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| LKFN > SEC Filings for LKFN > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
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 $15.3 million for the first nine months of 2008, versus $14.4 million in the same period of 2007, an increase of 6.1%. Net income was positively impacted by a $6.8 million increase in net interest income as well as an increase of $2.9 million in noninterest income. Offsetting these positive impacts was an increase of $4.6 million in the provision for loan losses and an increase of $3.4 million in noninterest expense. Basic earnings per share for the first nine months of 2008 were $1.25 per share, versus $1.18 per share for the first nine months of 2007. 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 2008 were $1.23 per share, versus $1.16 for the first nine months of 2007.
Net income for the third quarter of 2008 was $5.2 million, an increase of 19.5% versus $4.4 million for the comparable period of 2007. The rise in net income was driven by an increase of $3.6 million in net interest income as well as an increase of $1.1 million in noninterest income. Offsetting these positive impacts was an increase of $2.0 million in the provision for loan losses, as well as a $1.1 million increase in noninterest expense. Basic earnings per share for the third quarter of 2008 were $0.43 per share, versus $0.36 per share for the third quarter of 2007. Diluted earnings per share for the third quarter of 2008 were $0.42 per share, versus $0.35 per share for the third quarter of 2007.
RECENT DEVELOPMENTS
Recent events in the U.S. and global financial markets, including the deterioration of the worldwide credit markets, have created significant challenges for financial institutions such as the Company. Dramatic declines in the housing market during the past year, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. In addition, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties.
In response to the crises affecting the U.S. banking system and financial markets and attempt to bolster the distressed economy and improve consumer confidence in the financial system, on October 3, 2008, the U.S. Congress passed, and the President signed into law, the Emergency Economic Stabilization Act of 2008 (the "Stabilization Act"). The Stabilization Act authorizes the Secretary of the U.S. Treasury and the Federal Deposit Insurance Corporation (the "FDIC") to implement various temporary emergency programs designed to
On October 14, 2008, the U.S. Treasury announced that it will purchase equity stakes in eligible financial institutions that wish to participate. This program, known as the Capital Purchase Program, allocates $250 billion from the $700 billion authorized by the Stabilization Act to the U.S. Treasury for the purchase of senior preferred shares from qualifying financial institutions. Eligible institutions will be able to sell equity interests to the U.S. Treasury in amounts equal to between 1% and 3% of the institution's risk-weighted assets. In conjunction with the purchase of preferred stock, the U.S. Treasury will receive warrants to purchase common stock from the participating institutions with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions will be required to adopt the U.S. Treasury's standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds equity issued under the Capital Purchase Program. Many financial institutions have already announced that they will participate in the Capital Purchase Program. The Company is evaluating whether to apply for participation in the CPP. Participation in the program is not automatic and subject to approval by the Treasury.
Also on October 14, 2008, using the systemic risk exception to the FDIC Improvement Act of 1991, the U.S. Treasury authorized the FDIC to provide a 100% guarantee of newly-issued senior unsecured debt and deposits in non-interest bearing accounts at FDIC insured institutions. Initially, all eligible financial institutions will automatically be covered under this program, known as the Temporary Liquidity Guarantee Program, without incurring any fees for a period of 30 days. Coverage under the Temporary Liquidity Guarantee Program after the initial 30-day period is available to insured financial institutions at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for non-interest bearing deposits. After the initial 30-day period, institutions will continue to be covered under the Temporary Liquidity Guarantee Program unless they inform the FDIC that they have decided to opt out of the program. The Company has determined that it will participate in the portion of the Temporary Liquidity Guarantee Program that guarantees deposits in non-interest bearing accounts, but has elected not to participate in the portion of the Temporary Liquidity Guarantee Program that guarantees newly-issued senior unsecured debt.
Under the Troubled Asset Auction Program, another initiative based on the authority granted by the Stabilization Act, the U.S. Treasury, through a newly-created Office of Financial Stability, will purchase certain troubled mortgage-related assets from financial institutions in a reverse-auction format. Troubled assets eligible for purchase by the Office of Financial Stability include residential and commercial mortgages originated on or before March 14, 2008, securities or obligations that are based on such mortgages, and any other financial instrument that the Secretary of the U.S. Treasury determines, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, is necessary to promote financial market stability. The U.S. Treasury has not issued any definitive guidance regarding this program and the Company's management has not determined whether or not it will participate.
Under the Stabilization Act, the U.S. Treasury is also required to establish a program that will guarantee principal of, and interest on, troubled assets originated or issued prior to March 14, 2008, including mortgage-backed securities. The program may take any form and may vary by asset class, but it must be voluntary and
It is not clear at this time what impact the Stabilization Act, the Capital Purchase Program, the Temporary Liquidity Guarantee Program, the Troubled Asset Auction Program, other liquidity and funding initiatives of the Federal Reserve and other agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the Company's future financial condition and results of operations.
The preceding is a summary of recently enacted laws and regulations that could materially impact the Company's results of operations or financial condition. This discussion is qualified in its entirety by reference to such laws and regulations and should be read in conjunction with "Supervision and Regulation" discussion contained in the Company's 2007 Form 10-K.
RESULTS OF OPERATIONS
Net Interest Income
For the nine-month period ended September 30, 2008, net interest income totaled $47.3 million, an increase of 16.7%, or $6.8 million, versus the first nine months of 2007. This increase was primarily due to a $303.5 million, or 17.8%, increase in average earning assets to $2.005 billion. For the three month period ended September 30, 2008, net interest income totaled $17.3 million, an increase of 25.9%, or $3.6 million. The increase was primarily driven by a $339.7 million, or 19.5%, increase in average earning assets. In addition, net interest income was positively impacted in the nine-month and three-month periods ended September 30, 2008 by the collection of $1.2 million in loan interest income as a result of the payoff of an impaired commercial credit, which had been in nonaccrual status. Excluding the $1.2 million collection, the Company's net interest income for the third quarter would have been $16.1 million, versus $13.7 million for the comparable period of 2007, an increase of 17.1%
Given the Company's mix of interest earning assets and interest bearing liabilities at September 30, 2008, the Company would generally be considered to have a relatively neutral balance sheet structure. The Company's balance sheet structure would normally be expected to produce a stable or declining net interest margin in a declining rate environment. As the Company's balance sheet has become more neutral in structure, management believes that future rate movements will have less impact on net interest margin than historically, although other factors such as deposit mix, market deposit rate pricing and non-bank deposit products could have a dramatic impact on net interest margin. The Company's mix of deposits has shifted to more reliance on certificates of deposits, specifically public fund deposits and brokered deposits, and corporate and public fund money market and repurchase agreements, which generally carry a higher interest rate cost than other types of interest bearing deposits.
During the first nine months of 2008, loan interest income decreased by $973,000, or 1.3%, to $75.8 million, versus $76.7 million during the first nine months of 2007. The decrease was driven by a 120 basis point decrease in the tax equivalent yield on loans to 6.2%, versus 7.4% in the first nine months of 2007, somewhat offset by a $246.3 million, or 17.8%, increase in average daily loan balances. During the third quarter of 2008, loan interest income decreased by $306,000, or 1.2%, to $25.9 million, versus $26.2 million during the third quarter of 2007. The decrease was driven by a 125 basis point decrease in the tax equivalent yield on loans to 6.1%, versus 7.4% in the third quarter of 2007, somewhat offset by a $273.7 million, or 19.4%, increase in average daily loan balances. Loan interest income in the nine months and three months ended September 30, 2008, was positively impacted by $1.2 million as a result of the payoff of an impaired commercial credit, which had been in nonaccrual status.
The average daily securities balances for the first nine months of 2008 increased $63.5 million, or 21.2%, to $363.4 million, versus $299.9 million for the same period of 2007. During the same periods, income from securities increased by $3.4 million, or 33.4%, to $13.6 million versus $10.2 million during the first nine months of 2007. The increase was primarily the result of the increase in average daily securities balances, as well as a 40 basis point increase in the tax equivalent yield on securities, to 5.3%, versus 4.9% in the first nine months of 2007. The average daily securities balances for the third quarter of 2008 increased $85.3 million, or 28.0%, to $389.8 million, versus $304.5 million for the same period of 2007. During the third quarter of 2008, income from securities was $5.0 million, an increase of $1.5 million, or 42.6%, versus the third quarter of 2007. The increase was primarily the result of the increase in average daily securities balances, as well as a 46 basis point increase in the tax equivalent yield on securities, to 5.4%, versus 4.9% in the third quarter of 2007.
Total interest expense decreased $4.8 million, or 10.2%, to $42.3 million for the nine-month period ended September 30, 2008, from $47.1 million for the comparable period in 2007. The decrease was primarily the result of a 91 basis point decrease in the Company's daily cost of funds to 2.9%, versus 3.8% for the same period of 2007. Total interest expense decreased $2.7 million, or 16.4%, to $13.7 million for the third quarter of 2008, versus $16.4 million for the third quarter of 2007. The decrease was primarily the result of a 116 basis point decrease in the Company's daily cost of funds to 2.7%, from 3.8% for the same period of 2007.
On an average daily basis, total deposits (including demand deposits) increased $107.9 million, or 7.4%, to $1.570 billion for the nine-month period ended September 30, 2008, versus $1.462 billion during the same period in 2007. The average daily balances for the third quarter of 2008 increased $156.6 million, or 10.5%, to $1.642 billion from $1.485 billion during the third quarter of 2007. On an average daily basis, non-interest bearing demand deposits decreased to $219.2 million for the nine-month period ended September 30, 2008, versus $224.3 million for the same period in 2007. The average daily noninterest bearing demand deposit balances for the third quarter of 2008 were $221.2 million, versus $229.1 million for the third quarter of 2007.
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 increased its usage of brokered certificates of deposits as a result of loan growth and overall liquidity and funding management. On an average daily basis, total brokered certificates of deposit decreased $10.8 million to $70.1 million for the nine-month period ended September 30, 2008, versus $80.9 million for the same period in 2007. During the third quarter of 2008, average daily brokered certificates of deposit were $93.2 million, versus $107.2 million during the third quarter of 2007. On an average daily basis, total public fund certificates of deposit increased $7.4 million to $259.4 million for the nine-month period ended September 30, 2008, versus $252.0 million for the same period in 2007. During the third quarter of 2008, average daily public fund certificates of deposit were $252.8 million, versus $187.2 million during the third quarter of 2007. The variability in public fund deposits is primarily due to the ongoing challenges in the state of Indiana related to the reapportionment of real estate property taxes and the intense competition for these funds. Due to delays in issuing real estate property tax bills, public fund entities have generally had lower balances of investable funds in 2008.
Average daily balances of borrowings were $387.0 million during the nine months ended September 30, 2008, versus $195.8 million during the same period of 2007, and the rate paid on borrowings decreased 185 basis points to 3.0%. The increase in average borrowings was driven by increases of $115.0 million in notes payable, $43.7 million in securities sold under agreements to repurchase and $32.6 million in federal funds purchased. During the third quarter of 2008 the average daily balances of borrowings increased $185.8 million to $397.6 million, versus $211.8 million for the same period of 2007, and the rate paid on borrowings decreased 207 basis points to 2.8%. On an average daily basis, total deposits (including demand deposits) and purchased funds increased 18.0% and 20.2%, respectively, when comparing the nine-month and three-month periods ended September 30, 2008 versus the same periods in 2007.
As a result of the unprecedented activity in the financial markets during the third quarter of 2008, the Company has reviewed its liquidity plan and has taken several actions designed to provide for an appropriate funding strategy in this unsettled environment. These actions include: actively communicating with correspondent banks who provide federal fund lines to ensure availability of these funds; expanded use of brokered certificate of deposits, which have been readily available to the Company at competitive rates; allocation of collateral at the Federal Reserve Bank for potential borrowings under their programs; increased usage of FHLB advances at advantageous rates and an increased focus on attractive core deposit programs offered by the Company.
The following tables set forth consolidated information regarding average balances and rates:
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