UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-11487
LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1559596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
202 East Center Street
P.O. Box 1387, Warsaw, Indiana 46581-1387
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (574)267-6144
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [x] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at July 31, 2003
Common Stock, No Par Value 5,772,032
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 . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . 25
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 29
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . 29
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 29
Item 4. Submission of Matters to a Vote of Security Holders . . . 29
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 30
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 31
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 1 - FINANCIAL STATEMENTS
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2003 and December 31, 2002
(in thousands)
(Page 1 of 2)
June 30, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 56,412 $ 74,149
Short-term investments 7,184 13,000
------------ ------------
Total cash and cash equivalents 63,596 87,149
Securities available-for-sale:
U. S. Treasury and government agency securities 14,164 17,284
Mortgage-backed securities 211,228 222,036
State and municipal securities 45,928 34,785
------------ ------------
Total securities available-for-sale
(carried at fair value) 271,320 274,105
Real estate mortgages held-for-sale 11,230 10,395
Loans:
Total loans 839,355 822,676
Less: Allowance for loan losses 9,786 9,533
------------ ------------
Net loans 829,569 813,143
Land, premises and equipment, net 26,286 24,768
Accrued income receivable 4,943 4,999
Goodwill 4,970 4,970
Other intangible assets 968 1,042
Other assets 26,691 27,215
------------ ------------
Total assets $ 1,239,573 $ 1,247,786
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2003 and December 31, 2002
(in thousands except for share and per share data)
(Page 2 of 2)
June 30, December 31,
2003 2002
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 183,436 $ 192,787
Interest bearing deposits 782,808 720,538
------------ ------------
Total deposits 966,244 913,325
Short-term borrowings:
Federal funds purchased 17,000 30,000
Securities sold under agreements
to repurchase 98,736 124,968
U.S. Treasury demand notes 1,848 4,000
Other borrowings 10,000 26,000
------------ ------------
Total short-term borrowings 127,584 184,968
Accrued expenses payable 7,430 12,503
Other liabilities 1,367 2,417
Long-term borrowings 30,047 31,348
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,358 19,345
------------ ------------
Total liabilities 1,152,030 1,163,906
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,817,459 shares issued and 5,773,731 outstanding as of
June 30, 2003, and 5,813,984 shares issued and 5,767,010
outstanding at December 31, 2002 1,453 1,453
Additional paid-in capital 9,671 8,537
Retained earnings 75,873 70,819
Accumulated other comprehensive income 1,373 3,937
Treasury stock, at cost (827) (866)
------------ ------------
Total stockholders' equity 87,543 83,880
------------ ------------
Total liabilities and stockholders' equity $ 1,239,573 $ 1,247,786
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
2
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and Six Months Ended June 30, 2003 and 2002
(in thousands except for share and per share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 12,077 $ 12,315 $ 23,910 $ 24,651
Tax exempt 66 34 129 67
------------ ------------ ------------ ------------
Total loan income 12,143 12,349 24,039 24,718
Short-term investments 58 64 85 92
Securities:
U.S. Treasury and government agency securities 145 342 315 737
Mortgage-backed securities 2,694 3,039 5,626 5,797
State and municipal securities 497 400 925 800
Other debt securities 0 87 0 202
------------ ------------ ------------ ------------
Total interest and dividend income 15,537 16,281 30,990 32,346
INTEREST EXPENSE
- ----------------
Interest on deposits 3,702 4,226 7,488 8,578
Interest on short-term borrowings 313 635 653 1,555
Interest on long-term debt 771 755 1,540 1,327
------------ ------------ ------------ ------------
Total interest expense 4,786 5,616 9,681 11,460
------------ ------------ ------------ ------------
NET INTEREST INCOME 10,751 10,665 21,309 20,886
- -------------------
Provision for loan losses 717 747 1,384 1,249
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,034 9,918 19,925 19,637
- ------------------------- ------------ ------------ ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage fees 565 641 1,175 1,299
Service charges on deposit accounts 1,736 1,739 3,400 3,137
Other income (net) 1,431 814 2,450 1,742
Net gains on the sale of real estate mortgages
held-for-sale 1,193 350 2,272 711
Net securities gains 0 16 0 16
------------ ------------ ------------ ------------
Total noninterest income 4,925 3,560 9,297 6,905
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 5,008 4,536 9,713 9,134
Occupancy and equipment expense 1,218 1,082 2,580 2,181
Other expense 3,035 3,181 5,932 6,053
------------ ------------ ------------ ------------
Total noninterest expense 9,261 8,799 18,225 17,368
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and Six Months Ended June 30, 2003 and 2002
(in thousands except for share and per share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 5,698 4,679 10,997 9,174
- --------------------------------
Income tax expense 1,949 1,619 3,733 3,161
------------ ------------ ------------ ------------
NET INCOME $ 3,749 $ 3,060 $ 7,264 $ 6,013
- ---------- ============ ============ ============ ============
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-
for-sale securities (1,240) 2,195 (2,564) 2,437
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME $ 2,509 $ 5,255 $ 4,700 $ 8,450
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,819,448 5,813,984 5,815,386 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.64 $ 0.53 $ 1.25 $ 1.03
- ------------------------------- ============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 5,977,598 5,973,772 5,960,399 5,941,108
DILUTED EARNINGS PER COMMON SHARE $ 0.63 $ 0.51 $ 1.22 $ 1.01
- --------------------------------- ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
4
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(in thousands)
(Unaudited)
(Page 1 of 2)
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 7,264 $ 6,013
------------ ------------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 1,118 1,108
Provision for loan losses 1,384 1,249
Amortization of intangible assets 88 88
Amortization of mortgage servicing rights 414 170
Impairment of mortgage servicing rights 169 203
Loans originated for sale (84,959) (35,928)
Net gain on sale of loans (2,272) (711)
Proceeds from sale of loans 85,857 43,650
Net loss on sale of premises and equipment 1 16
Net (gain) on sale of securities available-for-sale 0 (16)
Net securities amortization 709 932
(Decrease) in taxes payable (549) (56)
Decrease in income receivable 56 133
Increase (decrease) in accrued expenses payable (466) 149
(Increase) in life insurance cash surrender value (340) 0
(Increase) decrease in other assets (367) 595
Increase in other liabilities 4 735
------------ ------------
Total adjustments 847 12,317
------------ ------------
Net cash from operating activities 8,111 18,330
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 68,833 34,754
Purchases of securities available-for-sale (70,782) (38,110)
Net increase in total loans (19,339) (26,300)
Proceeds from sales of land, premises and equipment 0 6
Purchase of land, premises and equipment (2,636) (1,226)
------------ ------------
Net cash from investing activities (23,924) (30,876)
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(in thousands)
(Unaudited)
(Page 2 of 2)
2003 2002
------------ ------------
Cash flows from financing activities:
Net increase in total deposits $ 52,919 $ 49,782
Proceeds from short-term borrowings 12,676,285 14,979,710
Payments on short-term borrowings (12,733,669) (15,009,512)
Proceeds from long-term borrowings 0 20,000
Payments on long-term borrowings (1,301) (20)
Dividends paid (2,094) (1,962)
Proceeds from the sale of common stock 81 0
(Purchase) sale of treasury stock 39 (67)
------------ ------------
Net cash from financing activities (7,740) 37,931
------------ ------------
Net decrease in cash and cash equivalents (23,553) 25,385
Cash and cash equivalents at beginning of the period 87,149 79,123
------------ ------------
Cash and cash equivalents at end of the period $ 63,596 $ 104,508
============ ============
Cash paid during the period for:
Interest $ 9,642 $ 11,753
============ ============
Income taxes $ 4,277 $ 3,399
============ ============
Loans transferred to other real estate $ 1,530 $ 0
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
6
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(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 and six-month periods ending June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2003. The 2002 Lakeland Financial Corporation Annual Report on Form 10-K
should be read in conjunction with these statements.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 149 and No. 150. SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts. The
provisions of this statement require that contracts with comparable
characteristics be accounted for similarly. The provisions of SFAS No. 149 are
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. SFAS No. 150 establishes
standards on the classification and measurement of certain financial
instruments with characteristics of both liability and equity. SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and to all other instruments that exist as of the beginning of the first
interim period beginning after June 15, 2003. Management does not expect the
adoption of SFAS No. 149 and SFAS No. 150 to have a material impact to the
Company's consolidated financial position or results of operations.
7
NOTE 3. 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.
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. No
additional options were granted in the first six months of 2003. Had
compensation cost for stock options been recorded in the financial statements,
net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more
options are granted.
Six Months ended
June 30,
2003 2002
--------- ----------
Net income (in thousands) as reported $ 7,264 $ 6,013
Deduct: stock-based compensation expense
determined under fair value based method 270 351
--------- ----------
Pro forma net income $ 6,994 $ 5,662
========= ==========
Basic earnings per common share as reported $ 1.25 $ 1.03
Pro forma basic earnings per share $ 1.20 $ 0.97
Diluted earnings per common share as reported $ 1.22 $ 1.01
Pro forma diluted earnings per share $ 1.17 $ 0.95
8
Three Months ended
June 30,
2003 2002
--------- ----------
Net income (in thousands) as reported $ 3,749 $ 3,060
Deduct: stock-based compensation expense
determined under fair value based method 152 171
--------- ----------
Pro forma net income $ 3,597 $ 2,889
========= ==========
Basic earnings per common share as reported $ 0.64 $ 0.53
Pro forma basic earnings per share $ 0.62 $ 0.50
Diluted earnings per common share as reported $ 0.63 $ 0.51
Pro forma diluted earnings per share $ 0.60 $ 0.48
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet at June 30, 2003 reflects the acquisition of 43,728
shares of Company common stock to offset a liability for a directors' deferred
compensation plan. These shares are treated as outstanding when computing the
weighted-average common shares outstanding for the calculation of both basic
and diluted earnings per share.
NOTE 4. LOANS
June 30, December 31,
2003 2002
------------ ------------
(in thousands)
Commercial and industrial loans $ 577,597 $ 556,800
Agri-business and agricultural loans 69,561 68,137
Real estate mortgage loans 39,056 44,644
Real estate construction loans 2,453 2,540
Installment loans and credit cards 150,688 150,555
------------ ------------
Total loans $ 839,355 $ 822,676
============ ============
Impaired loans $ 6,297 $ 7,298
Non-performing loans $ 6,633 $ 7,603
NOTE 5. 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.
9
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
June 30, 2003
OVERVIEW
Lakeland Financial Corporation is the holding company for Lake City Bank.
The Company is headquartered in Warsaw, Indiana and operates 41 offices in 12
counties in northern Indiana. The Company earned $7.3 million for the first
six months of 2003 versus $6.0 million in the same period of 2002, an increase
of 20.8%. The increase was driven by a $2.4 million increase in non-interest
income and a $423,000 increase in net interest income. Offsetting these
positive impacts were increases of $135,000 in the provision for loan losses,
and $857,000 in non-interest expense. Basic earnings per share for the first
six months of 2003 was $1.25 per share versus $1.03 per share for the first
six months of 2002. 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 six months of 2003 was $1.22 per share,
versus $1.01 per share for the first six months of 2002.
Net income for the second quarter of 2003 was $3.7 million, an increase
of 22.5% versus $3.1 million for the comparable period of 2002. Basic earnings
per share for the second quarter of 2003 were $0.64 per share, versus $0.53
per share for the second quarter of 2002. Diluted earnings per share for the
second quarter of 2003 were $0.63 per share, versus $0.51 per share for the
second quarter of 2002.
RESULTS OF OPERATIONS
Net Interest Income
For the six-month period ended June 30, 2003, net interest income totaled
$21.3 million, an increase of 2.0%, or $423,000 versus the first six months of
2002. For the three-month period ended June 30, 2003, net interest income
totaled $10.8 million, an increase of 0.8%, or $86,000, over the same period
of 2002. Net interest income increased in both the six-month and three-month
periods of 2003 versus the comparable periods of 2002, primarily due to
increases in average interest bearing assets combined with increases in
average non-interest bearing demand deposits. For the six-month period ended
June 30, 2003, average earning assets increased by $87.1 million, and average
non-interest bearing demand deposits increased by $21.1 million versus the
same period in 2002. For the three-month period ended June 30, 2003, average
10
earning assets increased by $86.8 million, and average non-interest bearing
demand deposits increased by $24.1 million, versus the same period in 2002.
The net interest income was negatively impacted by declines in the Company's
net interest margin to 3.92% and 3.89%, respectively, for the six-month and
three-month periods ended June 30, 2003, versus 4.14% and 4.15% for the
comparable periods of 2002.
During the first six months of 2003, total interest and dividend income
decreased by $1.3 million, or 4.2% to $31.0 million, versus $32.3 million
during the same six months of 2002. During the second quarter of 2003,
interest and dividend income decreased $744,000, or 4.6%, to $15.5 million,
versus $16.3 million during the same quarter of 2002. Daily average earning
assets for the first six months of 2003 increased 8.4% to $1.125 billion
versus the same period in 2002. For the second quarter, daily average earning
assets increased 8.3% to $1.137 billion versus the same period of 2002. The
tax equivalent yield on average earning assets decreased by 71 basis points to
5.7% for the six-month period ended June 30, 2003 versus the same period of
2002. For the three-month period ended June 30, 2003, the yield decreased 75
basis points to 5.6% from the yield for the three-month period ended June 30,
2002.
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 six-month and three-month periods
ended June 30, 2003 were 24.2% and 23.7% compared to 26.4% and 26.1% for the
same periods of 2002.
The average daily loan balances for the first six months of 2003
increased 11.3% to $838.1 million, over the average daily loan balances of
$753.2 million for the same period of 2002. During the same period, loan
interest income declined by $679,000, or 2.8%, to $24.0 million. The decrease
was the result of an 83 basis point decrease in the tax equivalent yield on
loans to 5.8% from 6.6% in the first six months of 2002. The average daily
loan balances for the second quarter of 2003 increased $85.7 million, or
11.3%, to $846.5 million, versus $760.7 million for the same period of 2002.
During the same period, loan interest income declined by $206,000, or 1.7%, to
$12.1 million versus $12.3 million during the second quarter of 2002. The
decrease was the result of a 76 basis point decrease in the tax equivalent
yield on loans, to 5.7%, versus 6.5% in the second quarter of 2002.
The average daily securities balances for the first six months of 2003
decreased $1.3 million, or 0.5%, to $272.6 million, versus $273.9 million for
the same period of 2002. During the same periods, income from securities
declined by $670,000, or 0.9%, to $6.9 million versus $7.5 million during the
first six months of 2002. The decrease was primarily the result of a 42 basis
11
point decline in the tax equivalent yields on securities, to 5.4% versus 5.8%
in the first six months of 2002. The average daily securities balances for the
second quarter of 2003 decreased $4.0 million, or 1.5%, to $269.9 million,
versus $274.0 million for the same period of 2002. During the same periods,
income from securities declined by $532,000, or 13.8%, to $3.3 million versus
$3.9 million during the second quarter of 2002. The decrease was primarily the
result of a 62 basis point decrease in the tax equivalent yield on securities,
to 5.3%, versus 6.0% in the second quarter of 2002.
Total interest expense decreased $1.8 million, or 15.5%, to $9.7 million
for the six-month period ended June 30, 2003, from $11.5 million for the
comparable period in 2002. The decrease was primarily the result of a 51 basis
point decrease in the Company's daily cost of funds to 1.73%, versus 2.24% for
the same period of 2002. Total interest expense decreased $830,000, or 14.8%,
to $4.8 million for the three-month period ended June 30, 2003, from $5.6
million for the comparable period of 2002. The decrease was primarily the
result of a 47 basis point decrease in the Company's daily cost of funds to
1.69%, versus 2.16% for the same period of 2002. On an average daily basis,
total deposits (including demand deposits) increased $116.6 million, or 14.0%,
to $951.2 million for the six-month period ended June 30, 2003, versus $834.6
million in the same period in 2002. The average daily deposit balances for the
second quarter of 2003 increased $116.4 million, or 13.7%, to $968.1 million
versus $851.7 million during the second quarter of 2002. On an average daily
basis, noninterest bearing demand deposits increased $21.1 million, or 14.7%
and $24.1 million, or 16.4% for the six and three-month periods ended June 30,
2003, versus the same periods in 2002. When comparing the six months ended
June 30, 2003 with the same period of 2002, the average daily balance of time
deposits, which pay a higher rate of interest compared to demand deposit and
transaction accounts, increased $49.8 million and the rate paid on such
accounts declined by 67 basis points versus the same period in 2002. In the
second quarter of 2003, the average daily balance of time deposits increased
by $31.2 million and the rate paid on such accounts declined by 58 basis
points versus the same period in 2002. During the remainder of 2003,
management plans to continue efforts to grow relationship type accounts such
as demand deposit and Investors' Weekly accounts, which traditionally 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 $24.6 million, or 12.4%, to $174.2 million
for the six months ended June 30, 2003 versus $198.8 million for the same
period in 2002, and decreased $23.0 million, or 11.9% for the three months
ended June 30 2003. The rate on borrowings decreased 38 basis points and 33
basis points, respectively, when comparing the six and three month periods of
2003 with the same periods of 2002. On an average daily basis, total deposits
(including demand deposits) and purchased funds increased 8.9% for both the
six-month and three-month periods ended June 30, 2003 versus the same periods
12
in 2002. The following tables set forth consolidated information regarding
average balances and rates.
13
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Six Months Ended June 30,
----------------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
----------- ------------ --------- ----------- ----------- ---------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 831,090 $ 23,910 5.80 % $ 750,609 $ 24,651 6.62 %
Tax exempt (1) 7,019 129 4.93 2,602 67 7.41
Investments: (1)
Available for sale 272,560 6,866 5.42 273,857 7,536 5.84
Short-term investments 8,620 50 1.16 7,117 58 1.63
Interest bearing deposits 6,005 35 1.17 3,963 34 1.72
----------- ----------- ----------- -----------
Total earning assets 1,125,294 30,990 5.65 % 1,038,148 32,346 6.37 %
Nonearning assets:
Cash and due from banks 44,985 0 41,588 0
Premises and equipment 25,195 0 24,405 0
Other nonearning assets 37,942 0 25,716 0
Less allowance for loan losses (9,778) 0 (8,234) 0
----------- ----------- ----------- -----------
Total assets $ 1,223,639 $ 30,990 $ 1,121,623 $ 32,346
=========== =========== =========== ===========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2003
and 2002. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1,
1983 included the TEFRA adjustment applicable to nondeductible interest expenses.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the six months
ended June 30, 2003 and 2002, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
</FN>
14
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
Six Months Ended June 30,
----------------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
----------- ----------- --------- ----------- ----------- ---------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 58,751 $ 139 0.48 % $ 52,570 $ 216 0.83 %
Interest bearing checking accounts 268,308 1,596 1.20 228,832 1,865 1.64
Time deposits:
In denominations under $100,000 207,152 3,268 3.18 198,443 3,798 3.86
In denominations over $100,000 252,788 2,485 1.98 211,675 2,699 2.57
Miscellaneous short-term borrowings 123,598 653 1.06 159,618 1,555 1.97
Long-term borrowings 50,647 1,540 6.13 39,211 1,327 6.83
----------- ----------- ----------- -----------
Total interest bearing liabilities 961,244 9,681 2.03 % 890,349 11,460 2.60 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 164,175 0 143,084 0
Other liabilities 11,730 0 11,747 0
Stockholders' equity 86,489 0 76,443 0
Total liabilities and stockholders' ----------- ------------ ----------- ------------
equity $ 1,223,639 $ 9,681 $ 1,121,623 $ 11,460
=========== ============ =========== ============
Net interest differential - yield on
average daily earning assets $ 21,309 3.92 % $ 20,886 4.14 %
============ ===========
15
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Three Months Ended June 30,
----------------------------------------------------------------------------------
2003 2002
-------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
----------- ------------ --------- ----------- ----------- ---------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 839,251 $ 12,077 5.77 % $ 758,076 $ 12,315 6.52 %
Tax exempt (1) 7,228 66 4.86 2,666 34 7.30
Investments: (1)
Available for sale 269,945 3,336 5.33 273,989 3,868 5.95
Short-term investments 12,271 35 1.14 12,322 50 1.62
Interest bearing deposits 8,256 23 1.10 3,134 14 1.69
----------- ------------ ----------- -----------
Total earning assets 1,136,951 15,537 5.58 % 1,050,187 16,281 6.30 %
Nonearning assets:
Cash and due from banks 46,974 0 44,190 0
Premises and equipment 25,600 0 24,456 0
Other nonearning assets 36,677 0 26,650 0
Less allowance for loan losses (9,936) 0 (8,519) 0
----------- ------------ ----------- -----------
Total assets $ 1,236,266 $ 15,537 $ 1,136,964 $ 16,281
=========== ============ =========== ===========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2003
and 2002. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1,
1983 included the TEFRA adjustment applicable to nondeductible interest expenses.
(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the three months
ended June 30, 2003 and 2002, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
</FN>
16
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
Three Months Ended June 30,
----------------------------------------------------------------------------------
2003 2002
-------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
----------- ------------ --------- ----------- ----------- ---------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 60,759 $ 70 0.46 % $ 54,110 $ 110 0.82 %
Interest bearing checking accounts 283,818 839 1.19 229,357 900 1.57
Time deposits:
In denominations under $100,000 205,371 1,584 3.09 198,373 1,850 3.74
In denominations over $100,000 247,008 1,209 1.96 222,792 1,366 2.46
Miscellaneous short-term borrowings 119,968 313 1.05 145,914 635 1.75
Long-term borrowings 50,601 771 6.11 47,625 755 6.36
----------- ------------ ----------- -----------
Total interest bearing liabilities 967,525 4,786 1.98 % 898,171 5,616 2.51 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 171,126 0 147,032 0
Other liabilities 10,237 0 14,081 0
Stockholders' equity 87,378 0 77,680 0
Total liabilities and stockholders' ----------- ------------ ----------- -----------
equity $ 1,236,266 $ 4,786 $ 1,136,964 $ 5,616
=========== ============ =========== ===========
Net interest differential - yield on
average daily earning assets $ 10,751 3.89 % $ 10,665 4.15 %
============ ===========
17
Provision for Loan Losses
Based on management's review of the adequacy of the allowance for loan
losses, provisions for losses on loans of $1.4 million and $717,000 were
recorded during the six-month and three-month periods ended June 30, 2003,
versus provisions of $1.2 million and $747,000 recorded during the same
periods of 2002. The increase in the provision for loan losses for the
six-month period reflected a number of factors, including the increase in the
size of the loan portfolio, the amount and status of impaired loans, the
amount and status of past due accruing loans (90 days or more), and
management's overall view on current credit quality, as discussed in more
detail below in the analysis relating to the Company's financial condition.
Noninterest Income
Noninterest income categories for the six and three-month periods ended
June 30, 2003 and 2002 are shown in the following table:
Six Months ended
June 30,
----------------------------------
Percent
2003 2002 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 1,175 $ 1,299 (9.6)%
Service charges on deposits 3,400 3,137 8.4
Other income (net) 2,450 1,742 40.6
Net gains on the sale of real estate
mortgages held-for-sale 2,272 711 219.6
Net securities gains 0 16 (100.0)
---------- ---------- ----------
Total noninterest income $ 9,297 $ 6,905 34.6 %
========== ========== ==========
18
Three Months ended
June 30,
----------------------------------
Percent
2003 2002 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 565 $ 641 (11.9)%
Service charges on deposits 1,736 1,739 (0.2)
Other income (net) 1,431 814 75.8
Net gains on the sale of real estate
mortgages held-for-sale 1,193 350 240.9
Net securities gains 0 16 (100.0)
---------- ---------- ----------
Total noninterest income $ 4,925 $ 3,560 38.3 %
========== ========== ==========
Trust fees decreased $174,000 and $92,000, respectively, in the six-month
and three-month periods ended June 30, 2003 versus the same periods in 2002.
These decreases were primarily in employee benefit plan, stock transfer, and
living trust fees. The Company exited the stock transfer business in late
2002. Many of the trust fees are determined based upon the dollar amount of
the assets held in the various trusts. The overall decline in the stock market
has adversely impacted the value of those trust assets, and therefore reduced
the trust income based upon it. Brokerage fees increased $49,000 and $15,000,
respectively, in the six-month and three-month periods ended June 30, 2003
versus the same periods in 2002, driven by increased trading volume during
2003.
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 that were implemented in 2002.
Other income consists of normal recurring fee income such as mortgage
service fees, credit card fees, insurance income and fees, valuation of
mortgage servicing rights and safe deposit box rent, as well as other income
that management classifies as non-recurring. Other fee income increased
$708,000 and $617,000, respectively, in the six-month and three- month periods
ended June 30, 2003 versus the same periods of 2002. The primary drivers
behind the increase in the six-month period were a $340,000 increase in the
cash surrender value of bank owned life insurance, a $146,000 increase in
mortgage fees and a $79,000 increase in operating lease income. Offsetting
these was a $244,000 increase in the amortization of the Bank's mortgage
servicing rights. The primary reasons for the second quarter increase were a
$172,000 increase in the cash surrender value of bank owned life insurance,
the $105,000 increase in mortgage fees and the $79,000 increase in operating
19
lease income. Offsetting these was a $113,000 increase in the amortization of
the Bank's mortgage servicing rights.
The increase in profits from the sale of mortgages reflected an increase
in the volume of mortgages sold during the six-month and three-month periods
ended June 30, 2003 versus the same periods in 2002. During the first six
months of 2003, the Company sold $84.1 million in mortgages versus $43.2
million in the comparable period of 2002. During the second quarter of 2003,
the Company sold $43.2 million in mortgages versus $21.9 million in the second
quarter of 2002. These increases in volume were the result of the low interest
rate environment, which has resulted in increased mortgage refinance activity
and increased demand for home mortgages. Management does not anticipate that
this level of mortgage sales gains will continue throughout the year.
Noninterest Expense
Noninterest expense categories for the six and three-month periods ended
June 30, 2003, and 2002 are shown in the following table:
Six Months ended
June 30,
----------------------------------
Percent
2003 2002 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 9,713 $ 9,134 6.3 %
Occupancy and equipment expense 2,580 2,181 18.3
Other expense 5,932 6,053 (2.0)
---------- ---------- ----------
Total noninterest expense $ 18,225 $ 17,368 4.9 %
========== ========== ==========
Three Months ended
June 30,
----------------------------------
Percent
2003 2002 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 5,008 $ 4,536 10.4 %
Occupancy and equipment expense 1,218 1,082 12.6
Other expense 3,035 3,181 (4.6)
---------- ---------- ----------
Total noninterest expense $ 9,261 $ 8,799 5.3 %
========== ========== ==========
20
The increase in salaries and employee benefits reflected normal salary
increases, increases related to the employee 401(k) plan and incentive
compensation plan and higher health care costs. Total employees remained
stable at 471 at June 30, 2003, compared to 472 at June 30, 2002.
The increase in occupancy and equipment expense reflected higher property
taxes, as well as higher maintenance and repair expense due to an increased
commitment to the physical enhancement of offices and higher snow removal
costs required during the first quarter of 2003, versus the comparable period
of 2002.
Other expense includes corporate and business development, data
processing fees, telecommunications, postage, and professional fees such as
legal, accounting, and directors' fees. Other expense declined slightly in
both the six-month and three-month periods ended June 30, 2003, versus the
comparable periods in 2002, primarily as a result of a decrease in
telecommunications expense.
Income Tax Expense
Income tax expense increased $572,000, or 18.1%, for the first six months
of 2003, compared to the same period in 2002. Income tax expense for the
second quarter of 2003 increased $330,000, or 20.4%, compared to the same
period of 2002. The combined state franchise tax expense and the federal
income tax expense as a percentage of income before income tax expense
decreased to 33.9% during the first six months of 2003 compared to 34.5%
during the same period in 2002. It decreased to 34.2% for the second quarter
of 2003, versus 34.6% for the second quarter of 2002.
FINANCIAL CONDITION
Certain of the Company's accounting policies are important to the
portrayal of the Company's financial condition, since they require management
to make difficult, complex or subjective judgments, some of which may relate
to matters that are inherently uncertain. Estimates associated with these
policies are susceptible to material changes as a result of changes in facts
and circumstances. Some of the facts and circumstances which could affect
these judgments include changes in interest rates, in the performance of the
economy or in the financial condition of borrowers. Management believes that
its critical accounting policies include determining the allowance for loan
losses, determining the fair value of securities and other financial
instruments and the valuation of mortgage servicing rights.
21
Total assets of the Company were $1.240 billion as of June 30, 2003, a
decrease of $8.2 million, or 0.7%, when compared to $1.248 billion as of
December 31, 2002.
Total cash and cash equivalents decreased by $23.5 million, or 27.0%, to
$63.6 million at June 30, 2003 from $87.1 million at December 31, 2002. The
decrease was attributable to decreases in the Company's short-term borrowings.
Total securities available-for-sale decreased by $2.8 million, or 1.0%,
to $271.3 million at June 30, 2003 from $274.1 million at December 31, 2002.
The decrease was a result of a number of transactions in the securities
portfolio. Paydowns of $57.7 million were received, and the amortization of
premiums, net of the accretion of discounts, was $709,000. Maturities, calls
and sales of securities totaled $11.2 million, and the fair market value of
the securities declined by $4.0 million. The market value decline was driven
by paydowns received in the mortgage-backed portion on the securities
portfolio. These portfolio decreases were offset by securities purchases
totaling $70.8 million. The investment portfolio is managed to limit the
Company's exposure to risk by containing mostly CMO's and other securities
which are either directly or indirectly backed by the federal government or a
local municipal government.
Real estate mortgages held-for-sale increased by $835,000, or 8.0%, to
$11.2 million at June 30, 2003 from $10.4 million at December 31, 2002. The
balance of this asset category is subject to a high degree of variability
depending on, among other things, recent mortgage loan rates and the timing of
loan sales into the secondary market. During the six months ended June 30,
2003, $84.9 million in real estate mortgages were originated for sale and
$84.1 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased by
$16.7 million or 2.0% to $839.4 million at June 30, 2003 from $822.7 million
at December 31, 2002. The mix of loan types within the Company's portfolio
remained relatively unchanged, reflecting 77% commercial, 5% real estate and
18% consumer loans at June 30, 2003 compared to 76% commercial, 6% real estate
and 18% consumer loans at December 31, 2002.
The allowance for loan losses increased $253,000, or 2.7%, to $9.8
million at June 30, 2003 from $9.5 million at December 31, 2002. Net
charge-offs for the six months ended June 30, were $1.1 million in 2003 and
$311,000 in 2002. The increase in charge-offs was primarily due to one
commercial credit. The allowance for loan losses at June 30, 2003 was 1.17% of
total loans, net of residential mortgage loans held for sale on the secondary
market, versus 1.16% at December 31, 2002.
The Company has a relatively high percentage of commercial and commercial
real estate loans, most of which are extended to small or medium-sized
businesses. Commercial loans represent higher dollar loans to fewer customers
22
and therefore higher credit risk. Pricing is adjusted to manage the higher
credit risk associated with these types of loans. The majority of fixed rate
mortgage loans, which represent increased interest rate risk, are sold in the
secondary market, as well as some variable rate mortgage loans. The remainder
of the variable rate mortgage loans and a small number of fixed rate mortgage
loans are retained. Management believes the allowance for loan losses is at a
level commensurate with the overall risk exposure of the loan portfolio.
However, as a result of the continuing difficult economic climate, certain
borrowers may experience difficulty and the level of non-performing loans,
charge-offs, and delinquencies could rise and require further increases in the
provision.
Loans are charged against the allowance for loan losses when management
believes that the collectibility of the principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance. The allowance is an amount
that management believes will be adequate to absorb probable losses relating
to specifically identified loans based on an evaluation as well as other
probable incurred losses inherent in the loan portfolio. The evaluations take
into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans,
and current economic conditions that may affect the borrower's ability to
repay. Management also considers trends in adversely classified loans based
upon a monthly review of those credits. An appropriate level of general
allowance is determined based on the application of loss percentages to graded
loans by categories. Federal regulations require insured institutions to
classify their own assets on a regular basis. The regulations provide for
three categories of classified loans - substandard, doubtful and loss. The
regulations also contain a special mention category. Special mention is
defined as loans that do not currently expose an insured institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof
is classified as loss, the insured institution must either establish specified
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. At June 30, 2003, on the basis of
management's review of the loan portfolio, the Company had $43.1 million of
assets classified special mention, $25.8 million classified as substandard,
$254,000 classified as doubtful and $0 classified as loss as compared to $47.6
million, $27.0 million, $211,000 and $200,000 at December 31, 2002.
Classified loan percentages of estimated loss are as follows: Special
Mention-5%; Substandard-15%; Doubtful-50%; and Loss-100%. Management
additionally provides a reserve estimate for incurred losses in non-classified
loans ranging from 0.20% to 0.75%. Allowance estimates are developed by
management in consultation with regulatory authorities, taking into account
both actual loss experience and peer group loss experience, and are adjusted
23
for current economic conditions. Allowance estimates are considered a prudent
measurement of the risk in the Company's loan portfolio and are applied to
individual loans based on loan type. In accordance with FASB Statements 5 and
114, the allowance is provided for losses that have been incurred as of the
balance sheet date and is based on past events and current economic
conditions, and does not include the effects of expected losses on specific
loans or groups of loans that are related to future events or expected changes
in economic conditions.
At June 30, 2003, total nonperforming loans decreased by $1.0 million to
$6.6 million from $7.6 million at December 31, 2002. Loans delinquent 90 days
or more that were included in the accompanying financial statements as
accruing totaled $3.1 million at June 30, 2003 and $3.4 million at December
31, 2002. Total impaired loans decreased by $1.0 million to $6.3 million at
June 30, 2003 from $7.3 million at December 31, 2002. The decrease in the
impaired loans category resulted primarily from payments received on two
commercial credits totaling $1.2 million. The decrease in nonperforming loans
also resulted from the payments on the aforementioned loans. The impaired loan
total includes $3.2 million in nonaccrual loans. A loan is impaired when full
payment under the original loan terms is not expected. Impairment is evaluated
in total for smaller-balance loans of similar nature such as residential
mortgage, consumer, and credit card loans, and on an individual loan basis for
other loans. If a loan is impaired, a portion of the allowance may be
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate or at the fair value of
collateral if repayment is expected solely from the collateral.
Total deposits increased by $52.9 million, or 5.8%, to $966.2 million at
June 30, 2003 from $913.3 million at December 31, 2002. The increase resulted
from increases of $45.6 million in NOW accounts, $31.4 million in Investors'
Weekly accounts, $5.9 million in savings accounts and $1.3 million in money
market accounts. Offsetting these increases were declines of $22.0 million in
certificates of deposit and $9.3 million in demand deposits.
Total short-term borrowings decreased by $57.4 million, or 31.0%, to
$127.6 million at March 31, 2003 from $184.9 million at December 31, 2002. The
decrease resulted from declines of $26.2 million in securities sold under
agreements to repurchase, $13.0 million in federal funds purchased and $16.0
million in other borrowings, primarily short-term advances from the Federal
Home Loan Bank of Indianapolis.
Total stockholders' equity increased by $3.7 million, or 4.4%, to $87.5
million at June 30, 2003 from $83.9 million at December 31, 2002. Net income
of $7.3 million, less dividends of $2.2 million, less the decrease in the
accumulated other comprehensive income of $2.6 million, plus $39,000 for the
cost of treasury stock sold plus $81,000 for stock issued through options
exercises, comprised most of this increase. In addition, effective January 1,
24
2003, the Company's directors' deferred compensation plan was amended to no
longer permit diversification outside of Company stock and to require that
settlement of deferred balances be made in shares of Company stock. In
accordance with EITF 97-14: "Accounting for Deferred Compensation Arrangements
Where Amounts Earned Are Held in a Rabbi Trust and Invested," on the date of
the plan change the $1.1 million current value of the liability for the
Company shares was transferred to additional paid-in capital from other
liabilities.
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 June 30, 2003,
the Company's Tier 1 leverage capital ratio, Tier 1 risk based capital ratio
and total risk based capital ratio were 8.2%, 10.6% and 11.7%, 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 2003. The policy sets guidelines for
balance sheet structure, which are designed to protect the Company from the
impact that interest rate changes could have on net income, but does not
necessarily indicate the effect on future net interest income. The Company,
through its Asset/Liability Committee, manages interest rate risk by
monitoring the computer simulated earnings impact of various rate scenarios
and general market conditions. The Company then modifies its long-term risk
parameters by attempting to generate the type of loans, investments, and
deposits that currently fit the Company's needs, as determined by the
Asset/Liability Committee. This computer simulation analysis measures the net
interest income impact of various interest rate scenario changes during the
next 12 months. If the change in net interest income is less than 3% of
primary capital, the balance sheet structure is considered to be within
acceptable risk levels. At June 30, 2003, the Company's potential pretax
exposure was within the Company's policy limit, and not significantly
different from December 31, 2002.
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
25
Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of June 30, 2003. Based on that evaluation, the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that the Company's disclosure controls and procedures were
effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls.
FORWARD-LOOKING STATEMENTS
This document contains, and future oral and written statements of the
Company and its management may contain, forward-looking statements, within the
meaning of such term in the Private Securities Litigation Reform Act of 1995,
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of the Company. Forward-looking
statements, which may be based upon beliefs, expectations and assumptions of
the Company's management and on information currently available to management,
are generally identifiable by the use of words such as "believe," "expect,"
"anticipate," "plan," "intend," "estimate," "may," "will," "would," "could,"
"should" or other similar expressions. Additionally, all statements in this
document, including forward-looking statements, speak only as of the date they
are made, and the Company undertakes no obligation to update any statement in
light of new information or future events.
The Company's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors, which could have a
material adverse effect on the operations and future prospects of the Company
and its subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which
may be less favorable than expected and may result in, among other
things, a deterioration in the credit quality and value of the Company's
assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws,
regulations and policies affecting banking, securities, insurance and
monetary and financial matters.
o The effects of changes in interest rates (including the effects of
changes in the rate of prepayments of the Company's assets) and the
policies of the Board of Governors of the Federal Reserve System.
26
o The ability of the Company to compete with other financial institutions
as effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain
existing customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such
as the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to
the Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives
and employees in an effective manner.
o Consumer spending and saving habits, which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses, which
may be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies, the Financial Accounting Standards
Board, the Securities and Exchange Commission and the Public Company
Accounting Oversight Board.
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
27
results, is included in the Company's filings with the Securities and Exchange
Commission.
28
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 2003
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 and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 8, 2003, the Company's annual meeting of stockholders was
held. At the meeting, Crowe Chizek and Company LLC was appointed as
the Company's independent auditors for the year ended December 31,
2003, and R. Douglas Grant, Jerry L. Helvey, Allan J. Ludwig, D. Jean
Northenor, Emily Pichon and Richard L. Pletcher were elected to serve
as directors with terms expiring in 2006. As disclosed in the
Company's proxy statement relating to the annual meeting, Mr. Grant
retired from the board in June, 2003, and Ms. Northenor and Mr. Helvey
intend to retire before the end of 2003. Continuing as directors until
2004 are Anna K. Duffin, L. Craig Fulmer, Charles E. Niemier, Donald
B. Steininger and Terry L. Tucker. Continuing as directors until 2005
are Robert E. Bartels, Jr., Michael L. Kubacki, Steven D. Ross and M.
Scott Welch.
Election of Directors:
For Withheld
--------- --------
R. Douglas Grant 4,282,510 311,007
Jerry L. Helvey 4,560,533 32,984
Allan J. Ludwig 4,149,398 444,119
D. Jean Northenor 4,317,439 276,078
Emily Pichon 4,562,998 30,519
Richard L. Pletcher 4,559,982 33,535
29
Ratification of Auditors:
For Withheld
--------- --------
Crowe Chizek and Company LLC 4,397,188 196,329
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
b. Reports
A report on Form 8-K was filed on July 15, 2003 under Item 5 which
reported the Company's second quarter financial information in the
form of a press release.
A report on Form 8-K was filed on April 15, 2003 under Item 5
which reported the Company's first quarter financial information
in the form of a press release.
30
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 2003
Part II - Other Information
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
(Registrant)
Date: August 5, 2003 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: August 5, 2003 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: August 5, 2003 /s/Teresa A. Bartmen
Teresa A. Bartman - Vice President and
Controller
31