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, 2005
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 by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
YES [ ] NO [x]
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, 2005
Common Stock, No Par Value 5,946,742
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 . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . 27
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 30
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds. . . . . . . . . . . . . . . . . . . . 30
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 30
Item 4. Submission of Matters to a Vote of Security Holders . . . 30
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 31
Form 10-Q Signature Page. . . . . . . . . . . . . . . . . . . . . . 32
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 1 - FINANCIAL STATEMENTS
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2005 and December 31, 2004
(in thousands)
(Page 1 of 2)
September 30, December 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
Cash and due from banks $ 56,361 $ 81,144
Short-term investments 6,082 22,714
------------ ------------
Total cash and cash equivalents 62,443 103,858
Securities available-for-sale (carried at fair value) 289,198 286,582
Real estate mortgages held-for-sale 3,478 2,991
Loans, net of allowance for loan losses of $12,233 and $10,754 1,133,133 992,465
Land, premises and equipment, net 24,820 25,057
Bank owned life insurance 17,521 16,896
Accrued income receivable 6,503 5,765
Goodwill 4,970 4,970
Other intangible assets 1,087 1,245
Other assets 14,560 13,293
------------ ------------
Total assets $ 1,557,713 $ 1,453,122
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2005 and December 31, 2004
(in thousands except for share and per share data)
(Page 2 of 2)
September 30, December 31,
2005 2004
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 228,242 $ 237,261
Interest bearing deposits 1,022,728 878,138
------------ ------------
Total deposits 1,250,970 1,115,399
Short-term borrowings:
Federal funds purchased 2,600 20,000
Securities sold under agreements
to repurchase 70,626 88,057
U.S. Treasury demand notes 1,428 2,593
Other borrowings 70,000 75,000
------------ ------------
Total short-term borrowings 144,654 185,650
Accrued expenses payable 8,797 7,445
Other liabilities 1,847 1,889
Long-term borrowings 10,046 10,046
Subordinated debentures 30,928 30,928
------------ ------------
Total liabilities 1,447,242 1,351,357
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,985,354 shares issued and 5,946,864 outstanding as of
September 30, 2005, and 5,915,854 shares issued and 5,881,283
outstanding at December 31, 2004 1,453 1,453
Additional paid-in capital 14,259 12,463
Retained earnings 98,729 89,864
Accumulated other comprehensive loss (3,060) (1,267)
Treasury stock, at cost (910) (748)
------------ ------------
Total stockholders' equity 110,471 101,765
------------ ------------
Total liabilities and stockholders' equity $ 1,557,713 $ 1,453,122
============ ============
<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, 2005 and 2004
(in thousands except for share and per share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET INTEREST INCOME
- ----------------------------
Interest and fees on loans:
Taxable $ 17,894 $ 12,352 $ 48,561 $ 35,255
Tax exempt 47 67 132 206
Interest and dividends on securities:
Taxable 2,313 1,971 6,949 6,018
Tax exempt 585 585 1,759 1,757
Short-terminvestments 83 33 184 82
------------ ------------ ------------ ------------
Total interest income 20,922 15,008 57,585 43,318
Interest on deposits 6,609 3,249 16,139 9,381
Interest on short-term borrowings 1,207 517 2,950 1,215
Interest on long-term borrowings 572 428 1,607 1,422
------------ ------------ ------------ ------------
Total interest expense 8,388 4,194 20,696 12,018
------------ ------------ ------------ ------------
NET INTEREST INCOME 12,534 10,814 36,889 31,300
- -------------------
Provision for loan losses 659 150 1,779 648
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,875 10,664 35,110 30,652
- ------------------------- ------------ ------------ ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage income 742 800 2,261 2,319
Service charges on deposit accounts 1,860 1,840 5,112 5,194
Loan, insurance and service fees 440 521 1,333 1,706
Merchant card fee income 692 576 1,857 1,657
Other income 371 363 1,428 1,237
Net gains on sale of real estate mortgages
held for sale 275 431 726 724
------------ ------------ ------------ ------------
Total noninterest income 4,380 4,531 12,717 12,837
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 5,051 4,921 15,224 14,705
Net occupancy expense 728 634 2,059 1,802
Equipment costs 468 569 1,476 1,532
Data processing fees and supplies 586 656 1,715 1,901
Credit card interchange 442 404 1,158 1,037
Other expense 2,080 2,017 6,384 6,327
------------ ------------ ------------ ------------
Total noninterest expense 9,355 9,201 28,016 27,304
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and Nine Months Ended September 30, 2005 and 2004
(in thousands except for share and per share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 6,900 5,994 19,811 16,185
- --------------------------------
Income tax expense 2,378 2,043 6,830 5,388
------------ ------------ ------------ ------------
NET INCOME $ 4,522 $ 3,951 $ 12,981 $ 10,797
- ---------- ============ ============ ============ ============
Other comprehensive income/(loss), net of tax:
Unrealized gain/(loss) on available-
for-sale securities (1,552) 3,007 (1,793) 486
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME $ 2,970 $ 6,958 $ 11,188 $ 11,283
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,978,865 5,874,981 5,956,507 5,859,191
BASIC EARNINGS PER COMMON SHARE $ 0.76 $ 0.67 $ 2.18 $ 1.84
- ------------------------------- ============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 6,154,776 6,058,608 6,139,587 6,053,125
DILUTED EARNINGS PER SHARE $ 0.73 $ 0.65 $ 2.11 $ 1.78
- -------------------------- ============ ============ ============ ============
<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, 2005 and 2004
(in thousands)
(Unaudited)
(Page 1 of 2)
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 12,981 $ 10,797
------------ ------------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 1,214 1,492
Provision for loan losses 1,779 648
Amortization of intangible assets 158 161
Amortization of loan servicing rights 449 408
Net change in loan servicing rights valuation allowance (109) (85)
Loans originated for sale (34,192) (48,555)
Net gain on sale of loans (725) (724)
Proceeds from sale of loans 34,114 49,977
Net (gain) loss on sale of premises and equipment (74) 91
Net securities amortization 2,003 2,817
Stock compensation expense 0 33
Earnings on life insurance (593) (466)
Net change:
Accrued income receivable (738) (244)
Accrued expenses payable 2,417 (225)
Other assets (815) 2,008
Other liabilities (42) 215
------------ ------------
Total adjustments 4,846 7,551
------------ ------------
Net cash from operating activities 17,827 18,348
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 37,206 52,098
Purchases of securities available-for-sale (44,653) (57,774)
Purchase of life insurance (32) (117)
Net increase in total loans (142,447) (81,937)
Proceeds from sales of land, premises and equipment 591 74
Purchase of land, premises and equipment (1,494) (872)
------------ ------------
Net cash from investing activities (150,829) (88,528)
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2005 and 2004
(in thousands)
(Unaudited)
(Page 2 of 2)
2005 2004
------------ ------------
Cash flows from financing activities:
Net increase in total deposits $ 135,571 $ 117,122
Net decrease in short-term borrowings (40,996) (27,675)
Payments on long-term borrowings 0 (20,001)
Dividends paid (3,984) (3,572)
Proceeds from stock options exercise 1,158 852
Purchase of treasury stock (162) (157)
------------ ------------
Net cash from financing activities 91,587 66,569
------------ ------------
Net increase (decrease) in cash and cash equivalents (41,415) (3,611)
Cash and cash equivalents at beginning of the period 103,858 57,441
------------ ------------
Cash and cash equivalents at end of the period $ 62,443 $ 53,830
============ ============
Cash paid during the period for:
Interest $ 18,971 $ 11,437
============ ============
Income taxes $ 6,620 $ 3,602
============ ============
Loans transferred to other real estate $ 0 $ 7
============ ============
<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, 2005
(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, 2005 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2005. The 2004 Lakeland Financial Corporation
Annual Report on Form 10-K should be read in conjunction with these
statements.
NOTE 2. 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.
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
2005. 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.
7
Nine Months Ended
September 30,
2005 2004
--------- ---------
Net income (in thousands) as reported $ 12,981 $ 10,797
Deduct: stock-based compensation expense
determined under fair value based method 246 312
--------- ---------
Pro forma net income $ 12,735 $ 10,485
========= =========
Basic earnings per common share as reported $ 2.18 $ 1.84
Pro forma basic earnings per share $ 2.14 $ 1.79
Diluted earnings per share as reported $ 2.11 $ 1.78
Pro forma diluted earnings per share $ 2.07 $ 1.73
Three Months Ended
September 30,
2005 2004
--------- ---------
Net income (in thousands) as reported $ 4,522 $ 3,951
Deduct: stock-based compensation expense
determined under fair value based method 66 103
--------- ---------
Pro forma net income $ 4,456 $ 3,848
========= =========
Basic earnings per common share as reported $ 0.76 $ 0.67
Pro forma basic earnings per share $ 0.75 $ 0.66
Diluted earnings per share as reported $ 0.73 $ 0.65
Pro forma diluted earnings per share $ 0.72 $ 0.64
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet at September 30, 2005 reflects the holding of
38,490 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 3. LOANS
September 30, December 31,
2005 2004
------------ ------------
(in thousands)
Commercial and industrial loans $ 814,331 $ 688,211
Agri-business and agricultural loans 99,792 102,749
Real estate mortgage loans 62,563 47,642
Real estate construction loans 6,679 6,719
Installment loans and credit cards 162,005 158,065
------------ ------------
Subtotal 1,145,370 1,003,386
Less: Allowance for loan losses (12,233) (10,754)
Net deferred loan fees (4) (167)
------------ ------------
Loans, net $ 1,133,133 $ 992,465
============ ============
Impaired loans $ 7,207 $ 9,309
Non-performing loans $ 7,818 $ 9,991
Allowance for loan losses to total loans 1.07% 1.07%
Changes in the allowance for loan losses are summarized as follows:
Nine months ended
September 30,
------------------
2005 2004
-------- --------
Balance at beginning of period $ 10,754 $ 10,234
Provision for loan losses 1,779 648
Charge-offs (410) (381)
Recoveries 110 240
-------- --------
Net loans charged-off 300 141
-------- --------
Balance at end of period $ 12,233 $ 10,741
======== ========
9
NOTE 4. SECURITIES
The fair values of securities available for sale were as follows:
September 30, December 31,
2005 2004
------------ ------------
(in thousands)
U.S. Treasury securities $ 972 $ 989
U.S. Government agencies 30,691 22,885
Mortgage-backed securities 204,440 208,961
State and municipal securities 53,095 53,747
------------ ------------
Total $ 289,198 $ 286,582
============ ============
As of September 30, 2005, net unrealized losses on the total securities
available for sale portfolio totaled $3.0 million. As of December 31, 2004,
net unrealized losses on the total securities available for sale portfolio
totaled $142,000.
NOTE 5. EMPLOYEE BENEFIT PLANS
Components of Net Periodic Benefit Cost
Nine Months Ended September 30
----------------------------------
Pension Benefits SERP Benefits
---------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 112 112 60 62
Expected return on plan assets (109) (94) (77) (75)
Recognized net actuarial loss 28 29 33 27
---- ---- ---- ----
Net pension expense $ 31 $ 47 $ 16 $ 14
==== ==== ==== ====
10
Three Months Ended September 30
----------------------------------
Pension Benefits SERP Benefits
---------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 37 38 20 20
Expected return on plan assets (36) (32) (26) (25)
Recognized net actuarial loss 9 10 12 9
---- ---- ---- ----
Net pension expense $ 10 $ 16 $ 6 $ 4
==== ==== ==== ====
The Company previously disclosed in its financial statements for the year
ended December 31, 2004, that it expected to contribute $422,000 to its
pension plan and $106,000 to its SERP plan in 2005. As of September 30, 2005,
$106,000 had been contributed to the SERP plan and $468,000 to the pension
plan. The Company does not anticipate making any additional contributions to
its pension plan or SERP plan during the remainder of 2005.
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.
11
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
September 30, 2005
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 $13.0 million for the first
nine months of 2005, versus $10.8 million in the same period of 2004, an
increase of 20.2%. The increase was driven by a $5.6 million increase in net
interest income. Offsetting this positive impact were increases of $1.1
million in the provision for loan losses and $712,000 in noninterest expense.
Basic earnings per share for the first nine months of 2005 were $2.18 per
share versus $1.84 per share for the first nine months of 2004. 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 2005 were $2.11 per share, versus $1.78 per share for the first
nine months of 2004.
Net income for the third quarter of 2005 was $4.5 million, an increase of
14.5% versus $4.0 million for the comparable period of 2004. The increase was
driven by a $1.7 million increase in net interest income. Offsetting this
positive impact were increases of $509,000 in the provision for loan losses
and decreases of $151,000 in noninterest income. Basic earnings per share for
the third quarter of 2005 were $0.76 per share, versus $0.67 per share for the
third quarter of 2004. Diluted earnings per share for the third quarter of
2005 were $0.73 per share, versus $0.65 per share for the third quarter of
2004.
RESULTS OF OPERATIONS
Net Interest Income
For the nine-month period ended September 30, 2005, net interest income
totaled $36.9 million, an increase of 17.9%, or $5.6 million versus the first
nine months of 2004. Net interest income increased in the nine-month period of
2005 versus the comparable period of 2004, primarily due to a $151.6 million,
or 12.6% increase in average earning assets to $1.358 billion. In addition,
the net interest margin increased by 15 basis points from 3.57% to 3.72%. For
the three-month period ended September 30, 2005, net interest income totaled
$12.5 million, an increase of 15.9%, or $1.7 million. This increase was driven
12
by a $184.5 million, or 15.0% increase in average earning assets to $1.414
billion, versus the same period in 2004.
Given the Company's mix of interest earning assets and interest bearing
liabilities at September 30, 2005, the Company would generally be considered
to have an asset sensitive balance sheet. This balance sheet structure would
normally be expected to produce a stable or improving net interest margin in a
rising rate environment. Despite this balance sheet structure and a rising
rate environment during 2005, the Company experienced net interest margin
compression in the third quarter of 2005 versus the second quarter of 2005.
Management attributes this compression primarily to a highly competitive
deposit pricing environment that is having a negative impact on the net
interest margin. In addition, the Company's mix of deposits has shifted to
more reliance on certificates of deposits, which generally carry a higher
interest rate cost than other types of interest bearing deposits.
During the first nine months of 2005, total interest and dividend income
increased by $14.3 million, or 32.9% to $57.6 million, versus $43.3 million
during the first nine months of 2004. During the third quarter of 2005,
interest and dividend income increased by $5.9 million, or 39.4%, to $20.9
million, versus $15.0 million during the same quarter of 2004. These increases
were primarily the result of increases in interest rates generally, as well as
an increase in average earning assets. The tax equivalent yield on average
earning assets increased by 86 basis points to 5.8% for the nine-month period
ended September 30, 2005 versus the same period of 2004. For the third quarter
of 2005, the yield increased 99 basis points to 6.0%, versus 5.0% for the
third quarter of 2004.
The average daily loan balances for the first nine months of 2005
increased 16.0% to $1.063 billion, over the average daily loan balances of
$916.2 million for the same period of 2004. During the same period, loan
interest income increased by $13.2 million, or 37.3%, to $48.7 million. The
increase was the result of a 90 basis point increase in the tax equivalent
yield on loans to 6.1% from 5.2% in the first nine months of 2004. The average
daily loan balances for the third quarter of 2005 increased $176.0 million, or
18.7%, to $1.116 billion, versus $939.9 million for the third quarter of 2004.
During the same period, loan interest income increased by $5.5 million, or
44.5%, to $17.9 million versus $12.4 million during the third quarter of 2004.
The increase was driven by a 107 basis point increase in the tax equivalent
yield on loans, to 6.4%, versus 5.3% in the third quarter of 2004.
The average daily securities balances for the first nine months of 2005
increased $6.2 million, or 2.2%, to $286.9 million, versus $280.7 million for
the same period of 2004. During the same periods, income from securities
increased by $933,000, or 12.0%, to $8.7 million versus $7.8 million during
the first nine months of 2004. The increase was primarily the result of a 34
basis point increase in the tax equivalent yields on securities, to 4.5%
13
versus 4.1% in the first nine months of 2004. The average daily securities
balances for the third quarter of 2005 increased $8.1 million, or 2.9%, to
$288.0 million, versus $279.9 million for the same period of 2004. During the
same periods, income from securities increased by $342,000, or 13.4%, to $2.9
million, versus $2.6 million in the third quarter of 2004. The increase was
driven by a 33 basis point increase in the tax equivalent yield in securities
to 4.4% versus 4.1% in the third quarter of 2004.
Total interest expense increased $8.7 million, or 72.2%, to $20.7 million
for the nine-month period ended September 30, 2005, from $12.0 million for the
comparable period in 2004. The increase was primarily the result of a 70 basis
point increase in the Company's daily cost of funds to 2.04%, versus 1.34% for
the same period of 2004. Total interest expense increased $4.2 million, or
100.0%, to $8.4 million for the third quarter of 2005, versus $4.2 million for
the third quarter of 2004. The increase was primarily the result of a 102
basis point increase in the Company's daily cost of funds to 2.4%, from 1.4%
for the same period of 2004. Increases in total deposits also contributed to
increases in total interest expense over the two periods.
On an average daily basis, total deposits (including demand deposits)
increased $141.6 million, or 14.1%, to $1.144 billion for the nine-month
period ended September 30, 2005, versus $1.003 billion during the same period
in 2004. The average daily balances for the third quarter of 2005 increased
$170.4 million, or 16.7%, to $1.193 billion from $1.022 billion during the
third quarter of 2004. On an average daily basis, noninterest bearing demand
deposits increased $16.4 million, or 8.1% for the nine-month period ended
September 30, 2005, versus the same period in 2004. The average daily
noninterest bearing demand deposit balances for the third quarter of 2005
increased $4.8 million, or 2.2%, to $217.0 million from $212.2 million during
the third quarter of 2004. When comparing the nine months ended September 30,
2005 with the same period of 2004, the average daily balance of time deposits,
which pay a higher rate of interest compared to demand deposit and transaction
accounts, increased $134.0 million, primarily as a result of increases in
public fund deposits and brokered certificates of deposit. More public fund
deposits have become available due to increased property tax collections
resulting from the resolution of difficulties associated with the property tax
reassessment process in Indiana. The rate paid on time deposit accounts
increased 70 basis points to 3.2% for the nine-month period ended September
30, 2005, versus the same period in 2004. During the third quarter of 2005,
the average daily balance of time deposits increased $193.1 million to $580.8
million, and the rate paid increased 97 basis points to 3.6%, versus the third
quarter of 2004.
Management believes that it is important to grow demand deposit accounts
in both dollar volume and total number of accounts. These accounts typically
provide the Company with opportunities to expand into ancillary activities for
14
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.
Due to strong loan growth and additional relationship opportunities the
Company continues to focus on public fund deposits as a core funding strategy.
In addition, the Company has introduced brokered certificates of deposit to
the funding mix as a result of loan growth.
Average daily balances of borrowings were $209.3 million during the nine
months ended September 30, 2005, versus $208.6 million during the same period
of 2004, and the rate paid on borrowings increased 122 basis points to 2.9%.
During the third quarter of 2005, the average daily balances of borrowings
increased $2.3 million to $213.3 million, versus $211.0 million for the same
period in 2004. The rate on borrowings increased 154 basis points when
comparing the third quarter of 2005 with the same period of 2004. On an
average daily basis, total deposits (including demand deposits) and purchased
funds increased 11.8% and 14.0%, respectively, when comparing the nine-month
and three-month periods ended September 30, 2005 versus the same periods in
2004. The following tables set forth consolidated information regarding
average balances and rates.
15
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Nine Months Ended September 30,
--------------------------------------------------------------------------
2005 2004
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------ --------- ------ ------------ --------- ------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 1,058,227 $ 48,561 6.14 % $ 907,573 $ 35,255 5.19 %
Tax exempt (1) 4,416 172 5.21 8,655 275 4.24
Investments: (1)
Available for sale 286,866 9,569 4.46 280,704 8,658 4.12
Short-term investments 4,761 83 1.49 5,779 46 1.20
Interest bearing deposits 3,838 101 3.52 3,782 36 1.27
------------ --------- ------------ ---------
Total earning assets 1,358,108 58,486 5.76 % 1,206,493 44,270 4.90 %
Nonearning assets:
Cash and due from banks 54,439 0 50,109 0
Premises and equipment 25,068 0 25,888 0
Other nonearning assets 43,907 0 42,549 0
Less allowance for loan loss losses (11,403) 0 (10,515) 0
------------ --------- ------------ ---------
Total assets $ 1,470,119 $ 58,486 $ 1,314,524 $ 44,270
============ ========= ============ =========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2005 and 2004. 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,
2005 and 2004, 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)
Nine months Ended September 30,
------------------------------------------------------------------------
2005 2004
---------------------------------- ----------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
------------ --------- ------ ------------ --------- ------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 71,668 $ 58 0.11 % $ 68,375 $ 65 0.13 %
Interest bearing checking accounts 336,705 3,649 1.45 348,794 2,097 0.80
Time deposits:
In denominations under $100,000 225,411 5,179 3.07 216,224 4,575 2.83
In denominations over $100,000 291,589 7,253 3.33 166,816 2,644 2.12
Miscellaneous short-term bbborrowings 168,365 2,950 2.34 160,396 1,215 1.01
Long-term borrowings 40,974 1,607 5.24 48,200 1,422 3.94
------------ --------- ------------ ---------
Total interest bearing liabilities 1,134,712 20,696 2.44 % 1,008,805 12,018 1.59 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 218,925 0 202,493 0
Other liabilities 9,697 0 8,145 0
Stockholders' equity 106,785 0 95,081 0
Total liabilities and stockholders'
equity ------------ --------- ------------ ---------
$ 1,470,119 $ 20,696 $ 1,314,524 $ 12,018
============ ========= ============ =========
Net interest differential - yield on
average daily earning assets $ 37,790 3.72 % $ 32,252 3.57 %
========= =========
17
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Three Months Ended September 30,
------------------------------------------------------------------------
2005 2004
---------------------------------- ----------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------ --------- ------ ------------ --------- ------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 1,111,440 $ 17,894 6.39 % $ 931,102 $ 12,352 5.34 %
Tax exempt (1) 4,426 62 5.60 8,812 89 4.01
Investments: (1)
Available for sale 287,968 3,180 4.38 279,907 2,850 4.05
Short-term investments 5,412 45 3.30 5,090 17 1.33
Interest bearing deposits 4,568 38 3.30 4,445 16 1.43
------------ --------- ------------ ---------
Total earning assets 1,413,814 21,219 5.95 % 1,229,356 15,324 4.96 %
Nonearning assets:
Cash and due from banks 54,287 0 50,910 0
Premises and equipment 25,124 0 25,674 0
Other nonearning assets 44,652 0 43,701 0
Less allowance for loan loss losses (11,932) 0 (10,673) 0
------------ --------- ------------ ---------
Total assets $ 1,525,945 $ 21,219 $ 1,338,968 $ 15,324
============ ========= ============ =========
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2005 and 2004. 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, 2005 and 2004, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
</FN>
18
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
Three Months Ended September 30,
------------------------------------------------------------------------
2005 2004
---------------------------------- ----------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
------------ --------- ------ ------------ --------- ------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 71,158 $ 23 0.13 % $ 69,888 $ 17 0.10 %
Interest bearing checking accounts 323,660 1,383 1.70 352,381 717 0.81
Time deposits:
In denominations under $100,000 231,511 1,891 3.24 220,473 1,559 2.81
In denominations over $100,000 349,332 3,312 3.76 167,229 956 2.27
Miscellaneous short-term bbborrowings 172,329 1,207 2.78 169,981 517 1.21
Long-term borrowings 40,974 572 5.54 40,974 428 4.16
------------ --------- ------------ ---------
Total interest bearing liabilities 1,188,964 8,388 2.80 % 1,020,926 4,194 1.63 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 216,995 0 212,245 0
Other liabilities 9,926 0 8,308 0
Stockholders' equity 110,060 0 97,489 0
Total liabilities and stockholders'
equity ------------ --------- ------------ ---------
$ 1,525,945 $ 8,388 $ 1,338,968 $ 4,194
============ ========= ============ =========
Net interest differential - yield on
average daily earning assets $ 12,831 3.59 % $ 11,130 3.60 %
========= =========
19
Provision for Loan Losses
Based on management's review of the adequacy of the allowance for loan
losses, provisions for losses on loans of $1.8 million and $659,000 were
recorded during the nine-month and three-month periods ended September 30,
2005, versus provisions of $648,000 and $150,000 recorded during the same
periods of 2004. The increase in the provision for loan losses for the periods
ended September 30, 2005 was primarily due to growth in the loan portfolio, as
well as higher allocations on classified credits. Other factors impacting the
provision included 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, 2005 and 2004 are shown in the following table:
Nine Months Ended
September 30,
--------------------------------
Percent
2005 2004 Change
-------- -------- --------
(in thousands)
Trust and brokerage income $ 2,261 $ 2,319 (2.5)%
Service charges on deposit accounts 5,112 5,194 (1.6)
Loan, insurance and service fees 1,333 1,706 (21.9)
Merchant card fee income 1,857 1,657 12.1
Other income 1,428 1,237 15.4
Net gains on the sale of real
estate mortgages held for sale 726 724 0.3
-------- -------- --------
Total noninterest income $ 12,717 $ 12,837 (0.9)%
======== ======== ========
20
Three Months Ended
September 30,
------------------------------
Percent
2005 2004 Change
-------- -------- --------
(in thousands)
Trust and brokerage income $ 742 $ 800 (7.3)%
Service charges on deposit accounts 1,860 1,840 1.1
Loan, insurance and service fees 440 521 (15.6)
Merchant card fee income 692 576 20.1
Other income 371 363 2.2
Net gains on the sale of real
estate mortgages held for sale 275 431 (36.2)
-------- -------- --------
Total noninterest income $ 4,380 $ 4,531 (3.3)%
======== ======== ========
Noninterest income decreased $120,000 and $151,000, respectively, in the
nine-month and three-month periods ended September 30, 2005, versus the same
periods in 2004. Loan, insurance and service fees declined primarily due to
the classification of certain loan fees as interest income for 2005, versus
being classified as noninterest income during 2004. During the nine months
ended September 30, 2004, $323,000 of such fees was included in noninterest
income. In addition, profits from the sale of mortgages declined in the third
quarter of 2005 versus the third quarter of 2004 primarily due to lower
mortgage loan volumes. Partially offsetting these decreases were increases in
merchant card fee income driven by higher volume activity in interchange and
merchant fees. Other income increased in the nine-month period ended September
30, 2005 primarily due to a $62,000 gain on the sale of other real estate.
Noninterest Expense
Noninterest expense categories for the nine-month and three-month periods
ended September 30, 2005 and 2004 are shown in the following table:
21
Nine Months Ended
September 30,
------------------------------
Percent
2005 2004 Change
-------- -------- --------
(in thousands)
Salaries and employee benefits $ 15,224 $ 14,705 3.5 %
Net occupancy expense 2,059 1,802 14.3
Equipment costs 1,476 1,532 (3.7)
Data processing fees and supplies 1,715 1,901 (9.8)
Credit card interchange 1,158 1,037 11.7
Other expense 6,384 6,327 0.9
-------- -------- --------
Total noninterest expense $ 28,016 $ 27,304 2.6 %
======== ======== ========
Three Months Ended
September 30,
------------------------------
Percent
2005 2004 Change
-------- -------- --------
(in thousands)
Salaries and employee benefits $ 5,051 $ 4,921 2.6 %
Net occupancy expense 728 634 14.8
Equipment costs 468 569 (17.8)
Data processing fees and supplies 586 656 (10.7)
Credit card interchange 442 404 9.4
Other expense 2,080 2,017 3.1
-------- -------- --------
Total noninterest expense $ 9,355 $ 9,201 1.7 %
======== ======== ========
Noninterest expense increased $712,000 and $154,000, respectively, in the
nine-month and three-month periods ended September 30, 2005 versus the same
periods of 2004. Driving these increases were salaries and employee benefits,
which increased $519,000 and $130,000, respectively, in the nine-months and
three-months ended September 30, 2005. The increases were due largely to
normal salary increases and staff additions. In addition, net occupancy
expense increased due to higher property tax and maintenance expenses.
Offsetting these increases were decreases in data processing fees and supplies
which declined due to improved pricing with the Company's processing agents.
22
Income Tax Expense
Income tax expense increased $1.4 million, or 26.8%, for the first nine
months of 2005, compared to the same period in 2004. Income tax expense for
the third quarter of 2005 increased $335,000, or 16.4%, compared to the same
period of 2004. The combined state franchise tax expense and the federal
income tax expense as a percentage of income before income tax expense
increased to 34.5% during the first nine months of 2005 compared to 33.3%
during the same period in 2004. It increased to 34.5% for the third quarter of
2005, versus 34.1% for the third quarter of 2004. The increases were driven by
a decrease in the amount of income derived from tax-advantaged sources during
the nine-month and three-month periods ended September 30, 2005, versus the
comparable periods of 2004.
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
its critical accounting policies include determining the allowance for loan
losses 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, 2004 (incorporated by reference as part of the Company's
10-K filing).
FINANCIAL CONDITION
Total assets of the Company were $1.558 billion as of September 30, 2005,
an increase of $104.6 million, or 7.2%, when compared to $1.453 billion as of
December 31, 2004.
Total cash and cash equivalents decreased by $41.4 million, or 39.9%, to
$62.4 million at September 30, 2005 from $103.9 million at December 31, 2004.
The decrease was primarily attributable to loan growth.
Total securities available-for-sale increased by $2.6 million, or 0.9%,
to $289.2 million at September 30, 2005 from $286.6 million at December 31,
2004. The increase was a result of a number of transactions in the securities
portfolio. Securities purchases totaled $44.7 million. Offsetting this
increase were securities paydowns totaling $35.2 million, maturities and calls
of securities totaling $2.0 million, the amortization of premiums, net of the
23
accretion of discounts totaling $2.0 million, and the fair market value of the
securities portfolio decreased by $2.9 million. A rising interest rate
environment during the first nine months of 2005 drove the market value
decrease. The investment portfolio is managed to limit the Company's exposure
to risk by containing mostly collateralized mortgage obligations 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 $487,000, or 16.3%, to
$3.5 million at September 30, 2005 from $3.0 million at December 31, 2004. 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, 2005, $34.2 million in real estate mortgages were originated for sale and
$34.1 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased by
$142.1 million, or 14.2%, to $1.145 billion at September 30, 2005 from $1.003
billion at December 31, 2004. The mix of loan types within the Company's
portfolio consisted of 80% commercial, 6% real estate and 14% consumer loans
at September 30, 2005 compared to 79% commercial, 5% real estate and 16%
consumer at December 31, 2004.
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
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 uncertain 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
24
loans based upon a monthly review of those credits. An appropriate level of
general allowance is determined based on the application of loss allocations
to graded loans. 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, 2005, on the
basis of management's review of the loan portfolio, the Company had $26.7
million of assets classified as special mention, $26.5 million classified as
substandard, $801,000 classified as doubtful and $0 classified as loss as
compared to $32.1 million, $23.3 million, $751,000 and $0 at December 31,
2004.
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
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.
Total impaired loans decreased by $2.1 million to $7.2 million at
September 30, 2005 from $9.3 million at December 31, 2004. The decrease in the
impaired loans category resulted primarily from the upgrade of an impaired
commercial credit. The renewal of the loan in question had been complicated as
more than one bank was involved which resulted in it being past maturity. The
renewal issues were resolved in the third quarter of 2005, and the loan is
current as to principal and interest. 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. The following table
summarizes nonperforming assets at September 30, 2005 and December 31, 2004.
25
September 30, December 31,
2005 2004
-------- --------
(in thousands)
NONPERFORMING ASSETS:
Nonaccrual loans $ 7,600 $ 7,213
Loans past due over 90 days and accruing 218 2,778
-------- --------
Total nonperforming loans 7,818 9,991
-------- --------
Other real estate 0 261
Repossessions 12 13
-------- --------
Total nonperforming assets $ 7,830 $ 10,265
======== ========
Total impaired loans $ 7,207 $ 9,309
Nonperforming loans to total loans 0.68% 1.01%
Nonperforming assets to total assets 0.50% 0.71%
Total deposits increased by $135.6 million, or 12.2% to $1.251 billion at
September 30, 2005 from $1.115 billion at December 31, 2004. The increase
resulted from increases of $191.6 million in certificates of deposit and $9.2
million in money market accounts. Offsetting these increases were declines of
$37.1 million in Investors' Money Market accounts, $14.7 million in NOW
accounts, $9.0 million in demand deposits and $4.4 million in savings
accounts. Total short-term borrowings decreased by $41.0 million, or 22.1%, to
$144.7 million at September 30, 2005 from $185.7 million at December 31, 2004.
The decrease resulted primarily from decreases of $17.4 million in both
federal funds purchased and securities sold under agreements to repurchase.
Total stockholders' equity increased by $8.7 million, or 8.6%, to $110.5
million at September 30, 2005 from $101.8 million at December 31, 2004. Net
income of $13.0 million, minus dividends of $4.1 million, plus $1.6 million
for stock issued through options exercised, minus the decrease in the
accumulated other comprehensive income of $1.8 million, minus $162,000 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,
26
2005, the Company's Tier 1 leverage capital ratio, Tier 1 risk based capital
ratio and total risk based capital ratio were 9.0%, 10.9% and 11.9%,
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 2005. 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 September 30, 2005, the Company's potential pretax
exposure was within the Company's policy limit, and not significantly
different from December 31, 2004.
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, 2005. 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. During the quarter ended September 30, 2005, the Company has not
made a change to its disclosure controls and procedures or its internal
controls over financial reporting that has materially affected or is
reasonably likely to materially affect its disclosure controls or its controls
over financial reporting.
27
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.
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.
28
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.
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.
29
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 2005
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, 2005 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 Purchasof Shares that May
Total Number Average as Part of Publicly Yet Be Purchased
Paid of Shares Price Paid Announced Plans Under the Plan or
Period Purchased Per Share or Programs Programs
- ------- ---------- ------- --------- -----------
July 1-31 1,854 $ 43.76 0 0
August 1-31 0 $ 0 0 0
September 1-30 0 $ 0 0 0
----- ------- --------- -----------
Total 1,854 $ 43.76
===== =======
(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
30
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.
31
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 2005
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: October 31, 2005 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: October 31, 2005 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: October 31, 2005 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
32