UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 2004
Common Stock, No Par Value 5,839,677
LAKELAND FINANCIAL CORPORATION
Form 10-Q Quarterly Report
Table of Contents
PART I.
Page Number
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . 26
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 29
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities . . . . . . . . . . 29
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 29
Item 4. Submission of Matters to a Vote of Security Holders . . . 29
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 30
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 32
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 1 - FINANCIAL STATEMENTS
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2004 and December 31, 2003
(in thousands)
(Page 1 of 2)
June 30, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 60,849 $ 52,297
Short-term investments 6,095 5,144
------------ ------------
Total cash and cash equivalents 66,944 57,441
Securities available-for-sale:
U. S. Treasury and government agency securities 21,443 17,280
Mortgage-backed securities 204,681 211,142
State and municipal securities 51,763 52,945
------------ ------------
Total securities available-for-sale
(carried at fair value) 277,887 281,367
Real estate mortgages held-for-sale 5,866 3,431
Loans:
Total loans 929,565 870,882
Less: Allowance for loan losses 10,643 10,234
------------ ------------
Net loans 918,922 860,648
Land, premises and equipment, net 25,790 26,157
Accrued income receivable 4,977 5,010
Goodwill 4,970 4,970
Other intangible assets 1,353 1,460
Other assets 31,391 30,930
------------ ------------
Total assets $ 1,338,100 $ 1,271,414
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2004 and December 31, 2003
(in thousands except for share and per share data)
(Page 2 of 2)
June 30, December 31,
2004 2003
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 210,437 $ 185,734
Interest bearing deposits 811,898 740,657
------------ ------------
Total deposits 1,022,335 926,391
Short-term borrowings:
Federal funds purchased 12,000 24,000
Securities sold under agreements
to repurchase 90,007 102,601
U.S. Treasury demand notes 1,662 3,160
Other borrowings 70,000 55,000
------------ ------------
Total short-term borrowings 173,669 184,761
Accrued expenses payable 6,674 7,804
Other liabilities 1,518 1,461
Long-term borrowings 10,046 30,047
Subordinated debentures 30,928 30,928
------------ ------------
Total liabilities 1,245,170 1,181,392
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,873,244 shares issued and 5,841,021 outstanding as of
June 30, 2004, and 5,834,744 shares issued and 5,788,263
outstanding at December 31, 2003 1,453 1,453
Additional paid-in capital 11,304 10,509
Retained earnings 84,647 80,260
Accumulated other comprehensive loss (3,803) (1,282)
Treasury stock, at cost (671) (918)
------------ ------------
Total stockholders' equity 92,930 90,022
------------ ------------
Total liabilities and stockholders' equity $ 1,338,100 $ 1,271,414
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
2
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 2004 and 2003
(in thousands except for share and per share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 11,587 $ 12,077 $ 22,903 $ 23,910
Tax exempt 71 66 139 129
------------ ------------ ------------ ------------
Total loan income 11,658 12,143 23,042 24,039
Short-term investments 21 58 49 85
Securities:
U.S. Treasury and government agency securities 186 145 343 315
Mortgage-backed securities 1,682 2,694 3,704 5,626
State and municipal securities 588 497 1,172 925
------------ ------------ ------------ ------------
Total interest and dividend income 14,135 15,537 28,310 30,990
INTEREST EXPENSE
- ----------------
Interest on deposits 3,101 3,702 6,132 7,488
Interest on short-term borrowings 352 313 698 653
Interest on long-term debt 404 779 994 1,555
------------ ------------ ------------ ------------
Total interest expense 3,857 4,794 7,824 9,696
------------ ------------ ------------ ------------
NET INTEREST INCOME 10,278 10,743 20,486 21,294
- -------------------
Provision for loan losses 246 717 498 1,384
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,032 10,026 19,988 19,910
- ------------------------- ------------ ------------ ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage fees 780 565 1,519 1,175
Service charges on deposit accounts 1,697 1,736 3,354 3,400
Credit card fee income 581 466 1,081 826
Other income (net) 1,115 979 2,059 1,652
Net gains on sale of real estate mortgages
held for sale (27) 1,193 293 2,272
------------ ------------ ------------ ------------
Total noninterest income 4,146 4,939 8,306 9,325
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 4,859 5,008 9,784 9,713
Occupancy and equipment expense 1,114 1,218 2,131 2,580
Data processing expense 650 690 1,245 1,273
Credit card interchange 343 247 633 443
Other expense 2,229 2,104 4,310 4,229
------------ ------------ ------------ ------------
Total noninterest expense 9,195 9,267 18,103 18,238
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 2004 and 2003
(in thousands except for share and per share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 4,983 5,698 10,191 10,997
- --------------------------------
Income tax expense 1,639 1,949 3,345 3,733
------------ ------------ ------------ ------------
NET INCOME $ 3,344 $ 3,749 $ 6,846 $ 7,264
- ---------- ============ ============ ============ ============
Other comprehensive loss, net of tax:
Unrealized loss on available-
for-sale securities (3,972) (1,240) (2,521) (2,564)
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (628) $ 2,509 $ 4,325 $ 4,700
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,859,474 5,819,448 5,851,210 5,815,386
BASIC EARNINGS PER COMMON SHARE $ 0.57 $ 0.65 $ 1.17 $ 1.25
- ------------------------------- ============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 6,048,256 5,977,598 6,050,297 5,960,399
DILUTED EARNINGS PER SHARE $ 0.55 $ 0.63 $ 1.13 $ 1.22
- -------------------------- ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2004 and 2003
(in thousands)
(Unaudited)
(Page 1 of 2)
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 6,846 $ 7,264
------------ ------------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 960 1,118
Provision for loan losses 498 1,384
Amortization of intangible assets 107 88
Amortization of mortgage servicing rights 251 414
Impairment (recovery) of mortgage servicing rights (71) 169
Loans originated for sale (36,565) (84,959)
Net gain on sale of loans (293) (2,272)
Proceeds from sale of loans 34,147 85,857
Net loss on sale of premises and equipment 49 1
Net securities amortization 1,899 709
Stock compensation expense 33 0
Earnings on life insurance (312) (340)
Net change:
Income receivable 33 56
Accrued expenses payable (1,163) (466)
Other assets 1,829 (367)
Other liabilities 57 (545)
------------ ------------
Total adjustments 1,459 847
------------ ------------
Net cash from operating activities 8,305 8,111
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 35,587 68,833
Purchases of securities available-for-sale (38,069) (70,782)
Purchase of life insurance (104) 0
Net increase in total loans (58,779) (19,339)
Proceeds from sales of land, premises and equipment 49 0
Purchase of land, premises and equipment (691) (2,636)
------------ ------------
Net cash from investing activities (62,007) (23,924)
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2004 and 2003
(in thousands)
(Unaudited)
(Page 2 of 2)
2004 2003
------------ ------------
Cash flows from financing activities:
Net increase in total deposits $ 95,944 $ 52,919
Net decrease in short-term borrowings (11,092) (57,384)
Payments on long-term borrowings (20,001) (1,301)
Dividends paid (2,338) (2,094)
Proceeds from stock options exercise 780 81
(Purchase) sale of treasury stock (88) 39
------------ ------------
Net cash from financing activities 63,205 (7,740)
------------ ------------
Net increase (decrease) in cash and cash equivalents 9,503 (23,553)
Cash and cash equivalents at beginning of the period 57,441 87,149
------------ ------------
Cash and cash equivalents at end of the period $ 66,944 $ 63,596
============ ============
Cash paid during the period for:
Interest $ 7,111 $ 9,642
============ ============
Income taxes $ 2,740 $ 4,277
============ ============
Loans transferred to other real estate $ 7 $ 1,530
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
6
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 U.S. generally accepted accounting principles for interim
financial information and with instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (all of which are normal and recurring
in nature) considered necessary for a fair presentation have been included.
Operating results for the three-month and six-month periods ending June 30,
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. RECENT REGULATORY DEVELOPMENTS
Trust Preferred Securities. On May 6, 2004, the Board of Governors of the
Federal Reserve System (the "Board") issued a Notice of Proposed Rulemaking in
which it proposed to allow the continued inclusion of trust preferred
securities in the tier 1 capital of bank holding companies, subject to
stricter standards. The Board is proposing to limit the aggregate amount of a
bank holding company's cumulative perpetual preferred stock, trust preferred
securities and other minority interests to 25% of the company's core capital
elements, net of goodwill. Current regulations do not require the deduction of
goodwill. The proposal also provides that amounts of qualifying trust
preferred securities and certain minority interests in excess of the 25% limit
may be included in tier 2 capital but would be limited, together with
subordinated debt and limited-life preferred stock, to 50% of tier 1 capital.
The proposal provides a three-year transition period for bank holding
companies to meet these quantitative limitations. At this time, it is not
possible to predict the impact that this proposal would have on the Company.
7
Bank Sales of Securities. On June 17, 2004, the Securities and Exchange
Commission (the "SEC") issued a Proposed Rule in which it described the
parameters under which banks may sell securities to their customers without
having to register as broker-dealers with the SEC in accordance with Title II
of the Gramm-Leach-Bliley Act of 1999. The proposal, which is designated as
Regulation B, clarifies, among other things: (i) the limitations on the amount
that unregistered bank employees may be compensated for making referrals in
connection with a third-party brokerage arrangement; (ii) the manner by which
banks may be compensated for effecting securities transactions for its
customers in a fiduciary capacity; and (iii) the extent to which banks may
engage in certain securities transactions as a custodian. At this time, it is
not possible to predict the impact that this proposal would have on the
Company and its subsidiaries.
NOTE 3. 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 six 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.
Six Months Ended
June 30,
2004 2003
--------- ----------
Net income (in thousands) as reported $ 6,846 $ 7,264
Deduct: stock-based compensation expense
determined under fair value based method 291 270
--------- ----------
Pro forma net income $ 6,555 $ 6,994
========= ==========
Basic earnings per common share as reported $ 1.17 $ 1.25
Pro forma basic earnings per share $ 1.12 $ 1.20
Diluted earnings per share as reported $ 1.13 $ 1.22
Pro forma diluted earnings per share $ 1.08 $ 1.17
8
Three Months Ended
June 30,
2004 2003
--------- ----------
Net income (in thousands) as reported $ 3,344 $ 3,749
Deduct: stock-based compensation expense
determined under fair value based method 185 152
--------- ----------
Pro forma net income $ 3,159 $ 3,597
========= ==========
Basic earnings per common share as reported $ 0.57 $ 0.64
Pro forma basic earnings per share $ 0.54 $ 0.62
Diluted earnings per share as reported $ 0.55 $ 0.63
Pro forma diluted earnings per share $ 0.52 $ 0.60
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet at June 30, 2004 reflects the acquisition of 32,223
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 4. LOANS
June 30, December 31,
2004 2003
------------ ------------
(in thousands)
Commercial and industrial loans $ 642,812 $ 593,194
Agri-business and agricultural loans 84,496 82,262
Real estate mortgage loans 39,257 40,118
Real estate construction loans 5,466 3,932
Installment loans and credit cards 157,534 151,376
------------ ------------
Total loans $ 929,565 $ 870,882
============ ============
Impaired loans $ 4,056 $ 3,039
Non-performing loans $ 4,430 $ 3,744
9
NOTE 5. EMPLOYEE BENEFIT PLANS
Components of Net Periodic Benefit Cost
Six Months Ended June 30
----------------------------------
Pension Benefits SERP Benefits
---------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 74 78 42 45
Expected return on plan assets (62) (71) (50) (47)
Recognized net actuarial loss 19 14 18 15
---- ---- ---- ----
Net pension expense $ 31 $ 21 $ 10 $ 13
==== ==== ==== ====
Three Months Ended June 30
----------------------------------
Pension Benefits SERP Benefits
---------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 37 39 22 22
Expected return on plan assets (31) (36) (25) (23)
Recognized net actuarial loss 9 7 9 8
---- ---- ---- ----
Net pension expense $ 15 $ 10 $ 6 $ 7
==== ==== ==== ====
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 June 30, 2004,
$119,000 had been contributed to the SERP plan and $47,000 to the pension
plan. The Company presently anticipates contributing an additional $237,000 to
its pension plan in 2004, for a total of $284,000.
NOTE 6. RECLASSIFICATIONS
Certain amounts appearing in the financial statements and notes thereto
for prior periods have been reclassified to conform with the current
presentation. The reclassification had no effect on net income or
stockholders' equity as previously reported.
10
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
June 30, 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 $6.8 million for the first
six months of 2004, versus $7.3 million in the same period of 2003, a decrease
of 5.8%. Earnings were negatively impacted by a $1.0 million decrease in
noninterest income and an $808,000 decrease in net interest income. Offsetting
these negative impacts were decreases of $886,000 in the provision for loan
losses and $135,000 in noninterest expense. Basic earnings per share for the
first six months of 2004 were $1.17 per share versus $1.25 per share for the
first six months of 2003. Diluted earnings per share reflect the potential
dilutive impact of stock options granted under the stock option plan. Diluted
earnings per share for the first six months of 2004 were $1.13 per share,
versus $1.22 per share for the first six months of 2003.
Net income for the second quarter of 2004 was $3.3 million, a decrease of
10.8% versus $3.7 million for the comparable period of 2003. Basic earnings
per share for the second quarter of 2004 were $0.57 per share, versus $0.65
per share for the second quarter of 2003. Diluted earnings per share for the
second quarter of 2004 were $0.55 per share, versus $0.63 per share for the
second quarter of 2003.
RESULTS OF OPERATIONS
Net Interest Income
For the six-month period ended June 30, 2004, net interest income totaled
$20.5 million, a decrease of 3.8%, or $808,000 versus the first six months of
2003. For the three-month period ended June 30, 2004, net interest income
totaled $10.3 million, a decrease of 4.3%, or $465,000 over the same period of
2003. Net interest income decreased in both the six-month and three-month
periods of 2004 versus the comparable periods of 2003, primarily due to
declines in the net interest margin. For the six-month period ended June 30,
2004, the net interest margin declined 36 basis points to 3.56%, versus the
comparable period of 2003. For the three-month period ended June 30, 2004, the
net interest margin declined 37 basis points to 3.52%, versus the comparable
period of 2003. For the six-month period ended June 30, 2004, average earning
assets increased by $69.6 million, or 6.2%, to $1.195 billion, and average
11
noninterest bearing demand deposits increased by $33.4 million, or 20.3%, to
$197.6 million, versus the same period in 2003. For the three-month period
ended June 30, 2004, average earning assets increased by $76.0 million, or
6.7%, to $1.213 billion, and average noninterest bearing demand deposits
increased by $37.1 million, or 21.7%, to $208.2 million.
Given the Company's mix of interest earning assets and interest bearing
liabilities at June 30, 2004, the net interest margin could be expected to
increase in a rising rate environment. Management expects the net interest
margin to improve during the second half of 2004, as the effects of the recent
rate increase by the Federal Reserve Bank are felt.
During the first six months of 2004, total interest and dividend income
decreased by $2.7 million, or 8.7% to $28.3 million, versus $31.0 million
during the same six months of 2003. During the second quarter of 2004,
interest and dividend income decreased $1.4 million, or 9.0%, to $14.1
million, versus $15.5 million during the same quarter of 2003. The tax
equivalent yield on average earning assets decreased by 68 basis points to
4.9% for the six-month period ended June 30, 2004 versus the same period of
2003. For the three-month period ended June 30, 2004, the yield decreased 67
basis points to 4.8% from the yield for the three-month period ended June 30,
2003.
The average daily loan balances for the first six months of 2004
increased 7.9% to $904.3 million, over the average daily loan balances of
$838.1 million for the same period of 2003. During the same period, loan
interest income declined by $997,000, or 4.2%, to $23.0 million. The decrease
was the result of a 53 basis point decrease in the tax equivalent yield on
loans to 5.1% from 5.7% in the first six months of 2003. The average daily
loan balances for the second quarter of 2004 increased $78.3 million, or 9.3%,
to $924.8 million, versus $846.5 million for the same period of 2003. During
the same period, loan interest income declined by $485,000, or 4.0%, to $11.7
million versus $12.1 million during the second quarter of 2003. The decrease
was the result of a 52 basis point decrease in the tax equivalent yield on
loans, to 5.1%, versus 5.6% in the second quarter of 2003.
The average daily securities balances for the first six months of 2004
increased $8.5 million, or 3.1%, to $281.1 million, versus $272.6 million for
the same period of 2003. During the same periods, income from securities
declined by $1.6 million, or 28.1%, to $5.2 million versus $6.9 million during
the first six months of 2003. The decrease was primarily the result of a 126
basis point decline in the tax equivalent yields on securities, to 4.2% versus
5.4% in the first six months of 2003. The average daily securities balances
for the second quarter of 2004 increased $10.2 million, or 3.8%, to $280.2
million, versus $269.9 million for the same period of 2003. During the same
periods, income from securities declined by $880,000, or 26.4%, to $2.5
million versus $3.3 million during the second quarter of 2003. The decrease
was primarily the result of a 138 basis point decrease in the tax equivalent
yield on securities, to 4.0%, versus 5.3% in the second quarter of 2003.
12
Total interest expense decreased $1.9 million, or 19.3%, to $7.8 million
for the six-month period ended June 30, 2004, from $9.7 million for the
comparable period in 2003. The decrease was primarily the result of a 42 basis
point decrease in the Company's daily cost of funds to 1.31%, versus 1.73% for
the same period of 2003. Total interest expense decreased $937,000, or 19.6%,
to $3.9 million for the three-month period ended June 30, 2004, from $4.8
million for the comparable period in 2003. The decrease was primarily the
result of a 41 basis point decrease in the Company's daily cost of funds to
1.28%, versus 1.69% for the same period of 2003. On an average daily basis,
total deposits (including demand deposits) increased $41.7 million, or 4.4%,
to $992.8 million for the six-month period ended June 30, 2004, versus $951.2
million in the same period in 2003. The average daily deposit balances for the
second quarter of 2004 increased $48.9 million, or 5.1%, to $1.017 billion
from $968.1 million during the second quarter of 2003. On an average daily
basis, noninterest bearing demand deposits increased $33.4 million, or 20.3%
and $37.1 million, or 21.7% for the six and three-month periods ended June 30,
2004, versus the same periods in 2003. When comparing the six months ended
June 30, 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 $79.3 million and the rate paid on such
accounts declined by 4 basis points versus the same period in 2003. In the
second quarter of 2004, the average daily balance of time deposits decreased
by $61.6 million and the rate paid on such accounts increased by three basis
points versus the same period in 2003. The increase was primarily the result
of a time deposit promotion that ran during the first quarter of 2004, as well
as the general increase in interest rates. 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 $31.9
million, or 18.2%, to $207.4 million for the six months ended June 30, 2004
versus $175.5 million for the same period in 2003, and increased $31.0
million, or 18.1% for the three months ended June 30, 2004. The rate on
borrowings decreased 88 basis points and 103 basis points, respectively, when
comparing the six and three month periods of 2004 with the same periods of
2003. On an average daily basis, total deposits (including demand deposits)
and purchased funds increased 6.5% and 7.0%, respectively, when comparing the
six and three month periods ended June 30, 2004 versus the same periods in
2003. The following tables set forth consolidated information regarding
average balances and rates.
13
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Six Months Ended June 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------ ----------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 895,679 $ 22,903 5.14 % $ 831,090 $ 23,910 5.80 %
Tax exempt (1) 8,575 186 4.37 7,019 172 4.93
Investments: (1)
Available for sale 281,106 5,815 4.16 272,560 7,326 5.42
Short-term investments 6,128 29 0.95 8,620 50 1.17
Interest bearing deposits 3,448 20 1.17 6,005 35 1.18
---------- ---------- ---------- ----------
Total earning assets 1,194,936 28,953 4.87 % 1,125,294 31,493 5.55 %
Nonearning assets:
Cash and due from banks 49,704 0 44,985 0
Premises and equipment 25,996 0 25,195 0
Other nonearning assets 42,760 0 39,235 0
Less allowance for loan loss losses (10,435) 0 (9,778) 0
---------- --------- ---------- ----------
Total assets $ 1,302,961 $ 28,953 $ 1,224,931 $ 31,493
========== ========= ========== ==========
(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 six months
ended June 30, 2004 and 2003, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
14
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
Six Months Ended June 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------ ----------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 67,611 $ 48 0.14 % $ 58,751 $ 139 0.48 %
Interest bearing checking accounts 346,980 1,380 0.80 268,308 1,596 1.20
Time deposits:
In denominations under $100,000 214,077 3,016 2.83 207,152 3,268 3.18
In denominations over $100,000 166,606 1,688 2.04 252,788 2,485 1.98
Miscellaneous short-term borrowings 155,551 698 0.90 123,598 653 1.07
Long-term borrowings 53,297 994 3.75 51,915 1,555 6.04
---------- ---------- ---------- ----------
Total interest bearing liabilities 1,004,122 7,824 1.57 % 962,512 9,696 2.03 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 197,563 0 164,175 0
Other liabilities 8,150 0 11,565 0
Stockholders' equity 93,126 0 86,679 0
Total liabilities and stockholders'
equity ---------- ---------- ---------- ----------
$ 1,302,961 $ 7,824 $ 1,224,931 $ 9,696
========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 21,129 3.56 % $ 21,797 3.92 %
========== ==========
15
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Three Months Ended June 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------ ----------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 915,879 $ 11,587 5.09 % $ 839,251 $ 12,077 5.77 %
Tax exempt (1) 8,938 154 4.28 7,228 142 4.86
Investments: (1)
Available for sale 280,159 2,751 3.95 269,945 3,587 5.33
Short-term investments 4,080 10 0.99 12,271 35 1.14
Interest bearing deposits 3,889 11 1.14 8,256 23 1.12
---------- ---------- ---------- ----------
Total earning assets 1,212,945 14,513 4.79 % 1,136,951 15,864 5.46 %
Nonearning assets:
Cash and due from banks 51,640 0 46,974 0
Premises and equipment 25,928 0 25,600 0
Other nonearning assets 43,011 0 37,966 0
Less allowance for loan loss losses (10,509) 0 (9,936) 0
---------- ---------- ---------- ----------
Total assets $ 1,323,015 $ 14,513 $ 1,237,555 $ 15,864
========== ========== ========== ==========
(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 June 30, 2004 and 2003, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
16
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
Three Months Ended June 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------ ----------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 70,268 $ 20 0.11 % $ 60,759 $ 70 0.46 %
Interest bearing checking accounts 347,633 642 0.74 283,818 839 1.19
Time deposits:
In denominations under $100,000 222,777 1,576 2.85 205,371 1,584 3.09
In denominations over $100,000 168,048 863 2.07 247,008 1,209 1.96
Miscellaneous short-term borrowings 160,113 352 0.88 119,968 313 1.05
Long-term borrowings 44,176 404 3.68 51,866 779 6.02
---------- ---------- ---------- ----------
Total interest bearing liabilities 1,013,015 3,857 1.53 % 968,790 4,794 1.98 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 208,225 0 171,126 0
Other liabilities 7,967 0 10,070 0
Stockholders' equity 93,808 0 87,569 0
Total liabilities and stockholders'
equity ---------- ---------- ---------- ----------
$ 1,323,015 $ 3,857 $ 1,237,555 $ 4,794
========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 10,656 3.52 % $ 11,070 3.89 %
========== ==========
17
Provision for Loan Losses
Based on management's review of the adequacy of the allowance for loan
losses, provisions for losses on loans of $498,000 and $246,000 were recorded
during the six-month and three-month periods ended June 30, 2004, versus
provisions of $1.4 million and $717,000 recorded during the same periods of
2003. The decrease in the provision for loan losses for the periods ended June
30, 2004 reflected a number of factors, including the level of charge-offs,
management's overall view on current credit quality, the amount and status of
impaired loans and the amount and status of past due accruing loans (90 days
or more), as discussed in more detail below in the analysis relating to the
Company's financial condition.
Noninterest Income
Noninterest income categories for the six and three-month periods ended
June 30, 2004 and 2003 are shown in the following table:
Six Months Ended
June 30,
----------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 1,519 $ 1,175 29.3 %
Service charges on deposits 3,354 3,400 (1.4)
Credit card fee income 1,081 826 30.9
Other income (net) 2,059 1,652 24.6
Net gains on the sale of real estate
mortgages held-for-sale 293 2,272 (87.1)
---------- ---------- ----------
Total noninterest income $ 8,306 $ 9,325 (10.9)%
========== ========== ==========
18
Three Months Ended
June 30,
----------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 780 $ 565 38.1 %
Service charges on deposits 1,697 1,736 (2.3)
Credit card fee income 581 466 24.7
Other income (net) 1,115 979 13.9
Net gains (losses) on the sale of real
estate mortgages held for sale (27) 1,193 (102.3)
---------- ---------- ----------
Total noninterest income $ 4,146 $ 4,939 (16.1)%
========== ========== ==========
Trust fees increased $287,000 and $136,000, respectively, in the
six-month and three-month periods ended June 30, 2004 versus the same periods
in 2003. The increases in 2004 were primarily in living trust, agency, IRA and
employee benefit plan fees, and were derived principally from the Company's
December 1, 2003 acquisition of Indiana Capital Management. Brokerage fees
increased $57,000 and $79,000 respectively, in the six-month and three-month
periods ended June 30, 2004 versus the same periods in 2003.
Credit card fee income increased by $255,000 and $115,000, respectively,
in the six-month and three-month periods ended June 30, 2004 versus the same
periods in 2003. The increases were driven by higher volume activity in
interchange and merchant fee income.
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 $407,000 and $136,000,
respectively, in the six-month and three-month periods ended June 30, 2004
versus the same period of 2003. The primary drivers behind the increase in the
six-month period were a reduction of $240,000 in the non-cash impairment of
the Bank's mortgage servicing rights portfolio, and a $242,000 increase in
operating lease income. The primary drivers behind the increase in the
three-month period were a reduction of $258,000 in the non-cash impairment of
the Bank's mortgage servicing rights portfolio, and a $76,000 increase in
operating lease income.
The decrease in profits from the sale of mortgages reflected both the
timing of mortgage sales into the secondary market as well as a decrease in
the volume of mortgages sold during both the six-month and three-month periods
ended June 30, 2004 versus the same periods in 2003. During the first six
19
months of 2004, the Company sold $34.1 million in mortgages versus $84.1
million in the comparable period of 2003. During the second quarter of 2004,
the Company sold $20.8 million in mortgages versus $43.2 million in the second
quarter of 2003. The decreases in volume in 2004 were primarily the result of
rising mortgage rates during the second half of 2003 and the second quarter of
2004, which has resulted in decreased mortgage refinance activity and
decreased demand for home mortgages during 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 categories for the six and three-month periods ended
June 30, 2004, and 2003 are shown in the following table:
Six Months Ended
June 30,
----------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 9,784 $ 9,713 0.7 %
Occupancy and equipment expense 2,131 2,580 (17.4)
Data processing expense 1,245 1,273 (2.2)
Credit card interchange 633 443 42.9
Other expense 4,310 4,229 1.9
---------- ---------- ----------
Total noninterest expense $ 18,103 $ 18,238 (0.7)%
========== ========== ==========
Three Months Ended
June 30,
----------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 4,859 $ 5,008 (3.0)%
Occupancy and equipment expense 1,114 1,218 (8.5)
Data processing expense 650 690 (5.8)
Credit card interchange 343 247 38.9
Other expense 2,229 2,104 5.9
---------- ---------- ----------
Total noninterest expense $ 9,195 $ 9,267 (0.8)%
========== ========== ==========
The slight increase in salaries and employee benefits in the first six
months of 2004 was primarily due to higher health care costs. Total employees
remained stable with 477 at June 30, 2004, compared to 471 at June 30, 2003.
20
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, is now fully depreciated.
Credit card interchange fees increased during the six-month and
three-month periods ended June 30, 2004, due to an increase in processing
costs charged by VISA and increased credit card usage by Bank customers during
those periods versus the same periods 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 increased slightly in
the six-month and three-month periods ended June 30, 2004 versus the
comparable periods in 2003 primarily due to increases in corporate and
business development expense related to advertising.
Income Tax Expense
Income tax expense decreased $388,000, or 10.4%, for the first six months
of 2004, compared to the same period in 2003. Income tax expense for the
second quarter of 2004 decreased $310,000, or 15.9%, compared to the same
period of 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 six months of 2004 compared to 33.9%
during the same period in 2003. It decreased to 32.9% for the second quarter
of 2004, versus 34.2% for the second quarter of 2003. The decreases were the
result of a higher percentage of income being derived from tax-exempt
securities and loans during the six-month and three-month periods ended June
30, 2004, versus the comparable periods 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
21
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).
Total assets of the Company were $1.338 billion as of June 30, 2004, an
increase of $66.7 million, or 5.2%, when compared to $1.271 billion as of
December 31, 2003.
Total cash and cash equivalents increased by $9.5 million, or 16.5%, to
$66.9 million at June 30, 2004 from $57.4 million at December 31, 2003.
Total securities available-for-sale decreased by $3.5 million, or 1.2%,
to $277.9 million at June 30, 2004 from $281.4 million at December 31, 2003.
The decrease was a result of a number of transactions in the securities
portfolio. Paydowns totaling $34.7 million were received, and the amortization
of premiums, net of the accretion of discounts totaled $1.9 million.
Maturities and calls of securities totaled $873,000. Additionally, the fair
market value of the securities portfolio declined by $4.1 million. The market
value decrease was driven by the rising interest rate environment during the
second quarter of 2004. These decreases were offset by securities purchases
totaling $38.1 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.
Real estate mortgages held-for-sale increased by $2.4 million, or 71.0%,
to $5.9 million at June 30, 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 six months ended June 30,
2004, $36.6 million in real estate mortgages were originated for sale and
$34.1 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased by
$58.7 million, or 6.7%, to $929.6 million at June 30, 2004 from $870.9 million
at December 31, 2003. The mix of loan types within the Company's portfolio was
unchanged, reflecting 78% commercial, 5% real estate and 17% consumer loans at
both June 30, 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.
22
However, as a result of the slow economic recovery, 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
recoveries, if any, are credited to the allowance. The allowance is an amount
that management believes will be adequate to absorb probable incurred credit
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 June 30, 2004, on the basis of
management's review of the loan portfolio, the Company had $30.2 million of
assets classified special mention, $24.7 million classified as substandard,
$1.5 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 June 30, 2004 and June 30, 2003.
23
June 30, June 30,
2004 2003
-------------- --------------
(in thousands)
ALLOWANCE FOR LOAN LOSSES:
Beginning balance, January 1 $ 10,234 $ 9,533
Provision for loan losses, year-to-date 498 1,384
Loans charged-off, year-to-date (293) (1,211)
Recoveries, year-to-date 204 80
-------------- --------------
Ending balance $ 10,643 $ 9,786
============== ==============
NONPERFORMING ASSETS:
Nonaccrual loans $ 1,575 $ 3,548
Loans past due over 90 days and accruing 2,855 3,085
Other real estate 277 1,530
Repossessions 30 26
-------------- --------------
Total nonperforming assets $ 4,737 $ 8,189
============== ==============
Total impaired loans increased by $1.1 million to $4.1 million at June
30, 2004 from $3.0 million at December 31, 2003. The increase in the impaired
loans category resulted primarily from the addition of two commercial credits
and one mortgage loan to the impaired category. The impaired loan total
included $1.3 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 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 $95.9 million, or 10.4%, to $1.022 billion at
June 30, 2004 from $926.4 million at December 31, 2003. The increase resulted
from increases of $75.1 million in certificates of deposit, $24.7 million in
demand deposits, $5.9 million in savings accounts and $317,000 in NOW
accounts. Offsetting these increases were declines of $9.7 million in money
market accounts and $397,000 in Investors' Money Market accounts.
Total short-term borrowings decreased by $11.1 million, or 6.0%, to
$173.7 million at June 30, 2004 from $184.8 million at December 31, 2003. The
decrease resulted primarily from declines of $12.6 million in securities sold
under agreements to repurchase and $12.0 million in federal funds purchased.
24
Offsetting these decreases were increases of $15.0 million in other
borrowings, primarily short-term advances from the Federal Home Loan Bank of
Indianapolis.
Long-term borrowings decreased by $20.0 million, or 66.6%, to $10.0
million at June 30, 2004 from $30.0 million at December 31, 2003. Long-term
borrowings are primarily long-term advances from the Federal Home Loan Bank of
Indianapolis.
Total stockholders' equity increased by $2.9 million, or 3.2%, to $92.9
million at June 30, 2004 from $90.0 million at December 31, 2003. Net income
of $6.8 million, minus the decrease in the accumulated other comprehensive
income of $2.5 million, less dividends of $2.4 million, plus $1.1 million for
stock issued through options exercised and stock option expense, minus $88,000
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 June 30, 2004,
the Company's Tier 1 leverage capital ratio, Tier 1 risk based capital ratio
and total risk based capital ratio were 9.1%, 11.6% and 12.6%, 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 2004. The policy sets guidelines for
balance sheet structure, which are designed to protect the Company from the
impact that interest rate changes could have on net income, but does not
necessarily indicate the effect on future net interest income. The Company,
through its Asset/Liability Committee, manages interest rate risk by
monitoring the computer simulated earnings impact of various rate scenarios
and general market conditions. The Company then modifies its long-term risk
parameters by attempting to generate the type of loans, investments, and
deposits that currently fit the Company's needs, as determined by the
Asset/Liability Committee. This computer simulation analysis measures the net
interest income impact of various interest rate scenario changes during the
next 12 months. If the change in net interest income is less than 3% of
primary capital, the balance sheet structure is considered to be within
acceptable risk levels. At June 30, 2004, the Company's potential pretax
25
exposure was within the Company's policy limit, and not significantly
different from December 31, 2003.
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 June 30, 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.
26
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.
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.
27
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.
28
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 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, Use of Proceeds and Issuer Purchases
------------------------------------------------------------
Of Equity Securities
---------------------
The following table provides information as of June 30, 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
Total 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
------- ---------- ------- --------- -----------
April 1-30 203 $ 33.33 0 0
May 1-31 0 $ 0 0 0
June 1-30 0 $ 0 0 0
----- ------- --------- -----------
Total 203 $ 33.33
===== =======
(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
---------------------------------------------------
On April 13, 2004, the Company's annual meeting of stockholders was
held. At the meeting, Crowe Chizek and Company LLC was appointed as
the Company's independent auditors for the year ended December 31,
2004, and L. Craig Fulmer, Charles E. Niemier, Donald B. Steininger
and Terry L. Tucker were elected to serve as directors with terms
29
expiring in 2007. Continuing as directors until 2005 are Robert E.
Bartels, Jr., Michael L. Kubacki, Steven D. Ross and M. Scott Welch.
Continuing as directors until 2006 are Allan J. Ludwig, Emily E.
Pichon and Richard L. Pletcher.
Election of Directors:
For Withheld
--- --------
L. Craig Fulmer 4,769,111 34,430
Charles E. Niemier 4,787,611 15,930
Donald B. Steininger 4,792,382 11,159
Terry L. Tucker 4,755,933 47,608
Ratification of Auditors:
For Against Abstain
--- ------- -------
Crowe Chizek and Company LLC 4,782,311 16,652 4,577
Item 5. Other Information
-----------------
None
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 July 15, 2004 under Item 12 which
reported the Company's second quarter financial information in the
form of a press release.
A report on Form 8-K was filed on June 23, 2004 under Item 11 which
reported a blackout period for directors and executive officers
resulting from a change in administrators for the Lakeland
Financial Corporation 401(k) Plan.
30
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.
31
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 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: August 2, 2004 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: August 2, 2004 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: August 2, 2004 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
32