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, 2005
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, 2005
Common Stock, No Par Value 5,913,918
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 . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . 23
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 26
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds. . . . . . . . . . . . . . . . . . . . 26
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 26
Item 4. Submission of Matters to a Vote of Security Holders . . . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 27
Form 10-Q Signature Page . . . . . . . . . . . . . . . . . . . . . 28
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 1 - FINANCIAL STATEMENTS
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2005 and December 31, 2004
(in thousands)
(Page 1 of 2)
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
Cash and due from banks $ 52,419 $ 81,144
Short-term investments 5,665 22,714
------------ ------------
Total cash and cash equivalents 58,084 103,858
Securities available-for-sale (carried at fair value) 285,162 286,582
Real estate mortgages held-for-sale 2,726 2,991
Loans, net of allowance for loan losses of $11,115 and $10,754 1,011,069 992,465
Land, premises and equipment, net 24,951 25,057
Bank owned life insurance 17,156 16,896
Accrued income receivable 6,044 5,765
Goodwill 4,970 4,970
Other intangible assets 1,193 1,245
Other assets 14,677 13,293
------------ ------------
Total assets $ 1,426,032 $ 1,453,122
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2005 and December 31, 2004
(in thousands except for share and per share data)
(Page 2 of 2)
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 228,391 $ 237,261
Interest bearing deposits 904,155 878,138
------------ ------------
Total deposits 1,132,546 1,115,399
Short-term borrowings:
Federal funds purchased 12,500 20,000
Securities sold under agreements
to repurchase 89,959 88,057
U.S. Treasury demand notes 1,262 2,593
Other borrowings 35,000 75,000
------------ ------------
Total short-term borrowings 138,721 185,650
Accrued expenses payable 8,505 7,445
Other liabilities 2,015 1,889
Long-term borrowings 10,046 10,046
Subordinated debentures 30,928 30,928
------------ ------------
Total liabilities 1,322,761 1,351,357
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,950,554 shares issued and 5,914,149 outstanding as of
March 31, 2005, and 5,915,854 shares issued and 5,881,283
outstanding at December 31, 2004 1,453 1,453
Additional paid-in capital 13,316 12,463
Retained earnings 92,675 89,864
Accumulated other comprehensive loss (3,353) (1,267)
Treasury stock, at cost (820) (748)
------------ ------------
Total stockholders' equity 103,271 101,765
------------ ------------
Total liabilities and stockholders' equity $ 1,426,032 $ 1,453,122
============ ============
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, 2005 and 2004
(in thousands except for share and per share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended
March 31,
---------------------------
2005 2004
------------ ------------
NET INTEREST INCOME
- ----------------------------
Interest and fees on loans:
Taxable $ 14,513 $ 11,443
Tax exempt 45 68
Interest and dividends on securities:
Taxable 2,272 2,179
Tax exempt 587 584
Short-term investments 56 28
------------ ------------
Total interest income 17,473 14,302
Interest on deposits 4,448 3,031
Interest on short-term borrowings 680 346
Interest on long-term borrowings 494 590
------------ ------------
Total interest expense 5,622 3,967
------------ ------------
NET INTEREST INCOME 11,851 10,335
- -------------------
Provision for loan losses 458 252
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,393 10,083
- ------------------------- ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage income 728 739
Service charges on deposit accounts 1,549 1,657
Loan, insurance and service fees 415 487
Merchant card fee income 536 500
Other income 647 330
Net gains on sale of real estate mortgages
held for sale 244 320
------------ ------------
Total noninterest income 4,119 4,033
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 5,146 4,925
Net occupancy expense 656 578
Equipment costs 517 439
Data processing fees and supplies 558 595
Credit card interchange 328 290
Other expense 2,158 2,081
------------ ------------
Total noninterest expense 9,363 8,908
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2005 and 2004
(in thousands except for share and per share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended
March 31,
---------------------------
2005 2004
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 6,149 5,208
- --------------------------------
Income tax expense 2,094 1,706
------------ ------------
NET INCOME $ 4,055 $ 3,502
- ---------- ============ ============
Other comprehensive income/(loss), net of tax:
Unrealized gain/(loss) on available-
for-sale securities (2,086) 1,451
------------ ------------
TOTAL COMPREHENSIVE INCOME $ 1,969 $ 4,953
============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,936,370 5,842,946
BASIC EARNINGS PER COMMON SHARE $ 0.68 $ 0.60
- ------------------------------- ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 6,132,482 6,052,537
DILUTED EARNINGS PER SHARE $ 0.66 $ 0.58
- -------------------------- ============ ============
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, 2005 and 2004
(in thousands)
(Unaudited)
(Page 1 of 2)
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 4,055 $ 3,502
------------ ------------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 494 460
Provision for loan losses 458 252
Amortization of intangible assets 52 54
Amortization of loan servicing rights 151 147
Net change in loan servicing rights valuation allowance (51) 159
Loans originated for sale (10,048) (13,448)
Net gain on sale of loans (244) (320)
Proceeds from sale of loans 10,459 13,594
Net loss on sale of premises and equipment 0 25
Net securities amortization 732 822
Stock compensation expense 0 33
Earnings on life insurance (192) (151)
Net change:
Accrued income receivable (279) (163)
Accrued expenses payable 2,338 (215)
Other assets (1,209) 1,814
Other liabilities 126 52
------------ ------------
Total adjustments 2,787 3,115
------------ ------------
Net cash from operating activities 6,842 6,617
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 9,967 14,049
Purchases of securities available-for-sale (12,572) (16,205)
Purchase of life insurance (68) (91)
Net increase in total loans (19,062) (13,626)
Proceeds from sales of land, premises and equipment 43 26
Purchase of land, premises and equipment (431) (330)
------------ ------------
Net cash from investing activities (22,123) (16,177)
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2005 and 2004
(in thousands)
(Unaudited)
(Page 2 of 2)
2005 2004
------------ ------------
Cash flows from financing activities:
Net increase in total deposits $ 17,147 $ 80,420
Net decrease in short-term borrowings (46,929) (69,947)
Payments on long-term borrowings 0 (1)
Dividends paid (1,243) (1,109)
Proceeds from stock options exercise 604 312
Purchase of treasury stock (72) (82)
------------ ------------
Net cash from financing activities (30,493) 9,593
------------ ------------
Net increase (decrease) in cash and cash equivalents (45,774) 33
Cash and cash equivalents at beginning of the period 103,858 57,441
------------ ------------
Cash and cash equivalents at end of the period $ 58,084 $ 57,474
============ ============
Cash paid during the period for:
Interest $ 5,292 $ 3,392
============ ============
Income taxes $ 0 $ 0
============ ============
Loans transferred to other real estate $ 0 $ 0
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
6
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(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 period ending March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. The 2004 Lakeland Financial Corporation Annual Report on
Form 10-K should be read in conjunction with these statements.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement 123 (revised 2004),
Share-Based Payment. Among other items, SFAS No. 123(R) eliminates the use of
APB 25 and the intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the
financial statements. On April 14, 2005 the Securities and Exchange Commission
announced that the effective date for SFAS 123(R) would be delayed until
January 1, 2006, for calendar year companies. The Company plans to adopt this
standard as of January 1, 2006 and will begin expensing any unvested stock
options at that time. The Company does not anticipate the adoption of this
standard will have any material effect on the Company's financial condition or
results of operations.
NOTE 3. EARNINGS PER SHARE
Basic earnings per common share is based upon weighted-average common
shares outstanding. Diluted earnings per share show the dilutive effect of
additional common shares issueable.
7
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
2005. 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.
Three Months Ended
March 31,
2005 2004
--------- ---------
Net income (in thousands) as reported $ 4,055 $ 3,502
Deduct: stock-based compensation expense
determined under fair value based method 100 105
--------- ---------
Pro forma net income $ 3,955 $ 3,397
========= =========
Basic earnings per common share as reported $ 0.68 $ 0.60
Pro forma basic earnings per share $ 0.67 $ 0.58
Diluted earnings per share as reported $ 0.66 $ 0.58
Pro forma diluted earnings per share $ 0.65 $ 0.56
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet at March 31, 2005 reflects the acquisition of
36,405 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.
8
NOTE 4. LOANS
March 31, December 31,
2005 2004
------------ ------------
(in thousands)
Commercial and industrial loans $ 716,602 $ 688,211
Agri-business and agricultural loans 92,235 102,749
Real estate mortgage loans 52,073 47,642
Real estate construction loans 5,848 6,719
Installment loans and credit cards 155,574 158,065
------------ ------------
Subtotal 1,022,332 1,003,386
Less: Allowance for loan losses (11,115) (10,754)
Net deferred loan fees (148) (167)
------------ ------------
Loans, net $ 1,011,069 $ 992,465
============ ============
Impaired loans $ 8,885 $ 9,309
Non-performing loans $ 9,685 $ 9,990
Allowance for loan losses to total loans 1.09% 1.07%
Changes in the allowance for loan losses are summarized as follows:
Three months ended
March 31,
------------------
2005 2004
-------- --------
Balance at beginning of period $ 10,754 $ 10,234
Provision for loan losses 458 252
Charge-offs (144) (100)
Recoveries 47 91
-------- --------
Net loans charged-off 97 9
-------- --------
Balance at end of period $ 11,115 $ 10,477
======== ========
9
NOTE 5. SECURITIES
The fair values of securities available for sale are as follows:
March 31, December 31,
2005 2004
------------ ------------
(in thousands)
U.S. Treasury securities $ 964 $ 989
U.S. Government agencies 26,160 22,885
Mortgage-backed securities 205,620 208,961
State and municipal securities 52,418 53,747
------------ ------------
Total $ 285,162 $ 286,582
============ ============
As of March 31, 2005, net unrealized losses on the total securities
available for sale portfolio totaled $3.4 million. As of December 31, 2004,
net unrealized losses on the total securities available for sale portfolio
totaled $142,000.
NOTE 6. EMPLOYEE BENEFIT PLANS
Components of Net Periodic Benefit Cost
Three Months Ended March 31
----------------------------------
Pension Benefits SERP Benefits
---------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 37 37 20 20
Expected return on plan assets (36) (31) (26) (25)
Recognized net actuarial loss 10 10 11 9
---- ---- ---- ----
Net pension expense $ 11 $ 16 $ 5 $ 4
==== ==== ==== ====
The Company previously disclosed in its financial statements for the year
ended December 31, 2004, that it expected to contribute $422,000 to its
pension plan and $106,000 to its SERP plan in 2005. As of March 31, 2005,
$106,000 had been contributed to the SERP plan and $0 to the pension plan. The
Company presently anticipates contributing $422,000 to its pension plan in
2005.
10
NOTE 7. 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.
11
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
March 31, 2005
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 $4.1 million for the first
three months of 2005, versus $3.5 million in the same period of 2004, an
increase of 15.8%. The increase was driven by a $1.5 million increase in net
interest income. Offsetting this positive impact were increases of $455,000 in
noninterest expense and $206,000 in the provision for loan losses. Basic
earnings per share for the first three months of 2005 were $0.68 per share
versus $0.60 per share for the first three months of 2004. 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 three months
of 2005 were $0.66 per share, versus $0.58 per share for the first three
months of 2004.
RESULTS OF OPERATIONS
Net Interest Income
For the three-month period ended March 31, 2005, net interest income
totaled $11.9 million, an increase of 14.7%, or $1.5 million versus the first
three months of 2004. Net interest income increased in the three-month period
of 2005 versus the comparable period of 2004, primarily due to a 12 basis
point increase in the net interest margin from 3.65% to 3.77%, and an increase
in average earning assets. For the three-month period ended March 31, 2005,
average earning assets increased by $128.2 million, or 10.9%, to $1.305
billion, and average noninterest bearing demand deposits increased by $29.4
million, or 15.7%, to $216.3 million, versus the same period in 2004.
Given the Company's mix of interest earning assets and interest bearing
liabilities at March 31, 2005, the net interest margin could be expected to
increase in a rising rate environment. Management expects the net interest
margin will improve during 2005 versus 2004, as the effects of recent rate
increases by the Federal Reserve are felt.
During the first three months of 2005, total interest and dividend income
increased by $3.2 million, or 22.2% to $17.5 million, versus $14.3 million
during the first three months of 2004. The tax equivalent yield on average
earning assets increased by 52 basis points to 5.5% for the three-month period
ended March 31, 2005 versus the same period of 2004.
12
The average daily loan balances for the first three months of 2005
increased 14.3% to $1.010 billion, over the average daily loan balances of
$883.7 million for the same period of 2004. During the same period, loan
interest income increased by $3.0 million, or 26.5%, to $14.6 million. The
increase was the result of a 60 basis point increase in the tax equivalent
yield on loans to 5.9% from 5.3% in the first three months of 2005.
The average daily securities balances for the first three months of 2005
increased $3.9 million, or 1.4%, to $286.0 million, versus $282.1 million for
the same period of 2004. During the same periods, income from securities
increased by $96,000, or 3.5%, to $2.9 million versus $2.8 million during the
first three months of 2004. The increase was primarily the result of a 10
basis point increase in the tax equivalent yields on securities, to 4.5%
versus 4.4% in the first three months of 2004.
Total interest expense increased $1.7 million, or 41.7%, to $5.6 million
for the three-month period ended March 31, 2005, from $4.0 million for the
comparable period in 2004. The increase was primarily the result of a 40 basis
point increase in the Company's daily cost of funds to 1.75%, versus 1.35% for
the same period of 2004.
On an average daily basis, total deposits (including demand deposits)
increased $140.8 million, or 14.5%, to $1.110 billion for the three-month
period ended March 31, 2005, versus $968.7 million during the same period in
2004. On an average daily basis, noninterest bearing demand deposits increased
$29.4 million, or 15.7% for the three-month period ended March 31, 2005,
versus the same period in 2004. When comparing the three months ended March
31, 2005 with the same period of 2004, the average daily balance of time
deposits, which pay a higher rate of interest compared to demand deposit and
transaction accounts, increased $113.1 million primarily as a result of
increases in public fund deposits. The rate paid on time deposit accounts
increased 42 basis points to 2.9% versus the same period in 2004.
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 decreased $18.5 million, or 8.7%, to
$193.5 million for the three months ended March 31, 2005 versus $212.0 million
for the same period in 2004. The rate on borrowings increased 70 basis points
13
when comparing the three-month period of 2005 with the same period of 2004. On
an average daily basis, total deposits (including demand deposits) and
purchased funds increased 10.4% when comparing the three-month period ended
March 31, 2005 versus the same period in 2004. The following tables set forth
consolidated information regarding average balances and rates.
14
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Three Months Ended March 31,
-----------------------------------------------------------------------
2005 2004
---------------------------------- ----------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------ --------- ------- ------------ --------- -------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 1,004,608 $ 14,513 5.86 % $ 875,479 $ 11,443 5.26 %
Tax exempt (1) 4,999 60 4.83 8,212 96 4.70
Investments: (1)
Available for sale 285,971 3,145 4.46 282,053 3,058 4.36
Short-term investments 5,942 34 2.32 8,177 19 0.93
Interest bearing deposits 3,597 22 2.48 3,007 9 1.20
------------ --------- ------------ ---------
Total earning assets 1,305,117 17,774 5.52 % 1,176,928 14,625 5.00 %
Nonearning assets:
Cash and due from banks 54,120 0 47,768 0
Premises and equipment 25,017 0 26,064 0
Other nonearning assets 42,946 0 41,015 0
Less allowance for loan loss losses (10,893) 0 (10,362) 0
------------ --------- ------------ ---------
Total assets $ 1,416,307 $ 17,774 $ 1,281,413 $ 14,625
============ ========= ============ =========
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2005
and 2004. 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, 2005 and 2004, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
15
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
Three Months Ended March 31,
-----------------------------------------------------------------------
2005 2004
--------------------------------- ----------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
------------ --------- ------- ------------ --------- -------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 70,448 $ 17 0.10 % $ 64,953 $ 28 0.17 %
Interest bearing checking accounts 339,157 992 1.19 346,328 738 0.86
Time deposits:
In denominations under $100,000 220,829 1,582 2.91 205,378 1,440 2.82
In denominations over $100,000 262,831 1,857 2.87 165,164 825 2.01
Miscellaneous short-term bbborrowings 152,503 680 1.81 150,989 346 0.92
Long-term borrowings 40,973 494 4.89 60,974 590 3.89
------------ --------- ------------ ---------
Total interest bearing liabilities 1,086,741 5,622 2.10 % 993,786 3,967 1.61 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 216,286 0 186,901 0
Other liabilities 9,655 0 8,282 0
Stockholders' equity 103,625 0 92,444 0
Total liabilities and stockholders'
equity ------------ --------- ------------ ---------
$ 1,416,307 $ 5,622 $ 1,281,413 $ 3,967
============ ========= ============ =========
Net interest differential - yield on
average daily earning assets $ 12,152 3.77 % $ 10,658 3.65 %
========= =========
16
Provision for Loan Losses
Based on management's review of the adequacy of the allowance for loan
losses, provisions for losses on loans of $458,000 were recorded during the
three-month period ended March 31, 2005, versus provisions of $252,000
recorded during the same period of 2004. The increase in the provision for
loan losses for the period ended March 31, 2005 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 three-month periods ended March 31,
2005 and 2004 are shown in the following table:
Three Months Ended
March 31,
----------------------------------
Percent
2005 2004 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage income $ 728 $ 739 (1.5)%
Service charges on deposit accounts 1,549 1,657 (6.5)
Loan, insurance and service fees 415 487 (14.8)
Merchant card fee income 536 500 7.2
Other income 647 330 96.1
Net gains on the sale of real
estate mortgages held for sale 244 320 (23.8)
---------- ---------- ----------
Total noninterest income $ 4,119 $ 4,033 2.1 %
========== ========== ==========
Noninterest income increased $86,000, or 2.1% to $4.1 million for the
three-month period ended March 31, 2005 versus the same period in 2004. Other
income increased, primarily due to a $62,000 gain on the sale of other real
estate, as well as a $51,000 reduction in the loan servicing rights valuation
allowance during the first quarter of 2005, versus a $159,000 increase in the
allowance during the first quarter of 2004. Partially offsetting these
increases were decreases of $108,000 in service charges on deposit accounts.
This decline was driven by increases in the earnings credit available to
offset service charges on commercial checking accounts as well as reduced
overdraft activity resulting in fewer overdraft charges. Gains on sale of
mortgages decreased $76,000 as mortgage originations decreased from $13.4
17
million in the first quarter of 2004 to $10.0 million in the first quarter of
2005. The decreases in volume in 2005 were primarily the result of rising
mortgage rates during 2004 and 2005, which resulted in decreased mortgage
refinance activity and decreased demand for home mortgages during 2005.
Noninterest Expense
Noninterest expense categories for the three-month periods ended March
31, 2005 and 2004 are shown in the following table:
Three Months Ended
March 31,
----------------------------------
Percent
2005 2004 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 5,146 $ 4,925 4.5 %
Net occupancy expense 656 578 13.5
Equipment costs 517 439 17.8
Data processing fees and supplies 558 595 (6.2)
Credit card interchange 328 290 13.1
Other expense 2,158 2,081 3.7
---------- ---------- ----------
Total noninterest expense $ 9,363 $ 8,908 5.1 %
========== ========== ==========
Noninterest expense increased $455,000, or 5.1%, to $9.4 million for the
three-month period ended March 31, 2005 versus the same period in 2004. The
increase was driven by a $221,000 increase in salaries and employee benefits
due largely to higher health care costs as well as normal salary increases. In
addition, net occupancy expense increased by $78,000 due to higher property
tax expense, and equipment costs also increased by $78,000 due to higher
depreciation expense.
Income Tax Expense
Income tax expense increased $388,000, or 22.7%, for the first three
months of 2005, compared to the same period in 2004. The combined state
franchise tax expense and the federal income tax expense as a percentage of
income before income tax expense increased to 34.1% during the first three
months of 2005 compared to 32.8% during the same period in 2004. The increase
was driven by a decrease in the amount of income derived from tax-advantaged
sources.
18
CRITICAL ACCOUNTING POLICIES
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, 2004 (incorporated by reference as part of the
Company's 10-K filing).
FINANCIAL CONDITION
Total assets of the Company were $1.426 billion as of March 31, 2005, a
decrease of $27.1 million, or 1.9%, when compared to $1.453 billion as of
December 31, 2004.
Total cash and cash equivalents decreased by $45.8 million, or 44.1%, to
$58.1 million at March 31, 2005 from $103.9 million at December 31, 2004. The
decrease was attributable to loan growth as well as repayment of short-term
borrowings.
Total securities available-for-sale decreased by $1.4 million, or 0.5%,
to $285.2 million at March 31, 2005 from $286.6 million at December 31, 2004.
The decrease was a result of a number of transactions in the securities
portfolio. Securities paydowns totaled $9.1 million and the fair market value
of the securities portfolio decreased by $3.3 million. A rising interest rate
environment during the first quarter of 2005 drove the market value decrease.
Maturities and calls of securities totaled $865,000, and the amortization of
premiums, net of the accretion of discounts totaled $732,000. These decreases
were offset by securities purchases totaling $12.6 million. The investment
portfolio is managed to limit the Company's exposure to risk by containing
mostly collateralized mortgage obligations 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 decreased by $265,000, or 8.9%, to
$2.7 million at March 31, 2005 from $3.0 million at December 31, 2004. 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,
19
2005, $10.0 million in real estate mortgages were originated for sale and
$10.3 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased by
$19.0 million, or 1.9%, to $1.022 billion at March 31, 2005 from $1.003
billion at December 31, 2004. The mix of loan types within the Company's
portfolio consisted of 79% commercial, 6% real estate and 15% consumer loans
at March 31, 2005 compared to 79% commercial, 5% real estate and 16% consumer
at December 31, 2004.
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 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
20
classified loss, or charge off such amount. At March 31, 2005, on the basis of
management's review of the loan portfolio, the Company had $23.4 million of
assets classified as special mention, $24.5 million classified as substandard,
$1.4 million classified as doubtful and $0 classified as loss as compared to
$32.1 million, $23.3 million, $751,000 and $0 at December 31, 2004.
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.
Total impaired loans decreased by $434,000 to $8.9 million at March 31,
2005 from $9.3 million at December 31, 2004. The decrease in the impaired
loans category resulted primarily from the payoff of an impaired commercial
credit. The impaired loan total included $6.9 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. The following table summarizes nonperforming assets at March
31, 2005 and December 31, 2004.
21
March 31, December 31,
2005 2004
-------------- --------------
(in thousands)
NONPERFORMING ASSETS:
Nonaccrual loans $ 6,876 $ 7,213
Loans past due over 90 days and accruing 2,809 2,778
-------------- --------------
Total nonperforming loans 9,685 9,991
-------------- --------------
Other real estate 91 261
Repossessions 6 13
-------------- --------------
Total nonperforming assets $ 9,782 $ 10,265
============== ==============
Total impaired loans $ 8,885 $ 9,309
Nonperforming loans to total loans 0.95% 1.01%
Nonperforming assets to total assets 0.69% 0.71%
Total deposits increased by $17.1 million, or 1.5% to $1.133 billion at
March 31, 2005 from $1.115 billion at December 31, 2004. The increase resulted
from increases of $67.1 million in certificates of deposit and $5.7 million in
money market accounts. Offsetting these increases were declines of $24.6
million in NOW accounts, $22.0 million in Investors' Money Market accounts,
$8.9 million in demand deposits and $228,000 in savings accounts. Total
short-term borrowings decreased by $46.9 million, or 25.3%, to $138.7 million
at March 31, 2005 from $185.7 million at December 31, 2004. The decrease
resulted primarily from declines of $40.0 million in other borrowings,
primarily short-term advances from the Federal Home Loan Bank of Indianapolis,
and $7.5 million in federal funds purchased.
Total stockholders' equity increased by $1.5 million, or 1.5%, to $103.3
million at March 31, 2005 from $101.8 million at December 31, 2004. Net income
of $4.1 million, minus the decrease in the accumulated other comprehensive
income of $2.1 million, minus dividends of $1.2 million plus $781,000 for
stock issued through options exercised, minus $72,000 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
22
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, 2005,
the Company's Tier 1 leverage capital ratio, Tier 1 risk based capital ratio
and total risk based capital ratio were 9.2%, 11.6% and 12.5%, respectively.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk represents the Company's primary market risk exposure.
The Company does not have a material exposure to foreign currency exchange
risk, does not have any material amount of derivative financial instruments
and does not maintain a trading portfolio. The board of directors annually
reviews and approves the policy used to manage interest rate risk. The policy
was last reviewed and approved in May 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 March 31, 2005, the Company's potential pretax
exposure was within the Company's policy limit, and not significantly
different from December 31, 2004.
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, 2005. 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. During the quarter ended March 31, 2005, the Company has not made a
change to its disclosure controls and procedures or its internal controls over
financial reporting that has materially affected or is reasonably likely to
materially affect its disclosure controls or its controls over financial
reporting.
23
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.
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.
24
o The ability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such
as the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to
the Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives
and employees in an effective manner.
o Consumer spending and saving habits, which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses, which
may be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies, the Financial Accounting Standards
Board, the Securities and Exchange Commission and the Public Company
Accounting Oversight Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Additional information concerning the Company and its business,
including other factors that could materially affect the Company's financial
results, is included in the Company's filings with the Securities and Exchange
Commission.
25
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2005
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. Unregistered Sales of Equity Securities and Use of Proceeds
-------------------------------------------------------------
The following table provides information as of March 31, 2005 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
- ------- -------- ------- --------- -----------
January 1-31 1,834 $ 39.67 0 0
February 1-28 0 $ 0 0 0
March 1-31 0 $ 0 0 0
----- ------- --------- -----------
Total 1,834 $ 39.67
===== =======
(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
26
Item 6. 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.
27
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2005
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 2, 2005 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: May 2, 2005 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: May 2, 2005 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
28