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, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-11487
LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1559596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
202 East Center Street
P.O. Box 1387, Warsaw, Indiana 46581-1387
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219)267-6144
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at June 30, 1997
Common Stock, $.50 Stated Value 2,902,502
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 1997 and December 31, 1996
(in thousands)
(Unaudited)
(Page 1 of 2)
June 30, December 31,
1997 1996
----------- -----------
ASSETS
- ------
Cash and cash equivalents
Cash and due from banks $ 37,579 $ 41,190
Short-term investments 818 3,689
----------- -----------
Total cash and cash equivalents 38,397 44,879
Securities available-for-sale
U. S. Treasury and government agency securities 28,983 31,804
Mortgage-backed securities 47,132 46,839
State and municipal securities 2,156 2,167
Other debt securities 1,419 1,032
----------- -----------
Total securities available-for-sale
(carried at fair value) 79,690 81,842
Securities held-to-maturity
U. S. Treasury and government agency securities 21,651 17,020
Mortgage-backed securities 85,426 86,073
State and municipal securities 22,427 21,172
Other debt securities 3,177 1,009
----------- -----------
Total securities held-to-maturity
(fair value of $133,885 at
June 30, 1997, and $126,373
at December 31, 1996) 132,681 125,274
Real estate mortgages held-for-sale 926 895
Loans:
Total loans 412,483 382,265
Less: Allowance for loan losses 5,301 5,306
----------- -----------
Net loans 407,182 376,959
Land, premises and equipment, net 17,604 16,014
Accrued income receivable 4,437 4,254
Other assets 6,598 6,434
----------- -----------
Total assets $ 687,515 $ 656,551
=========== ===========
(Continued)
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 1997 and December 31, 1996
(in thousands)
(Unaudited)
(Page 2 of 2)
June 30, December 31,
1997 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Deposits:
Noninterest bearing deposits $ 84,245 $ 77,664
Interest bearing deposits 441,753 418,889
----------- -----------
Total deposits 525,998 496,553
Short-term borrowings
Federal funds purchased 3,300 0
U.S. Treasury demand notes 4,000 2,769
Securities sold under agreements
to repurchase 77,403 85,611
----------- -----------
Total short-term borrowings 84,703 88,380
Accrued expenses payable 5,151 5,033
Other liabilities 941 1,011
Long-term debt 25,383 23,531
----------- -----------
Total liabilities 642,176 614,508
Commitments, off-balance sheet risks
and contingencies
STOCKHOLDERS' EQUITY
- --------------------
Common stock: $.50 stated value, 10,000 shares
authorized, 2,903 shares issued and outstanding
as of June 30, 1997, and 2,897 shares issued and
outstanding at December 31, 1996 1,453 1,448
Additional paid-in capital 8,537 8,232
Retained earnings 35,122 31,967
Unrealized net gain (loss) on securities available-for-sale 370 396
Treasury stock (143) 0
----------- -----------
Total stockholders' equity 45,339 42,043
----------- -----------
Total liabilities and stockholders' equity $ 687,515 $ 656,551
=========== ===========
<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, 1997, and 1996
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 9,650 $ 8,033 $ 18,606 $ 15,821
Tax exempt 57 60 115 121
----------- ----------- ----------- -----------
Total loan income 9,707 8,093 18,721 15,942
Short-term investments 59 27 145 60
Securities:
U.S. Treasury and government agency securities 789 696 1,552 1,329
Mortgage-backed securities 2,195 2,026 4,311 4,014
State and municipal securities 356 346 703 686
Other debt securities 74 79 148 170
----------- ----------- ----------- -----------
Total interest and dividend income 13,180 11,267 25,580 22,201
INTEREST EXPENSE
- ----------------
Interest on deposits 5,207 4,485 10,074 9,033
Interest on short-term borrowings 1,290 992 2,603 1,867
Interest on long-term debt 335 277 569 549
----------- ----------- ----------- -----------
Total interest expense 6,832 5,754 13,246 11,449
----------- ----------- ----------- -----------
NET INTEREST INCOME 6,348 5,513 12,334 10,752
- -------------------
Provision for loan losses 60 30 120 60
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,288 5,483 12,214 10,692
- ------------------------- ----------- ----------- ----------- -----------
NONINTEREST INCOME
- ------------------
Trust fees 281 213 640 499
Service charges on deposit accounts 827 692 1,566 1,270
Other income (net) 676 455 1,073 847
Net gains on the sale of real estate mortgages held-for-sale 120 121 224 221
Net securities gains (losses) (18) (4) (18) (6)
----------- ----------- ----------- -----------
Total noninterest income 1,886 1,477 3,485 2,831
(Continued)
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 1997, and 1996
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 2,721 2,381 5,261 4,618
Occupancy and equipment expense 774 690 1,557 1,413
Other expense 1,330 1,202 2,663 2,466
----------- ----------- ----------- -----------
Total noninterest expense 4,825 4,273 9,481 8,497
INCOME BEFORE INCOME TAX EXPENSE 3,349 2,687 6,218 5,026
- --------------------------------
Income tax expense 1,149 973 2,191 1,808
----------- ----------- ----------- -----------
NET INCOME $ 2,200 $ 1,714 $ 4,027 $ 3,218
- ---------- =========== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING (Note 2) 2,902,502 2,896,992 2,903,563 2,896,992
EARNINGS PER COMMON SHARE
- -------------------------
Net Income (Note 2) $ 0.76 $ 0.59 $ 1.39 $ 1.11
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1997 and 1996
(in thousands except for shares)
(Unaudited)
Unrealized
Net Gain (Loss)
Common Stock Additional on Securities Total
---------------------- Paid-in Retained Available- Treasury Stockholders'
Shares Amount Capital Earnings For-Sale Stock Equity
---------- -------- ---------- ---------- ------------- -------- ------------
Balances, January 1, 1996 1,438,496 $ 1,438 $ 7,827 $ 26,858 $ 631 $ 0 $ 36,754
Net income for 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) $ 0 $ 39,009
========== ======== ========== ========== ============= ======== ============
Balances, January 1, 1997 2,896,992 $ 1,448 $ 8,232 $ 31,967 $ 396 $ 0 $ 42,043
Net income for six months
ended June 30, 1997 4,027 4,027
Net change in unrealized net gain (loss)
on securities available-for-sale (26) (26)
Issued 10,000 shares of previously
authorized, unissued shares 10,000 5 305 310
Acquired 4,490 shares of treasury stock (4,490) (143) (143)
Cash dividends declared -
$.30 per share (872) (872)
---------- -------- ---------- ---------- ------------- -------- ------------
Balances, June 30, 1997 2,902,502 $ 1,453 $ 8,537 $ 35,122 $ 370 $ (143) $ 45,339
========== ======== ========== ========== ============= ======== ============
<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, 1997 and 1996
(in thousands)
(Unaudited)
(Page 1 of 2)
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 4,027 $ 3,218
----------- -----------
Adjustments to reconcile net income to net cash
from operating activites:
Depreciation 668 625
Provision for loan losses 120 60
Loans originated for sale (12,105) (17,076)
Net (gain) loss on sale of loans (224) (221)
Proceeds from sale of loans 12,298 17,019
Net (gain) loss on sale of premises and equipment 4 21
Net (gain) loss on calls of securities held-to-maturity 18 6
Net securities amortization (accretion) 17 166
Increase (decrease) in taxes payable 466 536
(Increase) decrease in income receivable (183) (159)
Increase (decrease) in accrued expenses payable (63) (291)
(Increase) decrease in other assets (266) (728)
Increase (decrease) in other liabilities (70) 29
----------- -----------
Total adjustments 680 (13)
----------- -----------
Net cash from operating activities 4,707 3,205
----------- -----------
Cash flows from investing activities:
Proceeds from maturities and calls of securities held-to-maturity 5,648 3,818
Proceeds from maturities and calls of securities available-for-sale 19,091 5,940
Purchases of securities available-for-sale (16,963) (8,311)
Purchases of securities held-to-maturity (13,108) (10,343)
Proceeds from sales of securities available-for-sale 0 0
Net (increase) decrease in total loans (30,510) (22,066)
Purchases of land, premises and equipment (2,262) (1,389)
----------- -----------
Net cash from investing activities (38,104) (32,351)
----------- -----------
(Continued)
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996
(in thousands)
(Unaudited)
(Page 2 of 2)
1997 1996
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in total deposits $ 29,445 $ 36,349
Proceeds from short-term borrowings 467,972 389,963
Payments on short-term borrowings (471,649) (385,180)
Proceeds from long-term borrowings 10,000 2,000
Payments on long-term borrowings (8,148) 0
Dividends paid (872) (639)
Proceeds from sale of common stock 310 415
Purchase of treasury stock (143) 0
----------- -----------
Net cash from financing activities 26,915 42,908
----------- -----------
Net increase (decrease) in cash and cash equivalents (6,482) 13,762
Cash and cash equivalents at beginning of the period 44,879 26,895
----------- -----------
Cash and cash equivalents at end of the period $ 38,397 $ 40,657
=========== ===========
Cash paid during the period for:
Interest $ 13,097 $ 11,190
=========== ===========
Income taxes $ 1,743 $ 1,685
=========== ===========
Loans transferred to other real estate $ 167 $ 0
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This report is filed for Lakeland Financial Corporation (the Company) 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 Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate and do not make the information presented misleading.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's latest annual report and Form 10-K. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair statement of the results for interim periods are
reflected in the quarterly statements 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, 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. The average
common shares outstanding for 1997 reflect the acquisition of 4,490 shares of
Lakeland Financial Corporation common stock to offset a liability for a
directors' deferred compensation plan. This stock is classified as treasury
stock for financial reporting.
(Intentionally left blank)
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
June 30, 1997
FINANCIAL CONDITION
The financial statements reflect the Company's continued growth within
traditional markets and expansion into new market areas. The Elkhart Northwest
office of the Company at 1208 North Nappanee Street, Elkhart, IN, opened on
April 21, 1997, and the Granger office at 12830 State Road 23, Granger, IN,
opened on May 29, 1997. The construction of the Mishawaka office continues
with the opening planned for later this year. The Company has also purchased
property at 862 E. Jefferson Street, Plymouth, IN, and has received regulatory
approval to establish a full-service office at that location.
Total assets of the Company were $687,515,000 as of June 30, 1997. This
is an increase of $30,964,000 or 4.7 percent from $656,551,000 reported at
December 31, 1996. Total loans were $412,483,000 at June 30, 1997. This is an
increase of $30,218,000 or 7.9 percent from the December 31, 1996, balance.
Total securities (including available-for-sale (AFS) and held-to-maturity
(HTM)) increased $5,255,000 or 2.5 percent to $212,371,000 as of June 30,
1997, from $207,116,000 at December 31, 1996. Earning assets increased to
$626,598,000 at June 30, 1997. This is an increase of $32,633,000 or 5.5
percent from the December 31, 1996, total of $593,965,000.
Total deposits and securities sold under agreements to repurchase
(repurchase agreements) consist primarily of funds generated within the
Company's primary market area as defined by its Community Reinvestment Act
(CRA) statement. At June 30, 1997, these funds totaled $603,401,000. This
represented a $21,237,000 or 3.6 percent increase from December 31, 1996. The
growth has been primarily in certificates of deposit which increased
$30,834,000 or 10.0 percent from the balance at December 31, 1996. In addition
to these local funding sources, the Company 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
$636,084,000 at June 30, 1997. This is a $27,620,000 or 4.5 percent increase
from $608,464,000 reported at December 31, 1996.
On an average daily basis, total earning assets increased 14.1 percent
and 14.2 percent for the three month period and the six month period ended
June 30, 1997, respectively, as compared to similar periods ended June 30,
1996. On an average daily basis, total deposits and purchased funds increased
14.4 percent and 14.5 percent for the three month period and six month period
ended June 30, 1997, as compared to the three month period and six month
period ended June 30, 1996.
The Company's investment portfolio consists of U.S. Treasuries, agencies,
mortgage-backed securities, municipal bonds, and corporates. During 1997, new
investments have been primarily U.S. Treasuries, municipal bonds and
mortgage-backed securities. At June 30, 1997, and December 31, 1996, the
Company's investment in mortgage-backed securities comprised approximately
62.4 and 64.2 percent, respectively, of the total securities and consisted
mainly of CMO's and mortgage pools issued by GNMA, FNMA and FHLMC. As such,
these securities are backed directly or indirectly by the Federal Government.
All mortgage-backed securities purchased conform to the FFIEC high risk
standards which prohibit the purchase of securities that have excessive price,
prepayment, extension and original life risk characteristics. The Company uses
Bloomberg analytics to evaluate and monitor all purchases. At June 30, 1997,
the mortgage-backed securities in the HTM portfolio had a three year average
life, with a potential for approximately 9 percent price depreciation should
rates increase 300 basis points and approximately 7 percent price appreciation
should rates decrease 300 basis points. The mortgage-backed securities in the
AFS portfolio had a two year average life and a potential for approximately 7
percent price depreciation should rates move up 300 basis points and
approximately 5 percent price appreciation should rates move down 300 basis
points. As of June 30, 1997, all mortgage-backed securities continue to be in
compliance with FFIEC guidelines and are performing in a manner consistent
with management's original expectations.
The Company's AFS portfolio is managed with consideration given to
factors such as the Company's capital levels, growth prospects,
asset/liability structure and liquidity needs. At June 30, 1997, the AFS
portfolio constituted 37.5 percent of the total security portfolio. During the
first six months of 1997 purchases for the HTM and AFS portfolios were
$13,108,000 and $16,963,000, respectively. At June 30, 1997, the net after-tax
unrealized gain in the AFS portfolio included in stockholders' equity was
$370,000, a decrease of $26,000 from the unrealized gain included in
stockholders' equity at December 31, 1996. Since the securities portfolio is
primarily fixed rate, a negative equity adjustment 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 $30,218,000 to
$412,483,000 as of June 30, 1997, from $382,265,000 at December 31, 1996. Loan
growth is net of loans reclassified to other real estate. The Company
continues to experience good loan demand. Commercial loans at June 30, 1997,
increased 10.2 percent from the level at December 31, 1996. Retail loans at
June 30, 1997, increased 5.9 percent from December 31, 1996. Real estate loans
(excluding mortgages held-for-sale) increased 2.3 percent from December 31,
1996. The balances in the real estate loan portfolio are impacted by the sale
of real estate mortgages in the secondary market and the level of refinance
and new mortgage activity in the existing rate environment.
The Company had 61.3 percent of its loans concentrated in commercial
loans at June 30, 1997, and 60.1 percent at December 31, 1996. Traditionally,
this type of lending may have more credit risk than other types of lending.
This is attributed to the fact that individual commercial loans are generally
larger than residential real estate and retail loans, and because the type of
borrower and purpose of commercial loans are not as homogeneous as with
residential and retail customers. The Company manages this risk by pricing to
the perceived risk of each individual credit, and by diversifying the
portfolio by customer, product, industry and geography. Customer
diversification is accomplished through a relatively low administrative loan
limit of $4,500,000. Product diversification is accomplished by offering a
wide variety of financing options. Management reviews the loan portfolio to
ensure loans are diversified by industry. The loan portfolios are distributed
throughout the Company's principal trade area, which encompasses nine counties
in Indiana. Other than loans disclosed elsewhere in this filing as past-due,
nonaccrual or restructured, the Company is not aware of any loans classified
for regulatory purposes at June 30, 1997, that are expected to have a material
impact on the Company's future operating results, liquidity or capital
resources. The Company 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 Company 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 1997 the Company originated
mortgages for sale totaling $10,605,000 as compared to $11,784,000 during the
first six months of 1996. This program of mortgage sales continues to produce
the liquidity needed to meet the mortgage needs of the markets served by the
Company, and to generate a long-term servicing portfolio. As a part of the CRA
commitment to making real estate financing available in all markets, the
Company continues to originate non-conforming loans which are held to maturity
or prepayment.
Loans renegotiated as troubled debt restructuring are those loans for
which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the terms of the loan. Loans renegotiated as troubled debt
restructurings totaled $1,423,000 at June 30, 1997, as compared to $1,284,000
at December 31, 1996. The loans classified as troubled debt restructurings at
June 30, 1997, are performing in accordance with the modified terms. At June
30, 1997, there were no loans that would be considered impaired as defined in
SFAS Nos. 114 and 118.
The Indiana State legislature has enacted laws relating to a state
chartered bank's legal lending limit, by adopting the basic regulations
applied by the Office of the Comptroller of the Currency (OCC) to national
banks. These guidelines set overall limits on lending activity, but actual
bank limits are subject to Board of Director approval. Based upon these new
regulations, the Company's June 30, 1997 legal loan limit was approximately
$7,496,000. The legal loan limit will continue to increase as the Company's
combined equity and allowance for loan losses continues to increase. At its
February 11, 1997, meeting, the Company's Board of Directors modestly
increased the Company's policy limit by $500,000, to $4,500,000 for any one
borrower. With a relatively low administrative loan limit of $4,500,000, the
Company's loan portfolios consist primarily of loans to consumers and small
businesses.
For the first six months of 1997, loans have been increasing slightly
faster than deposits. The increase in loans is also affected by the sale of
mortgage loans in the secondary market as discussed earlier. While demand
accounts have increased $6,581,000 during the first six months of 1997, other
transaction accounts have decreased $7,971,000 during the same period. During
this period there has been a significant increase in time deposits which
increased $30,834,000 or 10.0 percent. During this six month period, loans
increased $30,218,000 or 7.9 percent. As a result of these loan and deposit
trends, the Company's average daily loans/deposits ratio amounted to 79.0
percent at June 30, 1997, which is an increase from 78.8 percent at year-end
1996. The Company's average daily loans/total deposits and repurchase
agreements ratio amounted to 71.3 percent at June 30, 1997. This is an
increase from 70.0 percent at year-end 1996.
The Company, through its Asset/Liability Committee (ALCO), manages
interest rate risk by monitoring both its GAP position and the computer
simulated earnings impact of various rate scenarios. The Company then modifies
its long-term risk parameters by attempting to generate the type of loans,
investments, and deposits that currently fit ALCO needs. The current long-term
guideline approved by the Board of Directors defines a neutral rate
sensitivity ratio (GAP/Total Assets) as plus or minus 20 percent. However, the
ALCO is authorized to manage this ratio outside these limits on a short-term
basis, as the committee's expectation of interest rates dictates. Management
has estimated that as of June 30, 1997, the Company's GAP/Total Assets ratios
were (9.9) percent, (13.9) percent, and (12.5) 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, 1996, three, six, and twelve month GAP ratios were (5.9) percent, (12.3)
percent, and (17.6) percent respectively.
Management supplements the GAP analysis with a computer simulation
approach to manage the interest rate risk of the Company. This computer
simulation analysis measures the net interest income impact of a 300 basis
point change in interest rates during the next 12 months. If the change in net
interest income is less than 3 percent of primary capital, the balance sheet
structure is considered to be within acceptable risk levels. At June 30, 1997,
the Company's potential pretax exposure was within the Company's policy limit.
This policy was last reviewed and approved by the Board of Directors in May,
1997.
The Company is a member of the FHLB of Indianapolis. Membership has
enabled the Company to participate in the housing programs sponsored by the
FHLB, thereby enhancing the Company's ability to offer additional programs
throughout its trade area. At its meeting in March, 1996, the Board of
Directors of the Company passed a resolution authorizing the Company to borrow
up to $50 million under the FHLB program. As of June 30, 1997, the borrowings
from the FHLB totaled $25,300,000 with $10,000,000 due April 27, 1998,
$4,000,000 due December 7, 1998, $10,000,000 due December 28, 1998, and
$1,300,000 due June 24, 2003. All borrowings are collateralized by residential
real estate mortgages. Membership in the FHLB requires an equity investment in
FHLB stock. The amount required is computed annually, and is based upon a
formula which considers the Company's total investment in residential real
estate loans, mortgage-backed securities and any FHLB advances outstanding at
year-end. The Company's investment in FHLB stock at June 30, 1997, was
$2,839,200.
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, 1997, the Company's ratios were 6.5 percent, 10.0 percent and 11.2
percent, respectively, excluding the SFAS No. 115 adjustment. These are
comparable to the ratios of 6.3 percent, 9.9 percent and 11.2 percent reported
at December 31, 1996, respectively, and ratios of 6.3 percent, 10.1 percent
and 11.3 percent reported at June 30, 1996, respectively. All ratios continue
to be above "well capitalized" levels.
The Company was examined by the Indiana Department of Financial
Institutions (DFI) as of March 31, 1997, in May, 1997. The Company 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 $3,296,000 or 7.8 percent from
December 31, 1996, to $45,339,000 at June 30, 1997. Net income of $4,027,000,
less dividends of $872,000, less the decrease in the unrealized net gain on
securities available for sale of $26,000, plus $310,000 from the issuance of
common stock, less $143,000 for the cost of treasury stock acquired comprise
this increase.
Total Company assets have grown from $356,979,000 at June 30, 1992, to
$687,515,000 at June 30, 1997. This is an increase of $330,536,000 or 92.6
percent which equates to a 14.0 percent rate of growth per year. Stockholders'
equity has increased from $22,435,000 to $45,339,000 for the same time period.
That is an increase of $22,904,000 or 102.1 percent which equates to a 15.1
percent rate of growth per year. Net income for the six months ended June 30,
1992, compared to the net income for the same period of 1997, increased
$2,302,000 or 133.4 percent from $1,725,000 to $4,027,000. From June 30, 1992,
to June 30, 1997, the number of Lake City Bank offices increased from 19 to
33. This growth has been funded through results of operation and existing
capital.
RESULTS OF OPERATIONS
Net Interest Income
For the six month period ended June 30, 1997, total interest and dividend
income increased $3,379,000 or 15.2 percent to $25,580,000, from $22,201,000
during the same six months of 1996. Interest and dividend income increased
$1,913,000 or 17.0 percent for the three month period ended June 30, 1997, as
compared to the three month period ended June 30, 1996. Daily average earning
assets for the first two quarters of 1997 increased to $618,923,000, a 14.2
percent increase over the same period in 1996. For the second quarter alone,
the daily average earning assets increased to $628,531,000 or 14.1 percent
increase over the daily average earning assets of the second quarter of 1996.
The tax equivalent yields on average earning assets increased by 7 basis
points for the six month period ended June 30, 1997, when compared to the same
respective period of 1996. For the three month period ended June 30, 1997,
this yield increased 24 basis points over the yield for the three month period
ended June 30, 1996.
The increase in the yield on average earning assets was mainly due to
rising interest rates. The Company's investment portfolio, which is primarily
fixed rate, experienced a 17 basis point increase in yield between the first
six months of 1997 compared to the first six months of 1996. The 8 basis point
reduction in the overall tax equivalent yield on loans for the first two
quarters of 1997 as compared to the first two quarters of 1996 was offset by
good loan demand. Strong local economies and expansion into new markets
produced growth in average daily loan balances of 18.6 percent between the
first two quarters of 1997 and the same period of 1996. This growth in loan
balances, coupled with the decline in average yield, resulted in a 17.4
percent increase in total loan income to $18,721,000 during the first six
months of 1997, from $15,942,000 reported for the first six months of 1996.
For the three months ended June 30, 1997, as compared to the same period for
1996, loan income increased $1,614,000 or 19.9 percent from $8,093,000 to
$9,707,000.
Total security income amounted to $6,714,000 for the six month period
ended June 30, 1997, and $3,414,000 for the three month period ended June 30,
1997. This compares to the $6,199,000 and $3,147,000 recorded for the same
periods in 1996. These increases in income reflect increases in average daily
balances of 5.2 percent and 4.9 percent, respectively, and security yield
increases of 17 basis points and 20 basis points, respectively, when comparing
the six and three months ending June 30, 1997, to the same periods for 1996.
Income from short-term investments amounted to $145,000 for the six month
period ended June 30, 1997 and $59,000 for the three month period ended June
30, 1997. This compares to $60,000 and $27,000 for the same respective periods
in 1996. The difference in the short-term investment income for the six months
ending June 30, 1997, compared to the six months ending June 30, 1996, results
from a higher average balance in short-term investments during the six months
of 1997, partially offset by a 26 basis point reduction in the tax equivalent
yield. The higher income for the three months ending June 30, 1997, as
compared to the three months ending June 30, 1996, is due to a $2,248,000
increase in the average daily balance along with a 16 basis point increase in
the tax equivalent yield.
Total interest expense increased $1,797,000 or 15.7 percent to
$13,246,000 for the six month period ended June 30, 1997, from $11,449,000 for
the six month period ended June 30, 1996, and it increased $1,078,000 or 18.7
percent for the three month period ended June 30, 1997, from the $5,754,000
for the three month period ended June 30, 1996. This is a result of the
overall growth of deposits and the change in the deposit mix. On an average
daily basis, total deposits (including demand deposits) increased 11.3 percent
and 12.3 percent for the six and three month periods ended June 30, 1997, as
compared to the similar periods ended June 30, 1996. When comparing these same
periods, the average daily balances of the demand deposit accounts rose
$8,476,000 and $7,263,000, respectively, while the average daily balances of
savings and transaction accounts combined rose $1,885,000 and $1,859,000,
respectively. The average daily balance of time deposits, which pay a higher
rate of interest as compared to demand deposit and transaction accounts,
increased $39,305,000 and $45,726,000 for the six and three months ended June
30, 1997, compared to the six and three months ended June 30, 1996. On an
average daily basis, total deposits (including demand deposits) and purchased
funds increased 14.5 percent and 14.4 percent for the six and three month
periods ended June 30, 1997, as compared to the six and three month periods
ended June 30, 1996. The Company's daily cost of funds during the six month
period ended June 30, 1997, increased 4 basis points when compared to the same
period of 1996, and increased 16 basis points when comparing the three month
periods ended June 30, 1997 and June 30, 1996.
The net effect of all factors affecting total interest and dividend
income and total interest expense was to increase net interest income. For the
six month period ended June 30, 1997, net interest income totaled $12,334,000,
an increase of 14.7 percent or $1,582,000 over the first six months of 1996.
For the three month period ended June 30, 1997, net interest income totaled
$6,348,000, an increase of $835,000 or 15.1 percent over the three months
ended June 30, 1996.
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 Company to maintain the allowance for loan losses
at a level that is deemed appropriate based upon loan loss experience, the
nature of the portfolio, the growth 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 Company 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 (primarily in the
commercial loan portfolio) for unfavorable collectibility factors (including
impairment) and assesses the requirement for specific reserves on such
credits. For those loans not subject to specific reviews, management reviews
previous loan loss experience to establish historical ratios and trends in
charge-offs by loan category. The ratios of net charge-offs to particular
types of loans enables management to establish charge-offs in future periods
by loan category and thereby establish appropriate reserves for loans not
specifically reviewed.
2. Management reviews the current and anticipated economic conditions of
its lending market to determine the effects on future loan charge-offs by loan
category, in addition to the effects on the loan portfolio as a whole.
3. Management reviews delinquent loan reports to determine risk of future
loan charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Given this methodology for determining the adequacy of the loan loss
reserve, the provision for loan losses was modestly higher in 1997, as
compared to 1996. The provision amounted to $120,000 and $60,000,
respectively, for the six month periods ended June 30, 1997 and 1996. These
provisions reflect the modest levels of past due accruing loans (90 days or
more) and nonaccrual loans over the same periods. These levels of
non-performing loans reflect both the general economic conditions that have
promoted growth and expansion in the Company's trade area during the last
several years, and a credit risk management strategy that promotes
diversification.
The Company increased its provision for loan losses to $120,000 for the
first six months of 1997 versus $60,000 for the same period in 1996. This
increase was in response to continued good loan growth in the first six months
of 1997. The Company is currently evaluating the provision for loan losses for
the third and fourth quarters of 1997, as a result of the Company's expansion
into new markets and the continued strong commercial loan growth.
As of June 30, 1997, loans delinquent 30 days or more that were included
in the accompanying financial statements as accrual loans totaled
approximately $4,146,000. At June 30, 1997, there were loans totaling $266,000
on nonaccrual. At December 31, 1996, there were $2,070,000 in loans delinquent
30 days or more included as accruing loans in the financial statements and
$384,000 in nonaccrual loans. During the second quarter of 1997, loans
totaling $167,000 were transferred into other real estate owned.
As part of the loan review process, management also reviews all loans
classified as `special mention' or below, as well as other loans that might
warrant application of SFAS No. 114 and SFAS No. 118, `Accounting by Creditors
for Impairment of a Loan'. As of June 30, 1997, no loans were considered
impaired.
Following is a summary of the loan loss experience for the six months
ending June 30, 1997, and the year ending December 31, 1996.
June 30, December 31,
1997 1996
------------ ------------
(in thousands)
Amount of loans outstanding $ 412,483 $ 382,265
------------ ------------
Average daily loans outstanding for the
period $ 402,184 $ 352,811
------------ ------------
Allowance for loan losses at the
beginning of the period $ 5,306 $ 5,472
Charge-offs
Commercial 50 171
Real estate 0 0
Installment 100 158
Credit card and personal lines of credit 19 39
------------ ------------
Total charge-offs 169 368
Recoveries
Commercial 16 12
Real estate 0 0
Installment 25 54
Credit card and personal lines of credit 3 16
------------ ------------
Total recoveries 44 82
------------ ------------
Net charge-offs 125 286
Provision charged to expense 120 120
------------ ------------
Allowance for loan losses at the end of
the period $ 5,301 $ 5,306
============ ============
Ratio of net charge-offs during the period
to average daily loans during the period (annualized)
Commercial 0.02% 0.04%
Real estate 0.00% 0.00%
Installment 0.04% 0.03%
Credit card and personal credit lines 0.00% 0.01%
------------ ------------
Total 0.06% 0.08%
============ ============
Net interest income after provision for loan losses totaled $12,214,000
and $6,288,000 for the six and three month periods ended June 30, 1997. This
represents increases of 14.2 percent and 14.7 percent over the same respective
periods ended June 30, 1996.
Noninterest Income
Total noninterest income increased $654,000 or 23.1 percent to $3,485,000
for the six month period ended June 30, 1997, from $2,831,000 recorded for the
six month period ended June 30, 1996. Total noninterest income for the three
month period ended June 30, 1997, was $1,886,000 which was $409,000 or 27.7
percent higher than the noninterest income for the three months ended June 30,
1996.
Trust fees, which represent basic recurring service fee income, increased
$141,000 or 28.3 percent to $640,000 for the six month period ended June 30,
1997, as compared to $499,000 for the first six months of 1996. For the three
month period ended June 30, 1997, trust fees were $281,000, an increase of
$68,000 over the fees for the same period in 1996. The major fee increases
were in testamentary trust fees, employee benefit plan fees and stock transfer
service fees.
Service charges on deposit accounts increased 23.3 percent or $296,000
during the six month period ended June 30, 1997, totaling $1,566,000, as
compared to the same period in 1996. These service charges increased $135,000
for the three month period ended June 30, 1997, over the amount recorded for
the three month period ended June 30, 1996. Fees on the LCB Club account (the
Company's low cost checking account service), business checking account fees
and overdraft fees were the primary sources for the increase. These increases
reflect the growth of the Company and adjustments to the schedule of deposit
account fees implemented in 1996.
Other income (net) consists of normal recurring fee income, as well as
other income that management classifies as nonrecurring. Other income (net)
increased 26.7 percent or $226,000 to $1,073,000 for the six month period
ended June 30, 1997, as compared to the same period in 1996. It increased
$221,000 or 48.6 percent for the three months ended June 30, 1997, as compared
to the same months in 1996. The major increases in other income were in letter
of credit fees and ATM fees.
The profits from the sale of mortgages during the six month period ended
June 30, 1997, totaled $224,000, as compared to $221,000 during the same
period in 1996. For the second quarter of 1997 only, these profits were
$120,000 as compared to $121,000 for the same period in 1996. These profits
are a reflection of the steady volume of mortgages originated and sold in the
secondary market.
Net investment security gains (losses) amounted to $(18,000) and
$(18,000) for the six and three month periods ended June 30, 1997, as compared
to $(6,000) and $(4,000) for the six and three month periods ended June 30,
1996. In the first six months of 1997 and 1996, special calls of zero coupon
bonds were responsible for these small losses. Additional calls are expected
in future periods.
Noninterest Expense
Noninterest expense increased $984,000 or 11.6 percent to $9,481,000 for
the six month period ended June 30, 1997, as compared to the first six months
of 1996. Noninterest expense increased $552,000 or 12.9 percent when comparing
the three months ended June 30, 1997, to the three months ended June 30, 1996.
For the six months ended June 30, 1997, salaries and employee benefits
increased to $5,261,000, a $643,000 increase or 13.9 percent as compared to
the first six months of 1996. When comparing the three months ended June 30,
1997, to the same period in 1996, the increase was $340,000 or 14.3 percent.
These increases reflect the staffing of the Elkhart Northwest, Granger,
Hubbard Hill and Kendallville locations, as well as normal salary increases.
Full-time equivalent employees increased to 350 at June 30, 1997, from 310 at
June 30, 1996.
For the six and three month periods ended June 30, 1997, occupancy and
equipment expenses were $1,557,000 and $774,000 respectively, a $144,000
increase or 10.2 percent and $84,000 or 12.2 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 1997 and 1996. These expenses are expected to
continue to increase in 1997 with the Company's continued growth and
expansion.
For the six month period ended June 30, 1997, other expenses totaled
$2,663,000 as compared to $2,466,000 during the same period in 1996. This is
an increase of 8.0 percent or $197,000. For the second quarter of 1997 as
compared to the second quarter of 1996 the increase was $128,000 or 10.7
percent.
Income Before Income Tax Expense
As a result of the above factors, income before income tax expense
increased to $6,218,000 for the first six months of 1997, as compared to
$5,026,000 for the same period in 1996. This is an increase of $1,192,000 or
23.7 percent. For the three months ended June 30, 1997, as compared to the
three months ended June 30, 1996, the increase in income before income tax
expense was $662,000 or 24.6 percent.
Income Tax Expense
Income tax expense increased to $2,191,000 for the first six months of
1997, as compared to $1,808,000 for the same period in 1996. This is a
$383,000 or 21.2 percent increase. Income tax expense for the second quarter
of 1997 increased $176,000 or 18.1 percent as compared to the second quarter
of 1996.
The combined State franchise tax expense and the Federal income tax
expense as a percent of income before income tax expense decreased to 35.2
percent during the first six months of 1997, as compared to 36.0 percent
during the same period in 1996. It decreased to 34.3 percent for the three
months ended June 30, 1997, as compared to 36.2 percent for the same three
months in 1996. Currently the State franchise tax rate is 8.5 percent and is a
deductible expense for computing Federal income tax.
Net Income
As a result of all factors indicated above, net income increased to
$4,027,000 for the first six months of 1997, an increase of $809,000 or 25.1
percent from the $3,218,000 recorded over the same period in 1996. Earnings
per share for the first six months of 1997 were $1.39 per share as compared to
$1.11 per share for the first six months of 1996. The 1996 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, 1997, net income was $2,200,000 as compared to
$1,714,000 for the three months ended June 30, 1996, an increase of $486,000
or 28.4 percent.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 1997
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on April 8, 1997, the
shareholders voted on a proposal to amend the Articles of Incorporation. The
proposed amendment reduces the required vote to amend the Articles of
Incorporation to a simple majority of those shares voted in person or by proxy
at the annual or special meeting of the shareholders of the Company. The
Articles of Incorporation of Lakeland Financial Corporation, prior to such
amendment, required an affirmative vote of two-thirds of the issued and
outstanding shares of the Company in order to amend the Articles of
Incorporation. There were 2,903,799 votes entitled to be cast. At the annual
meeting there were 2,194,751 votes for the proposal, and 56,991 votes against
the proposal. All abstentions and non-votes were treated as no votes. In order
for the proposal to pass there needed to be 1,935,866 shares voted for the
proposal. There being more than the required two-thirds vote for the proposal,
the proposal passed.
There were no other submissions of matters to a vote by security holders
during the quarter ended June 30, 1997.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 1997
Part II - Other Information
Item 5 - Other Information
RECENT DEVELOPMENTS
On July 28, 1997, the Bank entered into a definitive agreement to
purchase selected assets and assume all of the deposits, approximately $25
million, of the branch office of NBD Bank, N.A. located in Huntington, Indiana
(the "Proposed NBD Branch Purchase"). On July 31, 1997, the Bank entered into
a definitive agreement to purchase selected assets, including approximately
$24 million of loans, and assume all of the deposits, approximately $70
million, of six branch offices of KeyCorp located in North Central Indiana
(the "Proposed KeyCorp Branch Purchases" and together with the Proposed NBD
Branch Purchase, the "Proposed Branch Purchases"). The Proposed Branch
Purchases will be accounted for as purchase transactions. In addition to
customary regulatory conditions and approvals applicable to the Proposed
Branch Purchases, the definitive agreement for the Proposed KeyCorp Branch
Purchases provides that KeyCorp may terminate the agreement, without liability
to either party, in the event that the Company, prior to October 1, 1997, has
not issued at least $15 million of trust preferred securities constituting
Tier 1 capital for bank regulatory purposes or otherwise increased its capital
such that the Company would be considered "well capitalized", as defined for
purposes of the FDICIA, on a pro forma basis giving effect to the consummation
of the transaction. Neither the Proposed NBD Branch Purchase nor the Proposed
KeyCorp Branch Purchases are conditioned upon the consummation of the other.
Regulatory applications for the Proposed Branch Purchases will be filed in the
near future and the Proposed Branch Purchases are expected to be completed in
the fourth quarter of 1997. There can be no assurance that all necessary
regulatory approvals will be obtained or that all conditions to the proposed
Branch Purchases will be satisfied such that the Proposed Branch Purchases
will be consummated.
REGULATION AND SUPERVISION
General
The Company and the Bank are extensively regulated under federal and
state law. These laws and regulations are intended to protect depositors, not
shareholders. To the extent that the following information describes statutory
or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws
or regulations may have a material effect on the business and prospects of the
Company, and the operations of the Company may be affected by legislative
changes and by the policies of various regulatory authorities. The Company is
unable to predict the nature or the extent of the effects on its business and
earnings that fiscal or monetary policies, economic controls or new federal or
state legislation may have in the future.
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"), and, as such, is subject to
regulation, supervision and examination by the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). The Company is required to
file annual reports with the Federal Reserve and to provide the Federal
Reserve such additional information as it may require.
The Bank, as an Indiana state bank, is supervised by the Indiana
Department of Financial Institutions (the "DFI") and the Federal Deposit
Insurance Corporation ("FDIC"). As such, the Bank is regularly examined by,
and is subject to regulations promulgated by, the DFI and the FDIC.
Recent and Pending Legislation
The enactment of the legislation described below has significantly
affected the banking industry generally and will have an ongoing effect on the
Company and the Bank in the future.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") reorganized and reformed the regulatory structure applicable to
financial institutions generally. FIRREA, among other things, enhanced the
supervisory and enforcement powers for the federal bank regulatory agencies,
required insured financial institutions to guaranty repayment of losses
incurred by the FDIC in connection with the failure of an affiliated financial
institution, required financial institutions to provide their primary federal
regulator with notice (under certain circumstances) of changes in senior
management and broadened authority for bank holding companies to acquire
savings institutions.
Under FIRREA, federal banking regulators have greater flexibility to
bring enforcement actions against insured institutions and
institution-affiliated parties, including cease and desist orders, prohibition
orders, civil money penalties, termination of insurance and the imposition of
operating restrictions and capital plan requirements. These enforcement
actions, in general, may be initiated for violations of laws and regulations
and unsafe or unsound practices. FIRREA also requires, except under certain
circumstances, public disclosure of final enforcement actions by the federal
banking agencies.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
adopted to recapitalize the FDIC's Bank Insurance Fund ("BIF"), which in
general insures the deposits of commercial banks such as the Bank, and imposes
certain supervisory and regulatory reforms on insured depository institutions.
FDICIA includes provisions, among others, to (i) increase the FDIC's line of
credit with the U.S. Treasury in order to provide the FDIC with additional
funds to cover the losses of federally insured banks, (ii) reform the deposit
insurance system, including the implementation of risk-based deposit insurance
premiums, (iii) establish a format for closer monitoring of financial
institutions to enable prompt corrective action by banking regulators when a
financial institution begins to experience financial difficulty and create
five capital levels for financial institutions ("well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized") that would impose more scrutiny and
restrictions on less capitalized institutions, (iv) require the federal
banking regulators to set operational and managerial standards for all insured
depository institutions and their holding companies, including limits on
excessive compensation to executive officers, directors, employees and
principal shareholders, and establish standards for loans secured by real
estate, (v) adopt certain accounting reforms, including the authority of
banking regulators to require independent audits of banks and thrifts, and
require on-site examinations of federally insured institutions within
specified timeframes, (vi) revise risk-based capital standards to ensure that
they (a) take adequate account of interest-rate changes, concentration of
credit risk and the risks of nontraditional activities, and (b) reflect the
actual performance and expected risk of loss of multi-family mortgages, and
(vii) restrict state-chartered banks from engaging in activities not permitted
for national banks unless they are adequately capitalized and have FDIC
approval. FDICIA also permits the FDIC to make special assessments on insured
depository institutions, in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or for any other purpose the FDIC deems necessary
and grants authority to the FDIC to establish semiannual assessment rates on
financial institutions that are members of either the BIF or the Savings
Association Insurance Fund ("SAIF"), which in general insures the deposits of
thrifts, in order to maintain these funds at the designated reserve ratios.
FDICIA also contained the Truth in Savings Act, which requires clear and
uniform disclosure of the rates of interest payable on deposit accounts by
depository institutions, and the fees assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims
of financial institutions with regard to deposit accounts and products.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Act") in September 1994. Beginning in September
1995, bank holding companies have the right to expand, by acquiring existing
banks, into all states, even those which had theretofore restricted entry. The
legislation also provides that holding companies have the right, starting on
June 1, 1997, to convert the banks that they own in different states to
branches of a single bank. A state was permitted to "opt out" of this law but
was not permitted to "opt out" of the law allowing bank holding companies from
other states to enter the state. A state may also determine, at its option, to
permit interstate branching through the establishment of de novo branches by
out-of-state banks. The State of Indiana did not "opt out" of the interstate
branching provisions of the Interstate Act and has authorized the
establishment of de novo branches of out-of-state banks. The Interstate Act
also establishes limits on acquisitions by large banking organizations by
providing that no acquisition may be undertaken if it would result in the
organization having deposits exceeding either 10% of all bank deposits in the
United States or 30% of the bank deposits in the state in which the
acquisition would occur.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "EGRPRA")
was signed into law on September 30, 1996. EGRPRA streamlined the non-banking
activities application process for well-capitalized and well-managed bank
holding companies. Under EGRPRA, qualified bank holding companies may commence
a regulatorily approved non-banking activity without prior notice to the
Federal Reserve; written notice is required within 10 days after commencing
the activity. Under EGRPRA, the prior notice period is reduced to 12 days in
the event of any non-banking acquisition or share purchase, assuming the size
of the acquisition does not exceed 10% of risk-weighted assets of the
acquiring bank holding company and the consideration does not exceed 15% of
Tier 1 capital. EGRPRA also provided for the recapitalization of the SAIF in
order to bring it into parity with the BIF.
Pending Legislation. Because of concerns relating to competitiveness and
the safety and soundness of the banking industry, Congress is considering a
number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Among such
bills are new proposals to merge the BIF and the SAIF insurance funds, to
alter the statutory separation of commercial and investment banking and to
further expand the powers of banks, bank holding companies and competitors of
banks. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of the Company may be
affected thereby.
Bank and Bank Holding Company Regulation
As noted above, both the Company and the Bank are subject to extensive
regulation and supervision.
Bank Holding Company Act. Under the BHCA, the activities of a bank
holding company, such as the Company, are limited to business so closely
related to banking, managing or controlling banks as to be a proper incident
thereto. The Company is also subject to capital requirements applied on a
consolidated basis in a form substantially similar to those required of the
Bank. The BHCA requires a bank holding company to obtain approval from the
Federal Reserve before (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless
it already owns or controls the majority of such shares), (ii) acquiring all
or substantially all of the assets of another bank or bank holding company, or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve will not approve any acquisition, merger or consolidation that would
have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served.
The Federal Reserve also considers capital adequacy and other financial and
managerial factors in reviewing acquisitions or mergers.
The BHCA also prohibits a bank holding company, with certain limited
exceptions, (i) from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a
bank or bank holding company, or (ii) from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by
Federal Reserve regulation or order, have been identified as activities
closely related to the business of banking or of managing or controlling
banks. The Federal Reserve, in making such determination, considers whether
the performance of such activities by a bank holding company can be expected
to produce benefits to the public such as greater convenience, increased
competition or gains in efficiency in resources, which can be expected to
outweigh the risks of possible adverse effects such as decreased or unfair
competition, conflicts of interest or unsound banking practices.
Insurance of Accounts. The FDIC provides insurance, through the BIF, to
deposit accounts at the Bank to a maximum of $100,000 for each insured
depositor. On January 1, 1996, the FDIC adopted an amendment to its BIF
risk-based assessment schedule which effectively eliminated deposit insurance
assessments for most commercial banks and other depository institutions with
deposits insured by the BIF only. Following enactment of EGRPRA, the overall
assessment rate for 1997 for institutions in the lowest risk-based premium
category was revised to equal 1.29 cents for each $100 of BIF-assessable
deposits. Deposits insured by the SAIF continue to be assessed at a higher
rate. At this time, the deposit insurance assessment rate for institutions in
the lowest risk-based premium category is zero, and all of the assessments
paid by institutions in this category are used to service debt issued by the
Financing Corporation, a federal agency established to finance the
recapitalization of the former Federal Savings and Loan Insurance Corporation.
Regulations Governing Capital Adequacy. The federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation
of bank holding companies and banks. If the capital falls below the minimum
levels established by these guidelines, the bank holding company or bank may
be denied approval to acquire or establish additional banks or nonbank
businesses or to open facilities.
The Federal Reserve and the FDIC adopted risk-based capital guidelines
for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items are assigned to broad risk categories, each with appropriate weights.
The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items. Under these guidelines, all
bank holding companies and federally regulated banks must maintain a minimum
risk-based total capital ratio equal to 8%, of which at least one-half must be
Tier 1 capital.
The Federal Reserve also has implemented a leverage ratio, which is Tier
1 capital to total assets, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding company may leverage
its equity capital base. The Federal Reserve requires a minimum leverage ratio
of 3%. For all but the most highly-rated bank holding companies and for bank
holding companies seeking to expand, however, the Federal Reserve expects that
additional capital sufficient to increase the ratio by at least 100 to 200
basis points will be maintained.
Management of the Company believes that the risk-weighting of assets and
the risk-based capital guidelines do not have a material adverse impact on the
Company's operations or on the operations of the Bank.
Community Reinvestment Act. The Community Reinvestment Act of 1977
requires that, in connection with examinations of financial institutions
within their jurisdiction, the federal banking regulators must evaluate the
record of the financial institutions in meeting the credit needs of their
local communities, including low and moderate income neighborhoods, consistent
with the safe and sound operation of those banks. These factors are also
considered in evaluating mergers, acquisitions and applications to open a
branch or facility.
Regulations Governing Extensions of Credit. The Bank is subject to
certain restrictions imposed by the Federal Reserve Act on extensions of
credit to the bank holding company or its subsidiaries, or investments in
their securities and on the use of their securities as collateral for loans to
any borrowers. These regulations and restrictions may limit the ability of the
Company to obtain funds from the Bank for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses.
Further, under the BHCA and certain regulations of the Federal Reserve, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tying arrangements in connection with any extension of credit, lease or sale
of property or furnishing of services.
The Bank is also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors,
principal shareholders or any related interest of such persons. Extensions of
credit (i) must be made on substantially the same terms, including
interest-rates and collateral as, and following credit underwriting procedures
that are not less stringent than, those prevailing at the time for comparable
transactions with persons not covered above and who are not employees, and
(ii) must not involve more than the normal risk of repayment or present other
unfavorable features. The Bank is also subject to certain lending limits and
restrictions on overdrafts to such persons.
Reserve Requirements. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time deposits. Reserves of 3% must be maintained against total
transaction accounts of $49.3 million or less (subject to adjustment by the
Federal Reserve) and an initial reserve of $1,479,000 plus 10% (subject to
adjustment by the Federal Reserve to a level between 8% and 14%) must be
maintained against that portion of total transaction accounts in excess of
such amount. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve may be used to satisfy liquidity requirements.
Dividends. The ability of the Bank to pay dividends and management fees
is limited by various state and federal laws, by the regulations promulgated
by its primary regulators and by the principles of prudent bank management.
Monetary Policy and Economic Control. The commercial banking business in
which the Company engages is affected not only by general economic conditions,
but also by the monetary policies of the Federal Reserve. Changes in the
discount rate on member bank borrowing, availability of borrowing at the
"discount window," open market operations, the imposition of changes in
reserve requirements against member banks deposits and assets of foreign
branches, and the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates are some of the instruments
of monetary policy available to the Federal Reserve. These monetary policies
are used in varying combinations to influence overall growth and distributions
of bank loans, investments and deposits, and such use may affect interest
rates charged on loans or paid on deposits. The monetary policies of the
Federal Reserve have had a significant effect on the operating results of
commercial banks and are expected to do so in the future. The monetary
policies of the Federal Reserve are influenced by various factors, including
inflation, unemployment, short-term and long-term changes in the international
trade balance and in the fiscal policies of the U.S. Government. Future
monetary policies and the effect of such policies on the future business and
earnings of the Company and the Bank cannot be predicted.
FORWARD-LOOKING STATEMENTS
Statements contained in this Report and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases
and in oral statements made with the approval of an authorized executive
officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). There can be no assurance, in light of certain risks and
uncertainties, that such forward-looking statements will in fact transpire.
The following important factors, risks and uncertainties, among others, could
cause actual results to differ materially from such forward-looking
statements:
Credit risk: Approximately 60.1% and 61.3% of the Company's loans at
December 31, 1996 and June 30, 1997, respectively, were commercial in
nature (including agri-business and agricultural loans), and, as of both
December 31, 1996 and June 30, 1997, the Company estimates that in excess
of 95% of the Bank's commercial, industrial, agri-business and
agricultural real estate mortgage loans, real estate construction
mortgage and consumer loans are made within the Bank's basic trade area.
Changes in local and national economic conditions could adversely affect
credit quality in the Company's loan portfolio.
Interest rate risk: Although the Company actively manages its interest
rate sensitivity, such management is not an exact science. Rapid
increases or decreases in interest rates could adversely impact the
Company's net interest margin if changes in its cost of funds do not
correspond to the changes in income yields.
Competition: The Company's activities involve competition with other
banks as well as other financial institutions and enterprises. Also, the
financial service markets have and likely will continue to experience
substantial changes, which could significantly change the Company's
competitive environment in the future.
Legislative and regulatory environment: The Company operates in a rapidly
changing legislative and regulatory environment. It cannot be predicted
how or to what extent future developments in these areas will affect the
Company. These developments could negatively impact the Company through
increased operating expenses for compliance with new laws and
regulations, restricted access to new products and markets, or in other
ways.
General business and economic trends: General business and economic
trends, including the impact of inflation levels, influence the Company's
results in numerous ways, including operating expense levels, deposit and
loan activity, and availability of trained individuals needed for future
growth.
The use of estimates and assumptions: In preparing financial statements
in conformity with generally accepted accounting principles, management
must make estimates and assumptions that affect the amounts reported
therein and the disclosures provided. Actual results could differ from
these estimates.
The foregoing list should not be construed as exhaustive and the Company
disclaims any obligation to subsequently update or revise any forward-looking
statements after the date of this Report.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 1997
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
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Registrant during the last
30 weeks ending July 25, 1997.
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 1997
Part II - Other Information
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
(Registrant)
Date: July 31, 1997 R. Douglas Grant
R. Douglas Grant - President
Date: July 31, 1997 Terry M. White
Terry M. White - Secretary/Treasurer
EXHIBIT INDEX
Exhibit
No. Description Page
------- ------------------------------------------- -------
3(i) Restated Articles of Incorporation of
Lakeland Financial Corporation
27 Financial Data Schedule (EDGAR filing only)