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LKFN > SEC Filings for LKFN > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for LAKELAND FINANCIAL CORP


9-Aug-2013

Quarterly Report


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

June 30, 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 $18.5 million for the first six months of 2013, versus $17.4 million in the same period of 2012, an increase of 5.9%. Net income was positively impacted by an increase in noninterest income of $3.4 million and a $1.3 million decrease in the provision for loan losses. Offsetting these positive impacts were a decrease in net interest income of $1.5 million and an increase of $1.1 million in noninterest expense. Basic earnings per common share for the first six months of 2013 were $1.13 per share versus $1.07 per share for the first six months of 2012, an increase of 5.6%. 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 six months of 2013 were $1.12 per share versus $1.06 for the first six months of 2012, an increase of 5.7%.

Net income for the second quarter of 2013 was $9.2 million, an increase of 4.7% versus $8.8 million for the comparable period of 2012. The increase was driven by a $1.8 million increase in noninterest income and a $500,000 decrease in the provision for loan losses. Offsetting this positive impact was an increase in noninterest expense of $842,000 and a decrease in net interest income of $236,000. Basic earnings per common share for the second quarter of 2013 were $0.56 per share, versus $0.54 per share for the second quarter of 2012. Diluted earnings per common share for the second quarter of 2013 were $0.56 per share, versus $0.54 per share for the second quarter of 2012, an increase of 3.7%.

Earnings for the three month and six month periods ended June 30, 2013 were negatively impacted by a $465,000 provision for state income tax expense due to a revaluation of the Company's deferred tax items relating to state income tax. During the second quarter of 2013, the Indiana legislature enacted new, lower tax rates for financial institutions which will take effect beginning in 2014. One effect of the lower, future rates is to reduce the benefit which will be provided by the Company's existing deferred tax items requiring the non-cash adjustment. Excluding the effect of the adjustment, net income for the three months and six months ended June 30, 2013 would have been $9.7 million and $18.9 million, respectively, representing increases of 10% and 9% over the comparable periods of 2012.

RESULTS OF OPERATIONS

Net Interest Income

For the six-month period ended June 30, 2013, net interest income totaled $43.2 million, a decrease of 3.3%, or $1.5 million, versus the first six months of 2012. This decrease was primarily due to a 24 basis point decrease in the Company's net interest margin to 3.19% for the six month period ended June 30, 2013, versus 3.37% for the comparable period of 2012. During the six-month period ended June 30, 2013, average earning assets increased by $65.2 million, or 2.4%, to $2.782 billion. For the second quarter of 2013, net interest income totaled $21.9 million, a decrease of 1.1%, or $236,000, versus the second quarter of 2012. This decrease was primarily due to a 12 basis point decrease in the Company's net interest margin to 3.20% for the second quarter of 2013, versus 3.32% for the second quarter of 2012. Average earning assets increased $65.5 million, or 2.4%, to $2.796 billion in the second quarter of 2013, versus the second quarter of 2012.


Given the Company's mix of interest earning assets and interest bearing liabilities at June 30, 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 ongoing 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 six months of 2013, total interest and dividend income decreased by $6.3 million, or 10.7%, to $52.7 million, versus $59.0 million during the first six months of 2012. This decrease was primarily the result of a 55 basis point decrease in the tax equivalent yield on average earning assets to 3.9%, versus 4.4% for the same period of 2012. Average earning assets increased by $65.2 million, or 2.4%, during the first six months of 2013 versus the same period of 2012. During the second quarter of 2013, total interest and dividend income decreased by $2.8 million, or 9.7%, to $26.4 million, versus $29.2 million during the second quarter of 2012. This decrease was primarily the result of a 52 basis point decrease in the tax equivalent yield on average earning assets to 3.9% in the second quarter of 2013, versus 4.4% for the same period of 2012. Average earning assets increased by $65.5 million, or 2.4%, in the second quarter of 2013 versus the same period of 2012.

During the first six months of 2013, loan interest income decreased by $3.1 million, or 6.0%, to $49.1 million, versus $52.2 million during the first six months of 2012. The decrease was driven by a 39 basis point decrease in the tax equivalent yield on loans, to 4.4%, versus 4.7% in the first three months of 2012. During the second quarter of 2013, loan interest income decreased by $1.4 million, or 5.5%, to $24.5 million, versus $25.9 million during the second quarter of 2012. The decrease was driven by a 43 basis point decrease in the tax equivalent yield on loans, to 4.3%, versus 4.7% in the second quarter of 2012.

The average daily securities balances for the first six months of 2013 increased $5.8 million, or 1.2%, to $480.4 million, versus $474.6 million for the same period of 2012. During the same periods, income from securities decreased by $3.2 million, or 46.9%, to $3.6 million versus $6.8 million during the first six months of 2012. The decrease was primarily the result of a 134 basis point decrease in the tax equivalent yield on securities, to 1.8%, versus 3.2% in the first six months of 2012. The average daily securities balances for the second quarter of 2013 increased $3.4 million, or 0.7%, to $482.6 million, versus $479.2 million for the same period of 2012. During the same periods, income from securities decreased by $1.4 million, or 42.2%, to $1.9 million versus $3.3 million during the second quarter of 2012. The decrease was primarily the result of a 116 basis point decrease in the tax equivalent yield on securities, to 1.9%, versus 3.1% in the second quarter 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 actively considering and implementing changes in its investment strategy. The plan 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 $4.8 million, or 33.6%, to $9.5 million for the six-month period ended June 30, 2013, from $14.4 million for the comparable period in 2012. The decrease was primarily the result of a 36 basis point decrease in the Company's daily cost of funds to 0.7%, versus 1.1% for the same period of 2012. Total interest expense decreased $2.6 million, or 36.5%, to $4.5 million for the second quarter of 2013, versus $7.1 million for the second quarter of 2012. The decrease was primarily the result of a 37 basis point decrease in the Company's cost of funds to 0.7%, from 1.1% for the same period of 2012.

On an average daily basis, total deposits (including demand deposits) decreased $94.2 million, or 0.4%, to $2.482 billion for the six-month period ended June 30, 2013, versus $2.491 billion during the same period in 2012. The average daily balances for the second quarter of 2013 decreased $63.9 million, or 2.5%, to $2.490 billion from $2.554 billion during the second quarter of 2012. On an average daily basis, noninterest bearing demand deposits were $384.0 million for the six-month period ended June 30, 2013, versus $340.0 million for the same period in 2012. The average daily noninterest bearing demand deposit balances for the second quarter of 2013 were $387.2 million, versus $345.7 million for the second quarter of 2012. On an average daily basis, interest bearing transaction accounts increased $23.5 million, or 2.4%, to $1.021 billion for the six-month period ended June 30, 2013, versus the same period in 2012. Average daily interest bearing transaction accounts decreased $568,000, or 0.1%, to $1.042 billion for the second quarter of 2013, versus $1.042 billion for the second quarter of 2012. When comparing the six months ended June 30, 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 $109.5 million. The average rate paid on time deposit accounts decreased 41 basis points to 1.3% for the six-month period ended June 30, 2013, versus the same period in 2012. During the second quarter of 2013, the average daily balance of time deposits decreased $141.5 million, and the rate paid decreased 41 basis points to 1.2%, versus the second quarter of 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 $30.2 million to $18.4 million for the six-month period ended June 30, 2013, versus $48.6 million for the same period in 2012. During the second quarter of 2013, average daily brokered certificates of deposit were $8.9 million, versus $42.7 million during the second quarter of 2012. On an average daily basis, total public fund certificates of deposit increased $30.2 million to $122.8 million for the six-month period ended June 30, 2013, versus $92.6 million for the same period in 2012. During the second quarter of 2013, average daily public fund certificates of deposit were $130.7 million, versus $102.0 million during the second quarter of 2012. In addition, the Company had average public fund interest bearing transaction accounts of $192.7 million and $192.2 million, respectively, in the six months and three months ended June 30, 2013, versus $191.1 million and $189.5 million for the comparable periods 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 $158.1 million during the six months ended June 30, 2013, versus $165.1 million during the same period of 2012, and the rate paid on borrowings decreased 26 basis points to 1.0%. During the second quarter of 2013, the average daily balances of borrowings increased $7.6 million to $165.3 million, versus $157.7 million for the same period of 2012, and the rate paid on borrowings decreased 37 basis points to 0.9%. On an average daily basis, total deposits (including demand deposits) and purchased funds decreased 0.4% and 1.9%, respectively, during the six-month and three-month periods ended June 30, 2013 versus the same periods 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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