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, 2001
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 (219)267-6144
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at April 30, 2001
Common Stock, No Par Value 5,779,932
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 . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 29
Item 2. Changes in 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 . . . . . . . . . . . . . . . . . . . . 29
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 29
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 30
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2001 and December 31, 2000
(in thousands)
(Page 1 of 2)
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS Cash and cash equivalents:
Cash and due from banks $ 38,234 $ 84,682
Short-term investments 875 4,311
------------ ------------
Total cash and cash equivalents 39,109 88,993
Securities available-for-sale:
U. S. Treasury and government agency securities 38,285 38,066
Mortgage-backed securities 211,717 207,594
State and municipal securities 35,463 35,430
Other debt securities 13,209 12,518
------------ ------------
Total securities available-for-sale
(carried at fair value) 298,674 293,608
Real estate mortgages held-for-sale 1,515 183
Loans:
Total loans 714,740 718,876
Less: Allowance for loan losses 7,189 7,124
------------ ------------
Net loans 707,551 711,752
Land, premises and equipment, net 27,034 27,297
Accrued income receivable 6,418 6,744
Intangible assets 9,407 9,624
Other assets 12,120 10,956
------------ ------------
Total assets $ 1,101,828 $ 1,149,157
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 2001 and December 31, 2000
(in thousands)
(Page 2 of 2)
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 128,537 $ 164,606
Interest bearing deposits 713,872 680,723
------------ ------------
Total deposits 842,409 845,329
Short-term borrowings:
Federal funds purchased 6,000 8,250
U.S. Treasury demand notes 891 3,674
Securities sold under agreements
to repurchase 121,696 138,154
Other borrowings 20,000 50,000
------------ ------------
Total short-term borrowings 148,587 200,078
Accrued expenses payable 10,288 6,684
Other liabilities 1,540 1,369
Long-term borrowings 11,422 11,433
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,298 19,291
------------ ------------
Total liabilities 1,033,544 1,084,184
SHAREHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized, 5,813,984 shares
issued and 5,779,932 outstanding as of March 31, 2001, and 5,813,984 shares
issued and 5,784,105
outstanding at December 31, 2000 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 57,111 55,734
Accumulated other comprehensive income/(loss) 1,787 (207)
Treasury stock, at cost (604) (544)
------------ ------------
Total shareholders' equity 68,284 64,973
------------ ------------
Total liabilities and shareholders' equity $ 1,101,828 $ 1,149,157
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2001, and 2000
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended
March 31,
---------------------------
2001 2000
------------ ------------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 15,614 $ 14,377
Tax exempt 33 45
------------ ------------
Total loan income 15,647 14,422
Short-term investments 242 58
Securities:
U.S. Treasury and government agency securities 733 729
Mortgage-backed securities 3,316 3,079
State and municipal securities 445 446
Other debt securities 115 101
------------ ------------
Total interest and dividend income 20,498 18,835
INTEREST EXPENSE
- ----------------
Interest on deposits 9,315 7,439
Interest on short-term borrowings 1,991 2,276
Interest on long-term debt 603 681
------------ ------------
Total interest expense 11,909 10,396
------------ ------------
NET INTEREST INCOME 8,589 8,439
- -------------------
Provision for loan losses 213 215
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,376 8,224
- ------------------------- ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage fees 794 551
Service charges on deposit accounts 1,108 1,078
Other income (net) 706 803
Net gains on the sale of real estate mortgages
held-for-sale 127 130
------------ ------------
Total noninterest income 2,735 2,562
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 4,212 4,029
Occupancy and equipment expense 1,269 1,289
Other expense 2,627 2,303
------------ ------------
Total noninterest expense 8,108 7,621
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2001, and 2000
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended
March 31,
---------------------------
2001 2000
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 3,003 3,165
- --------------------------------
Income tax expense 874 963
------------ ------------
NET INCOME $ 2,129 $ 2,202
- ---------- ============ ============
AVERAGE COMMON SHARES OUTSTANDING (Note 2) 5,813,984 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.37 $ 0.38
- ------------------------------- ============ ============
DILUTED EARNINGS PER COMMON SHAE SHARE $ 0.37 $ 0.38
- -------------------------------------- ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2001 and 2000
(in thousands)
(unaudited)
For the Three Months Ended
March 31,
----------------------------------
2001 2000
---------------- ----------------
Common Stock:
Balance at beginning of the period $ 1,453 $ 1,453
------- -------
Balance at end of the period 1,453 1,453
Paid-in Capital:
Balance at beginning of the period 8,537 8,537
------- -------
Balance at end of the period 8,537 8,537
Retained Earnings:
Balance at beginning of the period 55,734 49,422
Net Income 2,129 $ 2,129 2,202 $ 2,202
Cash dividends declared ($.13
per share for 2001 and 2000) (752) (754)
------- -------
Balance at end of the period 57,111 50,870
Accumulated Other Comprehensive Income/(Loss):
Balance at beginning of the period (207) (4,797)
Unrealized gain (loss) on available-for-
sale securities arising during the period 1,994 (314)
------- -------
Other comprehensive income/(loss)(net of taxes
of $1,046 and $[206]) 1,994 1,994 (314) (314)
------- ------- ------- -------
Total comprehensive income $ 4,123 $
1,888
Balance at end of the period 1,787 ======= (5,111) =======
Treasury Stock:
Balance at beginning of the period (544) (421)
Acquisition of treasury stock (60) (57)
------- -------
Balance at end of the period (604) (478)
------- -------
Total Shareholders' Equity $68,284 $55,271
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2001 and 2000
(in thousands)
(Unaudited)
(Page 1 of 2)
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 2,129 $ 2,202
------------ ------------
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 588 605
Provision for loan losses 213 215
Amortization of intangible assets 224 231
Amortization of mortgage servicing rights 65 62
Impairment of mortgage servicing rights 192 0
Loans originated for sale (8,245) (5,379)
Net gain on sale of loans (127) (130)
Proceeds from sale of loans 7,002 5,649
Net loss on sale of premises and equipment 11 7
Net securities amortization 202 267
Increase in taxes payable 854 117
(Increase) decrease in income receivable 326 (720)
Increase in accrued expenses payable 1,417 2,213
Increase in other assets (1,200) (1,147)
Decrease in other liabilities 171 212
------------ ------------
Total adjustments 1,693 2,202
------------ ------------
Net cash from operating activities 3,822 4,404
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities available-for-sale 8,467 10,556
Purchases of securities available-for-sale (10,559) (18,633)
Net (increase) decrease in total loans 3,956 (7,574)
Purchases of land, premises and equipment (336) (254)
------------ ------------
Net cash from investing activities 1,528 (15,905)
------------ ------------
(Continued)
6
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2001 and 2000
(in thousands)
(Unaudited)
(Page 2 of 2)
2001 2000
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in total deposits $ (2,920) $ 45,766
Proceeds from short-term borrowings 6,863,916 5,289,199
Payments on short-term borrowings (6,915,407) (5,325,869)
Payments on long-term borrowings (11) (10)
Dividends declared (752) (754)
Purchase of treasury stock (60) (57)
------------ ------------
Net cash from financing activities (55,234) 8,275
------------ ------------
Net increase (decrease) in cash and cash equivalents (49,884) (3,226)
Cash and cash equivalents at beginning of the period 88,993 63,104
------------ ------------
Cash and cash equivalents at end of the period $ 39,109 $ 59,878
============ ============
Cash paid during the period for:
Interest $ 10,258 $ 9,400
============ ============
Income taxes $ 20 $ 247
============ ============
Loans transferred to other real estate $ 32 $ 0
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
7
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This report is filed for Lakeland Financial Corporation (the Company)
and its wholly owned subsidiaries, Lake City Bank (the Bank) and Lakeland
Capital Trust (Lakeland Trust). All significant inter-company balances and
transactions have been eliminated in consolidation. Also included is the
Bank's wholly-owned subsidiary, LCB Investments Limited (LCB Investments).
The consolidated financial statements have been prepared by the
Company, without audit and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate and do not make the information presented misleading.
It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's latest annual report to shareholders and Form 10-K. In preparing
financial statements in conformity with generally accepted accounting
principles, management must make estimates and assumptions. These estimates
and assumptions affect the amounts reported and the disclosures provided.
Results for the period ended March 31, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. In the
opinion of management, all adjustments (consisting only of normal, recurring
adjustments) which are necessary for a fair statement of the results for
interim periods are reflected in the quarterly statements.
The Company formed Lakeland Trust in July 1997. Lakeland Trust issued
$20 million of 9% Cumulative Trust Preferred Securities (Preferred
Securities). The Preferred Securities issued by Lakeland Trust are presented
as a separate line item as long-term debt in the consolidated balance sheets
of the Company. The securities are captioned "Guaranteed Preferred Beneficial
Interests in Company's Subordinated Debentures". The Company records
distributions payable on the Preferred Securities as interest expense in its
consolidated statements of income.
LCB Investments is a single purpose, wholly-owned subsidiary of the
Bank that began operation in November 1999. Its principal office is in
Bermuda, and it was formed to manage a portion of the securities portfolio of
the Bank.
8
NOTE 2. EARNINGS PER SHARE
Basic earnings per common share is based upon weighted-average common
shares outstanding. Diluted earnings per common share shows the dilutive
effect of additional common shares issueable.
The common shares outstanding for the shareholders' equity section of
the consolidated balance sheet at March 31, 2001 reflects the acquisition of
34,052 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.
A reconciliation of the numerators and denominators of the basic
earnings per common share and the diluted earnings per common share for the
periods ended March 31, 2001 and 2000 follows. All amounts are in thousands
except share data.
9
For the three months
ended March 31,
----------------------------------------
2001 2000
------------------ ------------------
Basic earnings per common share
Net income $ 2,129 $ 2,202
Weighted-average common
shares outstanding 5,813,984 5,813,984
Basic earnings per
common share $ .37 $ .38
Diluted earnings per common share
Net income $ 2,129 $ 2,202
Weighted-average common
shares outstanding for
basic earnings per
common share 5,813,984 5,813,984
Add: dilutive effect
of assumed exercises
of stock options 15,703 0
Average common shares
and dilutive potential
common shares 5,829,687 5,813,984
Diluted earnings per
common share $ .37 $ .38
Stock options for 318,570 and 353,670 shares of common stock were not
considered in computing diluted earnings per common share for March 31, 2001
and 2000 because they were antidilutive.
10
NOTE 3. STOCK OPTIONS
The Lakeland Financial Corporation 1997 Share Incentive Plan reserves
600,000 shares of common stock for which Incentive Share Options (ISO) and
Non-Qualified Share Options (NQSO) may be granted to employees of the Company
and its subsidiaries, and NQSOs which may be granted to directors of the
Company. Most options granted under this plan were issued for 10-year periods
with full vesting five years from the date the option was granted. Information
about options granted, exercised and forfeited during 2001 follows:
Number Weighted Risk- Stock Fair
of Exercise Free Price Value of
Options Price Rate Volatility Grants
---------- ---------- ---------- ----------- ---------
Outstanding 1/1/01 454,770
Granted 1/9/01 134,025 $ 13.63 4.73% 62.45% $ 5.92
Exercised 0
Forfeited 22,000 $ 23.27
Outstanding 3/31/01 566,795
The fair values of the options were estimated using an expected life
of 5 years and expected dividends of $.13 per quarter. There were 6,200
options exercisable as of March 31, 2001.
The Company accounts for the stock options under APB 25. Statement of
Financial Accounting Standards (SFAS) No. 123 requires pro forma disclosures
for companies that do not adopt its fair value accounting method for
stock-based compensation. The following pro forma information presents net
income, basic earnings per common share and diluted earnings per common share
had the fair value method been used to measure compensation cost for stock
option plans. No compensation cost was actually recognized for stock options
in 2001 or 2000.
11
For the three months
ended March 31,
----------------------
2001 2000
---------- ----------
Net income as reported $ 2,129 $ 2,202
Pro forma net income $ 1,931 $ 2,099
Basic earnings per common
share as reported $ .37 $ .38
Diluted earnings per
common share as reported $ .37 $ .38
Pro forma basic earnings
per common share $ .33 $ .36
Pro forma diluted earnings
per common share $ .33 $ .36
NOTE 4. SECURITIES AVAILABLE-FOR-SALE
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
(in thousands)
March 31, 2001
U.S. Treasury securities $ 38,285 $ 362 $ (6)
U.S. Government agencies and
corporations 6,707 41 0
Mortgage-backed securities 211,717 3,082 (702)
State and municipal securities 35,463 244 (195)
Other debt securities 6,502 85 (78)
---------- ---------- ----------
Total securities available-for-sale
at March 31, 2001 $ 298,674 $ 3,814 $ (981)
========== ========== ==========
December 31, 2000
U.S. Treasury securities $ 38,066 $ 212 $ (183)
U.S. Government agencies and
corporations 9,579 0 (170)
Mortgage-backed securities 207,594 1,809 (1,714)
State and municipal securities 35,430 214 (200)
Other debt securities 2,939 9 (320)
---------- ---------- ----------
Total securities available-for-sale
at December 31, 2000 $ 293,608 $ 2,244 $ (2,587)
========== ========== ==========
12
The fair value of available-for-sale debt securities by maturity as
of March 31, 2001, is presented below. Maturity information is based on
contractual maturity for all securities other than mortgage-backed securities.
Actual maturities of securities may differ from contractual maturities because
borrowers may have the right to prepay the obligation without prepayment
penalty.
Fair
Value
------------
(in thousands)
Due in one year or less $ 30,330
Due after one year through five years 18,301
Due after five years through ten years 2,307
Due after ten years 36,019
------------
86,957
Mortgage-backed securities 211,717
------------
Total debt securities $ 298,674
============
NOTE 5. LOANS
March 31, December 31,
2001 2000
------------ ------------
(in thousands)
Commercial and industrial loans $ 443,578 $ 440,941
Agri-business and agricultural loans 45,792 48,704
Real estate mortgage loans 50,246 48,959
Real estate construction loans 2,361 3,626
Installment loans and credit cards 172,763 176,646
------------ ------------
Total loans $ 714,740 $ 718,876
============ ============
Impaired loans $ 1,413 $ 1,413
Non-performing loans $ 2,542 $ 8,410
13
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
March 31, 2001
OVERVIEW
Lakeland Financial Corporation (the "Company") is the holding company
for Lake City Bank. The Company is headquartered in Warsaw, Indiana and
operates 43 offices in 15 counties in northern Indiana. The Company earned
$2.1 million for the first three months of 2001 versus $2.2 million in the
same period of 2000. The decrease was primarily caused by a reduction in the
Company's net interest margin, which decreased 24 basis points to 3.49% during
the first quarter of the year versus the comparable period in 2000. The
decrease occurred as a result of a 1.50% reduction in Lake City Bank's prime
rate which was driven by corresponding rate cuts by the Federal Reserve Bank
during the quarter. Given the Company's balance sheet structure, a declining
interest rate environment will generally lead to a lower net interest margin
and lower net interest income.
Since March 31, 1996, total Company assets have increased 91.2%, from
$576.3 million to $1.102 billion at March 31, 2001, a 13.8% annual compounded
growth rate. This growth was accomplished through continued growth in existing
markets with de-novo branch activity and the existing network of offices and
acquisitions. Shareholders' equity has increased 80.9% from $37.8 million to
$68.3 million over the same time period, a 12.6% annual compounded growth
rate. Net income for the three months ended March 31, 1996, compared to the
net income for the same period of 2001, increased 41.6% from $1.5 million to
$2.1 million. From March 31, 1996, to March 31, 2001, the number of Lake City
Bank offices increased from 30 to 43. The capital necessary to support this
growth has been provided through results of operation, issuance of trust
preferred securities and existing capital. It should be noted that historical
rates of growth may not be indicative of growth in future periods.
Forward-looking Statements
This release may contain forward-looking statements. Forward-looking
statements are identifiable by the inclusion of such qualifications as
expects, intends, believes, may, likely or similar statements or variations of
such terms which express views concerning trends and the future. These forward
looking statements are not historical facts and instead they are expressions
about management's confidence and strategies and management's expectations
about new and existing programs and products, relationships, opportunities,
technology and market conditions. Actual events and results may differ
14
significantly from those described in such forward-looking statements, due to
changes in the general economic or market conditions, government regulation,
competition or other factors. For additional information about these factors,
please review our filings with the Securities and Exchange Commission.
The Company wishes to caution readers not to place undo reliance on any
such forward-looking statements, which speak only as of the date made, and
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
Assets
Total assets of the Company were $1.102 billion as of March 31, 2001,
a decrease of $47.3 million, or 4.1%, when compared to $1.149 billion as of
December 31, 2000. Total loans were $714.7 million at March 31, 2001, a
decrease of $4.1 million, or 0.6%, versus the December 31, 2000 balance. Total
securities increased $5.1 million, or 1.7%, to $298.7 million as of March 31,
2001, versus $293.6 million at December 31, 2000. Earning assets decreased to
$1.009 billion as of March 31, 2001, a decrease of $1.2 million, or 0.1%,
versus the December 31, 2000, total of $1.010 billion.
Funding
Total deposits and securities sold under agreements to repurchase
(repurchase agreements) consist of funds generated within the Company's
primary market area. At March 31, 2001, this funding totaled $964.1 million.
This represented a $19.4 million, or 2.0%, decrease versus December 31, 2000.
The decrease was primarily in noninterest-bearing demand accounts, which
decreased $36.1 million, or 21.9%, when compared to the balance at December
31, 2000, and repurchase agreements, which decreased $16.5 million, or 11.9%,
during the same period. The repurchase agreements are a combination of fixed
rate contracts and variable rate corporate cash management accounts. Time
deposits increased $37.4 million, or 6.7% compared to the balance at December
31, 2000.
In addition to these local funding sources, the Company borrows
through the Treasury, Tax and Loan program, federal fund lines with
15
correspondent banks and advances from the Federal Home Loan Bank of
Indianapolis (FHLB). Including these non-local sources, funding totaled $1.002
billion at March 31, 2001, a $54.4 million, or a 5.1%, decrease versus $1.057
billion as of December 31, 2000. The primary decrease in non-local funding
sources was advances from the FHLB, which are used for short- and long-term
funding needs.
Earning Assets
On an average daily basis, total earning assets increased 9.5% for
the three-month period ended March 31, 2001, as compared to the same period in
2000. On an average daily basis, total deposits and purchased funds increased
7.3% for the three-month period ended March 31, 2001, as compared to the same
period in 2000.
Investment Portfolio
The Company's available-for-sale portfolio is managed with
consideration given to factors such as the Company's capital levels, growth
prospects, asset/liability structure and liquidity needs. At March 31, 2001,
the securities in the available-for-sale portfolio had a three year average
life and a potential for approximately 10% price depreciation in the event
that rates move up 300 basis points. If rates move down 300 basis points, the
average life would be three years with approximately 4% price appreciation
possible. The composition of this portfolio is primarily CMOs and mortgage
pools issued by GNMA, FNMA and FHLMC, which are directly or indirectly
guaranteed by the federal government. As of March 31, 2001, all
mortgage-backed securities were performing in a manner consistent with
management's original expectations. Future investment activity is difficult to
predict, as it is dependent upon loan and deposit trends and other factors.
Loans
The Company had 68.5% of its loans concentrated in commercial loans
at March 31, 2001 versus 68.1% as of December 31, 2000. Traditionally, this
type of lending may have more credit risk than other types of lending because
of the size and diversity of the credits. The Company manages this risk by
adjusting its pricing to the perceived risk of each individual credit and by
diversifying the portfolio by customer, product, industry and geography.
Customer diversification is accomplished through an administrative loan limit
of $10.0 million. Based upon state banking regulations, the Bank's legal loan
limit as of March 31, 2001, was approximately $12.6 million. Product
diversification is accomplished by offering a wide variety of financing
options. Management reviews the loan portfolio to ensure loans are diversified
by industry. The loans in the portfolios are distributed throughout the
Company's principal trade area, which encompasses 15 counties in Indiana.
16
The real estate loan portfolio is impacted by secondary market
activity, which is a function of current interest rates and economic
conditions. As interest rates have gradually fallen since December 31, 2000,
the level of new financings and refinancings has increased. Through March 31,
2001, the Company sold mortgages totaling $6.9 million into the secondary
market as compared to $5.6 million during the same period in 2000. During
these same two periods, loans originated for sale totaled $8.2 million and
$5.4 million, respectively. As a part of the Community Reinvestment Act
commitment to making real estate financing available to a variety of
customers, the Company continues to originate non-conforming loans that are
held to maturity or prepayment.
Loans renegotiated as troubled debt restructurings are those loans
for which either the contractual interest rate has been reduced and/or other
concessions were granted to the borrower. These actions are typically taken as
a result of a deterioration in the financial condition of the borrower which
results in the inability of the borrower to perform under the original terms
of the loan. Loans renegotiated as troubled debt restructurings totaled $1.1
million at both March 31, 2001 and December 31, 2000. The loans classified as
troubled debt restructurings at March 31, 2001 were performing in accordance
with the modified terms.
While the trend in non-performing loans reflects improved asset
quality, the Company continues to be concerned with weakening economic
conditions in some of its market area as well as the country in general. A
slowing economy could adversely affect cash flows for both commercial and
individual borrowers, as a result of which, the Company could experience
increases in problem assets, delinquencies, and losses on loans.
For the first three months of 2001, loans decreased more than
deposits. During this three-month period, time deposits increased $35.6
million, or 9.0%, from $396.5 million to $432.0 million and other transaction
accounts decreased $2.4 million, or 0.9%, during the same period. Repurchase
agreements decreased $16.5 million, or 11.9%, during the first three months of
this year, and demand accounts, which are noninterest bearing, decreased $36.1
million, or 21.9%. During this same three-month period, loans decreased $4.1
million, or 0.6%. Commercial loan growth opportunities continue to be strong,
while consumer loan growth opportunities have slowed somewhat. Since 2000, the
Company has strategically focused on loan growth in the commercial portfolio
that historically produces higher returns than the consumer loan portfolio.
The Company's loan to deposit ratio was 84.8% as of March 31, 2001, versus
85.0% at December 31, 2000.
Market Risk
The Company's primary market risk exposure is interest rate risk. The
Company does not have a material exposure to foreign currency exchange risk,
does not own any 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. This policy was last reviewed and
17
approved in May 2000. This 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. Given the Company's mix of interest bearing
liabilities and interest bearing assets at March 31, 2001, the net interest
margin could be expected to decline in a falling rate environment and
conversely, to increase in a rising rate environment. The Company, through its
asset/liability committee, manages interest rate risk by monitoring the
computer simulated earnings impact of various rate scenarios. 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 a 300 basis point change in
interest rates 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, 2001, the Company's
potential pretax exposure was within the Company's policy limit.
The following table provides information about the Company's
financial instruments used for purposes other than trading that are sensitive
to changes in interest rates. For loans, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities. Additionally, the
Company's historical prepayment experience is included in cash flows for
residential and home equity loans and for mortgage-backed securities. For core
deposits such as demand deposits, interest-bearing checking, savings and money
market deposits that have no contractual maturity, the table presents
principal cash flows based upon management's judgment and statistical
analysis. Weighted-average variable rates are the rates in effect at the
reporting date.
18
QUANTITATIVE MARKET RISK DISCLOSURE
Principal/Notional Amount Maturing in:
(Dollars in thousands) Fair
---------------------------------------------------------------------------------- Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 3/31/01
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 114,814 $ 72,401 $ 81,383 $ 47,103 $ 20,239 $ 12,107 $ 348,047 $ 358,973
Average interest rate 8.69% 8.79% 8.52% 8.43% 8.68% 8.01% 8.62%
Variable interest rate loans $ 323,174 $ 1,325 $ 1,276 $ 1,232 $ 1,217 $ 39,984 $ 368,208 $ 368,110
Average interest rate 8.74% 10.56% 10.11% 9.78% 9.39% 7.13% 8.58%
Fixed interest rate securities $ 46,788 $ 28,493 $ 23,999 $ 21,183 $ 20,184 $ 152,107 $ 292,754 $ 295,550
Average interest rate 5.74% 6.46% 6.32% 6.53% 6.61% 6.46% 6.35%
Variable interest rate securities $ 310 $ 318 $ 326 $ 334 $ 344 $ 1,455 $ 3,087 $ 3,124
Average interest rate 5.68% 5.80% 5.76% 5.72% 5.68% 5.77% 5.75%
Other interest-bearing assets $ 875 $ 0 $ 0 $ 0 $ 0 $ 0 $ 875 $ 875
Average interest rate 5.11% 0.00% 0.00% 0.00% 0.00% 0.00% 5.11%
Rate sensitive liabilities:
Non-interest bearing checking $ 6,684 $ 5,964 $ 1,080 $ 1,028 $ 1,504 $ 112,277 $ 128,537 $ 128,537
Average interest rate
Savings & interest bearing checking $ 21,475 $ 19,390 $ 17,219 $ 15,641 $ 12,541 $ 195,558 $ 281,824 $ 281,825
Average interest rate 3.59% 3.59% 3.59% 3.59% 3.59% 3.03% 3.20%
Time deposits $ 375,828 $ 38,256 $ 10,052 $ 3,988 $ 2,652 $ 1,272 $ 432,048 $ 435,243
Average interest rate 6.06% 5.92% 5.62% 5.72% 5.91% 4.30% 6.03%
Fixed interest rate borrowings $ 158,187 $ 400 $ 1,422 $ 0 $ 0 $ 19,298 $ 179,307 $ 177,700
Average interest rate 4.78% 6.45% 6.15% 0.00% 0.00% 8.96% 5.24%
19
Borrowings
The Company is a member of the FHLB of Indianapolis. Membership has
enabled the Company to participate in the housing programs sponsored by the
FHLB, which enhances the Company's ability to offer additional programs
throughout its trade area. The Company has authorized borrowings of up to $100
million under the FHLB program. As of March 31, 2001, the borrowings from the
FHLB totaled $31.3 million, with maturities as follows:
March 31,
2001
--------------
(in thousands)
Due July 10, 2001 20,000
Due December 28, 2001 10,000
Due June 24, 2003 1,300
Due January 15, 2018 49
--------------
Total $ 31,349
==============
All borrowings are collateralized by residential real estate
mortgages and mortgage-backed securities. Membership in the FHLB requires an
equity investment in FHLB stock. The amount required is computed annually, and
is based upon a formula that considers the Company's total investment in
residential real estate loans, mortgage-backed securities and any FHLB
advances outstanding at year-end. The Company's investment in FHLB stock at
March 31, 2001, was $3.6 million.
Capital and Shareholders' Equity
The Federal Deposit Insurance Corporation's risk based capital
regulations require that all banks 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 Bank's ratios continue to
be above "well capitalized" levels.
The Company's and Bank's actual capital amounts and ratios at the
dates indicated are presented in the following table (in thousands):
20
Minimum Required To Be
Minimum Required Well Capitalized Under
For Capital Prompt Corrective Action
Actual Adequacy Purposes Regulations
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
As of March 31, 2001
Total Capital
(to Risk Weighted Assets)
Consolidated $ 84,141 10.57% $ 63,666 8.00% $ 79,583 10.00%
Bank $ 83,827 10.56% $ 63,510 8.00% $ 79,388 10.00%
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 76,951 9.67% $ 31,833 4.00% $ 47,750 6.00%
Bank $ 76,638 9.65% $ 31,755 4.00% $ 47,633 6.00%
Tier I Capital
(to Average Assets)
Consolidated $ 76,951 6.97% $ 44,164 4.00% $ 55,205 5.00%
Bank $ 76,638 6.93% $ 44,252 4.00% $ 55,316 5.00%
As of December 31, 2000
Total Capital
(to Risk Weighted Assets)
Consolidated $ 82,537 10.24% $ 64,496 8.00% $ 80,621 10.00%
Bank $ 81,020 10.06% $ 64,434 8.00% $ 80,542 10.00%
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 75,414 9.35% $ 32,248 4.00% $ 48,372 6.00%
Bank $ 73,896 9.17% $ 32,217 4.00% $ 48,325 6.00%
Tier I Capital
(to Average Assets)
Consolidated $ 75,414 7.20% $ 41,874 4.00% $ 52,343 5.00%
Bank $ 73,896 7.06% $ 41,850 4.00% $ 52,313 5.00%
Total shareholders' equity as of March 31, 2001 increased $3.3
million, or 5.1%, to $68.3 million when compared to December 31, 2000. Net
income of $2.1 million, less dividends of $0.8 million, plus the increase in
the accumulated other comprehensive income of $2.0 million, less $60,000 for
the cost of treasury stock acquired, comprised this increase. The Company has
adopted a dividend reinvestment and stock purchase plan that became available
to the Company's shareholders in July 2000. The purpose of the dividend
reinvestment plan is to provide participating shareholders with a simple and
convenient method of investing cash dividends paid by the Company on its
shares of common stock into additional shares of common stock. All of the
Company's shareholders of record are eligible to participate in the plan.
21
RESULTS OF OPERATIONS
Net Income
Net income decreased $73,000, or 3.3%, to $2.1 million for the first
three months of 2001, versus $2.2 million in the same period in 2000. Basic
earnings per share for the first three months of 2001 was $0.37 per share,
versus $0.38 per share for the first three months of 2000. Diluted earnings
per share reflect the potential dilutive impact of stock options granted under
an employee stock option plan. The stock options did not have an impact on
earnings per share as diluted earnings per share were the same as basic
earnings per share for the three-month period ended March 31, 2001.
Net Interest Income
The net impact of the factors affecting total interest and dividend
income and total interest expense was an increase in net interest income. For
the three-month period ended March 31, 2001, net interest income increased
1.8% to $8.6 million, an increase of $0.2 million, versus the first three
months of 2000. The increase occurred as a result of the increase in average
earning assets, and despite a significant decline in the Company's net
interest margin from 3.73% to 3.49%.
During the first three months of 2001, total interest and dividend
income increased $1.7 million, or 8.8%, to $20.5 million, versus $18.8 million
during the same three months of 2000. Daily average earning assets for the
first quarter of 2001 increased 9.5% to $1.026 billion versus the same period
in 2000. The tax equivalent yield on average earning assets was 8.1% for the
three-month period ended March 31, 2001, which is unchanged compared to the
same period of 2000.
The yield on securities is historically lower than the yield on
loans, and decreasing the ratio of securities to total earning assets will
normally raise the yield on earning assets. The ratio of average daily
securities to average earning assets for the three-month periods ended March
31, 2001 was 28.7% compared to 29.1% for the same period of 2000. In addition,
the overall tax equivalent yield on loans increased seven basis points to 8.8%
when comparing the three-month periods. The yield on securities decreased nine
basis points to 6.6% when comparing the three-month periods.
The average daily loan balances for the first three months of 2001
increased 8.3% to $714.0 million, over the average daily loan balances of
$659.4 million for the same period of 2000. This loan growth was funded by
increases in deposits and borrowings. The 8.5% increase in loan interest
income of $1.2 million for the three-month period in 2001 versus the same
period in 2000 resulted primarily from the loan growth, as well as an increase
in the yields.
22
Income from securities totaled $4.6 million for the first three
months of 2001, an increase of $254,000, or 5.8%, versus the same period of
2000. This increase resulted from an increase in the average daily balances of
securities and was offset by a decrease in yields on securities. The average
daily balances of securities for the three-month period ended March 31, 2001
increased $21.4 million to $294.3 million when compared to $272.9 the same
period of the prior year.
Income from short-term investments amounted to $242,000 for the
three-month period ended March 31, 2001, compared to $58,000 for the same
period in 2000. The increase of $184,000 resulted primarily from a $12.9
million increase in the average daily balances of short-term investments to
$17.6 million compared to the same period of the prior year.
Total interest expense increased $1.5 million, or 14.6% to $11.9
million for the three-month period ended March 31, 2001, from $10.4 million
for the comparable period in 2000. The increase resulted from the overall
growth of deposits in existing offices, changes in the deposit mix and a 33
basis point increase in the Company's daily cost of funds. On an average daily
basis, total deposits (including demand deposits) increased 11.9% for the
three-month period ended March 31, 2001, as compared to the same period in
2000. When comparing the same periods, the average daily balances of the
demand deposit accounts rose $3.7 million, while the average daily balances of
savings and transaction accounts combined increased $6.8 million. The average
daily balance of time deposits, which pay a higher rate of interest compared
to demand deposit and transaction accounts, increased $80.1 million, from
$363.2 million to $443.3 million, for the three months ended March 31, 2001,
versus the same period in 2000. This increase was driven by the loan growth
which required additional funding. During the remainder of 2001, management
plans to continue efforts to grow relationship type accounts such as demand
deposit and Investors' Weekly accounts, which pay a lower rate of interest
compared to time deposit accounts and better match the characteristics of the
assets being generated. Average daily balances of borrowings decreased $31.8
million for the three-month period ended March 31, 2001 compared to the same
period of 2000. In addition, the rate on borrowings decreased 12 basis points
when comparing the same periods. On an average daily basis, total deposits
(including demand deposits) and purchased funds increased 7.3% from $968.4
million to $1.039 billion for the three-month period ended March 31, 2001,
versus the comparable period in 2000.
Provision for Loan Losses
The Company maintains the allowance for loan losses at a level that
is deemed appropriate based upon a number of factors, including loan loss
experience, the nature of the portfolio, the growth of the portfolio and the
evaluation of current economic conditions. Special consideration is given to
watch list loans, non-performing loans and non-accrual loans, as well as other
23
factors that management feels deserve recognition. The Company maintains a
quarterly loan review program designed to provide reasonable assurance that
the allowance is maintained at an appropriate level and that changes in the
status of loans are reflected in the financial statements in a timely manner.
The adherence to this policy may result in fluctuations in the provision for
loan losses. Consequently, the increase in net interest income before
provision for loan losses, discussed above, may not necessarily flow through
to the net interest income after provision for loan losses.
The provision was $213,000 and $215,000 for the three-month periods
ended March 31, 2001 and 2000, respectively. These provisions reflected a
number of factors, including the size of the loan portfolio, the amount of
past due accruing loans (90 days or more), the amount of non-accrual loans and
management's overall view on current credit quality.
As of March 31, 2001, loans delinquent 90 days or more that were
included in the accompanying financial statements as accrual loans totaled
approximately $706,000 versus $6.8 million as of December 31, 2000, a
reduction of 89.6%. At March 31, 2001, loans totaling $1.8 million were on
non-accrual versus $206,000 as of December 31, 2000. Major reductions resulted
from the repayment of a $1.4 million loan from another bank, and the extension
of terms of a $4.8 million loan, which now matures in July, 2001. These levels
of non-performing loans reflect both the general economic conditions that have
promoted growth and expansion in the Company's trade area during the last
several years, and a credit risk management strategy that promotes
diversification.
As a result of management's analysis of the adequacy of the
allowance, the ratio of the allowance for loan losses to total loans was
approximately 1.01% at March 31, 2001, compared to 0.99% at December 31 and
1.01% at March 31, 2000. While management believes that it uses the best
information available to determine the allowance for losses loan losses,
unforeseen market conditions could result in adjustments to the allowance for
loan losses and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in establishing the allowance
for loan losses.
As part of the loan review process, management reviews all loans
classified as `special mention' or below, as well as other loans that might
require classification as impaired. As of March 31, 2001 and December 31,
2000, loan balances totaling $1,413,000 were classified as impaired.
Following is a summary of the loan loss experience for the three
months ended March 31, 2001, and the year ended December 31, 2000.
24
March 31, December 31,
2001 2000
------------- -------------
(in thousands)
Amount of loans outstanding $ 714,740 $ 718,876
------------- -------------
Average daily loans outstanding for
the period $ 714,007 $ 659,365
------------- -------------
Allowance for loan losses at the
beginning of the period $ 7,124 $ 6,522
Charge-offs:
Commercial 0 200
Real estate 0 30
Installment 170 483
Credit card and personal credit lines 14 35
------------- ------------
Total charge-offs 184 748
Recoveries:
Commercial 1 45
Real estate 0 0
Installment 33 93
Credit card and personal credit lines 2 6
------------- ------------
Total recoveries 36 144
------------- ------------
Net charge-offs 148 604
Provision charged to expense 213 1,206
------------- ------------
Allowance for loan losses at the end of
the period $ 7,189 $ 7,124
============= ============
Ratio of annualized net charge-offs during the period to average daily
loans during the period:
Commercial 0.00% 0.02%
Real estate 0.00% 0.01%
Installment 0.08% 0.06%
Credit card and personal credit lines 0.00% 0.00%
------------- ------------
Total 0.08% 0.09%
============= ============
25
Net interest income after provision for loan losses totaled $8.4
million for the three-month period ended March 31, 2001, an increase of 1.8%
over the comparable period 2000.
Noninterest Income
Noninterest income categories for the three-month periods ended March
31, 2001, and 2000 are shown in the following table:
Three Months Ended
March 31,
----------------------------------
Percent
2001 2000 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 794 $ 551 44.1 %
Service charges on deposits 1,108 1,078 2.8
Other income (net) 706 803 (12.1)
Net gains on the sale of real estate
mortgages held-for-sale 127 130 (2.3)
---------- ---------- ----------
Total noninterest income $ 2,735 $ 2,562 6.8 %
========== ========== ==========
Trust fees increased 10.9% in the first quarter of 2001 versus the
same period in 2000. This increase was primarily in agency and living trust
fees. Brokerage fees increased $203,000, or 112.6%, in the first quarter of
2001 versus the same period in 2000, driven by fees of approximately $156,000
related to the sale of several annuity accounts. This portion of the increase
may be non-recurring. Excluding these fees, brokerage revenues increased 24.4%
in the first quarter of 2001 versus the comparable period in 2000.
The primary sources for the increase in service charges on deposit
accounts were fees related to business checking accounts.
Other income consists of normal recurring fee income such as mortgage
service fees, credit card fees, insurance fees, and safe deposit box rent, as
well as other income that management classifies as non-recurring. Other income
decreased $97,000 in the first quarter of 2001 versus the same period in 2000.
The decrease was in mortgage service fee income due to a charge of $192,500
related to non-cash impairment of the Bank's mortgage servicing rights. The
impairment was a direct result of the decline in interest rates during the
first quarter of 2001.
26
Noninterest Expense
Noninterest expense categories for the three-month periods ended
March 31, 2001, and 2000 are shown in the following tables:
Three Months Ended
March 31,
-------------------------------
Percent
2001 2000 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 4,212 $ 4,029 4.5 %
Occupancy and equipment expense 1,269 1,289 (1.6)
Other expense 2,627 2,303 14.1
---------- ---------- ----------
Total noninterest expense $ 8,108 $ 7,621 6.4 %
========== ========== ==========
The increase in salaries and employee benefits reflected an increase
in employee benefit expenses, primarily insurance costs, and normal salary
increases. Total employees decreased to 474 at March 31, 2001, from 478 at
March 31, 2000. This decrease resulted primarily from the closing of two
offices during the second quarter of 2000.
The decrease in occupancy and equipment expense was also primarily
the result of closing two offices in the second quarter of 2000.
Other expense includes corporate and business development, data
processing fees, telecommunications, postage, and professional fees such as
legal, accounting, and directors' fees. Other expense increased primarily as a
result of an increase in professional fees and losses related to robberies
which occurred in the quarter.
Income Before Income Tax Expense
Income before income tax expense decreased $162,000, or 5.1%, to $3.0
million for the first three months of 2001 versus $3.2 million for the same
period in 2000. This was primarily due to the decrease in the net interest
margin.
Income Tax Expense
Income tax expense decreased $89,000, or 9.2%, from $963,000 to
$874,000 for the first three months of 2001, compared to the same period in
2000.
The combined state franchise tax expense and the federal income tax
expense as a percentage of income before income tax expense decreased to 29.1%
during the first three months of 2001, compared to 30.4% during the same
period in 2000. The decrease was primarily a result of lower state franchise
tax expense.
27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
See "Market Risk" on pages 17-19.
28
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2001
Part II - Other Information
Item 1. Legal proceedings
-----------------
There are no material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
None
b. Reports
None
29
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2001
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 14, 2001 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: May 14, 2001 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: May 14, 2001 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
30