or 6.7
percent. As a result of these loan and deposit trends, the Bank's average
daily loans/deposits ratio amounted to 75.8 percent at June 30, 1996, which is
unchanged from the ratio at year-end 1995. The Bank's average daily
loans/total deposits and repurchase agreements ratio amounted to 68.7 percent
at June 30, 1996. This is an increase from 67.8 percent at year-end 1995.
The Bank, through its Asset/Liability Committee (ALCO), manages interest
rate risk by monitoring both its GAP position and the computer simulated
earnings impact of various rate scenarios. The Bank then modifies its
long-term risk 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 June 30, 1996, the Bank's GAP/Total Assets ratios
were (7.3) percent, (11.5) percent, and (13.5) percent for the three, six, and
twelve month time periods, respectively. 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, 1995, three, six, and twelve month GAP ratios were (5.2) percent, (11.7)
percent, and (12.8) percent respectively.
Management supplements the GAP analysis with a computer simulation
approach to manage the interest rate risk of the Bank. This computer
simulation analysis measures the net interest income impact of a 300 basis
point change 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 June 30, 1996,
the Bank's potential pretax exposure was within the Bank's policy limit. This
policy was last reviewed and approved by the Board of Directors in May, 1996.
The Bank is a member of the FHLB of Indianapolis. Membership has enabled
the Bank to participate in the housing programs sponsored by the FHLB, thereby
enhancing the Bank's ability to offer additional programs throughout its trade
area. At its meeting in March, 1996, the Board of Directors of the Bank passed
a resolution authorizing the Bank to borrow up to $50 million under the FHLB
program. As of June 30, 1996, the borrowings from the FHLB totaled $19,432,000
with $1,300,000 due June 24, 2003, $8,132,000 due January 14, 1997, and
$10,000,000 due December 18, 1998. 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 investment in FHLB stock at June
30, 1996, was $1,934,700.
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
June 30, 1996, the Bank's ratios were 6.3 percent, 10.1 percent and 11.3
percent, respectively, excluding the SFAS No. 115 adjustment. These are
comparable to the ratios of 6.3 percent, 10.1 percent and 11.4 percent
reported at December 31, 1995, respectively, and ratios of 6.3 percent, 10.1
percent and 11.3 percent reported at June 30, 1995, respectively. All ratios
continue to be above "well capitalized" levels.
The Bank was examined by the Indiana Department of Financial Institutions
(DFI) as of March 31, 1995, in June, 1995. The Bank was also examined by the
FDIC as of March 31, 1996, in June, 1996. Management is not aware of any
regulatory recommendations that if implemented would have a material effect on
liquidity, capital or results of operations.
Total stockholders' equity increased $2,255,000 or 6.1 percent from
December 31, 1995, to $39,009,000 at June 30, 1996. Net income of $3,218,000,
less dividends of $639,000, and plus the change in the unrealized net gain
(loss) on securities available for sale of $(739,000), and $415,000 from the
issuance of common stock comprise this increase.
Total Bank assets have grown from $300,126,000 at June 30, 1991, to
$613,827,000 at June 30, 1996. This is an increase of $313,701,000 or 104.5
percent which equates to a 14.6 percent rate of growth per year. Stockholders'
equity has increased from $19,822,000 to $39,009,000 for the same time period.
That is an increase of $19,187,000 or 96.8 percent which equates to a 14.5
percent rate of growth per year. Net income for the six months ended June 30,
1991, compared to the net income for the same period of 1996, increased
$1,954,000 or 154.6 percent from $1,264,000 to $3,218,000. From June 30, 1991,
to June 30, 1996, the number of Lake City Bank offices increased from 18 to
31. This growth has been funded through results of operation and existing
capital. Management anticipates the Bank will continue to fund its growth from
current capital and results of operations. However, should the need arise, the
Corporation would have the ability to issue additional stock as a means of
pursuing growth.
RESULTS OF OPERATIONS
Net Interest Income
For the six month period ended June 30, 1996, total interest and dividend
income increased $2,287,000 or 11.5 percent to $22,201,000, from $19,914,000
during the same six months of 1995. Interest and dividend income increased
$1,011,000 or 9.9 percent for the three month period ended June 30, 1996, as
compared to the three month period ended June 30, 1995. Daily average earning
assets for the first two quarters of 1996 increased to $542,199,000, a 14.5
percent increase over the same period in 1995. For the second quarter alone,
the daily average earning assets increased to $551,001,000 or 14.5 percent as
compared to the daily average earning assets of the second quarter of 1995.
The tax equivalent yields on average earning assets decreased by 23 basis
points for the six month period ended June 30, 1996, when compared to the same
respective period of 1995. For the three month period ended June 30, 1996,
this yield decreased 36 basis points over the yield for the three month period
ended June 30, 1995.
The decline in the yield on average earning assets was mainly due to
declining interest rates. The Bank's investment portfolio, which is primarily
fixed rate, experienced only a 1 basis point reduction in yield between the
first six months of 1996 and the first six months of 1995. However, the Bank's
home equity portfolio and most of the commercial portfolio are variable rate
and are tied to the Bank's base rate which is based upon the prime rate. The
average prime rate was 62 basis points lower during the first six months of
1996 when compared to the same period of 1995. This resulted in a 39 basis
point reduction in the overall tax equivalent yield on loans for the first two
quarters of 1996 as compared to the first two quarters of 1995. Offsetting
this yield reduction was good loan demand. Strong local economies, combined
with lower interest rates, produced growth in average daily loan balances of
15.4 percent between the first two quarters of 1996 and the same period of
1995. This growth in loan balances, coupled with the decline in average yield,
resulted in a 11.4 percent increase in total loan income to $15,942,000 during
the first six months of 1996, from $14,310,000 reported for the first six
months of 1995. For the three months ended June 30, 1996, as compared to the
same period for 1995, loan income increased $665,000 or 9.0 percent from
$7,428,000 to 8,093,000.
Total security income amounted to $6,199,000 for the six month period
ended June 30, 1996, and $3,147,000 for the three month period ended June 30,
1996. This compares to the $5,514,000 and $2,803,000 recorded for the same
periods in 1995. These increases in income reflect increases in average daily
balances of 14.5 percent and 14.5 percent, respectively. The security yields
remained relatively unchanged when comparing the yields for the six and three
months ending June 30, 1996, to the same periods for 1995. For both the six
and the three month comparisons the tax equivalent yield decreased only 1
basis point.
Income from short-term investments amounted to $60,000 for the six month
period ended June 30, 1996 and $27,000 for the three month period ended June
30, 1996. This compares to $90,000 and $25,000 for the same respective periods
in 1995. The differences in the short-term investment income for the six
months ending June 30, 1996, compared to the six months ending June 30, 1995,
results from a lower average balance in short-term investments during the six
months of 1996, along with an 11 basis point reduction in the tax equivalent
yield. The slightly higher income for the three months ending June 30, 1996,
as compared to the three months ending June 30, 1995, is due to a $181,000
increase in the average daily balance partially offset by a 6 basis point
reduction in the tax equivalent yield.
Total interest expense increased $1,408,000 or 14.0 percent to
$11,449,000 for the six month period ended June 30, 1996, from $10,041,000 for
the six month period ended June 30, 1995, and it increased $522,000 or 10.0
percent for the three month period ended June 30, 1996, from the $5,232,000
for the three month period ended June 30, 1995. This is a result of the
overall growth of deposits and the change in the deposit mix. On an average
daily basis, total deposits (including demand deposits) increased 14.1 percent
and 13.6 percent for the six and three month periods ended June 30, 1996, as
compared to the similar periods ended June, 1995. When comparing these same
periods, the average daily balances of the demand deposit accounts rose
$8,115,000 and $9,419,000, respectively, while the average daily balances of
savings and transaction accounts combined declined $1,207,000 and $976,000,
respectively. The average daily balance of time deposits, which pay a higher
rate of interest as compared to demand deposit and transaction accounts,
increased $53,451,000 and $49,580,000 for the six and three months ended June
30, 1996, compared to the six and three months ended June 30, 1995. On an
average daily basis, total deposits (including demand deposits) and purchased
funds increased 14.0 percent and 14.5 for the six and three month periods
ended June 30, 1996, as compared to the six and three month periods ended June
30, 1995. The Corporation's daily cost of funds during the six month period
ended June 30, 1996, remained unchanged as compared to the same period of
1995, but decreased 17 basis points when comparing the three month periods
ended June 30, 1996, and June 30, 1995.
The net effect of all factors affecting total interest and dividend
income and total interest expense was to increase net interest income. For the
six month period ended June 30, 1996, net interest income totaled $10,752,000,
an increase of 8.9 percent or $879,000 over the first six months of 1995. For
the three month period ended June 30, 1996, net interest income totaled
$5,513,000, an increase of $489,000 or 9.7 percent over the three months ended
June 30, 1995.
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 may result in fluctuations in the provision for loan losses.
Consequently, the increase in net interest income before provision for loan
losses, discussed above, may not necessarily flow through to the net interest
income after provision for loan losses.
The process of identifying credit losses that may occur based upon
current circumstances is subjective. Therefore, management maintains a general
allowance to cover all credit losses within the entire portfolio. The
methodology management uses to determine the adequacy of the loan loss reserve
is as follows:
1. Management reviews the larger individual loans for unfavorable
collectibility factors and assesses the requirement for specific reserves on
such credits. For those loans not subject to specific reviews, management
reviews previous loan loss experience to establish historical ratios and
trends in charge-offs by loan category. The ratios of net charge-offs to
particular types of loans enables management to establish charge-offs in
future periods by loan category and thereby establish appropriate reserves for
loans not specifically reviewed.
2. Management reviews the current and anticipated economic conditions of
its lending market to determine the effects on future loan charge-offs by loan
category, in addition to the effects on the loan portfolio as a whole.
3. Management reviews delinquent loan reports to determine risk of future
loan charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Given this methodology for determining the adequacy of the loan loss
reserve, the provision for loan losses was the same in 1996, as compared to
1995. The provision amounted to $60,000 for each of the six month periods
ended June 30, 1996 and 1995. These provisions reflect the levels of past due
accruing loans (90 days or more). They also reflect the immaterial levels of
nonaccrual loans over the same periods. These levels of non-performing loans
reflect both the general economic conditions that have promoted growth and
expansion in the Bank's trade area during the last several years, and a credit
risk management strategy that promotes diversification.
At June 30, 1996, 73.3 percent of the Bank's allowance for loan losses
was classified as unallocated as compared to 74.2 percent classified as
unallocated at December 31, 1995. To a large extent, this reflects the growth
in total loans with the concentration of growth in the commercial loan
portfolio. With the commercial loan growth and the expansion into new markets,
management believes that it is prudent to continue to provide for loan losses,
due to the inherent credit risk involved with the commercial loan portfolio.
As of June 30, 1996, loans delinquent 30 days or more that were included
in the accompanying financial statements as accrual loans totaled
approximately $2,245,000. At June 30, 1996, there were loans totaling $160,000
on nonaccrual. At December 31, 1995, there was $1,435,000 in loans delinquent
30 days or more included as accruing loans in the financial statements and
$532,000 in nonaccrual loans. During the second quarter of 1996, loans
totaling $272,000 and included in nonaccrual loans at December 31, 1995, were
transferred into other real estate owned.
Following is a summary of the loan loss experience for the six months
ending June 30, 1996, and the year ending December 31, 1995.
June 30, December 31,
1996 1995
------------- -------------
(in thousands)
Amount of loans outstanding $ 349,516 $ 327,617
------------- -------------
Average daily loans outstanding for the
period $ 339,254 $ 309,241
------------- -------------
Allowance for loan losses at the
beginning of the period $ 5,472 $ 4,866
Charge-offs
Commercial 123 137
Real estate 0 48
Installment 56 112
Credit card and personal lines of credit 19 58
------------- -------------
Total charge-offs 198 355
Recoveries
Commercial 3 26
Real estate 0 0
Installment 26 63
Credit card and personal lines of credit 2 6
------------- -------------
Total recoveries 31 95
------------- -------------
Net charge-offs (recoveries) 167 260
Purchase loan adjustment 0 746
Provision charged to expense 60 120
------------- -------------
Allowance for loan losses at the end of
the period $ 5,365 $ 5,472
============= =============
Ratio of net charge-offs during the period
to average daily loans during the period
Commercial 0.04% 0.03%
Real estate 0.00% 0.01%
Installment 0.01% 0.02%
Credit card and personal credit lines 0.00% 0.02%
------------- -------------
Total 0.05% 0.08%
============= =============
The purchase loan adjustment was the result of the acquisition of Gateway
Bank in July, 1995.
Net interest income after provision for loan losses totaled $10,692,000
and $5,483,000 for the six and three month periods ended June 30, 1996. This
represents increases of 9.0 percent and 9.8 percent over the same respective
periods ended June 30, 1995.
Noninterest Income
Total noninterest income increased $693,000 or 32.4 percent to $2,831,000
for the six month period ended June 30, 1996, from $2,138,000 recorded for the
six month period ended June 30, 1995. Total noninterest income for the three
month period ended June 30, 1996, was $1,477,000 which was $389,000 or 35.8
percent higher than the noninterest income for the three months ended June 30,
1995.
Trust fees, which represent basic recurring service fee income, increased
$107,000 or 27.3 percent to $499,000 for the six month period ended June 30,
1996, as compared to $392,000 for the first six months of 1995. For the three
month period ended June 30, 1996, trust fees were $213,000, an increase of
$46,000 over the fees for the same period in 1995. The major fee increases
were in testamentary trust fees, employee benefit plan fees and stock transfer
service fees.
Service charges on deposit accounts increased 15.6 percent or $171,000
during the six month period ended June 30, 1996, totaling $1,270,000, as
compared to the same period in 1995. These service charges increased $115,000
for the three month period ended June 30, 1996, over the amount recorded for
the three month period ended June 30, 1995. Fees on the LCB Club account (the
Bank's low cost checking account service) and overdraft fees were the primary
sources for the increase. Adjustments to the schedule of deposit account fees
also contributed to this increase.
Other income (net) consists of normal recurring fee income, as well as
other income that management classifies as nonrecurring. Other income (net)
increased 37.1 percent or $229,000 to $847,000 for the six month period ended
June 30, 1996, as compared to the same period in 1995. It increased $139,000
or 44.0 percent for the three months ended June 30, 1996, as compared to the
same months in 1995. Recurring components of other income increased 31.6
percent during the first six months of 1996, as compared to the first six
months of 1995, and increased 53.7 percent for the three months of the second
quarter of 1996, as compared to the three months of the second quarter of
1995. The major increase for the first six months was in mortgage service
fees. The nonrecurring components of other income increased $68,000 or 66.0
percent for the first six months of 1996, as compared to the same period in
1995. The majority of this increase was from other real estate owned income.
The profits from the sale of mortgages during the six month period ended
June 30, 1996, totaled $221,000, as compared to $52,000 during the same period
in 1995. For the second quarter of 1996 only, these profits were $121,000 as
compared to $35,000 for the same period in 1995. These increases from the
prior periods are a reflection of a lower rate environment which has increased
the volume of mortgages originated and the adoption of SFAS No. 122. The
impact of adopting SFAS No. 122 was to increase the profits on the sale of
mortgage loans during the first six months of 1996 by approximately $126,000.
Net investment security gains (losses) amounted to $(6,000) and $(4,000)
for the six and three month periods ended June 30, 1996, as compared to
$(23,000) and $(7,000) for the six and three month periods ended June 30,
1995. In the first six months of 1996 and 1995, special calls of zero coupon
bonds were responsible for these small losses. Additional calls are expected
in future periods.
Noninterest Expense
Noninterest expense increased $584,000 or 7.4 percent to $8,497,000 for
the six month period ended June 30, 1996, as compared to the first six months
of 1995. Noninterest expense increased $186,000 or 4.6 percent when comparing
the three months ended June 30, 1996, to the three months ended June 30, 1995.
For the six months ended June 30, 1996, salaries and employee benefits
increased to $4,618,000, a $593,000 increase or 14.7 percent as compared to
the first six months of 1995. When comparing the three months ended June 30,
1996, to the same period in 1995, the increase was $321,000 or 15.6 percent.
These increases reflect the staffing of the Middlebury, LaGrange, Elkhart
Concord, Rochester and Kendallville locations, as well as normal salary
increases. Full-time equivalent employees increased to 310 at June 30, 1996,
from 284 at June 30, 1995.
For the six and three month periods ended June 30, 1996, occupancy and
equipment expenses were $1,413,000 and $690,000 respectively, a $161,000
increase or 12.9 percent and $58,000 or 9.2 percent from the same periods one
year ago. This performance reflects the ordinary timing differences incurred
with these types of expenses, as well as additional occupancy expense related
to the new locations added in 1996 and 1995. These expenses are expected to
continue to increase in 1996 with the Bank's continued growth and expansion.
For the six month period ended June 30, 1996, other expenses totaled
$2,466,000 as compared to $2,636,000 during the same period in 1995. This is a
decrease of 6.5 percent or $170,000. For the second quarter of 1996 as
compared to the second quarter of 1995 the decrease was $193,000 or 13.8
percent. Increases in business development, data processing, supplies,
telephone, postage and other miscellaneous expenses were offset by a decline
in professional and regulatory fees. When comparing the six months ended June
30, 1996, to the six months ended June 30, 1995, other expenses, excluding
professional and regulatory fees, increased $286,000. This was offset by a
$456,000 decrease in professional and regulatory fees resulting from the
reduction in FDIC insurance fees. When comparing the three months ended June
30, 1996, to the three months ended June 30, 1995, other expense, excluding
professional and regulatory fees, increased $44,000. This was offset by a
$237,000 decrease in professional and regulatory fees resulting from the
reduction in FDIC insurance fees.
Income Before Income Tax Expense
As a result of the above factors, income before income tax expense
increased to $5,026,000 for the first six months of 1996, as compared to
$4,038,000 for the same period in 1995. This is an increase of $988,000 or
24.5 percent. For the three months ended June 30, 1996, as compared to the
three months ended June 30, 1995, the increase in income before income tax
expense was $692,000 or 34.7 percent.
Income Tax Expense
Income tax expense increased to $1,808,000 for the first six months of
1996, as compared to $1,385,000 for the same period in 1995. This is a
$423,000 or 30.5 percent increase. Income tax expense for the second quarter
of 1996 increased $325,000 or 50.2 percent as compared to the second quarter
of 1995.
The combined State franchise tax expense and the Federal income tax
expense as a percent of income before income tax expense increased to 36.0
percent during the first six months of 1996, as compared to 34.3 percent
during the same period in 1995. It increased to 36.2 percent for the three
months ended June 30, 1996, as compared to 32.5 percent for the same three
months in 1995. 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
$3,218,000 for the first six months of 1996, an increase of $565,000 or 21.3
percent from the $2,653,000 recorded over the same period in 1995. Earnings
per share for the first six months of 1996 were $1.11 per share as compared to
$.92 per share for the first six months of 1995. The 1996 and 1995 earnings
per share have been restated to reflect a two-for-one stock split on April 30,
1996. For the three months ended June 30, 1996, net income was $1,714,000 as
compared to $1,347,000 for the three months ended June 30, 1995, an increase
of $367,000 or 27.2 percent.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 1996
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on April 9, 1996, the
shareholders voted on a proposal to increase the capital stock of the
Corporation from 2,750,000 shares to 10,000,000 shares. The Articles of
Incorporation of Lakeland Financial Corporation require an affirmative vote of
two-thirds of the issued and outstanding shares of the Corporation in order to
increase the capital stock. At the annual meeting there were 1,138,676 votes
for the increase and 56,411 against. All abstentions and non-votes were
treated as no vote. In order for the proposal to pass there needed to be
965,664 shares voted for the proposal. There being more than the required
two-thirds vote for the proposal to increase the capital stock, the proposal
passed.
There were no other submissions of matters to a vote by security holders
during the quarter ended June 30, 1996.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 1996
Part II - Other Information
Item 5 - Other Information
Subsequent to the shareholder approval to increase the common stock of
the Corporation, the Board of Directors of the Corporation declared a
two-for-one stock split at their regularly scheduled meeting. The record date
for the split was April 30, 1996, with new certificates issued on May 15,
1996.
At their regularly scheduled meeting on May 14, 1996, the Board of
Directors of Lakeland Financial Corporation approved the restated Articles of
Incorporation and the restated By-Laws of Lakeland Financial Corporation.
At their regularly scheduled meeting on June 11, 1996, the Board of
Directors of Lake City Bank approved the restated Articles of Incorporation
and the restated By-Laws of Lake City Bank.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 1996
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit 3(i) Restated Articles of Incorporation of Lakeland
Financial Corporation
Exhibit 3(i) Restated Articles of Incorporation of Lake City Bank
Exhibit 3(ii) Restated By-Laws of Lakeland Financial Corporation
Exhibit 3(ii) Restated By-Laws of Lake City Bank
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Registrant during the last
32 weeks ending August 9, 1996.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 1996
Part II - Other Information
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
(Registrant)
Date: August 9, 1996 R. Douglas Grant
R. Douglas Grant - President
Date: August 9, 1996 Terry M. White
Terry M. White - Secretary/Treasurer
EXHIBIT INDEX
Exhibit
No. Description Page
------- ------------------------------------------- -------
3(i) Restated Articles of Incorporation of
Lakeland Financial Corporation
3(i) Restated Articles of Incorporation of
Lake City Bank
3(ii) Restated By-Laws of Lakeland Financial
Corporation
3(ii) Restated By-Laws of Lake City Bank
27 Financial Data Schedule (EDGAR filing only)