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 March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 April 30, 2003
Common Stock, No Par Value 5,772,931
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 . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . 17
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . 20
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . . 20
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 20
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 21
Form 10-Q Certifications. . . . . . . . . . . . . . . . . . . . . . 22
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 1 - FINANCIAL STATEMENTS
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2003 and December 31, 2002
(in thousands)
(Page 1 of 2)
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 52,344 $ 74,149
Short-term investments 8,190 13,000
------------ ------------
Total cash and cash equivalents 60,534 87,149
Securities available-for-sale:
U. S. Treasury and government agency securities 14,171 17,284
Mortgage-backed securities 221,498 222,036
State and municipal securities 40,527 34,785
------------ ------------
Total securities available-for-sale
(carried at fair value) 276,196 274,105
Real estate mortgages held-for-sale 7,001 10,395
Loans:
Total loans 826,865 822,676
Less: Allowance for loan losses 9,742 9,533
------------ ------------
Net loans 817,123 813,143
Land, premises and equipment, net 24,612 24,768
Accrued income receivable 5,124 4,999
Goodwill 4,970 4,970
Other intangible assets 1,005 1,042
Other assets 25,051 27,215
------------ ------------
Total assets $ 1,221,616 $ 1,247,786
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2003 and December 31, 2002
(in thousands except for share and per share data)
(Page 2 of 2)
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 167,558 $ 192,787
Interest bearing deposits 793,936 720,538
------------ ------------
Total deposits 961,494 913,325
Short-term borrowings:
Federal funds purchased 9,300 30,000
Securities sold under agreements
to repurchase 91,457 124,968
U.S. Treasury demand notes 581 4,000
Other borrowings 10,000 26,000
------------ ------------
Total short-term borrowings 111,338 184,968
Accrued expenses payable 10,773 12,503
Other liabilities 1,246 2,417
Long-term borrowings 31,347 31,348
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,351 19,345
------------ ------------
Total liabilities 1,135,549 1,163,906
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,813,984 shares issued and 5,770,565 outstanding as of
March 31, 2003, and 5,813,984 shares issued and 5,767,010
outstanding at December 31, 2002 1,453 1,453
Additional paid-in capital 9,591 8,537
Retained earnings 73,230 70,819
Accumulated other comprehensive income 2,612 3,937
Treasury stock, at cost (819) (866)
------------ ------------
Total stockholders' equity 86,067 83,880
------------ ------------
Total liabilities and stockholders' equity $ 1,221,616 $ 1,247,786
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
2
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2003 and 2002
(in thousands except for share and per share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended
March 31,
---------------------------
2003 2002
------------ ------------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 11,833 $ 12,336
Tax exempt 63 33
------------ ------------
Total loan income 11,896 12,369
Short-term investments 27 28
Securities:
U.S. Treasury and government agency securities 170 395
Mortgage-backed securities 2,932 2,758
State and municipal securities 428 400
Other debt securities 0 115
------------ ------------
Total interest and dividend income 15,453 16,065
INTEREST EXPENSE
- ----------------
Interest on deposits 3,786 4,352
Interest on short-term borrowings 340 920
Interest on long-term borrowings 769 572
------------ ------------
Total interest expense 4,895 5,844
------------ ------------
NET INTEREST INCOME 10,558 10,221
- -------------------
Provision for loan losses 667 502
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,891 9,719
- ------------------------- ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage fees 610 658
Service charges on deposit accounts 1,664 1,398
Other income (net) 1,019 928
Net gains on the sale of real estate mortgages
held-for-sale 1,079 361
------------ ------------
Total noninterest income 4,372 3,345
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 4,705 4,598
Occupancy and equipment expense 1,362 1,099
Other expense 2,897 2,872
------------ ------------
Total noninterest expense 8,964 8,569
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2003, and 2002
(in thousands except for share and per share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended
March 31,
---------------------------
2003 2002
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 5,299 4,495
- --------------------------------
Income tax expense 1,784 1,542
------------ ------------
NET INCOME $ 3,515 $ 2,953
- ---------- ============ ============
Other comprehensive income(loss), net of tax:
Unrealized gain/(loss) on available-
for-sale securities (1,325) 242
------------ ------------
TOTAL COMPREHENSIVE INCOME $ 2,190 $ 3,195
============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,813,984 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.60 $ 0.51
- ------------------------------- ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 5,957,134 5,901,581
DILUTED EARNINGS PER COMMON SHARE $ 0.59 $ 0.50
- --------------------------------- ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 2003 and 2002
(in thousands)
(Unaudited)
(Page 1 of 2)
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 3,515 $ 2,953
------------ ------------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 540 558
Provision for loan losses 667 502
Amortization of intangible assets 44 44
Amortization of mortgage servicing rights 215 84
Impairment of mortgage servicing rights 141 (23)
Loans originated for sale (37,514) (17,246)
Net gain on sale of loans (1,079) (361)
Proceeds from sale of loans 41,710 21,516
Net (gain) loss on sale of premises and equipment 0 2
Net securities amortization 376 550
Increase in taxes payable 1,763 1,469
(Increase) decrease in income receivable (125) 158
Increase (decrease) in accrued expenses payable (163) 219
(Increase) in life insurance cash surrender value (168) 0
(Increase) in other assets (397) (598)
Increase (decrease) in other liabilities (117) 112
------------ ------------
Total adjustments 5,893 6,986
------------ ------------
Net cash from operating activities 9,408 9,939
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 32,928 16,635
Purchases of securities available-for-sale (37,451) (18,733)
Net increase in total loans (4,713) (6,856)
Purchase of land, premises and equipment (383) (774)
------------ ------------
Net cash from investing activities (9,619) (9,728)
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2003 and 2002
(in thousands)
(Unaudited)
(Page 2 of 2)
2003 2002
------------ ------------
Cash flows from financing activities:
Net increase in total deposits $ 48,169 $ 51,371
Proceeds from short-term borrowings 6,464,530 7,026,470
Payments on short-term borrowings (6,538,161) (7,115,357)
Payments on long-term borrowings (1) (12)
Dividends paid (988) (864)
(Purchase) sale of treasury stock 47 (67)
------------ ------------
Net cash from financing activities (26,404) (38,459)
------------ ------------
Net decrease in cash and cash equivalents (26,615) (38,248)
Cash and cash equivalents at beginning of the period 87,149 79,123
------------ ------------
Cash and cash equivalents at end of the period $ 60,534 $ 40,875
============ ============
Cash paid during the period for:
Interest $ 4,312 $ 5,685
============ ============
Income taxes $ 25 $ 250
============ ============
Loans transferred to other real estate $ 65 $ 0
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
6
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(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 period ending March 31, 2003 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003. The
2002 Lakeland Financial Corporation Annual Report on Form 10-K should be read
in conjunction with these statements.
NOTE 2. 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.
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. No
additional options were granted in the first quarter of 2003. Had compensation
cost for stock options been recorded in the financial statements, net income
and earnings per share would have been the pro forma amounts indicated below.
The pro forma effect may increase in the future if more options are granted.
7
Three Months ended
March 31,
2003 2002
--------- ----------
Net income (in thousands) as reported $ 3,515 $ 2,953
Deduct: stock-based compensation expense
determined under fair value based method 118 180
--------- ----------
Pro forma net income $ 3,397 $ 2,773
========= ==========
Basic earnings per common share as reported $ 0.60 $ 0.51
Pro forma basic earnings per share $ 0.58 $ 0.48
Diluted earnings per common share as reported $ 0.59 $ 0.50
Pro forma diluted earnings per share $ 0.57 $ 0.47
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet at March 31, 2003 reflects the acquisition of
43,419 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.
NOTE 3. LOANS
March 31, December 31,
2003 2002
------------ ------------
(in thousands)
Commercial and industrial loans $ 565,237 $ 556,800
Agri-business and agricultural loans 63,991 68,137
Real estate mortgage loans 45,220 44,644
Real estate construction loans 2,279 2,540
Installment loans and credit cards 150,138 150,555
------------ ------------
Total loans $ 826,865 $ 822,676
============ ============
Impaired loans $ 8,232 $ 7,298
Non-performing loans $ 8,594 $ 7,603
NOTE 4. 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.
8
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
March 31, 2003
OVERVIEW
Lakeland Financial Corporation is the holding company for Lake City Bank.
The Company is headquartered in Warsaw, Indiana and operates 41 offices in 12
counties in northern Indiana. The Company earned $3.5 million for the first
three months of 2003 versus $3.0 million in the same period of 2002, an
increase of 19.0%. The increase was driven by a $337,000 increase in net
interest income and a $1.0 million increase in non-interest income. Offsetting
these positive impacts were increases of $165,000 in the provision for loan
losses, and $395,000 in non-interest expense. Basic earnings per share for the
first three months of 2003 was $0.60 per share versus $0.51 per share for the
first three months of 2002. 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 three months of 2003 was $0.59 per
share, versus $0.50 per share for the first three months of 2002.
RESULTS OF OPERATIONS
Net Interest Income
For the three-month period ended March 31, 2003, net interest income
totaled $10.6 million, an increase of 3.3%, or $337,000 versus the first three
months of 2002. Net interest income increased in the three-month periods of
2003 versus the comparable periods of 2002, primarily due to a $87.5 million
increase in average interest bearing assets combined with an $18.0 million
increase in average non-interest bearing demand deposits. The increase in net
interest income occurred despite a 19 basis point decline in the Company's net
interest margin to 3.93% for the three-month period ended March 31, 2003,
versus 4.12% for the comparable period of 2002.
During the first three months of 2003, total interest and dividend income
decreased by $612,000, or 3.8% to $15.5 million, versus $16.1 million during
the same three months of 2002. Daily average earning assets for the first
three months of 2003 increased 8.5% to $1.114 billion versus the same period
in 2002. The tax equivalent yield on average earning assets decreased by 67
basis points to 5.6% for the three-month period ended March 31, 2003 versus
the same period of 2002.
9
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 three-month period ended March
31, 2003 was 24.7% compared to 26.7% for the same period of 2002.
The average daily loan balances for the first three months of 2003
increased 11.3% to $829.6 million, over the average daily loan balances of
$745.6 million for the same period of 2002. During the same period, loan
interest income declined by $473,000, or 3.8%, to $11.9 million. The decrease
was the result of an 83 basis point decrease in the tax equivalent yield on
loans to 5.7% from 6.6% in the first three months of 2002.
Income from short-term investments was $27,000 for the three-month period
ended March 31, 2003, versus $28,000 for the same period of 2002.
The average daily securities balances for the first three months of 2003
increased $1.5 million, or 0.5%, to $275.2 million, versus $273.7 million for
the same period of 2002. During the same periods, income from securities
declined by $138,000, or 3.8%, to $3.5 million versus $3.7 million during the
first three months of 2002. The decrease was primarily the result of a 21
basis point decline in the tax equivalent yields on securities, to 5.5% versus
5.7% in the first three months of 2002.
Total interest expense decreased $949,000, or 16.2%, to $4.9 million for
the three-month period ended March 31, 2003, from $5.8 million for the
comparable period in 2002. The decrease was primarily the result of a 53 basis
point decrease in the Company's daily cost of funds to 1.79%, versus 2.32% for
the same period of 2002. On an average daily basis, total deposits (including
demand deposits) increased $116.7 million, or 14.3%, to $934.1 million for the
three-month period ended March 31, 2003, versus $817.4 million in the same
period in 2002. On an average daily basis, noninterest bearing demand deposits
increased $18.0 million, or 13.0%, for the three-month period ended March 31,
2003, versus the same period in 2002. When comparing the three months ended
March 31, 2003 with the same period of 2002, the average daily balance of time
deposits, which pay a higher rate of interest compared to demand deposit and
transaction accounts, increased $68.6 million and the rate paid on such
accounts declined by 77 basis points versus the same period in 2002. During
the remainder of 2003, management plans to continue efforts to grow
relationship type accounts such as demand deposit and Investors' Weekly
accounts, which traditionally 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 decreased $26.2 million,
or 12.8%, to $178.0 million for the three months ended March 31, 2003 versus
$204.2 million for the same period in 2002. The rate on borrowings decreased
10
43 basis points when comparing the first quarter of 2003 with the same period
of 2002. On an average daily basis, total deposits (including demand deposits)
and purchased funds increased 8.9% for the three-month period ended March 31,
2003 versus the same period in 2002.
Provision for Loan Losses
Based on management's review of the adequacy of the allowance for loan
losses, a provision for losses on loans of $667,000 was recorded during the
three-month period ended March 31, 2003, versus a provision of $502,000
recorded during the same period of 2002. The increase in the provision for
loan losses for the three-month period 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, as discussed in more
detail below in the analysis relating to the Company's financial condition.
Noninterest Income
Noninterest income categories for the three-month periods ended March 31,
2003 and 2002 are shown in the following table:
Three Months ended
March 31,
----------------------------------
Percent
2003 2002 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 610 $ 658 (7.3)%
Service charges on deposits 1,664 1,398 19.0
Other income (net) 1,019 928 9.8
Net gains on the sale of real estate
mortgages held-for-sale 1,079 361 198.9
---------- ---------- ----------
Total noninterest income $ 4,372 $ 3,345 30.7 %
========== ========== ==========
Trust fees decreased 15.7%, from $517,000 to $436,000, in the first three
months of 2003 versus the same period in 2002. This decrease was primarily in
employee benefit plan, stock transfer, and living trust fees. Many of the
trust fees are determined based upon the dollar amount of the assets held in
the various trusts. The overall decline in the stock market has adversely
impacted the value of those trust assets, and therefore reduced the trust
income based upon it. Brokerage fees increased 24.3%, from $140,000 to
$174,000, in the first three months of 2003 versus the same period in 2002,
driven by increased trading volume during 2003.
11
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 that were implemented in 2002.
Other income consists of normal recurring fee income such as mortgage
service fees, credit card fees, insurance income and fees, valuation of
mortgage servicing rights and safe deposit box rent, as well as other income
that management classifies as non-recurring. Other fee income increased
$91,000 in the first three months of 2003 versus the same period in 2002. The
primary drivers behind the increase were a $168,000 increase in the cash
surrender value of bank owned life insurance and a $58,000 increase in
mortgage fees. Offsetting these was a $164,000 increase in the 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 three months of 2003 versus
sales during the first three months of 2002. During the first three months of
2003, the Company sold $40.9 million in mortgages versus $21.3 million in the
comparable period of 2002. This increase in volume was the result of the low
interest rate environment, which has resulted in increased mortgage refinance
activity and increased demand for home mortgages. Management does not
anticipate that this level of mortgage sales gains will continue throughout
the year.
Noninterest Expense
Noninterest expense categories for the three-month periods ended March
31, 2003, and 2002 are shown in the following table:
Three Months ended
March 31,
----------------------------------
Percent
2003 2002 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 4,705 $ 4,598 2.3 %
Occupancy and equipment expense 1,362 1,099 23.9
Other expense 2,897 2,872 0.9
---------- ---------- ----------
Total noninterest expense $ 8,964 $ 8,569 4.6 %
========== ========== ==========
The slight increase in salaries and employee benefits was primarily due
to normal salary increases, as total employees decreased to 463 at March 31,
2003, from 466 at March 31, 2002.
12
The 23.9% increase in occupancy and equipment expense reflected higher
property taxes, as well as higher maintenance and repair expense due to an
increased commitment to the physical enhancement of offices and higher snow
removal costs required during the first quarter of 2003, versus the comparable
period of 2002.
Other expense includes corporate and business development, data
processing fees, telecommunications, postage, and professional fees such as
legal, accounting, and directors' fees. Other expense remained stable although
data processing expenses incurred during the first three-months of 2003 were
greater than during the same period of 2002.
Income Tax Expense
Income tax expense increased $242,000, or 15.7%, for the first three
months of 2003, compared to the same period in 2002. The combined state
franchise tax expense and the federal income tax expense as a percentage of
income before income tax expense decreased to 33.7% during the first three
months of 2003 compared to 34.3% during the same period in 2002.
FINANCIAL CONDITION
Total assets of the Company were $1.222 billion as of March 31, 2003, a
decrease of $26.2 million, or 2.1%, when compared to $1.248 billion as of
December 31, 2002.
Total cash and cash equivalents decreased by $26.6 million, or 30.5%, to
$60.5 million at March 31, 2003 from $87.1 million at December 31, 2002. The
decrease was attributable to decreases in the Company's short-term borrowings.
Total securities available-for-sale increased by $2.1 million, or 0.8%,
to $276.2 million at March 31, 2003 from $274.1 million at December 31, 2002.
The increase was a result of a number of transactions in the securities
portfolio. Paydowns of $27.1 million were received, and the amortization of
premiums, net of the accretion of discounts, was $376,000. Maturities, calls
and sales of securities totaled $5.9 million, and the fair market value of the
securities declined by $2.0 million. The market value decline was driven by
paydowns received in the mortgage-backed portion on the securities portfolio.
These portfolio decreases were offset by securities purchases totaling $37.5
million. 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.
13
Real estate mortgages held-for-sale decreased by $3.4 million, or 32.7%,
to $7.0 million at March 31, 2003 from $10.4 million at December 31, 2002. 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 three months ended March 31,
2003, $37.5 million in real estate mortgages were originated for sale and
$40.9 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased by
$4.2 million or 0.5% to $826.9 million at March 31, 2003 from $822.7 million
at December 31, 2002. The mix of loan types within the Company's portfolio
remained relatively unchanged, reflecting 76% commercial, 6% real estate and
18% consumer loans at both March 31, 2003 and December 31, 2002.
The allowance for loan losses increased $209,000, or 2.2%, to $9.7
million at March 31, 2003 from $9.5 million at December 31, 2002. Net
charge-offs for the three months ended March 31, were $458,000 in 2003 and
$139,000 in 2002. The increase in charge-offs was primarily due to one
commercial credit. The allowance for loan losses at March 31, 2003 was 1.18%
of total loans, net of residential mortgage loans held for sale on the
secondary market, versus 1.16% at December 31, 2002.
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. The majority of 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 and a small number of fixed 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, as a result of the continuing difficult economic climate, 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 incurred 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. An appropriate level of general
14
allowance is determined based on the application of loss percentages to graded
loans by categories. Federal regulations require insured institutions to
classify their own assets on a regular basis. The regulations provide for
three categories of classified loans - substandard, doubtful and loss. The
regulations also contain a special mention category. Special mention is
defined as loans that do not currently expose an insured institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof
is classified as loss, the insured institution must either establish specified
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. At March 31, 2003, on the basis of
management's review of the loan portfolio, the Company had $28.4 million of
assets classified special mention, $33.1 million classified as substandard,
$487,000 classified as doubtful and $0 classified as loss as compared to $47.6
million, $27.0 million, $211,000 and $200,000 at December 31, 2002.
Classified loan percentages of estimated loss are as follows: Special
Mention-5%; Substandard-15%; Doubtful-50%; and Loss-100%. Management
additionally provides a reserve estimate for incurred losses in non-classified
loans ranging from 0.20% to 0.75%. Allowance estimates are developed by
management in consultation with regulatory authorities, taking into account
both actual loss experience and peer group loss experience, and are adjusted
for current economic conditions. Allowance estimates are considered a prudent
measurement of the risk in the Company's loan portfolio and are applied to
individual loans based on loan type. 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.
At March 31, 2003, total nonperforming loans increased by $1.0 million to
$8.6 million from $7.6 million at December 31, 2002. Loans delinquent 90 days
or more that were included in the accompanying financial statements as
accruing totaled $3.4 million at both March 31, 2003 and December 31, 2002.
Total impaired loans increased by $934,000 to $8.2 million at March 31, 2003
from $7.3 million at December 31, 2002. The increase in the impaired loans
category resulted primarily from one commercial credit totaling $1.7 million.
The increase in nonperforming loans also resulted from the addition of the
aforementioned loan. The impaired loan total includes $5.0 million in
nonaccrual loans. A loan is impaired when full payment under the original loan
terms is not expected. Impairment is evaluated in total for smaller-balance
loans of similar nature such as residential mortgage, consumer, and credit
card loans, and on an individual loan basis for other loans. If a loan is
impaired, a portion of the allowance may be allocated so that the loan is
15
reported, net, at the present value of estimated future cash flows using the
loan's existing rate or at the fair value of collateral if repayment is
expected solely from the collateral.
Total deposits increased by $48.2 million, or 5.3%, to $961.5 million at
March 31, 2003 from $913.3 million at December 31, 2002. The increase resulted
from increases of $41.8 million in certificates of deposit driven by a $48.3
million increase in public fund CD's, $17.5 million in NOW accounts, $10.3
million in Investors' Weekly accounts and $4.0 million in savings accounts.
Offsetting these increases were declines of $25.2 million in demand deposits
and $221,000 in money market accounts.
Total short-term borrowings decreased by $73.6 million, or 39.8%, to
$111.3 million at March 31, 2003 from $184.9 million at December 31, 2002. The
decrease resulted from declines of $33.5 million in securities sold under
agreements to repurchase, $20.7 million in federal funds purchased and $16.0
million in other borrowings, primarily short-term advances from the Federal
Home Loan Bank of Indianapolis.
Total stockholders' equity increased by $2.2 million, or 2.6%, to $86.1
million at March 31, 2003 from $83.9 million at December 31, 2002. Net income
of $3.5 million, less dividends of $1.1 million, less the decrease in the
accumulated other comprehensive income of $1.3 million, plus $47,000 for the
cost of treasury stock sold, comprised most of this increase. In addition,
effective January 1, 2003, the Company's directors' deferred compensation plan
was amended to no longer permit diversification outside of Company stock and
to require that settlement of deferred balances be made in shares of Company
stock. In accordance with EITF 97-14: "Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested," on
the date of the plan change the $1.1 million current value of the liability
for the Company shares was transferred to additional paid-in capital from
other liabilities.
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 March 31, 2003,
the Company's Tier 1 leverage capital ratio, Tier 1 risk based capital ratio
and total risk based capital ratio were 8.1%, 10.5% and 11.6%, respectively.
16
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 March 31, 2003, the Company's potential pretax
exposure was within the Company's policy limit, and not significantly
different from December 31, 2002.
ITEM 4 - CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date of
this report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect the Company's internal
controls subsequent to the date of the evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
17
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 past and any future terrorist attacks, acts of war
or threats thereof 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.
18
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, the Financial Accounting Standards
Board, the Securities and Exchange Commission and the Public Company
Accounting Oversight 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.
19
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2003
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 and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
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
A report on Form 8-K was filed on April 15, 2003 under Item 5
which reported the Company's first quarter financial information
in the form of a press release.
20
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2003
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: May 5, 2003 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: May 5, 2003 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: May 5, 2003 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
21
Certifications
I, Michael L. Kubacki, Chief Executive Officer of the Company, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Lakeland Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
22
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 5, 2003 /s/Michael L. Kubacki
Michael L. Kubacki - Chief Executive Officer
23
Certifications
I, David M. Findlay, Chief Financial Officer of the Company, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Lakeland Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
24
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 5 2003 /s/David M. Findlay
David M. Findlay - Chief Financial Officer
25