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LKFN > SEC Filings for LKFN > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for LAKELAND FINANCIAL CORP


10-May-2013

Quarterly Report


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

March 31, 2013

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 $9.2 million for the first three months of 2013, versus $8.6 million in the same period of 2012, an increase of 7.2%. Net income was positively impacted by an increase in noninterest income of $1.6 million and a $799,000 decrease in the provision for loan losses. Offsetting these positive impacts were a decrease in net interest income of $1.2 million and an increase of $213,000 in noninterest expense. Basic earnings per common share for the first three months of 2013 were $0.56 per share versus $0.53 per share for the first three months of 2012, an increase of 5.7%. 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 three months of 2013 were $0.56 per share versus $0.52 for the first three months of 2012, an increase of 7.7%.

RESULTS OF OPERATIONS

Net Interest Income

For the three-month period ended March 31, 2013, net interest income totaled $21.3 million, a decrease of 5.5%, or $1.2 million, versus the first three months of 2012. This decrease was primarily due to a 24 basis point decrease in the Company's net interest margin to 3.17% for the three month period ended March 31, 2013, versus 3.41% for the comparable period of 2012. During the three-month period ended March 31, 2013, average earning assets increased by $64.7 million, or 2.4%, to $2.768 billion.

Given the Company's mix of interest earning assets and interest bearing liabilities at March 31, 2013, 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 three months of 2013, total interest and dividend income decreased by $3.5 million, or 11.7%, to $26.3 million, versus $29.8 million during the first three months of 2012. This decrease was primarily the result of a 58 basis point decrease in the tax equivalent yield on average earning assets to 3.9%, versus 4.5% for the same period of 2012. Average earning assets increased by $64.7 million, or 2.4%, during the first three months of 2013 versus the same period of 2012.

During the first three months of 2013, loan interest income decreased by $1.7 million, or 6.5%, to $24.6 million, versus $26.3 million during the first three months of 2012. The decrease was driven by a 35 basis point decrease in the tax equivalent yield on loans, to 4.4%, versus 4.8% in the first three months of 2012.

The average daily securities balances for the first three months of 2013 increased $8.1 million, or 1.7%, to $478.1 million, versus $470.0 million for the same period of 2012. During the same periods, income from securities decreased by $1.8 million, or 51.5%, to $1.7 million versus $3.5 million during the first three months of 2012. The decrease was primarily the result of a 152 basis point decrease in the tax equivalent yield on securities, to 1.7%, versus 3.3% in the first three months of 2012. 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. In addition, the prepayments have the effect of accelerating premium amortization of those mortgage backed securities which were purchased at a premium. 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, although the Company does not expect this will result in a significant change in strategy.

Total interest expense decreased $2.2 million, or 30.8%, to $5.0 million for the three-month period ended March 31, 2013, from $7.3 million for the comparable period in 2012. The decrease was primarily the result of a 30 basis point decrease in the Company's daily cost of funds to 0.8%, versus 1.1% for the same period of 2012.

On an average daily basis, total deposits (including demand deposits) increased $45.4 million, or 1.9%, to $2.473 billion for the three-month period ended March 31, 2013, versus $2.428 billion during the same period in 2012. On an average daily basis, noninterest bearing demand deposits were $380.8 million for the three-month period ended March 31, 2013, versus $334.4 million for the same period in 2012. On an average daily basis, interest bearing transaction accounts increased $47.3 million, or 5.0%, to $999.3 million for the three-month period ended March 31, 2013, versus the same period in 2012. When comparing the three months ended March 31, 2013 with the same period of 2012, 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 $77.2 million. The average rate paid on time deposit accounts decreased 41 basis points to 1.3% for the three-month period ended March 31, 2013, versus the same period in 2012. 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 $26.5 million to $28.0 million for the three-month period ended March 31, 2013, versus $54.5 million for the same period in 2012. On an average daily basis, total public fund certificates of deposit increased $31.5 million to $114.8 million for the three-month period ended March 31, 2013, versus $83.3 million for the same period in 2012. In addition, the Company had average public fund interest bearing transaction accounts of $193.1 million in the three months ended March 31, 2013, versus $192.7 for the comparable period of 2012. 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 $150.9 million during the three months ended March 31, 2013, versus $172.6 million during the same period of 2012, and the rate paid on borrowings decreased 13 basis points to 1.1%. On an average daily basis, total deposits (including demand deposits) and purchased funds increased 1.1% during the three-month period ended March 31, 2013 versus the same period in 2012.

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:


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