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 September 30, 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 October 31, 2001
Common Stock, No Par Value 5,775,632
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 . . . . . . 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 33
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 33
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 33
Item 4. Submission of Matters to a Vote of Security Holders . . . 33
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 33
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 33
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 34
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2001 and December 31, 2000
(in thousands)
(Page 1 of 2)
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS Cash and cash equivalents:
Cash and due from banks $ 57,503 $ 84,682
Short-term investments 5,121 4,311
------------ ------------
Total cash and cash equivalents 62,624 88,993
Securities available-for-sale:
U. S. Treasury and government agency securities 32,104 38,066
Mortgage-backed securities 214,433 207,594
State and municipal securities 35,242 35,430
Other debt securities 12,796 12,518
------------ ------------
Total securities available-for-sale
(carried at fair value) 294,575 293,608
Real estate mortgages held-for-sale 1,502 183
Loans:
Total loans 722,532 718,876
Less: Allowance for loan losses 7,592 7,124
------------ ------------
Net loans 714,940 711,752
Land, premises and equipment, net 24,709 27,297
Accrued income receivable 6,277 6,744
Intangible assets 6,317 9,624
Other assets 14,117 10,956
------------ ------------
Total assets $ 1,125,061 $ 1,149,157
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2001 and December 31, 2000
(in thousands)
(Page 2 of 2)
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 145,064 $ 164,606
Interest bearing deposits 666,764 680,723
------------ ------------
Total deposits 811,828 845,329
Short-term borrowings:
Federal funds purchased 28,200 8,250
U.S. Treasury demand notes 3,456 3,674
Securities sold under agreements
to repurchase 135,510 138,154
Other borrowings 30,000 50,000
------------ ------------
Total short-term borrowings 197,166 200,078
Accrued expenses payable 9,712 6,684
Other liabilities 1,701 1,369
Long-term borrowings 11,400 11,433
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,311 19,291
------------ ------------
Total liabilities 1,051,118 1,084,184
SHAREHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized, 5,813,984 shares
issued and 5,775,632 outstanding as of September 30, 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 60,399 55,734
Accumulated other comprehensive income/(loss) 4,224 (207)
Treasury stock, at cost (670) (544)
------------ ------------
Total shareholders' equity 73,943 64,973
------------ ------------
Total liabilities and shareholders' equity $ 1,125,061 $ 1,149,157
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
2
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 2001, and 2000
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 14,721 $ 15,752 $ 45,363 $ 45,291
Tax exempt 33 33 100 107
------------ ------------ ------------ ------------
Total loan income 14,754 15,785 45,463 45,398
Short-term investments 140 97 416 240
Securities:
U.S. Treasury and government agency securities 715 727 2,141 2,190
Mortgage-backed securities 3,120 3,228 9,664 9,491
State and municipal securities 442 446 1,331 1,337
Other debt securities 112 115 341 320
------------ ------------ ------------ ------------
Total interest and dividend income 19,283 20,398 59,356 58,976
INTEREST EXPENSE
- ----------------
Interest on deposits 7,127 8,484 24,493 23,578
Interest on short-term borrowings 1,647 2,559 5,583 7,370
Interest on long-term debt 613 607 1,834 1,916
------------ ------------ ------------ ------------
Total interest expense 9,387 11,650 31,910 32,864
------------ ------------ ------------ ------------
NET INTEREST INCOME 9,896 8,748 27,446 26,112
- -------------------
Provision for loan losses 970 92 1,490 707
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,926 8,656 25,956 25,405
- ------------------------- ------------ ------------ ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage fees 600 530 2,023 1,586
Service charges on deposit accounts 1,295 1,109 3,747 3,304
Other income (net) 710 871 2,180 2,478
Net gains on the sale of branches 753 0 753 0
Net gains on the sale of real estate mortgages
held-for-sale 348 128 792 366
Net securities gains (losses) 50 0 52 0
------------ ------------ ------------ ------------
Total noninterest income 3,756 2,638 9,547 7,734
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 4,616 4,257 13,202 11,881
Occupancy and equipment expense 1,158 1,277 3,668 3,866
Other expense 2,796 2,471 8,067 7,272
------------ ------------ ------------ ------------
Total noninterest expense 8,570 8,005 24,937 23,019
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 2001, and 2000
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 4,112 3,289 10,566 10,120
- --------------------------------
Income tax expense 1,345 974 3,299 3,102
------------ ------------ ------------ ------------
NET INCOME $ 2,767 $ 2,315 $ 7,267 $ 7,018
- ---------- ============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,813,984 5,813,984 5,813,984 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.48 $ 0.40 $ 1.25 $ 1.21
- ------------------------------- ============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 5,853,748 5,814,007 5,836,549 5,814,234
DILUTED EARNINGS PER COMMON SHARE $ 0.47 $ 0.40 $ 1.25 $ 1.21
- --------------------------------- ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
4
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months and Nine Months Ended September 30, 2001 and 2000
(in thousands)
(unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------------------------------------------
2001 2000 2001 2000
---------------- ---------------- --------------- ---------------
Common Stock:
Balance at beginning of the period $ 1,453 $ 1,453 $ 1,453 $ 1,453
------- ------- ------- -------
Balance at end of the period 1,453 1,453 1,453 1,453
Paid-in Capital:
Balance at beginning of the period 8,537 8,537 8,537 8,537
------- ------- ------- -------
Balance at end of the period 8,537 8,537 8,537 8,537
Retained Earnings:
Balance at beginning of the period 58,498 52,618 55,734 49,422
Net Income 2,767 $ 2,767 2,315 $ 2,315 7,267 $ 7,267 7,018 $7,018
Cash dividends declared ($.15 and $.13
per share for 2001 and 2000) (866) (752) (2,602) (2,259)
------- ------- ------- -------
Balance at end of the period 60,399 54,181 60,399 54,181
Accumulated Other Comprehensive Income/(Loss):
Balance at beginning of the period 1,698 (5,414) (207) (4,797)
Unrealized gain (loss) on available-for-sale
securities arising during the period (net of taxes) 2,526 1,689 4,431 1,072
------- ------- ------- -------
Other comprehensive income/(loss)(net of taxes
of $1,526, $1,108, $2,506 and $703) 2,526 2,526 1,689 1,689 4,431 4,431 1,072 1,072
------- ------- ------- ------- ------- ------- ------- -----
Total comprehensive income $ 5,293 $ 4,004 $11,698 $8,090
Balance at end of the period 4,224 ======= (3,725) ======= 4,224 ======= (3,725) =====
Treasury Stock:
Balance at beginning of the period (604) (478) (544) (421)
Acquisition of treasury stock (66) (66) (126) (123)
------- ------- ------- -------
Balance at end of the period (670) (544) (670) (544)
------- ------- ------- -------
Total Shareholders' Equity $73,943 $59,902 $73,943 $59,902
======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000
(in thousands)
(Unaudited)
(Page 1 of 2)
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 7,267 $ 7,018
------------ ------------
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 1,775 1,829
Provision for loan losses 1,490 707
Amortization of intangible assets 666 693
Amortization of mortgage servicing rights 205 179
Impairment of mortgage servicing rights 471 0
Loans originated for sale (43,467) (15,897)
Net gain on sale of loans (792) (366)
Proceeds from sale of loans 42,672 16,287
Net (gain) loss on sale of premises and equipment (23) (2)
Net (gain) loss on sale of branches (753) 0
Net (gain) loss on sale of securities available-for-sale (52) 0
Net securities amortization 791 761
Change in taxes payable 904 (3,508)
Change in income receivable 467 (1,233)
Change in accrued expenses payable (580) 5,697
Change in other assets (1,984) (530)
Change in other liabilities 332 (246)
------------ ------------
Total adjustments 2,122 4,371
------------ ------------
Net cash from operating activities 9,389 11,389
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 39,700 30,417
Purchases of securities available-for-sale (34,469) (43,667)
Net increase in total loans (30,520) (41,613)
Proceeds from sales of land, premises and equipment 0 436
Purchases of land, premises and equipment (1,361) (1,324)
Net payments from branch divestitures (40,325) 0
------------ ------------
Net cash from investing activities (66,975) (55,751)
------------ ------------
(Continued)
6
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000
(in thousands)
(Unaudited)
(Page 2 of 2)
2001 2000
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in total deposits $ 36,773 $ 54,894
Proceeds from short-term borrowings 23,303,700 17,083,485
Payments on short-term borrowings (23,306,611) (17,101,027)
Payments on long-term borrowings (33) (5,030)
Dividends paid (2,486) (2,259)
Purchase of treasury stock (126) (123)
------------ ------------
Net cash from financing activities 31,217 29,940
------------ ------------
Net increase (decrease) in cash and cash equivalents (26,369) (14,422)
Cash and cash equivalents at beginning of the period 88,993 63,104
------------ ------------
Cash and cash equivalents at end of the period $ 62,624 $ 48,682
============ ============
Cash paid during the period for:
Interest $ 32,646 $ 30,913
============ ============
Income taxes $ 2,395 $ 3,642
============ ============
Loans transferred to other real estate $ 1,435 $ 0
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
7
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 periods ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ended 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
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141. "Business
Combinations." SFAS No. 141 requires all business combinations within its
scope to be accounted for using the purchase method, rather than the
pooling-of-interests method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001. The adoption of this
Statement will only impact the Company's financial statements if it enters
into a business combination.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which addresses the accounting for such assets arising
from prior and future business combinations. Upon adoption of this Statement,
goodwill arising from business combinations will no longer be amortized, but
rather will be assessed regularly for impairment, with any such impairment
recognized as a reduction in earnings in the period identified. Other
identified intangible assets, such as core deposit intangible assets, will
continue to be amortized over their useful lives. The Company is required to
adopt this Statement on January 1, 2002 and early adoption is not permitted.
The Company is in the process of analyzing the impact of this Statement on its
financial statements.
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 September 30, 2001 reflects the acquisition
of 38,352 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 September 30, 2001 and 2000 follows. All amounts are in
thousands except share data.
9
For the three months For the nine months
ended September 30, ended September 30,
---------------------------------------- -----------------------------------
2001 2000 2001 2000
------------------ ------------------ ----------------- ---------------
Basic earnings per common share
Net income $ 2,767 $ 2,315 $ 7,267 $ 7,018
Weighted-average common
shares outstanding 5,813,984 5,813,984 5,813,984 5,813,984
Basic earnings per
common share $ .48 $ .40 $ 1.25 $ 1.21
Diluted earnings per common share
Net income $ 2,767 $ 2,315 $ 7,267 $ 7,018
Weighted-average common
shares outstanding for
basic earnings per
common share 5,813,984 5,813,984 5,813,984 5,813,984
Add: dilutive effect
of assumed exercises
of stock options 39,764 23 22,565 250
Average common shares
and dilutive potential
common shares 5,853,748 5,814,007 5,836,549 5,814,234
Diluted earnings per
common share $ .47 $ .40 $ 1.25 $ 1.21
<FN>
For the nine-month periods ending September 30, 2001 and 2000 stock options
for 303,270 and 353,670 shares of common stock were not considered in
computing diluted earnings per common share because they were antidilutive.
For the three-month periods ending September 30, 2001 and 2000 stock options
for 219,920 and 446,809 were not considered in computing diluted earnings
because they were antidilutive.
</FN>
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
Granted 5/8/01 1,000 $ 14.00 4.74% 63.89% $ 5.99
Granted 6/12/01 3,000 $ 14.25 4.80% 64.01% $ 6.15
Exercised 0
Forfeited 42,300 $ 21.27
Outstanding 9/30/01 550,495
The fair values of the options were estimated using an expected life
of 5 years and expected dividends of $.15 per quarter. There were 24,500
options exercisable as of September 30, 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 For the nine months
ended September 30, ended September 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income as reported $ 2,767 $ 2,315 $ 7,267 $ 7,018
Pro forma net income $ 2,577 $ 2,097 $ 6,683 $ 6,538
Basic earnings per common
share as reported $ .48 $ .40 $ 1.25 $ 1.21
Diluted earnings per
common share as reported $ .47 $ .40 $ 1.25 $ 1.21
Pro forma basic earnings
per common share $ .44 $ .36 $ 1.15 $ 1.12
Pro forma diluted earnings
per common share $ .44 $ .36 $ 1.15 $ 1.12
NOTE 4. PENSION PLAN CURTAILMENT
On April 1, 2000 the Lake City Bank Pension Plan was frozen. As a
result of this curtailment, a $500,000 gain was recognized in the second
quarter of 2000. The gain is included in salaries and employee benefits.
NOTE 5. BRANCH DIVESTITURE
On September 22, 2001 the Company sold five southern market offices
to First Farmers Bank and Trust of Converse, Indiana. The offices included in
the sale are located in the following Indiana cities: Peru, Greentown, Wabash,
Roann, and Logansport. Collectively, the offices had approximately $70.3
million in deposits, $24.4 million in loans, $2.7 million in intangible
assets, $2.2 million in fixed assets and $0.4 million in vault cash. The sale
resulted in a gain of $753,000. Management believes the sale of these
non-strategic branches will position the Company to focus on growth
opportunities in its core northern markets, which are anchored by the cities
of Warsaw, Fort Wayne, Elkhart and South Bend, Indiana.
12
NOTE 6. SECURITIES AVAILABLE-FOR-SALE
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
(in thousands)
September 30, 2001
U.S. Treasury securities $ 32,104 $ 394 $ 0
U.S. Government agencies and
corporations 6,890 235 0
Mortgage-backed securities 214,433 6,339 (542)
State and municipal securities 35,242 313 (250)
Other debt securities 5,906 119 (14)
---------- ---------- ----------
Total securities available-for-sale
at September 30, 2001 $ 294,575 $ 7,400 $ (806)
========== ========== ==========
December 31, 2000
U.S. Treasury securities $ 38,066 $ 212 $ (183)
U.S. Government agencies and
corporations 6,550 0 (122)
Mortgage-backed securities 207,594 1,809 (1,714)
State and municipal securities 35,430 214 (200)
Other debt securities 5,968 9 (368)
---------- ---------- ----------
Total securities available-for-sale
at December 31, 2000 $ 293,608 $ 2,244 $ (2,587)
========== ========== ==========
The fair value of available-for-sale debt securities by maturity as
of September 30, 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 $ 28,775
Due after one year through five years 13,914
Due after five years through ten years 2,238
Due after ten years 35,215
----------
80,142
Mortgage-backed securities 214,433
----------
Total debt securities $ 294,575
==========
13
NOTE 7. LOANS
September 30, December 31,
2001 2000
------------ ------------
(in thousands)
Commercial and industrial loans $ 465,104 $ 440,941
Agri-business and agricultural loans 55,086 48,558
Real estate mortgage loans 42,918 49,104
Real estate construction loans 2,241 3,627
Installment loans and credit cards 157,183 176,646
------------ ------------
Total loans $ 722,532 $ 718,876
============ ============
Impaired loans $ 2,359 $ 1,413
Non-performing loans $ 2,040 $ 8,410
14
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
September 30, 2001
OVERVIEW
Lakeland Financial Corporation (the "Company") 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
$7.3 million for the first nine months of 2001 versus $7.0 million in the same
period of 2000. During the third quarter of this year, earnings were $2.8
million, versus $2.3 million in the third quarter of 2000. The increase was
primarily caused by increases in non-interest income driven by a one-time gain
of $753,000 on the sale of five non-strategic branches during the third
quarter of 2001, coupled with year-to-date increases of $437,000 in trust and
brokerage fees and $443,000 in service charges on deposit accounts. Offsetting
these positive impacts was an increase in the provision for loan losses of
$878,000 in the third quarter of 2001 versus the same quarter in 2000. In
addition, during the third quarter, the Company's net interest margin
increased to 3.81% from 3.71% in the third quarter of 2000. During the first
nine months of the year, the Company's net interest margin decreased 12 basis
points from 3.75% to 3.63% versus the comparable period in 2000. The decrease
occurred as a result of a 3.50% reduction in Lake City Bank's prime rate which
was driven by corresponding cuts by the Federal Reserve Bank during the first
nine months of 2001. 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 September 30, 1996, total Company assets have increased 80.0%,
from $624.9 million to $1.125 billion at September 30, 2001, a 12.5% annual
compound growth rate. This growth was accomplished through continued growth in
existing branch offices and de-novo branch activity in existing and new
markets, and acquisitions. Shareholders' equity has increased 82.0% from $40.6
million to $73.9 million over the same time period, a 12.8% annual compounded
growth rate. Net income for the nine months ended September 30, 1996 compared
to the net income for the same period of 2001, increased 52.1% from $4.8
million to $7.3 million. From September 30, 1996, to September 30, 2001, the
number of Lake City Bank branch offices increased from 32 to 40, taking into
account the sale of the five non-strategic branches during the third quarter
of 2001. 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.
15
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
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 forward-looking statements contained in this report are made only as
of the date of this report.
FINANCIAL CONDITION
Assets
Total assets of the Company were $1.125 billion as of September 30,
2001, a decrease of $24.1 million, or 2.1%, when compared to $1.149 billion as
of December 31, 2000. Total loans were $722.5 million at September 30, 2001,
an increase of $3.7 million, or 0.5%, versus the December 31, 2000 balance.
Total securities increased $1.0 million, or 0.3%, to $294.6 million as of
September 30, 2001, versus $293.6 million at December 31, 2000. Earning assets
increased to $1.016 billion as of September 30, 2001, an increase of $6.3
million, or 0.6%, versus the December 31, 2000, total of $1.010 billion. As
detailed in Note 5, approximately $29.7 million in assets were divested in the
southern branch sale.
16
Funding
Total deposits and securities sold under agreements to repurchase
(repurchase agreements) consist of funds generated within the Company's
primary market area. At September 30, 2001, this funding totaled $947.3
million. This represented a $36.1 million, or 3.7%, decrease versus December
31, 2000. The decrease was driven by the approximately $70.3 million in
deposits which were divested in the southern branch sale. The decrease was
primarily in non-interest bearing demand accounts, which decreased $19.5
million, or 11.9%, when compared to the balance at December 31, 2000, and
interest-bearing demand accounts, which decreased $19.3 million, or 6.8%,
during the same period. The decrease in non-interest bearing demand accounts
was driven by a reduction in balances with public fund customers of $14.8
million. Time deposits increased $5.3 million, or 1.3%, when compared to the
balance at December 31, 2000, and repurchase agreements decreased $2.6 million
or 1.9%. The repurchase agreements are a combination of fixed rate contracts
and variable rate corporate cash management accounts.
In addition to these local funding sources, the Company borrows
through non-local sources including federal fund lines with correspondent
banks, advances from the Federal Home Loan Bank of Indianapolis (FHLB) and
through the Treasury, Tax and Loan program. Including these non-local sources,
funding totaled $1.020 billion at September 30, 2001, a $36.4 million, or a
3.4%, decrease versus $1.057 billion as of December 31, 2000. The primary
decrease in non-local funding sources was Federal Home Loan Bank advances,
which are used for short-term funding needs.
Earning Assets
On an average daily basis, total earning assets increased 8.4% and
8.6%, respectively, for the nine-month and three-month periods ended September
30, 2001, as compared to the same periods in 2000. On an average daily basis,
total deposits and purchased funds increased 6.4% and 6.9%, respectively, for
the nine-month and three-month periods ended September 30, 2001, as compared
to the same periods 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 September 30,
2001, the securities in the available-for-sale portfolio had a four year
average life and a potential for approximately 9% 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 2% price
appreciation possible. The composition of this portfolio is primarily
collateralized mortgage obligations (CMOs) and mortgage pools issued by GNMA,
FNMA and FHLMC, which are directly or indirectly guaranteed by the federal
government. As of September 30, 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.
17
Loans and Deposits
The Company had 72.0% of its loans concentrated in commercial loans
at September 30, 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 September 30, 2001, was approximately $13.4 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 primarily
throughout the Company's principal trade area, which encompasses multiple
markets in Northern Indiana.
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 September
30, 2001, the Company sold mortgages totaling $42.1 million into the secondary
market as compared to $15.9 million during the same period in 2000. During
these same two periods, loans originated for sale totaled $43.5 million and
$15.9 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 $0.4
million at September 30, 2001, versus $1.1 million at December 31, 2000. The
loans classified as troubled debt restructurings at September 30, 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.
18
For the first nine months of 2001, loans increased while deposits
decreased. During this nine-month period, demand accounts, which are
non-interest bearing, decreased $19.5 million, or 11.9%, from $164.6 million
to $145.1 million and other transaction accounts decreased $19.3 million, or
6.8%, during the same period. Time deposits increased $5.3 million, or 1.3%,
during the first nine months of the year, and repurchase agreements decreased
$2.6 million, or 1.9%. During this same nine-month period, loans increased
$3.7 million, or 0.5%. Loan growth opportunities continue to be strong,
particularly in the commercial and mortgage markets. 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 89.0% as of September 30, 2001, versus
85.0% at December 31, 2000.
Market and Interest Rate Risk
The Company is asset sensitive and therefore susceptible to interest
rate risk. 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. Given the Company's mix of interest bearing
liabilities and interest bearing assets at September 30, 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 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
September 30, 2001, the Company's potential pretax exposure was within the
Company's policy limit.
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 September
30, 2001. 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.
19
Management, along with other financial institutions, shares a concern
for the possible continued softening of the economy. Should the economic
climate continue to deteriorate, borrowers may experience difficulty, and the
level of non-performing loans, charge-offs and delinquencies could rise.
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. 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 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.
20
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 9/30/01
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 114,402 $ 77,889 $ 86,098 $ 33,175 $ 28,193 $ 9,386 $ 349,143 $365,868
Average interest rate 8.27% 8.48% 8.21% 8.46% 7.36% 7.86% 8.24%
Variable interest rate loans $ 335,324 $ 1,155 $ 1,133 $ 1,125 $ 1,097 $ 35,057 $ 374,891 $375,185
Average interest rate 6.49% 8.83% 8.38% 7.97% 7.55% 5.82% 6.45%
Fixed interest rate securities $ 96,585 $ 55,121 $ 39,428 $ 21,305 $ 14,069 $ 58,702 $ 285,210 $291,737
Average interest rate 6.17% 6.56% 6.38% 6.63% 6.60% 5.85% 6.26%
Variable interest rate securities $ 290 $ 298 $ 307 $ 316 $ 326 $ 1,234 $ 2,771 $2,838
Average interest rate 4.15% 4.19% 4.14% 4.09% 4.04% 4.36% 4.23%
Other interest-bearing assets $ 5,121 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,121 $5,121
Average interest rate 3.00% 0.00% 0.00% 0.00% 0.00% 0.00% 3.00%
Rate sensitive liabilities:
Non-interest bearing checking $ 7,543 $ 6,731 $ 1,219 $ 1,160 $ 1,697 $ 126,714 $ 145,064 $145,064
Average interest rate
Savings & interest bearing checking $ 20,191 $ 18,230 $ 16,190 $ 14,706 $ 11,792 $ 183,867 $ 264,976 $264,976
Average interest rate 2.32% 2.32% 2.32% 2.32% 2.32% 1.98% 2.08%
Time deposits $ 348,901 $ 32,362 $ 15,487 $ 2,991 $ 1,003 $ 1,044 $ 401,788 $404,923
Average interest rate 4.41% 5.14% 5.07% 5.58% 5.42% 2.53% 4.49%
Fixed interest rate borrowings $ 197,166 $ 11,400 $ 0 $ 0 $ 0 $ 19,311 $ 227,877 $228,125
Average interest rate 3.33% 4.24% 0.00% 0.00% 0.00% 9.26% 3.88%
21
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's Board of Directors has authorized
borrowings of up to $100 million under the FHLB program. As of September 30,
2001, the borrowings from the FHLB totaled $41.3 million, with maturities as
follows:
September 30,
2001
--------------
(in thousands)
Due December 28, 2001 10,000
Due April 8, 2002 20,000
Due July 29, 2002 10,000
Due June 24, 2003 1,300
Due January 15, 2018 49
--------------
Total $ 41,349
==============
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
September 30, 2001, was $3.6 million.
Capital and Shareholders' Equity
The Federal Deposit Insurance Corporation's (FDIC) 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 are
presented in the following table (in thousands):
22
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 September 30, 2001
Total Capital
(to Risk Weighted Assets)
Consolidated $ 90,846 11.17% $ 65,074 8.00% $ 81,343 10.00%
Bank $ 89,363 11.01% $ 64,923 8.00% $ 81,154 10.00%
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 83,254 10.23% $ 32,537 4.00% $ 48,806 6.00%
Bank $ 81,770 10.08% $ 32,462 4.00% $ 48,692 6.00%
Tier I Capital
(to Average Assets)
Consolidated $ 83,254 7.51% $ 44,344 4.00% $ 55,431 5.00%
Bank $ 81,770 7.21% $ 45,394 4.00% $ 56,743 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 September 30, 2001 increased $9.0
million, or 13.8%, to $73.9 million when compared to December 31, 2000. Net
income of $7.3 million, less dividends of $2.6 million, plus the increase in
the accumulated other comprehensive income of $4.4 million, less $126,000 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. Shares acquired
under the plan are purchased in the open market. All of the Company's
shareholders of record are eligible to participate in the plan.
23
RESULTS OF OPERATIONS
Net Income
Net income was $7.3 million for the first nine months of 2001, versus
$7.0 million in the same period in 2000. For the three months ended September
30, 2001, net income was $2.8 million compared to $2.3 million for the three
months ended September 30, 2000. Basic earnings per share for the first nine
months of 2001 was $1.25 per share, versus $1.21 per share for the first nine
months of 2000, and $.48 per share for the third quarter of 2001 compared to
$.40 per share for the same period of 2000. 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 nine months of 2001 was
$1.25 per share, versus $1.21 per share for the first nine months of 2000, and
$.47 per share for the third quarter of 2001 compared to $.40 per share for
the same period of 2000.
Net Interest Income
For the nine-month period ended September 30, 2001, net interest
income totaled $27.4 million, an increase of 5.1%, or $1.3 million, versus the
first nine months of 2000. For the three-month period ended September 30,
2001, net interest income totaled $9.9 million, an increase of 13.1%, or $1.1
million, over the same period of 2000. Net interest income increased in both
the three and nine month periods during 2001, primarily as a result of the
increase in average earning assets, and despite a decline in the Company's net
interest margin from 3.75% to 3.63%.
During the first nine months of 2001, total interest and dividend
income increased $0.4 million, or 0.6%, to $59.4 million, versus $59.0 million
during the same nine months of 2000. Interest and dividend income decreased
$1.1 million, or 5.4%, for the third quarter of 2001, compared to the 2000
quarter. Daily average earning assets for the first three quarters of 2001
increased 8.4% to $1.034 billion versus the same period in 2000. For the third
quarter, the daily average earning assets increased 8.6% to $1.052 billion
versus the same period in 2000. The tax equivalent yield on average earning
assets decreased by 61 basis points to 7.7% for the nine-month period ended
September 30, 2001 versus the same period of 2000. For the three-month period
ended September 30, 2001, the yield decreased 113 basis points to 7.2% from
the yield for the three-month period ended September 30, 2000.
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 raise the yield on earning assets. The ratio of average
daily securities to average earning assets for the nine-month and three-month
periods ended September 30, 2001 were 28.4% and 27.8% compared to 29.0% and
24
29.1% for the same periods of 2000. In addition, the overall tax equivalent
yield on loans decreased 70 and 136 basis points to 8.2% and 7.7% when
comparing the nine-month and three-month periods. The yield on securities
decreased 32 basis points to 6.4% and 44 basis points to 6.2% when comparing
the nine-month and three-month periods.
The average daily loan balances for the first nine months of 2001
increased 8.4% to $728.1 million, over the average daily loan balances of
$671.5 million for the same period of 2000. The average daily loan balances
for the three-months ended September 30, 2001 increased 9.2% to $743.7 million
over the average daily loan balances of $681.2 million for the same period in
2000. This loan growth was primarily funded by increases in deposits. The 0.1%
increase in loan interest income of $0.1 million for the nine-month period in
2001 versus the same period in 2000 resulted from loan growth. The 6.5%
decrease in loan interest income of $1.0 million in the three-month period
ended September 30, 2001, versus the same period in 2000, resulted from a
decrease in yields.
Income from securities totaled $13.5 million for the first nine
months of 2001, an increase of $139,000, or 1.0%, versus the same period of
2000. The income from securities for the three-month period ended September
30, 2001 was $4.4 million, a decrease of $127,000, or 2.8%, versus the same
period of 2000. The increase for the nine-month period resulted from an
increase in average daily balances of securities offset by the decrease in
yields on securities. The average daily balances of securities for the
nine-month period ended September 30, 2001 increased $16.8 million to $294.0
million when compared to the same period of the prior year. For the
three-month period ended September 30, 2001, the average daily balances of
securities increased $11.2 million to $292.7 million when compared to the same
period of 2000.
Income from short-term investments amounted to $416,000 for the
nine-month period and $140,000 for the three-month period ended September 30,
2001. This compares to $240,000 and $97,000 for the same periods in 2000. The
increase of $176,000 for the nine-month period of 2001 over the same period in
2000 resulted primarily from a $6.9 million increase in average daily assets
to $12.0 million. The increase of $43,000 for the three-month period in 2001
over the same period in 2000 was the result of a $9.9 million increase in
average daily earning assets to $15.8 million.
Total interest expense decreased $1.0 million or 2.9% to $31.9
million for the nine-month period ended September 30, 2001, from $32.9 million
for the comparable period in 2000, and decreased $2.3 million or 19.4% to $9.4
million for the three-month period ended September 30, 2001, from $11.7
million for the comparable period in 2000. This was primarily a result of a 39
basis point decrease in the Company's daily cost of funds. On an average daily
basis, total deposits (including demand deposits) increased 8.7% and 7.9% for
the nine and three-month periods ended September 30, 2001, as compared to the
same periods in 2000. When comparing the same periods, the average daily
25
balances of the demand deposit accounts rose $2.4 million and $6.6 million,
while the average daily balances of savings and transaction accounts combined
increased $4.0 million and $2.2 million. The average daily balance of time
deposits, which pay a higher rate of interest compared to demand deposit and
transaction accounts, increased $61.3 million for the nine months ended
September 30, 2001 versus the same period in 2000. For the three-month period
ended September 30, 2001, the average daily balance of time deposits increased
$53.7 million 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 are generally viewed by
management as stable and reliable funding sources. Average daily balances of
borrowings decreased $5.1 million for the nine months ended September 30, 2001
versus the same period in 2000. For the three-month period ended September 30,
2001, the average daily balance of borrowings increased $5.6 million versus
the same period in 2000. The rate on borrowings decreased 110 and 191 basis
points when comparing the same periods. On an average daily basis, total
deposits (including demand deposits) and purchased funds increased 6.4% and
6.9% for the nine and three-month periods ended September 30, 2001 versus the
same periods 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
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 amounted to $1,490,000 and $707,000 for the nine-month
periods ended September 30, 2001 and 2000, respectively. For the three-month
periods ended September 30, 2001 and 2000, the provision amounted to $970,000
and $92,000, respectively. The increase in the provisions reflect a number of
factors, including the increase in the size of the loan portfolio, the
increase in net charge-offs, the amount of impaired loans and management's
overall view on current credit quality.
26
Net loan charge-offs increased to $1.02 million during the first
nine-months of 2001 versus $0.28 million during the same period of 2000.
During the third quarter of 2001, net loan charge-offs were $0.80 million
versus $0.11 million during the third quarter of 2000. As of September 30,
2001, loans delinquent 90 days or more that were included in the accompanying
financial statements as accrual loans totaled approximately $138,000 versus
$6.8 million as of December 31, 2000. Reductions resulted primarily from the
repayment of a $1.4 million loan from another bank, and the extension of terms
of a $4.8 million loan. At September 30, 2001, loans totaling $1.9 million
were on non-accrual versus $206,000 as of December 31, 2000. The increase in
non-accrual loans resulted from the inclusion of three commercial loans
totaling $1.6 million. 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 1.05% for September 30, 2001, 0.99% for December 31 and 1.00%
for September 30, 2000.
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 September 30, 2001, $2.4 million in
loans were classified as impaired and as of December 31, 2000, $1.4 million
were classified as impaired. The increase in impaired loans resulted primarily
from the deterioration of five commercial loans during the third quarter.
Following is a summary of the loan loss experience for the nine
months ended September 30, 2001, and the year ended December 31, 2000.
27
September 30, December 31,
2001 2000
------------- -------------
(in thousands)
Amount of loans outstanding $ 722,532 $ 718,876
------------- -------------
Average daily loans outstanding for
the period $ 728,685 $ 659,365
------------- -------------
Allowance for loan losses at the
beginning of the period $ 7,124 $ 6,522
Charge-offs:
Commercial 533 200
Real estate 0 30
Installment 554 483
Credit card and personal credit lines 55 35
------------- ------------
Total charge-offs 1,142 748
Recoveries:
Commercial 1 45
Real estate 16 0
Installment 99 93
Credit card and personal credit lines 4 6
------------- ------------
Total recoveries 120 144
------------- ------------
Net charge-offs 1,022 604
Provision charged to expense 1,490 1,206
------------- ------------
Allowance for loan losses at the end of
the period $ 7,592 $ 7,124
============= ============
Ratio of annualized net charge-offs during the period to average daily
loans during the period:
Commercial 0.10% 0.02%
Real estate 0.00% 0.01%
Installment 0.08% 0.06%
Credit card and personal credit lines 0.01% 0.00%
------------- ------------
Total 0.19% 0.09%
============= ============
28
Net interest income after provision for loan losses totaled $26.0
million and $8.9 million for the nine and three month periods ended September
30, 2001. This represented increases of 2.2% and 3.1% over the same periods
ended September 30, 2000.
Noninterest Income
Noninterest income categories for the nine and three-month periods
ended September 30, 2001, and 2000 are shown in the following tables:
Nine Months ended
September 30,
----------------------------------
Percent
2001 2000 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 2,023 $ 1,586 27.6 %
Service charges on deposits 3,747 3,304 13.4
Other income (net) 2,180 2,478 (12.0)
Net gain on the sale of branches 753 0 100.0
Net gains on the sale of real estate
mortgages held-for-sale 792 366 116.4
Net securities gains 52 0 100.0
---------- ---------- ----------
Total noninterest income $ 9,547 $ 7,734 23.4 %
========== ========== ==========
Three Months ended
September 30,
----------------------------------
Percent
2001 2000 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 600 $ 530 13.2 %
Service charges on deposits 1,295 1,109 16.8
Other income (net) 710 871 (18.5)
Net gains on the sale of branches 753 0 100.0
Net gains on the sale of real estate
mortgages held-for-sale 348 128 171.9
Net securities gains 50 0 100.0
---------- ---------- ----------
Total noninterest income $ 3,756 $ 2,638 42.4 %
========== ========== ==========
Trust fees increased 12.4% in the first nine months of 2001 versus
the same period in 2000. This increase was primarily in agency and living
trust fees. Brokerage fees increased $308,000, or 57.2%, in the first nine
29
months 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 by 28.2% in the first nine months of 2001 versus the comparable
period in 2000.
The primary sources of 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 fee
income decreased $298,000 in the first nine months of 2001 versus the same
period in 2000, and $161,000 in the third quarter versus the same period in
2000. The decrease in mortgage service fee income was due to charges of
$471,000 and $175,000, respectively, during the nine month and three month
periods ending September 30, 2001, related to the 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 nine months of 2001. Excluding
these non-cash charges, other income would have increased 7.0% and 1.6%,
respectively, in the first nine months and third quarter versus the same
periods in 2000.
During the third quarter of 2001, the Company sold five non-strategic
branches resulting in a gain of $753,000. Excluding this one-time gain, total
non-interest income increased by 13.7% and 13.8%, respectively, in the first
nine months and third quarter versus the same periods in 2000.
The increase in profits from the sale of mortgages reflected an
increase in the volume of mortgages sold during the first nine months of 2001
versus sales during the first nine months of 2000. This increase in volume was
a result of the falling interest rate environment and an increase in demand
for home mortgages. Management does not anticipate that this trend will shift
during the balance of 2001.
Noninterest Expense
Noninterest expense categories for the nine and three-month periods
ended September 30, 2001, and 2000 are shown in the following tables:
30
Nine Months ended
September 30,
----------------------------------
Percent
2001 2000 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 13,202 $ 11,881 11.1 %
Occupancy and equipment expense 3,668 3,866 (5.1)
Other expense 8,067 7,272 10.9
---------- ---------- ----------
Total noninterest expense $ 24,937 $ 23,019 8.3 %
========== ========== ==========
Three Months ended
September 30,
----------------------------------
Percent
2001 2000 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 4,616 $ 4,257 8.4 %
Occupancy and equipment expense 1,158 1,277 (9.3)
Other expense 2,796 2,471 13.2
---------- ---------- ----------
Total noninterest expense $ 8,570 $ 8,005 7.1 %
========== ========== ==========
The increase in salaries and employee benefits reflected normal
salary increases and higher employee insurance premiums combined with a
pension plan curtailment gain of $500,000 recognized in the second quarter of
2000. Excluding the pension plan curtailment gain, salaries and employee
benefits increased by 6.6% for the nine-month period ending September 30,
2001. Total employees decreased to 476 at September 30, 2001, from 479 at
September 30, 2000. This decrease resulted primarily from the reduction in
staff in connection with the sale of the five non-strategic branches in
September, 2001, taking into account the growth of the Company, driven by the
addition of three new offices since September 30, 2000, which required
additional staffing.
The decrease in occupancy and equipment expense was the result of
closing two offices in the second quarter of 2000, combined with the sale of
five 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 director's fees. Other expense increased primarily due
31
to costs associated with the Bank's compliance with new regulations regarding
the Privacy Policy, as well as increases in professional fees and losses
related to robberies during the year.
Income Before Income Tax Expense
Income before income tax expense increased $446,000, or 4.4%, to
$10.6 million for the first nine months of 2001, versus $10.1 million for the
same period in 2000. For the three months ended September 30, 2001, income
before income taxes was $4.1 million versus $3.3 million for the same period
in 2000. This was due primarily to the increase in other non-interest income.
Income Tax Expense
Income tax expense decreased $197,000, or 6.4%, for the first nine
months of 2001, compared to the same period in 2000. Income tax expense for
the third quarter of 2001 increased $371,000, or 38.1%, compared to the third
quarter of 2000.
The combined state franchise tax expense and the federal income tax
expense as a percentage of income before income tax expense increased to 31.2%
during the first nine months of 2001 compared to 30.7% during the same period
in 2000. It increased to 32.7% for the three months ended September 30, 2001,
compared to 29.6% during the same period in 2000. The increases were primarily
a result of higher state franchise tax expense.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
See "Market and Interest Rate Risk" on pages 19-21.
32
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 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
33
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 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: November 13, 2001 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: November 13, 2001 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: November 13, 2001 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
34