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, 2004
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 October 31, 2004
Common Stock, No Par Value 5,847,103
LAKELAND FINANCIAL CORPORATION
Form 10-Q Quarterly Report
Table of Contents
PART I.
Page Number
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . 26
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 29
Item 2. Unregistered Sales of Equity 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 . . . . . . . . . . . . . . . . . . . . 29
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 30
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 31
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 1 - FINANCIAL STATEMENTS
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2004 and December 31, 2003
(in thousands)
(Page 1 of 2)
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 47,134 $ 52,297
Short-term investments 6,696 5,144
------------ ------------
Total cash and cash equivalents 53,830 57,441
Securities available-for-sale:
U. S. Treasury and government agency securities 21,950 17,280
Mortgage-backed securities 208,902 211,142
State and municipal securities 54,131 52,945
------------ ------------
Total securities available-for-sale
(carried at fair value) 284,983 281,367
Real estate mortgages held-for-sale 2,298 3,431
Loans:
Total loans 952,671 870,882
Less: Allowance for loan losses 10,741 10,234
------------ ------------
Net loans 941,930 860,648
Land, premises and equipment, net 25,372 26,157
Accrued income receivable 5,254 5,010
Goodwill 4,970 4,970
Other intangible assets 1,299 1,460
Other assets 29,598 30,930
------------ ------------
Total assets $ 1,349,534 $ 1,271,414
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2004 and December 31, 2003
(in thousands except for share and per share data)
(Page 2 of 2)
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 211,262 $ 185,734
Interest bearing deposits 832,251 740,657
------------ ------------
Total deposits 1,043,513 926,391
Short-term borrowings:
Federal funds purchased 22,500 24,000
Securities sold under agreements
to repurchase 71,794 102,601
U.S. Treasury demand notes 2,792 3,160
Other borrowings 60,000 55,000
------------ ------------
Total short-term borrowings 157,086 184,761
Accrued expenses payable 7,548 7,804
Other liabilities 1,676 1,461
Long-term borrowings 10,046 30,047
Subordinated debentures 30,928 30,928
------------ ------------
Total liabilities 1,250,797 1,181,392
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,876,744 shares issued and 5,842,377 outstanding as of
September 30, 2004, and 5,834,744 shares issued and 5,788,263
outstanding at December 31, 2003 1,453 1,453
Additional paid-in capital 11,461 10,509
Retained earnings 87,359 80,260
Accumulated other comprehensive loss (796) (1,282)
Treasury stock, at cost (740) (918)
------------ ------------
Total stockholders' equity 98,737 90,022
------------ ------------
Total liabilities and stockholders' equity $ 1,349,534 $ 1,271,414
============ ============
<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 Nine Months Ended September 30, 2004 and 2003
(in thousands except for share and per share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 12,352 $ 11,543 $ 35,255 $ 35,453
Tax exempt 67 74 206 203
------------ ------------ ------------ ------------
Total loan income 12,419 11,617 35,461 35,656
Short-term investments 33 48 82 133
Securities:
U.S. Treasury and government agency securities 191 145 534 460
Mortgage-backed securities 1,780 2,473 5,484 8,099
State and municipal securities - tax exempt 585 550 1,757 1,475
------------ ------------ ------------ ------------
Total interest and dividend income 15,008 14,833 43,318 45,823
INTEREST EXPENSE
- ----------------
Interest on deposits 3,249 3,421 9,381 10,909
Interest on short-term borrowings 517 244 1,215 897
Interest on long-term debt 428 763 1,422 2,318
------------ ------------ ------------ ------------
Total interest expense 4,194 4,428 12,018 14,124
------------ ------------ ------------ ------------
NET INTEREST INCOME 10,814 10,405 31,300 31,699
- -------------------
Provision for loan losses 150 380 648 1,764
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,664 10,025 30,652 29,935
- ------------------------- ------------ ------------ ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage fees 800 627 2,319 1,802
Service charges on deposit accounts 1,840 1,736 5,194 5,136
Credit card fee income 576 487 1,657 1,313
Other income (net) 884 1,256 2,943 2,908
Net gains on sale of real estate mortgages
held for sale 431 383 724 2,655
Net securities losses 0 (8) 0 (8)
------------ ------------ ------------ ------------
Total noninterest income 4,531 4,481 12,837 13,806
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 4,921 5,076 14,705 14,789
Occupancy and equipment expense 1,203 1,192 3,334 3,772
Data processing expense 656 562 1,901 1,835
Credit card interchange 404 285 1,037 728
Other expense 2,017 1,981 6,327 6,210
------------ ------------ ------------ ------------
Total noninterest expense 9,201 9,096 27,304 27,334
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and Nine Months Ended September 30, 2004 and 2003
(in thousands except for share and per share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 5,994 5,410 16,185 16,407
- --------------------------------
Income tax expense 2,043 1,819 5,388 5,552
------------ ------------ ------------ ------------
NET INCOME $ 3,951 $ 3,591 $ 10,797 $ 10,855
- ---------- ============ ============ ============ ============
Other comprehensive income/(loss), net of tax:
Unrealized gain/(loss) on available-
for-sale securities 3,007 (1,399) 486 (3,963)
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME $ 6,958 $ 2,192 $ 11,283 $ 6,892
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,874,981 5,819,671 5,859,191 5,816,830
BASIC EARNINGS PER COMMON SHARE $ 0.67 $ 0.62 $ 1.84 $ 1.87
- ------------------------------- ============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 6,058,608 6,017,241 6,053,125 5,982,283
DILUTED EARNINGS PER SHARE $ 0.65 $ 0.60 $ 1.78 $ 1.81
- -------------------------- ============ ============ ============ ============
<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 Nine Months Ended September 30, 2004 and 2003
(in thousands)
(Unaudited)
(Page 1 of 2)
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 10,797 $ 10,855
------------ ------------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 1,492 1,675
Provision for loan losses 648 1,764
Amortization of intangible assets 161 132
Amortization of mortgage servicing rights 408 541
Recovery of mortgage servicing rights impairment (85) (107)
Loans originated for sale (48,555) (128,014)
Net gain on sale of loans (724) (2,655)
Proceeds from sale of loans 49,977 130,401
Net loss on sale of premises and equipment 91 1
Net loss on sale of securities available-for-sale 0 8
Net securities amortization 2,817 1,065
Stock compensation expense 33 0
Earnings on life insurance (466) (518)
Net change:
Income receivable (244) 55
Accrued expenses payable (225) (151)
Other assets 2,008 (364)
Other liabilities 215 (432)
------------ ------------
Total adjustments 7,551 3,401
------------ ------------
Net cash from operating activities 18,348 14,256
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 52,098 110,508
Purchases of securities available-for-sale (57,774) (119,743)
Purchase of life insurance (117) 0
Net increase in total loans (81,937) (27,801)
Proceeds from sales of land, premises and equipment 74 0
Purchase of land, premises and equipment (872) (3,351)
------------ ------------
Net cash from investing activities (88,528) (40,387)
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2004 and 2003
(in thousands)
(Unaudited)
(Page 2 of 2)
2004 2003
------------ ------------
Cash flows from financing activities:
Net increase in total deposits $ 117,122 $ 88,712
Net decrease in short-term borrowings (27,675) (85,914)
Payments on long-term borrowings (20,001) (1,301)
Dividends paid (3,572) (3,199)
Proceeds from stock options exercise 852 333
(Purchase) sale of treasury stock (157) (43)
------------ ------------
Net cash from financing activities 66,569 (1,412)
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,611) (27,543)
Cash and cash equivalents at beginning of the period 57,441 87,149
------------ ------------
Cash and cash equivalents at end of the period $ 53,830 $ 59,606
============ ============
Cash paid during the period for:
Interest $ 11,437 $ 14,668
============ ============
Income taxes $ 3,602 $ 5,881
============ ============
Loans transferred to other real estate $ 7 $ 1,530
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
6
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
This report is filed for Lakeland Financial Corporation (the "Company")
and its wholly-owned subsidiary, Lake City Bank (the "Bank"). All significant
inter-company balances and transactions have been eliminated in consolidation.
Also included is the Bank's wholly-owned subsidiary, LCB Investments Limited
("LCB Investments").
The unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (all of which are normal and recurring
in nature) considered necessary for a fair presentation have been included.
Operating results for the three-month and nine-month periods ending September
30, 2004 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2004. The 2003 Lakeland Financial Corporation
Annual Report on Form 10-K should be read in conjunction with these
statements.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
Emerging Issues Task Force (EITF) Issue 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
EITF 03-1 provides application guidance that should be used to determine when
an investment is considered impaired, whether that impairment is
other-than-temporary, and the recognition of an impairment loss. The guidance
also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. In September 2004, the FASB delayed the accounting requirements
of EITF 03-1 until additional implementation guidance is issued and goes into
effect.
NOTE 3. EARNINGS PER SHARE
Basic earnings per common share is based upon weighted-average common
shares outstanding. Diluted earnings per share show the dilutive effect of
additional common shares issueable.
7
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income at the time of grant, as all options granted had an exercise price
equal to or greater than the market price of the underlying common stock at
date of grant. No additional options were granted in the first nine months of
2004. 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.
Nine Months Ended
September 30,
2004 2003
--------- ----------
Net income (in thousands) as reported $ 10,797 $ 10,855
Deduct: stock-based compensation expense
determined under fair value based method 312 403
--------- ----------
Pro forma net income $ 10,485 $ 10,452
========= ==========
Basic earnings per common share as reported $ 1.84 $ 1.87
Pro forma basic earnings per share $ 1.79 $ 1.80
Diluted earnings per share as reported $ 1.78 $ 1.81
Pro forma diluted earnings per share $ 1.73 $ 1.75
Three Months Ended
September 30,
2004 2003
--------- ----------
Net income (in thousands) as reported $ 3,951 $ 3,591
Deduct: stock-based compensation expense
determined under fair value based method 103 134
--------- ----------
Pro forma net income $ 3,848 $ 3,457
========= ==========
Basic earnings per common share as reported $ 0.67 $ 0.62
Pro forma basic earnings per share $ 0.66 $ 0.59
Diluted earnings per share as reported $ 0.65 $ 0.60
Pro forma diluted earnings per share $ 0.64 $ 0.57
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet at September 30, 2004 reflects the acquisition of
34,367 shares of Company common stock to offset a liability for a directors'
deferred compensation plan. These shares are treated as outstanding when
computing the weighted-average common shares outstanding for the calculation
of both basic and diluted earnings per share.
8
NOTE 4. LOANS
September 30, December 31,
2004 2003
------------ ------------
(in thousands)
Commercial and industrial loans $ 656,343 $ 593,194
Agri-business and agricultural loans 88,069 82,262
Real estate mortgage loans 44,098 40,118
Real estate construction loans 5,242 3,932
Installment loans and credit cards 158,919 151,376
------------ ------------
Total loans $ 952,671 $ 870,882
============ ============
Impaired loans $ 9,942 $ 3,039
Non-performing loans $ 10,600 $ 3,744
NOTE 5. EMPLOYEE BENEFIT PLANS
Components of Net Periodic Benefit Cost
Nine Months Ended September 30
----------------------------------
Pension Benefits SERP Benefits
---------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 112 117 62 68
Expected return on plan assets (94) (106) (75) (71)
Recognized net actuarial loss 29 21 27 22
---- ---- ---- ----
Net pension expense $ 47 $ 32 $ 14 $ 19
==== ==== ==== ====
9
Three Months Ended September 30
----------------------------------
Pension Benefits SERP Benefits
---------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 38 39 20 23
Expected return on plan assets (32) (35) (25) (24)
Recognized net actuarial loss 10 7 9 7
---- ---- ---- ----
Net pension expense $ 16 $ 11 $ 4 $ 6
==== ==== ==== ====
The Company previously disclosed in its financial statements for the year
ended December 31, 2003, that it expected to contribute $299,000 to its
pension plan and $119,000 to its SERP plan in 2004. As of September 30, 2004,
$119,000 had been contributed to the SERP plan and $284,000 to the pension
plan. The Company does not anticipate making any additional contributions to
its pension plan or SERP plan during the remainder of 2004.
NOTE 6. RECLASSIFICATIONS
Certain amounts appearing in the financial statements and notes thereto
for prior periods have been reclassified to conform with the current
presentation. The reclassification had no effect on net income or
stockholders' equity as previously reported.
10
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
September 30, 2004
OVERVIEW
Lakeland Financial Corporation is the holding company for Lake City Bank.
The Company is headquartered in Warsaw, Indiana and operates 43 offices in 12
counties in northern Indiana. The Company earned $10.8 million for the first
nine months of 2004, versus $10.9 million in the same period of 2003, a
decrease of 0.5%. Earnings were negatively impacted by a $969,000 decrease in
noninterest income and a $399,000 decrease in net interest income. Offsetting
these negative impacts were decreases of $1.1 million in the provision for
loan losses and $30,000 in noninterest expense. Basic earnings per share for
the first nine months of 2004 were $1.84 per share versus $1.87 per share for
the first nine months of 2003. Diluted earnings per share reflect the
potential dilutive impact of stock options granted under the stock option
plan. Diluted earnings per share for the first nine months of 2004 were $1.78
per share, versus $1.81 per share for the first nine months of 2003.
Net income for the third quarter of 2004 was $4.0 million, an increase of
10.0% versus $3.6 million for the comparable period of 2003. Basic earnings
per share for the third quarter of 2004 were $0.67 per share, versus $0.62 per
share for the third quarter of 2003. Diluted earnings per share for the third
quarter of 2004 were $0.65 per share, versus $0.60 per share for the third
quarter of 2003.
RESULTS OF OPERATIONS
Net Interest Income
For the nine-month period ended September 30, 2004, net interest income
totaled $31.3 million, a decrease of 1.3%, or $399,000 versus the first nine
months of 2003. For the three-month period ended September 30, 2004, net
interest income totaled $10.8 million, an increase of 3.9%, or $409,000 over
the same period of 2003. Net interest income decreased in the nine-month
period of 2004 versus the comparable period of 2003, primarily due to a 27
basis point decline in the net interest margin from 3.84% to 3.57%. For the
nine-month period ended September 30, 2004, average earning assets increased
by $75.6 million, or 6.7%, to $1.206 billion, and average noninterest bearing
demand deposits increased by $33.5 million, or 19.8%, to $202.5 million,
versus the same period in 2003. Net interest income increased in the
three-month period ended September 30, 2004 versus the comparable period of
2003 primarily due to an $87.4 million increase in average earning assets
11
combined with a $33.7 million increase in average noninterest bearing demand
deposits. For the three-month period ended September 30, 2004, the net
interest margin declined 11 basis points to 3.60%, versus the comparable
period of 2003.
Given the Company's mix of interest earning assets and interest bearing
liabilities at September 30, 2004, the net interest margin could be expected
to increase in a rising rate environment. Management expects the net interest
margin will improve during the remainder of 2004, as the effects of recent
rate increases by the Federal Reserve are felt.
During the first nine months of 2004, total interest and dividend income
decreased by $2.5 million, or 5.5% to $43.3 million, versus $45.8 million
during the first nine months of 2003. During the third quarter of 2004,
interest and dividend income increased $175,000, or 1.2%, to $15.0 million,
versus $14.8 million during the same quarter of 2003. The tax equivalent yield
on average earning assets decreased by 52 basis points to 4.9% for the
nine-month period ended September 30, 2004 versus the same period of 2003. For
the three-month period ended September 30, 2004, the yield decreased 22 basis
points to 5.0% from the yield for the three-month period ended September 30,
2003.
The average daily loan balances for the first nine months of 2004
increased 8.7% to $916.2 million, over the average daily loan balances of
$843.3 million for the same period of 2003. During the same period, loan
interest income declined by $195,000, or 0.6%, to $35.5 million. The decrease
was the result of a 36 basis point decrease in the tax equivalent yield on
loans to 5.2% from 5.5% in the first nine months of 2003. The average daily
loan balances for the third quarter of 2004 increased $86.5 million, or 10.1%,
to $939.9 million, versus $853.4 million for the same period of 2003. During
the same period, loan interest income increased by $802,000, or 6.9%, to $12.4
million versus $11.6 million during the third quarter of 2003. The tax
equivalent yield on loans was unchanged at 5.3% during the third quarters of
2004 and 2003.
The average daily securities balances for the first nine months of 2004
increased $9.8 million, or 3.6%, to $280.7 million, versus $270.9 million for
the same period of 2003. During the same periods, income from securities
declined by $2.3 million, or 22.5%, to $7.8 million versus $10.0 million
during the first nine months of 2003. The decrease was primarily the result of
a 120 basis point decline in the tax equivalent yields on securities, to 4.1%
versus 5.3% in the first nine months of 2003. The average daily securities
balances for the third quarter of 2004 increased $12.2 million, or 4.5%, to
$279.9 million, versus $267.8 million for the same period of 2003. During the
same periods, income from securities declined by $612,000, or 19.3%, to $2.6
million versus $3.2 million during the third quarter of 2003. The decrease was
primarily the result of a 106 basis point decrease in the tax equivalent yield
on securities, to 4.1%, versus 5.1% in the third quarter of 2003.
12
Total interest expense decreased $2.1 million, or 14.9%, to $12.0 million
for the nine-month period ended September 30, 2004, from $14.1 million for the
comparable period in 2003. The decrease was primarily the result of a 34 basis
point decrease in the Company's daily cost of funds to 1.32%, versus 1.66% for
the same period of 2003. Total interest expense decreased $234,000, or 5.3%,
to $4.2 million for the three-month period ended September 30, 2004, from $4.4
million for the comparable period in 2003. The decrease was primarily the
result of a 17 basis point decrease in the Company's daily cost of funds to
1.35%, versus 1.52% for the same period of 2003.
On an average daily basis, total deposits (including demand deposits)
increased $40.1 million, or 4.3%, to $1.003 billion for the nine-month period
ended September 30, 2004, versus $961.8 million in the same period in 2003.
The average daily deposit balances for the third quarter of 2004 increased
$39.6 million, or 4.0%, to $1.022 billion from $982.6 million during the third
quarter of 2003. On an average daily basis, noninterest bearing demand
deposits increased $33.5 million, or 19.8% and $33.7 million, or 18.9% for the
nine and three-month periods ended September 30, 2004, versus the same periods
in 2003. When comparing the nine months ended September 30, 2004 with the same
period of 2003, the average daily balance of time deposits, which pay a higher
rate of interest compared to demand deposit and transaction accounts,
decreased $68.4 million and the rate paid on such accounts was unchanged at
2.5% versus the same period in 2003. In the third quarter of 2004, the average
daily balance of time deposits decreased by $47.1 million and the rate paid on
such accounts increased by 21 basis points versus the same period in 2003. The
increase was primarily the result of a time deposit promotion that ran during
the first quarter of 2004, as well as the general increase in interest rates.
Management believes that it is critical to grow demand deposit accounts
in both the dollar volume and total number of accounts. These accounts
typically provide the Company with opportunities to expand into ancillary
activities for both retail and commercial customers. In addition, they
represent low cost deposits. Furthermore, the Company is focused on growing
transaction money market accounts which also provide a reasonable cost of
funds and generally represent relationship accounts. Average daily balances of
borrowings increased $36.0 million, or 20.9%, to $208.6 million for the nine
months ended September 30, 2004 versus $172.6 million for the same period in
2003, and increased $44.0 million, or 26.4% for the three months ended
September 30, 2004. The rate on borrowings decreased 78 basis points and 58
basis points, respectively, when comparing the nine and three month periods of
2004 with the same periods of 2003. On an average daily basis, total deposits
(including demand deposits) and purchased funds increased 6.8% and 7.3%,
respectively, when comparing the nine and three month periods ended September
30, 2004 versus the same periods in 2003. 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)
Nine Months Ended September 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------ ----------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 907,573 $ 35,255 5.19 % $ 835,908 $ 35,453 5.67 %
Tax exempt (1) 8,655 275 4.24 7,362 270 4.90
Investments: (1)
Available for sale 280,704 8,658 4.12 270,941 10,781 5.32
Short-term investments 5,779 46 1.20 10,456 81 1.04
Interest bearing deposits 3,782 36 1.27 6,248 52 1.11
---------- ---------- ---------- ----------
Total earning assets 1,206,493 44,270 4.90 % 1,130,915 46,637 5.42 %
Nonearning assets:
Cash and due from banks 50,109 0 45,558 0
Premises and equipment 25,888 0 25,615 0
Other nonearning assets 42,549 0 40,011 0
Less allowance for loan loss losses (10,515) 0 (9,847) 0
---------- ---------- ---------- ----------
Total assets $ 1,314,524 $ 44,270 $ 1,232,252 $ 46,637
========== ========== ========== ==========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2004
and 2003. 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 nine months
ended September 30, 2004 and 2003, 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)
Nine Months Ended September 30,
-----------------------------------------------------------------------------
2004 2003
----------------------------------- ------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 68,375 $ 65 0.13 % $ 60,101 $ 193 0.43 %
Interest bearing checking accounts 348,794 2,097 0.80 281,178 2,366 1.12
Time deposits:
In denominations under $100,000 216,224 4,575 2.83 205,472 4,764 3.10
In denominations over $100,000 166,816 2,644 2.12 246,010 3,586 1.95
Miscellaneous short-term borrowings 160,396 1,215 1.01 121,119 897 0.99
Long-term borrowings 48,200 1,422 3.94 51,494 2,296 5.96
---------- ---------- ---------- ----------
Total interest bearing liabilities 1,008,805 12,018 1.59 % 965,374 14,102 1.95 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 202,493 0 169,009 0
Other liabilities 8,145 0 10,474 0
Stockholders' equity 95,081 0 87,395 0
Total liabilities and stockholders'
equity ---------- ---------- ---------- ----------
$ 1,314,524 $ 12,018 $ 1,232,252 $ 14,102
========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 32,252 3.57 % $ 32,535 4.02 %
========== ==========
15
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Three Months Ended September 30,
----------------------------------------------------------------------------
2004 2003
----------------------------------- ----------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
---------- --------- ---------- ---------- ---------- ----------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 931,102 $ 12,352 5.34 % $ 845,388 $ 11,543 5.48 %
Tax exempt (1) 8,812 89 4.01 8,037 97 4.78
Investments: (1)
Available for sale 279,907 2,850 4.05 267,757 3,449 5.11
Short-term investments 5,090 17 1.33 14,067 31 0.87
Interest bearing deposits 4,445 16 1.43 6,724 17 1.00
---------- ---------- ---------- ----------
Total earning assets 1,229,356 15,324 4.96 % 1,141,973 15,137 5.18 %
Nonearning assets:
Cash and due from banks 50,910 0 46,685 0
Premises and equipment 25,674 0 26,442 0
Other nonearning assets 43,701 0 40,637 0
Less allowance for loan loss losses (10,673) 0 (9,984) 0
---------- ---------- ---------- ----------
Total assets $ 1,338,968 $ 15,324 $ 1,245,753 $ 15,137
========== ========== ========== ==========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2004
and 2003. 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 September 30, 2004 and 2003, 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 September 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------ ----------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
---------- ---------- ------ ---------- ---------- ------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 69,888 $ 17 0.10 % $ 62,757 $ 54 0.43 %
Interest bearing checking accounts 352,381 717 0.81 306,497 770 1.12
Time deposits:
In denominations under $100,000 220,473 1,559 2.81 202,165 1,496 2.94
In denominations over $100,000 167,229 956 2.27 232,677 1,101 1.88
Miscellaneous short-term borrowings 169,981 517 1.21 116,243 244 0.83
Long-term borrowings 40,974 428 4.16 50,666 741 5.80
---------- ---------- ---------- ----------
Total interest bearing liabilities 1,020,926 4,194 1.63 % 971,005 4,406 1.80 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 212,245 0 178,521 0
Other liabilities 8,308 0 8,328 0
Stockholders' equity 97,489 0 87,899 0
Total liabilities and stockholders'
equity ---------- ---------- ---------- ----------
$ 1,338,968 $ 4,194 $ 1,245,753 $ 4,406
========== ========== ========== ==========
Net interest differential - yield on
average daily earning assets $ 11,130 3.60 % $ 10,731 3.71 %
========== ==========
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 $648,000 and $150,000 were recorded
during the nine-month and three-month periods ended September 30, 2004, versus
provisions of $1.8 million and $380,000 recorded during the same periods of
2003. The decrease in the provision for loan losses for the periods ended
September 30, 2004 reflected a number of factors, including the level of
charge-offs, management's overall view on current credit quality, the amount
and status of impaired loans and the amount and status of past due accruing
loans (90 days or more), as discussed in more detail below in the analysis
relating to the Company's financial condition.
Noninterest Income
Noninterest income categories for the nine and three-month periods ended
September 30, 2004 and 2003 are shown in the following table:
Nine Months Ended
September 30,
---------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 2,319 $ 1,802 28.7 %
Service charges on deposits 5,194 5,136 1.1
Credit card fee income 1,657 1,313 26.2
Other income (net) 2,943 2,908 1.2
Net gains on the sale of real estate
mortgages held-for-sale 724 2,655 (72.7)
Net securities losses 0 (8) (100.0)
---------- ---------- ----------
Total noninterest income $ 12,837 $ 13,806 (7.0)%
========== ========== ==========
18
Three Months Ended
September 30,
---------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Trust and brokerage fees $ 800 $ 627 27.6 %
Service charges on deposits 1,840 1,736 6.0
Credit card fee income 576 487 18.3
Other income (net) 884 1,256 (29.6)
Net gains (losses) on the sale of real
estate mortgages held for sale 431 383 12.5
Net securities losses 0 (8) (100.0)
---------- ---------- ----------
Total noninterest income $ 4,531 $ 4,481 1.1 %
========== ========== ==========
Trust fees increased $488,000 and $201,000, respectively, in the
nine-month and three-month periods ended September 30, 2004 versus the same
periods in 2003. The increases in 2004 were primarily in living trust, agency,
IRA and employee benefit plan fees, and were derived principally from the
Company's December 1, 2003 acquisition of Indiana Capital Management.
Brokerage fees increased $29,000 and decreased $28,000 respectively, in the
nine-month and three-month periods ended September 30, 2004 versus the same
periods in 2003.
Credit card fee income increased by $344,000 and $89,000, respectively,
in the nine-month and three-month periods ended September 30, 2004 versus the
same periods in 2003. The increases were driven by higher volume activity in
interchange and merchant fee income.
Other income consists of normal recurring fee income such as mortgage
service 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 income increased $35,000 and decreased
$372,000, respectively, in the nine-month and three-month periods ended
September 30, 2004 versus the same period of 2003. The primary drivers behind
the decrease in the three-month period were a $262,000 decrease in the
recovery of the non-cash impairment of the Bank's mortgage servicing rights
portfolio, a $43,000 decrease in operating lease income and a $43,000 loss on
the disposal of fixed assets.
19
The decrease in profits from the sale of mortgages resulted primarily
from a decrease in the volume of mortgages sold during both the nine-month and
three-month periods ended September 30, 2004 versus the same periods in 2003.
In addition, the timing of mortgage sales into the secondary market during the
second quarter of 2004 affected profits. During the first nine months of 2004,
the Company sold $49.7 million in mortgages versus $128.7 million in the
comparable period of 2003. During the third quarter of 2004, the Company sold
$15.6 million in mortgages versus $44.5 million in the third quarter of 2003.
The decreases in volume in 2004 were primarily the result of rising mortgage
rates during the second half of 2003 and during 2004, which has resulted in
decreased mortgage refinance activity and decreased demand for home mortgages
during 2004. Management does not expect that the high level of mortgage sales
gains experienced during 2003 will be repeated during the remainder of 2004.
Noninterest Expense
Noninterest expense categories for the nine and three-month periods ended
September 30, 2004, and 2003 are shown in the following table:
Nine Months Ended
September 30,
----------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 14,705 $ 14,789 (0.6)%
Occupancy and equipment expense 3,334 3,772 (11.6)
Data processing expense 1,901 1,835 3.6
Credit card interchange 1,037 728 42.5
Other expense 6,327 6,210 1.9
---------- ---------- ----------
Total noninterest expense $ 27,304 $ 27,334 (0.1)%
========== ========== ==========
Three Months Ended
September 30,
----------------------------------
Percent
2004 2003 Change
---------- ---------- ----------
(in thousands)
Salaries and employee benefits $ 4,921 $ 5,076 (3.1)%
Occupancy and equipment expense 1,203 1,192 0.9
Data processing expense 656 562 16.7
Credit card interchange 404 285 41.8
Other expense 2,017 1,981 1.8
---------- ---------- ----------
Total noninterest expense $ 9,201 $ 9,096 1.2 %
========== ========== ==========
20
Salaries and employee benefits were virtually unchanged in the first nine
months of 2004. Total employees remained stable with 450 at September 30,
2004, compared to 455 at September 30, 2003.
The decrease in occupancy and equipment expense reflected lower property
taxes, as well as lower depreciation expense due to the fact that much of the
equipment purchased for significant technology upgrades in 1998 and 1999 and
to ensure no interruption from Year 2000 issues, is now fully depreciated.
Credit card interchange fees increased during the nine-month and
three-month periods ended September 30, 2004, due to an increase in processing
costs charged by VISA and increased credit card usage by Bank customers during
those periods versus the same periods of 2003.
Other expense includes corporate and business development, data
processing fees, telecommunications, postage, and professional fees such as
legal, accounting, and directors' fees. Other expense increased slightly in
the nine-month and three-month periods ended September 30, 2004 versus the
comparable periods in 2003 primarily due to increases in corporate and
business development expense related to advertising.
Income Tax Expense
Income tax expense decreased $164,000, or 3.0%, for the first nine months
of 2004, compared to the same period in 2003. Income tax expense for the third
quarter of 2004 increased $224,000, or 12.3%, compared to the same period of
2003. The combined state franchise tax expense and the federal income tax
expense as a percentage of income before income tax expense decreased to 33.3%
during the first nine months of 2004 compared to 33.8% during the same period
in 2003. It increased to 34.1% for the third quarter of 2004, versus 33.6% for
the third quarter of 2003. The increase was driven by a decrease in the amount
of income derived from tax-advantaged sources.
FINANCIAL CONDITION
Critical Accounting Policies
Certain of the Company's accounting policies are important to the
portrayal of the Company's financial condition, since they require management
to make difficult, complex or subjective judgments, some of which may relate
to matters that are inherently uncertain. Estimates associated with these
policies are susceptible to material changes as a result of changes in facts
and circumstances. Some of the facts and circumstances which could affect
these judgments include changes in interest rates, in the performance of the
economy or in the financial condition of borrowers. Management believes that
21
its critical accounting policies include determining the allowance for loan
losses, determining the fair value of securities and other financial
instruments and the valuation of mortgage servicing rights. The Company's
critical accounting policies are discussed in detail in the Annual Report for
the year ended December 31, 2003 (incorporated by reference as part of the
Company's 10-K filing).
Total assets of the Company were $1.350 billion as of September 30, 2004,
an increase of $78.1 million, or 6.1%, when compared to $1.271 billion as of
December 31, 2003.
Total cash and cash equivalents decreased by $3.6 million, or 6.3%, to
$53.8 million at September 30, 2004 from $57.4 million at December 31, 2003.
Total securities available-for-sale increased by $3.6 million, or 1.3%,
to $285.0 million at September 30, 2004 from $281.4 million at December 31,
2003. The increase was a result of a number of transactions in the securities
portfolio. Securities purchases totaled $57.8 million, and the fair market
value of the securities portfolio increased by $757,000. The market value
increase was driven by a flattening of the yield curve during the third
quarter of 2004 which resulted in a decline in longer-term rates. These
increases were offset by securities paydowns totaling $49.4 million, and the
amortization of premiums, net of the accretion of discounts totaled $2.8
million. Maturities and calls of securities totaled $2.7 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 decreased by $1.1 million, or 32.0%,
to $2.3 million at September 30, 2004 from $3.4 million at December 31, 2003.
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 nine months ended September
30, 2004, $48.6 million in real estate mortgages were originated for sale and
$49.7 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased by
$81.8 million, or 9.4%, to $952.7 million at September 30, 2004 from $870.9
million at December 31, 2003. The mix of loan types within the Company's
portfolio was unchanged, reflecting 78% commercial, 5% real estate and 17%
consumer loans at both September 30, 2004 and December 31, 2003.
The Company has a relatively high percentage of commercial and commercial
real estate loans, most of which are extended to small or medium-sized
businesses. Commercial loans represent higher dollar loans to fewer customers
and therefore higher credit risk. Pricing is adjusted to manage the higher
credit risk associated with these types of loans. The majority of fixed rate
22
mortgage loans, which represent increased interest rate risk, are sold in the
secondary market, as well as some variable rate mortgage loans. The remainder
of the variable rate mortgage loans and a small number of fixed rate mortgage
loans are retained. Management believes the allowance for loan losses is at a
level commensurate with the overall risk exposure of the loan portfolio.
However, as a result of the slow economic recovery, certain borrowers may
experience difficulty and the level of non-performing loans, charge-offs, and
delinquencies could rise and require further increases in the provision for
loan losses.
Loans are charged against the allowance for loan losses when management
believes that the uncollectibility of the principal is confirmed. Subsequent
recoveries, if any, are credited to the allowance. The allowance is an amount
that management believes will be adequate to absorb probable incurred credit
losses relating to specifically identified loans based on an evaluation as
well as other probable incurred losses inherent in the loan portfolio. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to repay. Management also considers trends in adversely classified
loans based upon a monthly review of those credits. An appropriate level of
general allowance is determined based on the application of loss percentages
to graded loans by categories. Federal regulations require insured
institutions to classify their own assets on a regular basis. The regulations
provide for three categories of classified loans - substandard, doubtful and
loss. The regulations also contain a special mention category. Special mention
is defined as loans that do not currently expose an insured institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof
is classified as loss, the insured institution must either establish specified
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. At September 30, 2004, on the
basis of management's review of the loan portfolio, the Company had $35.4
million of assets classified special mention, $22.5 million classified as
substandard, $1.5 million classified as doubtful and $0 classified as loss as
compared to $41.9 million, $27.7 million, $869,000 and $0 at December 31,
2003.
Allowance estimates are developed by management in consultation with
regulatory authorities, taking into account actual loss experience, and are
adjusted for current economic conditions. Allowance estimates are considered a
prudent measurement of the risk in the Company's loan portfolio and are
applied to individual loans based on loan type. In accordance with FASB
Statements 5 and 114, the allowance is provided for losses that have been
incurred as of the balance sheet date and is based on past events and current
23
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. The following table summarizes the
loan loss reserve and nonperforming assets at September 30, 2004 and September
30, 2003.
September 30, September 30,
2004 2003
-------------- --------------
(in thousands)
ALLOWANCE FOR LOAN LOSSES:
Beginning balance, January 1 $ 10,234 $ 9,533
Provision for loan losses, year-to-date 648 1,764
Loans charged-off, year-to-date (381) (1,396)
Recoveries, year-to-date 240 163
-------------- --------------
Ending balance $ 10,741 $ 10,064
============== ==============
NONPERFORMING ASSETS:
Nonaccrual loans $ 7,779 $ 1,291
Loans past due over 90 days and accruing 2,821 3,226
Other real estate 277 1,530
Repossessions 28 120
-------------- --------------
Total nonperforming assets $ 10,905 $ 6,167
============== ==============
Total impaired loans increased by $6.9 million to $9.9 million at
September 30, 2004 from $3.0 million at December 31, 2003. The increase in the
impaired loans category resulted primarily from the addition of a single
commercial credit of $6.1 million. The borrower filed for chapter 11
bankruptcy late in the third quarter and is in the process of determining its
future business strategy. Borrower collateral and the personal guarantees of
its principals support the credit. The impaired loan total included $7.2
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 $117.1 million, or 12.6%, to $1.044 billion
at September 30, 2004 from $926.4 million at December 31, 2003. The increase
resulted from increases of $115.1 million in certificates of deposit, $25.5
24
million in demand deposits, $6.5 million in savings accounts and $648,000 in
NOW accounts. Offsetting these increases were declines of $17.4 million in
Investors' Money Market accounts and $13.2 million in money market accounts.
Total short-term borrowings decreased by $27.7 million, or 15.0%, to
$157.1 million at September 30, 2004 from $184.8 million at December 31, 2003.
The decrease resulted primarily from declines of $30.8 million in securities
sold under agreements to repurchase and $1.5 million in federal funds
purchased. Offsetting these decreases were increases of $5.0 million in other
borrowings, primarily short-term advances from the Federal Home Loan Bank of
Indianapolis.
Long-term borrowings decreased by $20.0 million, or 66.6%, to $10.0
million at September 30, 2004 from $30.0 million at December 31, 2003.
Long-term borrowings are primarily long-term advances from the Federal Home
Loan Bank of Indianapolis.
Total stockholders' equity increased by $8.7 million, or 9.7%, to $98.7
million at September 30, 2004 from $90.0 million at December 31, 2003. Net
income of $10.8 million, plus the increase in the accumulated other
comprehensive income of $486,000, less dividends of $3.7 million, plus $1.3
million for stock issued through options exercised and stock option expense,
minus $157,000 for the cost of treasury stock purchased, comprised most of
this increase.
The Federal Deposit Insurance Corporation's risk based capital
regulations require that all banking organizations maintain an 8.0% total risk
based capital ratio. The FDIC has also established definitions of "well
capitalized" as a 5.0% Tier I leverage capital ratio, a 6.0% Tier I risk based
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 September 30,
2004, the Company's Tier 1 leverage capital ratio, Tier 1 risk based capital
ratio and total risk based capital ratio were 9.2%, 11.7% and 12.7%,
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 2004. The policy sets guidelines for
balance sheet structure, which are designed to protect the Company from the
impact that interest rate changes could have on net income, but does not
necessarily indicate the effect on future net interest income. The Company,
through its Asset/Liability Committee, manages interest rate risk by
monitoring the computer simulated earnings impact of various rate scenarios
25
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, 2004, the Company's potential pretax
exposure was within the Company's policy limit, and not significantly
different from December 31, 2003.
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of September 30, 2004. 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:
26
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which
may be less favorable than expected and may result in, among other
things, a deterioration in the credit quality and value of the Company's
assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws,
regulations and policies affecting banking, securities, insurance and
monetary and financial matters.
o The effects of changes in interest rates (including the effects of
changes in the rate of prepayments of the Company's assets) and the
policies of the Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions
as effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The ability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such
as the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to
the Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives
and employees in an effective manner.
o Consumer spending and saving habits, which may change in a manner that
affects the Company's business adversely.
27
o Business combinations and the integration of acquired businesses, which
may be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies, the Financial Accounting Standards
Board, the Securities and Exchange Commission and the Public Company
Accounting Oversight Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Additional information concerning the Company and its business,
including other factors that could materially affect the Company's financial
results, is included in the Company's filings with the Securities and Exchange
Commission.
28
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 2004
Part II - Other Information
Item 1. Legal proceedings
-----------------
There are no material pending legal proceedings to which the Company
or its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-------------------------------------------------------------
The following table provides information as of September 30, 2004 with
respect to shares of common stock repurchased by the Company during
the quarter then ended:
Issuer Purchases of Equity Securities(a)
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number Average as Part of Publicly Yet Be Purchased
of Shares Price Paid Announced Plans Under the Plan or
Period Purchased Per Share or Programs Programs
- ------- ---------- ------- --------- -----------
July 1-31 2,144 $ 32.26 0 0
August 1-31 0 $ 0 0 0
September 1-30 0 $ 0 0 0
----- ------- --------- -----------
Total 2,144 $ 32.26
===== =======
(a) The shares purchased during the periods were credited to the deferred
share accounts of seven non-employee directors under the Company's
directors' deferred compensation plan.
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
29
Item 6. Exhibits
--------
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
30
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 2004
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 1, 2004 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: November 1, 2004 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: November 1, 2004 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
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