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 JuneSeptember 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 JulyOctober 31, 2005
Common Stock, No Par Value 5,933,5145,946,742
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 . . . . . . . . . . . . . . . . . . . . 3130
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 31
Form 10-Q Signature PagePage. . . . . . . . . . . . . . . . . . . . . . 32
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 1 - FINANCIAL STATEMENTS
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of JuneSeptember 30, 2005 and December 31, 2004
(in thousands)
(Page 1 of 2)
JuneSeptember 30, December 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
Cash and due from banks $ 87,86256,361 $ 81,144
Short-term investments 5,0796,082 22,714
------------ ------------
Total cash and cash equivalents 92,94162,443 103,858
Securities available-for-sale (carried at fair value) 289,557289,198 286,582
Real estate mortgages held-for-sale 4,2693,478 2,991
Loans, net of allowance for loan losses of $11,724$12,233 and $10,754 1,082,3241,133,133 992,465
Land, premises and equipment, net 25,09124,820 25,057
Bank owned life insurance 17,32817,521 16,896
Accrued income receivable 6,4036,503 5,765
Goodwill 4,970 4,970
Other intangible assets 1,1401,087 1,245
Other assets 14,59214,560 13,293
------------ ------------
Total assets $ 1,538,6151,557,713 $ 1,453,122
============ ============
(Continued)
1
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of JuneSeptember 30, 2005 and December 31, 2004
(in thousands except for share and per share data)
(Page 2 of 2)
JuneSeptember 30, December 31,
2005 2004
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 232,413228,242 $ 237,261
Interest bearing deposits 893,4591,022,728 878,138
------------ ------------
Total deposits 1,125,8721,250,970 1,115,399
Short-term borrowings:
Federal funds purchased 69,5002,600 20,000
Securities sold under agreements
to repurchase 92,58970,626 88,057
U.S. Treasury demand notes 2,0771,428 2,593
Other borrowings 89,90070,000 75,000
------------ ------------
Total short-term borrowings 254,066144,654 185,650
Accrued expenses payable 7,3118,797 7,445
Other liabilities 1,9361,847 1,889
Long-term borrowings 10,046 10,046
Subordinated debentures 30,928 30,928
------------ ------------
Total liabilities 1,430,1591,447,242 1,351,357
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,968,2045,985,354 shares issued and 5,931,5685,946,864 outstanding as of
JuneSeptember 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 13,75414,259 12,463
Retained earnings 95,58698,729 89,864
Accumulated other comprehensive loss (1,508)(3,060) (1,267)
Treasury stock, at cost (829)(910) (748)
------------ ------------
Total stockholders' equity 108,456110,471 101,765
------------ ------------
Total liabilities and stockholders' equity $ 1,538,6151,557,713 $ 1,453,122
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
2
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and SixNine Months Ended JuneSeptember 30, 2005 and 2004
(in thousands except for share and per share data)
(Unaudited)
(Page 1 of 2)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET INTEREST INCOME
- ----------------------------
Interest and fees on loans:
Taxable $ 16,15417,894 $ 11,68812,352 $ 30,66748,561 $ 23,13135,255
Tax exempt 40 71 85 13947 67 132 206
Interest and dividends on securities:
Taxable 2,364 1,868 4,636 4,0472,313 1,971 6,949 6,018
Tax exempt 587 588 1,174 1,172
Short-term investments 45 21 101 49585 585 1,759 1,757
Short-terminvestments 83 33 184 82
------------ ------------ ------------ ------------
Total interest income 19,190 14,236 36,663 28,53820,922 15,008 57,585 43,318
Interest on deposits 5,082 3,101 9,530 6,1326,609 3,249 16,139 9,381
Interest on short-term borrowings 1,063 352 1,743 6981,207 517 2,950 1,215
Interest on long-term borrowings 541 404 1,035 994572 428 1,607 1,422
------------ ------------ ------------ ------------
Total interest expense 6,686 3,857 12,308 7,8248,388 4,194 20,696 12,018
------------ ------------ ------------ ------------
NET INTEREST INCOME 12,504 10,379 24,355 20,71412,534 10,814 36,889 31,300
- -------------------
Provision for loan losses 662 246 1,120 498659 150 1,779 648
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,842 10,133 23,235 20,21611,875 10,664 35,110 30,652
- ------------------------- ------------ ------------ ------------ ------------
NONINTEREST INCOME
- ------------------
Trust and brokerage income 791 780 1,519 1,519742 800 2,261 2,319
Service charges on deposit accounts 1,703 1,697 3,252 3,3541,860 1,840 5,112 5,194
Loan, insurance and service fees 478 470 893 957440 521 1,333 1,706
Merchant card fee income 629 581 1,165 1,081692 576 1,857 1,657
Other income 410 544 1,057 874371 363 1,428 1,237
Net gains on sale of real estate mortgages
held for sale 207 (27) 451 293275 431 726 724
------------ ------------ ------------ ------------
Total noninterest income 4,218 4,045 8,337 8,0784,380 4,531 12,717 12,837
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 5,027 4,859 10,173 9,7845,051 4,921 15,224 14,705
Net occupancy expense 675 590 1,331 1,168728 634 2,059 1,802
Equipment costs 491 524 1,008 963468 569 1,476 1,532
Data processing fees and supplies 571 650 1,129 1,245586 656 1,715 1,901
Credit card interchange 388 343 716 633442 404 1,158 1,037
Other expense 2,146 2,229 4,304 4,3102,080 2,017 6,384 6,327
------------ ------------ ------------ ------------
Total noninterest expense 9,298 9,195 18,661 18,1039,355 9,201 28,016 27,304
(Continued)
3
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and SixNine Months Ended JuneSeptember 30, 2005 and 2004
(in thousands except for share and per share data)
(Unaudited)
(Page 2 of 2)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 6,762 4,983 12,911 10,1916,900 5,994 19,811 16,185
- --------------------------------
Income tax expense 2,358 1,639 4,452 3,3452,378 2,043 6,830 5,388
------------ ------------ ------------ ------------
NET INCOME $ 4,4044,522 $ 3,3443,951 $ 8,45912,981 $ 6,84610,797
- ---------- ============ ============ ============ ============
Other comprehensive income/(loss), net of tax:
Unrealized gain/(loss) on available-
for-sale securities 1,845 (3,972) (241) (2,521)(1,552) 3,007 (1,793) 486
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME $ 6,2492,970 $ (628)6,958 $ 8,21811,188 $ 4,32511,283
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR BASIC EPS 5,953,831 5,859,474 5,945,149 5,851,2105,978,865 5,874,981 5,956,507 5,859,191
BASIC EARNINGS PER COMMON SHARE $ 0.740.76 $ 0.570.67 $ 1.422.18 $ 1.171.84
- ------------------------------- ============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED EPS 6,129,603 6,048,256 6,130,937 6,050,2976,154,776 6,058,608 6,139,587 6,053,125
DILUTED EARNINGS PER SHARE $ 0.720.73 $ 0.550.65 $ 1.382.11 $ 1.131.78
- -------------------------- ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the SixNine Months Ended JuneSeptember 30, 2005 and 2004
(in thousands)
(Unaudited)
(Page 1 of 2)
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 8,45912,981 $ 6,84610,797
------------ ------------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 958 9601,214 1,492
Provision for loan losses 1,120 4981,779 648
Amortization of intangible assets 105 107158 161
Amortization of loan servicing rights 306 251449 408
Net change in loan servicing rights valuation allowance (69) (71)(109) (85)
Loans originated for sale (21,766) (36,565)(34,192) (48,555)
Net gain on sale of loans (451) (293)(725) (724)
Proceeds from sale of loans 20,751 34,14734,114 49,977
Net (gain) loss on sale of premises and equipment (5) 49(74) 91
Net securities amortization 1,356 1,8992,003 2,817
Stock compensation expense 0 33
Earnings on life insurance (384) (312)(593) (466)
Net change:
Accrued income receivable (638) 33(738) (244)
Accrued expenses payable (46) (1,163)2,417 (225)
Other assets (1,017) 1,829(815) 2,008
Other liabilities 47 57(42) 215
------------ ------------
Total adjustments 267 1,4594,846 7,551
------------ ------------
Net cash from operating activities 8,726 8,30517,827 18,348
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales and calls of securities available-for-sale 22,442 35,58737,206 52,098
Purchases of securities available-for-sale (27,147) (38,069)(44,653) (57,774)
Purchase of life insurance (48) (104)(32) (117)
Net increase in total loans (90,979) (58,779)(142,447) (81,937)
Proceeds from sales of land, premises and equipment 111 49591 74
Purchase of land, premises and equipment (1,098) (691)(1,494) (872)
------------ ------------
Net cash from investing activities (96,719) (62,007)(150,829) (88,528)
------------ ------------
(Continued)
5
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the SixNine Months Ended JuneSeptember 30, 2005 and 2004
(in thousands)
(Unaudited)
(Page 2 of 2)
2005 2004
------------ ------------
Cash flows from financing activities:
Net increase in total deposits $ 10,473135,571 $ 95,944117,122
Net decrease in short-term borrowings 68,416 (11,092)(40,996) (27,675)
Payments on long-term borrowings 0 (20,001)
Dividends paid (2,611) (2,338)(3,984) (3,572)
Proceeds from stock options exercise 879 7801,158 852
Purchase of treasury stock (81) (88)(162) (157)
------------ ------------
Net cash from financing activities 77,076 63,20591,587 66,569
------------ ------------
Net increase (decrease) in cash and cash equivalents (10,917) 9,503(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 $ 92,94162,443 $ 66,94453,830
============ ============
Cash paid during the period for:
Interest $ 11,76218,971 $ 7,11111,437
============ ============
Income taxes $ 5,0806,620 $ 2,7403,602
============ ============
Loans transferred to other real estate $ 0 $ 7
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
6
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 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 six-monthnine-month periods ending JuneSeptember
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 sixnine 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
SixNine Months Ended
JuneSeptember 30,
2005 2004
--------- ---------
Net income (in thousands) as reported $ 8,45912,981 $ 6,84610,797
Deduct: stock-based compensation expense
determined under fair value based method 180 291246 312
--------- ---------
Pro forma net income $ 8,27912,735 $ 6,55510,485
========= =========
Basic earnings per common share as reported $ 1.422.18 $ 1.171.84
Pro forma basic earnings per share $ 1.392.14 $ 1.121.79
Diluted earnings per share as reported $ 1.382.11 $ 1.131.78
Pro forma diluted earnings per share $ 1.352.07 $ 1.081.73
Three Months Ended
JuneSeptember 30,
2005 2004
--------- ---------
Net income (in thousands) as reported $ 4,4044,522 $ 3,3443,951
Deduct: stock-based compensation expense
determined under fair value based method 80 18566 103
--------- ---------
Pro forma net income $ 4,3244,456 $ 3,1593,848
========= =========
Basic earnings per common share as reported $ 0.740.76 $ 0.570.67
Pro forma basic earnings per share $ 0.730.75 $ 0.540.66
Diluted earnings per share as reported $ 0.720.73 $ 0.550.65
Pro forma diluted earnings per share $ 0.710.72 $ 0.520.64
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet at JuneSeptember 30, 2005 reflects the holding of
36,63638,490 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
JuneSeptember 30, December 31,
2005 2004
------------ ------------
(in thousands)
Commercial and industrial loans $ 770,816814,331 $ 688,211
Agri-business and agricultural loans 101,71599,792 102,749
Real estate mortgage loans 55,87062,563 47,642
Real estate construction loans 6,6106,679 6,719
Installment loans and credit cards 159,097162,005 158,065
------------ ------------
Subtotal 1,094,1081,145,370 1,003,386
Less: Allowance for loan losses (11,724)(12,233) (10,754)
Net deferred loan fees (60)(4) (167)
------------ ------------
Loans, net $1,082,324$ 1,133,133 $ 992,465
============ ============
Impaired loans $ 8,7667,207 $ 9,309
Non-performing loans $ 9,2077,818 $ 9,991
Allowance for loan losses to total loans 1.07% 1.07%
Changes in the allowance for loan losses are summarized as follows:
SixNine months ended
JuneSeptember 30,
------------------
2005 2004
-------- --------
Balance at beginning of period $ 10,754 $ 10,234
Provision for loan losses 1,120 4981,779 648
Charge-offs (236) (293)(410) (381)
Recoveries 86 204110 240
-------- --------
Net loans charged-off 150 89300 141
-------- --------
Balance at end of period $ 11,72412,233 $ 10,64310,741
======== ========
9
NOTE 4. SECURITIES
The fair values of securities available for sale were as follows:
JuneSeptember 30, December 31,
2005 2004
------------ ------------
(in thousands)
U.S. Treasury securities $ 984972 $ 989
U.S. Government agencies 31,11030,691 22,885
Mortgage-backed securities 203,472204,440 208,961
State and municipal securities 53,99153,095 53,747
------------ ------------
Total $ 289,557289,198 $ 286,582
============ ============
As of JuneSeptember 30, 2005, net unrealized losses on the total securities
available for sale portfolio totaled $517,000.$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
SixNine Months Ended JuneSeptember 30
----------------------------------
Pension Benefits SERP Benefits
---------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 75 74 40 42112 112 60 62
Expected return on plan assets (73) (62) (51) (50)(109) (94) (77) (75)
Recognized net actuarial loss 19 19 21 1828 29 33 27
---- ---- ---- ----
Net pension expense $ 21 $ 31 $ 1047 $ 1016 $ 14
==== ==== ==== ====
10
Three Months Ended JuneSeptember 30
----------------------------------
Pension Benefits SERP Benefits
---------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Service cost $ 0 $ 0 $ 0 $ 0
Interest cost 37 38 37 20 2220
Expected return on plan assets (37) (31) (25)(36) (32) (26) (25)
Recognized net actuarial loss 9 9 10 12 9
---- ---- ---- ----
Net pension expense $ 10 $ 1516 $ 56 $ 64
==== ==== ==== ====
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 JuneSeptember 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
JuneSeptember 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 $8.5$13.0 million for the first
sixnine months of 2005, versus $6.8$10.8 million in the same period of 2004, an
increase of 23.6%20.2%. The increase was driven by a $3.6$5.6 million increase in net
interest income. Offsetting this positive impact were increases of $622,000$1.1
million in the provision for loan losses and $558,000$712,000 in noninterest expense.
Basic earnings per share for the first sixnine months of 2005 were $1.42$2.18 per
share versus $1.17$1.84 per share for the first sixnine 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
sixnine months of 2005 were $1.38$2.11 per share, versus $1.13$1.78 per share for the first
sixnine months of 2004.
Net income for the secondthird quarter of 2005 was $4.4$4.5 million, an increase of
31.7%14.5% versus $3.3$4.0 million for the comparable period of 2004. The increase was
driven by a $2.1$1.7 million increase in net interest income. Offsetting this
positive impact was an increasewere increases of $416,000$509,000 in the provision for loan losses.losses
and decreases of $151,000 in noninterest income. Basic earnings per share for
the secondthird quarter of 2005 were $0.74$0.76 per share, versus $0.57$0.67 per share for the
secondthird quarter of 2004. Diluted earnings per share for the secondthird quarter of
2005 were $0.72$0.73 per share, versus $0.55$0.65 per share for the secondthird quarter of
2004.
RESULTS OF OPERATIONS
Net Interest Income
For the six-monthnine-month period ended JuneSeptember 30, 2005, net interest income
totaled $24.4$36.9 million, an increase of 17.6%17.9%, or $3.6$5.6 million versus the first
sixnine months of 2004. Net interest income increased in the six-monthnine-month period of
2005 versus the comparable period of 2004, primarily due to an 18 basis pointa $151.6 million,
or 12.6% increase in average earning assets to $1.358 billion. In addition,
the net interest margin from 3.60% to 3.78%. In addition, average
earning assets increased by $134.9 million, or 11.3%15 basis points from 3.57% to $1.330 billion.3.72%. For
the three-month period ended JuneSeptember 30, 2005, net interest income totaled
$12.5 million, an increase of 20.5%15.9%, or $2.1$1.7 million. This increase was driven
12
by a 23 basis point$184.5 million, or 15.0% increase in the net interest margin from 3.55% to 3.78%. In
addition, average earning assets increased by $141.3 million, or 11.6%, to 12
$1.354$1.414
billion, versus the same period in 2004.
Given the Company's mix of interest earning assets and interest bearing
liabilities at JuneSeptember 30, 2005, the net interest margin couldCompany would generally be considered
to have an asset sensitive balance sheet. This balance sheet structure would
normally be expected to be
maintainedproduce a stable or to increaseimproving 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 expectsattributes this compression primarily to a highly competitive
deposit pricing environment that is having a negative impact on the net
interest margin will continuemargin. In addition, the Company's mix of deposits has shifted to
improve during 2005 versus 2004, as the
effectsmore reliance on certificates of recentdeposits, which generally carry a higher
interest rate increases by the Federal Reserve are felt.cost than other types of interest bearing deposits.
During the first sixnine months of 2005, total interest and dividend income
increased by $8.1$14.3 million, or 28.5%32.9% to $36.7$57.6 million, versus $28.5$43.3 million
during the first sixnine months of 2004. During the secondthird quarter of 2005,
interest and dividend income increased by $5.0$5.9 million, or 34.8%39.4%, to $19.2$20.9
million, versus $14.2$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 7486 basis points to 5.7%5.8% for the six-monthnine-month period
ended JuneSeptember 30, 2005 versus the same period of 2004. For the secondthird quarter
of 2005, the yield increased 9499 basis points to 5.8%6.0%, versus 4.8%5.0% for the
secondthird quarter of 2004.
The average daily loan balances for the first sixnine months of 2005
increased 14.5%16.0% to $1.036$1.063 billion, over the average daily loan balances of
$904.3$916.2 million for the same period of 2004. During the same period, loan
interest income increased by $7.5$13.2 million, or 32.2%37.3%, to $30.8$48.7 million. The
increase was the result of an 80a 90 basis point increase in the tax equivalent
yield on loans to 6.0%6.1% from 5.2% in the first sixnine months of 2005.2004. The average
daily loan balances for the secondthird quarter of 2005 increased $136.5$176.0 million, or
14.8%18.7%, to $1.061$1.116 billion, versus $924.8$939.9 million for the secondthird quarter of 2004.
During the same period, loan interest income increased by $4.4$5.5 million, or
37.7%44.5%, to $16.2$17.9 million versus $11.8$12.4 million during the secondthird quarter of 2004.
The increase was driven by a 101107 basis point increase in the tax equivalent
yield on loans, to 6.1%6.4%, versus 5.1%5.3% in the secondthird quarter of 2004.
The average daily securities balances for the first sixnine months of 2005
increased $5.2$6.2 million, or 1.9%2.2%, to $286.3$286.9 million, versus $281.1$280.7 million for
the same period of 2004. During the same periods, income from securities
increased by $591,000,$933,000, or 11.3%12.0%, to $5.8$8.7 million versus $5.2$7.8 million during
the first sixnine 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 4.2%4.1% in the first sixnine months of 2004. The average daily securities
balances for the secondthird quarter of 2005 increased $6.5$8.1 million, or 2.3%2.9%, to
$286.6$288.0 million, versus $280.2$279.9 million for the same period of 2004. During the
same periods, income from securities increased by $495,000,$342,000, or 20.2%13.4%, to $3.0$2.9
million, versus $2.5$2.6 million in the secondthird quarter of 2004. The increase was
driven by a 5833 basis point increase in the tax equivalent yield in securities
to 4.5%4.4% versus 4.0%4.1% in the secondthird quarter of 2004.
13
Total interest expense increased $4.5$8.7 million, or 57.3%72.2%, to $12.3$20.7 million
for the six-monthnine-month period ended JuneSeptember 30, 2005, from $7.8$12.0 million for the
comparable period in 2004. The increase was primarily the result of a 5670 basis
point increase in the Company's daily cost of funds to 1.87%2.04%, versus 1.31%1.34% for
the same period of 2004. Total interest expense increased $2.8$4.2 million, or
73.4%100.0%, to $6.7$8.4 million for the secondthird quarter of 2005, versus $3.9$4.2 million for
the secondthird quarter of 2004. The increase was primarily the result of a 62102
basis point increase in the Company's daily cost of funds to 2.0%2.4%, from 1.3%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 $126.9$141.6 million, or 12.8%14.1%, to $1.120$1.144 billion for the six-monthnine-month
period ended JuneSeptember 30, 2005, versus $992.8 million$1.003 billion during the same period
in 2004. The average daily balances for the secondthird quarter of 2005 increased
$112.8$170.4 million, or 11.1%16.7%, to $1.130$1.193 billion from $1.017$1.022 billion during the
secondthird quarter of 2004. On an average daily basis, noninterest bearing demand
deposits increased $22.3$16.4 million, or 11.3%8.1% for the six-monthnine-month period ended
JuneSeptember 30, 2005, versus the same period in 2004. The average daily
noninterest bearing demand deposit balances for the secondthird quarter of 2005
increased $15.3$4.8 million, or 7.3%2.2%, to $223.5$217.0 million from $208.2$212.2 million during
the secondthird quarter of 2004. When comparing the sixnine months ended JuneSeptember 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 $103.9$134.0 million, primarily as a result of increases in
public fund deposits.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 5370 basis points to 3.0%3.2% for the nine-month period ended September
30, 2005, versus the same period in 2004. During the secondthird quarter of 2005,
the average daily balance of time deposits increased $94.6$193.1 million to $485.4$580.8
million, and the rate paid increased 6297 basis points to 3.1%3.6%, versus the secondthird
quarter of 2004.
Management believes that it is important 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
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 $207.3$209.3 million during the sixnine
months ended JuneSeptember 30, 2005, versus $208.8$208.6 million during the same period
of 2004, and the rate paid on borrowings increased 108122 basis points to 2.7%2.9%.
During the secondthird quarter of 2005, the average daily balances of borrowings
increased $16.7$2.3 million to $221.0$213.3 million, versus $204.2$211.0 million for the same
period in 2004. The rate on borrowings increased 71154 basis points when
comparing the secondthird quarter of 2005 with the same period of 2004. On an
average daily basis, total deposits (including demand deposits) and purchased
funds increased 10.3%11.8% and 11.3%14.0%, respectively, when comparing the six-monthnine-month
and three-month periods ended JuneSeptember 30, 2005 versus the same periods in
2004.
14
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)
SixNine Months Ended JuneSeptember 30,
--------------------------------------------------------------------------------------------------------------------------------------------------------
2005 2004
------------------------------------ ------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------ ---------- ----------------- ------ ------------ --------- ---------------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 1,031,1801,058,227 $ 30,667 6.0048,561 6.14 % $ 895,679907,573 $ 23,13135,255 5.19 %
Tax exempt (1) 4,411 112 5.10 8,575 186 4.374,416 172 5.21 8,655 275 4.24
Investments: (1)
Available for sale 286,307 6,389 4.50 281,106 5,815 4.16286,866 9,569 4.46 280,704 8,658 4.12
Short-term investments 4,429 55 2.50 6,128 29 0.954,761 83 1.49 5,779 46 1.20
Interest bearing deposits 3,467 46 2.68 3,448 20 1.173,838 101 3.52 3,782 36 1.27
------------ --------- ------------ ---------
Total earning assets 1,329,794 37,269 5.651,358,108 58,486 5.76 % 1,194,936 29,181 4.911,206,493 44,270 4.90 %
Nonearning assets:
Cash and due from banks 54,51654,439 0 49,70450,109 0
Premises and equipment 25,03825,068 0 25,99625,888 0
Other nonearning assets 43,52843,907 0 42,76042,549 0
Less allowance for loan loss losses (11,133)(11,403) 0 (10,435)(10,515) 0
------------ --------- ------------ ---------
Total assets $ 1,441,7431,470,119 $ 37,26958,486 $ 1,302,9611,314,524 $ 29,18144,270
============ ========= ============ =========
(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 sixnine months ended JuneSeptember 30,
2005 and 2004, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
16
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
SixNine months Ended JuneSeptember 30,
-----------------------------------------------------------------------------------------------------------------------------------------------------
2005 2004
----------------------------------- ---------------------------------------------------------------------- ----------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
------------ --------- ------ ------------ --------- ------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 71,92771,668 $ 35 0.1058 0.11 % $ 67,61168,375 $ 48 0.1465 0.13 %
Interest bearing checking accounts 343,335 2,266 1.33 346,980 1,380336,705 3,649 1.45 348,794 2,097 0.80
Time deposits:
In denominations under $100,000 222,311 3,289 2.98 214,077 3,016225,411 5,179 3.07 216,224 4,575 2.83
In denominations over $100,000 262,239 3,940 3.03 166,606 1,688 2.04291,589 7,253 3.33 166,816 2,644 2.12
Miscellaneous short-term bbborrowings 166,350 1,743 2.11 155,551 698 0.90168,365 2,950 2.34 160,396 1,215 1.01
Long-term borrowings 40,974 1,035 5.09 53,297 994 3.751,607 5.24 48,200 1,422 3.94
------------ --------- ------------ ---------
Total interest bearing liabilities 1,107,136 12,308 2.241,134,712 20,696 2.44 % 1,004,122 7,824 1.571,008,805 12,018 1.59 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 219,907218,925 0 197,563202,493 0
Other liabilities 9,5799,697 0 8,1508,145 0
Stockholders' equity 105,121106,785 0 93,12695,081 0
Total liabilities and stockholders'
equity ------------ --------- ------------ ---------
$ 1,441,7431,470,119 $ 12,30820,696 $ 1,302,9611,314,524 $ 7,82412,018
============ ========= ============ =========
Net interest differential - yield on
average daily earning assets $ 24,961 3.7837,790 3.72 % $ 21,357 3.6032,252 3.57 %
========= =========
17
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
Three Months Ended JuneSeptember 30,
------------------------------------------------------------------------------------------------------------------------------------------------------
2005 2004
----------------------------------- ----------------------------------------------------------------------- ----------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------ --------- ------ ------------ --------- ------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 1,057,4591,111,440 $ 16,154 6.1317,894 6.39 % $ 915,879931,102 $ 11,688 5.1312,352 5.34 %
Tax exempt (1) 3,830 53 5.51 8,938 154 4.284,426 62 5.60 8,812 89 4.01
Investments: (1)
Available for sale 286,638 3,237 4.53 280,159 2,751 3.95287,968 3,180 4.38 279,907 2,850 4.05
Short-term investments 2,933 21 2.87 4,080 10 0.995,412 45 3.30 5,090 17 1.33
Interest bearing deposits 3,339 24 2.88 3,889 11 1.144,568 38 3.30 4,445 16 1.43
------------ --------- ------------ ---------
Total earning assets 1,354,199 19,489 5.771,413,814 21,219 5.95 % 1,212,945 14,614 4.831,229,356 15,324 4.96 %
Nonearning assets:
Cash and due from banks 54,90954,287 0 51,64050,910 0
Premises and equipment 25,05925,124 0 25,92825,674 0
Other nonearning assets 44,10544,652 0 43,01143,701 0
Less allowance for loan loss losses (11,372)(11,932) 0 (10,509)(10,673) 0
------------ --------- ------------ ---------
Total assets $ 1,466,9001,525,945 $ 19,48921,219 $ 1,323,0151,338,968 $ 14,61415,324
============ ========= ============ =========
(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 JuneSeptember
30, 2005 and 2004, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
18
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
Three Months Ended JuneSeptember 30,
-----------------------------------------------------------------------------------------------------------------------------------------------------
2005 2004
----------------------------------- ---------------------------------------------------------------------- ----------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
------------ --------- ------ ------------ --------- ------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 73,38971,158 $ 18 0.1023 0.13 % $ 70,26869,888 $ 20 0.1117 0.10 %
Interest bearing checking accounts 347,468 1,274 1.47 347,633 642 0.74323,660 1,383 1.70 352,381 717 0.81
Time deposits:
In denominations under $100,000 223,778 1,707 3.06 222,777 1,576 2.85231,511 1,891 3.24 220,473 1,559 2.81
In denominations over $100,000 261,652 2,083 3.19 168,048 863 2.07349,332 3,312 3.76 167,229 956 2.27
Miscellaneous short-term bbborrowings 180,046 1,063 2.37 160,113 352 0.88172,329 1,207 2.78 169,981 517 1.21
Long-term borrowings 40,974 541 5.30 44,176 404 3.68572 5.54 40,974 428 4.16
------------ --------- ------------ ---------
Total interest bearing liabilities 1,127,307 6,686 2.381,188,964 8,388 2.80 % 1,013,015 3,857 1.531,020,926 4,194 1.63 %
Noninterest bearing liabilities
and stockholders' equity:
Demand deposits 223,488216,995 0 208,225212,245 0
Other liabilities 9,5059,926 0 7,9678,308 0
Stockholders' equity 106,600110,060 0 93,80897,489 0
Total liabilities and stockholders'
equity ------------ --------- ------------ ---------
$ 1,466,9001,525,945 $ 6,6868,388 $ 1,323,0151,338,968 $ 3,8574,194
============ ========= ============ =========
Net interest differential - yield on
average daily earning assets $ 12,803 3.7812,831 3.59 % $ 10,757 3.5511,130 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 $1.1$1.8 million and $662,000$659,000 were
recorded during the six-monthnine-month and three-month periods ended JuneSeptember 30,
2005, versus provisions of $498,000$648,000 and $246,000$150,000 recorded during the same
periods of 2004. The increase in the provision for loan losses for the periods
ended JuneSeptember 30, 2005 reflected a number ofwas primarily due to growth in the loan portfolio, as
well as higher allocations on classified credits. Other factors includingimpacting 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 sixnine and three-month periods ended
JuneSeptember 30, 2005 and 2004 are shown in the following table:
SixNine Months Ended
JuneSeptember 30,
------------------------------------------------------------------
Percent
2005 2004 Change
---------- ---------- ------------------ -------- --------
(in thousands)
Trust and brokerage income $ 1,5192,261 $ 1,519 0.0 2,319 (2.5)%
Service charges on deposit accounts 3,252 3,354 (3.0)5,112 5,194 (1.6)
Loan, insurance and service fees 893 957 (6.7)1,333 1,706 (21.9)
Merchant card fee income 1,165 1,081 7.81,857 1,657 12.1
Other income 1,057 874 20.91,428 1,237 15.4
Net gains on the sale of real
estate mortgages held for sale 451 293 53.9
---------- ---------- ----------726 724 0.3
-------- -------- --------
Total noninterest income $ 8,33712,717 $ 8,078 3.2 12,837 (0.9)%
========== ========== ================== ======== ========
20
Three Months Ended
JuneSeptember 30,
----------------------------------------------------------------
Percent
2005 2004 Change
---------- ---------- ------------------ -------- --------
(in thousands)
Trust and brokerage income $ 791742 $ 780 1.4 800 (7.3)%
Service charges on deposit accounts 1,703 1,697 0.41,860 1,840 1.1
Loan, insurance and service fees 478 470 1.7440 521 (15.6)
Merchant card fee income 629 581 8.3692 576 20.1
Other income 410 544 (24.6)371 363 2.2
Net gains on the sale of real
estate mortgages held for sale 207 (27) 866.7
---------- ---------- ----------275 431 (36.2)
-------- -------- --------
Total noninterest income $ 4,2184,380 $ 4,045 4.3 4,531 (3.3)%
========== ========== ================== ======== ========
Noninterest income increased $259,000decreased $120,000 and $173,000,$151,000, respectively, in the
six-monthnine-month and three-month periods ended JuneSeptember 30, 2005, versus the same
periods in 2004. Driving these increases were gains onLoan, 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 which
increased $158,000 and $234,000, respectively,declined in the six-month and
three-month periods ended June 30, 2005. The increases reflected a more
favorable timing of mortgage sales into the secondary market during the secondthird
quarter of 2005 versus the secondthird quarter of 2004.2004 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 six-monthnine-month period ended JuneSeptember
30, 2005 primarily due to a $62,000 gain on the sale of other real estate.
Partially offsetting these increases were
decreases of $102,000 in service charges on deposit accounts. This decline was
driven by increases in the earnings credit available to offset service charges
on commercial checking accounts as well as reduced overdraft activity
resulting in fewer overdraft charges.
Noninterest Expense
Noninterest expense categories for the six-monthnine-month and three-month periods
ended JuneSeptember 30, 2005 and 2004 are shown in the following table:
21
SixNine Months Ended
JuneSeptember 30,
----------------------------------------------------------------
Percent
2005 2004 Change
---------- ---------- ------------------ -------- --------
(in thousands)
Salaries and employee benefits $ 10,17315,224 $ 9,784 4.014,705 3.5 %
Net occupancy expense 1,331 1,168 14.02,059 1,802 14.3
Equipment costs 1,008 963 4.71,476 1,532 (3.7)
Data processing fees and supplies 1,129 1,245 (9.3)1,715 1,901 (9.8)
Credit card interchange 716 633 13.11,158 1,037 11.7
Other expense 4,304 4,310 (0.1)
---------- ---------- ----------6,384 6,327 0.9
-------- -------- --------
Total noninterest expense $ 18,66128,016 $ 18,103 3.127,304 2.6 %
========== ========== ================== ======== ========
Three Months Ended
JuneSeptember 30,
----------------------------------------------------------------
Percent
2005 2004 Change
---------- ---------- ------------------ -------- --------
(in thousands)
Salaries and employee benefits $ 5,0275,051 $ 4,859 3.54,921 2.6 %
Net occupancy expense 675 590 14.4728 634 14.8
Equipment costs 491 524 (6.3)468 569 (17.8)
Data processing fees and supplies 571 650 (12.2)586 656 (10.7)
Credit card interchange 388 343 13.1442 404 9.4
Other expense 2,146 2,229 (3.7)
---------- ---------- ----------2,080 2,017 3.1
-------- -------- --------
Total noninterest expense $ 9,2989,355 $ 9,195 1.19,201 1.7 %
========== ========== ================== ======== ========
Noninterest expense increased $558,000$712,000 and $103,000,$154,000, respectively, in the
six-monthnine-month and three-month periods ended JuneSeptember 30, 2005 versus the same
periods of 2004. Driving these increases were salaries and employee benefits,
which increased $389,000$519,000 and $168,000,$130,000, respectively, in the six-monthsnine-months and
three-months ended JuneSeptember 30, 2005. The increases were due largely to
higher
health care costs as well as normal salary increases.increases and staff additions. In addition, net occupancy
expense increased due to higher property tax expense.and maintenance expenses.
Offsetting these increases were decreases in data processing fees and supplies
which declined due to lowerimproved pricing with the Company's processing costs.agents.
22
Income Tax Expense
Income tax expense increased $1.1$1.4 million, or 33.1%26.8%, for the first sixnine
months of 2005, compared to the same period in 2004. Income tax expense for
the secondthird quarter of 2005 increased $719,000,$335,000, or 43.9%16.4%, compared to the same
22
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 threenine months of 2005 compared to 32.8%33.3%
during the same period in 2004. It increased to 34.9%34.5% for the secondthird quarter of
2005, versus 32.9%34.1% for the secondthird quarter of 2004. The increases were driven by
a decrease in the amount of income derived from tax-advantaged sources during
the six-monthnine-month and three-month periods ended JuneSeptember 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 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, 2004 (incorporated by reference as part of the Company's
10-K filing).
FINANCIAL CONDITION
Total assets of the Company were $1.539$1.558 billion as of JuneSeptember 30, 2005,
an increase of $85.5$104.6 million, or 5.9%7.2%, when compared to $1.453 billion as of
December 31, 2004.
Total cash and cash equivalents decreased by $10.9$41.4 million, or 10.5%39.9%, to
$92.9$62.4 million at JuneSeptember 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 $3.0$2.6 million, or 1.0%0.9%,
to $289.6$289.2 million at JuneSeptember 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 $27.2$44.7 million. Offsetting this
increase were securities paydowns totaling $20.7$35.2 million, maturities and calls
of securities totaling $1.7$2.0 million, the amortization of premiums, net of the
23
accretion of discounts totaling $1.4$2.0 million, and the fair market value of the
securities portfolio decreased by $374,000.$2.9 million. A rising interest rate
environment during the first halfnine 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 23
either directly or indirectly backed by the federal
government or a local municipal government.
Real estate mortgages held-for-sale increased by $1.3 million,$487,000, or 42.7%16.3%, to
$4.3$3.5 million at JuneSeptember 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 sixnine months ended JuneSeptember
30, 2005, $21.8$34.2 million in real estate mortgages were originated for sale and
$20.8$34.1 million in mortgages were sold.
Total loans, excluding real estate mortgages held-for-sale, increased by
$90.8$142.1 million, or 9.1%14.2%, to $1.094$1.145 billion at JuneSeptember 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 JuneSeptember 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 slowuncertain 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
24
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 JuneSeptember 30, 2005, on the
basis of management's review of the loan portfolio, the Company had $31.0$26.7
million of assets classified as special mention, $26.1$26.5 million classified as
substandard, $933,000$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 $543,000$2.1 million to $8.8$7.2 million at
JuneSeptember 30, 2005 from $9.3 million at December 31, 2004. The decrease in the
impaired loans category resulted primarily from the payoffupgrade 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 $6.7$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 JuneSeptember 30, 2005 and December 31, 2004.
25
JuneSeptember 30, December 31,
2005 2004
------------ -------------------- --------
(in thousands)
NONPERFORMING ASSETS:
Nonaccrual loans $ 6,6657,600 $ 7,213
Loans past due over 90 days and accruing 2,542218 2,778
------------ -------------------- --------
Total nonperforming loans 9,2077,818 9,991
------------ -------------------- --------
Other real estate 0 261
Repossessions 1412 13
------------ -------------------- --------
Total nonperforming assets $ 9,2217,830 $ 10,265
============ ==================== ========
Total impaired loans $ 8,7667,207 $ 9,309
Nonperforming loans to total loans 0.85%0.68% 1.01%
Nonperforming assets to total assets 0.60%0.50% 0.71%
Total deposits increased by $10.5$135.6 million, or 0.9%12.2% to $1.126$1.251 billion at
JuneSeptember 30, 2005 from $1.115 billion at December 31, 2004. The increase
resulted from increases of $49.5$191.6 million in certificates of deposit and $1.7$9.2
million in money market accounts. Offsetting these increases were declines of
$29.7$37.1 million in Investors' Money Market accounts, $4.9$14.7 million in NOW
accounts, $9.0 million in demand deposits $4.3 million in NOW accounts and $1.8$4.4 million in savings
accounts. Total short-term borrowings increaseddecreased by $68.4$41.0 million, or 36.9%22.1%, to
$254.1$144.7 million at JuneSeptember 30, 2005 from $185.7 million at December 31, 2004.
The increasedecrease resulted primarily from increasesdecreases of $49.5$17.4 million in both
federal funds purchased and $14.9 million in other borrowings, primarily short-term advances from the
Federal Home Loan Bank of Indianapolis.securities sold under agreements to repurchase.
Total stockholders' equity increased by $6.7$8.7 million, or 6.6%8.6%, to $108.5$110.5
million at JuneSeptember 30, 2005 from $101.8 million at December 31, 2004. Net
income of $8.5$13.0 million, minus dividends of $2.7$4.1 million, plus $1.2$1.6 million
for stock issued through options exercised, minus the decrease in the
accumulated other comprehensive income of $241,000,$1.8 million, minus $81,000$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 JuneSeptember 30,
2005,
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%, 11.0%10.9% and 12.0%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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 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
JuneSeptember 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 JuneSeptember 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 Purchased ofPurchasof Shares that May
Total Number Average as Part of Publicly Yet Be Purchased
Paid of Shares PricePaidPrice Paid Announced Plans Under the Plan or
Period Purchased Per Share or Programs Programs
- ------- ---------- ------- --------- -----------
April 1-30 231July 1-31 1,854 $ 36.2043.76 0 0
MayAugust 1-31 0 $ 0 0 0
JuneSeptember 1-30 0 $ 0 0 0
----- ------- --------- -----------
Total 2311,854 $ 36.2043.76
===== =======
(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
---------------------------------------------------
On April 12, 2005, the Company's annual meeting of stockholders was
held. At the meeting, the stockholders ratified the selection of Crowe
Chizek and Company LLC as the Company's independent auditors for the
year ended December 31, 2005, and Robert E. Bartels, Jr.,
30
Michael L. Kubacki, Steven D. Ross and M. Scott Welch were elected to
serve as directors with terms expiring in 2008. Continuing as
directors until 2006 are Allan J. Ludwig, Emily E. Pichon and Richard
L. Pletcher. Continuing as directors until 2007 are L. Craig Fulmer,
Charles E. Niemier, Donald B. Steininger and Terry L. Tucker.
Election of Directors:
For Withheld
--- --------
Robert L. Bartels, Jr. 4,968,966 11,121
Michael L. Kubacki 4,724,260 255,830
Steven D. Ross 4,972,444 7,646
M. Scott Welch 4,972,519 7,571
Ratification of Auditors:
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
Crowe Chizek and Company LLC 4,951,629 19,785 0 0None
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
JuneSeptember 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: August 1,October 31, 2005 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: August 1,October 31, 2005 /s/David M. Findlay
David M. Findlay - Executive Vice President
and Chief Financial Officer
Date: August 1,October 31, 2005 /s/Teresa A. Bartman
Teresa A. Bartman - Vice President and
Controller
32