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, 2002
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 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, 2002
Common Stock, No Par Value 5,771,837
LAKELAND FINANCIAL CORPORATION
Form 10-Q Quarterly Report
Table of Contents
PART I.
Page Number
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 22
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 22
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 22
Item 4. Submission of Matters to a Vote of Security Holders . . . 22
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 22
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 23
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2002 and December 31, 2001
(in thousands)
(Page 1 of 2)
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS Cash and cash equivalents:
Cash and due from banks $ 34,619 $ 70,219
Short-term investments 6,257 8,904
------------ ------------
Total cash and cash equivalents 40,876 79,123
Securities available-for-sale:
U. S. Treasury and government agency securities 19,179 19,440
Mortgage-backed securities 216,708 216,654
State and municipal securities 31,792 29,663
Other debt securities 5,868 5,882
------------ ------------
Total securities available-for-sale
(carried at fair value) 273,547 271,639
Real estate mortgages held-for-sale 4,422 8,493
Loans:
Total loans 744,940 738,223
Less: Allowance for loan losses 8,309 7,946
------------ ------------
Net loans 736,631 730,277
Land, premises and equipment, net 24,466 24,252
Accrued income receivable 5,283 5,441
Intangible assets 6,011 6,161
Other assets 16,838 12,326
------------ ------------
Total assets $ 1,108,074 $ 1,137,712
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2002 and December 31, 2001
(in thousands except for share data)
(Page 2 of 2)
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 139,598 $ 169,549
Interest bearing deposits 705,153 623,831
------------ ------------
Total deposits 844,751 793,380
Short-term borrowings:
Federal funds purchased 4,000 49,000
U.S. Treasury demand notes 1,361 4,000
Securities sold under agreements
to repurchase 107,869 149,117
Other borrowings 30,000 30,000
------------ ------------
Total short-term borrowings 143,230 232,117
Accrued expenses payable 11,707 6,131
Other liabilities 2,071 1,843
Long-term borrowings 11,377 11,389
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,324 19,318
------------ ------------
Total liabilities 1,032,460 1,064,178
SHAREHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized, 5,813,984 shares
issued and 5,771,837 outstanding as of March 31, 2002, and 5,813,984 shares
issued and 5,775,632
outstanding at December 31, 2001 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 64,283 62,378
Accumulated other comprehensive income/(loss) 2,077 1,835
Treasury stock, at cost (736) (669)
------------ ------------
Total shareholders' equity 75,614 73,534
------------ ------------
Total liabilities and shareholders' equity $ 1,108,074 $ 1,137,712
============ ============
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, 2002, and 2001
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 12,336 $ 15,614
Tax exempt 33 33
------------ ------------
Total loan income 12,369 15,647
Short-term investments 28 242
Securities:
U.S. Treasury and government agency securities 395 733
Mortgage-backed securities 2,758 3,316
State and municipal securities 400 445
Other debt securities 115 115
------------ ------------
Total interest and dividend income 16,065 20,498
INTEREST EXPENSE
- ----------------
Interest on deposits 4,352 9,315
Interest on short-term borrowings 920 1,991
Interest on long-term debt 572 610
------------ ------------
Total interest expense 5,844 11,916
------------ ------------
NET INTEREST INCOME 10,221 8,582
- -------------------
Provision for loan losses 502 213
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,719 8,369
- ------------------------- ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage fees 658 794
Service charges on deposit accounts 1,322 1,108
Other income (net) 1,004 841
Net gains on the sale of real estate mortgages
held-for-sale 361 127
------------ ------------
Total noninterest income 3,345 2,870
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 4,598 4,212
Occupancy and equipment expense 1,099 1,269
Other expense 2,986 2,755
------------ ------------
Total noninterest expense 8,683 8,236
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2002, and 2001
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 4,381 3,003
- --------------------------------
Income tax expense 1,496 874
------------ ------------
NET INCOME $ 2,885 $ 2,129
- ---------- ============ ============
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-
for-sale securities 242 1,994
------------ ------------
TOTAL COMPREHENSIVE INCOME $ 3,127 $ 4,123
============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,813,984 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.50 $ 0.37
- ------------------------------- ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 5,901,581 5,829,687
DILUTED EARNINGS PER COMMON SHARE $ 0.49 $ 0.37
- --------------------------------- ============ ============
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, 2002 and 2001
(in thousands)
(Unaudited)
(Page 1 of 2)
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 2,885 $ 2,129
------------ ------------
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 558 588
Provision for loan losses 502 213
Amortization of intangible assets 156 224
Amortization of mortgage servicing rights 84 65
Impairment of mortgage servicing rights (23) 192
Loans originated for sale (17,246) (8,245)
Net gain on sale of loans (361) (127)
Proceeds from sale of loans 21,516 7,002
Net loss on sale of premises and equipment 2 11
Net securities amortization 550 202
Increase in taxes payable 1,426 854
Decrease in income receivable 158 326
Increase in accrued expenses payable 219 1,417
(Increase) in other assets (598) (1,200)
Increase in other liabilities 228 171
------------ ------------
Total adjustments 7,171 1,693
------------ ------------
Net cash from operating activities 10,056 3,822
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 16,635 8,467
Purchases of securities available-for-sale (18,733) (10,559)
Net (increase) decrease in total loans (6,856) 3,956
Purchases of land, premises and equipment (774) (336)
------------ ------------
Net cash from investing activities (9,728) 1,528
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2002 and 2001
(in thousands)
(Unaudited)
(Page 2 of 2)
2002 2001
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in total deposits $ 51,371 $ (2,920)
Proceeds from short-term borrowings 7,026,470 6,863,916
Payments on short-term borrowings (7,115,357) (6,915,407)
Payments on long-term borrowings (12) (11)
Dividends paid (980) (752)
Purchase of treasury stock (67) (60)
------------ ------------
Net cash from financing activities (38,575) (55,234
------------ ------------
Net increase (decrease) in cash and cash equivalents (38,247) (49,884)
Cash and cash equivalents at beginning of the period 79,123 88,993
------------ ------------
Cash and cash equivalents at end of the period $ 40,876 $ 39,109
============ ============
Cash paid during the period for:
Interest $ 5,685 $ 10,258
============ ============
Income taxes $ 250 $ 20
============ ============
Loans transferred to other real estate $ 0 $ 32
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
This report is filed for Lakeland Financial Corporation (the
"Company") and its wholly owned subsidiaries, Lake City Bank (the "Bank") and
Lakeland Capital Trust ("Lakeland Trust"). All significant inter-company
balances and transactions have been eliminated in consolidation. Also included
is the Bank's wholly-owned subsidiary, LCB Investments Limited ("LCB
Investments").
The unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with instructions for Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (all of which are normal and recurring in nature) considered
necessary for a fair presentation have been included. Operating results for
the three-month period ending March 31, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2002. The
2001 Lakeland Financial Corporation Annual Report on Form 10-K should be read
in conjunction with these statements.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted a new accounting standard
which addresses accounting for goodwill and intangible assets arising from
business combinations. Identifiable intangible assets must be separated from
goodwill. Identifiable intangible assets with finite useful lives are
amortized under the new standard, whereas unidentified intangible assets
resulting from business combinations, both amounts previously recorded and
future amounts purchased, cease being amortized. Annual impairment testing is
required for goodwill with impairment being recorded if the carrying amount of
goodwill exceeds its implied fair value. Adoption of this standard on January
1, 2002 did not have a material effect on the Company's financial statements.
7
Intangible assets subject to amortization are as follows:
As of March 31, 2002
----------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
(in thousands)
Core deposit intangible $ 2,032 $ 878
Other unidentified intangible 6,812 1,955
-------------- ------------
Total $ 8,844 $ 2,833
============== ============
Amortization expense for the first quarter of 2002 was $151,000.
Estimated amortization expense for the next five years is:
For year ended 12/31/02 $603,000
For year ended 12/31/03 $584,000
For year ended 12/31/04 $568,000
For year ended 12/31/05 $554,000
For year ended 12/31/06 $541,000
The Financial Accounting Standards Board has issued Statement 143,
"Accounting for Asset Retirement Obligations" and Statement 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". Statement 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset. Statement 144
supersedes FASB Statement 121 and the accounting and reporting provisions of
APB Opinion No. 30. Statement 144 establishes a single accounting model for
long-lived assets to be disposed of by sale at the lower of its carrying
amount or its fair value less costs to sell and to cease
depreciation/amortization. For the Company, the provisions of Statement 144
were effective January 1, 2002. The provisions of Statement 143 will be
effective January 1, 2003. Implementation of Statement 144 did not have a
material impact on the Company's financial statements, and Statement 143 is
not anticipated to have a material impact on the Company's financial
statements.
NOTE 3. RECENT REGULATORY DEVELOPMENTS
On October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other
provisions, the USA PATRIOT Act requires each financial institution: (i) to
8
establish an anti-money laundering program; (ii) to establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of,
foreign banks that do not have a physical presence in any country. The USA
PATRIOT Act also requires the Secretary of the Treasury to prescribe, by
regulations to be issued jointly with the federal banking regulators and
certain other agencies, minimum standards that financial institutions must
follow to verify the identity of customers, both foreign and domestic, when a
customer opens an account. In addition, the USA PATRIOT Act contains a
provision encouraging cooperation among financial institutions, regulatory
authorities and law enforcement authorities with respect to individuals,
entities and organizations suspected of engaging in terrorist acts or money
laundering activities.
During the first quarter of 2002, the Financial Crimes Enforcement
Network (FinCEN), a bureau of the Department of the Treasury, issued proposed
and interim regulations as mandated by the USA PATRIOT Act that would: (i)
prohibit certain financial institutions from providing correspondent accounts
to foreign shell banks; (ii) require such financial institutions to take
reasonable steps to ensure that correspondent accounts provided to foreign
banks are not being used to indirectly provide banking services to foreign
shell banks; (iii) require certain financial institutions that provide
correspondent accounts to foreign banks to maintain records of the ownership
of such foreign banks and their agents in the United States; (iv) require the
termination of correspondent accounts of foreign banks that fail to turn over
their account records in response to a lawful request from the Secretary of
the Treasury or the Attorney General; and (v) encourage information sharing
among financial institutions and federal law enforcement agencies to identify,
prevent, deter and report money laundering and terrorist activity. To date, it
has not been possible to predict the impact the USA PATRIOT ACT and its
implementing regulations may have on the Company or the Bank in the future.
NOTE 4. 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, 2002 reflects the acquisition of
42,147 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.
9
For the three-month periods ended March 31, 2002 and 2001, stock
options for 330,225 shares and 248,225 shares were considered dilutive for
purposes of computing diluted earnings per share. There were no stock options
granted in the period ended March 31, 2002.
NOTE 5. LOANS
March 31, December 31,
2002 2001
------------ ------------
(in thousands)
Commercial and industrial loans $ 493,183 $ 478,288
Agri-business and agricultural loans 57,286 58,901
Real estate mortgage loans 43,348 44,898
Real estate construction loans 1,099 2,354
Installment loans and credit cards 150,024 153,782
------------ ------------
Total loans $ 744,940 $ 738,223
============ ============
Impaired loans $ 8,881 $ 10,008
Non-performing loans $ 1,916 $ 2,498
NOTE 6. RECLASSIFICATIONS
Certain amounts appearing in the financial statements and notes
thereto for prior periods have been reclassified to conform with the current
presentation. The reclassification had no effect on net income or
stockholders' equity as previously reported.
10
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
March 31, 2002
OVERVIEW
Lakeland Financial Corporation is the holding company for Lake City
Bank. The Company is headquartered in Warsaw, Indiana and operates 40 offices
in 11 counties in northern Indiana. The Company earned $2.9 million for the
first three months of 2002 versus $2.1 million in the same period of 2001, an
increase of 35.5%. The increase was driven by a $1.6 million increase in net
interest income and a $475,000 increase in non-interest income. Offsetting
these positive impacts was an increase of $289,000 in the provision for loan
losses. Basic earnings per share for the first three months of 2002 was $0.50
per share, versus $0.37 per share for the first three months of 2001. Diluted
earnings per share reflect the potential dilutive impact of stock options
granted under an employee stock option plan. Diluted earnings per share for
the first three months of 2002 was $0.49 per share, versus $0.37 per share for
the first three months of 2001.
RESULTS OF OPERATIONS
Net Interest Income
For the three-month period ended March 31, 2002, net interest income
totaled $10.2 million, an increase of 19.1%, or $1.6 million, over the same
period of 2001. Net interest income increased primarily due to the falling
interest rate environment, which resulted in the decline in the Company's cost
of funds being 56 basis points greater than the decline in its yield on
earning assets. In addition, average interest bearing liabilities decreased by
$26.7 million, or 2.9%, and average non-interest bearing demand deposits
increased by $10.4 million, or 8.1%. The effect of these changes was to
increase the Company's net interest margin to 4.12% at March 31, 2002 from
3.49% at March 31, 2001.
During the first three months of 2002, total interest and dividend
income decreased $4.4 million, or 21.6%, to $16.1 million, versus $20.5
million during the same three months of 2001. Daily average earning assets for
the first quarter of 2002 decreased 0.2% to $1.024 billion versus the same
period in 2001. The tax equivalent yield on average earning assets decreased
by 177 basis points to 6.3% for the three-month period ended March 31, 2002
versus the same period of 2001.
11
The decrease in the yield on average earning assets reflected
decreases in the yields on both loans and securities caused by the falling
interest rate environment. The yield on securities is historically lower than
the yield on loans, and decreasing the ratio of securities to total earning
assets will normally improve the yield on earning assets. The ratio of average
daily securities to average earning assets for the three-month period ended
March 31, 2002 was 26.7% compared to 28.7% for the same period of 2001.
The average daily loan balances for the first three months of 2002
increased $30.4 million, or 4.3%, to $744.4 million, versus $714.0 million for
the same period of 2001. During the same period, loan interest income declined
by $3.2 million, or 21%, to $12.4 million versus $15.6 million during the
first quarter of 2001. The decrease was the result of a 217 basis point
decrease in the tax equivalent yield on loans, to 6.6%, versus 8.8% in the
first quarter of 2001.
Income from short-term investments amounted to $28,000 for the
three-month period ended March 31, 2002, versus $242,000 for the same period
in 2001. The decrease of $214,000 for the three-month period of 2002 over the
same period in 2001 resulted from a $10.4 million decrease in average daily
assets to $6.7 million, combined with a 404 basis point decline in yields.
The average daily securities balances for the first three months of
2002 decreased $20.6 million, or 7.0%, to $273.7 million, versus $294.3
million for the same period of 2001. During the same periods, income from
securities declined by $941,000, or 20.4%, to $3.7 million versus $4.6 million
during the first quarter of 2001. The decrease was the result of the decrease
in average daily balances of securities combined with an 89 basis point
decline in the tax equivalent yields on securities, to 5.7% versus 6.6% in the
first quarter of 2001.
Total interest expense decreased $6.1 million, or 51.3%, to $5.8
million for the three-month period ended March 31, 2002, from $11.9 million
for the comparable period in 2001. This was primarily the result of a 233
basis point decrease in the Company's daily cost of funds. On an average daily
basis, total deposits (including demand deposits) decreased $34.2 million, or
4.0%, to $817.8 million for the three-month period ended March 31, 2002,
versus $852.0 million in the same period in 2001. The decrease was primarily
due to the Company's September, 2001 branch divestiture, which included $70.3
million in deposits. When comparing the period ended March 31, 2002 with the
same period of 2001, the average daily balances of the demand deposit accounts
increased $10.4 million, while the average daily balances of savings and
transaction accounts combined decreased $750,000. During the first three
months of 2002, the average daily balance of time deposits, which pay a higher
rate of interest compared to demand deposit and transaction accounts,
decreased $43.9 million and the rate paid on such accounts declined by 283
basis points versus the same period in 2001. Time deposits made up 48.8% of
12
average daily deposits during the quarter ended March 31, 2002 versus 52.0%
during the year ago first quarter. Such a reduction would generally reduce the
Company's cost of funds. During the remainder of 2002, 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 are generally viewed by management as stable and
reliable funding sources. Average daily balances of borrowings increased $17.9
million, or 9.6%, to $204.9 million for the three months ended March 31, 2002
versus $186.9 million for the same period in 2001. The rate on borrowings
decreased 269 basis points when comparing the same periods. On an average
daily basis, total deposits (including demand deposits) and purchased funds
decreased 1.6% for the three-month period ended March 31, 2002 versus the same
period in 2001.
Provision for Loan Losses
Based on management's review of the adequacy of the allowance for
loan losses, a provision for losses on loans of $502,000 was recorded during
the first quarter of 2002 versus a provision of $213,000 during the first
quarter of 2001. The increase in the provision reflected a number of factors,
including the increase in the size of the loan portfolio, the amount of
impaired loans and management's overall view on current credit quality.
Net interest income after provision for loan losses totaled $9.7
million for the three month period ended March 31, 2002. This represented an
increase of 16.0% over the same period ended March 31, 2001.
Noninterest Income
Noninterest income categories for the three-month periods ended March
31, 2002 and 2001 are shown in the following table:
Three Months ended
March 31,
----------------------------------
Percent
2002 2001 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 658 $ 794 (17.1)%
Service charges on deposits 1,322 1,108 19.3
Other income (net) 1,004 841 19.4
Net gains on the sale of real estate
mortgages held-for-sale 361 127 184.3
---------- ---------- ----------
Total noninterest income $ 3,345 $ 2,870 16.6 %
========== ========== ==========
13
Trust fees increased 25.8%, from $411,000 to $518,000, in the first
three months of 2002 versus the same period in 2001. This increase was
primarily in employee benefit plan, executorship, living trust and
testamentary trust fees. Brokerage fees decreased 63.4%, from $382,000 to
$140,000, in the first three months of 2002 versus the same period in 2001,
driven by nonrecurring fees received in 2001 of approximately $156,000 related
to the sale of several annuity accounts, and reduced trading volume.
The primary sources of the increase in service charges on deposit
accounts were fees related to business checking accounts as well as fees
related to new deposit services which were implemented in the first quarter of
2002.
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 fee
income increased $163,000 in the first three months of 2002 versus the same
period in 2001. The primary driver behind the increase was the stabilization
of the non-cash impairment of the Bank's mortgage servicing rights. During the
first quarter of 2002, a recovery of $23,000 was realized in the valuation for
impairment, versus a charge of $192,500 during the same period of 2001.
Excluding these non-cash charges, other income would have decreased 5.1% in
the first quarter versus the same period in 2001.
The increase in profits from the sale of mortgages reflected an
increase in the volume of mortgages sold during the first three months of 2002
versus sales during the first three months of 2001. During the first three
months of 2002, the Company sold $21.3 million in mortgages versus $6.9
million in the comparable period of 2001. This increase in volume was the
result of the falling interest rate environment during 2001 and an increase in
demand for home mortgages. Given that mortgage rates have begun to rise,
management does not anticipate that this trend will continue during the
balance of 2002.
14
Noninterest Expense
Noninterest expense categories for the three-month period ended March
31, 2002, and 2001 are shown in the following table:
Three Months ended
March 31,
----------------------------------
Percent
2002 2001 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 4,598 $ 4,212 9.2 %
Occupancy and equipment expense 1,099 1,269 (13.4)
Other expense 2,986 2,755 8.4
---------- ---------- ----------
Total noninterest expense $ 8,683 $ 8,236 5.4 %
========== ========== ==========
The increase in salaries and employee benefits reflected normal
salary increases and increases related to the employee 401(k) plan and
incentive compensation plan. Total employees decreased to 466 at March 31,
2002, from 474 at March 31, 2001. This decrease resulted primarily from the
reduction in staff in connection with the sale of the five non-strategic
branches in September, 2001.
The decrease in occupancy and equipment expense was also primarily
related to the sale of the five branch offices in the third quarter of 2001.
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 due
to increased advertising and public relations expenses incurred during the
first quarter of 2002 versus the same quarter of 2001.
Income Before Income Tax Expense
Income before income tax expense increased $1.4 million, or 45.9%, to
$4.4 million for the first three months of 2002, versus $3.0 million for the
same period in 2001. This was due primarily to the increase in net interest
income driven by an improved net interest margin.
Income Tax Expense
Income tax expense increased $622,000, or 71.2%, for the first three
months of 2002, compared to the same period in 2001. The combined state
15
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 2002 compared to 29.1% during the same period in 2001. The increase
was primarily due to greater profitability which resulted in a higher
percentage of income being subject to the state franchise tax combined with
the Company being taxed at the 35% federal tax rate in 2002 versus the 34%
rate in 2001.
FINANCIAL CONDITION
Total assets of the Company were $1.108 billion as of March 31, 2002,
a decrease of $29.6 million, or 2.6%, when compared to $1.138 billion as of
December 31, 2001.
Total cash and cash equivalents decreased by $38.2 million, or 48.3%,
to $40.9 million at March 31, 2002 from $79.1 million at December 31, 2001.
The decrease was attributable to corresponding decreases in short-term
borrowings, primarily federal funds purchased and securities sold under
agreements to repurchase.
Total securities available-for-sale increased by $1.9 million, or
0.7%, to $273.5 million at March 31, 2002 from $271.6 million at December 31,
2001. The increase was a result of a number of transactions in the securities
portfolio. Paydowns of $15.4 million were received, and the amortization of
premiums, net of the accretion of discounts, was $550 thousand. Maturities and
calls of securities totaled $1.2 million. These portfolio decreases were
offset by securities purchases totaling $18.7 million, and an increase of $360
thousand in the fair value of the securities. The investment portfolio is
managed to limit the Company's exposure to risk by containing mostly CMO's
which are either directly or indirectly backed by the federal government.
Real estate mortgages held-for-sale decreased by $4.1 million, or
47.9%, to $4.4 million at March 31, 2002 from $8.5 million at December 31,
2001. The decrease was primarily the result of increasing mortgage loan rates
which have caused the number of refinancings and new loans to decline. During
the three months ended March 31, 2002, $17.2 million in real estate mortgages
were originated for sale and $21.3 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased
by $6.7 million or 0.9% to $744.9 million at March 31, 2002 from $738.2
million at December 31, 2001. The mix of loan types within the Company's
portfolio remained relatively unchanged reflecting 74% commercial, 6% real
estate and 20% consumer loans compared to 73% commercial, 6% real estate and
21% consumer loans at December 31, 2001.
The allowance for loan losses increased $363,000, or 4.6%, to $8.3
million at March 31, 2002 from $7.9 million at December 31, 2001. The
16
allowance for loan losses is established through a provision for loan losses
based upon management's evaluation of the risk inherent in the loan portfolio.
Such evaluation, which includes a review of the larger individual loans
(primarily in the commercial loan portfolio), considers the fair value of the
underlying collateral, economic conditions, historical loan loss experience,
level of classified loans and other factors that warrant recognition in
providing for an adequate allowance for loan losses.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance and net earnings could be significantly
affected if circumstances differ substantially from the assumptions used in
establishing the allowance for loan losses.
Net charge-offs for the three months ended March 31, were $139,000 in
2002 and $147,000 in 2001. One measure of the adequacy of the allowance for
loan losses is the ratio of the allowance to the loan portfolio. The allowance
for loan losses as a percentage of loans was 1.12% at March 31, 2002, and
1.08% at December 31, 2001.
At March 31, 2002, total nonperforming loans decreased by $582,000 to
$1.9 million from $2.5 million at December 31, 2001. The decrease resulted
primarily from a $555,000 paydown in one nonaccrual commercial loan due
largely to funds received from the sale of underlying collateral by the
borrower. Total impaired loans decreased by $1.1 million to $8.9 million at
March 31, 2002 from $10.0 million at December 31, 2001. The decrease resulted
from the payoff of one commercial credit combined with the nonaccrual paydown
discussed earlier. The impaired loan total includes $1.5 million in nonaccrual
loans. As of March 31, 2002, loans delinquent 90 days or more that were
included in the accompanying financial statements as accruing totaled $213,000
versus $264,000 at December 31, 2001.
Regional economic conditions are monitored closely to identify
changes in any of the industries within the market area that may show signs of
weakening. The Company did not have any industry concentrations at March 31,
2002. The commercial loan portfolio has experienced rapid growth and comprises
most of the Company's loan portfolio. Commercial loans represent higher dollar
loans to fewer customers and therefore higher credit risk. Pricing is adjusted
to manage the higher credit risk involved with these types of loans. Fixed
rate mortgage loans, which represent increased interest rate risk, are sold to
the secondary market, as well as some variable rate mortgage loans. The
remainder of the variable rate mortgage loans are retained.
Management, along with other financial institutions, shares a concern
about the strength and duration of the current economic recovery. Should the
economic climate begin to deteriorate again, borrowers may experience
17
difficulty, and the level of non-performing loans, charge-offs and
delinquencies could rise.
Total deposits increased by $51.4 million, or 6.5%, to $844.8 million
at March 31, 2002 from $793.4 million at December 31, 2001. The increase
resulted from increases of $83.4 million in certificates of deposit, $3.0
million in Investors' Weekly accounts and $4.2 million in savings accounts.
Offsetting these increases were declines of $29.9 million in demand deposits,
$7.4 million in NOW accounts and $1.9 million in money market accounts. The
decline in demand deposits occurred primarily in commercial demand deposit
accounts, which decreased by $12.7 million.
Total short-term borrowings decreased by $88.9 million, or 38.3%, to
$143.2 million at March 31, 2002 from $232.1 million at December 31, 2001. The
decrease resulted primarily from a $45.0 million decline in federal funds
purchased combined with a $41.2 million decline in securities sold under
agreements to repurchase.
Total stockholders' equity increased by $2.1 million, or 2.8%, to
$75.6 million at March 31, 2002 from $73.5 million at December 31, 2001. Net
income of $2.9 million, less dividends of $981,000, plus the increase in the
accumulated other comprehensive income of $242,000, less $66,000 for the cost
of treasury stock acquired, comprised this increase.
The Federal Deposit Insurance Corporation's (FDIC) risk based capital
regulations require that all banking organizations maintain an 8.0% total risk
based capital ratio. The FDIC has also established definitions of "well
capitalized" as a 5.0% Tier I leverage capital ratio, a 6.0% Tier I risk based
capital ratio and a 10.0% total risk based capital ratio. All of the Company's
ratios continue to be above "well capitalized" levels. As of March 31, 2002,
the Company's Tier 1 leverage capital ratio, Tier 1 risk based capital ratio
and total risk based capital ratio were 7.9%, 10.4% and 11.4%, 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 2001. 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
18
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, 2002, the Company's potential pretax
exposure was within the Company's policy limit, and not significantly
different from December 31, 2001.
19
FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference)
contains, and future oral and written statements of the Company and its
management may contain, forward-looking statements, within the meaning of such
term in the Private Securities Litigation Reform Act of 1995, with respect to
the financial condition, results of operations, plans, objectives, future
performance and business of the Company. Forward-looking statements, which may
be based upon beliefs, expectations and assumptions of the Company's
management and on information currently available to management, are generally
identifiable by the use of words such as "believe," "expect," "anticipate,"
"plan," "intend," "estimate," "may," "will," "would," "could," "should" or
other similar expressions. Additionally, all statements in this document,
including forward-looking statements, speak only as of the date they are made,
and the Company undertakes no obligation to update any statement in light of
new information or future events.
The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors, which could have
a material adverse effect on the operations and future prospects of the
Company and its subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the
strength of the local economies in which the Company
conducts its operations which may be less favorable than
expected and may result in, among other things, a
deterioration in the credit quality and value of the
Company's assets.
o The economic impact of the terrorist attacks that occurred
on September 11th, as well as any future threats and
attacks, 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
20
due to increases in competitive pressures in the financial
services sector.
o The inability of the Company to obtain new customers and to
retain existing customers.
o The timely development and acceptance of products and
services, including products and services offered through
alternative delivery channels such as the Internet.
o Technological changes implemented by the Company and by
other parties, including third party vendors, which may be
more difficult or more expensive than anticipated or which
may have unforeseen consequences to the Company and its
customers.
o The ability of the Company to develop and maintain secure
and reliable electronic systems.
o The ability of the Company to retain key executives and
employees and the difficulty that the Company may experience
in replacing key executives and employees in an effective
manner.
o Consumer spending and saving habits, which may change in a
manner that affects the Company's business adversely.
o Business combinations and the integration of acquired
businesses, which may be more difficult or expensive than
expected.
o The costs, effects and outcomes of existing or future
litigation.
o Changes in accounting policies and practices, as may be
adopted by state and federal regulatory agencies and the
Financial Accounting Standards 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.
21
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2002
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
22
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
March 31, 2002
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 9, 2002 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: May 9, 2002 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: May 9, 2002 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
23