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LKFN > SEC Filings for LKFN > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for LAKELAND FINANCIAL CORP

Form 10-Q for LAKELAND FINANCIAL CORP


7-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

and

RESULTS OF OPERATIONS

September 30, 2012

OVERVIEW

Lakeland Financial Corporation is the holding company for Lake City Bank. The Company is headquartered in Warsaw, Indiana and operates 45 offices in 13 counties in Northern and Central Indiana. The Company earned $26.8 million for the first nine months of 2012, versus $22.4 million in the same period of 2011, an increase of 19.6%. Net income was positively impacted by a $9.6 million decrease in the provision for loan losses and an increase in noninterest income of $1.2 million. Offsetting these positive impacts were a decrease in net interest income of $2.5 million and an increase of $1.6 million in noninterest expense. Basic earnings per common share for the first nine months of 2012 were $1.64 per share, versus $1.38 per share for the first nine months of 2011, an increase of 18.8%. Diluted earnings per common share reflect the potential dilutive impact of stock options, stock awards and warrants. Diluted earnings per common share for the first nine months of 2012 were $1.63 per share, versus $1.37 for the first nine months of 2011, an increase of 19.0%.

Net income for the third quarter of 2012 was $9.3 million, an increase of 10.7% versus $8.4 million for the comparable period of 2011. The increase was driven by a $2.4 million decrease in the provision for loan losses and an increase in noninterest income of $306,000. Offsetting these positive impacts was an increase of $823,000 in noninterest expense as well as a decrease of $661,000 in net interest income. Basic earnings per common share for the third quarter of 2012 were $0.57 per share, versus $0.52 per share for the third quarter of 2011. Diluted earnings per common share for the third quarter of 2012 were $0.57 per share, versus $0.52 per share for the third quarter of 2011, an increase of 9.6%.

RESULTS OF OPERATIONS

Net Interest Income

For the nine-month period ended September 30, 2012, net interest income totaled $66.8 million, a decrease of 3.6%, or $2.5 million, versus the first nine months of 2011. This decrease was primarily due to a 26 basis point decrease in the Company's net interest margin to 3.34% for the nine month period ended September 30, 2012, versus 3.60% comparable period of 2011. During the nine-month period ended September 30, 2012, average earning assets increased by $101.0 million, or 3.9%, to $2.717 billion. For the third quarter of 2012, net interest income totaled $22.2 million, a decrease of 2.9%, or $661,000, versus the third quarter of 2011. This decrease was primarily due to an 18 basis point decrease in the Company's net interest margin to 3.30% for the third quarter of 2012, versus 3.48% for the third quarter of 2011. Average earning assets increased $78.0 million, or 3.0%, to $2.718 billion in the third quarter of 2012, versus the third quarter of 2011.

Given the Company's mix of interest earning assets and interest bearing liabilities at September 30, 2012, 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 rate movements and other factors such as deposit mix, market deposit rate pricing and non-bank deposit products could have an impact on net interest margin. As a result of the prolonged and unprecedented low interest rate environment, and given recent indications by the Federal Reserve Bank regarding its intentions to maintain current target rate levels, the Company expects to experience continued pressure on its net interest margin. Also contributing to this net interest margin compression is a recent trend of aggressive loan pricing by the Company's competitors in its markets on both variable and fixed rate commercial loans. As a result of this competitive pricing influence, the Company believes that its yields on the commercial loan portfolio will continue to experience downward pressure. Over time, the Company's mix of deposits has shifted to more reliance on transaction accounts such as Rewards Checking, as well as Rewards Savings 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. The Company believes that this deposit strategy provides for an appropriate funding strategy.

During the first nine months of 2012, total interest and dividend income decreased by $4.0 million, or 4.4%, to $87.7 million, versus $91.7 million during the first nine months of 2011. This decrease was primarily the result of a 38 basis point decrease in the tax equivalent yield on average earning assets to 4.4%, versus 4.8% for the same period of 2011. Average earning assets increased by $101.0 million, or 3.9%, during the first nine months of 2012 versus the same period of 2011. During the third quarter of 2012, total interest and dividend income decreased by $1.8 million, or 5.8%, to $28.7 million, versus $30.4 million during the third quarter of 2011. This decrease was primarily the result of a 38 basis point decrease in the tax equivalent yield on average earning assets to 4.3% in the third quarter of 2012, versus 4.6% for the same period of 2011. Average earning assets increased by $78.0 million, or 3.0%, in the third quarter of 2012 versus the same period of 2011.

During the first nine months of 2012, loan interest income decreased by $790,000, or 1.0%, to $78.1 million, versus $78.9 million during the first nine months of 2011. The decrease was driven by a 24 basis point decrease in the tax equivalent yield on loans, to 4.7%, versus 5.0% in the first nine months of 2011. During the third quarter of 2012, loan interest income decreased by $592,000, or 2.2%, to $25.9 million, versus $26.5 million during the third quarter of 2011. The decrease was driven by a 22 basis point decrease in the tax equivalent yield on loans, to 4.7%, versus 4.9% in the third quarter of 2011.

The average daily securities balances for the first nine months of 2012 increased $33.3 million, or 7.5%, to $475.0 million, versus $441.8 million for the same period of 2011. During the same periods, income from securities decreased by $3.2 million, or 25.1%, to $9.5 million versus $12.7 million during the first nine months of 2011. The decrease was primarily the result of a 119 basis point decrease in the tax equivalent yield on securities, to 3.0%, versus 4.2% in the first nine months of 2011. The average daily securities balances for the third quarter of 2012 increased $18.5 million, or 4.1%, to $475.9 million, versus $457.4 million for the same period of 2011. During the same periods, income from securities decreased by $1.2 million, or 30.1%, to $2.7 million versus $3.9 million during the third quarter of 2011. The decrease was primarily the result of a 112 basis point decrease in the tax equivalent yield on securities, to 2.6%, versus 3.7% in the third quarter of 2011. The prolonged low interest rate environment has driven accelerated prepayments in the Company's portfolio of mortgage backed securities. Those prepayments must then be reinvested in securities at current, lower market yields, resulting in less income from securities despite the higher average securities balances. Due to the unprecedented low interest rate environment, the Company is currently reevaluating its investment strategy. The reevaluation includes considering the purchase of good quality, higher yielding alternative investments. Given the strength of the Company's balance sheet and the likelihood of the low interest rate environment persisting into the future, the Company believes that this would be an appropriate and prudent strategy.

Total interest expense decreased $1.6 million, or 6.9%, to $20.9 million for the nine-month period ended September 30, 2012, from $22.4 million for the comparable period in 2011. The decrease was primarily the result of a 16 basis point decrease in the Company's daily cost of funds to 1.1%, versus 1.2% for the same period of 2011. Total interest expense decreased $1.1 million, or 14.6%, to $6.5 million for the third quarter of 2012, versus $7.6 million for the third quarter of 2011. The decrease was primarily the result of a 23 basis point decrease in the Company's cost of funds to 1.0%, from 1.2% for the same period of 2011.

On an average daily basis, total deposits (including demand deposits) increased $198.5 million, or 8.7%, to $2.491 billion for the nine-month period ended September 30, 2012, versus $2.293 billion during the same period in 2011. The average daily balances for the third quarter of 2012 increased $175.7 million, or 7.6%, to $2.492 billion from $2.316 billion during the third quarter of 2011. On an average daily basis, noninterest bearing demand deposits were $348.3 million for the nine-month period ended September 30, 2012, versus $302.2 million for the same period in 2011. The average daily noninterest bearing demand deposit balances for the third quarter of 2012 were $364.6 million, versus $317.9 million for the third quarter of 2011. On an average daily basis, interest bearing transaction accounts increased $147.6 million, or 17.5%, to $992.0 million for the nine-month period ended September 30, 2012, versus the same period in 2011. Average daily interest bearing transaction accounts increased $131.4 million, or 15.5%, to $981.8 million for the third quarter of 2012, versus $850.3 million for the third quarter of 2011. When comparing the nine months ended September 30, 2012 with the same period of 2011, the average daily balance of time deposits, which pay a higher rate of interest compared to demand deposits and non-Rewards Checking transaction accounts, decreased $21.4 million. The average rate paid on time deposit accounts decreased three basis points to 1.6% for the nine-month period ended September 30, 2012, versus the same period in 2011. During the third quarter of 2012, the average daily balance of time deposits decreased $30.4 million, and the rate paid decreased 12 basis points to 1.5%, versus the third quarter of 2011. Despite the low interest rate environment, the Company has been able to attract and retain retail deposit customers through offering innovative deposit products such as Rewards Checking and Savings. These products pay somewhat higher interest rates but also encourage certain customer behaviors such as using debit cards and electronic statements, which have the effect of generating additional related fee income and reducing the Company's processing costs.

The Company's funding strategy is generally focused on leveraging its retail branch network to grow traditional retail deposits and on its presence with commercial customers and public fund entities in its Indiana markets to generate deposits. In addition, the Company has utilized the Certificate of Deposit Account Registry Service (CDARS) program and out-of-market brokered certificates of deposit. Due to the Company's historical loan growth, the Company sought these deposits and has expanded its funding strategy over time to include these types of non-core deposit programs, although its reliance on these types of deposits has reduced significantly over the past several years. The Company believes that these deposit programs represent an appropriate tool in the overall liquidity and funding strategy but will continue to focus on funding loan and investment growth with in-market deposits whenever possible. On an average daily basis, total brokered certificates of deposit decreased $107.2 million to $42.5 million for the nine-month period ended September 30, 2012, versus $149.7 million for the same period in 2011. During the third quarter of 2012, average daily brokered certificates of deposit were $30.4 million, versus $125.1 million during the third quarter of 2011. On an average daily basis, total public fund certificates of deposit decreased $4.8 million to $97.9 million for the nine-month period ended September 30, 2012, versus $102.7 million for the same period in 2011. During the third quarter of 2012, average daily public fund certificates of deposit were $108.2 million, versus $104.6 million during the third quarter of 2011. In addition, the Company had average public fund interest bearing transaction accounts of $190.5 million and $189.5 million, respectively, in the nine months and three months ended September 30, 2012, versus $105.6 million and $108.9 million for the comparable periods of 2011. Availability of public fund deposits can be cyclical, primarily due to the timing differences between when real estate property taxes are collected versus when those tax revenues are spent, as well as the intense competition for these funds.

Average daily balances of borrowings were $163.0 million during the nine months ended September 30, 2012, versus $193.2 million during the same period of 2011, and the rate paid on borrowings increased 17 basis points to 1.3%. During the third quarter of 2012 the average daily balances of borrowings decreased $35.1 million to $158.7 million, versus $193.7 million for the same period of 2011, and the rate paid on borrowings increased 22 basis points to 1.3%. On an average daily basis, total deposits (including demand deposits) and purchased funds increased 6.8% and 5.6%, respectively, during the nine-month and three-month periods ended September 30, 2012 versus the same periods in 2011.

The Board of Directors and management recognize the importance of liquidity during times of normal operations and in times of stress. In 2010, the Company formalized and expanded upon its extensive Contingency Funding Plan ("CFP"). The formal CFP was developed to help ensure that the multiple liquidity sources available to the Company are detailed. The CFP identifies the potential funding sources, which include the Federal Home Loan Bank of Indianapolis, The Federal Reserve Bank, brokered certificates of deposit, certificates of deposit available from the CDARS program, repurchase agreements, and Fed Funds. The CFP also addresses the role of the securities portfolio in liquidity.

Further, the plan identifies CFP team members and expressly details their respective roles. Potential risk scenarios are identified and the plan includes multiple scenarios, including short-term and long-term funding crisis situations. Under the long-term funding crisis, two additional scenarios are identified: a moderate risk scenario and a highly stressed scenario. The CFP indicates the responsibilities and the actions to be taken by the CFP team under each scenario. Monthly reports to management and the Board of Directors under the CFP include an early warning indicator matrix and pro forma cash flows for the various scenarios. The Company will continue to carefully monitor its liquidity planning and will consider adjusting its plans as circumstances warrant.

The following tables set forth consolidated information regarding average balances and rates:

         DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;

                    INTEREST RATES AND INTEREST DIFFERENTIAL

                           (in thousands of dollars)



                                                     Nine Months Ended September 30,
                                           2012                                           2011
                          Average        Interest                        Average        Interest
                          Balance         Income        Yield (1)        Balance         Income        Yield (1)
ASSETS
Earning assets:
Loans:
Taxable (2)(3)          $ 2,207,594     $   77,789            4.71 %   $ 2,121,294     $   78,555            4.95 %
Tax exempt (1)                9,634            498            6.91          10,471            529            6.76
Investments: (1)
Available for sale          475,028         10,562            2.97         441,771         13,745            4.16
Short-term
investments                  22,891             16            0.09          17,219             18            0.14
Interest bearing
deposits                      2,178             27            1.66          25,606             96            0.50

Total earning assets      2,717,325         88,892            4.37 %     2,616,361         92,943            4.75 %

Nonearning assets:
Cash and due from
banks                       162,385              0                          65,115              0
Premises and
equipment                    34,995              0                          30,752              0
Other nonearning
assets                       94,853              0                          95,007              0
Less allowance for
loan losses                 (53,076 )            0                         (49,469 )            0

Total assets            $ 2,956,482     $   88,892                     $ 2,757,766     $   92,943

(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2012 and 2011. The tax equivalent rate for tax exempt loans and tax exempt securities 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, 2012 and 2011, are included as taxable loan interest income.

(3) Nonaccrual loans are included in the average balance of taxable loans.

         DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;

                INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)

                           (in thousands of dollars)



                                                   Nine Months Ended September 30,
                                          2012                                         2011
                          Average        Interest                      Average        Interest
                          Balance        Expense         Yield         Balance        Expense         Yield

LIABILITIES AND
STOCKHOLDERS' EQUITY

Interest bearing
liabilities:
Savings deposits        $   192,969     $      530          0.37 %   $   166,740     $      686          0.55 %
Interest bearing
checking accounts           992,045          7,139          0.96         844,488          7,994          1.27
Time deposits:
In denominations
under $100,000              395,807          5,384          1.82         348,557          5,125          1.97
In denominations over
$100,000                    562,157          6,299          1.50         630,820          7,063          1.50
Miscellaneous
short-term borrowings       117,002            329          0.38         147,263            477          0.43
Long-term borrowings
and subordinated
debentures                   45,966          1,198          3.48          45,968          1,084          3.15

Total interest
bearing liabilities       2,305,946         20,879          1.21 %     2,183,836         22,429          1.37 %

Noninterest bearing
liabilities and
stockholders' equity:
Demand deposits             348,280              0                       302,170              0
Other liabilities            17,760              0                        14,931              0
Stockholders' equity        284,496              0                       256,829              0
Total liabilities and
stockholders' equity    $ 2,956,482     $   20,879                   $ 2,757,766     $   22,429

Net interest
differential - yield
on average daily
earning assets                          $   68,013          3.34 %                   $   70,514          3.60 %

         DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;

                    INTEREST RATES AND INTEREST DIFFERENTIAL

                           (in thousands of dollars)



                                                    Three Months Ended September 30,
                                           2012                                           2011
                          Average        Interest                        Average        Interest
                          Balance         Income        Yield (1)        Balance         Income        Yield (1)
ASSETS
Earning assets:
Loans:
Taxable (2)(3)          $ 2,206,051     $   25,803            4.65 %   $ 2,150,201     $   26,390            4.87 %
Tax exempt (1)                9,406            164            6.93           9,806            170            6.88
Investments: (1)
Available for sale          475,899          3,074            2.57         457,360          4,254            3.69
Short-term
investments                  24,595              6            0.10          12,082              3            0.10
Interest bearing
deposits                      2,367             10            1.68          10,849             15            0.55

Total earning assets      2,718,318         29,057            4.25 %     2,640,298         30,832            4.63 %

Nonearning assets:
Cash and due from
banks                       165,790              0                          77,111              0
Premises and
equipment                    35,043              0                          31,203              0
Other nonearning
assets                       93,258              0                          93,763              0
Less allowance for
loan losses                 (52,046 )            0                         (52,184 )            0

Total assets            $ 2,960,363     $   29,057                     $ 2,790,191     $   30,832

(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2012 and 2011. The tax equivalent rate for tax exempt loans and tax exempt securities 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, 2012 and 2011, are included as taxable loan interest income.

(3) Nonaccrual loans are included in the average balance of taxable loans.

         DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;

                INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)

                           (in thousands of dollars)



                                                  Three Months Ended September 30,
                                          2012                                         2011
                          Average        Interest                      Average        Interest
                          Balance        Expense         Yield         Balance        Expense         Yield

LIABILITIES AND
STOCKHOLDERS' EQUITY

Interest bearing
liabilities:
Savings deposits        $   197,322     $      160          0.32 %   $   169,281     $      239          0.56 %
Interest bearing
checking accounts           981,770          2,174          0.88         850,343          2,769          1.29
Time deposits:
In denominations
under $100,000              388,516          1,684          1.72         360,060          1,773          1.95
In denominations over
$100,000                    559,855          1,971          1.40         618,718          2,309          1.48
Miscellaneous
short-term borrowings       112,722            112          0.40         147,771            159          0.43
Long-term borrowings
and subordinated
debentures                   45,966            399          3.45          45,967            361          3.12

Total interest
bearing liabilities       2,286,151          6,500          1.13 %     2,192,140          7,610          1.38 %

Noninterest bearing
liabilities and
stockholders' equity:
Demand deposits             364,579              0                       317,921              0
Other liabilities            18,120              0                        15,670              0
Stockholders' equity        291,513              0                       264,460              0
Total liabilities and
stockholders' equity    $ 2,960,363     $    6,500                   $ 2,790,191     $    7,610

Net interest
differential - yield
on average daily
earning assets                          $   22,557          3.30 %                   $   23,222          3.48 %

Provision for Loan Losses

Based on management's review of the adequacy of the allowance for loan losses, provisions for loan losses of $1.3 million and $0 were recorded during the nine-month and three-month periods ended September 30, 2012, versus provisions of $10.9 million and $2.4 million recorded during the same periods of 2011. Factors impacting the provision included the amount and status of classified and watch list credits, the level of charge-offs, management's overall view on current credit quality and the regional and national economic conditions impacting credit quality, the amount and status of impaired loans, the amount and status of past due accruing loans (90 days or more), and overall loan growth as discussed in more detail below in the analysis relating to the Company's financial condition.

Noninterest Income



Noninterest income categories for the nine-month and three-month periods ended
September 30, 2012 and 2011 are shown in the following table:



                                                               Nine Months Ended
                                                                 September 30,
                                                                                  Percent
                                                       2012          2011          Change

Wealth advisory fees                                 $   2,770     $   2,613            6.0 %
Investment brokerage fees                                2,435         2,093           16.3
Service charges on deposit accounts                      5,937         5,938            0.0
Loan, insurance and service fees                         4,062         3,595           13.0
Merchant card fee income                                   902           775           16.4
Other income                                             1,614         1,380           17.0
Mortgage banking income                                  1,574           594          165.0
Net securities losses                                     (377 )        (167 )        125.7
Impairment on available-for-sale securities
(includes total losses of $1,026 and $154,   net
of $0 and $0 recognized in other comprehensive
income, pre-tax)                                        (1,026 )        (154 )        566.2
Total noninterest income                             $  17,891     $  16,667            7.3 %




                                                               Three Months Ended
                                                                 September 30,
                                                                                  Percent
                                                       2012          2011          Change

Wealth advisory fees                                 $     959     $     866           10.7 %
Investment brokerage fees                                  695           741           (6.2 )
Service charges on deposit accounts                      2,045         2,036            0.4
Loan, insurance and service fees                         1,421         1,259           12.9
Merchant card fee income                                   297           253           17.4
Other income                                               669           362           84.8
Mortgage banking income                                    590           440           34.1
Net securities losses                                     (380 )          (1 )          N/A
Impairment on available-for-sale securities
(includes total losses of $67 and $33,  net of $0
and $0 recognized in other comprehensive income,
pre-tax)                                                   (67 )         (33 )        103.0
Total noninterest income                             $   6,229     $   5,923            5.2 %

Noninterest income increased $1.2 million and $306,000 respectively, for the nine-month and three-month periods ended September 30, 2012 versus the same . . .

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