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, 2004
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, 2004
Common Stock, No Par Value 5,822,171
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 . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . 21
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . 24
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 24
Item 4. Submission of Matters to a Vote of Security Holders . . . 24
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 25
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 26
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 1 - FINANCIAL STATEMENTS
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2004 and December 31, 2003
(in thousands)
(Page 1 of 2)
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 50,651 $ 52,297
Short-term investments 6,823 5,144
------------ ------------
Total cash and cash equivalents 57,474 57,441
Securities available-for-sale:
U. S. Treasury and government agency securities 19,641 17,280
Mortgage-backed securities 211,988 211,142
State and municipal securities 53,322 52,945
------------ ------------
Total securities available-for-sale
(carried at fair value) 284,951 281,367
Real estate mortgages held-for-sale 3,513 3,431
Loans:
Total loans 884,499 870,882
Less: Allowance for loan losses 10,477 10,234
------------ ------------
Net loans 874,022 860,648
Land, premises and equipment, net 25,976 26,157
Accrued income receivable 5,173 5,010
Goodwill 4,970 4,970
Other intangible assets 1,406 1,460
Other assets 28,444 30,930
------------ ------------
Total assets $ 1,285,929 $ 1,271,414
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2004 and December 31, 2003
(in thousands except for share and per share data)
(Page 2 of 2)
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 197,977 $ 185,734
Interest bearing deposits 808,834 740,657
------------ ------------
Total deposits 1,006,811 926,391
Short-term borrowings:
Federal funds purchased 16,000 24,000
Securities sold under agreements
to repurchase 86,511 102,601
U.S. Treasury demand notes 2,303 3,160
Other borrowings 10,000 55,000
------------ ------------
Total short-term borrowings 114,814 184,761
Accrued expenses payable 7,626 7,804
Other liabilities 1,513 1,461
Long-term borrowings 30,046 30,047
Subordinated debentures 30,928 30,928
------------ ------------
Total liabilities 1,191,738 1,181,392
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,849,494 shares issued and 5,817,474 outstanding as of
March 31, 2004, and 5,834,744 shares issued and 5,788,263
outstanding at December 31, 2003 1,453 1,453
Additional paid-in capital 10,700 10,509
Retained earnings 82,534 80,260
Accumulated other comprehensive income (loss) 169 (1,282)
Treasury stock, at cost (665) (918)
------------ ------------
Total stockholders' equity 94,191 90,022
------------ ------------
Total liabilities and stockholders' equity $ 1,285,929 $ 1,271,414
============ ============
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, 2004 and 2003
(in thousands except for share and per share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended
March 31,
---------------------------
2004 2003
------------ ------------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 11,316 $ 11,833
Tax exempt 68 63
------------ ------------
Total loan income 11,384 11,896
Short-term investments 28 27
Securities:
U.S. Treasury and government agency securities 157 170
Mortgage-backed securities 2,022 2,932
State and municipal securities 584 428
------------ ------------
Total interest and dividend income 14,175 15,453
INTEREST EXPENSE
- ----------------
Interest on deposits 3,031 3,786
Interest on short-term borrowings 346 340
Interest on long-term debt 590 776
------------ ------------
Total interest expense 3,967 4,902
------------ ------------
NET INTEREST INCOME 10,208 10,551
- -------------------
Provision for loan losses 252 667
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,956 9,884
- ------------------------- ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage fees 739 610
Service charges on deposit accounts 1,657 1,664
Credit card fee income 500 360
Other income (net) 944 673
Net gains on the sale of real estate mortgages
held-for-sale 320 1,079
------------ ------------
Total noninterest income 4,160 4,386
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 4,925 4,705
Occupancy and equipment expense 1,017 1,362
Data processing expense 595 583
Credit card interchange 290 196
Other expense 2,081 2,125
------------ ------------
Total noninterest expense 8,908 8,971
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2004 and 2003
(in thousands except for share and per share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended
March 31,
---------------------------
2004 2003
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 5,208 5,299
- --------------------------------
Income tax expense 1,706 1,784
------------ ------------
NET INCOME $ 3,502 $ 3,515
- ---------- ============ ============
Other comprehensive income (loss), net of tax:
Unrealized gain/(loss) on available-
for-sale securities 1,451 (1,325)
------------ ------------
TOTAL COMPREHENSIVE INCOME $ 4,953 $ 2,190
============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,842,946 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.60 $ 0.60
- ------------------------------- ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 6,052,537 5,957,134
DILUTED EARNINGS PER SHARE $ 0.58 $ 0.59
- -------------------------- ============ ============
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 31, 2004 and 2003
(in thousands)
(Unaudited)
(Page 1 of 2)
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 3,502 $ 3,515
------------ ------------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 460 540
Provision for loan losses 252 667
Amortization of intangible assets 54 44
Amortization of mortgage servicing rights 147 215
Impairment of mortgage servicing rights 159 141
Loans originated for sale (13,448) (37,514)
Net gain on sale of loans (320) (1,079)
Proceeds from sale of loans 13,594 41,710
Net loss on sale of premises and equipment 25 0
Net securities amortization 822 376
Stock compensation expense 33 0
Earnings on life insurance (151) (168)
Net change:
Income receivable (163) (125)
Accrued expenses payable (215) (163)
Other assets 1,814 (397)
Other liabilities 52 1,646
------------ ------------
Total adjustments 3,115 5,893
------------ ------------
Net cash from operating activities 6,617 9,408
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 14,049 32,928
Purchases of securities available-for-sale (16,205) (37,451)
Purchase of life insurance (91) 0
Net increase in total loans (13,626) (4,713)
Proceeds from sales of land, premises and equipment 26 0
Purchase of land, premises and equipment (330) (383)
------------ ------------
Net cash from investing activities (16,177) (9,619)
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2004 and 2003
(in thousands)
(Unaudited)
(Page 2 of 2)
2004 2003
------------ ------------
Cash flows from financing activities:
Net increase in total deposits $ 80,420 $ 48,169
Proceeds from short-term borrowings 5,548,834 6,464,530
Payments on short-term borrowings (5,618,781) (6,538,161)
Payments on long-term borrowings (1) (1)
Dividends paid (1,109) (988)
Proceeds from stock options exercise 312 0
(Purchase) sale of treasury stock (82) 47
------------ ------------
Net cash from financing activities 9,593 (26,404)
------------ ------------
Net decrease in cash and cash equivalents 33 (26,615)
Cash and cash equivalents at beginning of the period 57,441 87,149
------------ ------------
Cash and cash equivalents at end of the period $ 57,474 $ 60,543
============ ============
Cash paid during the period for:
Interest $ 3,392 $ 4,312
============ ============
Income taxes $ 0 $ 25
============ ============
Loans transferred to other real estate $ 0 $ 65
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
6
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
This report is filed for Lakeland Financial Corporation (the "Company")
and its wholly-owned subsidiary, Lake City Bank (the "Bank"). 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, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004. The
2003 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 share show 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 at the time of grant, 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 three months of
2004. 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,
2004 2003
--------- ----------
Net income (in thousands) as reported $ 3,502 $ 3,515
Deduct: stock-based compensation expense
determined under fair value based method 105 118
--------- ----------
Pro forma net income $ 3,397 $ 3,397
========= ==========
Basic earnings per common share as reported $ 0.60 $ 0.60
Pro forma basic earnings per share $ 0.58 $ 0.58
Diluted earnings per share as reported $ 0.58 $ 0.59
Pro forma diluted earnings per share $ 0.56 $ 0.57
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet at March 31, 2004 reflects the acquisition of
32,020 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,
2004 2003
------------ ------------
(in thousands)
Commercial and industrial loans $ 609,626 $ 593,194
Agri-business and agricultural loans 78,293 82,262
Real estate mortgage loans 40,745 40,118
Real estate construction loans 4,110 3,932
Installment loans and credit cards 151,725 151,376
------------ ------------
Total loans $ 884,499 $ 870,882
============ ============
Impaired loans $ 3,468 $ 3,039
Non-performing loans $ 4,208 $ 3,744
8
NOTE 4. EMPLOYEE BENEFIT PLANS
Components of Net Periodic Benefit Cost
Three months ended March 31:
Pension Benefits SERP Benefits
---------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 37 39 20 23
Expected return on plan assets (31) (35) (25) (24)
Recognized net actuarial loss 10 7 9 7
---- ---- ---- ----
Net pension expense $ 16 $ 11 $ 4 $ 6
==== ==== ==== ====
The Company previously disclosed in its financial statements for the year
ended December 31, 2003, that it expected to contribute $299,000 to its
pension plan and $119,000 to its SERP plan in 2004. As of March 31, 2004,
$119,000 had been contributed to the SERP plan and $0 to the pension plan. The
Company presently anticipates contributing $299,000 to its pension plan in
2004.
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.
9
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
March 31, 2004
OVERVIEW
Lakeland Financial Corporation is the holding company for Lake City Bank.
The Company is headquartered in Warsaw, Indiana and operates 43 offices in 12
counties in northern Indiana. The Company earned $3.5 million for the first
three months of 2004, which is nearly unchanged versus the comparable period
of 2003. Earnings were positively impacted by a $415,000 decrease in the
provision for loan losses and a $63,000 decrease in noninterest expense.
Offsetting these positive impacts were decreases of $343,000 in net interest
income and $226,000 in noninterest income. Basic earnings per share were $0.60
per share in the first quarters of both 2004 and 2003. 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 2004 were $0.58 per share, versus $0.59 per share for the first
three months of 2003.
RESULTS OF OPERATIONS
Net Interest Income
For the three-month period ended March 31, 2004, net interest income
totaled $10.2 million, a decrease of 3.3%, or $343,000 versus the first three
months of 2003. Net interest income decreased in the three-month period of
2004 versus the comparable period of 2003, primarily due to a 33 basis point
decline in the net interest margin to 3.60% in the three-month period ended
March 31, 2004 versus the comparable period of 2003. For the three-month
period ended March 31, 2004, average earning assets increased by $63.4
million, or 5.7%, to $1.177 billion, and average noninterest bearing demand
deposits increased by $29.8 million, or 18.9%, to $186.9 million, versus the
same period in 2003.
During the first three months of 2004, total interest and dividend income
decreased by $1.3 million, or 8.3% to $14.2 million, versus $15.5 million
during the same three months of 2003. The tax equivalent yield on average
earning assets decreased by 69 basis points to 5.0% for the three-month period
ended March 31, 2004 versus the same period of 2003.
The average daily loan balances for the first three months of 2004
increased 6.5% to $883.7 million, over the average daily loan balances of
$829.6 million for the same period of 2003. During the same period, loan
10
interest income declined by $512,000, or 4.3%, to $11.4 million. The decrease
was the result of a 54 basis point decrease in the tax equivalent yield on
loans to 5.2% from 5.7% in the first three months of 2003.
The average daily securities balances for the first three months of 2004
increased $6.9 million, or 2.5%, to $282.1 million, versus $275.2 million for
the same period of 2003. During the same periods, income from securities
declined by $767,000, or 21.7%, to $2.8 million versus $3.5 million during the
first three months of 2003. The decrease was primarily the result of a 116
basis point decline in the tax equivalent yields on securities, to 4.4% versus
5.5% in the first three months of 2003.
Total interest expense decreased $935,000, or 19.1%, to $4.0 million for
the three-month period ended March 31, 2004, from $4.9 million for the
comparable period in 2003. The decrease was primarily the result of a 43 basis
point decrease in the Company's daily cost of funds to 1.35%, versus 1.78% for
the same period of 2003. On an average daily basis, total deposits (including
demand deposits) increased $34.6 million, or 3.7%, to $968.7 million for the
three-month period ended March 31, 2004, versus $934.1 million in the same
period in 2003. On an average daily basis, noninterest bearing demand deposits
increased $29.8 million, or 18.9% for the three-month period ended March 31,
2004, versus the same period in 2003. When comparing the three months ended
March 31, 2004 with the same period of 2003, the average daily balance of time
deposits, which pay a higher rate of interest compared to demand deposit and
transaction accounts, decreased $97.0 million and the rate paid on such
accounts declined by 11 basis points versus the same period in 2003.
Management believes that it is critical to grow demand deposit accounts in
both the dollar volume and total number of accounts. These accounts typically
provide the Company with opportunities to expand into ancillary activities for
both retail and commercial customers. In addition, they represent low cost
deposits. Furthermore, the Company is focused on growing transaction money
market accounts which also provide a reasonable cost of funds and generally
represent relationship accounts. Average daily balances of borrowings
increased $32.7 million, or 18.3%, to $212.0 million for the three months
ended March 31, 2004 versus $179.2 million for the same period in 2003. The
rate on borrowings decreased 73 basis points when comparing the three-month
period of 2004 with the same period of 2003. On an average daily basis, total
deposits (including demand deposits) and purchased funds increased 6.1% for
the three-month period ended March 31, 2004 versus the same period in 2003.
The following tables set forth consolidated information regarding average
balances and rates.
11
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Three Months Ended March 31,
----------------------------------------------------------------------------
2004 2003
------------------------------------ ---------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
---------- ---------- ---------- ---------- ---------- ---------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 875,479 $ 11,319 5.20 % $ 822,839 $ 11,833 5.83 %
Tax exempt (1) 8,212 96 4.70 6,808 83 4.94
Investments: (1)
Available for sale 282,053 3,058 4.36 275,204 3,746 5.52
Short-term investments 8,177 19 0.93 4,928 15 1.23
Interest bearing deposits 3,007 9 1.20 3,729 12 1.31
---------- ---------- ---------- ----------
Total earning assets 1,176,928 14,501 4.95 % 1,113,508 15,689 5.71 %
Nonearning assets:
Cash and due from banks 47,768 0 42,975 0
Premises and equipment 26,064 0 24,785 0
Other nonearning assets 41,015 0 40,493 0
Less allowance for loan loss losses (10,362) 0 (9,619) 0
---------- ---------- ---------- --------
Total assets $ 1,281,413 $ 14,501 $ 1,212,142 $ 15,689
========== ========== ========== ========
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2004 and 2003. The tax
equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the TEFRA adjustment
applicable to nondeductible interest expenses.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended March 31, 2004
and 2003, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
12
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
Three Months Ended March 31,
-----------------------------------------------------------------------------
2004 2003
----------------------------------- ----------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
---------- --------- ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 64,953 $ 28 0.17 % $ 56,720 $ 69 0.49 %
Interest bearing checking accounts 346,328 738 0.86 252,626 757 1.22
Time deposits:
In denominations under $100,000 205,378 1,440 2.82 208,952 1,684 3.27
In denominations over $100,000 165,164 825 2.01 258,633 1,276 2.00
Miscellaneous short-term borrowings 150,989 346 0.92 127,268 340 1.08
Long-term borrowings 60,974 590 3.89 51,966 776 6.06
---------- ---------- ---------- ----------
Total interest bearing liabilities 993,786 3,967 1.61 % 956,165 4,902 2.08 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 186,901 0 157,147 0
Other liabilities 8,282 0 13,241 0
Stockholders' equity 92,444 0 85,589 0
Total liabilities and stockholders' ---------- ---------- ---------- ----------
equity $ 1,281,413 $ 3,967 $ 1,212,142 $ 4,902
========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 10,534 3.60 % $ 10,787 3.93 %
========== ==========
13
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 $252,000 was recorded during the
three-month period ended March 31, 2004, versus $667,000 recorded during the
same period of 2003. The decrease in the provision for loan losses for the
three-month periods reflected a number of factors, including the amount and
status of impaired loans, the amount and status of past due accruing loans (90
days or more), the level of charge-offs, 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 decreased by $226,000 to $4.2 million in the first
quarter of 2004 from $4.4 million during the same period of 2003. Noninterest
income categories for the three-month periods ended March 31, 2004 and 2003
are shown in the following table:
Three Months ended
March 31,
----------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 739 $ 610 21.2 %
Service charges on deposits 1,657 1,664 (0.4)
Credit card fee income 500 360 38.9
Other income (net) 944 673 40.3
Net gains on the sale of real estate
mortgages held-for-sale 320 1,079 (70.3)
---------- ---------- ----------
Total noninterest income $ 4,160 $ 4,386 (5.2)%
========== ========== ==========
Trust fees increased $151,000 in the three-month period ended March 31,
2004 versus the same period in 2003. The increase in 2004 was primarily in
living trust, agency, IRA and employee benefit plan fees, and was derived
principally from the Company's December 1, 2003 acquisition of Indiana Capital
Management. Brokerage fees decreased $22,000 in the three-month period ended
March 31, 2004 versus the same period in 2003.
Credit card fee income increased by $140,000, or 38.9% in the three-month
period ended March 31, 2004 versus the same period in 2003. The increase was
driven by higher volume activity in interchange and merchant fee income.
14
Other income consists of normal recurring fee income such as mortgage
service 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 income increased $271,000 in the
three-month period ended March 31, 2004 versus the same period of 2003. The
primary driver behind the increase was a $166,000 increase in operating lease
income.
The decrease in profits from the sale of mortgages reflected a decrease
in the volume of mortgages sold during the three-month period ended March 31,
2004 versus the same period in 2003. During the first three months of 2004,
the Company sold $13.3 million in mortgages versus $40.9 million in the
comparable period of 2003. The decrease in volume in 2004 was primarily the
result of rising mortgage rates during the second half of 2003, the effects of
which, in the form of decreased mortgage refinance activity and decreased
demand for home mortgages, have carried over to 2004. Although mortgage rates
have fallen somewhat during the first quarter of 2004, management does not
expect that the high level of mortgage sales gains experienced during 2003
will be repeated during 2004.
Noninterest Expense
Noninterest expense decreased by $63,000 to $8.9 million in the first
quarter of 2004 from $9.0 million in the same period of 2003. Noninterest
expense categories for the three-month period ended March 31, 2004, and 2003
are shown in the following table:
Three Months Ended
March 31,
----------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 4,925 $ 4,705 4.7 %
Occupancy and equipment expense 1,017 1,362 (25.3)
Data processing expense 595 583 2.1
Credit card interchange 290 196 48.0
Other expense 2,081 2,125 (2.1)
---------- ---------- ----------
Total noninterest expense $ 8,908 $ 8,971 (0.7)%
========== ========== ==========
The increase in salaries and employee benefits reflected normal salary
increases, increases related to the employee 401(k) plan and incentive
compensation plan and higher health care costs. Total employees remained
stable with 469 at March 31, 2004, compared to 463 at March 31, 2003.
15
The decrease in occupancy and equipment expense reflected lower property
taxes, as well as lower depreciation expense due to the fact that much of the
equipment purchased for significant technology upgrades in 1998 and 1999 and
to ensure no interruption from Year 2000 issues are now fully depreciated.
Credit card interchange fees increased by $94,000 during the first
quarter of 2004, due to an increase in processing costs charged by VISA and
increased credit card usage by Bank customers during that period versus the
first quarter of 2003.
Other expense includes corporate and business development, data
processing fees, telecommunications, postage, and professional fees such as
legal, accounting, and directors' fees. Other expense decreased slightly in
the three-month period ended March 31, 2004 versus the comparable period in
2003.
Income Tax Expense
Income tax expense decreased $78,000, or 4.4%, for the first three months
of 2004, compared to the same period in 2003. The combined state franchise tax
expense and the federal income tax expense as a percentage of income before
income tax expense decreased to 32.8% during the first three months of 2004
compared to 33.7% during the same period in 2003.
FINANCIAL CONDITION
Certain of the Company's accounting policies are important to the
portrayal of the Company's financial condition, since they require management
to make difficult, complex or subjective judgments, some of which may relate
to matters that are inherently uncertain. Estimates associated with these
policies are susceptible to material changes as a result of changes in facts
and circumstances. Some of the facts and circumstances which could affect
these judgments include changes in interest rates, in the performance of the
economy or in the financial condition of borrowers. Management believes that
its critical accounting policies include determining the allowance for loan
losses, determining the fair value of securities and other financial
instruments and the valuation of mortgage servicing rights. The Company's
critical accounting policies are discussed in detail in the Annual Report for
the year ended December 31, 2003 (incorporated by reference as part of the
Company's 10-K filing) in Note 1 of the Notes to the Consolidated Financial
Statements.
Total assets of the Company were $1.286 billion as of March 31, 2004, an
increase of $14.5 million, or 1.1%, when compared to $1.271 billion as of
December 31, 2003.
16
Total cash and cash equivalents increased by $33,000, or 0.01%, to $57.5
million at March 31, 2004 from $57.4 million at December 31, 2003.
Total securities available-for-sale increased by $3.6 million, or 1.3%,
to $285.0 million at March 31, 2004 from $281.4 million at December 31, 2003.
The increase was a result of securities purchases totaling $16.2 million as
well as a $2.2 million increase in the fair market value of the securities.
The market value increase was driven by the declining interest rate
environment during the first quarter of 2004. These increases were offset by a
number of transactions in the securities portfolio. Paydowns of $13.7 million
were received, and the amortization of premiums, net of the accretion of
discounts, was $822,000. Maturities and calls of securities totaled $293,000.
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.
Real estate mortgages held-for-sale increased by $82,000, or 2.4%, to
$3.5 million at March 31, 2004 from $3.4 million at December 31, 2003. 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,
2004, $13.4 million in real estate mortgages were originated for sale and
$13.3 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased by
$13.6 million, or 1.6%, to $884.5 million at March 31, 2004 from $870.9
million at December 31, 2002. The mix of loan types within the Company's
portfolio was unchanged, reflecting 78% commercial, 5% real estate and 17%
consumer loans at both March 31, 2004 and December 31, 2003.
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 for loan losses.
Loans are charged against the allowance for loan losses when management
believes that the uncollectibility of the principal is confirmed. Subsequent
17
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
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, 2004, on the basis of
management's review of the loan portfolio, the Company had $38.0 million of
assets classified special mention, $27.1 million classified as substandard,
$1.2 million classified as doubtful and $0 classified as loss as compared to
$41.9 million, $27.7 million, $869,000 and $0 at December 31, 2003.
Allowance estimates are developed by management in consultation with
regulatory authorities, taking into account actual 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. The following table summarizes the
loan loss reserve and nonperforming assets at March 31, 2004 and March 31,
2003.
18
March 31, March 31,
2004 2003
-------------- --------------
(in thousands)
ALLOWANCE FOR LOAN LOSSES:
Beginning balance, January 1 $ 10,234 $ 9,533
Provision for loan losses, year-to-date 252 667
Loans charged-off, year-to-date (100) (494)
Recoveries, year-to-date 91 36
-------------- --------------
Ending balance $ 10,477 $ 9,742
============== ==============
NONPERFORMING ASSETS:
Nonaccrual loans $ 997 $ 5,208
Loans past due over 90 days and accruing 3,211 3,386
Other real estate 277 109
Repossessions 39 62
-------------- --------------
Total nonperforming assets $ 4,524 $ 8,765
============== ==============
Total impaired loans increased by $429,000 to $3.5 million at March 31,
2004 from $3.0 million at December 31, 2003. The increase in the impaired
loans category resulted primarily from the addition of one commercial credit
and one mortgage loan to the impaired category. The impaired loan total
includes $626,000 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 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 $80.4 million, or 8.7%, to $1.007 billion at
March 31, 2004 from $926.4 million at December 31, 2003. The increase resulted
from increases of $107.3 million in certificates of deposit, $12.2 million in
demand deposits, $11.3 million in Investors' Money Market accounts and $5.1
million in savings accounts. Offsetting these increases were declines of $40.0
million in NOW accounts, and $15.5 million in money market accounts.
19
Total short-term borrowings decreased by $70.0 million, or 37.9%, to
$114.8 million at March 31, 2004 from $184.8 million at December 31, 2003. The
decrease resulted from declines of $45.0 million in other borrowings,
primarily short-term advances from the Federal Home Loan Bank of Indianapolis,
$16.1 million in securities sold under agreements to repurchase and $8.0
million in federal funds purchased.
Total stockholders' equity increased by $4.2 million, or 4.6%, to $94.2
million at March 31, 2004 from $90.0 million at December 31, 2003. Net income
of $3.5 million, less dividends of $1.2 million, plus the increase in the
accumulated other comprehensive income of $1.5 million, plus $444,000 for
stock issued through options exercised and stock options expense, minus
$82,000 for the cost of treasury stock purchased, comprised most of this
increase.
The Federal Deposit Insurance Corporation's 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, 2004,
the Company's Tier 1 leverage capital ratio, Tier 1 risk based capital ratio
and total risk based capital ratio were 9.2%, 12.0% and 13.0%, 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 2003. 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, 2004, the Company's potential pretax
exposure was within the Company's policy limit, and not significantly
different from December 31, 2003.
20
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of March 31, 2004. Based on that evaluation, the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that the Company's disclosure controls and procedures were
effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls.
FORWARD-LOOKING STATEMENTS
This document 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.
21
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.
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.
22
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.
23
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2004
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
-----------------------------------------
The following table provides information as of March 31, 2004 with
respect to shares of Common Stock repurchased by the Company during
the quarter then ended:
Issuer Purchases of Equity Securities(a)
Total Number of Maximum Number
Shares Purchased of Shares that May
Number Average as part of Publicly Yet Be Purchased
of Shares Price Paid Announced Plans Under the Plan or
Period Purchased Per Share or Programs Programs
- ------- ---------- ------- --------- -----------
January 1-31 1,968 $ 36.42 0 0
February 1-29 0 $ 0 0 0
March 1-31 0 $ 0 0 0
----- ------- --------- -----------
Total 1,968 $ 36.42
===== =======
(a) The shares purchased during the periods were credited to the deferred
share accounts of seven non-employee directors under the Company's
directors' deferred compensation plan.
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
24
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b. Reports
A report on Form 8-K was filed on April 15, 2004 under Item 12
which reported the Company's first quarter financial information
in the form of a press release.
A report on Form 8-K was filed on January 15, 2004 under Item 12
which reported the Company's financial information for the fiscal
year ended December 31, 2003 in the form of a press release.
25
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2004
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 3, 2004 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: May 3, 2004 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: May 3, 2004 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
26