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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.
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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
============ ============ ============ ============
(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.
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
============ ============ ============ ============
(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.
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
============ ============ ============ ========== ============ ============
(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.
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%
============ ============ ============ ============
(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.
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
============ ============ ============ ============ ============
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.
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%
============ ============ ============ ============ ============ ============
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.
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
============ ============ ============ ============ ============
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.
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%
============ ============ ============
As of December 31, 2004, time certificates of deposit will mature as follows:
$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%
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.
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
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.
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