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, 2002
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 (574)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 July 31, 2002
Common Stock, No Par Value 5,769,537
LAKELAND FINANCIAL CORPORATION
Form 10-Q Quarterly Report
Table of Contents
PART I.
Page Number
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 23
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 23
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 23
Item 4. Submission of Matters to a Vote of Security Holders . . . 23
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 24
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 25
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2002 and December 31, 2001
(in thousands)
(Page 1 of 2)
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS Cash and cash equivalents:
Cash and due from banks $ 97,903 $ 70,219
Short-term investments 6,605 8,904
------------ ------------
Total cash and cash equivalents 104,508 79,123
Securities available-for-sale:
U. S. Treasury and government agency securities 17,021 19,440
Mortgage-backed securities 222,344 216,654
State and municipal securities 32,646 29,663
Other debt securities 5,877 5,882
------------ ------------
Total securities available-for-sale
(carried at fair value) 277,888 271,639
Real estate mortgages held-for-sale 1,193 8,493
Loans:
Total loans 764,212 738,223
Less: Allowance for loan losses 8,884 7,946
------------ ------------
Net loans 755,328 730,277
Land, premises and equipment, net 24,348 24,252
Accrued income receivable 5,308 5,441
Intangible assets 5,860 6,161
Other assets 15,459 12,326
------------ ------------
Total assets $ 1,189,892 $ 1,137,712
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2002 and December 31, 2001
(in thousands except for share data)
(Page 2 of 2)
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 159,705 $ 169,549
Interest bearing deposits 683,457 623,831
------------ ------------
Total deposits 843,162 793,380
Short-term borrowings:
Federal funds purchased 36,600 49,000
U.S. Treasury demand notes 4,000 4,000
Securities sold under agreements
to repurchase 121,715 149,117
Other borrowings 40,000 30,000
------------ ------------
Total short-term borrowings 202,315 232,117
Accrued expenses payable 11,317 6,131
Other liabilities 2,578 1,843
Long-term borrowings 31,369 11,389
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,331 19,318
------------ ------------
Total liabilities 1,110,072 1,064,178
SHAREHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized, 5,813,984 shares
issued and 5,771,837 outstanding as of June 30, 2002, and 5,813,984 shares
issued and 5,775,632
outstanding at December 31, 2001 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 66,294 62,378
Accumulated other comprehensive income 4,272 1,835
Treasury stock, at cost (736) (669)
------------ ------------
Total shareholders' equity 79,820 73,534
------------ ------------
Total liabilities and shareholders' equity $ 1,189,892 $ 1,137,712
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHANSIVE INCOME
For the Three Months and Six Months Ended June 30, 2002, and 2001
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 12,315 $ 15,028 $ 24,651 $ 30,642
Tax exempt 34 34 67 67
------------ ------------ ------------ ------------
Total loan income 12,349 15,062 24,718 30,709
Short-term investments 64 34 92 276
Securities:
U.S. Treasury and government agency securities 342 693 737 1,426
Mortgage-backed securities 3,039 3,228 5,797 6,544
State and municipal securities 400 444 800 889
Other debt securities 87 114 202 229
------------ ------------ ------------ ------------
Total interest and dividend income 16,281 19,575 32,346 40,073
INTEREST EXPENSE
- ----------------
Interest on deposits 4,226 8,051 8,578 17,366
Interest on short-term borrowings 635 1,945 1,555 3,936
Interest on long-term debt 755 611 1,327 1,221
------------ ------------ ------------ ------------
Total interest expense 5,616 10,607 11,460 22,523
------------ ------------ ------------ ------------
NET INTEREST INCOME 10,665 8,968 20,886 17,550
- -------------------
Provision for loan losses 747 307 1,249 520
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,918 8,661 19,637 17,030
- ------------------------- ------------ ------------ ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage fees 641 629 1,299 1,423
Service charges on deposit accounts 1,659 1,344 2,981 2,452
Other income (net) 894 946 1,898 1,787
Net gains on the sale of real estate mortgages
held-for-sale 350 317 711 444
Net securities gains (losses) 16 2 16 2
------------ ------------ ------------ ------------
Total noninterest income 3,560 3,238 6,905 6,108
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 4,536 4,374 9,134 8,586
Occupancy and equipment expense 1,082 1,241 2,181 2,510
Other expense 3,294 2,833 6,280 5,588
------------ ------------ ------------ ------------
Total noninterest expense 8,912 8,448 17,595 16,684
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 2002, and 2001
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 4,566 3,451 8,947 6,454
- --------------------------------
Income tax expense 1,573 1,080 3,069 1,954
------------ ------------ ------------ ------------
NET INCOME $ 2,993 $ 2,371 $ 5,878 $ 4,500
- ---------- ============ ============ ============ ============
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-
for-sale securities 2,195 (89) 2,437 1,905
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME $ 5,188 $ 2,282 $ 8,315 $ 6,405
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,813,984 5,813,984 5,813,984 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.51 $ 0.41 $ 1.01 $ 0.78
- ------------------------------- ============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 5,973,772 5,829,464 5,941,108 5,829,587
DILUTED EARNINGS PER COMMON SHARE $ 0.50 $ 0.41 $ 0.99 $ 0.78
- --------------------------------- ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 2002 and 2001
(in thousands)
(Unaudited)
(Page 1 of 2)
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 5,878 $ 4,500
------------ ------------
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 1,108 1,182
Provision for loan losses 1,249 520
Amortization of intangible assets 314 447
Amortization of mortgage servicing rights 170 135
Impairment of mortgage servicing rights 203 296
Loans originated for sale (35,928) (26,541)
Net gain on sale of loans (711) (444)
Proceeds from sale of loans 43,650 25,819
Net loss on sale of premises and equipment 16 11
Net gain on sale of securities available-for-sale (16) (2)
Net securities amortization 932 501
Decrease in taxes payable (147) (376)
Decrease in income receivable 133 632
Increase (decrease) in accrued expenses payable 149 (298)
(Increase) decrease in other assets 595 (917)
Increase in other liabilities 735 322
------------ ------------
Total adjustments 12,452 1,287
------------ ------------
Net cash from operating activities 18,330 5,787
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 34,754 24,741
Purchases of securities available-for-sale (38,110) (20,887)
Net increase in total loans (26,300) (25,595)
Proceeds from sales of land, premises and equipment 6 0
Purchases of land, premises and equipment (1,226) (952)
------------ ------------
Net cash from investing activities (30,876) (22,693)
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and 2001
(in thousands)
(Unaudited)
(Page 2 of 2)
2002 2001
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in total deposits $ 49,782 $ (24,363)
Proceeds from short-term borrowings 14,979,710 15,285,721
Payments on short-term borrowings (15,009,512) (15,254,129)
Proceeds from long-term borrowings 20,000 0
Payments on long-term borrowings (20) (22)
Dividends paid (1,962) (1,619)
Purchase of treasury stock (67) (60)
------------ ------------
Net cash from financing activities 37,931 5,528
------------ ------------
Net increase (decrease) in cash and cash equivalents 25,385 (11,378)
Cash and cash equivalents at beginning of the period 79,123 88,993
------------ ------------
Cash and cash equivalents at end of the period $ 104,508 $ 77,615
============ ============
Cash paid during the period for:
Interest $ 11,753 $ 22,148
============ ============
Income taxes $ 3,399 $ 2,330
============ ============
Loans transferred to other real estate $ 0 $ 1,473
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
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 inter-company
balances and transactions have been eliminated in consolidation. Also included
is the Bank's wholly-owned subsidiary, LCB Investments Limited ("LCB
Investments").
The unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with instructions for Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (all of which are normal and recurring in nature) considered
necessary for a fair presentation have been included. Operating results for
the three-month and six-month periods ending June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2002. The 2001 Lakeland Financial Corporation Annual Report on Form 10-K
should be read in conjunction with these statements.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted a new accounting standard
which addresses accounting for goodwill and intangible assets arising from
business combinations. Identifiable intangible assets must be separated from
goodwill. Identifiable intangible assets with finite useful lives are
amortized under the new standard, whereas unidentified intangible assets
resulting from business combinations, both amounts previously recorded and
future amounts purchased, cease being amortized. Annual impairment testing is
required for goodwill with impairment being recorded if the carrying amount of
goodwill exceeds its implied fair value. Adoption of this standard on January
1, 2002 did not have a material effect on the Company's financial statements.
7
Intangible assets subject to amortization are as follows:
As of June 30, 2002
----------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
(in thousands)
Core deposit intangible $ 2,032 $ 915
Other unidentified intangible 6,812 2,069
-------------- ------------
Total $ 8,844 $ 2,984
============== ============
Amortization expense for the three-month and six-month periods ended June 30,
2002 was $151,000 and $301,000, respectively. Estimated amortization expense
for the next five years is:
For year ended 12/31/02 $603,000
For year ended 12/31/03 $584,000
For year ended 12/31/04 $568,000
For year ended 12/31/05 $554,000
For year ended 12/31/06 $541,000
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 143 and No. 144. SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. SFAS No.
144 supersedes SFAS No. 121 and the accounting and reporting provisions of APB
Opinion No. 30. SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale at the lower of its carrying
amount or its fair value less costs to sell and to cease
depreciation/amortization. For the Company, the provisions of SFAS No. 144
were effective January 1, 2002. The provisions of SFAS No. 143 will be
effective January 1, 2003. Implementation of SFAF No. 144 did not have a
material impact on the Company's financial statements, and SFAS No. 143 is not
anticipated to have a material impact on the Company's financial statements.
The FASB has also recently issued Statement of Financial Accounting
Standards (SFAS) No. 145 and No. 146. SFAS No. 145 applies for years beginning
after May 14, 2002 and may be adopted sooner. SFAS No. 145 covers
8
extinguishments of debt and leases, and includes some minor technical
corrections. Under previous accounting guidance, gains or losses from
extinguishments of debt were always treated as extraordinary items. Under SFAS
No. 145 they will no longer be considered extraordinary, except under very
limited conditions. Upon adoption of SFAS No. 145, any prior gains and losses
from extinguishments of debt must be reclassified as ordinary gains and
losses. Under SFAS No. 145, if a capital lease is modified to become an
operating lease, it will be accounted for as a sale-leaseback, by following
the accounting guidance of SFAS No. 98, instead of being accounted for as a
new lease. SFAS No. 146 covers accounting for costs associated with exit or
long-lived asset disposal activities, such as restructurings, consolidation or
closing of facilities, lease termination costs or employee relocation or
severance costs. SFAS No. 146 replaces Emerging Issues Task Force (EITF) 94-3,
and is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002, and may be adopted sooner. A company may not restate
its previously issued financial statements. SFAS No. 146 requires exit or
long-lived asset disposal costs to be recognized as an expense when the
liability is incurred and can be measured at fair value, rather than at the
date of making a commitment to an exit or disposal plan. Management does not
expect the effects of the future adoptions of SFAS No. 145 and SFAS No. 146 to
be material to the Company's consolidated financial position or results of
operations.
NOTE 3. EARNINGS PER SHARE
Basic earnings per common share is based upon weighted-average common
shares outstanding. Diluted earnings per common share shows the dilutive
effect of additional common shares issueable.
The common shares outstanding for the shareholders' equity section of
the consolidated balance sheet at June 30, 2002 reflects the acquisition of
42,147 shares of Company common stock to offset a liability for a directors'
deferred compensation plan. These shares are treated as outstanding when
computing the weighted-average common shares outstanding for the calculation
of both basic and diluted earnings per share.
For the three-month periods ended June 30, 2002 and 2001, stock
options for 511,803 shares and 250,625 shares were considered dilutive for
purposes of computing diluted earnings per share. For the six-month periods
ended June 30, 2002 and 2001, stock options for 400,526 and 250,625 were
considered dilutive for purposes of computing diluted earnings per share.
9
NOTE 4. LOANS
June 30, December 31,
2002 2001
------------ ------------
(in thousands)
Commercial and industrial loans $ 505,524 $ 478,288
Agri-business and agricultural loans 64,261 58,901
Real estate mortgage loans 41,837 44,898
Real estate construction loans 1,022 2,354
Installment loans and credit cards 151,568 153,782
------------ ------------
Total loans $ 764,212 $ 738,223
============ ============
Impaired loans $ 11,944 $ 10,008
Non-performing loans $ 4,976 $ 2,498
NOTE 5. RECLASSIFICATIONS
Certain amounts appearing in the financial statements and notes
thereto for prior periods have been reclassified to conform with the current
presentation. The reclassification had no effect on net income or
stockholders' equity as previously reported.
10
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
June 30, 2002
OVERVIEW
Lakeland Financial Corporation is the holding company for Lake City
Bank. The Company is headquartered in Warsaw, Indiana and operates 40 offices
in 11 counties in northern Indiana. The Company earned $5.9 million for the
first six months of 2002 versus $4.5 million in the same period of 2001, an
increase of 30.6%. The increase was driven by a $3.3 million increase in net
interest income and a $797,000 increase in non-interest income. Offsetting
these positive impacts was an increase of $729,000 in the provision for loan
losses. Basic earnings per share for the first six months of 2002 was $1.01
per share, versus $0.78 per share for the first six months of 2001. Diluted
earnings per share reflect the potential dilutive impact of stock options
granted under an employee stock option plan. Diluted earnings per share for
the first six months of 2002 was $0.99 per share, versus $0.78 per share for
the first six months of 2001.
Net income for the second quarter of 2002 was $3.0 million, an
increase of 26.2% versus $2.4 million for the comparable period of 2001. Basic
earnings per share for the second quarter of 2002 was $0.51 per share, versus
$0.41 per share for the second quarter of 2001. Diluted earnings per share for
the second quarter of 2002 was $0.50 per share, versus $0.41 per share for the
second quarter of 2001.
RESULTS OF OPERATIONS
Net Interest Income
For the six-month period ended June 30, 2002, net interest income
totaled $20.9 million, an increase of 19.0%, or $3.3 million versus the first
six months of 2001. For the three-month period ended June 30, 2002, net
interest income totaled $10.7 million, an increase of 18.9%, or $1.7 million,
over the same period of 2001. Net interest income increased in both the six
and three month periods of 2002 versus the comparable periods of 2001,
primarily due to the implementation of a liability pricing strategy which has
resulted in an improved net interest margin. Although rates have stabilized
somewhat during 2002, the Company continues to see improvement in its net
interest margin as term deposits and other borrowed funds reprice to lower
rates at maturity. In addition, average interest bearing assets and average
non-interest bearing demand deposits increased in both the six and three month
periods ending June 30, 2002. The effect of these changes was to increase the
11
Company's net interest margin to 4.15% and 4.16%, respectively, for the six
and three month periods ended June 30, 2002, versus 3.54% and 3.59% for the
comparable periods of 2001.
During the first six months of 2002, total interest and dividend
income decreased by $7.7 million, or 19.3% to $32.3 million, versus $40.1
million during the same six months of 2001. During the second quarter of 2002,
interest and dividend income decreased $3.3 million, or 16.8%, to $16.3
million, versus $19.6 million during the same quarter of 2001. Daily average
earning assets for the first six months of 2002 increased 1.1% to $1.036
billion versus the same period in 2001. For the second quarter, daily average
earning assets increased 2.3% to $1.049 billion versus the same period in
2001. The tax equivalent yield on average earning assets decreased by 160
basis points to 6.3% for the six-month period ended June 30, 2002 versus the
same period of 2001. For the three-month period ended June 30, 2002, the yield
decreased by 143 basis points to 6.2% from the yield for the three-month
period ended June 30, 2001.
The decrease in the yield on average earning assets reflected
decreases in the yields on both loans and securities caused by the falling
interest rate environment. The yield on securities is historically lower than
the yield on loans, and decreasing the ratio of securities to total earning
assets will normally improve the yield on earning assets. The ratio of average
daily securities to average earning assets for the six-month and three-month
periods ended June 30, 2002 were 26.1% and 26.4% compared to 28.7% and 28.8%
for the same periods of 2001.
The average daily loan balances for the first six months of 2002
increased 4.3% to $751.5 million, over the average daily loan balances of
$720.8 million for the same period of 2001. During the same period, loan
interest income declined by $6.0 million, or 19.5%, to $24.7 million. The
decrease was the result of a 198 basis point decrease in the tax equivalent
yield on loans to 6.5% from 8.5% in the first six months of 2001. The average
daily loan balances for the second quarter of 2002 increased $32.4 million, or
4.5%, to $759.5 million, versus $727.1 million for the same period of 2001.
During the same period, loan interest income declined by $2.7 million, or
18.0%, to $12.4 million versus $15.1 million during the second quarter of
2001. The decrease was the result of a 178 basis point decrease in the tax
equivalent yield on loans, to 6.4%, versus 8.2% in the second quarter of 2001.
Income from short-term investments was $92,000 for the six-month
period and $64,000 for the three-month period ended June 30, 2002. This
compares to $276,000 and $34,000 for the same periods of 2001. The $184,000
decrease between the six-month periods was primarily the result of a 386 basis
point decrease in yields. The $30,000 increase between the three-month periods
resulted primarily from a $12.3 million increase in the average daily
short-term investments balances.
12
The average daily securities balances for the first six months of
2002 decreased $20.8 million, or 7.1%, to $273.9 million, versus $294.6
million for the same period of 2001. During the same periods, income from
securities declined by $1.6 million, or 17.1%, to $7.5 million versus $9.1
million during the first six months of 2001. The decrease was the result of
the decrease in average daily balances of securities combined with a 64 basis
point decline in the tax equivalent yields on securities, to 5.8% versus 6.5%
in the first six months of 2001. The average daily securities balances for the
second quarter of 2002 decreased $20.9 million, or 7.1%, to $274.0 million,
versus $294.9 million for the same period of 2001. During the same periods,
income from securities declined by $611,000, or 13.6%, to $3.9 million versus
$4.5 million during the second quarter of 2001. The decrease was the result of
a 40 basis point decrease in the tax equivalent yield on securities, to 6.0%,
versus 6.4% in the second quarter of 2001, combined with the decline in
average daily securities balances.
Total interest expense decreased $11.1 million, or 49.1%, to $11.5
million for the six-month period ended June 30, 2002, from $22.5 million for
the comparable period in 2001. The decrease was primarily the result of a 214
basis point decrease in the Company's daily cost of funds to 2.23%, versus
4.37% for the same period of 2001. Total interest expense decreased $5.0
million or 47.1% to $5.6 million for the three-month period ended June 30,
2002, from $10.6 million for the comparable period of 2001. The decrease was
primarily the result of a 195 basis point decrease in the Company's daily cost
of funds to 2.15%, versus 4.10% for the same period of 2001. On an average
daily basis, total deposits (including demand deposits) decreased $5.0
million, or 0.6%, to $835.4 million for the six-month period ended June 30,
2002, versus $840.4 million in the same period in 2001. The decrease was
primarily due to the Company's September, 2001 branch divestiture, which
included $70.3 million in deposits. The average daily deposit balances for the
second quarter of 2002 increased $24.0 million, or 2.9%, to $852.9 million
versus $828.9 million during the second quarter of 2001, despite the impact
resulting from the branch sale. On an average daily basis, noninterest bearing
demand deposits increased $10.0 million, or 7.5% and $9.5 million, or 6.9% for
the six and three-month periods ended June 30, 2002, versus the same periods
in 2001. When comparing the six months ended June 30, 2002 with the same
period of 2001, the average daily balance of time deposits, which pay a higher
rate of interest compared to demand deposit and transaction accounts,
decreased $16.5 million and the rate paid on such accounts declined by 276
basis points versus the same period in 2001. In the second quarter of 2002,
the average daily balance of time deposits increased by $10.7 million and the
rate paid on such accounts decreased by 267 basis points. During the remainder
of 2002, management plans to continue efforts to grow relationship type
accounts such as demand deposit and Investors' Weekly accounts, which pay a
lower rate of interest compared to time deposit accounts and are generally
viewed by management as stable and reliable funding sources. Average daily
balances of borrowings increased $1.3 million, or 0.7%, to $199.5 million for
the six months ended June 30, 2002 versus $198.2 million for the same period
13
in 2001, and decreased $15.2 million, or 7.2% for the three months ended June
30, 2002. The rate on borrowings decreased 234 basis points and 203 basis
points, respectively, when comparing the six and three month periods of 2002
with the same periods of 2001. On an average daily basis, total deposits
(including demand deposits) and purchased funds decreased 0.4% and increased
by 0.8% for the six-month and three-month periods ended June 30, 2002 versus
the same periods in 2001.
Provision for Loan Losses
Based on management's review of the adequacy of the allowance for
loan losses, provisions for losses on loans of $1.2 million and $747,000 were
recorded during the six month and three month periods ended June 30, 2002,
versus provisions of $520,000 and $307,000 recorded during the same periods of
2001. The increase in the provision reflected a number of factors, including
the increase in the size of the loan portfolio, the amount of impaired loans,
the amount of past due accruing loans (90 days or more), and management's
overall view on current credit quality.
Noninterest Income
Noninterest income categories for the six and three-month periods ended
June 30, 2002 and 2001 are shown in the following table:
Six Months ended
June 30,
----------------------------------
Percent
2002 2001 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 1,299 $ 1,423 (8.7)%
Service charges on deposits 2,981 2,452 21.6
Other income (net) 1,898 1,787 6.2
Net gains on the sale of real estate
mortgages held-for-sale 711 444 60.1
Net securities gains 16 2 700.0
---------- ---------- ----------
Total noninterest income $ 6,905 $ 6,108 13.1 %
========== ========== ==========
14
Three Months ended
June 30,
----------------------------------
Percent
2002 2001 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 641 $ 629 1.9 %
Service charges on deposits 1,659 1,344 23.4
Other income (net) 894 946 (5.5)
Net gains on the sale of real estate
mortgages held-for-sale 350 317 10.4
Net securities gains 16 2 700.0
---------- ---------- ----------
Total noninterest income $ 3,560 $ 3,238 9.9 %
========== ========== ==========
Trust fees increased 24.4%, from $803,000 to $999,000, in the first
six months of 2002 versus the same period in 2001. This increase was primarily
in employee benefit plan, executorship, living trust and testamentary trust
fees. Brokerage fees decreased 51.6%, from $620,000 to $300,000, in the first
six months of 2002 versus the same period in 2001, driven by nonrecurring fees
received in 2001 of approximately $156,000 related to the sale of several
annuity accounts, and reduced trading volume during 2002.
The primary sources of the increase in service charges on deposit
accounts were fees related to business checking accounts as well as fees
related to new deposit services which were implemented in the first quarter of
2002.
Other income consists of normal recurring fee income such as mortgage
service fees, credit card fees, insurance fees, and safe deposit box rent, as
well as other income that management classifies as non-recurring. Other fee
income increased $111,000 in the first six months of 2002 versus the same
period in 2001, and decreased $52,000 in the second quarter versus the same
period in 2001. The increase in the six-month period was primarily due to a
$151,000 increase in credit card fees driven by increases in fees paid to the
Company by merchants for handling credit card sales. The primary driver behind
the second quarter decrease was a $226,000 charge for non-cash impairment of
the Bank's mortgage servicing rights.
The increase in profits from the sale of mortgages reflected an
increase in the volume of mortgages sold during the first six months of 2002
versus sales during the first six months of 2001. During the first six months
of 2002, the Company sold $43.2 million in mortgages versus $25.4 million in
the comparable period of 2001. This increase in volume was the result of the
15
falling interest rate environment during 2001, the effects of which, in the
form of increased mortgage refinance activity and increased demand for home
mortgages, have carried over to 2002.
Noninterest Expense
Noninterest expense categories for the six and three-month periods
ended June 30, 2002, and 2001 are shown in the following table:
Six Months ended
June 30,
----------------------------------
Percent
2002 2001 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 9,134 $ 8,586 6.4 %
Occupancy and equipment expense 2,181 2,510 (13.1)
Other expense 6,280 5,588 12.4
---------- ---------- ----------
Total noninterest expense $ 17,595 $ 16,684 5.5 %
========== ========== ==========
Three Months ended
June 30,
----------------------------------
Percent
2002 2001 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 4,536 $ 4,374 3.7 %
Occupancy and equipment expense 1,082 1,241 (12.8)
Other expense 3,294 2,833 16.3
---------- ---------- ----------
Total noninterest expense $ 8,912 $ 8,448 5.5 %
========== ========== ==========
The increase in salaries and employee benefits reflected normal
salary increases and increases related to the employee 401(k) plan and
incentive compensation plan. Total employees decreased to 472 at June 30,
2002, from 496 at June 30, 2001. This decrease resulted primarily from the
reduction in staff in connection with the sale of five non-strategic bank
branches in September, 2001.
The decrease in occupancy and equipment expense was also primarily
related to the sale of the five branch offices in the third quarter of 2001.
16
Other expense includes corporate and business development, data
processing fees, telecommunications, postage, and professional fees such as
legal, accounting, and directors' fees. Other expense increased primarily due
to increased professional, advertising and public relations expenses incurred
during the first six-months of 2002 versus the same period of 2001.
Income Tax Expense
Income tax expense increased $1.1 million, or 57.1%, for the first
six months of 2002, compared to the same period in 2001. Income tax expense
for the second quarter of 2002 increased $493,000, or 45.7%, compared to the
second quarter of 2001. The combined state franchise tax expense and the
federal income tax expense as a percentage of income before income tax expense
increased to 34.3% during the first six months of 2002 compared to 30.3%
during the same period in 2001. It increased to 34.5% for the second quarter
of 2002, versus 31.3% for the second quarter of 2001. The increases were
primarily due to greater profitability which resulted in a higher percentage
of income being subject to the state franchise tax combined with the Company
being taxed at the 35% federal tax rate in 2002 versus the 34% rate in 2001.
FINANCIAL CONDITION
Total assets of the Company were $1.190 billion as of June 30, 2002,
an increase of $52.2 million, or 4.6%, when compared to $1.138 billion as of
December 31, 2001.
Total cash and cash equivalents increased by $25.4 million, or 32.1%,
to $104.5 million at June 30, 2002 from $79.1 million at December 31, 2001.
The increase was attributable to corresponding increases in interest bearing
deposits and long-term borrowings, offset by declines in short-term
borrowings, primarily federal funds purchased and securities sold under
agreements to repurchase.
Total securities available-for-sale increased by $6.3 million, or
2.3%, to $277.9 million at June 30, 2002 from $271.6 million at December 31,
2001. The increase was a result of a number of transactions in the securities
portfolio. Paydowns of $28.3 million were received, and the amortization of
premiums, net of the accretion of discounts, was $932 thousand. Maturities and
calls of securities totaled $6.4 million. These portfolio decreases were
offset by securities purchases totaling $38.1 million, and an increase of $3.8
million in the fair value of the securities. The investment portfolio is
managed to limit the Company's exposure to risk by containing mostly CMO's and
other securities which are either directly or indirectly backed by the federal
government or a local municipal government.
17
Real estate mortgages held-for-sale decreased by $7.3 million, or
86.0%, to $1.2 million at June 30, 2002 from $8.5 million at December 31,
2001. The balance of this asset category is subject to a high degree of
variability depending on, among other things, recent mortgage loan rates and
the timing of loan sales into the secondary market. During the six months
ended June 30, 2002, $35.9 million in real estate mortgages were originated
for sale and $43.2 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased
by $26.0 million or 3.5% to $764.2 million at June 30, 2002 from $738.2
million at December 31, 2001. The mix of loan types within the Company's
portfolio remained relatively unchanged reflecting 74% commercial, 6% real
estate and 20% consumer loans compared to 73% commercial, 6% real estate and
21% consumer loans at December 31, 2001.
The allowance for loan losses increased $938,000, or 11.8%, to $8.9
million at June 30, 2002 from $7.9 million at December 31, 2001. Net
charge-offs for the six months ended June 30, were $311,000 in 2002 and
$223,000 in 2001. The allowance for loan losses at June 30, 2002 was 1.16% of
total loans, net of residential mortgage loans held for sale on the secondary
market, versus 1.08% at December 31, 2001.
The Company has a relatively high percentage of commercial and
commercial real estate loans, most of which are extended to small or
medium-sized businesses. Commercial loans represent higher dollar loans to
fewer customers and therefore higher credit risk. Pricing is adjusted to
manage the higher credit risk associated with these types of loans. Fixed rate
mortgage loans, which represent increased interest rate risk, are sold in the
secondary market, as well as some variable rate mortgage loans. The remainder
of the variable rate mortgage loans are retained. Management believes the
allowance for loan losses is at a level commensurate with the overall risk
exposure of the loan portfolio. However, should the economic climate
deteriorate further, certain borrowers may experience difficulty and the level
of non-performing loans, charge-offs, and delinquencies could rise and require
further increases in the provision.
Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely.
Subsequent recoveries, if any, are credited to the allowance. The allowance is
an amount that management believes will be adequate to absorb probable losses
relating to specifically identified loans based on an evaluation as well as
other probable losses inherent in the loan portfolio. The evaluations take
into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans,
and current economic conditions that may affect the borrower's ability to
repay. Management also considers trends in adversely classified loans based
upon a monthly review of those credits. Since December 31, 2001, the
18
percentage of loans internally adversely classified has increased. In
accordance with FASB Statements 5 and 114, the allowance is provided for
losses that have been incurred as of the balance sheet date and is based on
past events and current economic conditions, and does not include the effects
of expected losses on specific loans or groups of loans that are related to
future events or expected changes in economic conditions. The majority of the
risk in the loan portfolio lies in the commercial loans that include
commercial real estate loans. Accordingly, the Company allocated $7.6 million
(or approximately 86% of the total loan loss reserve) to these loans, which
comprise approximately 74% of the loan portfolio.
At June 30, 2002, total nonperforming loans increased by $2.5 million
to $5.0 million from $2.5 million at December 31, 2001. Loans delinquent 90
days or more that were included in the accompanying financial statements as
accruing totaled $3.6 million versus $264,000 at December 31, 2001. Total
impaired loans increased by $1.9 million to $11.9 million at June 30, 2002
from $10.0 million at December 31, 2001. The increases in the nonperforming
loans, loans delinquent 90 days or more and accruing and impaired loans
categories resulted primarily from one commercial credit totaling $3.4
million. This loan is current as to principal and interest. However, the
renewal of this loan has been complicated as more than one bank is involved,
and therefore it is past maturity. The impaired loan total includes $1.3
million in nonaccrual loans. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price of the fair value of the collateral if the loan is collateral dependent.
A loan is impaired when it is probable the creditor will be unable to collect
all of the contractual principal and interest payments due in accordance with
the terms of the loan agreement.
Total deposits increased by $49.8 million, or 6.3%, to $843.2 million
at June 30, 2002 from $793.4 million at December 31, 2001. The increase
resulted from increases of $58.4 million in certificates of deposit, $5.6
million in savings accounts and $2.1 million in NOW accounts. Offsetting these
increases were declines of $9.8 million in demand deposits, $3.9 million in
money market accounts and $2.1 million in Investors' Weekly accounts.
Total short-term borrowings decreased by $29.8 million, or 12.8%, to
$202.3 million at June 30, 2002 from $232.1 million at December 31, 2001. The
decrease resulted primarily from a $27.4 million decline in securities sold
under agreements to repurchase combined with a $12.4 million decline in
federal funds purchased. Offsetting these declines was a $10 million increase
in other borrowings, primarily short-term advances from the Federal Home Loan
Bank of Indianapolis.
Total stockholders' equity increased by $6.3 million, or 8.6%, to
$79.8 million at June 30, 2002 from $73.5 million at December 31, 2001. Net
19
income of $5.9 million, less dividends of $2.0 million, plus the increase in
the accumulated other comprehensive income of $2.4 million, less $67,000 for
the cost of treasury stock acquired, comprised this increase.
The Federal Deposit Insurance Corporation's (FDIC) risk based capital
regulations require that all banking organizations maintain an 8.0% total risk
based capital ratio. The FDIC has also established definitions of "well
capitalized" as a 5.0% Tier I leverage capital ratio, a 6.0% Tier I risk based
capital ratio and a 10.0% total risk based capital ratio. All of the Company's
ratios continue to be above "well capitalized" levels. As of June 30, 2002,
the Company's Tier 1 leverage capital ratio, Tier 1 risk based capital ratio
and total risk based capital ratio were 8.1%, 10.4% and 11.5%, respectively.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk represents the Company's primary market risk
exposure. The Company does not have a material exposure to foreign currency
exchange risk, does not have any material amount of derivative financial
instruments and does not maintain a trading portfolio. The board of directors
annually reviews and approves the policy used to manage interest rate risk.
The policy was last reviewed and approved in May 2002. The policy sets
guidelines for balance sheet structure, which are designed to protect the
Company from the impact that interest rate changes could have on net income,
but does not necessarily indicate the effect on future net interest income.
The Company, through its Asset/Liability Committee, manages interest rate risk
by monitoring the computer simulated earnings impact of various rate scenarios
and general market conditions. The Company then modifies its long-term risk
parameters by attempting to generate the type of loans, investments, and
deposits that currently fit the Company's needs, as determined by the
Asset/Liability Committee. This computer simulation analysis measures the net
interest income impact of various interest rate scenario changes during the
next 12 months. If the change in net interest income is less than 3% of
primary capital, the balance sheet structure is considered to be within
acceptable risk levels. At June 30, 2002, the Company's potential pretax
exposure was within the Company's policy limit, and not significantly
different from December 31, 2001.
20
FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference)
contains, and future oral and written statements of the Company and its
management may contain, forward-looking statements, within the meaning of such
term in the Private Securities Litigation Reform Act of 1995, with respect to
the financial condition, results of operations, plans, objectives, future
performance and business of the Company. Forward-looking statements, which may
be based upon beliefs, expectations and assumptions of the Company's
management and on information currently available to management, are generally
identifiable by the use of words such as "believe," "expect," "anticipate,"
"plan," "intend," "estimate," "may," "will," "would," "could," "should" or
other similar expressions. Additionally, all statements in this document,
including forward-looking statements, speak only as of the date they are made,
and the Company undertakes no obligation to update any statement in light of
new information or future events.
The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors, which could have
a material adverse effect on the operations and future prospects of the
Company and its subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the
strength of the local economies in which the Company
conducts its operations which may be less favorable than
expected and may result in, among other things, a
deterioration in the credit quality and value of the
Company's assets.
o The economic impact of the terrorist attacks that occurred
on September 11th, as well as any future threats and
attacks, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local
laws, regulations and policies affecting banking,
securities, insurance and monetary and financial matters.
o The effects of changes in interest rates (including the
effects of changes in the rate of prepayments of the
Company's assets) and the policies of the Board of Governors
of the Federal Reserve System.
o The ability of the Company to compete with other financial
institutions as effectively as the Company currently intends
due to increases in competitive pressures in the financial
services sector.
21
o The inability of the Company to obtain new customers and to
retain existing customers.
o The timely development and acceptance of products and
services, including products and services offered through
alternative delivery channels such as the Internet.
o Technological changes implemented by the Company and by
other parties, including third party vendors, which may be
more difficult or more expensive than anticipated or which
may have unforeseen consequences to the Company and its
customers.
o The ability of the Company to develop and maintain secure
and reliable electronic systems.
o The ability of the Company to retain key executives and
employees and the difficulty that the Company may experience
in replacing key executives and employees in an effective
manner.
o Consumer spending and saving habits, which may change in a
manner that affects the Company's business adversely.
o Business combinations and the integration of acquired
businesses, which may be more difficult or expensive than
expected.
o The costs, effects and outcomes of existing or future
litigation.
o Changes in accounting policies and practices, as may be
adopted by state and federal regulatory agencies and the
Financial Accounting Standards Board.
o The ability of the Company to manage the risks associated
with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Additional information concerning the Company and its business,
including other factors that could materially affect the Company's financial
results, is included in the Company's filings with the Securities and Exchange
Commission.
22
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 2002
Part II - Other Information
Item 1. Legal proceedings
-----------------
There are no material pending legal proceedings to which the Company
or its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 9, 2002, the Company's annual meeting of stockholders was
held. At the meeting, Crowe, Chizek and Company, LLP was appointed as
the Company's independent auditors for the year ended December 31,
2002, and Eddie Creighton, Michael L. Kubacki, Steven D. Ross, M.
Scott Welch and George L. White were elected to serve as directors
with terms expiring in 2005. Continuing as directors until 2003 are
R. Douglas Grant, Jerry L. Helvey, Allan J. Ludwig, D. Jean Northernor
and Richard L. Pletcher. Continuing as directors until 2004 are Anna
K. Duffin, L. Craig Fulmer, Charles E. Niemier, Donald B. Steininger
and Terry L. Tucker.
Election of Directors:
For Withheld
--------- --------
Eddie Creighton 4,868,459 903,378
Michael L. Kubacki 4,663,527 1,108,310
Steven D. Ross 4,972,399 799,438
M. Scott Welch 4,972,399 799,438
George L. White 4,962,187 809,650
Ratification of Auditors:
For Withheld
--------- --------
Crowe, Chizek & Co., LLP 4,970,219 801,618
23
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
99.1 - Certificate of Chief Executive Officer
99.2 - Certificate of Chief Financial Officer
b. Reports
None
24
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 2002
Part II - Other Information
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
(Registrant)
Date: August 12, 2002 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: August 12, 2002 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: August 12, 2002 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
25