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 September 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 September 30, 1997
Common Stock, $.50 Stated Value 2,902,502
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 1997 and December 31, 1996
(in thousands)
(Unaudited)
(Page 1 of 2)
September 30, December 31,
1997 1996
------------- -------------
ASSETS
- ------
Cash and cash equivalents
Cash and due from banks $ 35,526 $ 41,190
Short-term investments 4,958 3,689
------------- -------------
Total cash and cash equivalents 40,484 44,879
Securities available-for-sale
U. S. Treasury and government agency securities 29,189 31,804
Mortgage-backed securities 45,867 46,839
State and municipal securities 2,185 2,167
Other debt securities 1,409 1,032
------------- -------------
Total securities available-for-sale
(carried at fair value) 78,650 81,842
Securities held-to-maturity
U. S. Treasury and government agency securities 22,183 17,020
Mortgage-backed securities 96,964 86,073
State and municipal securities 22,415 21,172
Other debt securities 3,180 1,009
------------- -------------
Total securities held-to-maturity
(fair value of $146,890 at
September 30, 1997, and $126,373
at December 31, 1996) 144,742 125,274
Real estate mortgages held-for-sale 1,137 895
Loans:
Total loans 424,928 382,265
Less: Allowance for loan losses 5,317 5,306
------------- -------------
Net loans 419,611 376,959
Land, premises and equipment, net 18,349 16,014
Accrued income receivable 4,350 4,254
Other assets 6,889 6,434
------------- -------------
Total assets $ 714,212 $ 656,551
============= =============
(Continued
2
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 1997 and December 31, 1996
(in thousands)
(Unaudited)
(Page 2 of 2)
September 30, December 31,
1997 1996
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Deposits:
Noninterest bearing deposits $ 78,173 $ 77,664
Interest bearing deposits 454,962 418,889
------------- -------------
Total deposits 533,135 496,553
Short-term borrowings
Federal funds purchased 0 0
U.S. Treasury demand notes 4,000 2,769
Securities sold under agreements
to repurchase 79,008 85,611
------------- -------------
Total short-term borrowings 83,008 88,380
Accrued expenses payable 5,396 5,033
Other liabilities 1,033 1,011
Notes payable 25,375 23,531
Guaranteed preferred beneficial interests in
the Company's subordinated debentures 19,204 0
------------- -------------
Total liabilities 667,151 614,508
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 September 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 36,563 31,967
Unrealized net gain (loss) on securities available-for-sale 651 396
Treasury stock (143) 0
------------- -------------
Total stockholders' equity 47,061 42,043
------------- -------------
Total liabilities and stockholders' equity $ 714,212 $ 656,551
============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 1997 and 1996
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 9,690 $ 8,283 $ 28,296 $ 24,104
Tax exempt 58 63 173 184
----------- ----------- ----------- -----------
Total loan income 9,748 8,346 28,469 24,288
Short-term investments 79 128 224 188
Securities:
U.S. Treasury and Government agency securities 817 753 2,369 2,082
Mortgage-backed securities 2,264 2,058 6,575 6,072
State and municipal securities 365 346 1,068 1,032
Other debt securities 71 77 219 247
----------- ----------- ----------- -----------
Total interest and dividend income 13,344 11,708 38,924 33,909
INTEREST EXPENSE
- ----------------
Interest on deposits 5,494 4,662 15,568 13,695
Interest on short-term borrowings 1,167 1,137 3,770 3,004
Interest on long-term debt 579 277 1,148 826
----------- ----------- ----------- -----------
Total interest expense 7,240 6,076 20,486 17,525
----------- ----------- ----------- -----------
NET INTEREST INCOME 6,104 5,632 18,438 16,384
- -------------------
Provision for loan losses 60 30 180 90
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,044 5,602 18,258 16,294
- ------------------------- ----------- ----------- ----------- -----------
NONINTEREST INCOME
- ------------------
Trust fees 267 212 907 711
Service charges on deposit accounts 887 746 2,453 2,016
Other income (net) 694 425 1,767 1,272
Net gains on the sale of real estate mortgages held-for-sale 168 94 392 315
Net securities gains (losses) 0 0 (18) (6)
----------- ----------- ----------- -----------
Total noninterest income 2,016 1,477 5,501 4,308
(Continued)
4
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 1997 and 1996
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 2,858 2,416 8,119 7,034
Occupancy and equipment expense 804 752 2,361 2,165
Other expense 1,494 1,493 4,157 3,959
----------- ----------- ----------- -----------
Total noninterest expense 5,156 4,661 14,637 13,158
INCOME BEFORE INCOME TAX EXPENSE 2,904 2,418 9,122 7,444
- --------------------------------
Income tax expense 1,034 807 3,225 2,615
----------- ----------- ----------- -----------
NET INCOME $ 1,870 $ 1,611 $ 5,897 $ 4,829
- ---------- =========== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING (Note 2) 2,902,502 2,896,992 2,902,863 2,896,992
EARNINGS PER COMMON SHARE
- -------------------------
Net Income (Note 2) $ 0.64 $ 0.56 $ 2.03 $ 1.67
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1997 and 1996
(in thousands except for shares)
(Unaudited)
Unrealized
Net Gain (Loss)
Common Stock 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 nine months
ended September 30, 1996 4,829 4,829
Net change in unrealized net gain (loss)
on securities available-for-sale (451) (451)
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 -
$.34 per share (986) (986)
--------- --------- --------- --------- --------- --------- ------------
Balances, September 30, 1996 2,896,992 $ 1,448 $ 8,232 $ 30,701 $ 180 $ 0 $ 40,561
========= ========= ========= ========= ========= ========= ============
Balances, January 1, 1997 2,896,992 $ 1,448 $ 8,232 $ 31,967 $ 396 $ 0 $ 42,043
Net income for nine months
ended September 30, 1997 5,897 5,897
Net change in unrealized net gain (loss)
on securities available-for-sale 255 255
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 -
$.45 per share (1,301) (1,301)
--------- --------- --------- --------- --------- --------- ------------
Balances, September 30, 1997 2,902,502 $ 1,453 $ 8,537 $ 36,563 $ 651 $ (143) $ 47,061
========= ========= ========= ========= ========= ========= ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
6
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(in thousands)
(Unaudited)
(Page 1 of 2)
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 5,897 $ 4,829
----------- -----------
Adjustments to reconcile net income to net cash
from operating activites:
Depreciation 1,030 943
Provision for loan losses 180 90
Write-down of other real estate owned 0 20
Loans originated for sale (19,564) (21,464)
Net (gain) loss on sale of loans (392) (315)
Proceeds from sale of loans 19,714 21,465
Net (gain) loss on sale of premises and equipment 6 2
Net (gain) loss on calls of securities held-to-maturity 19 6
Net securities amortization (accretion) 14 231
Increase (decrease) in taxes payable 175 366
(Increase) decrease in income receivable (96) 85
Increase (decrease) in accrued expenses payable 297 (34)
(Increase) decrease in other assets (675) (171)
Increase (decrease) in other liabilities (36) (6)
----------- -----------
Total adjustments 672 1,218
----------- -----------
Net cash from operating activities 6,569 6,047
----------- -----------
Cash flows from investing activities:
Proceeds from maturities and calls of securities held-to-maturity 9,428 7,510
Proceeds from maturities and calls of securities available-for-sale 23,186 10,383
Purchases of securities available-for-sale (19,525) (13,246)
Purchases of securities held-to-maturity (28,974) (18,474)
Proceeds from sales of securities available-for-sale 0 0
Net (increase) decrease in total loans (42,832) (37,826)
Purchases of land, premises and equipment (3,371) (2,850)
----------- -----------
Net cash from investing activities (62,088) (54,503)
----------- -----------
(Continued)
7
Part I
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(in thousands)
(Unaudited)
(Page 2 of 2)
1997 1996
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in total deposits $ 36,582 $ 34,144
Proceeds from short-term borrowings 689,373 615,834
Payments on short-term borrowings (694,745) (599,731)
Proceeds from long-term borrowings 10,000 2,118
Payments on long-term borrowings (8,156) (18)
Dividends paid (1,301) (986)
Proceeds from sale of common stock 310 415
Net proceeds from sale of trust preferred securities 19,204 0
Purchase of treasury stock (143) 0
----------- -----------
Net cash from financing activities 51,124 51,776
----------- -----------
Net increase (decrease) in cash and cash equivalents (4,395) 3,320
Cash and cash equivalents at beginning of the period 44,879 26,895
----------- -----------
Cash and cash equivalents at end of the period $ 40,484 $ 30,215
=========== ===========
Cash paid during the period for:
Interest $ 20,203 $ 17,136
=========== ===========
Income taxes $ 2,883 $ 2,545
=========== ===========
Loans transferred to other real estate $ 167 $ 0
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
8
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This report is filed for Lakeland Financial Corporation (the Company) and
its wholly owned subsidiaries, Lake City Bank (the Bank) and Lakeland Capital
Trust (Lakeland Trust). All significant intercompany balances and transactions
have been eliminated in consolidation.
The 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 nine months ended September 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.
NOTE 3. TRUST PREFERRED SECURITIES
The Company formed Lakeland Trust on July 24, 1997. Lakeland Trust issued
$20 million of 9% Cumulative Trust Preferred Securities (Preferred
Securities). These proceeds were used to purchase Subordinated Debentures of
the Company. The Company owns all of the common stock of Lakeland Trust. The
sole assets of Lakeland Trust are the Subordinated Debentures and the payments
thereunder. The obligations of the Company under the Guarantee, the Trust
Agreement, the Subordinated Debentures, the Indenture and the Expense
Agreement provide, in the aggregate, a full, irrevocable and unconditional
guarantee, on a subordinated basis, of all the obligations of Lakeland Trust
under the Preferred Securities.
9
Lakeland Trust will be treated for financial reporting purposes as a
subsidiary of the Company and, accordingly, the accounts of Lakeland Trust
will be included in the consolidated financial statements of the Company. The
Preferred Securities issued by Lakeland Trust will be presented as a separate
line item as long-term debt in the consolidated balance sheet of the Company
under the caption "Guaranteed Preferred Beneficial Interests in Company's
Subordinated Debentures" and the Company will record Distributions payable on
the Preferred Securities as an expense in its consolidated statements of
income.
(Intentionally left blank)
10
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
September 30, 1997
FINANCIAL CONDITION
The financial statements reflect the Company's continued growth within
traditional markets and expansion into new market areas. The construction of
the Mishawaka office continues with the opening planned for mid-November. 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. The Company has entered into an agreement to purchase selected
assets and assume all deposits of the office of NDB Bank, N.A. located in
Huntington, Indiana. In addition, the Company has entered into an agreement to
purchase selected assets and assume all deposits of the KeyCorp offices in
Columbia City, Indiana; Kendallville, Indiana; Ligonier, Indiana; Logansport,
Indiana; Medaryville, Indiana; and Rochester, Indiana. These two purchases are
expected to add approximately $24 million in loans and $95 million in
deposits. The purchases from First Chicago NBD and KeyCorp are planned to be
closed during the fourth quarter of 1997. The Company has also entered into an
agreement to purchase selected assets and assume all deposits of the Peru,
Indiana and Greentown, Indiana offices of National City Bank. This purchase is
expected to add $40 million in deposits. The closing of this purchase is
planned for the first quarter of 1998.
Total assets of the Company were $714,212,000 as of September 30, 1997.
This is an increase of $57,661,000 or 8.8 percent from $656,551,000 reported
at December 31, 1996. Total loans were $424,928,000 at September 30, 1997.
This is an increase of $42,663,000 or 11.2 percent from the December 31, 1996,
balance. Total securities (including available-for-sale (AFS) and
held-to-maturity (HTM)) increased $16,276,000 or 7.9 percent to $223,392,000
as of September 30, 1997, from $207,116,000 at December 31, 1996. Earning
assets increased to $654,415,000 at September 30, 1997. This is an increase of
$60,450,000 or 10.2 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 September 30, 1997, these funds totaled $612,143,000. This
represented a $29,979,000 or 5.1 percent increase from December 31, 1996. The
growth has been primarily in time deposits which increased $52,678,000 or 17.1
percent from the balance at December 31, 1996. The growth in time deposits was
offset by decreases in the interest-bearing demand accounts and repurchase
agreements. In addition to these local funding sources, the Company borrows
11
through the Treasury, Tax and Loan program, through federal fund lines with
correspondent banks and through term advances from the Federal Home Loan Bank
of Indianapolis (FHLB). Including these non-local sources, funding totaled
$641,518,000 at September 30, 1997. This is a $33,054,000 or 5.4 percent
increase from $608,464,000 reported at December 31, 1996. Other funding of
$19,204,000 was provided through the issuance of trust preferred securities.
On an average daily basis, total earning assets increased 12.1 percent
and 13.5 percent for the three month period and the nine month period ended
September 30, 1997, respectively, as compared to similar periods ended
September 30, 1996. On an average daily basis, total deposits and purchased
funds increased 11.9 percent and 13.6 percent for the three month period and
nine month period ended September 30, 1997, as compared to the three month
period and nine month period ended September 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 September 30, 1997, and December 31, 1996, the
Company's investment in mortgage-backed securities comprised approximately
63.9 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 September 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 4 percent price appreciation should rates move down
300 basis points. As of September 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 September 30, 1997, the AFS
portfolio constituted 35.2 percent of the total security portfolio. During the
first nine months of 1997 purchases for the HTM and AFS portfolios were
$28,974,000 and $19,525,000, respectively. At September 30, 1997, the net
after-tax unrealized gain in the AFS portfolio included in stockholders'
equity was $651,000, an increase of $255,000 from the unrealized gain included
12
in stockholders' equity at December 31, 1996. Future investment activity is
difficult to predict, as it is dependent upon loan and deposit trends.
As previously indicated, total loans increased $42,663,000 to
$424,928,000 as of September 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 September 30,
1997, increased 12.9 percent from the level at December 31, 1996. Retail loans
at September 30, 1997, increased 10.7 percent from December 31, 1996. Real
estate loans (excluding mortgages held-for-sale) increased 5.4 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 61.0 percent of its loans concentrated in commercial
loans at September 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 September 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 nine months of 1997 the Company originated
mortgages for sale in the secondary market totaling $18,064,000 as compared to
$16,172,000 during the first nine 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.
13
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 $1,402,000 at September 30, 1997, as compared to
$1,284,000 at December 31, 1996. The loans classified as troubled debt
restructurings at September 30, 1997, are performing in accordance with the
modified terms. At September 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 September 30, 1997 legal loan limit was
approximately $10,357,000. The $2,861,000 increase in the legal loan limit
from the prior quarter is a result of a portion of the proceeds from the
issuance of the Preferred Securities being invested in and increasing the
surplus of Lake City Bank. 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 nine 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 $509,000 during the first nine months of 1997, other
transaction accounts have decreased $16,606,000 during the same period. During
this period there has been a significant increase in time deposits which
increased $52,678,000 or 17.1 percent. During this nine month period, loans
increased $42,663,000 or 11.2 percent. As a result of these loan and deposit
trends, the Company's average daily loans/deposits ratio amounted to 79.8
percent at September 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 73.1 percent at September 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
14
basis. Management has estimated that as of September 30, 1997, the Company's
GAP/Total Assets ratios were (8.2) percent, (9.7) percent, and (8.5) percent
for the three, nine, 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, nine, 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 September 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 September 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 September 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
September 30, 1997, the Company's ratios were 8.6 percent, 13.3 percent and
14.4 percent, respectively, excluding the SFAS No. 115 adjustment. The
September 30, 1997 ratios include in Tier I capital the maximum amount of the
trust preferred securities allowed by the regulations. Current regulations
limit the amount of the trust preferred securities included in Tier I capital
to the greater of the amount of the preferred securities or 25 percent of the
total Tier I capital. The September 30, 1997 ratios are higher than the ratios
of 6.3 percent, 9.9 percent and 11.2 percent reported at December 31, 1996,
respectively, and ratios of 6.4 percent, 10.1 percent and 11.3 percent
15
reported at September 30, 1996, respectively. The increases in these ratios
are a result of the sale of the trust preferred securities. 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 $5,018,000 or 11.9 percent from
December 31, 1996, to $47,061,000 at September 30, 1997. Net income of
$5,897,000, less dividends of $1,301,000, plus the increase in the unrealized
net gain on securities available for sale of $255,000, 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 $366,493,000 at September 30, 1992,
to $714,212,000 at September 30, 1997. This is an increase of $347,719,000 or
94.9 percent which equates to a 14.3 percent rate of growth per year.
Stockholders' equity has increased from $23,032,000 to $47,061,000 for the
same time period. That is an increase of $24,029,000 or 104.3 percent which
equates to a 15.4 percent rate of growth per year. Net income for the nine
months ended September 30, 1997, compared to the net income for the same
period of 1992, increased $3,419,000 or 138.0 percent from $2,478,000 to
$5,897,000. From September 30, 1992, to September 30, 1997, the number of Lake
City Bank offices increased from 21 to 33. This growth has been funded through
results of operation and existing capital.
RESULTS OF OPERATIONS
Net Interest Income
For the nine month period ended September 30, 1997, total interest and
dividend income increased $5,015,000 or 14.8 percent to $38,924,000, from
$33,909,000 during the same nine months of 1996. Interest and dividend income
increased $1,636,000 or 14.0 percent for the three month period ended
September 30, 1997, as compared to the three month period ended September 30,
1996. Daily average earning assets for the first three quarters of 1997
increased to $626,743,000, a 13.5 percent increase over the same period in
1996. For the third quarter alone, the daily average earning assets increased
to $642,128,000 or a 12.1 percent increase over the daily average earning
assets of the third quarter of 1996. The tax equivalent yields on average
earning assets increased by 9 basis points for the nine month period ended
September 30, 1997, when compared to the same respective period of 1996. For
the three month period ended September 30, 1997, this yield increased 15 basis
points over the yield for the three month period ended September 30, 1996.
16
The increase in the yield on average earning assets was mainly due to an
increase in the investment portfolio yield plus the growth in the loan
portfolio (which typically has a higher yield than the investment portfolio)
exceeding the growth in the investment portfolio. The Company's investment
portfolio, which is primarily fixed rate, experienced a 17 basis point
increase in yield between the first nine months of 1997 compared to the first
nine months of 1996. The 5 basis point reduction in the overall tax equivalent
yield on loans for the first three quarters of 1997 as compared to the first
three 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 18.1 percent between the first three quarters of 1997 and the same period
of 1996. This growth in loan balances, coupled with the decline in average
yield, resulted in a 17.2 percent increase in total loan income to $28,469,000
during the first nine months of 1997, from $24,288,000 reported for the first
nine months of 1996. For the three months ended September 30, 1997, as
compared to the same period for 1996, loan income increased $1,402,000 or 16.8
percent from $8,346,000 to $9,748,000.
Total security income amounted to $10,231,000 for the nine month period
ended September 30, 1997, and $3,517,000 for the three month period ended
September 30, 1997. This compares to $9,433,000 and $3,234,000 recorded for
the same periods in 1996. These increases in income reflect increases in
average daily balances of 5.5 percent and 6.0 percent, respectively, and
security yield increases of 17 basis points and 17 basis points, respectively,
when comparing the nine and three months ending September 30, 1997, to the
same periods for 1996.
Income from short-term investments amounted to $224,000 for the nine
month period ended September 30, 1997 and $79,000 for the three month period
ended September 30, 1997. This compares to $188,000 and $128,000 for the same
respective periods in 1996. The difference in the short-term investment income
for the nine months ending September 30, 1997, compared to the nine months
ending September 30, 1996, results from a higher average balance in short-term
investments during the nine months of 1997, plus an 8 basis point increase in
the tax equivalent yield. The lower income for the three months ending
September 30, 1997, as compared to the three months ending September 30, 1996,
is due to a $3,832,000 decrease in the average daily balance offset by a 47
basis point increase in the tax equivalent yield.
Total interest expense increased $2,961,000 or 16.9 percent to
$20,486,000 for the nine month period ended September 30, 1997, from
$17,525,000 for the nine month period ended September 30, 1996, and it
increased $1,164,000 or 19.2 percent for the three month period ended
September 30, 1997, from the $6,076,000 for the three month period ended
September 30, 1996. This is a result of the overall growth of deposits, the
change in the deposit mix and the additional long-term debt. On an average
daily basis, total deposits (including demand deposits) increased 11.5 percent
and 11.9 percent for the nine and three month periods ended September 30,
17
1997, as compared to the similar periods ended September 30, 1996. When
comparing these same periods, the average daily balances of the demand deposit
accounts rose $7,691,000 and $6,131,000, respectively, while the average daily
balances of savings and transaction accounts combined rose $1,796,000 and
declined $496,000, respectively. The average daily balance of time deposits,
which pay a higher rate of interest as compared to demand deposit and
transaction accounts, increased $42,913,000 and $49,966,000 for the nine and
three months ended September 30, 1997, compared to the nine and three months
ended September 30, 1996. On an average daily basis, total deposits (including
demand deposits) and purchased funds increased 13.6 percent and 11.9 percent
for the nine and three month periods ended September 30, 1997, as compared to
the nine and three month periods ended September 30, 1996. The Company's daily
cost of funds during the nine month period ended September 30, 1997, increased
13 basis points when compared to the same period of 1996, and increased 27
basis points when comparing the three month periods ended September 30, 1997
and September 30, 1996. The Company's cost of funds for the nine month and
three month periods ended September 30, 1997 reflect the impact of the 9
percent trust preferred securities issued August 20, 1997. The interest
related to the 9 percent trust preferred securities is included in the
interest expense on long-term debt. The impact of this interest on the
Company's cost of funds will be greater in future quarters.
The net effect of all factors affecting total interest and dividend
income and total interest expense was to increase net interest income. For the
nine month period ended September 30, 1997, net interest income totaled
$18,438,000, an increase of 12.5 percent or $2,054,000 over the first nine
months of 1996. For the three month period ended September 30, 1997, net
interest income totaled $6,104,000, an increase of $472,000 or 8.4 percent
over the three months ended September 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
18
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 $180,000 and $90,000,
respectively, for the nine month periods ended September 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 increase in the provision for loan losses is in response to continued
good loan growth in the first nine months of 1997. The Company is currently
evaluating the provision for loan losses for the fourth quarter of 1997, as a
result of the Company's expansion into new markets and the continued strong
commercial loan growth.
As of September 30, 1997, loans delinquent 30 days or more that were
included in the accompanying financial statements as accrual loans totaled
approximately $2,284,000. At September 30, 1997, there were loans totaling
$715,000 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
19
statements and $384,000 in nonaccrual loans. During the third quarter of 1997,
there were no loans 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 September 30, 1997, no loans were considered
impaired.
Following is a summary of the loan loss experience for the nine months
ending September 30, 1997, and the year ending December 31, 1996.
20
September 30, December 31,
1997 1996
------------- -------------
(in thousands)
Amount of loans outstanding $ 424,928 $ 382,265
------------- -------------
Average daily loans outstanding for the
period $ 407,163 $ 352,811
------------- -------------
Allowance for loan losses at the
beginning of the period $ 5,306 $ 5,472
Charge-offs
Commercial 80 171
Real estate 0 0
Installment 136 158
Credit card and personal lines of credit 27 39
------------- -------------
Total charge-offs 243 368
Recoveries
Commercial 17 12
Real estate 0 0
Installment 52 54
Credit card and personal lines of credit 5 16
------------- -------------
Total recoveries 74 82
------------- -------------
Net charge-offs 169 286
Provision charged to expense 180 120
------------- -------------
Allowance for loan losses at the end of
the period $ 5,317 $ 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 0.03% 0.03%
Credit card and personal credit lines 0.01% 0.01%
------------- -------------
Total 0.06% 0.08%
============= =============
21
Net interest income after provision for loan losses totaled $18,258,000
and $6,044,000 for the nine and three month periods ended September 30, 1997.
This represents increases of 12.1 percent and 7.9 percent over the same
respective periods ended September 30, 1996.
Noninterest Income
Total noninterest income increased $1,193,000 or 27.7 percent to
$5,501,000 for the nine month period ended September 30, 1997, from $4,308,000
recorded for the nine month period ended September 30, 1996. Total noninterest
income for the three month period ended September 30, 1997, was $2,016,000
which was $539,000 or 36.5 percent higher than the noninterest income for the
three months ended September 30, 1996.
Trust fees, which represent basic recurring service fee income, increased
$196,000 or 27.6 percent to $907,000 for the nine month period ended September
30, 1997, as compared to $711,000 for the first nine months of 1996. For the
three month period ended September 30, 1997, trust fees were $267,000, an
increase of $55,000 over the fees for the same period in 1996. The major fee
increases were in testamentary trust fees, living trust fees, executorship
fees and employee benefit plan fees.
Service charges on deposit accounts increased 21.7 percent or $437,000
during the nine month period ended September 30, 1997, totaling $2,453,000, as
compared to the same period in 1996. These service charges increased $141,000
for the three month period ended September 30, 1997, over the amount recorded
for the three month period ended September 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 38.9 percent or $495,000 to $1,767,000 for the nine month period
ended September 30, 1997, as compared to the same period in 1996. It increased
$269,000 or 63.3 percent for the three months ended September 30, 1997, as
compared to the same months in 1996. The major increases in other income were
in credit card fees, discount brokerage fees, letter of credit fees and ATM
fees.
The profits from the sale of mortgages during the nine month period ended
September 30, 1997, totaled $392,000, as compared to $315,000 during the same
period in 1996. For the third quarter of 1997 only, these profits were
$168,000 as compared to $94,000 for the same period in 1996. These profits are
a reflection of the steady volume of mortgages originated and sold in the
secondary market.
22
Net investment security gains (losses) amounted to $(18,000) for the nine
month period ended September 30, 1997 and there were less than $500 in losses
for the three month period ended September 30, 1997. Net investment security
gains (losses) were $(6,000) and $0 for the nine and three month periods ended
September 30, 1996. In the first nine 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 $1,479,000 or 11.2 percent to $14,637,000
for the nine month period ended September 30, 1997, as compared to the first
nine months of 1996. Noninterest expense increased $495,000 or 10.6 percent
when comparing the three months ended September 30, 1997, to the three months
ended September 30, 1996.
For the nine months ended September 30, 1997, salaries and employee
benefits increased to $8,119,000, a $1,085,000 increase or 15.4 percent as
compared to the first nine months of 1996. When comparing the three months
ended September 30, 1997, to the same period in 1996, the increase was
$442,000 or 18.3 percent. These increases reflect the staffing of the offices
opened during 1996 and 1997, as well as normal salary increases. Full-time
equivalent employees increased to 363 at September 30, 1997, from 316 at
September 30, 1996.
For the nine and three month periods ended September 30, 1997, occupancy
and equipment expenses were $2,361,000 and $804,000 respectively, a $196,000
increase or 9.1 percent and $52,000 or 6.9 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 1997. These expenses are expected to
continue to increase in 1997 with the Company's continued growth and
expansion.
For the nine month period ended September 30, 1997, other expenses
totaled $4,157,000 as compared to $3,959,000 during the same period in 1996.
This is an increase of 5.0 percent or $198,000. For the third quarter of 1997
as compared to the third quarter of 1996 the increase was $1,000 or .1
percent.
Income Before Income Tax Expense
As a result of the above factors, income before income tax expense
increased to $9,122,000 for the first nine months of 1997, as compared to
$7,444,000 for the same period in 1996. This is an increase of $1,678,000 or
22.5 percent. For the three months ended September 30, 1997, as compared to
the three months ended September 30, 1996, the increase in income before
income tax expense was $486,000 or 20.1 percent.
23
Income Tax Expense
Income tax expense increased to $3,225,000 for the first nine months of
1997, as compared to $2,615,000 for the same period in 1996. This is a
$610,000 or 23.3 percent increase. Income tax expense for the third quarter of
1997 increased $227,000 or 28.1 percent as compared to the third quarter of
1996.
The combined State franchise tax expense and the Federal income tax
expense as a percent of income before income tax expense increased slightly to
35.4 percent during the first nine months of 1997, as compared to 35.1 percent
during the same period in 1996. It increased to 35.6 percent for the three
months ended September 30, 1997, as compared to 33.4 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
$5,897,000 for the first nine months of 1997, an increase of $1,068,000 or
22.1 percent from the $4,829,000 recorded over the same period in 1996.
Earnings per share for the first nine months of 1997 were $2.03 per share as
compared to $1.67 per share for the first nine 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 September 30, 1997, net income was
$1,870,000 as compared to $1,611,000 for the three months ended September 30,
1996, an increase of $259,000 or 16.1 percent.
24
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 1997
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
There were no submissions of matters to a vote by security holders during
the quarter ended September 30, 1997.
25
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 1997
Part II - Other Information
Item 5 - Other Information
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
26
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
27
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
28
number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. 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
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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
30
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
31
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 61.0% of the Company's loans at
December 31, 1996 and September 30, 1997, respectively, were commercial
in nature (including agri-business and agricultural loans), and, as of
both December 31, 1996 and September 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
32
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.
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LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 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:
None
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Registrant during the last
46 weeks ending November 8, 1997.
34
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 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: November 11, 1997 R. Douglas Grant
R. Douglas Grant - President
Date: November 11, 1997 Terry M. White
Terry M. White - Secretary/Treasurer
35