UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
Commission file number 0-11487
LAKELAND FINANCIAL CORPORATION
Indiana 35-1559596
(State of incorporation) (I.R.S. Employer Identification No.)
202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387
(Address of principal executive offices)
Telephone (574) 267-6144
Securities registered pursuant to Section 12(b) of
the Act: None Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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 twelve months (or for such other 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No___
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on the
Nasdaq Stock Market on June 30, 2004, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$176,379,946.
Number of shares of common stock outstanding at February 23, 2005: 5,910,249
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Proxy Statement for the Annual Meeting of
Shareholders dated as of March 11, 2005 are incorporated by reference into
Part III hereof.
LAKELAND FINANCIAL CORPORATION
Annual Report on Form 10-K
Table of Contents
Page Number
PART I
Item 1. Business 3
Forward - Looking Statements 4
Supervision and Regulation 7
Industry Segments 12
Guide 3 Information 12
Item 2. Properties 30
Item 3. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 31
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities 31
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 34
Overview 34
Results of Operations 34
Financial Condition 37
Critical Accounting Policies 40
Newly Issued But Not Yet Effective Accounting Standards 41
Liquidity 41
Inflation 43
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 43
Item 8. Financial Statements and Supplemental Data 47
Financial Statements 47
Notes to Financial Statements 51
Report of Independent Registered Public Accounting Firm 77
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 78
Item 9a. Controls and Procedures 78
Item 9b. Other Information 78
PART III
Item 10. Directors and Executive Officers of the Registrant 78
Item 11. Executive Compensation 78
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters 78
Item 13. Certain Relationships and Related Transactions 79
Item 14. Principal Accountant Fees and Services 79
PART IV
Item 15. Exhibits and Financial Statement Schedules 80
Form 10-K Signature Page S1
2
PART I
ITEM 1. BUSINESS
The Company was incorporated under the laws of the State of Indiana
on February 8, 1983. As used herein, the term "Company" refers to Lakeland
Financial Corporation, or if the context dictates, Lakeland Financial
Corporation and its wholly-owned subsidiary, Lake City Ban k(the "Bank"), an
Indiana state bank headquartered in Warsaw, Indiana. Also included in the
consolidated financial statements is LCB Investments Limited, a wholly-owned
subsidiary of Lake City Bank, which is a Bermuda corporation that manages a
portion of the Bank's investment portfolio. All intercompany transactions and
balances are eliminated in consolidation.
General
Company's Business. The Company is a bank holding company as defined
in the Bank Holding Company Act of 1956, as amended. The Company owns all of
the outstanding stock of Lake City Bank, Warsaw, Indiana, a full service
commercial bank organized under Indiana law. In trust, the Bank recognizes a
wholly-owned subsidiary, LCB Investments Limited, which manages a portion of
the Bank's investment portfolio. The Company conducts no business except that
incident to its ownership of the outstanding stock of the Bank and the
operation of the Bank.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation. The Bank's activities cover all phases of commercial banking,
including checking accounts, savings accounts, time deposits, the sale of
securities under agreements to repurchase, commercial and agricultural
lending, direct and indirect consumer lending, real estate mortgage lending,
retail and merchant credit card services, corporate cash management services,
retirement services, bond administration, safe deposit box service and trust
and brokerage services.
The Bank's main banking office is located at 202 East Center Street,
Warsaw, Indiana. As of December 31, 2004, the Bank had 43 offices in twelve
counties throughout northern Indiana.
Market Overview. While the Company operates in twelve counties, it
currently defines operations by four primary geographical markets. They are
the South Region, which includes Kosciusko and portions of contiguous
counties; the North Region, which includes portions of Elkhart and St. Joseph
Counties, the Central Region, which includes portions of Elkhart County and
contiguous counties; and the East Region, which includes Allen and DeKalb
Counties. The South Region includes the city of Warsaw, which is the location
of the Company's headquarters. The Company has had a presence in this region
since 1872. It has been in the North and Central Regions, which includes the
cities of Elkhart, South Bend and Goshen, since 1990. The Company opened its
first office in the East Region, which includes the cities of Fort Wayne and
Auburn, in 1999.
The Company believes that these are well-established and fairly
diverse economic regions. The Company's markets include a mix of industrial
and service companies with no business or industry concentrations.
Furthermore, no single industry or employer dominates any of the markets. Fort
Wayne represents the largest population center served by the Company with a
population of 206,000, according to 2000 U.S. Census Bureau data. South Bend,
with a 2000 population of 108,000, is the second largest city served by the
Company. Elkhart, with a 2000 population of 52,000, is the third largest city
that the Company currently serves. As a result of the presence of offices in
twelve counties that are widely dispersed, no single city or industry
represents an undue concentration.
Expansion Strategy. The Company's expansion strategy is driven
primarily by the potential for increased penetration in existing markets where
opportunities for market share growth exists. Additionally, the Company
considers growth in new markets with a close geographic proximity to its
current operations. These markets are considered when the Company believes
they would be receptive to its strategic plan to deliver broad based financial
services with a local flavor. Since the early 1990's, the Company has focused
on growth through de novo branching in locations that management believes have
potential for creating new market opportunities or for further penetrating
existing markets. The Company also acquired the Fort Wayne, Indiana office of
Indiana Capital Management Bank & Trust in late 2003 to augment the existing
trust business and further penetrate the Fort Wayne market. In new markets,
the Company believes it is critical to attract experienced local management
with a similar philosophy in order to provide a basis for success.
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The Company also considers opportunities beyond current markets when
the Company's board of directors and management believes that the opportunity
will provide a desirable strategic fit without posing undue risk. The Company
does not currently have any definitive understandings or agreements for any
acquisitions or de novo expansion.
Products and Services. The Company is a full service commercial bank
and provides commercial, retail, trust and investment services to its
customers. Commercial products include commercial loans and technology-driven
solutions to commercial customers' cash management needs such as internet
business banking and on-line cash management services in addition to
retirement services, bond administration and health savings account services.
Retail banking clients are provided a wide array of traditional retail banking
services, including lending, deposit and investment services. Retail lending
programs are focused on mortgage loans, home equity lines of credit and
traditional retail installment loans. The Company provides credit card
services to retail and commercial customers through its retail card program
and merchant processing activity. The Company also has an Honors Private
Banking program that is positioned to serve the more financially sophisticated
customer with a menu including brokerage and trust services, executive
mortgage programs and access to financial planning seminars and programs. The
Bank's Prospero Program is dedicated to serving the expanding financial needs
of the Latino community. The Company provides trust clients with traditional
personal and corporate trust services. The Company also provides retail
brokerage services, including an array of financial and investment products
such as annuities and life insurance.
Forward-looking Statements
This document (including information incorporated by reference)
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.
4
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.
Business Developments
The Company conducts no business except that which is incident to its
ownership of the stock of the Bank, the collection of dividends from the Bank,
and the disbursement of dividends to shareholders.
Lakeland Statutory Trust II (the "Trust"), a statutory business
trust, was formed under Connecticut law pursuant to a trust agreement dated
October 1, 2003 and a certificate of trust filed with the Connecticut
Secretary of State on October 1, 2003. Through a private placement, the trust
issued $30.0 million in trust preferred securities. The Trust exists for the
exclusive purposes of (i) issuing the trust securities representing undivided
beneficial interests in the assets of the Trust, (ii) investing the gross
proceeds of the trust securities in the subordinated debentures issued by the
Company, and (iii) engaging in only those activities necessary, advisable, or
incidental thereto. The subordinated debentures are the only assets of the
Trust, and payments under the subordinated debentures are the only revenue of
the Trust. The Trust has a term of 35 years, but may be terminated earlier as
provided in the trust agreement. The Trust is not included in the consolidated
Company.
Competition
The Bank was originally organized in 1872 and has continuously
operated under the laws of the State of Indiana since its organization. The
Bank's activities cover all phases of commercial banking, including checking
accounts, savings accounts, time deposits, the sale of securities under
agreements to repurchase, commercial and agricultural lending, direct and
indirect consumer lending, real estate mortgage lending, retail and merchant
credit card services, corporate cash management services, retirement services,
bond administration, safe deposit box services and trust and brokerage
5
services. The interest rates for both deposits and loans, as well as the range
of services provided, are consistent with those of all banks competing within
the Bank's service area.
The Bank competes for loans principally through a high degree of
customer contact, timely loan review and approval, market-driven competitive
loan pricing in certain situations and the Bank's reputation throughout the
region. The Bank believes that its convenience, quality service and high
touch, responsive approach to banking enhances its ability to compete
favorably in attracting and retaining individual and business customers. The
Bank actively solicits deposit-related customers and competes for customers by
offering personal attention, professional service and competitive interest
rates.
The Bank's primary service area is northern Indiana. In addition to
the banks located within its service area, the Bank also competes with savings
and loan associations, credit unions, farm credit services, finance companies,
personal loan companies, insurance companies, money market funds, and other
non-depository financial intermediaries. Also, financial intermediaries such
as money market mutual funds and large retailers are not subject to the same
regulations and laws that govern the operation of traditional depository
institutions and accordingly may have an advantage in competing for funds.
The Bank competes with other major banks for large commercial deposit
and loan accounts. The Bank is presently subject to an aggregate maximum loan
limit to any single account pursuant to Indiana law of $20.5 million. The Bank
currently enforces an internal limit of $14.0 million, which is less than the
amount permitted by law. This maximum might occasionally limit the Bank from
providing loans to those businesses or personal accounts whose borrowings
periodically exceed this amount. In the event this were to occur, the Bank
maintains correspondent relationships with other financial institutions. The
Bank may participate with other banks in the placement of large borrowings in
excess of its lending limit. The Bank is also a member of the Federal Home
Loan Bank of Indianapolis in order to broaden its mortgage lending and
investment activities and to provide additional funds, if necessary, to
support these activities.
Foreign Operations
The Company has no investments with any foreign entity other than two
nominal demand deposit accounts. One is maintained with a Canadian bank in
order to facilitate the clearing of checks drawn on banks located in other
countries. The other is maintained with a bank in Bermuda for LCB Investments
Limited to be used for administrative expenses. There are no foreign loans.
Employees
At December 31, 2004, the Company, including its subsidiaries, had
427 full-time equivalent employees. Benefit programs include a pension plan,
401(k) plan, group medical insurance, group life insurance and paid vacations.
Effective April 1, 2000, the defined benefit pension plan was frozen and
employees can no longer accrue new benefits under that plan. The Bank is not a
party to any collective bargaining agreement, and employee relations are
considered good. The Company also has a stock option plan under which stock
options may be granted to employees and directors.
Internet Website
The Company maintains an Internet site at www.lakecitybank.com. The
Company makes available free of charge on this site its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after it electronically files such
material with, or furnishes it to, the Securities and Exchange Commission. The
Company's Code of Conduct and the charters of its various committees of the
Board of Directors are also available on the website.
6
SUPERVISION AND REGULATION
General
Financial institutions, their holding companies and their affiliates
are extensively regulated under federal and state law. As a result, the growth
and earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Indiana Department of Financial
Institutions (the "DFI"), the Board of Governors of the Federal Reserve System
(the "Federal Reserve") and the Federal Deposit Insurance Corporation (the
"FDIC"). Furthermore, taxation laws administered by the Internal Revenue
Service and state taxing authorities and securities laws administered by the
Securities and Exchange Commission (the "SEC") and state securities
authorities have an impact on the business of the Company. The effect of these
statutes, regulations and regulatory policies may be significant, and cannot
be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions regulate, among other things, the scope of business,
the kinds and amounts of investments, reserve requirements, capital levels
relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers and consolidations and the payment of
dividends. This system of supervision and regulation establishes a
comprehensive framework for the respective operations of the Company and its
subsidiaries and is intended primarily for the protection of the FDIC-insured
deposits and depositors of the Bank, rather than shareholders.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not
describe all of the statutes, regulations and regulatory policies that apply,
nor does it restate all of the requirements of those that are described. As
such, the following is qualified in its entirety by reference to applicable
law. Any change in statutes, regulations or regulatory policies may have a
material effect on the business of the Company and its subsidiaries.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank
holding company. As a bank holding company, the Company is registered with,
and is subject to regulation by, the Federal Reserve under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). In accordance with Federal
Reserve policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances where the Company might not otherwise do so. Under the BHCA, the
Company is subject to periodic examination by the Federal Reserve. The Company
is required to file with the Federal Reserve periodic reports of the Company's
operations and such additional information regarding the Company and its
subsidiaries as the Federal Reserve may require. The Company is also subject
to regulation by the DFI under Indiana law.
Acquisitions, Activities and Change in Control. The primary purpose
of a bank holding company is to control and manage banks. The BHCA generally
requires the prior approval of the Federal Reserve for any merger involving a
bank holding company or any acquisition by a bank holding company of another
bank or bank holding company. Subject to certain conditions (including deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state of the United
States. In approving interstate acquisitions, the Federal Reserve is required
to give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its
insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) and state
laws that require that the target bank have been in existence for a minimum
period of time (not to exceed five years) before being acquired by an
out-of-state bank holding company.
The BHCA generally prohibits the Company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company that is not a bank and from engaging in any business other than that
of banking, managing and controlling banks or furnishing services to banks and
their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be "so closely related to banking ... as to be a proper
incident thereto." This authority would permit the Company to engage in a
7
variety of banking-related businesses, including the operation of a thrift,
consumer finance, equipment leasing, the operation of a computer service
bureau (including software development), and mortgage banking and brokerage.
The BHCA generally does not place territorial restrictions on the domestic
activities of non-bank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility
requirements prescribed by the BHCA and elect to operate as financial holding
companies may engage in, or own shares in companies engaged in, a wider range
of nonbanking activities, including securities and insurance underwriting and
sales, merchant banking and any other activity that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines by regulation or
order is financial in nature, incidental to any such financial activity or
complementary to any such financial activity and does not pose a substantial
risk to the safety or soundness of depository institutions or the financial
system generally. As of the date of this filing, the Company has neither
applied for nor received approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring
"control" of an FDIC-insured depository institution or its holding company
without prior notice to the appropriate federal bank regulator. "Control" is
conclusively presumed to exist upon the acquisition of 25% or more of the
outstanding voting securities of a bank or bank holding company, but may arise
under certain circumstances at 10% ownership.
Capital Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required levels, a bank
holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
risk-based requirement expressed as a percentage of total assets weighted
according to risk; and (ii) a leverage requirement expressed as a percentage
of total assets. The risk-based requirement consists of a minimum ratio of
total capital to total risk-weighted assets of 8% and a minimum ratio of Tier
1 capital to total risk-weighted assets of 4%. The leverage requirement
consists of a minimum ratio of Tier 1 capital to total assets of 3% for the
most highly rated companies, with a minimum requirement of 4% for all others.
For purposes of these capital standards, Tier 1 capital consists primarily of
permanent stockholders' equity less intangible assets (other than certain loan
servicing rights and purchased credit card relationships). Total capital
consists primarily of Tier 1 capital plus certain other debt and equity
instruments that do not qualify as Tier 1 capital and a portion of the
company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any
banking organization experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions
(i.e., Tier 1 capital less all intangible assets), well above the minimum
levels. As of December 31, 2004, the Company had regulatory capital in excess
of the Federal Reserve's minimum requirements.
Dividend Payments. The Company's ability to pay dividends to its
shareholders may be affected by both general corporate law considerations and
policies of the Federal Reserve applicable to bank holding companies. As an
Indiana corporation, the Company is subject to the limitations of the Indiana
General Business Corporation Law, which prohibit the Company from paying
dividends if the Company is, or by payment of the dividend would become,
insolvent, or if the payment of dividends would render the Company unable to
pay its debts as they become due in the usual course of business.
Additionally, policies of the Federal Reserve caution that a bank holding
company should not pay cash dividends that exceed its net income or that can
only be funded in ways that weaken the bank holding company's financial
health, such as by borrowing. The Federal Reserve also possesses enforcement
powers over bank holding companies and their non-bank subsidiaries to prevent
or remedy actions that represent unsafe or unsound practices or violations of
applicable statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding companies.
8
Federal Securities Regulation. The Company's common stock is
registered with the SEC under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Consequently, the Company is subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the SEC under the
Exchange Act.
The Bank
General. The Bank is an Indiana-chartered bank, the deposit accounts
of which are insured by the FDIC's Bank Insurance Fund ("BIF"). As an
Indiana-chartered bank, the Bank is subject to the examination, supervision,
reporting and enforcement requirements of the DFI, the chartering authority
for Indiana banks, and the FDIC, designated by federal law as the primary
federal regulator of state-chartered, FDIC-insured banks that, like the Bank,
are not members of the Federal Reserve System ("non-member banks").
Deposit Insurance. As an FDIC-insured institution, the Bank is
required to pay deposit insurance premium assessments to the FDIC. The FDIC
has adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well-capitalized (as
defined by the FDIC) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (as defined by the
FDIC) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
for each semi-annual assessment period.
During the year ended December 31, 2004, BIF assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2005, BIF assessment rates will continue to range from 0%
of deposits to 0.27% of deposits.
FICO Assessments. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF
members and BIF members became subject to assessments to cover the interest
payments on outstanding FICO obligations until the final maturity of such
obligations in 2019. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. During the year ended December 31,
2004, the FICO assessment rate for BIF and SAIF members was approximately
0.02% of deposits.
Supervisory Assessments. All Indiana banks are required to pay
supervisory assessments to the DFI to fund the operations of the DFI. The
amount of the assessment is calculated on the basis of the bank's total
assets. During the year ended December 31, 2004, the Bank paid supervisory
assessments to the DFI totaling $102,000.
Capital Requirements. Banks are generally required to maintain
capital levels in excess of other businesses. The FDIC has established the
following minimum capital standards for state-chartered FDIC-insured
non-member banks, such as the Bank: (i) a leverage requirement consisting of a
minimum ratio of Tier 1 capital to total assets of 3% for the most
highly-rated banks with a minimum requirement of at least 4% for all others;
and (ii) a risk-based capital requirement consisting of a minimum ratio of
total capital to total risk-weighted assets of 8% and a minimum ratio of Tier
1 capital to total risk-weighted assets of 4%. For purposes of these capital
standards, the components of Tier 1 capital and total capital are the same as
those for bank holding companies discussed above.
The capital requirements described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example,
regulations of the FDIC provide that additional capital may be required to
take adequate account of, among other things, interest rate risk or the risks
posed by concentrations of credit, nontraditional activities or securities
trading activities.
Further, federal law and regulations provide various incentives for
financial institutions to maintain regulatory capital at levels in excess of
minimum regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may
qualify for expedited processing of other required notices or applications.
Additionally, one of the criteria that determines a bank holding company's
9
eligibility to operate as a financial holding company is a requirement that
all of its financial institution subsidiaries be "well-capitalized." Under the
regulations of the FDIC, in order to be "well-capitalized" a financial
institution must maintain a ratio of total capital to total risk-weighted
assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted
assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or
greater.
Federal law also provides the federal banking regulators with broad
power to take prompt corrective action to resolve the problems of
undercapitalized institutions. The extent of the regulators' powers depends on
whether the institution in question is "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators'
corrective powers include: (i) requiring the institution to submit a capital
restoration plan; (ii) limiting the institution's asset growth and restricting
its activities; (iii) requiring the institution to issue additional capital
stock (including additional voting stock) or to be acquired; (iv) restricting
transactions between the institution and its affiliates; (v) restricting the
interest rate the institution may pay on deposits; (vi) ordering a new
election of directors of the institution; (vii) requiring that senior
executive officers or directors be dismissed; (viii) prohibiting the
institution from accepting deposits from correspondent banks; (ix) requiring
the institution to divest certain subsidiaries; (x) prohibiting the payment of
principal or interest on subordinated debt; and (xi) ultimately, appointing a
receiver for the institution.
As of December 31, 2004: (i) the Bank was not subject to a directive
from the FDIC to increase its capital to an amount in excess of the minimum
regulatory capital requirements; (ii) the Bank exceeded its minimum regulatory
capital requirements under FDIC capital adequacy guidelines; and (iii) the
Bank was "well-capitalized," as defined by FDIC regulations.
Dividend Payments. The primary source of funds for the Company is
dividends from the Bank. Indiana law prohibits the Bank from paying dividends
in an amount greater than its undivided profits. The Bank is required to
obtain the approval of the DFI for the payment of any dividend if the total of
all dividends declared by the Bank during the calendar year, including the
proposed dividend, would exceed the sum of the Bank's retained net income for
the year to date combined with its retained net income for the previous two
years. Indiana law defines "retained net income" to mean the net income of a
specified period, calculated under the consolidated report of income
instructions, less the total amount of all dividends declared for the
specified period.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, the Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 2004. As of December 31, 2004, approximately
$23.2 million was available to be paid as dividends by the Bank.
Notwithstanding the availability of funds for dividends, however, the FDIC may
prohibit the payment of any dividends by the Bank if the FDIC determines such
payment would constitute an unsafe or unsound practice.
Insider Transactions. The Bank is subject to certain restrictions
imposed by federal law on extensions of credit to the Company, on investments
in the stock or other securities of the Company and the acceptance of the
stock or other securities of the Company as collateral for loans made by the
Bank. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank to its directors and officers, to directors
and officers of the Company, to principal shareholders of the Company and to
"related interests" of such directors, officers and principal shareholders. In
addition, federal law and regulations may affect the terms upon which any
person who is a director or officer of the Company or the Bank or a principal
shareholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have
adopted guidelines that establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
The guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals
to be achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an institution
10
fails to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit
a plan for achieving and maintaining compliance. If an institution fails to
submit an acceptable compliance plan, or fails in any material respect to
implement a compliance plan that has been accepted by its primary federal
regulator, the regulator is required to issue an order directing the
institution to cure the deficiency. Until the deficiency cited in the
regulator's order is cured, the regulator may restrict the institution's rate
of growth, require the institution to increase its capital, restrict the rates
the institution pays on deposits or require the institution to take any action
the regulator deems appropriate under the circumstances. Noncompliance with
the standards established by the safety and soundness guidelines may also
constitute grounds for other enforcement action by the federal banking
regulators, including cease and desist orders and civil money penalty
assessments.
Branching Authority. Indiana banks, such as the Bank, have the
authority under Indiana law to establish branches anywhere in the State of
Indiana, subject to receipt of all required regulatory approvals.
Federal law permits state and national banks to merge with banks in
other states subject to: (i) regulatory approval; (ii) federal and state
deposit concentration limits; and (iii) state law limitations requiring the
merging bank to have been in existence for a minimum period of time (not to
exceed five years) prior to the merger. The establishment of new interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is
permitted only in those states that authorize such expansion.
State Bank Investments and Activities. The Bank generally is
permitted to make investments and engage in activities directly or through
subsidiaries as authorized by Indiana law. However, under federal law and FDIC
regulations, FDIC insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. Federal law and FDIC
regulations also prohibit FDIC insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. These restrictions have not had, and are not
currently expected to have, a material impact on the operations of the Bank.
Federal Reserve System. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular
checking accounts), as follows: for transaction accounts aggregating $47.6
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $47.6 million, the
reserve requirement is $1.218 million plus 10% of the aggregate amount of
total transaction accounts in excess of $47.6 million. The first $7.0 million
of otherwise reservable balances are exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by the Federal
Reserve. The Bank is in compliance with the foregoing requirements.
INDUSTRY SEGMENTS
While the Company's chief decision-makers monitor the revenue streams
of the various Company products and services, the identifiable segments
operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the Company's financial service
operations are considered by management to be aggregated in one reportable
operating segment -- commercial banking.
GUIDE 3 INFORMATION
On the pages that follow are tables that set forth selected
statistical information relative to the business of the Company. This data
should be read in conjunction with the consolidated financial statements,
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as set forth in Items 7 & 8, below, herein
incorporated by reference.
11
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
2004 2003
---------------------------------------- ----------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 921,807 $ 49,087 5.33% $ 839,797 $ 46,861 5.58%
Tax exempt (1) 9,127 381 4.17 7,758 430 5.54
Investments: (1)
Available for sale 281,870 11,642 4.13 271,161 14,118 5.21
Short-term investments 8,806 132 1.50 11,882 120 1.01
Interest bearing deposits 3,643 52 1.43 6,134 68 1.11
------------ ------------ ------------ ------------
Total earning assets 1,225,253 61,294 5.00% 1,136,732 61,597 5.42%
Nonearning assets:
Cash and due from banks 50,890 0 46,394 0
Premises and equipment 25,715 0 25,810 0
Other nonearning assets 41,423 0 40,062 0
Less allowance for loan losses (10,568) 0 (9,909) 0
------------ ------------ ------------ ------------
Total assets $ 1,332,713 $ 61,294 $ 1,239,089 $ 61,597
============ ============ ============ ============
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2004 and 2003. 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 years ended December 31, 2004 and
2003, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
</FN>
12
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
2003 2002
---------------------------------------- ----------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 839,797 $ 46,861 5.58% $ 766,962 $ 49,083 6.40%
Tax exempt (1) 7,758 430 5.54 3,935 279 7.09
Investments: (1)
Available for sale 271,161 14,118 5.21 274,155 15,677 5.72
Short-term investments 11,882 120 1.01 12,672 191 1.51
Interest bearing deposits 6,134 68 1.11 4,283 70 1.61
------------ ------------ ------------ ------------
Total earning assets 1,136,732 61,597 5.42% 1,062,007 65,300 6.15%
Nonearning assets:
Cash and due from banks 46,394 0 42,904 0
Premises and equipment 25,810 0 24,469 0
Other nonearning assets 40,062 0 28,032 0
Less allowance for loan losses (9,909) 0 (8,662) 0
------------ ------------ ------------ ------------
Total assets $ 1,239,089 $ 61,597 $ 1,148,750 $ 65,300
============ ============ ============ ============
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2003 and 2002. 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 years ended December 31, 2003 and
2002, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
</FN>
13
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
2004 2003
---------------------------------------- ----------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 68,593 $ 83 0.12% $ 61,053 $ 232 0.38%
Interest bearing checking accounts 358,945 3,109 0.87 301,328 3,214 1.07
Time deposits:
In denominations under $100,000 216,764 6,129 2.83 203,196 6,153 3.03
In denominations over $100,000 181,904 4,076 2.24 230,417 4,480 1.94
Miscellaneous short-term borrowings 148,562 1,556 1.05 118,109 1,110 0.94
Long-term borrowings and
subordinated debentures 46,384 1,880 4.05 53,892 2,948 5.47
------------ ------------ ------------ ------------
Total interest bearing liabilities 1,021,152 16,833 1.65% 967,995 18,137 1.87%
Noninterest bearing liabilities and
stockholders' equity:
Demand deposits 207,592 0 173,716 0
Other liabilities 8,533 0 10,069 0
Stockholders' equity 95,436 0 87,309 0
Total liabilities and stockholders' ------------ ------------ ------------ ------------
equity $ 1,332,713 $ 16,833 $ 1,239,089 $ 18,137
============ ============ ============ ============
Net interest differential - yield on
average daily earning assets $ 44,461 3.63% $ 43,460 3.82%
============ ============
14
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
2003 2002
---------------------------------------- ----------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 61,053 $ 232 0.38% $ 53,792 $ 404 0.75%
Interest bearing checking accounts 301,328 3,214 1.07 231,712 3,592 1.55
Time deposits:
In denominations under $100,000 203,196 6,153 3.03 203,531 7,491 3.68
In denominations over $100,000 230,417 4,480 1.94 224,437 5,604 2.50
Miscellaneous short-term borrowings 118,109 1,110 0.94 146,619 2,552 1.74
Long-term borrowings and
subordinated debentures 53,892 2,948 5.47 46,287 2,915 6.30
------------ ------------ ------------ ------------
Total interest bearing liabilities 967,995 18,137 1.87% 906,378 22,558 2.49%
Noninterest bearing liabilities and
stockholders' equity:
Demand deposits 173,716 0 150,226 0
Other liabilities 10,069 0 13,093 0
Stockholders' equity 87,309 0 79,053 0
Total liabilities and stockholders' ------------ ------------ ------------ ------------
equity $ 1,239,089 $ 18,137 $ 1,148,750 $ 22,558
============ ============ ============ ============
Net interest differential - yield on
average daily earning assets $ 43,460 3.82% $ 42,742 4.02%
============ ============
15
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(fully taxable equivalent basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
2004 Over (Under) 2003 (1) 2003 Over (Under) 2002 (1)
---------------------------------------- ----------------------------------------
Volume Rate Total Volume Rate Total
------------ ------------ ------------ ------------ ------------ ------------
INTEREST AND LOAN FEE INCOME (2)
Loans:
Taxable $ 4,434 $ (2,208) $ 2,226 $ 4,407 $ (6,629) $ (2,222)
Tax exempt 68 (117) (49) 223 (72) 151
Investments:
Available for sale 539 (3,015) 2,476) (170) (1,389) (1,559)
Short-term investments (36) 48 12 (11) (60) (71)
Interest bearing deposits (32) 16 (16) 25 (27) (2)
------------ ------------ ------------ ------------ ------------ ------------
Total interest income 4,973 (5,276) (303) 4,474 (8,177) (3,703)
------------ ------------ ------------ ------------ ------------ ------------
INTEREST EXPENSE
Savings deposits 26 (175) (149) 49 (221) (172)
Interest bearing checking accounts 556 (661) (105) 914 (1,292) (378)
Time deposits:
In denominations under $100,000 397 (421) (24) (12) (1,326) (1,338)
In denominations over $100,000 (1,027) 623 (404) 146 (1,270) (1,124)
Miscellaneous short-term borrowings 309 137 446 (428) (1,014) (1,442)
Long-term borrowings and
subordinated debentures (373) (695) (1,068) 444 (411) 33
------------ ------------ ------------ ------------ ------------ ------------
Total interest expense (112) (1,192) (1,304) 1,113 (5,534) (4,421)
------------ ------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 5,085 $ (4,084) $ 1,001 $ 3,361 $ (2,643) $ 718
============ ============ ============ ========== ============ ============
<FN>
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 2004, 2003 and 2002. The changes in volume represent "changes in volume times the old rate". The changes in
rate represent "changes in rate times old volume". The changes in rate/volume were also calculated by "change in rate
times change in volume" and allocated consistently based upon the relative absolute values of the changes in volume and
changes in rate.
(2) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2004, 2003 and 2002. 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 expense.
</FN>
16
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 2004, 2003 and 2002 were as follows:
2004 2003 2002
-------------------------- -------------------------- ---------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------ ------------ ------------ ------------ ------------ ------------
Securities available for sale:
U.S. Treasury securities $ 1,003 $ 989 $ 0 $ 0 $ 5,143 $ 5,338
U.S. Government agencies and corporations 23,042 22,885 17,234 17,280 11,371 11,946
Mortgage-backed securities 210,997 208,961 213,071 211,142 216,619 222,036
State and municipal securities 51,682 53,747 51,138 52,945 33,534 34,785
------------ ------------ ------------ ------------ ------------ ------------
Total debt securities available for sale $ 286,724 $ 286,582 $ 281,443 $ 281,367 $ 266,667 $ 274,105
============ ============ ============ ============ ============ ============
17
ANALYSIS OF SECURITIES (cont.)
(fully tax equivalent basis)
(in thousands of dollars)
The weighted average yields (1) and maturity distribution (2) for debt securities portfolio at December 31, 2004, were as
follows:
After One After Five
Within Year Years Over
One Within Within Ten Ten
Year Five Years Years Years
------------ ------------ ------------ ------------
Securities available for sale:
US Treasury securities
Book value $ 0 $ 989 $ 0 $ 0
Yield 0.00% 3.38% 0.00% 0.00%
Government agencies and corporations
Book value 0 22,885 0 0
Yield 0.00% 3.99% 0.00% 0.00%
Mortgage-backed securities
Book value 0 12,549 60,357 136,055
Yield 0.00% 5.47% 5.59% 5.44%
State and municipal securities
Book value 100 1,552 6,354 45,741
Yield 2.65% 3.42% 4.56% 4.65%
------------ ------------ ------------ ------------
Total debt securities available for sale:
Book value $ 100 $ 37,975 $ 66,711 $ 181,796
Yield 2.65% 4.45% 5.55% 5.22%
============ ============ ============ ============
<FN>
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate.
(2) The maturity distribution of mortgage-backed securities was based upon anticipated payments as computed by using the
historic average payment speed from date of issue.
There were no investments in securities of any one issuer, other than the U.S. Government and its agencies that exceeded
10% of stockholders' equity at December 31, 2004.
</FN>
18
ANALYSIS OF LOAN PORTFOLIO
Analysis of Loans Outstanding
(in thousands of dollars)
The Company segregates its loan portfolio into four basic segments: commercial (including agri-business and
agricultural loans), real estate mortgages, installment and personal line of credit loans (including credit card loans). The loan
portfolio as of December 31, 2004, 2003, 2002, 2001 and 2000 was as follows:
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Commercial loans:
Taxable $ 784,591 $ 667,672 $ 619,963 $ 534,645 $ 487,125
Tax exempt 6,369 7,785 4,974 2,544 2,374
------------ ------------ ------------ ------------ ------------
Total commercial loans 790,960 675,457 624,937 537,189 489,499
Real estate mortgage loans 54,361 44,172 47,325 47,409 52,883
Installment loans 53,138 58,722 75,836 95,724 129,838
Line of credit and credit card loans 104,927 92,653 74,719 58,058 46,808
------------ ------------ ------------ ------------ ------------
Subtotal loans 1,003,386 871,004 822,817 738,380 719,028
Less: Allowance for loan losses 10,754 10,234 9,533 7,946 7,124
Net deferred loan fees 167 122 141 157 152
------------ ------------ ------------ ------------ ------------
Net loans $ 992,465 $ 860,648 $ 813,143 $ 730,277 $ 711,752
============ ============ ============ ============ ============
<FN>
The real estate mortgage loan portfolio included construction loans totaling $6,719, $3,932, $2,540, $2,354 and $3,626
as of December 31, 2004, 2003, 2002, 2001 and 2000. The loan classifications are based on the nature of the loans as of the loan
origination date. There were no foreign loans included in the loan portfolio for the periods presented.
</FN>
19
ANALYSIS OF LOAN PORTFOLIO (cont.)
Analysis of Loans Outstanding (cont.)
(in thousands of dollars)
Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules
included in the related loan agreements or upon maturity of each principal payment. The following table indicates the scheduled
maturities of the loan portfolio as of December 31, 2004.
Line of
Real Credit and
Commercial Estate Installment Credit Card Total Percent
------------ ------------ ------------ ------------ ------------ ------------
Original maturity of one day $ 497,378 $ 325 $ 185 $ 101,517 $ 599,405 59.8%
Other within one year 88,083 11,993 19,581 0 119,657 11.9
After one year, within five years 190,875 9,780 31,277 0 231,932 23.1
Over five years 7,472 32,203 2,095 3,410 45,180 4.5
Nonaccrual loans 7,152 60 0 0 7,212 0.7
------------ ------------ ------------ ------------ ------------ ------------
Total loans $ 790,960 $ 54,361 $ 53,138 $ 104,927 $ 1,003,386 100.0%
============ ============ ============ ============ ============ ============
<FN>
A portion of the loans is short-term maturities. At maturity, credits are reviewed and, if renewed, are renewed at
rates and conditions that prevail at the time of maturity.
Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or
adjustable interest rates as of December 31, 2004 amounted to $240,073 and $36,889.
</FN>
20
ANALYSIS OF LOAN PORTFOLIO (cont.)
Review of Nonperforming Loans
(in thousands of dollars)
The following is a summary of nonperforming loans as of December 31, 2004, 2003, 2002, 2001 and 2000.
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 117 $ 160 $ 0 $ 170 $ 398
Commercial and industrial loans 2,633 2,912 3,245 0 7,635
Loans to individuals for household, family and
other personal expenditures 28 119 142 94 171
Loans to finance agriculture production and
other loans to farmers 0 0 0 0 0
------------ ------------ ------------ ------------ ------------
Total past due loans 2,778 3,191 3,387 264 8,204
------------ ------------ ------------ ------------ ------------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 60 101 106 59 37
Commercial and industrial loans 7,152 452 4,110 2,175 169
Loans to individuals for household, family and
other personal expenditures 0 0 0 0 0
Loans to finance agriculture production and
other loans to farmers 0 0 0 0 0
------------ ------------ ------------ ------------ ------------
Total past due loans 7,212 553 4,216 2,234 206
------------ ------------ ------------ ------------ ------------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 0 0 0 0 1,127
------------ ------------ ------------ ------------ ------------
Total nonperforming loans $ 9,990 $ 3,744 $ 7,603 $ 2,498 $ 9,537
============ ============ ============ ============ ============
<FN>
Nonearning assets of the Company include nonperforming loans (as indicated above), nonaccrual investments, other real
estate and repossessions, which amounted to $10,264 at December 31, 2004.
</FN>
21
ANALYSIS OF LOAN PORTFOLIO (cont.)
Comments Regarding Nonperforming Assets
PART A - CONSUMER LOANS
Consumer installment loans, except those loans that are secured by
real estate, are not placed on nonaccrual status since these loans are
charged-off when they have been delinquent from 90 to 180 days, and when the
related collateral, if any, is not sufficient to offset the indebtedness.
Advances under Mastercard and Visa programs, as well as advances under all
other consumer line of credit programs, are charged-off when collection
appears doubtful.
PART B - NONPERFORMING LOANS
When a loan is classified as a nonaccrual loan, interest on the loan
is no longer accrued and all accrued interest receivable is charged off. It is
the policy of the Bank that all loans for which the collateral is insufficient
to cover all principal and accrued interest will be reclassified as
nonperforming loans to the extent they are unsecured, on or before the date
when the loan becomes 90 days delinquent. Thereafter, interest is recognized
and included in income only when received. Interest not recorded on nonaccrual
loans is referenced in Footnote 4 in Item 8 below.
As of December 31, 2004, there were $7.2 million of loans on
nonaccrual status, some of which were also on impaired status. There were $9.3
million of loans classified as impaired.
PART C - TROUBLED DEBT RESTRUCTURED LOANS
Loans renegotiated as troubled debt restructurings are those loans
for which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the terms of the loan.
As of December 31, 2004 and 2003, there were no loans renegotiated as
troubled debt restructurings.
PART D - OTHER NONPERFORMING ASSETS
Management is of the opinion that there are no significant
foreseeable losses relating to nonperforming assets, as defined in the
preceding table, or classified loans, except as discussed above in Part B -
Nonperforming Loans and Part C - Troubled Debt Restructured Loans.
PART E - LOAN CONCENTRATIONS
There were no loan concentrations within industries, which exceeded
ten percent of total assets. It is estimated that nearly all of the Bank's
commercial, industrial, agri-business and agricultural real estate mortgage,
real estate construction mortgage and consumer loans are made within its basic
service area.
22
Basis For Determining Allowance For Loan Losses:
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 loans based upon a monthly review of
those credits. An appropriate level of general allowance is determined after
considering the following: application of historical loss percentages,
emerging market risk, commercial loan focus and large credit concentration,
new industry lending activity and general economic conditions.
Based upon these policies and objectives, $1.2 million, $2.3 million
and $3.1 million were charged to the provision for loan losses and added to
the allowance for loan losses in 2004, 2003 and 2002.
The allocation of the allowance for loan losses to the various
lending areas is performed by management in relation to perceived exposure to
loss in the various loan portfolios. However, the allowance for loan losses is
available in its entirety to absorb losses in any particular loan category.
23
ANALYSIS OF LOAN PORTFOLIO (cont.)
Summary of Loan Loss
(in thousands of dollars)
The following is a summary of the loan loss experience for the years ended December 31, 2004, 2003, 2002, 2001 and 2000.
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Amount of loans outstanding, December 31, $ 1,003,219 $ 870,882 $ 822,676 $ 738,223 $ 718,876
============ ============ ============ ============ ============
Average daily loans outstanding during
the year ended December 31, $ 930,934 $ 847,555 $ 770,897 $ 729,750 $ 679,198
============ ============ ============ ============ ============
Allowance for loan losses, January 1, $ 10,234 $ 9,533 $ 7,946 $ 7,124 $ 6,522
------------ ------------ ------------ ------------ ------------
Loans charged-off
Commercial 630 1,261 1,268 569 200
Real estate 20 47 0 0 30
Installment 271 353 509 868 483
Credit cards and personal credit lines 73 113 98 103 35
------------ ------------ ------------ ------------ ------------
Total loans charged-off 994 1,774 1,875 1,540 748
------------ ------------ ------------ ------------ ------------
Recoveries of loans previously charged-off
Commercial 121 21 270 3 45
Real estate 13 0 0 16 0
Installment 129 188 128 113 93
Credit cards and personal credit lines 28 12 8 5 6
------------ ------------ ------------ ------------ ------------
Total recoveries 291 221 406 137 144
------------ ------------ ------------ ------------ ------------
Net loans charged-off 703 1,553 1,469 1,403 604
Provision for loan loss charged to expense 1,223 2,254 3,056 2,225 1,206
------------ ------------ ------------ ------------ ------------
Balance, December 31, $ 10,754 $ 10,234 $ 9,533 $ 7,946 $ 7,124
============ ============ ============ ============ ============
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial 0.05% 0.15% 0.13% 0.08% 0.02%
Real estate 0.00 0.00 0.00 0.00 0.00
Installment 0.02 0.02 0.05 0.10 0.06
Credit cards and personal credit lines 0.01 0.01 0.01 0.01 0.01
------------ ------------ ------------ ------------ ------------
Total 0.08% 0.18% 0.19% 0.19% 0.09%
============ ============ ============ ============ ============
Ratio of allowance for loan losses to
nonperforming assets 104.76% 236.46% 123.15% 192.58% 73.83%
============ ============ ============ ============ ============
24
ANALYSIS OF LOAN PORTFOLIO (cont.)
Allocation of Allowance for Loan Losses
(in thousands of dollars)
The following is a summary of the allocation for loan losses as of December 31, 2004, 2003, 2002, 2001 and 2000.
2004 2003 2002
-------------------------- -------------------------- --------------------------
Allowance Loans as Allowance Loans as Allowance Loans as
For Percentage For Percentage For Percentage
Loan of Gross Loan of Gross Loan of Gross
Losses Loans Losses Loans Losses Loans
------------ ------------ ------------ ------------ ------------ ------------
Allocated allowance for loan losses
Commercial $ 8,696 78.84% $ 8,634 77.56% $ 7,824 75.96%
Real estate 136 5.40 110 5.06 123 5.74
Installment 398 5.29 440 6.72 573 9.20
Credit cards and personal credit lines 789 10.47 696 10.66 563 9.10
------------ ------------ ------------ ------------ ------------ ------------
Total allocated allowance for loan losses 10,019 100.00% 9,880 100.00% 9,083 100.00%
============ =========== ============
Unallocated allowance for loan losses 735 354 450
------------ ------------ ------------
Total allowance for loan losses $ 10,754 $ 10,234 $ 9,533
============ ============ ============
2001 2000
-------------------------- --------------------------
Allowance Loans as Allowanc Loans as
For Percentage For Percentage
Loan of Gross Loan of Gross
Losses Loans Losses Loans
------------ ------------ ------------ ------------
Allocated allowance for loan losses
Commercial $ 6,412 72.77% $ 5,205 68.09%
Real estate 127 6.40 132 7.34
Installment 728 12.95 974 18.04
Credit cards and personal credit lines 431 7.88 352 6.53
------------ ----------- ------------ ------------
Total allocated allowance for loan
losses 7,698 100.00% 6,663 100.00%
=========== ===========
Unallocated allowance for loan losses 248 461
------------ ------------
Total allowance for loan losses $ 7,946 $ 7,124
============ ============
25
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 2004, 2003 and 2002, and the average rates paid on those
deposits are summarized in the following table:
2004 2003 2002
-------------------------- -------------------------- --------------------------
Average Average Average Average Average Average
Daily Rate Daily Rate Daily Rate
Balance Paid Balance Paid Balance Paid
------------ ------------ ------------ ------------ ------------ ------------
Demand deposits $ 207,592 0.00% $ 173,716 0.00% $ 150,226 0.00%
Savings and transaction accounts:
Regular savings 68,593 0.12 61,053 0.38 53,792 0.75
Interest bearing checking 358,945 0.87 301,328 1.07 231,712 1.55
Time deposits:
Deposits of $100,000 or more 181,904 2.24 230,417 1.94 224,437 2.50
Other time deposits 216,764 2.83 203,196 3.03 203,531 3.68
------------ ------------ ------------
Total deposits $ 1,033,798 1.30% $ 969,710 1.45% $ 863,698 1.98%
============ ============ ============
<FN>
As of December 31, 2004, time certificates of deposit will mature as follows:
</FN>
$100,000
or more Other
------------ ------------
Within three months $ 81,069 37.54% $ 36,132 16.55%
Over three months, within six months 66,281 30.69 31,737 14.53
Over six months, within twelve months 34,297 15.88 35,140 16.09
Over twelve months 34,311 15.89 115,351 52.83
------------ ------------ ------------ ------------
Total time certificates of deposit $ 215,958 100.00% $ 218,360 100.00%
============ ============ ============ ============
26
QUALITATIVE MARKET RISK DISCLOSURE
Management's market risk disclosure appears under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7, below, and is incorporated herein by reference in
response to this item. The Company's primary market risk exposure is interest
rate risk. The Company does not have a material exposure to foreign currency
exchange rate risk, does not own any material derivative financial instruments
and does not maintain a trading portfolio.
RETURN ON EQUITY AND OTHER RATIOS
The rates of return on average daily assets and stockholders'
equity, the dividend payout ratio, and the average daily stockholders' equity
to average daily assets for the years ended December 31, 2004, 2003 and 2002
were as follows:
2004 2003 2002
----------- ----------- -----------
Percent of net income to:
Average daily total assets 1.09% 1.12% 1.08%
Average daily stockholders' equity 15.24% 15.88% 15.64%
Percentage of dividends declared per
common share to basic earnings per
weighted average number of common
shares outstanding (5,867,705 shares
in 2004, 5,819,916 shares in 2003
and 5,813,984 shares in 2002) 33.87% 31.93% 31.92%
Percentage of average daily
stockholders' equity to average
daily total assets 7.16% 7.05% 6.88%
27
SHORT-TERM BORROWINGS
(in thousands of dollars)
The following is a schedule, at the end of the year indicated, of statistical information relating to securities sold
under agreement to repurchase maturing within one year and secured by either U.S. Government agency securities or mortgage-backed
securities classified as other debt securities and other short-term borrowings maturing within one year. There were no other
categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of
stockholders' equity at the end of each period.
2004 2003 2002
------------ ------------ ------------
Outstanding at year end
Securities sold under agreements to
repurchase $ 88,057 $ 102,601 $ 124,969
Other short-term borrowings $ 75,000 $ 55,000 $ 26,000
Approximate average interest rate at year end
Securities sold under agreements to
repurchase 0.62% 0.79% 1.03%
Other short-term borrowings 1.95% 1.19% 1.52%
Highest amount outstanding as of any month end
during the year
Securities sold under agreements to
repurchase $ 90,007 $ 108,270 $ 139,857
Other short-term borrowings $ 75,000 $ 55,000 $ 40,000
Approximate average outstanding during the year
Securities sold under agreements to
repurchase $ 84,907 $ 97,808 $ 116,214
Other short-term borrowings $ 45,423 $ 10,386 $ 20,414
Approximate average interest rate during the year
Securities sold under agreements to
repurchase 0.64% 0.83% 1.49%
Other short-term borrowings 1.60% 1.33% 2.38%
<FN>
Securities sold under agreement to repurchase include fixed rate, term transactions initiated by the investment
department of the Bank, as well as corporate sweep accounts. Other short-term borrowings consist of Federal Home Loan Bank advances.
</FN>
28
ITEM 2. PROPERTIES
The Company conducts its operations from the following locations:
Branches/Headquarters
Main/Headquarters 202 East Center St. Warsaw IN
Warsaw Drive-up East Center St. Warsaw IN
Akron 102 East Rochester Akron IN
Argos 100 North Michigan Argos IN
Auburn 1220 East 7th St. Auburn IN
Bremen 1600 State Road 331 Bremen IN
Columbia City 601 Countryside Dr. Columbia City IN
Concord 4202 Elkhart Rd. Goshen IN
Cromwell 111 North Jefferson St. Cromwell IN
Elkhart Beardsley 864 East Beardsley St. Elkhart IN
Elkhart East 22050 State Road 120 Elkhart IN
Elkhart Hubbard Hill 58404 State Road 19 Elkhart IN
Elkhart Northwest 1208 North Nappanee St. Elkhart IN
Fort Wayne North 302 East DuPont Rd. Fort Wayne IN
Fort Wayne Northeast 10411 Maysville Rd. Fort Wayne IN
Fort Wayne Southwest 10429 Illinois Rd. Fort Wayne IN
Fort Wayne Downtown 200 East Main St., Suite 600 Fort Wayne IN
Goshen Downtown 102 North Main St. Goshen IN
Goshen South 2513 South Main St. Goshen IN
Granger 12830 State Road 23 Granger IN
Huntington 1501 North Jefferson St. Huntington IN
Kendallville East 631 Professional Way Kendallville IN
LaGrange 901 South Detroit LaGrange IN
Ligonier Downtown 222 South Cavin St. Ligonier IN
Ligonier South 1470 U.S. Highway 33 South Ligonier IN
Medaryville Main St. Medaryville IN
Mentone 202 East Main St. Mentone IN
Middlebury 712 Wayne Ave. Middlebury IN
Milford State Road 15 North Milford IN
Mishawaka 5015 North Main St. Mishawaka IN
Nappanee 202 West Market St. Nappanee IN
North Webster 644 North Main St. North Webster IN
Pierceton 202 South First St. Pierceton IN
Plymouth 862 East Jefferson St. Plymouth IN
Rochester 507 East 9th St. Rochester IN
Shipshewana 895 North Van Buren St. Shipshewana IN
Silver Lake 102 Main St. Silver Lake IN
South Bend Northwest 21113 Cleveland Rd. South Bend IN
Syracuse 502 South Huntington Syracuse IN
Warsaw East 3601 Commerce Dr. Warsaw IN
Warsaw North 420 Chevy Way Warsaw IN
Warsaw West 1221 West Lake St. Warsaw IN
Winona Lake 99 Chestnut St. Winona Lake IN
Winona Lake East 1324 Wooster Rd. Winona Lake IN
The Company leases from third parties the real estate and buildings
for its Milford, Winona Lake East and Fort Wayne Downtown offices. In
addition, the Company leases the real estate for its three freestanding ATMs.
All the other branch facilities are owned by the Company. The Company also
owns parking lots in downtown Warsaw for the use and convenience of Company
employees and customers, as well as leasehold improvements, equipment,
furniture and fixtures necessary to operate the banking facilities.
29
In addition, the Company owns buildings at 110 South High St.,
Warsaw, Indiana, and 114-118 East Market St., Warsaw, Indiana, which it uses
for various offices, a building at 113 East Market St., Warsaw, Indiana, which
it uses for office and computer facilities, and a building at 109 South
Buffalo St., Warsaw, Indiana, which it uses for training and development. The
Company also leases from third parties facilities in Warsaw, Indiana, for the
storage of supplies and in Elkhart, Indiana, for computer facilities.
None of the Company's assets are the subject of any material
encumbrances.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Company and the
Bank are a party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2004
Trading prices (per share)*
Low $33.800 $30.740 $28.310 $31.410
High $40.900 $34.460 $34.490 $38.051
Dividends declared (per share) $ 0.21 $ 0.21 $ 0.21 $ 0.21
2003
Trading prices (per share)*
Low $33.510 $29.510 $24.400 $23.000
High $37.469 $34.400 $31.220 $25.750
Dividends declared (per share) $ 0.19 $ 0.19 $ 0.19 $ 0.19
* The trading ranges are the high and low prices as obtained from The Nasdaq
Stock Market.
The common stock of the Company began being quoted on The Nasdaq
Stock Market under the symbol LKFN in August, 1997. On December 31, 2004, the
Company had approximately 514 shareholders of record and estimates that it has
approximately 2,400 shareholders in total.
The Company paid dividends as set forth in the table above. The
Company's ability to pay dividends to shareholders is largely dependent upon
the dividends it receives from the Bank, and the Bank is subject to regulatory
limitations on the amount of cash dividends it may pay. See "Business -
Supervision and Regulation - The Company - Dividend Payments" and "Business -
Supervision and Regulation - The Bank - Dividend Payments" for a more detailed
description of these limitations.
30
The following table provides information about purchases by the Company and its affiliates during the quarter ended
December 31, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES
Maximum Number (or
Total Number of Appropriate Dollar
Shares Purchased as Value) of Shares that
Part of Publicly May Yet Be Purchased
Total Number of Average Price Announced Plans or Under the Plans or
Period Shares Purchased Paid per Share Programs Programs
- --------------------- ------------------ ------------------- -------------------- ------------------------
10/01/04-10/31/04 204 $ 35.30 0 $ 0.00
11/01/04-11/30/04 0 0.00 0 0.00
12/01/04-12/31/04 0 0.00 0 0.00
------------------ ------------------- -------------------- ------------------------
Total 204 $ 35.30 0 $ 0.00
<FN>
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.
</FN>
31
ITEM 6. SELECTED FINANCIAL DATA
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
(in thousands except share and per share data)
Interest income $ 60,005 $ 60,336 $ 64,335 $ 76,615 $ 80,050
Interest expense 16,833 18,137 22,558 39,230 45,030
------------ ------------ ------------ ------------ ------------
Net interest income 43,172 42,199 41,777 37,385 35,020
Provision for loan losses 1,223 2,254 3,056 2,225 1,206
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 41,949 39,945 38,721 35,160 33,814
Other noninterest income 15,571 14,909 12,894 11,449 10,469
Net gain on sale of branches 0 0 0 753 0
Net gains on sale of real estate
mortgages held for sale 987 3,018 1,914 1,232 504
Net securities gains (losses) 0 500 55 120 0
Noninterest expense (36,660) (37,679) (34,698) (33,857) (31,349)
------------ ------------ ------------ ------------ ------------
Income before income tax expense 21,847 20,693 18,886 14,857 13,438
Income tax expense 7,302 6,828 6,520 4,744 4,116
------------ ------------ ------------ ------------ ------------
Net income $ 14,545 $ 13,865 $ 12,366 $ 10,113 $ 9,322
============ ============ ============ ============ ============
Basic weighted average common shares
outstanding 5,867,705 5,819,916 5,813,984 5,813,984 5,813,984
============ ============ ============ ============ ============
Basic earnings per common share $ 2.48 $ 2.38 $ 2.13 $ 1.74 $ 1.60
============ ============ ============ ============ ============
Diluted weighted average common shares
outstanding 6,064,077 6,001,449 5,958,386 5,841,196 5,813,999
============ ============ ============ ============ ============
Diluted earnings per common share $ 2.40 $ 2.31 $ 2.08 $ 1.73 $ 1.60
============ ============ ============ ============ ============
Cash dividends declared $ 0.84 $ 0.76 $ 0.68 $ 0.60 $ 0.52
============ ============ ============ ============ ============
32
ITEM 6. SELECTED FINANCIAL DATA (continued)
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
(in thousands)
Balances at December 31,
- -----------------------------------
Total assets $ 1,453,122 $ 1,271,414 $ 1,249,060 $ 1,139,013 $ $1,150,485
Total loans $ 1,003,219 $ 870,882 $ 822,676 $ 738,223 $ 718,876
Total deposits $ 1,115,399 $ 926,391 $ 913,325 $ 793,380 $ 845,329
Total short-term borrowings $ 185,650 $ 184,761 $ 184,968 $ 232,117 $ 200,078
Long-term borrowings $ 10,046 $ 30,047 $ 31,348 $ 11,389 $ 11,433
Subordinated debentures $ 30,928 $ 30,928 $ 20,619 $ 20,619 $ 20,619
Total stockholders' equity $ 101,765 $ 90,022 $ 83,880 $ 73,534 $ 64,973
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Lakeland Financial Corporation is the holding company for Lake City
Bank. The Company is headquartered in Warsaw, Indiana and operates 43 offices
in twelve counties in northern Indiana. The Company earned $14.5 million for
the year 2004 versus $13.9 million for 2003, an increase of 4.9%. The increase
was driven by a $1.0 million decrease in the provision for loan losses, a $1.0
million decrease in noninterest expense and a $973,000 increase in net
interest income. Offsetting these positive impacts was a $1.9 million decrease
in non-interest income, driven by a $2.0 million decrease in net gains on the
sale of mortgages held for sale. The Company earned $13.9 million for 2003
versus $12.4 million for 2002, an increase of 12.1%. The increase was driven
by a $3.6 million increase in noninterest income, an $802,000 decrease in the
provision for loan losses and a $422,000 increase in net interest income.
Offsetting these positive impacts was a $3.0 million increase in noninterest
expense, driven by a $804,000 expense related to debt extinguishment costs and
an other real estate owned impairment of $300,000.
Basic earnings per share for the year 2004 was $2.48 per share versus
$2.38 per share for 2003 and $2.13 for 2002. Diluted earnings per share
reflect the potential dilutive impact of stock options granted under an
employee stock option plan. Diluted earnings per share for the year ended 2004
was $2.40 per share versus $2.31 per share for the year ended 2003 and $2.08
for the year ended 2002.
RESULTS OF OPERATIONS
2004 versus 2003
The Company reported record net income of $14.5 million in 2004, an
increase of $680,000, or 4.9%, versus net income of $13.9 million in 2003. Net
interest income increased $973,000, or 2.3%, to $43.2 million versus $42.2
million in 2003. Net interest income increased due to a decrease in interest
expense on interest bearing checking accounts and long-term borrowings, as
well as growth in commercial loans, which offset some of the effect of the
declining interest rates during the year. Despite growth in earning assets,
interest income decreased $331,000, or 0.6%, from $60.3 million in 2003 to
$60.0 million in 2004. The decrease was driven primarily by a 33 basis point
reduction in the tax equivalent yield on average earning assets over the year.
Interest expense decreased $1.3 million, or 7.2%, from $18.1 million in 2003
to $16.8 million in 2004. The decrease was primarily the result of a 21 basis
33
point decrease in the Company's daily cost of funds over the year. The Company
had a net interest margin of 3.63% in 2004 versus 3.82% in 2003. Average
earning assets increased by $88.5 million from $1.1 billion in 2003 to $1.2
billion in 2004. The primary driver was an $83.4 million increase in the
average daily loan balance. Deposits increased to fund the loan growth during
2004, driven primarily by increases of $57.6 million in the average daily
interest bearing checking account balances and increases of $33.9 million in
the average daily demand deposit balances. Management believes that the growth
in the loan portfolio will likely continue as a result of our continuing
strategic focus on commercial lending and in conjunction with the general
expansion and penetration of the geographical markets the Company serves.
Nonaccrual loans were $7.2 million, or 0.72% of total loans, at year
end versus $553,000, or 0.06% of total loans, at the end of 2003. There were
four relationships totaling $9.3 million classified as impaired as of December
31, 2004 versus two relationships totaling $3.0 million at the end of 2003.
The increase in both nonaccrual and impaired loans was due primarily to one
commercial credit totaling $6.1 million. The borrower filed for chapter 11
bankruptcy late in the third quarter of 2004 and is in the process of
determining its future business strategy. Borrower collateral and the personal
guarantees of its principals support the credit. Net charge-offs were $703,000
in 2004 versus $1.6 million in 2003, representing 0.08% and 0.18% of average
daily loans in 2004 and 2003. Total nonperforming loans were $10.0 million, or
1.00% of total loans, at year end 2004 versus $3.7 million, or 0.43% of total
loans, at the end of 2003. The provision for loan loss expense was $1.2
million in 2004, resulting in an allowance for loan losses at December 31,
2004 of $10.8 million, which represented 1.07% of the loan portfolio, versus a
provision for loan loss expense of $2.3 million in 2003 and an allowance for
loan losses of $10.2 million at the end of 2003, or 1.18% of the loan
portfolio. The lower provision in 2004 versus 2003 was attributable to a
number of factors, but was primarily a result of the decrease in the level of
charge-offs from $1.6 million in 2003 to $703,000 in 2004. The level of loan
loss provision is also influenced by the overall growth in the loan portfolio
and other factors related to this growth, such as emerging market risk,
commercial loan focus and large credit concentration, new industry lending
activity, general economic conditions and historical loss percentages. In
addition, management gives consideration to changes in the allocation for
specific watch list credits in determining the appropriate level of the loan
loss provision. Management's overall view on current credit quality was also a
factor in the determination of the provision for loan losses. The Company's
management continues to monitor the adequacy of the provision based on loan
levels, asset quality, economic conditions and other factors that may
influence the assessment of the collectability of loans.
Noninterest income was $16.6 million in 2004 versus $18.4 million in
2003, a decrease of $1.9 million, or 10.1%. The decrease was driven by a $2.0
million, or 67.3%, decrease in gains on sale of mortgages, from $3.0 million
in 2003 to $987,000 in 2004 as mortgage originations decreased from $143.2
million in 2003 to $59.3 million in 2004, a decrease of 58.6%. As experienced
by the industry generally, this decrease was a result of the decreased level
of mortgage activity during 2004 resulting from consumers having refinanced
their homes in 2002 and 2003 when rates were falling. Additionally,
noninterest income decreased due to a $500,000 decrease in gains on securities
sold. Partially offsetting these decreases were increases of $645,000, or
27.2%, in trust and brokerage fees and $472,000, or 27.0%, in merchant card
fee income. The increase in trust and brokerage fees was driven by the
Company's December 1, 2003 acquisition of Indiana Capital Management while the
increase in merchant card fees was driven by higher volume activity in
interchange and merchant fee income.
Noninterest expense decreased $1.0 million, or 2.7% from $37.7
million in 2003 to $36.7 million in 2004. Equipment expense decreased from
$2.5 million in 2003 to $2.1 million in 2004, primarily as a result of lower
depreciation expense and personal property tax expenses. Depreciation expense
was lower as a result of technology asset additions related to system upgrades
driven by Y2K issues; these assets have now fully depreciated. Credit card
interchange fees increased from $1.0 million in 2003 to $1.4 million in 2004
driven by higher processing costs charged by VISA and increased credit card
usage. In addition, during 2003, the Company redeemed its existing high fixed
rate subordinated debentures and reissued variable rate subordinated
debentures at a lower rate to better match long-term assets and liabilities.
The redemption resulted in a loss on extinguishment of $804,000.
As a result of these factors, income before income tax expense
increased $1.2 million, or 5.6%, from $20.7 million in 2003 to $21.8 million
in 2004. Income tax expense was $7.3 million in 2004 versus $6.8 million in
2003. Income tax as a percentage of income before tax was 33.4% in 2004 versus
33.0% in 2003. The higher tax rate resulted from a decreased percentage of the
Company's income being derived from tax-advantaged sources. Net income
increased $680,000, or 4.9%, to $14.5 million in 2004 versus $13.9 million in
2003. Basic earnings per share in 2004 was $2.48, an increase of 4.2%, versus
34
$2.38 in 2003. The Company's net income performance represented a 16.2% return
on January 1, 2004, stockholders' equity versus 16.5% in 2003. The net income
performance resulted in a 1.09% return on average daily assets in 2004 versus
1.12% in 2003.
2003 versus 2002
The Company reported record net income of $13.9 million in 2003, an
increase of $1.5 million, or 12.1%, versus net income of $12.4 million in
2002. Net interest income increased $422,000, or 1.0%, to $42.2 million versus
$41.8 million in 2002. Net interest income increased due to a decrease in
interest expense on time deposits and short-term borrowings, as well as growth
in commercial loans, which offset some of the effect of the declining interest
rates during the year. Despite growth in earning assets, interest income
decreased $4.0 million, or 6.2%, from $64.3 million in 2002 to $60.3 million
in 2003. The decrease was driven primarily by a 73 basis point reduction in
the tax equivalent yield on average earning assets over the year. Interest
expense decreased $4.4 million, or 19.6%, from $22.6 million in 2002 to $18.1
million in 2003. The decrease was primarily the result of a 55 basis point
decrease in the Company's daily cost of funds over the year. The Company had a
net interest margin of 3.82% in 2003 versus 4.02% in 2002. Average earning
assets increased by $74.7 million and totaled $1.1 billion in 2003 and 2002.
The primary driver was a $76.7 million increase in the average daily loan
balance. Deposits increased to fund the loan growth during 2003, driven
primarily by increases of $69.6 million in the average daily interest bearing
checking account balances and increases of $23.5 million in the average daily
demand deposit balances. During the fourth quarter of 2003, the Company
completed the issuance of floating rate trust preferred securities and the
redemption of its existing fixed rate trust preferred securities. The interest
rate on subordinated debentures, which are tied to the trust preferred
securities, changed from a 9% fixed rate to a variable rate of 305 basis
points over the 3 month LIBOR rate in the fourth quarter of 2003.
Nonaccrual loans were $553,000, or 0.06% of total loans, at year end
2003 versus $4.2 million, or 0.51% of total loans, at the end of 2002. There
were two relationships totaling $3.0 million classified as impaired as of
December 31, 2003 versus nine relationships totaling $7.3 million at the end
of 2002. One commercial credit represented $2.9 million and $3.2 million of
this amount in 2003 and 2002. The renewal of this loan was complicated as more
than one bank was involved, and it was past maturity, however at year end 2003
the loan was current as to principal and interest. The loan first became
delinquent in 2002 and the maturity was not extended. The decrease was the
result of payments on six commercial loans, including one loan of $1.7
million. Net charge-offs were $1.6 million in 2003 versus $1.5 million in
2002, representing 0.18% and 0.19% of average daily loans in 2003 and 2002.
Total nonperforming loans were $3.7 million, or 0.43% of total loans, at year
end 2003 versus $7.6 million, or 0.92% of total loans, at the end of 2002. The
provision for loan loss expense was $2.3 million in 2003, resulting in an
allowance for loan losses at December 31, 2003 of $10.2 million, which
represented 1.18% of the loan portfolio, versus a provision for loan loss
expense of $3.1 million in 2002 and an allowance for loan losses of $9.5
million in 2002, or 1.16% of the loan portfolio. The lower provision in 2003
versus 2002 was attributable to a number of factors, but was primarily a
result of the decrease in nonperforming loans during 2003. The continued
challenging economic conditions during 2003 and the resulting impact on asset
quality as evidenced by the percentage of internally classified loans in 2003
was also a factor in the determination of the provision for loan losses. The
Company's management continued to monitor the adequacy of the provision based
on loan levels, asset quality, economic conditions and other factors that may
influence the assessment of the collectability of loans.
Noninterest income was $18.4 million in 2003 versus $14.9 million in
2002, an increase of $3.6 million, or 24.0%. The increase was driven by a $1.1
million, or 57.7%, increase in gains on sale of mortgages, from $1.9 million
in 2002 to $3.0 million in 2003. This increase was a result of the increased
level of mortgage activity during 2003. Additionally, noninterest income
increased due to a $558,000 reduction in the charge for non-cash impairment of
the Company's mortgage servicing rights, a $624,000 increase in the earnings
on life insurance, a $445,000 increase in gains on securities sold and a
$411,000 increase in operating lease income. The increase in earnings on life
insurance occurred primarily due to the life insurance not being put into
place until the fourth quarter of 2002.
Noninterest expense increased $3.0 million, or 8.6% from $34.7
million in 2002 to $37.7 million in 2003. Salaries and wages increased $1.3
million, or 7.2%, to $19.8 million in 2003 versus $18.5 million in 2002. This
increase was attributable to normal salary increases, increases related to the
employee 401(k) plan, higher health care costs and staff additions. Net
occupancy expense increased from $2.2 million in 2002 to $2.4 million in 2003
as a result of increased spending to refurbish several offices and higher real
estate tax expense. Included in other expense was a $300,000 write-down on an
ORE property, which was subsequently sold by year end. During the fourth
35
quarter of 2003, the Company completed the issuance of floating rate trust
preferred securities and the redemption of its existing fixed rate trust
preferred securities. The redemption resulted in a loss on extinguishment of
$804,000.
As a result of these factors, income before income tax expense
increased $1.8 million, or 9.6%, from $18.9 million in 2002 to $20.7 million
in 2003. Income tax expense was $6.8 million in 2003 versus $6.5 million in
2002. Income tax as a percentage of income before tax was 33.0% in 2003 versus
34.5% in 2002. The lower tax rate resulted from increased investment in tax
advantaged securities and investments and an increase in the level of income
derived from the investment subsidiary. Net income increased $1.5 million, or
12.1%, to $13.9 million in 2003 versus $12.4 million in 2002. Basic earnings
per share in 2003 was $2.38, an increase of 11.7%, versus $2.13 in 2002. The
Company's net income performance represented a 16.5% return on January 1,
2003, stockholders' equity versus 16.8% in 2002. The net income performance
resulted in a 1.12% return on average daily assets in 2003 versus 1.08% in
2002.
FINANCIAL CONDITION
As of December 31, 2004, the Company had 43 offices serving twelve
counties in northern Indiana. The Company added no new offices during 2004.
Since 1996, the Company has added seventeen new offices through acquisition
and internal growth. The Company will consider future acquisition and
expansion opportunities with an emphasis on markets that it believes would be
receptive to its business philosophy of local, independent banking. The
Company sold five branches in its south region during the third quarter of
2001 in order to help position the Company to focus on growth opportunities in
its core northern markets, which are anchored by the cities of Warsaw, Fort
Wayne, Elkhart and South Bend, Indiana.
Total assets of the Company were $1.453 billion as of December 31,
2004, an increase of $181.7 million, or 14.3%, when compared to $1.271 billion
as of December 31, 2003.
Total cash and cash equivalents increased by $46.4 million, or 80.8%,
to $103.9 million at December 31, 2004 from $57.4 million at December 31,
2003. The increase was primarily attributable to funding needs associated with
a corresponding increase in the Company's deposits.
Total securities available for sale increased by $5.2 million, or
1.9%, to $286.6 million at December 31, 2004 from $281.4 million at December
31, 2003. The increase was a result of a number of activities in the
securities portfolio. Paydowns of $60.2 million were received, and the
amortization of premiums, net of the accretion of discounts, was $3.6 million.
Maturities, calls and sales of securities totaled $3.0 million. The fair value
of the securities increased $67,000 as a result of a flattening of the yield
curve during the second half of 2004. These portfolio decreases were offset by
securities purchases totaling $72.0 million. The investment portfolio is
managed to limit the Company's exposure to risk and contains mostly
collateralized mortgage obligations and other securities which are either
directly or indirectly backed by the federal government or a local municipal
government. The investment portfolio did not contain any corporate debt
instruments or trust preferred instruments as of December 31, 2004.
Real estate mortgages held for sale decreased by $440,000, or 12.8%,
to $3.0 million at December 31, 2004 from $3.4 million at December 31, 2003.
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 2004, $59.3 million in real
estate mortgages were originated for sale and $59.8 million in mortgages were
sold, compared to $143.2 million and $150.2 million in 2003.
Total loans, excluding real estate mortgages held for sale, increased
by $132.3 million or 15.2%, to $1.003 billion at December 31, 2004 from $870.9
million at December 31, 2003. The mix of loan types within the Company's
portfolio extended a trend toward a higher percentage of the total loan
portfolio being in commercial loans. The portfolio breakdown at year end 2004
reflected 79% commercial, 5% real estate and 16% consumer loans compared to
78% commercial, 5% real estate and 17% consumer loans at December 31, 2003.
At December 31, 2004, the allowance for loan losses was $10.8
million, or 1.07% of total loans outstanding, versus $10.2 million, or 1.18%,
of total loans outstanding at December 31, 2003. The process of identifying
probable credit losses is a subjective process. Therefore, the Company
36
maintains a general allowance to cover probable incurred credit losses within
the entire portfolio. The methodology management uses to determine the
adequacy of the loan loss reserve includes the following considerations.
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 slow economic recovery, certain
borrowers may experience difficulty and the level of nonperforming 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 uncollectability 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 loans based upon a monthly review of those credits. An appropriate
level of general allowance is determined after considering the following
factors: application of historical loss percentages, emerging market risk,
commercial loan focus and large credit concentrations, new industry lending
activity and general economic conditions. 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 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 specific 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 December 31, 2004, on the basis
of management's review of the loan portfolio, the Company had loans totaling
$56.2 million on the classified loan list versus $70.4 million on December 31,
2003. As of December 31, 2004, the Company had $32.1 million of assets
classified special mention, $23.3 million classified as substandard, $751,000
classified as doubtful and $0 classified as loss as compared to $41.9 million,
$27.7 million, $869,000 and $0 at December 31, 2003.
Allowance estimates are developed by management in consultation with
regulatory authorities, taking into account actual loss experience, 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.
The Company has experienced growth in total loans over the last three
years of $180.5 million, or 22.0%. The concentration of this loan growth was
in the commercial loan portfolio. Commercial loans comprised 79%, 78% and 76%
of the total loan portfolio at December 31, 2004, 2003 and 2002.
Traditionally, this type of lending may have more credit risk than other types
of lending because of the size and diversity of the credits. The Company
manages this risk by adjusting its pricing to the perceived risk of each
individual credit and by diversifying the portfolio by customer, product,
industry and geography. Management believes that it is prudent to continue to
provide for loan losses in a manner consistent with its historical approach
due to loan growth described above and current economic conditions.
As a result of the methodology in determining the adequacy of the
allowance for loan losses, the provision for loan losses was $1.2 million in
2004 versus $2.3 million in 2003. At December 31, 2004, total nonperforming
loans increased by $6.3 million to $10.0 million from $3.7 million at December
31, 2003. Loans delinquent 90 days or more that were included in the
accompanying financial statements as accruing totaled $2.8 million versus $3.2
37
million at December 31, 2003. Total impaired loans increased by $6.3 million
to $9.3 million at December 31, 2004 from $3.0 million at December 31, 2003.
The increases in nonperforming loans and impaired loans resulted primarily
from the addition of a single commercial credit of $6.1 million. The borrower
filed for chapter 11 bankruptcy late in the third quarter of 2004 and is in
the process of determining its future business strategy. Borrower collateral
and the personal guarantees of its principals support the credit. The total
loans that are delinquent 90 days or more include one commercial credit for
$2.6 million and $2.9 million in 2004 and 2003. The renewal of this loan has
been complicated as more than one bank is involved, and it remains past
maturity. The loan first became delinquent in 2002 and the maturity has not
been extended. While this loan is current as to principal and interest, there
can be no assurance that it will remain current given the circumstances
involved. The impaired loan total includes $6.7 million in nonaccrual loans.
The Company allocated $1.7 million and $456,000 of the allowance for loan
losses to the impaired loans in 2004 and 2003. 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 Company does not believe that the increase in total nonperforming
loans is indicative of a trend and that the overall decrease in classified
loans is a better reflection of the continued focus on enforcement of a strong
credit environment, an aggressive position on loan work-out situations and a
general improvement in the regional economic conditions. The allowance for
loan loss to total loans percentage decreased from 1.18% in 2003 to 1.07% in
2004. Despite these factors, the Company does not believe that it has
experienced any meaningful change in overall asset quality. The Company
believes that its overall expansion strategy has employed a credit risk
management approach that promotes diversification and therefore creates a
balanced portfolio with appropriate risk parameters.
Total deposits increased by $189.0 million, or 20.4%, to $1.115
billion at December 31, 2004 from $926.4 million at December 31, 2003. The
increase resulted from increases of $133.8 million in certificates of deposit,
$51.5 million in demand deposit accounts, $49.1 million in NOW accounts and
$5.3 million in savings accounts. Offsetting these increases were declines of
$32.1 million in Investors' Money Market accounts and $18.6 million in money
market accounts.
Total short-term borrowings increased by $889,000, or 0.5%, to $185.7
million at December 31, 2004 from $184.8 million at December 31, 2003. The
increase resulted from a $20.0 million increase in Federal Home Loan Bank
advances combined with decreases of $14.5 million in securities sold under
agreements to repurchase, $4.0 million in federal fund purchases and $567,000
in U.S. Treasury demand notes.
The Company believes that a strong, appropriately managed capital
position is critical to long-term earnings and expansion. Bank regulatory
agencies exclude the market value adjustment created by SFAS No. 115 (AFS
adjustment) from capital adequacy calculations. Excluding this adjustment from
the calculation, the Company had a total risk-based capital ratio of 12.3% and
a Tier I risk-based capital ratio of 11.3% as of December 31, 2004. These
ratios met or exceeded the Federal Reserve's "well-capitalized" minimums of
10.0% and 6.0%, respectively.
The ability to maintain and grow these ratios is a function of the
balance between net income and a prudent dividend policy. Total stockholders'
equity increased by 13.0% to $101.8 million as of December 31, 2004 from $90.0
million as of December 31, 2003. The increase in 2004 resulted from net income
of $14.5 million less the following factors:
o cash dividends of $4.9 million,
o an unfavorable change in the AFS adjustment for the market valuation
on securities held for sale of $18,000, net of tax,
o a positive minimum pension liability adjustment of $33,000, net of
tax,
o $165,000 for the acquisition of treasury stock,
o $2.1 million related to stock option exercises and stock compensation
expense and
o $335,000 of treasury stock sold and distributed under the deferred
directors' plan.
38
Total stockholders' equity increased by 7.3% to $90.0 million as of
December 31, 2003, from $83.9 million as of December 31, 2002. The increase in
2003 resulted from net income of $13.9 million less the following factors:
o cash dividends of $4.4 million,
o an unfavorable change in the AFS adjustment for the market valuation
on securities held for sale of $4.9 million, net of tax,
o a negative minimum pension liability adjustment of $331,000, net of
tax,
o $169,000 for the acquisition of treasury stock,
o $819,000 related to stock option exercises and stock compensation
expense and
o $152,000 of treasury stock sold and distributed under the deferred
directors' plan.
In addition, effective January 1, 2003, the Company's directors'
deferred compensation plan was amended to no longer permit diversification
outside of Company stock and to require that settlement of deferred balances
be made in shares of Company stock. In accordance with EITF 97-14: "Accounting
for Deferred Compensation Arrangements Where Amounts Earned Are Held in a
Rabbi Trust and Invested," on the date of the plan change, the $949,000
current value of the liability for the Company shares was transferred to
additional paid-in-capital from other liabilities. Subsequent payments under
the directors' deferred plan of $165,000 and $204,000 were made to
paid-in-capital under the new plan for 2004 and 2003.
The 2004 AFS adjustment reflected a 216 basis point increase in the
two to five year U.S. Treasury rates during 2004. Due to the fact that the
securities portfolio is primarily fixed rate, a negative equity adjustment
would likely occur if interest rates increased. Management has factored this
into the determination of the size of the AFS portfolio to assure that
stockholders' equity is adequate under various scenarios.
Other than those indicated in this management's discussion,
management is not aware of any known trends, events or uncertainties that
would have a material effect on the Company's liquidity, capital and results
of operations. In addition, management is not aware of any regulatory
recommendations that, if implemented, would have such an effect.
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 allowance for loan losses may be difficult to estimate due to
changes in economic conditions, the financial condition of borrowers and the
fact that there is not always a specific event that triggers a loss. The
Company believes that the allowance for loan losses has closely reflected
actual loss experience and expects this to continue as adjustments are made
for changes occurring in the facts and circumstances affecting the analysis.
Additional information detailing the analysis process and methodology is
included previously under "Financial Condition."
Determining fair value for securities and other financial instruments
may be difficult to estimate due to changing market conditions, difficulty in
predicting these market changes and changes in interest rates. The Company
determines fair value by obtaining current market prices from a third party
servicer for the individual securities held at the end of each month and
appling these rates to the securities. The Company believes the pricing
obtained and rates applied in determining the fair value of securities and
other financial instruments has been an accurate estimate of the instruments
fair value at a point in time. The Company monitors the prices obtained and
reviews the rates applied in determining fair value on a regular basis, making
adjustments when situations warrant and expects the accuracy of these
estimates at a point in time to continue.
39
The valuation of mortgage servicing rights is a complicated estimate
due to the number of assumptions that could be used to value the servicing
retained and the servicing rights themselves are not tangible. The Company
does not have a large mortgage origination business and feels that the
business closely reflects industry standards for the amount of mortgage
origination activity it conducts. Industry software is used to value the
servicing rights, and there are no assumptions applied that could be
considered outside industry standards. Fair value is calculated on a loan by
loan basis and is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions, specifically prepayment speeds and current interest
rates. Adjustments to the fair value of the mortgage servicing rights are made
monthly.
Newly Issued But Not Yet Effective Accounting Standards:
FASB Statement 123 (revised 2004), Share-Based Payment requires
expensing of stock options effective for fiscal periods beginning after June
15, 2005. The Company plans to adopt this standard as of July 1, 2005 and will
begin expensing any unvested stock options at that time. The Company does not
anticipate the adoption of this standard will have any material effect on the
Company's financial condition or results of operations.
Emerging Issues Task Force (EITF) Issue 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
EITF 03-1 provides application guidance that should be used to determine when
an investment is considered impaired, whether that impairment is
other-than-temporary, and the recognition of an impairment loss. The guidance
also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. In September 2004, the FASB delayed the accounting requirements
of EITF 03-1 until additional implementation guidance is issued and goes into
effect.
No other new accounting standards have been issued that are not yet
effective that would have a material impact on the Company's financial
condition or results of operations.
Liquidity
Management maintains a liquidity position that it believes will
adequately provide funding for loan demand and deposit run-off that may occur
in the normal course of business. The Company relies on a number of different
sources in order to meet these potential liquidity demands. The primary
sources are increases in deposit accounts and cash flows from loan payments
and the securities portfolio. Given current prepayment assumptions, the cash
flow from the securities portfolio is expected to provide approximately $44.9
million of funding in 2005.
In addition to these primary sources of funds, management has several
secondary sources available to meet potential funding requirements. As of
December 31, 2004, the Company had $110.0 million in Federal Fund lines with
correspondent banks and may borrow up to $100.0 million at the Federal Home
Loan Bank of Indianapolis. The Company has its securities in the available for
sale (AFS) portfolio. Therefore the Company may sell securities to meet
funding demands. Management believes that the securities in the AFS portfolio
are of high quality and would therefore be marketable. Approximately 81% of
this portfolio is comprised of Federal agency securities or mortgage-backed
securities directly or indirectly backed by the Federal government. In
addition, the Company has historically sold mortgage loans on the secondary
market to reduce interest rate risk and to create an additional source of
funding.
During 2004, cash and cash equivalents increased $46.4 million from
$57.4 million as of December 31, 2003 to $103.9 million as of December 31,
2004. The primary driver of this increase was an increase in deposit balances
of $189.0 million. Other sources of funds were proceeds from maturities, calls
and principal paydowns of securities of $63.2 million and proceeds from loan
sales of $60.2 million. The primary use of funds was a $133.0 million increase
in net loans, which is net of approximately $59.3 million in loans originated
and sold during 2004. Other uses of funds were purchases of securities of
$72.0 million and payments on long-term borrowings of $20.0 million.
During 2003, cash and cash equivalents decreased $29.7 million from
$87.1 million as of December 31, 2002 to $57.4 million as of December 31,
2003. The primary driver of this decrease was an increase in net loans of
$51.7 million, which is net of approximately $143.2 million of loans
originated and sold during 2003. A falling rate environment during the first
half of the year contributed to an increase in demand for residential real
40
estate mortgage loans. Other uses of funds were purchases of securities of
$162.5 million and payments on long-term borrowings of $31.9 million. Sources
of funds were proceeds from loan sales of $152.1 million and proceeds from
maturities, calls and principal paydowns of securities of $132.4 million.
Other sources of funds were proceeds from long-term borrowings of $40.9
million, proceeds from the sale of securities of $14.3 million and a net
increase in deposits of $13.1 million.
During 2002, cash and cash equivalents increased $8.0 million from
$79.1 million as of December 31, 2001 to $87.1 million as of December 31,
2002. A $119.9 million increase in deposit balances was the primary driver
behind this change. Other sources of funds included proceeds from the sale of
loans of $93.1 million, proceeds from calls and maturities of securities
totaling $83.4 million and proceeds from long term borrowings of $20.0
million. Uses of funds were purchases of securities of $89.4 million, an
increase in net loans of $86.0 million, which is net of approximately $93.8
million of loans originated and sold during 2002, and an increase in other
assets of $11.0 million due primarily to payments for an investment in bank
owned life insurance totaling $13.4 million.
The following tables disclose information on the maturity of the
Company's contractual long-term obligations and commitments. Certificates of
deposit listed are those with original maturities of 1 year or more.
Payments Due by Period
--------------------------------------------------------------------
One year After 5
Total or less 1-3 years 4-5 years years
------------ ------------ ------------ ------------ ------------
(in thousands)
Certificates of deposit $ 173,195 $ 75,913 $ 85,862 $ 11,330 $ 90
Long-term debt 10,046 10,000 0 0 46
Operating leases 351 112 198 39 2
Subordinated debentures 30,928 0 0 0 30,928
------------ ------------ ------------ ------------ ------------
Total contractual long-term cash
obligations $ 214,520 $ 86,025 $ 86,060 $ 11,369 $ 31,066
============ ============ ============ ============ ============
Amount of Commitment Expiration Per Period
------------------------------------------
Total
Amount One year Over one
Committed or less year
------------ ------------ ------------
(in thousands)
Unused loan commitments $ 475,188 $ 334,599 $ 140,589
Commercial letters of credit 1,883 936 947
Standby letters of credit 8,558 8,558 0
------------ ------------ ------------
Total commitments and letters of credit $ 485,629 $ 344,093 $ 141,536
============ ============ ============
Inflation
The effects of price changes and inflation can vary substantially for
most financial institutions. While management believes that inflation affects
the growth of total assets, it believes that it is difficult to assess the
overall impact. Management believes this to be the case due to the fact that
generally neither the timing nor the magnitude of the inflationary changes in
the consumer price index ("CPI") coincides with changes in interest rates. The
price of one or more of the components of the CPI may fluctuate considerably
and thereby influence the overall CPI without having a corresponding affect on
interest rates or upon the cost of those goods and services normally purchased
by the Company. In years of high inflation and high interest rates,
intermediate and long-term interest rates tend to increase, thereby adversely
impacting the market values of investment securities, mortgage loans and other
long-term fixed rate loans. In addition, higher short-term interest rates
caused by inflation tend to increase the cost of funds. In other years, the
reverse situation may occur.
41
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management (ALCO) and Securities
Interest rate risk represents the Company's primary market risk
exposure. The Company does not have material exposure to foreign currency
exchange risk, does not own any derivative financial instruments and does not
maintain a trading portfolio. The Board of Directors annually reviews and
approves the ALCO policy used to manage interest rate risk. This 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.
Given the Company's mix of interest bearing liabilities and interest bearing
assets on December 31, 2004, the net interest margin could be expected to
decline in a falling interest rate environment and conversely, to increase in
a rising rate environment. The low rate environment during 2004 continued to
have an adverse affect on the net interest margin. In July of 2004 the Federal
Open Market Committee (FOMC) began increasing the target federal funds rate at
what they defined as a measured pace. The FOMC increased the target federal
funds rate a total of 1.25 percent over the five meetings in the period of
August, 2004 through December, 2004, with an additional increase of 0.25
percent in January 2005. These increases had a positive impact on the net
interest margin during the later part of 2004. Future changes in the net
interest margin will be dependent upon multiple factors including further
actions by the FOMC during 2005, competitive pressures in the various markets
served, and changes in the structure of the balance sheet in response to
customer demands for products and services.
The Company utilizes a computer program to stress test the balance
sheet under a wide variety of interest rate scenarios. The model quantifies
the income impact of changes in customer preference for products, basis risk
between the assets and the liabilities that support them and the risk inherent
in different yield curves, as well as other factors. The ALCO committee
reviews these possible outcomes and makes loan, investment and deposit
decisions that maintain reasonable balance sheet structure in light of
potential interest rate movements. Although management does not consider GAP
ratios in this planning, the information can be used in a general fashion to
look at asset and liability mismatches. The Company's cumulative repricing GAP
ratio as of December 31, 2004 for the next 12 months using a rates unchanged
scenario was a negative 8.18% of earning assets.
The following tables provide information regarding the Company's
financial instruments used for purposes other than trading that are sensitive
to changes in interest rates. For loans, securities and liabilities with
contractual maturities, the tables present principal cash flows and related
weighted-average interest rates by contractual maturities, as well as the
Company's historical experience of the impact of interest-rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. Core deposits such as deposits, interest-bearing checking, savings
and money market deposits that have no contractual maturity, are shown under
Year 1, however historical experience indicates that some potion of the
balances are retained over time. Weighted-average variable rates are based
upon rates existing at the reporting date.
42
2004
Principal/Notional Amount Maturing in:
-----------------------------------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------------------------------
Fair
Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/2004
--------- --------- --------- --------- --------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 116,056 $ 67,603 $ 60,685 $ 49,801 $ 48,251 $ 13,733 $ 356,129 $ 357,252
Average interest rate 6.05% 6.24% 6.12% 5.96% 6.02% 6.20% 6.09%
Variable interest rate loans $ 610,201 $ 1,192 $ 1,209 $ 1,233 $ 1,889 $ 31,366 $ 647,090 $ 647,025
Average interest rate 5.41% 6.08% 6.12% 6.17% 5.08% 6.13% 5.44%
Fixed interest rate securities $ 26,296 $ 17,703 $ 20,480 $ 25,856 $ 28,766 $ 167,117 $ 286,218 $ 286,078
Average interest rate 4.90% 4.16% 4.04% 3.97% 3.93% 4.46% 4.36%
Variable interest rate securities $ 59 $ 56 $ 56 $ 56 $ 55 $ 224 $ 506 $ 504
Average interest rate 5.24% 5.28% 5.28% 5.28% 5.25% 4.83% 5.07%
Other interest-bearing assets $ 22,714 $ - $ - $ - $ - $ - $ 22,714 $ 22,714
Average interest rate 2.07% - - - - - 2.07%
Rate sensitive liabilities:
Non-interest bearing checking $ 237,261 $ - $ - $ - $ - $ - $ 237,261 $ 237,261
Average interest rate
Savings & interest bearing checking $ 443,820 $ - $ - $ - $ - $ - $ 443,820 $ 443,820
Average interest rate 0.97% - - - - - 0.97%
Time deposits $ 284,656 $ 72,426 $ 54,541 $ 9,876 $ 11,871 $ 948 $ 434,318 $ 435,233
Average interest rate 2.44% 3.02% 4.10% 3.64% 4.06% 4.12% 2.82%
Fixed interest rate borrowings $ 120,650 $ - $ - $ - $ - $ 46 $ 120,696 $ 120,649
Average interest rate 1.42% - - - - 6.15% 1.43%
Variable interest rate borrowings $ 75,000 $ - $ - $ - $ - $ 30,928 $ 105,928 $ 104,336
Average interest rate 1.95% - - - - 5.18% 2.89%
43
2003
Principal/Notional Amount Maturing in:
-----------------------------------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------------------------------
Fair
Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/2003
--------- --------- --------- --------- --------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 119,633 $ 65,696 $ 53,759 $ 33,556 $ 38,421 $ 15,955 $ 327,020 $ 332,837
Average interest rate 6.49% 6.56% 6.41% 6.36% 5.92% 6.39% 6.41%
Variable interest rate loans $ 506,402 $ 1,274 $ 1,298 $ 1,319 $ 1,314 $ 32,255 $ 543,862 $ 541,890
Average interest rate 4.30% 4.59% 4.59% 4.61% 4.54% 5.06% 4.36%
Fixed interest rate securities $ 19,199 $ 19,494 $ 19,689 $ 22,637 $ 27,797 $ 171,936 $ 280,752 $ 280,661
Average interest rate 4.58% 4.46% 4.51% 4.33% 4.18% 4.45% 4.43%
Variable interest rate securities $ 200 $ 145 $ 108 $ 83 $ 60 $ 95 $ 691 $ 706
Average interest rate 5.62% 6.58% 5.57% 4.69% 4.25% 3.42% 5.28%
Other interest-bearing assets $ 5,144 $ - $ - $ - $ - $ - $ 5,144 $ 5,144
Average interest rate 0.98% - - - - - 0.98%
Rate sensitive liabilities:
Non-interest bearing checking $ 185,734 $ - $ - $ - $ - $ - $ 185,734 $ 185,734
Average interest rate
Savings & interest bearing checking $ 440,154 $ - $ - $ - $ - $ - $ 440,154 $ 440,154
Average interest rate 0.81% - - - - - 0.81%
Time deposits $ 175,302 $ 71,067 $ 15,286 $ 28,526 $ 9,372 $ 950 $ 300,503 $ 305,003
Average interest rate 2.07% 2.87% 2.97% 4.87% 3.65% 2.89% 2.63%
Fixed interest rate borrowings $ 159,761 $ 10,000 $ - $ - $ - $ 47 $ 169,808 $ 170,089
Average interest rate 1.20% 2.36% - - - 6.15% 1.27%
Variable interest rate borrowings $ 45,000 $ - $ - $ - $ - $ 30,928 $ 75,928 $ 75,974
Average interest rate 1.31% $ - - - - 1.14% 1.24%
44
These tables illustrate the Company's growth during 2004 and the
effect of the rate cuts during fiscal year 2003. The changes in the balances
primarily reflect the growth of the Company's existing offices and acceptance
of the one office opened during 2003. The increase in loans during 2004 was
driven primarily by strong growth in the Company's commercial loan portfolio.
The average interest rates show the effect of the low interest rate
environment during the year.
The Company's investment portfolio consists of U.S. Treasury
securities, agencies, mortgage-backed securities and municipal bonds. During
2004, purchases in the securities portfolio consisted primarily of agency
securities and municipal bonds. As of December 31, 2004, the Company's
investment in mortgage-backed securities represented approximately 73% of
total securities and consisted of CMOs and mortgage pools issued by Ginnie
Mae, Fannie Mae and Freddie Mac. Ginnie Mae, Fannie Mae and Freddie Mac
securities are each guaranteed by their respective agencies as to principal
and interest. All mortgage securities purchased by the Company are within risk
tolerances for price, prepayment, extension and original life risk
characteristics contained in the Company's investment policy. The Company uses
Bloomberg analytics to evaluate and monitor all purchases. As of December 31,
2004, the securities in the AFS portfolio had approximately a two and one-half
year average life with approximately 12% price depreciation in the event of a
300 basis points upward movement. The portfolio had approximately 5% price
appreciation in the event of a 300 basis point downward movement in rates. As
of December 31, 2004, all mortgage securities were performing in a manner
consistent with management's original expectations.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS (in thousands except share data)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 2004 2003
------------ ------------
ASSETS
Cash and due from banks $ 81,144 $ 52,297
Short-term investments 22,714 5,144
------------ ------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,858 57,441
Securities available for sale (carried at fair value) 286,582 281,367
Real estate mortgages held for sale 2,991 3,431
Loans, net of allowance for loan losses of $10,754 and $10,234 . . . . . . . . . . . . . . . . . . . . . 992,465 860,648
Land, premises and equipment, net 25,057 26,157
Bank owned life insurance 16,896 15,453
Accrued income receivable 5,765 5,010
Goodwill 4,970 4,970
Other intangible assets 1,245 1,460
Other assets 13,293 15,477
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,453,122 $ 1,271,414
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 237,261 185,734
Interest bearing deposits 878,138 740,657
------------ ------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,115,399 926,391
Short-term borrowings
Federal funds purchased 20,000 24,000
Securities sold under agreements to repurchase 88,057 102,601
U.S. Treasury demand notes 2,593 3,160
Other short-term borrowings 75,000 55,000
------------ ------------
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,650 184,761
Accrued expenses payable 7,445 7,804
Other liabilities 1,889 1,461
Long-term borrowings 10,046 30,047
Subordinated debentures 30,928 30,928
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,351,357 1,181,392
Commitments, off-balance sheet risks and contingencies (Notes 1 and 19)
STOCKHOLDERS' EQUITY
Common stock: 90,000,000 shares authorized, no par value
5,915,854 shares issued and 5,881,283 outstanding as of December 31, 2004
5,834,744 shares issued and 5,788,263 outstanding as of December 31, 2003 1,453 1,453
Additional paid-in capital 12,463 10,509
Retained earnings 89,864 80,260
Accumulated other comprehensive loss (1,267) (1,282)
Treasury stock, at cost (2004 - 34,571 shares, 2003 - 46,481 shares) (748) (918)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,765 90,022
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,453,122 $ 1,271,414
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
46
CONSOLIDATED STATEMENTS OF INCOME (in thousands except share and per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 2004 2003 2002
------------ ------------ ------------
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 49,087 $ 46,861 $ 49,083
Tax exempt 287 280 181
Interest and dividends on securities
Taxable 8,103 10,946 13,205
Tax exempt 2,344 2,061 1,607
Interest on short-term investments 184 188 259
------------ ----------- ------------
Total interest income 60,005 60,336 64,335
Interest on deposits 13,397 14,079 17,091
Interest on borrowings
Short-term 1,556 1,110 2,552
Long-term 1,880 2,948 2,915
------------ ----------- ------------
Total interest expense 16,833 18,137 22,558
------------ ----------- ------------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,172 42,199 41,777
Provision for loan losses 1,223 2,254 3,056
------------ ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,949 39,945 38,721
NONINTEREST INCOME
Trust and brokerage income 3,015 2,370 2,451
Service charges on deposit accounts 6,917 6,860 6,717
Loan, insurance and service fees 1,945 2,296 1,704
Merchant card fee income 2,219 1,747 1,594
Other income 1,475 1,636 428
Net gains on sales of real estate mortgages held for sale 987 3,018 1,914
Net securities gains 0 500 55
------------ ----------- ------------
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,558 18,427 14,863
NONINTEREST EXPENSE
Salaries and employee benefits 19,673 19,829 18,501
Net occupancy expense 2,496 2,444 2,174
Equipment costs 2,106 2,538 2,483
Data processing fees and supplies 2,546 2,433 2,226
Credit card interchange 1,397 955 900
Loss on extinguishment of debt 0 804 0
Other expense 8,442 8,676 8,414
------------ ----------- ------------
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,660 37,679 34,698
------------ ----------- ------------
INCOME BEFORE INCOME TAX EXPENSE 21,847 20,693 18,886
Income tax expense 7,302 6,828 6,520
------------ ----------- ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 14,545 $ 13,865 $ 12,366
============ =========== ============
BASIC WEIGHTED AVERAGE COMMON SHARES 5,867,705 5,819,916 5,813,984
============ =========== ============
BASIC EARNINGS PER COMMON SHARE $ 2.48 $ 2.38 $ 2.13
============ =========== ============
DILUTED WEIGHTED AVERAGE COMMON SHARES 6,064,077 6,001,449 5,958,386
============ =========== ============
DILUTED EARNINGS PER COMMON SHARE $ 2.40 $ 2.31 $ 2.08
============ =========== ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
47
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands except share and per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income (Loss) Stock Equity
------------ ------------ ------------ ------------- ------------ -------------
Balance at January 1, 2002 $ 1,453 $ 8,537 $ 62,378 $ 1,835 $ (669) $ 73,534
Comprehensive income:
Net income 12,366 12,366
Other comprehensive income, net of tax 2,102 2,102
-------------
Comprehensive income 14,468
Cash dividends declared, $.68 per share (3,925) (3,925)
Acquisition of treasury stock (197) (197)
------------ ------------ ------------ ------------- ------------ -------------
Balance at December 31, 2002 1,453 8,537 70,819 3,937 (866) 83,880
Comprehensive income:
Net income 13,865 13,865
Other comprehensive income, net of tax (5,219) (5,219)
-------------
Comprehensive income 8,646
Cash dividends declared, $.76 per share (4,424) (4,424)
Transfer of deferred directors' liability 949 949
Treasury shares purchased under deferred
directors' plan (6,022 shares) 169 (169) 0
Treasury stock sold and distributed under
deferred directors'
plan (6,515 shares) 35 117 152
Stock issued for stock option exercises
(20,760 shares) 484 484
Tax benefit of stock option exercises 81 81
Stock compensation expense 254 254
------------ ------------ ------------ ------------- ------------ -------------
Balance at December 31, 2003 1,453 10,509 80,260 (1,282) (918) 90,022
Comprehensive income:
Net income 14,545 14,545
Other comprehensive income, net of tax 15 15
-------------
Comprehensive income 14,560
Cash dividends declared, $.84 per share (4,941) (4,941)
Treasury shares purchased under deferred
directors' plan (4,786 shares) 165 (165) 0
Treasury stock sold and distributed under
deferred directors'
plan (16,696 shares) (335) 335 0
Stock issued for stock option exercises
(81,110 shares) 1,711 1,711
Tax benefit of stock option exercises 359 359
Stock compensation expense 54 54
------------ ------------ ------------ ------------- ------------ -------------
Balance at December 31, 2004 $ 1,453 $ 12,463 $ 89,864 $ (1,267) $ (748) $ 101,765
============ ============ ============ ============= ============ =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
48
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 14,545 $ 13,865 $ 12,366
------------ ------------ ------------
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 2,091 2,210 2,291
Provision for loan losses 1,223 2,254 3,056
Write down of other real estate owned 15 0 0
Amortization of intangible assets 215 154 176
Amortization of loan servicing rights 573 671 452
Net change in loan servicing rights valuation allowance (154) (224) 334
Loans originated for sale (59,341) (143,230) (93,751)
Net gain on sales of loans (987) (3,018) (1,914)
Proceeds from sale of loans 60,243 152,118 93,142
Net (gain) loss on sale of premises and equipment 106 (101) 25
Net gain on sales of securities available for sale 0 (500) (55)
Net securities amortization 3,566 1,549 1,753
Stock compensation expense 54 254 0
Earnings on life insurance (632) (692) (68)
Net change:
Accrued income receivable (755) (11) 442
Accrued expenses payable (248) (1,404) 1,666
Other assets 2,641 2,603 2,417
Other liabilities 428 (958) (680)
------------ ------------ ------------
Total adjustments 9,038 11,675 9,286
------------ ------------ ------------
Net cash from operating activites . . . . . . . . . . . . . . . . . . . . . . . . 23,583 25,540 21,652
Cash flows from investing activites:
Proceeds from sale of securities available for sale 0 14,338 5,771
Proceeds from maturities, calls and principal paydowns of
securities available for sale 63,185 132,377 83,371
Purchases of securities available for sale (72,032) (162,540) (89,419)
Purchase of life insurance (811) (1,393) (13,300)
Net increase in total loans (133,047) (51,681) (85,966)
Proceeds from sales of land, premises and equipment 144 159 11
Purchases of land, premises and equipment (1,241) (3,627) (2,843)
Increase in investment in unconsolidated subsidiary 0 (309) 0
Net payments in acquisition 0 (600) 0
------------ ------------ ------------
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . (143,802) (73,276) (102,375)
Cash flows from financing activities:
Net increase in total deposits 189,008 13,066 119,945
Net increase (decrease) in short-term borrowings 889 (207) (47,149)
Proceeds from long-term borrowings 0 40,928 20,000
Payments on long-term borrowings (20,001) (31,920) (41)
Dividends paid (4,806) (4,306) (3,809)
Proceeds from the sale of common stock 0 152 0
Proceeds from stock option exercise 1,711 484 0
Purchase of treasury stock (165) (169) (197)
------------ ------------ ------------
Net cash from financing activites . . . . . . . . . . . . . . . . . . . . . . . . 166,636 18,028 88,749
------------ ------------ ------------
Net change in cash and cash equivalents 46,417 (29,708) 8,026
Cash and cash equivalents at beginning of the year 57,441 87,149 79,123
------------ ------------ ------------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . .$ 103,858 $ 57,441 $ 87,149
============ ============ ============
Cash paid during the year for:
Interest $ 15,663 $ 18,935 $ 22,610
Income taxes 5,587 6,955 7,249
Supplemental non-cash disclosures:
Loans transferred to other real estate 7 1,922 44
Directors' deferred liability transferred from other liabilities to equity 0 949 0
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
49
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation:
The consolidated financial statements include Lakeland Financial
Corporation and its wholly-owned subsidiary, Lake City Bank (the "Bank"),
together referred to as (the "Company"). Also included in the consolidated
financial statements is LCB Investments Limited, a wholly-owned subsidiary of
Lake City Bank, which is a Bermuda corporation that manages a portion of the
Bank's investment portfolio. All intercompany transactions and balances are
eliminated in consolidation. As further discussed in Note 11, a trust that had
previously been consolidated with the Company is now reported separately.
The Company provides financial services through its subsidiary, Lake
City Bank, a full-service commercial bank with 43 branch offices in twelve
counties in northern Indiana. The Company provides commercial, retail, trust
and investment services to its customers. Commercial products include
commercial loans and technology-driven solutions to commercial customers' cash
management needs such as internet business banking and on-line cash management
services. Retail banking clients are provided a wide array of traditional
retail banking services, including lending, deposit and investment services.
Retail lending programs are focused on mortgage loans, home equity lines of
credit and traditional retail installment loans. The Company provides credit
card services to retail and commercial customers through its retail card
program and merchant processing activity. The Company also has an Honors
Private Banking program that is positioned to serve the more financially
sophisticated customer with a menu including brokerage and trust services,
executive mortgage programs and access to financial planning seminars and
programs. The Company's Prospero Program is dedicated to serving the expanding
financial needs of the Latino community. The Company provides trust clients
with traditional personal and corporate trust services. The Company also
provides retail brokerage services, including an array of financial and
investment products such as annuities and life insurance. Other financial
instruments, which represent potential concentrations of credit risk, include
deposit accounts in other financial institutions.
Use of Estimates:
To prepare financial statements in conformity with U.S. generally
accepted accounting principles, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the
amounts reported in the financial statements and the disclosures provided and
future results could differ. The allowance for loan losses, the fair values of
financial instruments and the fair value of loan servicing rights are
particularly subject to change.
Cash Flows:
Cash and cash equivalents include cash, demand deposits in other
financial institutions and short-term investments with maturities of 90 days
or less. Cash flows are reported net for customer loan and deposit
transactions.
Securities:
Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive
income (loss). Trading securities are bought for sale in the near term and are
carried at fair value, with changes in unrealized holding gains and losses
included in income. Federal Home Loan Bank stock is carried at cost in other
assets. Securities are classified as held to maturity and carried at amortized
cost when management has the positive intent and ability to hold them to
maturity.
Purchase premiums or discounts are recognized in interest income
using the interest method over the terms of the securities or over estimated
lives for mortgage-backed securities. Gains and losses on sales are based on
the amortized cost of the security sold and recorded on the trade date.
Securities are written down to fair value when a decline in fair value is
deemed to be other than temporary, as more fully disclosed in Note 2.
The Company does not have any material derivative instruments for
presentation nor does the Company participate in any significant hedging
activities.
50
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Real Estate Mortgages Held for Sale:
Loans held for sale are reported at the lower of cost or market on an
aggregate basis. Net unrealized losses, if any, are recorded as a valuation
allowance and charged to earnings.
Loan sales occur on the delivery date agreed to in the commitment
agreement. The gain or loss on the sale of loans is the difference between the
carrying value of the loans sold and the funds received from the sale. The
Company retains servicing on the majority of loans sold.
Loans:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs,
and an allowance for loan losses.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. All
mortgage and commercial loans for which collateral is insufficient to cover
all principal and accrued interest are reclassified as nonaccrual loans to the
extent they are under collateralized, on or before the date when the loan
becomes 90 days delinquent. When a loan is classified as a nonaccrual loan,
interest on the loan is no longer accrued, all unpaid accrued interest is
reversed and interest income is subsequently recorded only to the extent cash
payments are received. Accrual status is resumed when all contractually due
payments are brought current and future payments are reasonably assured.
Consumer installment loans, except those loans that are secured by real
estate, are not placed on a nonaccrual status since these loans are
charged-off when they have been delinquent from 90 to 180 days, and when the
related collateral, if any, is not sufficient to offset the indebtedness.
Advances under Mastercard and Visa programs, as well as advances under all
other consumer line of credit programs, are charged-off when collection
appears doubtful.
Allowance for Loan Losses:
The allowance for loan losses is a valuation allowance for probable
incurred credit losses. Loan losses are charged against the allowance when
management believes the uncollectability of a loan balance is confirmed.
Susequent recoveries, if any are credited to the allowance. Management
estimates the allowance balance required using past loan loss experience,
known and inherent risks in the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral
values, internal loan grade classifications, economic conditions, and other
factors. This evaluation is inherently subjective, as it requires estimates
that are susceptible to significant revision, as more information becomes
available or as future events change. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that,
in management's judgment, should be charged-off.
The allowance consists of specific and general components. The
specific component relates to loans that are individually classified as
impaired or loans otherwise classified as special mention, substandard or
doubtful on the Company's watch list. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
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. Factors considered by
management in determining impairment include payment status, collateral value,
and the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the delay,
the borrower's prior payment record, and the amount of the shortfall in
relation to the principal and interest owed. 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. Mortgage and commercial loans, when they have been delinquent from
90 to 180 days, are reviewed to determine if a charge-off is necessary, if the
related collateral, if any, is not sufficient to offset the indebtedness.
51
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments in Limited Partnerships:
Investments in limited partnerships represent the Company's
investments in affordable housing projects for the primary purpose of
available tax benefits. The Company is a limited partner in these investments
and as such, the Company is not involved in the management or operation of
such investments. These investments are accounted for using the equity method
of accounting. Under the equity method of accounting, the Company records its
share of the partnership's earnings or losses in its income statement and
adjusts the carrying amount of the investments on the balance sheet. These
investments are evaluated for impairment when events indicate the carrying
amount may not be recoverable. The investment recorded at December 31, 2004
and 2003 was $431,000 and $500,000.
Foreclosed Assets:
Assets acquired through or instead of loan foreclosure are initially
recorded at fair value when acquired, establishing a new cost basis. If fair
value declines, a valuation allowance is recorded through expense. Costs after
acquisition are expensed. At December 31, 2004 and 2003, the balance of
repossessed assets and real estate owned was $274,000 and $584,000 and are
included with other assets on the balance sheet.
Land, Premises and Equipment:
Land is carried at cost. Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed on the straight-line
method over the useful lives of the assets. Premises assets have useful lives
between 7 and 40 years. Equipment assets have useful lives between 3 and 10
years.
Loan Servicing Rights:
Loan servicing rights are recognized as assets for the allocated
value of retained servicing rights on loans sold. Loan servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to loan type, term and interest rates.
Any impairment of a grouping is reported as a valuation allowance. Fair value
is calculated on a loan by loan basis and is determined using prices for
similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions, specifically prepayment
speeds and current interest rates.
Bank Owned Life Insurance:
At December 31, 2004 and 2003, the Company owned $16.8 million and
$15.5 million of life insurance policies on certain officers to replace group
term life insurance for these individuals. At December 31, 2004, the Company
also owned $136,000 of variable life insurance on certain officers to fund a
deferred compensation plan. Bank owned life insurance is recorded at its cash
surrender value, or the amount that can be realized. Bank owned life insurance
is included in other assets in the consolidated financial statements.
Goodwill and Other Intangible Assets:
Goodwill results from prior business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets
and liabilities and identifiable intangible assets. Upon adoption of new
accounting guidance in 2002, the Company ceased amortizing goodwill. Goodwill
is assessed at least annually for impairment and any such impairment will be
recognized in the period identified. The effect on net income of ceasing
goodwill amortization in 2002 was $274,000, net of tax.
Other intangible assets consist of core deposit intangibles arising
from branch acquisitions and trust deposit relationships arising from a trust
acquisition. Core deposit intangibles are initially measured at fair value and
then are amortized on an accelerated method over their estimated useful lives,
which is 12 years. Trust deposit relationships are initially measured at fair
value and then amortized on an accelerated method over their estimated useful
lives, which is 10 years.
52
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Repurchase Agreements:
Substantially all repurchase agreement liabilities represent amounts
advanced by various customers. Securities are pledged to cover these
liabilities, which are not covered by federal deposit insurance.
Long-term Assets:
Premises and equipment, core deposit and other intangible assets and
other long-term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows. If
impaired, the assets are recorded at fair value.
Benefit Plans:
The Company has a noncontributory defined benefit pension plan which
covered substantially all employees until the plan was frozen effective April
1, 2000. Funding of the plan equals or exceeds the minimum funding requirement
determined by the actuary. The projected unit credit cost method is used to
determine expense. Benefits are based on years of service and compensation
levels. An employee deferred compensation plan is available to certain
employees with returns based on investments in mutual funds. The Company
maintains a directors' deferred compensation plan. Effective January 1, 2003,
the directors' deferred compensation plan was amended to restrict the deferral
to be in stock only and deferred directors' fees are included in equity. Prior
to amending the plan, deferred directors' fees were included in other
liabilities. The Company acquires shares on the open market and records such
shares as treasury stock.
Stock Compensation:
Effective December 9, 1997, the Company adopted the Lakeland
Financial Corporation 1997 Share Incentive Plan. At its inception there were
600,000 shares of common stock reserved for grants of stock options to
employees of Lakeland Financial Corporation, its subsidiaries and Board of
Directors. As of December 31, 2004, 63,815 were available for future grants.
In accordance with SFAS No.123, "Accounting for Stock-Based Compensation," the
Company has elected to account for stock-based compensation within the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" and all subsequent amendments
and clarifications. Under this method, no compensation cost is recognized for
stock options granted at or above fair market value. Compensation cost is
recognized for stock option modifications, if applicable. Had compensation
expense for the plan been determined based upon fair value at the grant date
in accordance with SFAS 123, net income and earnings per common share would
have been the pro forma amounts indicated below. The pro forma effect may
increase in the future if more options are granted.
2004 2003 2002
------------ ------------ ------------
Net income (in thousands) as reporte $ 14,545 $ 13,865 $ 12,366
Deduct: stock-based compensation expense determined
under fair value based method (in thousands) 487 543 669
------------ ------------ ------------
Pro forma net income (in thousands) $ 14,058 $ 13,322 $ 11,697
============ ============ ============
Basic earnings per common share as reported $ 2.48 $ 2.38 $ 2.13
Pro forma basic earnings per common share $ 2.40 $ 2.29 $ 2.01
Diluted earnings per common share as reported $ 2.40 $ 2.31 $ 2.08
Pro forma diluted earnings per common share $ 2.32 $ 2.22 $ 1.96
<FN>
The pro forma effects are computed with the black scholes option pricing models, using the following weighted-average
assumptions as of the grant date for all options granted to date:
</FN>
Risk-free interest rate 5.26% 5.26% 5.53%
Expected option life 5.00 years 5.00 years 5.00 years
Expected price volatility 70.32% 73.13% 76.37%
Dividend yield 3.02% 2.85% 2.87%
53
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes:
Annual consolidated federal and state income tax returns are filed by
the Company. Deferred income tax assets and liabilities are determined using
the liability (or balance sheet) method. Income tax expense is recorded based
on the amount of taxes due on its tax return plus net deferred taxes computed
based upon the expected future tax consequences of temporary differences
between carrying amounts and tax basis of assets and liabilities, using
enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
Off-Balance Sheet Financial Instruments:
Financial instruments include credit instruments, such as commitments
to make loans and standby letters of credit, issued to meet customer financing
needs. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded. The fair value of standby
letters of credit is recorded as a liability during the commitment period in
accordance with FASB Interpretation No. 45.
Earnings Per Common Share:
Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share includes the dilutive effect of additional potential
common shares issuable under stock options. Earnings and dividends per share
are restated for all stock splits and dividends through the date of issue of
the financial statements. The common shares outstanding for the Stockholders'
Equity section of the Balance Sheet for 2004 and 2003 reflect the acquisition
of 34,571 and 46,481 shares, respectively of Lakeland Financial Corporation
common stock that have been purchased under the directors' deferred
compensation plan described above. Because these shares are held in trust for
the participants, they are treated as outstanding when computing the
weighted-average common shares outstanding for the calculation of both basic
and diluted earnings per share.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on
securities available for sale during the year and changes in the minimum
pension liability, which are also recognized as a separate component of
equity.
The components of other comprehensive income and related tax effects are as follows:
Years Ended December 31,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
(in thousands)
Unrealized holding gain/(loss) on securities available for sale
arising during the period $ (66) $ (7,014) $ 3,942
Reclassification adjustment for (gains)/losses included in net income 0 (500) (55)
------------ ------------ ------------
Net securities gain /(loss) activity during the period (66) (7,514) 3,887
Tax effect (48) (2,626) 1,442
------------ ------------ ------------
Net of tax amount (18) (4,888) 2,445
Minimum pension liability adjustment 56 (557) (588)
Tax effect 23 (226) (245)
------------ ------------ ------------
Net of tax amount 33 (331) (343)
------------ ------------ ------------
Other comprehensive income, net of tax $ 15 $ (5,219) $ 2,102
============ ============ ============
54
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loss Contingencies:
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood
of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will
have a material effect on the financial statements.
Restrictions on Cash:
The Company was required to have $17.3 million and $14.1 million of
cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at year-end 2004 and 2003. These balances do
not earn interest.
Dividend Restriction:
Banking regulations require maintaining certain capital levels and
may limit the dividends paid by the Bank to the Company or by the Company to
its shareholders. These restrictions pose no practical limit on the ability of
the Bank or Company to pay dividends at historical levels.
Fair Value of Financial Instruments:
Fair values of financial instruments are estimated using relevant
market information and other assumptions, as more fully disclosed in Note 18.
Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
Industry Segments:
While the Company's chief decision-makers monitor the revenue streams
of the various Company products and services, the identifiable segments
operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the Company's financial service
operations are considered by management to be aggregated in one reportable
operating segment.
Adoption of New Accounting Standards:
The Company did not adopt any new accounting standards during 2004.
Newly Issued But Not Yet Effective Accounting Standards:
FASB Statement 123 (revised 2004), Share-Based Payment requires
expensing of stock options effective for fiscal periods beginning after June
15, 2005. The Company plans to adopt this standard as of July 1, 2005 and will
begin expensing any unvested stock options at that time. The Company does not
anticipate the adoption of this standard will have any material effect on the
Company's financial condition or results of operations.
Emerging Issues Task Force (EITF) Issue 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
EITF 03-1 provides application guidance that should be used to determine when
an investment is considered impaired, whether that impairment is
other-than-temporary, and the recognition of an impairment loss. The guidance
also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. In September 2004, the FASB delayed the accounting requirements
of EITF 03-1 until additional implementation guidance is issued and goes into
effect.
No other new accounting standards have been issued that are not yet
effective that would have a material impact on the Company's financial
condition or results of operations.
55
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassifications:
Certain amounts appearing in the financial statements and notes
thereto for prior periods have been reclassified to conform with the current
presentation. The reclassifications had no effect on net income or
stockholders' equity as previously reported.
NOTE 2 - SECURITIES
Information related to the fair value of securities available for
sale and the related gross unrealized gains and losses recognized in
accumulated other comprehensive income (loss) at December 31 is provided in
the table below.
Gross Gross
Fair Unrealized Unrealized
Value Gain Losses
------------ ------------ ------------
(in thousands)
2004
U.S. Treasury securities $ 989 $ 0 $ (14)
U.S. Government agencies 22,885 0 (157)
Mortgage-backed securities 208,961 618 (2,654)
State and municipal securities 53,747 2,218 (153)
------------ ------------ ------------
Total . . . . . . . . . . . . . .$ 286,582 $ 2,836 $ (2,978)
============ ============ ============
2003
U.S. Government agencies $ 17,280 $ 51 $ (5)
Mortgage-backed securities 211,142 885 (2,814)
State and municipal securities 52,945 2,004 (197)
------------ ------------ ------------
Total . . . . . . . . . . . . . .$ 281,367 $ 2,940 $ (3,016)
============ ============ ============
Information regarding the fair value of available for sale debt
securities by maturity as of December 31, 2004 is presented below. Maturity
information is based on contractual maturity for all securities other than
mortgage-backed securities. Actual maturities of securities may differ from
contractual maturities because borrowers may have the right to prepay the
obligation without prepayment penalty.
Fair
Value
------------
(in thousands)
Due in one year or less $ 100
Due after one year through five years 25,426
Due after five years through ten years 6,354
Due after ten years 45,741
------------
77,621
Mortgage-backed securities 208,961
------------
Total debt securities . . . . . . . . . . . . . . . . . . . . .$ 286,582
============
56
NOTE 2 - SECURITIES (continued)
Security proceeds, gross gains and gross losses for 2004, 2003 and
2002 were as follows:
2004 2003 2002
----------- ----------- -----------
(in thousands)
Sales and calls of securities available
for sale
Proceeds $ 2,844 $ 30,154 $ 10,467
Gross gains 0 508 77
Gross losses 0 8 22
Securities with carrying values of $189.0 million and $197.8 million
were pledged as of December 31, 2004 and 2003, as collateral for deposits of
public funds, securities sold under agreements to repurchase, borrowings from
the FHLB and for other purposes as permitted or required by law. At year-end
2004 and 2003, there were no holdings of securities of any one issuer, other
than the U.S. Government and its agencies, in an amount greater than 10% of
stockholders' equity.
Information regarding securities with unrealized losses as of
December 31, 2004 and 2003 is presented below. The tables distribute the
securities between those with unrealized losses for less than twelve months
and those with unrealized losses for twelve months or more.
Less than 12 months 12 months or more Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
(in thousands)
2004
U.S. Treasury securities $ 989 $ 14 $ 0 $ 0 $ 989 $ 14
U.S. Government agencies 22,885 157 0 0 22,885 157
Mortgage-backed securities 110,501 1,326 46,540 1,328 157,041 2,654
State and municipal securities 3,770 37 4,169 116 7,939 153
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired $ 138,145 $ 1,534 $ 50,709 $ 1,444 $ 188,854 $ 2,978
============ ============ ============ ============ ============ ============
2003
U.S. Government agencies $ 3,016 $ 5 $ 0 $ 0 $ 3,016 $ 5
Mortgage-backed securities 126,347 2,215 20,637 599 146,984 2,814
State and municipal securities 10,865 183 411 14 11,276 197
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired $ 140,228 $ 2,403 $ 21,048 $ 613 $ 161,276 $ 3,016
============ ============ ============ ============ ============ ============
All of the following are considered to determine whether or not the
impairment of these securities is other-than-temporary. All of the securities
are backed by the U.S. Government or its agencies or are A rated or better, in
the case of non-local municipal securities. None of the securities have call
provisions (with the exception of the municipal securities) and payments as
originally agreed are being received. There are no concerns of credit losses
and there is nothing to indicate that full principal will not be received.
Management considers the unrealized losses to be market driven and no loss is
expected to be realized unless the securities are sold. The Company does not
have a history of actively trading securities, but keeps the securities
available for sale should liquidity or other needs develop that would warrant
the sale of securities. While these securities are held in the available for
sale portfolio, the current intent and ability is to hold them until a
recovery in fair value or maturity.
57
NOTE 3 - LOANS
Total loans outstanding as of year-end consisted of the following:
2004 2003
------------ ------------
(in thousands)
Commercial and industrial loans $ 688,211 $ 593,194
Agri-business and agricultural loans 102,749 82,262
Real estate mortgage loans 47,642 40,240
Real estate construction loans 6,719 3,932
Installment loans and credit cards 158,065 151,376
------------ ------------
Subtotal . . . . . . . . . . . . . . . . . . . . . 1,003,386 871,004
Less: Allowance for loan losses (10,754) (10,234)
Net deferred loan fees (167) (122)
------------ ------------
Loans, net . . . . . . . . . . . . . . . . . . . . .$ 992,465 $ 860,648
============ ============
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for
2004, 2003 and 2002:
2004 2003 2002
------------ ------------ ------------
(in thousands)
Balance, January 1, $ 10,234 $ 9,533 $ 7,946
Provision for loan losses 1,223 2,254 3,056
Loans charged-off (994) (1,774) (1,875)
Recoveries 291 221 406
------------ ------------ ------------
Net loans charged-off (703) (1,553) (1,469)
------------ ------------ ------------
Balance December 31 . . . . . . . . .$ 10,754 $ 10,234 $ 9,533
============ ============ ============
Nonaccrual loans $ 7,212 $ 553 $ 4,216
Interest not recorded on
nonaccrual loans 203 183 208
Loans past due 90 days and
still accruing 2,778 3,191 3,387
As of December 31, 2004, 2003 and 2002 there were no loans
renegotiated as troubled debt restructurings.
Impaired loans were as follows:
2004 2003
------------ ------------
(in thousands)
Year-end loans with no allocated
allowance for loan losses $ 0 $ 0
Year-end loans with allocated
allowance for loan losses 9,309 3,039
------------ ------------
$ 9,309 $ 3,039
============ ============
Amount of the allowance for loan
losses allocated $ 1,711 $ 456
2004 2003 2002
------------ ------------ ------------
(in thousands)
Average of impaired loans during
the year $ 5,606 $ 6,320 $ 10,476
Interest income recognized during
impairment 183 226 562
Cash-basis interest income
recognized 183 225 555
58
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (continued)
The Company is not committed to lend additional funds to debtors
whose loans have been modified in a troubled debt restructuring. The 2004 and
2003 impaired loan totals included $6.7 million and $127,000 which were also
included in the total for nonaccrual loans. Total impaired loans increased by
$6.3 million to $9.3 million at December 31, 2004 from $3.0 million at
December 31, 2003. The increases in nonperforming loans and impaired loans
resulted primarily from the addition of a single commercial credit of $6.1
million. The borrower filed chapter 11 bankruptcy late in the third quarter of
2004 and is in the process of determining its future business strategy.
Borrower collateral and the personal guarantees of its principals support this
credit. The loans delinquent 90 days or more total included one commercial
credit for $2.6 million and $2.9 million in 2004 and 2003. The renewal of this
loan has been complicated as more than one bank is involved, and it remains
past maturity. The loan first became delinquent in 2002 and the maturity has
not been extended. While this loan was current as to principal and interest at
December 31, 2005, there can be no assurance that it will remain current given
the circumstances involved.
NOTE 5 - SECONDARY MORTGAGE MARKET ACTIVITIES
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
these loans were $242.9 million and $231.8 million at December 31, 2004 and
2003. The fair value of loan servicing rights was $1.7 million and $1.6
million at December 31, 2004 and 2003. Net loan servicing income/(loss) was
$25,000, ($166,000) and ($48,000) for 2004, 2003 and 2002. Information on loan
servicing rights follows:
Loan servicing rights: 2004 2003 2002
------------ ------------ ------------
(in thousands)
Beginning of year $ 2,100 $ 1,677 $ 1,507
Originations 525 1,094 622
Amortization (573) (671) (452)
------------ ------------ ------------
End of year . . . . . . . . . . . .$ 2,052 $ 2,100 $ 1,677
============ ============ ============
Valuation allowance: 2004 2003 2002
------------ ------------ ------------
(in thousands)
Beginning of year $ 498 $ 722 $ 388
Additions expensed 173 421 913
Reductions credited to expense (327) (645) (579)
------------ ------------ ------------
End of year . . . . . . . . . . . .$ 344 $ 498 $ 722
============ ============ ============
NOTE 6 - LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation
were as follows at December 31:
2004 2003
------------ ------------
(in thousands)
Land $ 8,491 $ 8,456
Premises 21,292 21,004
Equipment 14,951 14,830
------------ ------------
Total cost . . . . . . . . . . . . . . . . . . . . 44,734 44,290
Less accumulated depreciation 19,677 18,133
------------ ------------
Land, premises and equipment, net $ 25,057 $ 26,157
============ ============
The Company had land of $274,000 pending sale at December 31, 2004.
59
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
There have been no changes in the $5.0 million carrying amount of
goodwill since 2002.
Acquired Intangible Assets
As of December 31, 2004 As of December 31, 2003
------------------------------ ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- -------------- -------------- --------------
Amortized intangible assets
Core deposit $ 2,032 $ 1,288 $ 2,032 $ 1,139
Trust deposit relationships 572 71 572 5
-------------- -------------- -------------- --------------
Total $ 2,604 $ 1,359 $ 2,604 $ 1,144
============== ============== ============== ==============
Aggregate amortization expense was $215,000, $154,000 and $149,000
for 2004, 2003 and 2002.
Estimated amortization expense for each of the next five years:
Amount
------------
(in thousands)
2005 $ 212
2006 209
2007 206
2008 206
2009 206
NOTE 8 - DEPOSITS
The aggregate amount of time deposits, each with a minimum
denomination of $100,000, was approximately $216.0 million and $106.4 million
at December 31, 2004 and 2003.
At December 31, 2004, the scheduled maturities of time deposits were
as follows:
Amount
------------
(in thousands)
Maturing in 2005 $ 284,656
Maturing in 2006 72,426
Maturing in 2007 54,541
Maturing in 2008 9,876
Maturing in 2009 11,871
Thereafter 948
------------
Total time deposits $ 434,318
============
60
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase ("repo accounts")
represent collateralized borrowings with customers located primarily within
the Company's service area. Repo accounts are not covered by federal deposit
insurance and are secured by securities owned. Information on these
liabilities and the related collateral for 2004 and 2003 is as follows:
2004 2003
------------ ------------
(in thousands)
Average daily balance during the year $ 84,907 $ 97,808
Average interest rate during the year 0.64% 0.83%
Maximum month-end balance during the year $ 90,007 $ 108,270
Securities underlying the agreements at year-end
Fair value $ 109,089 $ 115,708
Weighted
Repurchase Average Collateral at
Term Liability Interest Rate Fair Values
- ------------------------- -------------- -------------- --------------
(in thousands) (in thousands)
Mortgage-backed Securities:
On demand $ 87,670 0.62% $ 107,670
Over 90 days 387 1.13% 1,419
-------------- -------------- --------------
Total $ 88,057 0.62% $ 109,089
============== ============== ==============
The Company retains the right to substitute similar type securities,
and has the right to withdraw all collateral applicable to repo accounts
whenever the collateral values are in excess of the related repurchase
liabilities. At December 31, 2004, there were no material amounts of
securities at risk with any one customer. The Company maintains control of
these securities through the use of third-party safekeeping arrangements.
NOTE 10 - BORROWINGS
Long-term borrowings at December 31 consisted of:
2004 2003
------------ ------------
(in thousands)
Federal Home Loan Bank of Indianapolis Notes, 3.96%, Due April 9, 2004 $ 0 $ 20,000
Federal Home Loan Bank of Indianapolis Notes, 2.36%, Due December 29, 2005 10,000 10,000
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due January 15, 2018 46 47
------------ ------------
Total $ 10,046 $ 30,047
============ ============
All notes have a fixed rate, require monthly interest payments and
were secured by residential real estate loans and securities with a carrying
value of $111.4 million at December 31, 2004. At December 31, 2004, the
Company owned $4.4 million of Federal Home Loan Bank (FHLB) stock, which also
secures debts to the FHLB. The Company is authorized to borrow up to $100
million at the FHLB.
Short-term borrowings at December 31 consisted of:
2004 2003
------------ ------------
(in thousands)
Federal Home Loan Bank of Indianapolis Notes, 1.53%, Due July 20, 2004 $ 0 $ 10,000
Federal Home Loan Bank of Indianapolis Notes, 1.11%, Due January 30, 2004 0 45,000
Federal Home Loan Bank of Indianapolis Notes, 1.95%, Due February 9, 2005 75,000 0
------------ ------------
Total $ 75,000 $ 55,000
============ ============
61
NOTE 10 - BORROWINGS (continued)
Long-term borrowings mature over each of the next five years as
follows:
(in thousands)
------------
2005 $ 10,000
2006 0
2007 0
2008 0
2009 0
NOTE 11 - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
In September 1997, Lakeland Capital Trust completed a public offering
of two million shares of cumulative trust preferred securities with a
liquidation preference of $10 per security. The proceeds of the offering were
loaned to the Company in exchange for subordinated debentures with terms
similar to the preferred securities. On October 1, 2003, the subordinated
debentures were redeemed and the preferred securities called. Loss on
extinguishment of debt of $804,000 was recorded in connection with the call of
the preferred securities.
Lakeland Statutory Trust II, a trust formed by the Company, issued
$30.0 million of floating rate trust preferred securities on October 1, 2003
as part of a privately placed offering of such securities. The Company issued
subordinated debentures to the trust in exchange for the proceeds of the
trust. Subject to the Company having received prior approval of the Federal
Reserve if then required, the Company may redeem the subordinated debentures,
in whole or in part, but in all cases in a principal amount with integral
multiples of $1,000, on any interest payment date on or after October 1, 2008
at 100% of the principal amount, plus accrued and unpaid interest. The
subordinated debentures must be redeemed no later than 2033. These securities
are considered as Tier I capital (with certain limitations applicable) under
current regulatory guidelines. The floating rate of the trust preferred
securities and subordinated debentures was 5.610% and 4.205% at December 31,
2004 and 2003. The holding company's investment in the common stock of the
trust was $928,000 and is included in other assets.
Prior to 2003, Lakeland Capital Trust was consolidated in the
Company's financial statements, with the trust preferred securities issued by
the trust reported in liabilities as "guaranteed preferred beneficial
interests" and the subordinated debentures eliminated in consolidation. The
trust preferred securities issued by Lakeland Capital Trust have been redeemed
and are no longer outstanding. The Company issued new securities through
Lakeland Statutory Trust II in 2003. Under new accounting guidance, FASB
Interpretation No. 46, as revised in December 2003, trusts for a trust
preferred offering are no longer consolidated with the Company. Accordingly,
the Company does not report the securities issued by Lakeland Statutory Trust
II as liabilities, and instead reports as liabilities the subordinated
debentures issued by the Company and held by the trust, as these are no longer
eliminated in consolidation. Since the amount of the subordinated debentures
equals the amount of trust preferred securities and common stock, the effect
of no longer consolidating the trust changes certain balance sheet
classifications, but not equity or net income. Accordingly, the amounts
previously reported as "guaranteed preferred beneficial interest" in
liabilities have been recaptioned "subordinated debentures" and continue to be
presented in liabilities on the balance sheet.
62
NOTE 12 - EMPLOYEE BENEFIT PLANS
In April, 2000, the Lakeland Financial Corporation Pension Plan was
frozen. As a result of this curtailment, a gain was recognized in the income
statement for the second quarter of 2000. At December 31, 2004 and 2003, the
pension plan recorded a minimum pension liability of $1.8 million and $1.9
million. The Company also maintains a Supplemental Executive Retirement Plan
(SERP) for select officers that was established as a funded, non-qualified
deferred compensation plan. Only one current officer of the Company is a
participant in the plan and there are 7 total participants.
Information as to the Company's plans at December 31 is as follows:
Pension Benefits SERP Benefits
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Change in benefit obligation:
Beginning benefit obligation $ 2,642 $ 2,279 $ 1,457 $ 1,412
Interest cost 149 155 83 90
Actuarial (gain)/loss (114) 306 (13) 0
Change in discount rate 96 269 26 94
Benefits paid (110) (367) (134) (139)
------------ ------------ ------------ ------------
Ending benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . 2,663 2,642 1,419 1,457
Change in plan assets (primarily equity and fixed income investments and
money market funds), at fair value:
Beginning plan assets 1,265 1,501 1,008 934
Actual return 124 131 91 83
Employer contribution 284 0 119 130
Benefits paid (110) (367) (134) (139)
------------ ------------ ------------ ------------
Ending plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,563 1,265 1,084 1,008
Funded status (1,100) (1,377) (335) (449)
Unrecognized net actuarial loss 1,820 1,876 800 814
------------ ------------ ------------ ------------
Prepaid benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 720 $ 499 $ 465 $ 365
============ ============ ============ ============
Amounts recognized in the consolidated balance
sheets consist of: Pension Benefits SERP Benefits
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Prepaid benefit cost $ 720 $ 499 $ 465 $ 365
Accumulated other comprehensive income (pre-tax) (1,820) (1,876) 0 0
------------ ------------ ------------ ------------
Net amount recognized $ (1,100) $ (1,377) $ 465 $ 365
============ ============ ============ ============
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Projected benefit obligation $ 2,663 $ 2,642 $ 1,419 $ 1,457
Accumulated benefit obligation 2,663 2,642 1,419 1,457
Fair value of plan assets 1,563 1,265 1,084 1,008
63
NOTE 12 - EMPLOYEE BENEFIT PLANS (continued)
Net pension expense includes the following:
Pension Benefits SERP Benefits
---------------------------------------- ----------------------------------------
2004 2003 2002 2004 2003 2002
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands)
Service cost $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest cost 149 155 152 83 91 97
Expected return on plan assets (125) (141) (184) (100) (95) (104)
Recognized net actuarial (gain) loss 38 28 7 36 29 12
------------ ------------ ------------ ------------ ------------ ------------
Net pension expense (benefit) $ 62 $ 42 $ (25) $ 19 $ 25 $ 5
============ ============ ============ ============ ============ ============
Additional Information: Pension Benefits SERP Benefits
---------------------------------------- ----------------------------------------
2004 2003 2002 2004 2003 2002
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands)
(Decrease)/increase in minimum liability
included in other comprehensive income $ (56) $ 557 $ 588 $ 0 $ 0 $ 0
The following assumptions were used in
calculating the net benefit obligation:
Weighted average discount rate 6.00% 6.75% 7.50% 6.00% 6.75% 7.50%
Rate of increase in future
compensation N/A N/A N/A N/A N/A N/A
The following assumptions were used in
calculating the net pension expense:
Weighted average discount rate 5.75% 6.00% 6.75% 5.75% 6.00% 6.75%
Rate of increase in future
compensation N/A N/A N/A N/A N/A N/A
Expected long-term rate of return 8.25% 8.25% 8.50% 8.25% 8.25% 8.50%
The expected long-term rate of return on plan assets is developed in
consultation with the plan actuary. It is primarily based upon industry trends
and consensus rates of return which are then adjusted to reflect the specific
asset allocations and historical rates of return of the Company's plan assets.
The asset allocations at the measurement dates of September 30, 2004,
and 2003, by asset category are as follows:
Pension Plan Assets SERP Plan Assets
at September 30, at September 30,
-------------------------- --------------------------
Asset Category
- -------------- 2004 2003 2004 2003
------------ ------------ ------------ ------------
Equity securities 64% 74% 61% 59%
Debt Securities 29% 23% 34% 36%
Other 7% 3% 5% 5%
------------ ------------ ----------- ------------
Total 100% 100% 100% 100%
============ ============ =========== ============
The Company's investment strategies are to invest in a prudent manner
for the purpose of providing benefits to participants. The investment
strategies are targeted to maximize the total return of the portfolio net of
inflation, spending and expenses. Risk is controlled through diversification
of asset types and investments in domestic and international equities and
fixed income securities. Certain asset types and investment strategies are
prohibited including: commodities, options, futures, short sales, margin
transactions and non-marketable securities. The target allocation is 60%
equities and 40% debt securities although acceptable ranges are: 55-65%
equities and 35-45% debt securities.
Contributions
The Company expects to contribute $422,000 to its pension plan and
$106,000 to its SERP plan in 2005.
64
NOTE 12 - EMPLOYEE BENEFIT PLANS (continued)
Estimated Future Benefit Payments
The following benefit payments are expected to be paid:
Pension SERP
Plan Year Benefits Benefits
------------ ------------
(in thousands)
2005 $ 95 $ 125
2006 107 121
2007 108 116
2008 116 111
2009 123 105
Thereafter 758 434
Other Employee Benefit Plans
The Company maintains a 401(k) profit sharing plan for all employees
meeting age and service requirements. The Company contributions are based upon
the percentage of budgeted net income earned during the year for 2004 and upon
the rate of return on stockholders' equity as of January 1st of each year for
2003 and 2002. The expense recognized was $731,000, $732,000 and $620,000 in
2004, 2003 and 2002.
Effective January 1, 2004, the Company adopted the Lake City Bank
Deferred Compensation Plan. The purpose of the deferred compensation plan is
to extend full 401(k) type retirement benefits to certain individuals without
regard to statutory limitations under tax qualified plans. The expense
recognized was $10,000 for 2004. The plan is funded solely by participant
contributions and does not receive a company match.
Under employment agreements with certain executives, certain events
leading to separation from the Company could result in cash payments totaling
$2.4 million as of December 31, 2004. On December 31, 2004, no amounts were
accrued on these contingent obligations.
NOTE 13 - OTHER EXPENSE
Other expense for the years ended December 31, was as follows:
2004 2003 2002
------------ ------------ ------------
(in thousands)
Corporate and business development $ 1,036 $ 1,003 $ 985
Advertising 694 706 681
Office supplies 594 591 513
Telephone and postage 1,126 1,137 1,312
Regulatory fees and FDIC insurance 261 242 236
Professional fees 1,337 1,275 995
Amortization of other intangible
assets 215 154 149
Courier & delivery 578 548 521
Miscellaneous 2,601 3,020 3,022
------------ ------------ ------------
Total other expense . . . . . . . .$ 8,442 $ 8,676 $ 8,414
============ ============ ============
65
NOTE 14 - INCOME TAXES
Income tax expense for the years ended December 31, consisted of the
following:
2004 2003 2002
------------ ------------ ------------
(in thousands)
Current federal $ 5,446 $ 5,121 $ 6,936
Deferred federal 720 816 (1,134)
Current state 1,013 773 909
Deferred state 123 118 (191)
------------ ------------ ------------
Total income tax expense . . . . . .$ 7,302 $ 6,828 $ 6,520
============ ============ ============
Income tax expense included $0, $203,000 and $20,000 applicable to
security transactions for 2004, 2003 and 2002. The differences between
financial statement tax expense and amounts computed by applying the statutory
federal income tax rate of 35% for 2004, 2003 and 2002 to income before income
taxes were as follows:
2004 2003 2002
------------ ------------ ------------
(in thousands)
Income taxes at statutory federal rate $ 7,647 $ 7,243 $ 6,610
Increase (decrease) in taxes resulting from:
Tax exempt income (914) (813) (621)
Nondeductible expense 186 176 136
State income tax, net of federal tax effect 738 579 467
Net operating loss, Gateway (30) (30) (30)
Tax credits (104) (73) (48)
Bank owned life insurance (221) (242) (24)
Other 0 (12) 30
------------ ------------ ------------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 7,302 $ 6,828 $ 6,520
============ ============ ============
66
NOTE 14 - INCOME TAXES (continued)
The net deferred tax asset recorded in the consolidated balance
sheets at December 31, consisted of the following:
2004 2003
-------------------------- --------------------------
Federal State Federal State
------------ ------------ ------------ ------------
(in thousands)
Deferred tax assets
Bad debts $ 3,764 $ 766 $ 3,582 $ 801
Pension and deferred compensation liability 209 47 373 88
Net operating loss carryforward 178 0 208 0
Deferred loan fees 10 2 0 0
Other 170 30 154 33
------------ ------------ ------------ ------------
4,331 845 4,317 922
Deferred tax liabilities
Accretion 38 9 28 6
Depreciation 1,024 163 660 77
Loan servicing rights 598 137 561 125
State taxes 131 0 215 0
Leases 122 27 186 42
Deferred loan fees 0 0 12 3
Intangible assets 326 73 181 41
FHLB stock dividends 115 26 47 12
Prepaid expenses 152 35 0 0
------------ ------------ ------------ ------------
2,506 470 1,890 306
Valuation allowance 0 0 0 0
------------ ------------ ------------ ------------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,825 $ 375 $ 2,427 $ 616
============ ============ ============ ============
In addition to the net deferred tax assets included above, the
deferred income tax asset (liability) allocated to the unrealized net loss on
securities available for sale included in equity was $41,000 and $91,000 for
2004 and 2003. The deferred income tax asset allocated to the minimum pension
liability included in equity was $738,000 and $761,000 for 2004 and 2003.
NOTE 15 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates as of
December 31, 2004 and 2003 were as follows:
2004 2003
------------ ------------
(in thousands)
Beginning balance $ 47,088 $ 39,931
New loans and advances 91,627 70,919
Effect of changes in related parties 61 5,135
Repayments (88,351) (68,897)
------------ -----------
Ending balance . . . . . . . . . . . . . . . . . . .$ 50,425 $ 47,088
============ ===========
Deposits from principal officers, directors, and their affiliates at
year-end 2004 and 2003 were $2.5 million and $2.0 million. In addition, the
amount owed directors for fees under the deferred directors' plan as of
December 31, 2004 and 2003 was $813,000 and $994,000. The related expense for
the deferred directors' plan as of December 31, 2004, 2003 and 2002 was
$184,000, $235,000 and $487,000.
67
NOTE 16 - STOCK OPTIONS
The stock option plan requires that the exercise price for options be
the market price on the date the options are granted. The maximum option term
is ten years and the options vest over 5 years. A summary of the activity in
the plan follows:
2004 2003 2002
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at beginning of the year 521,475 $ 19.12 495,545 $ 17.26 550,345 $ 17.27
Granted 0 0.00 64,790 34.21 2,000 23.88
Exercised 81,110 21.09 20,760 23.33 0 0.00
Forfeited 6,050 19.68 18,100 17.51 56,800 17.53
------------ ------------ ------------
Outstanding at end of the year . . . . . . . . . 434,315 $ 18.75 521,475 $ 19.12 495,545 $ 17.26
============ ============ ============
Options exercisable at end of the year 96,300 $ 22.02 107,575 $ 23.15 3,600 $ 18.35
Weighted-average fair value of options
granted during the year $ 0.00 $ 11.06 $ 10.99
Options outstanding at year-end 2004 were as follows:
Exercisable
Outstanding --------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Number Life Price Number Price
------------ ------------ ------------ ------------ ------------
Range of exercise prices
<c>
$11.20-$14.00 186,925 5.8 $ 13.57 0 $ 0.00
$14.01-$16.80 87,600 5.4 15.07 0 0.00
$16.81-$22.40 42,150 4.1 19.26 42,150 19.26
$22.41-$25.20 50,500 3.4 23.82 49,500 23.82
$25.21-$28.00 5,650 3.7 27.74 4,650 27.90
$28.01-$35.00 61,490 8.9 34.37 0 0.00
------------ ------------
Outstanding at year-end . . . . . . . . . . . . . . . . . . . 434,315 5.7 18.75 96,300 22.02
============ ============
68
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Company and Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and
Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2004 and 2003, that the Company and Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2004, the most recent notification from the
federal regulators categorized the Company and Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company and Bank must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the Company's or Bank's category.
Minium Required to
Minimum Required Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
-------------------------- -------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------ ------------
(dollars in thousands)
As of December 31, 2004:
Total Capital (to Risk Weighted Assets)
Consolidated $ 136,315 12.28% $ 88,781 8.00% $ 110,977 10.00%
Bank $ 134,083 12.11% $ 88,569 8.00% $ 110,712 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 125,561 11.31% $ 44,391 4.00% $ 66,586 6.00%
Bank $ 123,329 11.14% $ 44,285 4.00% $ 66,427 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 125,561 9.07% $ 55,391 4.00% $ 69,239 5.00%
Bank $ 123,329 8.92% $ 55,289 4.00% $ 69,112 5.00%
As of December 31, 2003:
Total Capital (to Risk Weighted Assets)
Consolidated $ 124,941 12.83% $ 77,919 8.00% $ 97,399 10.00%
Bank $ 122,909 12.65% $ 77,709 8.00% $ 97,136 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 114,707 11.78% $ 38,959 4.00% $ 58,439 6.00%
Bank $ 112,675 11.60% $ 38,855 4.00% $ 58,282 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 114,707 9.15% $ 50,131 4.00% $ 62,664 5.00%
Bank $ 112,675 9.00% $ 50,064 4.00% $ 62,580 5.00%
69
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (continued)
Indiana law prohibits the Bank from paying dividends in an amount
greater than its undivided profits. The Bank is required to obtain the
approval of the Department of Financial Institutions for the payment of any
dividend if the total amount of all dividends declared by the Bank during the
calendar year, including the proposed dividend, would exceed the sum of the
retained net income for the year to date combined with its retained net income
for the previous two years. Indiana law defines "retained net income" to mean
the net income of a specified period, calculated under the consolidated report
of income instructions, less the total amount of all dividends declared for
the specified period. As of December 31, 2004, approximately $23.2 million was
available to be paid as dividends to the Company by the Bank.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, the Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 2004. Notwithstanding the availability of funds
for dividends, however, the FDIC may prohibit the payment of any dividends by
the Bank if the FDIC determines such payment would constitute an unsafe or
unsound practice.
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table contains the estimated fair values and the
related carrying values of the Company's financial instruments at December 31,
2004 and 2003. Items which are not financial instruments are not included.
2004 2003
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
(in thousands)
Financial Assets:
Cash and cash equivalents $ 103,858 $ 103,858 $ 57,441 $ 57,441
Securities available for sale 286,582 286,582 281,367 281,367
Real estate mortgages held for sale 2,991 3,018 3,431 3,431
Loans, net 992,465 993,496 860,648 864,493
Federal Home Loan Bank stock 4,442 4,442 4,252 4,252
Accrued interest receivable 5,752 5,752 4,997 4,997
Financial Liabilities:
Certificates of deposit (434,318) (435,233) (300,503) (305,003)
All other deposits (681,081) (681,081) (625,888) (625,888)
Securities sold under agreements to repurchase (88,057) (88,057) (102,601) (102,601)
Other short-term borrowings (97,593) (97,593) (82,160) (82,184)
Long-term borrowings (10,046) (9,999) (30,047) (30,304)
Subordinated debentures (30,928) (29,336) (30,928) (30,974)
Accrued interest payable (3,546) (3,546) (2,376) (2,376)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 2004 and 2003. The
estimated fair value for cash and cash equivalents, accrued interest and
Federal Home Loan Bank stock is considered to approximate cost. Real estate
mortgages held for sale are based upon the actual contracted price for those
loans sold but not yet delivered, or the current Federal Home Loan Mortgage
Corporation price for normal delivery of mortgages with similar coupons and
maturities at year-end. The estimated fair value of loans is based on
estimates of the rate the Company would charge for similar loans at December
31, 2004 and 2003, applied for the time period until estimated repayment. The
estimated fair value for demand and savings deposits is based on their
carrying value. The estimated fair value for certificates of deposit and
borrowings is based on estimates of the rate the Company would pay on such
deposits or borrowings at December 31, 2004 and 2003, applied for the time
period until maturity. The estimated fair value of variable rate short-term
borrowed funds is considered to approximate carrying value. The estimated fair
value of other financial instruments and off-balance sheet loan commitments
approximate cost and are not considered significant to this presentation.
70
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
While these estimates of fair value are based on management's
judgment of the most appropriate factors, there is no assurance that, were the
Company to have disposed of such items at December 31, 2004 and 2003, the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances. The estimated
fair values at December 31, 2004 and 2003 should not necessarily be considered
to apply at subsequent dates.
NOTE 19 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
During the normal course of business, the Company becomes a party to
financial instruments with off-balance sheet risk in order to meet the
financing needs of its customers. These financial instruments include
commitments to make loans and open-ended revolving lines of credit. Amounts as
of December 31, 2004 and 2003, were as follows:
2004 2003
-------------------------- --------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------------ ------------ ------------ ------------
(in thousands)
Commercial loan lines of credit $ 47,139 $ 320,711 $ 4,308 $ 222,755
Commercial loan letters of credit 0 10,441 0 11,424
Real estate mortgage loans 4,371 1,214 5,405 1,392
Real estate construction mortgage loans 2,123 1,554 535 2,605
Credit card open-ended revolving lines 11,136 2,014 8,560 1,582
Home equity mortgage open-ended revolving lines 0 80,546 0 68,030
Consumer loan open-ended revolving lines 0 4,380 0 3,901
------------ ------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 64,769 $ 420,860 $ 18,808 $ 311,689
============ ============ ============ ============
The index on variable rate commercial loan commitments is principally
the Company's base rate, which is the national prime rate. Interest rate
ranges on commitments and open-ended revolving lines of credit for December
31, 2004 and 2003, were as follows:
2004 2003
-------------------------- --------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------------ ------------ ------------ ------------
Commercial loan 2.00-10.75% 3.00-9.50% 2.00-10.75% 2.67-9.00%
Real estate mortgage loan 4.75-6.13% 5.00-6.25% 4.88-7.25% 5.00-7.00%
Credit card 14.95-17.95% 8.25-10.25% 14.95-17.95% 7.00%
Consumer loan open-ended revolving line 0.00% 5.25-15.00% 0.00% 2.99-15.00%
Commitments, excluding open-ended revolving lines, generally have
fixed expiration dates of one year or less. Open-ended revolving lines are
monitored for proper performance and compliance on a monthly basis. Since many
commitments expire without being drawn upon, the total commitment amount does
not necessarily represent future cash requirements. The Company follows the
same credit policy (including requiring collateral, if deemed appropriate) to
make such commitments as is followed for those loans that are recorded in its
financial statements.
The Company's exposure to credit losses in the event of
nonperformance is represented by the contractual amount of the commitments.
Management does not expect any significant losses as a result of these
commitments.
71
NOTE 20 - PARENT COMPANY STATEMENTS
The Company operates primarily in the banking industry, which accounts for substantially all of its revenues, operating
income, and assets. Presented below are parent only financial statements:
CONDENSED BALANCE SHEETS
December 31,
--------------------------
2004 2003
------------ ------------
(in thousands)
ASSETS
Deposits with Lake City Bank $ 924 $ 861
Investments in banking subsidiary 129,532 117,990
Investments in Lakeland Statutory Trust II 928 928
Other assets 2,649 2,394
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 134,033 $ 122,173
============ ============
LIABILITIES
Dividends payable and other liabilities $ 1,340 $ 1,223
Subordinated debt 30,928 30,928
STOCKHOLDERS' EQUITY 101,765 90,022
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 134,033 $ 122,173
============ ============
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
(in thousands)
Dividends from Lake City Bank, Lakeland Statutory Trust II
and Lakeland Capital Trust $ 4,080 $ 3,980 $ 5,730
Interest on deposits and repurchase agreements, Lake City Bank 0 1 4
Equity in undistributed income of subsidiaries 11,527 11,648 8,129
Interest expense on subordinated debt 1,437 1,725 1,856
Miscellaneous expense 357 1,264 620
------------ ------------ ------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,813 12,640 11,387
Income tax benefit 732 1,225 979
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 14,545 $ 13,865 $ 12,366
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
(in thousands)
Cash flows from operating activities:
Net income $ 14,545 $ 13,865 $ 12,366
Adjustments to net cash from operating activities
Equity in undistributed income of subsidiaries (11,527) (11,648) (8,129)
Other changes 305 510 (101)
------------ ------------ ------------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . 3,323 2,727 4,136
Cash flows from investing activities 0 (9,779) 0
Cash flows from financing activities (3,260) 6,470 (4,006)
------------ ------------ ------------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 63 (582) 130
Cash and cash equivalents at beginning of the year 861 1,443 1,313
------------ ------------ ------------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . .$ 924 $ 861 $ 1,443
============ ============ ============
72
NOTE 21 - EARNINGS PER SHARE
Following are the factors used in the earnings per share computations:
2004 2003 2002
------------ ------------ ------------
Basic earnings per common share
Net income $ 14,545,000 $ 13,865,000 $ 12,366,000
Weighted-average common shares outstanding 5,867,705 5,819,916 5,813,984
------------ ------------ ------------
Basic earnings per common share $ 2.48 $ 2.38 $ 2.13
============ ============ ============
Diluted earnings per common share
Net income $ 14,545,000 $ 13,865,000 $ 12,366,000
Weighted-average common shares outstanding for
basic earnings per common share 5,867,705 5,819,916 5,813,984
Add: Dilutive effect of assumed exercises of stock options 196,372 181,533 144,402
------------ ------------ ------------
Average shares and dilutive potential common shares 6,064,077 6,001,449 5,958,386
------------ ------------ ------------
Diluted earnings per common share $ 2.40 $ 2.31 $ 2.08
============ ============ ============
<FN>
Stock options for 61,490 and 63,790 shares of common stock were not considered in computing diluted earnings per common
share for 2004 and 2003 because they were antidilutive.
</FN>
73
NOTE 22 - SELECTED QUARTERLY DATA (UNAUDITED) (in thousands except per share data)
2004 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Interest income $ 16,364 $ 15,103 $ 14,236 $ 14,302
Interest expense 4,815 4,194 3,857 3,967
------------ ------------ ------------ ------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 11,549 $ 10,909 $ 10,379 $ 10,335
Provision for loan losses 575 150 246 252
------------ ------------ ------------ ------------
Net interest income after provision $ 10,974 $ 10,759 $ 10,133 $ 10,083
Noninterest income 4,044 4,436 4,045 4,033
Noninterest expense 9,356 9,201 9,195 8,908
Income tax expense 1,914 2,043 1,639 1,706
------------ ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,748 $ 3,951 $ 3,344 $ 3,502
============ ============ ============ ============
Basic earnings per common share $ 0.64 $ 0.67 $ 0.57 $ 0.60
============ ============ ============ ============
Diluted earnings per common share $ 0.62 $ 0.65 $ 0.55 $ 0.58
============ ============ ============ ============
2003 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Interest income $ 14,513 $ 14,833 $ 15,537 $ 15,453
Interest expense 4,013 4,429 4,793 4,902
------------ ------------ ------------ ------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . .. . . . .$ 10,500 $ 10,404 $ 10,744 $ 10,551
Provision for loan losses 490 380 717 667
------------ ------------ ------------ ------------
Net interest income after provision $ 10,010 $ 10,024 $ 10,027 $ 9,884
Noninterest income 4,621 4,481 4,939 4,386
Noninterest expense 10,345 9,095 9,268 8,971
Income tax expense 1,276 1,819 1,949 1,784
------------ ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,010 $ 3,591 $ 3,749 $ 3,515
============ ============ ============ ============
Basic earnings per common share $ 0.52 $ 0.62 $ 0.64 $ 0.60
============ ============ ============ ============
Diluted earnings per common share $ 0.49 $ 0.60 $ 0.63 $ 0.59
============ ============ ============ ============
74
NOTE 23 - TRUST ACQUISITION
On December 1, 2003, the Company acquired the Fort Wayne, Indiana
office of Indiana Capital Management Bank & Trust. The Company paid $600,000
to settle the net assets acquired. The assets of the trust business are held
by the Lake City Bank trust department. Summary information regarding the
effect of the sale on the balance sheet is presented below. In addition, the
Company received $60.0 million in trust assets that are not included in these
financial statements.
Amount
------------
Assets: (in thousands)
Equipment $ 30
Intangible assets 572
Liabilities:
Other liabilities $ 2
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
Stockholders and Board of Directors
Lakeland Financial Corporation
Warsaw, Indiana
We have audited the accompanying consolidated balance sheets of
Lakeland Financial Corporation ("Company") and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Lakeland Financial Corporation and subsidiaries as of December 31, 2004 and
2003 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in conformity with U.S.
generally accepted accounting principles.
Crowe Chizek and Company LLC
South Bend, Indiana
February 10, 2005
76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9a. CONTROLS AND PROCEDURES
a) 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 December 31, 2004. 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.
b) There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls
c) The Sarbanes-Oxley Act of 2002 (the "Act") imposed many requirements
regarding corporate governance and financial reporting. One requirement under
section 404 of the Act, beginning with this annual report, is for management
to report on the Company's internal controls over financial reporting and for
our independent registered public accounting firm to attest to this report. In
late November 2004, the Securities and Exchange Commission issued an exemptive
order providing a 45-day extension for the filing of these reports and
attestations by eligible companies. We elected to utilize this 45-day
extension; therefore, this Form 10-K does not include these reports. These
reports will be included in an amended Form 10-K expected to be filed in April
2005. During 2004, we spent considerable time and resources analyzing,
documenting and testing our system of internal controls. Currently, we are not
aware of any material weaknesses in our internal controls over financial
reporting and related disclosures.
ITEM 9b. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in the definitive Proxy Statement, dated as
of March 11, 2005, is incorporated herein by reference in response to this
item.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the definitive Proxy Statement, dated as
of March 11, 2005, is incorporated herein by reference in response to this
item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHARELHOLDER MATTERS
The information appearing in the definitive Proxy Statement, dated as
of March 11, 2005, is incorporated herein by reference in response to this
item.
77
Equity Compensation Plan Information
The table below sets forth the following information as of December
31, 2004 for (i) all compensation plans previously approved by the Company's
shareholders and (ii) all compensation plans not previously approved by the
Company's shareholders:
(a) the number of securities to be issued upon the exercise of
outstanding options, warrants and rights;
(b) the weighted-average exercise price of such outstanding options,
warrants and rights;
(c) other than securities to be issued upon the exercise of such
outstanding options, warrants and rights, the number of securities
remaining available for future issuance under the plans.
==================================================================================================================================
EQUITY COMPENSATION PLAN INFORMATION
- ----------------------------------------------------------------------------------------------------------------------------------
Number of securities to be
Plan category issued upon exercise of Weighted-average exercise Number of securities remaining
outstanding options price of outstanding options available for future issuance
==================================================================================================================================
Equity compensation plans approved
by security holders............... 434,315 18.75 63,815
- ----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders...... 0 0.00 0
- ----------------------------------------------------------------------------------------------------------------------------------
Total............................. 434,315 18.75 63,815
==================================================================================================================================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the definitive Proxy Statement, dated as
of March 11, 2005, is incorporated herein by reference in response to this
item.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information appearing in the definitive proxy statement, dated as
of March 11, 2005, is incorporated herein by reference in response to this
item.
78
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The documents listed below are filed as a part of this report:
(a) Exhibits
Exhibit No. Document Incorporated by reference to
3.1 Amended and Restated Articles Exhibit 4.1 to the Company's
of Incorporation of Lakeland Form S-8 filed with the
Financial Corporation Commission on April 15, 1998
3.2 Bylaws of Lakeland Exhibit 3(ii) to the Company's
Financial Corporation Form 10-Q for the quarter
ended June 30, 1996
4.1 Form of Common Stock Certificate Exhibit 4.1 to the Company's
Form 10-K for the fiscal year ended
December 31, 2003
10.1 Lakeland Financial Exhibit 4.3 to the Company's
Corporation 1997 Share Form S-8 filed with the
Incentive Plan Commission on April 15, 1998
10.3 Form of Indenture for Trust Preferred Exhibit 4.1 to the Company's
Issuance Form 10-K for the fiscal year ended
December 31, 2003
10.4 Lakeland Financial Corporation 401(k) Plan Exhibit 10.1 to the Company's Form S-8
filed with the Commission on October
23, 2000
10.5 Amended and Restated Lakeland Financial Exhibit 10.5 to the Company's Form 10-K
Corporation Director's Fee Deferral Plan for the fiscal year ended December 31,
2002
10.6 Form of Change of Control Agreement Exhibit 10.5 to the Company's Form 10-K
entered into with David M. Findlay and for the fiscal year ended December 31,
Kevin L. Deardorff 2001
10.7 Form of Change in Control Agreement Exhibit 10.3 to the Company's Form 10-K
entered into with Michael L. Kubacki, for the fiscal year ended December 31,
Charles D. Smith and Robert L. Condon 2000
10.8 Employee Deferred Compensation Plan and Attached hereto
Form of Agreement
10.9 Schedule of Board Fees Attached hereto
10.10 Form of Option Grant Agreement Attached hereto
10.11 Executive Incentive Bonus Plan Attached hereto
21.0 Subsidiaries Attached hereto
23.1 Consent of Independent Registered Public Attached hereto
Accounting Firm
31.1 Certification of Chief Executive Officer Attached hereto
Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Attached hereto
Pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Attached hereto
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 Attached hereto
Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
79
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities and
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
Date: February 23, 2005 By /s/ Michael L. Kubacki
Michael L. Kubacki, Chairman
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ Michael L. Kubacki
Michael L. Kubacki Principal Executive Officer February 23, 2005
and Director
/s/ David M. Findlay
David M. Findlay Principal Financial Officer February 23, 2005
/s/ Teresa A. Bartman
Teresa A. Bartman Principal Accounting Officer February 23, 2005
Robert E. Bartels, Jr Director February 23, 2005
/s/ L. Craig Fulmer
L. Craig Fulmer Director February 23, 2005
/s/ Allan J. Ludwig
Allan J. Ludwig Director February 23, 2005
/s/ Charles E. Niemier
Charles E. Niemier Director February 23, 2005
Emily E. Pichon Director February 23, 2005
/s/ Richard L. Pletcher
Richard L. Pletcher Director February 23, 2005
S1
/s/ Steven D. Ross
Steven D. Ross Director February 23, 2005
/s/ Donald B. Steininger
Donald B. Steininger Director February 23, 2005
/s/ Terry L. Tucker
Terry L. Tucker Director February 23, 2005
M. Scott Welch Director February 23, 2005
S2
Exhibit 21
Subsidiaries
1. Lake City Bank, Warsaw, Indiana, a banking corporation organized under the
laws of the State of Indiana.
2. Lakeland Statutory Trust II, a statutory business trust formed under
Connecticut law.
3. LCB Investments Limited, a subsidiary of Lake City Bank formed under the
laws of Bermuda to manage a portion of the Bank's investment portfolio.