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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, 2003
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(Section 229.405 of this chapter) 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, 2003, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$159,636,237.
Number of shares of common stock outstanding at February 25, 2004: 5,811,094
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Proxy Statement for the Annual Meeting of
Shareholders mailed on March 5, 2004 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 and Related Shareholder Matters 31
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 33
Overview 33
Results of Operations 33
Financial Condition 36
Critical Accounting Policies 39
Liquidity 39
Inflation 41
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplemental Data 46
Financial Statements 46
Notes to Financial Statements 50
Report of Independent Auditors 77
Management's Responsibility for Financial Statements 78
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 79
Item 9A. Controls and Procedures 79
PART III
Item 10. Directors and Executive Officers of the Registrant 79
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial Owners and Management 79
Item 13. Certain Relationships and Related Transactions 80
Item 14. Principal Accounting Fees and Services 80
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 81
Form 10-K Signature Page 83
Exhibit 21 Subsidiaries 85
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 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 (the "Bank"). 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,
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, 2003 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 three primary geographical markets. They are
the South Region, which includes Kosciusko and contiguous counties; the North
Region, which includes Elkhart and St. Joseph Counties; and the East Region,
which includes Allen and DeKalb Counties. The South Region includes the city
of Warsaw and 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 Region,
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. The Company has recently 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. 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.
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 CommerciaLink
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 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.
o The inability 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.
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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.
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, safe deposit box
services and trust and brokerage services. The interest rates for both
deposits and loans, as well as the range of services provided, are nearly the
same for 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 hometown
5
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. The Bank currently
enforces an internal limit of $12.0 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, 2003, the Company, including its subsidiaries, had
426 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.
Recent Regulatory Developments
National Bank Preemption. On January 7, 2004, the Office of the
Comptroller of the Currency (the "OCC") issued two final rules that clarify
the federal character of the national banking system. The first rule provides
that, except where made applicable by federal law, state laws that obstruct,
impair or condition national banks' ability to fully exercise their
deposit-taking, lending and operational powers are not applicable to national
banks. That rule further provides that the following types of state laws apply
to national banks to the extent that they only incidentally affect the
exercise of national banks' deposit-taking, lending and operational powers:
contract, criminal, taxation, tort, zoning and laws relating to certain
homestead rights, rights to collect debts, acquisitions and transfers of
property and other laws as determined to apply to national banks by the OCC.
The second rule affirms that, under federal law, with some exceptions, the OCC
has exclusive visitorial authority (the power to inspect, examine, supervise
and regulate) with respect to the content and conduct of activities authorized
for national banks. These controversial rules give national banks, especially
those that operate in multiple states, a significant competitive advantage
over state-chartered banks and are therefore likely to be challenged by
individuals and organizations that represent the interests of individual
states and state-chartered banks. Both the U.S. House Committee on Financial
Services and the New York Attorney General have already initiated such
challenges.
FACT Act. On December 4, 2003, President Bush signed into law the
Fair and Accurate Credit Transactions Act of 2003 (the "FACT Act"), which
contains numerous amendments to the Fair Credit Reporting Act relating to
matters including identity theft and privacy. Among its other provisions, the
FACT Act requires financial institutions: (i) to establish an identity theft
prevention program; (ii) to enhance the accuracy and integrity of information
furnished to consumer reporting agencies; and (iii) to allow customers to
prevent financial institution affiliates from using, for marketing
solicitation purposes, transaction and experience information about the
customers received from the financial institution. The FACT Act also requires
the federal banking regulators, and certain other agencies, to promulgate
regulations to implement its provisions. The various provisions of the FACT
Act contain different effective dates including March 31, 2004, for those
7
provisions of the FACT Act that do not require significant changes to business
procedures and December 1, 2004, for certain other provisions that will
require significant business procedure changes.
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
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.
8
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, 2003, 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.
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.
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During the year ended December 31, 2003, BIF assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2004, 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,
2003, 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, 2003, the Bank paid supervisory
assessments to the DFI totaling $84,000.
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
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, 2003: (i) the Bank was not subject to a directive
from the FDIC to increase its capital to an amount in excess of the minimum
10
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, 2003. As of December 31, 2003, approximately
$19.8 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
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
11
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 few 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 $45.4
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $45.4 million, the
reserve requirement is $1.164 million plus 10% of the aggregate amount of
total transaction accounts in excess of $45.4 million. The first $6.6 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.
12
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(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)
2002 2001
---------------------------------------- ----------------------------------------
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Earning assets:
Loans:
Taxable (2)(3) $ 766,962 $ 49,083 6.40% $ 727,330 $ 58,348 8.02%
Tax exempt (1) 3,935 279 7.09 2,420 209 8.64
Investments: (1)
Available for sale 274,155 15,677 5.72 291,901 18,556 6.36
Short-term investments 12,672 191 1.51 9,778 405 4.14
Interest bearing deposits 4,283 70 1.61 2,437 80 3.24
------------ ------------ ------------ ------------
Total earning assets 1,062,007 65,300 6.15% 1,033,866 77,598 7.51%
Nonearning assets:
Cash and due from banks 42,904 0 41,148 0
Premises and equipment 24,469 0 26,423 0
Other nonearning assets 28,032 0 28,743 0
Less allowance for loan losses (8,662) 0 (7,364) 0
------------ ------------ ------------ ------------
Total assets $ 1,148,750 $ 65,300 $ 1,122,816 $ 77,598
============ ============ ============ ============
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35 and 34 percent tax rate for 2002 and 2001. 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, 2002 and
2001, are included as taxable loan interest income.
(3) Nonaccrual loans are included in the average balance of taxable loans.
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
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
2002 2001
---------------------------------------- ----------------------------------------
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits $ 53,792 $ 404 0.75% $ 50,513 $ 613 1.21%
Interest bearing checking accounts 231,712 3,592 1.55 230,144 7,447 3.24
Time deposits:
In denominations under $100,000 203,531 7,491 3.68 211,728 11,151 5.27
In denominations over $100,000 224,437 5,604 2.50 203,067 10,639 5.24
Miscellaneous short-term borrowings 146,619 2,552 1.74 178,197 6,904 3.87
Long-term borrowings and
subordinated debentures 46,287 2,915 6.30 32,030 2,476 7.73
------------ ------------ ------------ ------------
Total interest bearing liabilities 906,378 22,558 2.49% 905,679 39,230 4.33%
Noninterest bearing liabilities and
stockholders' equity:
Demand deposits 150,226 0 137,011 0
Other liabilities 13,093 0 10,135 0
Stockholders' equity 79,053 0 69,991 0
Total liabilities and stockholders'
equity ------------ ------------ ------------ ------------
$ 1,148,750 $ 22,558 $ 1,122,816 $ 39,230
============ ============ ============ ============
Net interest differential - yield on
average daily earning assets $ 42,742 4.02% $ 38,368 3.71%
============ ============
16
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS
(fully taxable equivalent basis)
(in thousands of dollars)
YEAR ENDED DECEMBER 31,
2003 Over (Under) 2002 (1) 2002 Over (Under) 2001 (1)
---------------------------------------- ----------------------------------------
Volume Rate Total Volume Rate Total
------------ ------------ ------------ ------------ ------------ ------------
INTEREST AND LOAN FEE INCOME (2)
Loans:
Taxable $ 4,407 $ (6,629) $ (2,222) $ 3,043 $ (12,308) $ (9,265)
Tax exempt 223 (72) 151 113 (43) 70
Investments:
Available for sale (170) (1,389) (1,559) (1,085) (1,794) (2,879)
Short-term investments (11) (60) (71) 96 (310) (214)
Interest bearing deposits 25 (27) (2) 42 (52) (10)
------------ ------------ ------------ ------------ ------------ ------------
Total interest income 4,474 (8,177) (3,703) 2,209 (14,507) (12,298)
------------ ------------ ------------ ------------ ------------ ------------
INTEREST EXPENSE
Savings deposits 49 (221) (172) 38 (247) (209)
Interest bearing checking accounts 914 (1,292) (378) 50 (3,905) (3,855)
Time deposits:
In denominations under $100,000 (12) (1,326) (1,338) (417) (3,243) (3,660)
In denominations over $100,000 146 (1,270) (1,124) 1,022 (6,057) (5,035)
Miscellaneous short-term borrowings (428) (1,014) (1,442) (1,059) (3,293) (4,352)
Long-term borrowings and
subordinated debentures 444 (411) 33 958 (519) 439
------------ ------------ ------------ ------------ ------------ ------------
Total interest expense 1,113 (5,534) (4,421) 592 (17,264) (16,672)
------------ ------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN
INTEREST DIFFERENTIALS $ 3,361 $ (2,643) $ 718 $ 1,617 $ 2,757 $ 4,374
============ ============ ============ ============ ============ ============
(1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily
balances for 2003, 2002 and 2001. 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, 35 and 34 percent tax rate for 2003, 2002 and
2001. 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.
17
ANALYSIS OF SECURITIES
(in thousands of dollars)
The amortized cost and the fair value of securities as of December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001
------------------------- ------------------------- ---------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ------------ ------------ ------------ ------------ ------------
Securities available for sale:
U.S. Treasury securities $ 0 $ 0 $ 5,143 $ 5,338 $ 7,630 $ 7,866
U.S. Government agencies and corporations 17,234 17,280 11,371 11,946 11,528 11,574
Mortgage-backed securities 213,071 211,142 216,619 222,036 213,054 216,654
State and municipal securities 51,138 52,945 33,534 34,785 30,085 29,663
Other debt securities 0 0 0 0 5,791 5,882
----------- ------------ ------------ ------------ ------------ ------------
Total debt securities available for sale $ 281,443 $ 281,367 $ 266,667 $ 274,105 $ 268,088 $ 271,639
=========== ============ ============ ============ ============ ============
18
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, 2003, 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:
Government agencies and corporations
Book value $ 0 $ 11,799 $ 5,481 $ 0
Yield 0.00% 3.36% 5.25% 0.00%
Mortgage-backed securities
Book value 0 16,229 64,112 130,801
Yield 0.00% 5.74% 5.35% 5.45%
State and municipal securities
Book value 100 865 3,922 48,058
Yield 6.85% 3.34% 4.24% 4.63%
------------ ------------ ------------ ------------
Total debt securities available for sale:
Book value $ 100 $ 28,893 $ 73,515 $ 178,859
Yield 6.85% 4.69% 5.05% 5.23%
============ ============ ============ ============
(1) Tax exempt income was converted to a fully taxable equivalent basis at a 35% 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, 2003.
19
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, 2003, 2002, 2001, 2000 and 1999 was as follows:
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Commercial loans:
Taxable $ 667,672 $ 619,963 $ 534,645 $ 487,125 $ 419,034
Tax exempt 7,785 4,974 2,544 2,374 3,048
------------ ------------ ------------ ------------ ------------
Total commercial loans 675,457 624,937 537,189 489,499 422,082
Real estate mortgage loans 44,050 47,184 47,252 52,731 46,872
Installment loans 58,567 75,692 95,592 129,729 146,711
Line of credit and credit card loans 92,808 74,863 58,190 46,917 38,233
------------ ------------ ------------ ----------- ------------
Total loans 870,882 822,676 738,223 718,876 653,898
Less allowance for loan losses 10,234 9,533 7,946 7,124 6,522
------------ ------------ ------------ ----------- ------------
Net loans $ 860,648 $ 813,143 $ 730,277 $ 711,752 $ 647,376
============ ============ ============ =========== ============
The real estate mortgage loan portfolio included construction loans totaling $3,932, $2,540, $2,354, $3,626 and $4,488 as
of December 31, 2003, 2002, 2001, 2000 and 1999. 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.
20
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, 2003.
Line of
Real Credit and
Commercial Estate Installment Credit Card Total Percent
------------ ------------ ------------ ------------ ------------ ------------
Original maturity of one day $ 410,909 $ 0 $ 419 $ 90,006 $ 501,334 57.6%
Other within one year 94,472 6,256 23,420 0 124,148 14.2
After one year, within five years 158,334 5,632 32,671 0 196,637 22.6
Over five years 11,290 32,061 2,057 2,802 48,210 5.5
Nonaccrual loans 452 101 0 0 553 0.1
------------ ------------ ------------ ------------ ------------ ------------
Total loans $ 675,457 $ 44,050 $ 58,567 $ 92,808 $ 870,882 100.0%
============ ============ ============ ============ ============ ============
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, 2003 amounted to $207,387 and $37,460.
21
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, 2003, 2002, 2001, 2000 and 1999.
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
Real estate mortgage loans $ 160 $ 0 $ 170 $ 398 $ 0
Commercial and industrial loans 2,912 3,245 0 7,635 20
Loans to individuals for household, family and
other personal expenditures 119 142 94 171 151
Loans to finance agriculture production and
other loans to farmers 0 0 0 0 0
------------ ------------ ------------ ------------ ------------
Total past due loans 3,191 3,387 264 8,204 171
------------ ------------ ------------ ------------ ------------
PART B - NONACCRUAL LOANS
Real estate mortgage loans 101 106 59 37 0
Commercial and industrial loans 452 4,110 2,175 169 329
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 553 4,216 2,234 206 329
----------- ------------ ------------ ------------ ------------
PART C - TROUBLED DEBT RESTRUCTURED LOANS 0 0 0 1,127 1,179
----------- ------------ ------------ ------------ ------------
Total nonperforming loans $ 3,744 $ 7,603 $ 2,498 $ 9,537 $ 1,679
=========== ============ ============ ============ ============
Nonearning assets of the Company include nonperforming loans (as indicated above), nonaccrual investments, other real
estate and repossessions, which amounted to $4,328 at December 31, 2003.
22
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, 2003, there were $553,000 of loans on nonaccrual
status, some of which were also on impaired status. There were $3.0 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, 2003 and 2002, 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 over 90% of all 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.
23
Basis For Determining Allowance For Loan Losses:
Management is responsible for determining the adequacy of the
allowance for loan losses. This responsibility is fulfilled by management in a
number of ways, including the following:
1. Management reviews the larger individual loans (primarily in the
commercial loan portfolio) for unfavorable collectibility factors and assesses
the requirement for specific reserves on such credits. For those loans not
subject to specific reviews, management reviews previous loan loss experience
to establish historical ratios and trends in charge-offs by loan category. The
ratios of net charge-offs to particular types of loans enable management to
estimate charge-offs by loan category and thereby establish appropriate
reserves for loans not specifically reviewed.
2. Management reviews the current economic conditions of its lending
market to determine the effects on loan charge-offs by loan category, in
addition to the effects on the loan portfolio as a whole.
3. Management reviews delinquent loan reports to determine risk of
loan charge-offs. High delinquencies are generally indicative of an increase
in future loan charge-offs.
Based upon these policies and objectives, $2.3 million, $3.1 million
and $2.2 million were charged to the provision for loan losses and added to
the allowance for loan losses in 2003, 2002 and 2001.
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.
24
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, 2003, 2002, 2001, 2000 and 1999.
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Amount of loans outstanding, December 31, $ 870,882 $ 822,676 $ 738,223 $ 718,876 $ 653,898
============ ============ ============ ============ ============
Average daily loans outstanding during the year
ended December 31, $ 847,555 $ 770,897 $ 729,750 $ 679,198 $ 605,170
============ ============ ============ ============ ============
Allowance for loan losses, January 1, $ 9,533 $ 7,946 $ 7,124 $ 6,522 $ 5,510
------------ ------------ ------------ ------------ ------------
Loans charged-off
Commercial 1,261 1,268 569 200 147
Real estate 47 0 0 30 6
Installment 353 509 868 483 252
Credit cards and personal credit lines 113 98 103 35 30
------------ ------------ ------------ ------------ ------------
Total loans charged-off 1,774 1,875 1,540 748 435
------------ ------------ ------------ ------------ ------------
Recoveries of loans previously charged-off
Commercial 21 270 3 45 10
Real estate 0 0 16 0 0
Installment 188 128 113 93 114
Credit cards and personal credit lines 12 8 5 6 13
------------ ------------ ------------ ------------ ------------
Total recoveries 221 406 137 144 137
------------ ------------ ------------ ------------ ------------
Net loans charged-off 1,553 1,469 1,403 604 298
Provision for loan loss charged to expense 2,254 3,056 2,225 1,206 1,310
------------ ------------ ------------ ------------ ------------
Balance, December 31, $ 10,234 $ 9,533 $ 7,946 $ 7,124 $ 6,522
============ ============ ============ ============ ============
Ratio of net charge-offs during the period to
average daily loans outstanding
Commercial 0.15% 0.13% 0.08% 0.02% 0.02%
Real estate 0.00 0.00 0.00 0.00 0.00
Installment 0.02 0.05 0.10 0.06 0.02
Credit cards and personal credit lines 0.01 0.01 0.01 0.01 0.01
------------ ------------ ------------ ------------ ------------
Total 0.18% 0.19% 0.19% 0.09% 0.05%
============ ============ ============ ============ ============
Ratio of allowance for loan losses to
nonperforming assets 236.46% 123.15% 192.58% 73.83% 368.06%
============ ============ ============ ============ ============
25
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, 2003, 2002, 2001, 2000 and 1999.
2003 2002 2001
-------------------------- -------------------------- --------------------------
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 $ 8,634 77.56% $ 7,824 75.96% $ 6,412 72.77%
Real estate 110 5.06 123 5.74 127 6.40
Installment 440 6.72 573 9.20 728 12.95
Credit cards and personal credit lines 696 10.66 563 9.10 431 7.88
------------ ------------ ------------ ----------- ------------ ------------
Total allocated allowance for loan losses 9,880 100.00% 9,083 100.00% 7,698 100.00%
============ =========== ============
Unallocated allowance for loan losses 354 450 248
------------ ------------ ------------
Total allowance for loan losses $ 10,234 $ 9,533 $ 7,946
============ ============ ============
2000 1999
-------------------------- ---------------------------
Allowance Loans as Allowance Loans as
For Percentage For Percentage
Loan of Gross Loan of Gross
Losses Loans Losses Loans
------------ ------------ ------------ ------------
Allocated allowance for loan losses
Commercial $ 5,205 68.09% $ 4,750 64.55%
Real estate 132 7.34 120 7.17
Installment 974 18.04 1,202 22.43
Credit cards and personal credit lines 352 6.53 185 5.85
------------ ------------ ------------ ------------
Total allocated allowance for loan losses 6,663 100.00% 6,257 100.00%
============ ============
Unallocated allowance for loan losses 461 265
------------ ------------
Total allowance for loan losses $ 7,124 $ 6,522
============ ============
In 2001 and 1999, the Company reviewed and revised the allocation process for the Allowance for Loan Losses. These changes
primarily affected the allocations as they pertain to the commercial loans classified in the Company's internal watch list. These
changes also brought the Company's methodology into closer conformity with regulatory guidance. The Company continues to review the
allocation process and the documentation for the Allowance for Loan Losses, therefore future changes may occur.
26
ANALYSIS OF DEPOSITS
(in thousands of dollars)
The average daily deposits for the years ended December 31, 2003, 2002 and 2001, and the average rates paid on those
deposits are summarized in the following table:
2003 2002 2001
-------------------------- -------------------------- --------------------------
Average Average Average Average Average Average
Daily Rate Daily Rate Daily Rate
Balance Paid Balance Paid Balance Paid
------------ ------------ ------------ ------------ ------------ ------------
Demand deposits $ 173,716 0.00% $ 150,226 0.00% $ 137,011 0.00%
Savings and transaction accounts:
Regular savings 61,053 0.38 53,792 0.75 50,513 1.21
Interest bearing checking 301,328 1.07 231,712 1.55 230,144 3.24
Time deposits:
Deposits of $100,000 or more 230,417 1.94 224,437 2.50 203,067 5.24
Other time deposits 203,196 3.03 203,531 3.68 211,728 5.27
------------ ------------ -----------
Total deposits $ 969,710 1.45% $ 863,698 1.98% $ 832,463 3.59%
============ ============ ===========
As of December 31, 2003, time certificates of deposit in denominations of $100,000 or more will mature as follows:
Within three months $ 45,842
Over three months, within six months 17,847
Over six months, within twelve months 10,208
Over twelve months 32,471
------------
Total time certificates of deposit in
denominations of $100,000 or more $ 106,368
============
27
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, 2003, 2002 and 2001
were as follows:
2003 2002 2001
----------- ----------- -----------
Percent of net income to:
Average daily total assets 1.12% 1.08% 0.90%
Average daily stockholders' equity 15.88% 15.64% 14.45%
Percentage of dividends declared per
common share to basic earnings per
weighted average number of common
shares outstanding (5,819,916 shares
in 2003 and 5,813,984 shares in 2002
and 2001) 31.93% 31.92% 34.48%
Percentage of average daily
stockholders' equity to average
daily total assets 7.05% 6.88% 6.23%
28
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. 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.
2003 2002 2001
------------ ------------ ------------
Outstanding at year end $ 102,601 $ 124,969 $ 149,117
Approximate average interest rate at
year end 0.79% 1.03% 1.91%
Highest amount outstanding as of any
month end during the year $ 108,270 $ 139,857 $ 160,628
Approximate average outstanding
during the year $ 97,808 $ 116,214 $ 140,277
Approximate average interest rate
during the year 0.83% 1.49% 3.72%
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.
29
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 Indiana 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 Indiana 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 and Winona Lake East branches, and for its Fort Wayne Downtown
office. In addition, the Company leases the real estate for its 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.
30
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 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2003
Trading range (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
2002
Trading range (per share)*
Low $22.220 $23.570 $20.100 $17.410
High $24.995 $29.760 $28.840 $20.450
Dividends declared (per share) $ 0.17 $ 0.17 $ 0.17 $ 0.17
* The trading ranges are the high and low 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, 2003, the
Company had approximately 513 shareholders of record and estimates that is has
approximately 2,000 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.
31
ITEM 6. SELECTED FINANCIAL DATA
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(in thousands except share and per share data)
Interest income $ 60,336 $ 64,335 $ 76,615 $ 80,050 $ 69,395
Interest expense 18,137 22,558 39,230 45,030 37,122
------------ ------------ ------------ ------------ ------------
Net interest income . . . . . . . . . . . . . . . . . . . . . 42,199 41,777 37,385 35,020 32,273
Provision for loan losses 2,254 3,056 2,225 1,206 1,310
------------ ------------ ------------ ------------- ------------
Net interest income after provision
for loan losses 39,945 38,721 35,160 33,814 30,963
Other noninterest income 14,909 12,894 11,449 10,469 9,841
Net gain on sale of branches 0 0 753 0 0
Net gains on sale of real estate
mortgages held for sale 3,018 1,914 1,232 504 1,302
Net securities gains (losses) 500 55 120 0 1,340
Noninterest expense (37,679) (34,698) (33,857) (31,349) (31,042)
------------ ------------ ------------ ------------ ------------
Income before income tax expense . . . . . . . . . . . . . . . 20,693 18,886 14,857 13,438 12,404
Income tax expense 6,828 6,520 4,744 4,116 4,085
------------ ------------ ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .$ 13,865 $ 12,366 $ 10,113 $ 9,322 $ 8,319
============ ============ ============ ============ ============
Basic weighted average common shares
outstanding 5,819,916 5,813,984 5,813,984 5,813,984 5,813,984
============ ============ ============ ============ ============
Basic earnings per common share $ 2.38 $ 2.13 $ 1.74 $ 1.60 $ 1.43
============ ============ ============ ============ ============
Diluted weighted average common shares
outstanding 6,001,449 5,958,386 5,841,196 5,813,999 5,813,992
============ ============ ============ ============ ============
Diluted earnings per common share $ 2.31 $ 2.08 $ 1.73 $ 1.60 $ 1.43
============ ============ ============ ============ ============
Cash dividends declared $ 0.76 $ 0.68 $ 0.60 $ 0.52 $ 0.44
============ ============ ============ ============ ============
32
ITEM 6. SELECTED FINANCIAL DATA (continued)
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(in thousands)
Balances at December 31:
- --------------------------------------
Total assets $ 1,271,414 $ 1,249,060 $ 1,139,013 $ 1,150,485 $ 1,041,198
Total loans $ 870,882 $ 822,676 $ 738,223 $ 718,876 $ 653,898
Total deposits $ 926,391 $ 913,325 $ 793,380 $ 845,329 $ 748,243
Total short-term borrowings $ 184,761 $ 184,968 $ 232,117 $ 200,078 $ 195,374
Long-term borrowings $ 30,047 $ 31,348 $ 11,389 $ 11,433 $ 16,473
Subordinated debentures $ 30,928 $ 20,619 $ 20,619 $ 20,619 $ 20,619
Total stockholders' equity $ 90,022 $ 83,880 $ 73,534 $ 64,973 $ 54,194
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 $13.9 million for
the year ended 2003 versus $12.4 million for the year ended 2002, an increase
of 12.1%. The increase was driven by a $3.6 million increase in non-interest
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 non-interest expense, driven by $804,000 expense related
to debt extinguishment costs and an other real estate owned impairment of
$300,000. The Company earned $12.4 million for the year ended 2002 versus
$10.1 million for the year ended 2001, an increase of 22.3%. The increase was
driven by a $4.4 million increase in net interest income and a $1.3 million
increase in non-interest income. Offsetting these positive impacts were
increases of $831,000 in the provision for loan losses and $841,000 in
non-interest expense.
Basic earnings per share for the year ended 2003 was $2.38 per share
versus $2.13 per share for the year ended 2002 and $1.74 for the year ended
2001. 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 2003 was $2.31 per share versus $2.08 per share
for the year ended 2002 and $1.73 for the year ended 2001.
RESULTS OF OPERATIONS
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
33
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. The Company believes that the growth in the loan
portfolio will continue in conjunction with the strategic focus on commercial
lending and the general expansion and penetration of the geographical markets
the Company serves. 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. Interest expense on
subordinated debentures is expected to decrease in 2004 compared to 2003 given
the low interest rate environment and that the Company paid a higher fixed
rate for a portion of 2003.
Nonaccrual loans were $553,000, or 0.06% of total loans, at year end
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 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 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 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 $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 Company does not expect the
level of mortgage activity seen during 2003 to continue and therefore does not
expect mortgage sale gains to remain at the level seen during 2003. 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
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
34
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.
2002 versus 2001
The Company reported record net income of $12.4 million in 2002, an
increase of $2.3 million, or 22.3%, versus net income of $10.1 million in
2001. Net interest income increased $4.4 million, or 11.7%, to $41.8 million
versus $37.4 million in 2001. Net interest income increased primarily due to
the implementation of a liability pricing strategy during 2001 that resulted
in an improved net interest margin and growth in the loan portfolio. Interest
income decreased $12.3 million, or 16.0%, from $76.6 million in 2001 to $64.3
million in 2002. The decrease was driven primarily by a 134 basis point
reduction in the tax equivalent yield on average earning assets over the year.
Interest expense decreased $16.7 million, or 42.5%, from $39.2 million in 2001
to $22.6 million in 2002. The decrease was primarily the result of a 163 basis
point decrease in the Company's daily cost of funds over the year. The Company
had a net interest margin of 4.02% in 2002 versus 3.71% in 2001. Average
earning assets increased by $27.1 million to $1.1 billion in 2002 versus $1.0
billion in 2001. The primary driver was a $40.1 million increase in the
average daily loan balance. Deposits increased to fund the loan growth during
2002, driven primarily by increases of $13.6 million in the average daily time
deposit balances and increases of $13.2 million in the average daily demand
deposit balances. The increase in average daily total deposits occurred
despite the impact of the Company's September, 2001 branch divestiture, which
included $70.3 million in deposits.
Nonaccrual loans were $4.2 million, or 0.51% of total loans, at year
end versus $2.2 million, or 0.30% of total loans, at the end of 2001. There
were nine relationships totaling $7.3 million classified as impaired as of
December 31, 2002 versus six relationships totaling $10.0 million at the end
of 2001. One commercial credit represented $3.2 million of this amount in
2002. The renewal of this loan was complicated as more than one bank was
involved, and it was past maturity, however at year end 2002 the loan was
current as to principal and interest. The removal of one credit that had a
balance of $7.5 million at December 31, 2001 was offset by the addition of the
aforementioned loan. The impaired loan that was removed from impaired status
had been current on principal and interest for most of 2002 and was
restructured as a personal loan to the principal of the corporate entity with
the support of both the existing collateral and new collateral in the form of
life insurance and additional pledged securities. In addition, full payment
under the loan terms was expected. Net charge-offs were $1.5 million in 2002
versus $1.4 million in 2001, representing 0.19% and 0.19% of average daily
loans in 2002 and 2001. The provision for loan loss expense was $3.1 million
in 2002, resulting in an allowance for loan losses at December 31, 2002 of
$9.5 million, which represented 1.16% of the loan portfolio, versus $7.9
million in 2001, or 1.08% of the loan portfolio. The higher provision in 2002
versus 2001 was attributable to a number of factors, but was primarily a
result of the more challenging economic conditions during 2002 and the
resulting impact on asset quality as evidenced by an increase in the
percentage of internally classified loans in 2002. The growth of the
commercial loan portfolio was also a factor in the determination of the
provision for loan losses.
Noninterest income was $14.9 million in 2002 versus $13.6 million in
2001, an increase of $1.3 million, or 9.7%. The increase was driven by a $1.4
million, or 26.1%, increase in service charges on deposit accounts which was
largely due to fees related to new deposit services which were implemented in
the first quarter of 2002, as well as fees associated with business checking
accounts. The increase in noninterest income was also reflective of the low
interest rate environment which encouraged new mortgage and mortgage
refinancing activity. The increased mortgage activity resulted in a rise in
the gains on sale of mortgages, which were $1.9 million versus $1.2 million in
2001, an increase of 55.4%. Trust and brokerage fees decreased $197,000, or
7.4%, to $2.5 million versus $2.6 million in 2001 as a result of a reduction
in brokerage income from $1.1 million in 2001 to $695,000 in 2002. During
2001, the Company sold five non-strategic branches resulting in a gain of
$753,000.
Noninterest expense increased 2.5% from $33.9 million in 2001 to
$34.7 million in 2002. Salaries and wages increased $1.2 million, or 6.8%, to
$18.5 million in 2002 versus $17.3 million in 2001. This increase was
attributable to normal salary increases, increases related to the employee
401(k) plan and an expanded incentive compensation plan. Net occupancy expense
and equipment costs decreased from $4.9 million in 2001 to $4.7 million in
2002 as a result of the sale of five non-strategic branches during the second
half of 2001 and reductions in some operating expenses.
As a result of these factors, income before income tax expense
increased $4.0 million, or 27.1%, from $14.9 million in 2001 to $18.9 million
35
in 2002. Income tax expense was $6.5 million in 2002 versus $4.7 million in
2001. Income tax as a percentage of income before tax was 34.5% in 2002 versus
31.9% in 2001. The increase in income tax as a percentage of income before tax
was primarily due to greater profitability, as well as the adoption of FASB
147 during 2002, which resulted in the Company reversing previously amortized
goodwill and related taxes for the year of $378,000. Both of these resulted in
a higher percentage of income being subject to state franchise tax combined
with the Company being taxed at the 35% federal tax rate in 2002 versus the
34% rate in 2001. Net income increased $2.3 million, or 22.3%, to $12.4
million in 2002 versus $10.1 million in 2001. Basic earnings per share in 2002
was $2.13, an increase of 22.4%, versus $1.74 in 2001. The Company's net
income performance represented a 16.8% return on January 1, 2002,
stockholders' equity versus 15.6% in 2001. The net income performance resulted
in a 1.08% return on average daily assets in 2002 versus 0.90% in 2001.
FINANCIAL CONDITION
As of December 31, 2003, the Company had 43 offices serving twelve
counties in northern Indiana. The Company added two new offices during 2003.
Since 1996, the Company has added seventeen new offices through acquisition
and internal growth. The Company opened a thirteenth office in Kosciusko
County and a fourth office in Allen County as part of its acquisition of
Indiana Capital Management's Fort Wayne Office in 2003 and also continues to
evaluate additional expansion opportunities. 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 southern market branches 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 $1.271 billion as of December 31,
2003, an increase of $22.4 million, or 1.8%, when compared to $1.249 billion
as of December 31, 2002.
Total cash and cash equivalents decreased by $29.7 million, or 34.1%,
to $57.4 million at December 31, 2003 from $87.1 million at December 31, 2002.
The decrease was primarily attributable to the funding of real estate mortgage
loans due to an increase in demand resulting from falling interest rates
during the first half of 2003.
Total securities available for sale increased by $7.3 million, or
2.6%, to $281.4 million at December 31, 2003 from $274.1 million at December
31, 2002. The increase was a result of a number of activities in the
securities portfolio. Paydowns of $113.1 million were received, and the
amortization of premiums, net of the accretion of discounts, was $1.5 million.
Maturities, calls and sales of securities totaled $33.6 million. The fair
value of the securities decreased $7.5 million as a result of generally lower
interest rates. These portfolio decreases were offset by securities purchases
totaling $162.5 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, 2003.
Real estate mortgages held for sale decreased by $7.0 million, or
67.0%, to $3.4 million at December 31, 2003 from $10.4 million at December 31,
2002. 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 2003, $143.2
million in real estate mortgages were originated for sale and $150.2 million
in mortgages were sold, compared to $93.8 and $91.8 in 2002.
Total loans, excluding real estate mortgages held for sale, increased
by $48.2 million or 5.9%, to $870.9 million at December 31, 2003 from $822.7
million at December 31, 2002. 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 2003
reflected 78% commercial, 5% real estate and 17% consumer loans compared to
76% commercial, 6% real estate and 18% consumer loans at December 31, 2002.
At December 31, 2003, the allowance for loan losses was $10.2
million, or 1.18% of total loans outstanding, versus $9.5 million, or 1.16%,
of total loans outstanding at December 31, 2002. The process of identifying
probable credit losses is a subjective process. Therefore, the Company
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.
36
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 difficult economic climate,
certain borrowers may experience difficulty and the level of nonperforming
loans, charge-offs, and delinquencies could rise and require further increases
in the provision.
Loans are charged against the allowance for loan losses when
management believes that the collectability of the principal is unlikely.
Subsequent recoveries, if any, are credited to the allowance. The allowance is
an amount that management believes will be adequate to absorb probable
incurred 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 based on the application of
historical loss percentages to graded loans by categories. 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 general 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, 2003, on the basis of management's review of the loan portfolio,
the Company had loans totaling $70.4 million on the classified loan list
versus $75.0 million on December 31, 2002. As of December 31, 2003, the
Company had $41.9 million of assets classified special mention, $27.7 million
classified as substandard, $869,000 classified as doubtful and $0 classified
as loss as compared to $47.6 million, $27.0 million, $211,000 and $200,000 at
December 31, 2002.
Allowance estimates are developed by management in consultation with
regulatory authorities, taking into account both actual loss experience and
peer group loss experience and are 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 $152.0 million, or 21.1%. The concentration of this loan growth was
in the commercial loan portfolio. Commercial loans comprised 78%, 76% and 73%
of the total loan portfolio at December 31, 2003, 2002 and 2001.
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 $2.3 million in
2003 versus $3.1 million in 2002. At December 31, 2003 total nonperforming
loans decreased by $3.9 million to $3.7 million from $7.6 million at December
31, 2002. Loans delinquent 90 days or more that were included in the
accompanying financial statements as accruing totaled $3.2 million versus $3.4
million at December 31, 2002. Total impaired loans decreased by $4.3 million
to $3.0 million at December 31, 2003 from $7.3 million at December 31, 2002.
The decreases in nonperforming loans and impaired loans resulted from payments
on six commercial loans including one loan of $1.7 million. The loans
delinquent 90 days or more total includes one commercial credit for $2.9
million and $3.2 million in 2003 and 2002. The renewal of this loan has been
37
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 $127,000 in nonaccrual loans. The Company
allocated $456,000 and $1.3 million of the allowance for loan losses to the
impaired loans in 2003 and 2002. 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 believes that the improvement in total nonperforming
loans is a 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 increased from 1.16% in 2002 to 1.18% in 2003.
Despite these factors, the Company does not believe that it has experienced a
dramatic change in overall asset quality. Nonetheless, 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 $13.1 million, or 1.4%, to $926.4 million
at December 31, 2003 from $913.3 million at December 31, 2002. The increase
resulted from increases of $80.5 million in NOW accounts, $49.6 million in
Investors' Money Market accounts, $17.9 million in money market accounts and
$8.1 million in savings accounts. Offsetting these increases were declines of
$136.0 million in certificates of deposit and $7.1 million in demand deposit
accounts. The Company believes that this shift from certificates of deposits
to shorter term, liquid deposits is a reflection of the low interest rate
environment.
Total short-term borrowings decreased by $207,000, or 0.1%, to $184.8
million at December 31, 2003 from $185.0 million at December 31, 2002. The
decrease resulted from decreases of $22.4 million in securities sold under
agreements to repurchase, $6.0 million in federal fund purchases and $840,000
in U.S. Treasury demand notes combined with a $29.0 million increase in
Federal Home Loan Bank advances.
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 12.8% and
Tier I risk-based capital ratio of 11.8% as of December 31, 2003. 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 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 plan 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 deferred directors' plan of $204,000 were made to paid-in-capital
under the new plan. Total stockholders' equity increased by 14.1% to $83.9
million as of December 31, 2002, from $73.5 million as of December 31, 2001.
38
The increase in 2002 resulted from net income of $12.4 million less the
following factors:
o cash dividends of $3.9 million,
o a favorable change in the AFS adjustment of $2.5 million, net of tax,
o a negative minimum pension liability adjustment of $343,000, net of
tax, and
o $197,000 for the purchase of treasury stock.
The 2003 AFS adjustment reflected a 56 basis point increase in the
two to five year U.S. Treasury rates during 2003. 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
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.
The valuation of mortgage servicing rights may be difficult 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.
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 $49.8
million of funding in 2004.
39
In addition to these primary sources of funds, management has several
secondary sources available to meet potential funding requirements. As of
December 31, 2003, 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 81.0% 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 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
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.
During 2001, cash and cash equivalents decreased $9.9 million from
$89.0 million as of December 2000 to $79.1 million as of December 31, 2001.
The primary reason for this decrease was the effect of the branch sale. Other
uses of funds were purchases of securities, an increase in loans and payments
for the branch sale. Purchases of securities totaled $71.7 million. Net loans
increased $46.6 million in 2001, which was net of approximately $68.3 million
of loans originated and sold during 2001. Payments for the branch sale were
$40.2 million. The major sources of funds included proceeds from sales, calls
and maturities of securities of $96.5 million and proceeds from the sale of
loans of $60.8 million. Lower interest rates created more demand for
residential real estate mortgage loans and resulted in an increase in proceeds
from the sale of mortgage loans.
The following tables disclose information on the maturity of the
Company's contractual long-term obligations and commitments.
40
Payments Due by Period
--------------------------------------------------------------------
One year After 5
Total or less 1-3 years 4-5 years years
------------ ------------ ------------ ------------ ------------
(in thousands)
Long-term debt $ 30,047 $ 20,000 $ 10,000 $ 0 $ 47
Operating leases 451 112 203 134 2
Subordinated debentures 30,928 0 0 0 30,928
------------ ------------ ------------ ------------ ------------
Total contractual long-term cash
obligations $ 61,426 $ 20,112 $ 10,203 $ 134 $ 30,977
============ ============ ============ ============ ============
Amount of Commitment Expiration Per Period
------------------------------------------
Total
Amount One year Over one
Committed or less year
------------ ------------ ------------
(in thousands)
Unused loan commitments $ 319,073 $ 216,411 $ 102,662
Commercial letters of credit 251 251 0
Standby letters of credit 11,173 10,149 1,024
------------ ------------ ------------
Total commitments and letters of credit $ 330,497 $ 226,811 $ 103,686
============ ============ ============
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.
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 material 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, 2003, 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 at the end of 2002,
resulting from interest rate reductions by the Federal Open Market Committee
(the "FOMC") during 2001 and in November, 2002, continued to have an adverse
impact on the Company's net interest margin. In June, 2003, the FOMC reduced
the target for the Federal Funds rate 25 basis points from 1.25% to 1.00%.
This action resulted in the Bank lowering its Base Rate from 4.25% to 4.00%.
Due to the asset sensitive nature of the Company's balance sheet, this
reduction in the prime rate had an additional adverse impact on the net
interest margin during 2003. 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
41
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, 2003, for the next 12 months using a rates unchanged
scenario was a negative 9.10% 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. Loans are presented gross of the allowance for loan losses. For
core deposits such as demand deposits, interest-bearing checking, savings and
money market deposits that have no contractual maturity, the tables present
principal cash flows and, as applicable, related weighted-average interest
rates. These factors are based upon the Company's historical experience,
management's judgment and statistical analysis, as applicable, concerning
their most likely withdrawal behaviors. Weighted-average variable rates are
based upon rates existing at the reporting date.
42
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 $ 9,658 $ 8,618 $ 1,560 $ 1,486 $ 2,173 $ 162,239 $ 185,734 $ 185,734
Average interest rate
Savings & interest bearing checking $ 28,727 $ 25,936 $ 23,034 $ 20,923 $ 16,776 $ 324,758 $ 440,154 $ 440,154
Average interest rate 0.91% 0.91% 0.91% 0.91% 0.91% 0.74% 0.79%
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%
43
2002
Principal/Notional Amount Maturing in:
-----------------------------------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------------------------------
Fair
Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 12/31/2002
--------- --------- --------- --------- --------- ---------- ---------- ----------
Rate sensitive assets:
Fixed interest rate loans $ 108,157 $ 90,362 $ 54,746 $ 31,689 $ 21,441 $ 7,199 $ 313,594 $ 319,099
Average interest rate 7.11% 7.46% 7.29% 7.28% 6.72% 7.54% 7.24%
Variable interest rate loans $ 472,951 $ 1,229 $ 1,187 $ 1,147 $ 1,139 $ 31,429 $ 509,082 $ 507,516
Average interest rate 4.53% 7.74% 7.33% 6.97% 6.64% 4.85% 4.58%
Fixed interest rate securities $ 93,507 $ 90,190 $ 28,908 $ 10,261 $ 5,944 $ 36,801 $ 265,611 $ 273,017
Average interest rate 6.21% 6.06% 5.75% 6.16% 5.50% 5.00% 5.18%
Variable interest rate securities $ 110 $ 110 $ 110 $ 110 $ 110 $ 506 $ 1,056 $ 1,088
Average interest rate 4.59% 5.22% 5.22% 5.22% 5.22% 5.44% 5.30%
Other interest-bearing assets $ 13,000 $ - $ - $ - $ - $ - $ 13,000 $ 13,000
Average interest rate 1.25% - - - - - 1.25%
Rate sensitive liabilities:
Non-interest bearing checking $ 10,025 $ 8,945 $ 1,620 $ 1,542 $ 2,256 $ 168,399 $ 192,787 $ 192,787
Average interest rate
Savings & interest bearing checking $ 17,448 $ 15,754 $ 13,991 $ 12,708 $ 10,190 $ 213,992 $ 284,083 $ 284,083
Average interest rate 1.23% 1.23% 1.23% 1.23% 1.23% 0.98% 1.05%
Time deposits $ 335,796 $ 45,339 $ 22,332 $ 3,229 $ 28,298 $ 1,461 $ 436,455 $ 442,948
Average interest rate 2.32% 3.84% 4.06% 3.82% 4.92% 2.99% 2.75%
Fixed interest rate borrowings $ 170,268 $ 20,000 $ - $ - $ - $ 20,619 $ 210,887 $ 212,990
Average interest rate 1.28% 3.96% - - - 8.95% 2.24%
Variable interest rate borrowings $ 26,000 $ - $ - $ - $ - $ - $ 26,000 $ 26,000
Average interest rate 1.33% - - - - - 1.33%
44
These tables illustrate the Company's growth during 2003 and the
effect of the rate cuts during fiscal years 2003 and 2002. 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
2003 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 agencies,
mortgage-backed securities and municipal bonds. During 2003, purchases in the
securities portfolio consisted primarily of agency securities and municipal
bonds. As of December 31, 2003, the Company's investment in mortgage-backed
securities represented approximately 75% of total securities and consisted of
CMOs and mortgage pools issued by GNMA, FNMA and FHLMC. The federal government
backs these securities, directly or indirectly. 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, 2003, the securities in the AFS
portfolio had approximately a three year average life with approximately 12%
price depreciation in the event of a 300 basis points upward movement. The
portfolio had approximately 6% price appreciation in the event of a 300 basis
point downward movement in rates. As of December 31, 2003, 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 2003 2002
------------ ------------
ASSETS
Cash and due from banks $ 52,297 $ 74,149
Short-term investments 5,144 13,000
------------ ------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,441 87,149
Securities available for sale (carried at fair value) 281,367 274,105
Real estate mortgages held for sale 3,431 10,395
Total loans 870,882 822,676
Less allowance for loan losses 10,234 9,533
------------ ------------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 860,648 813,143
Land, premises and equipment, net 26,157 24,768
Accrued income receivable 5,010 4,999
Goodwill 4,970 4,970
Other intangible assets 1,460 1,042
Other assets 30,930 28,489
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,271,414 $ 1,249,060
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits $ 185,734 $ 192,787
Interest bearing deposits 740,657 720,538
------------ ------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 926,391 913,325
Short-term borrowings
Federal funds purchased 24,000 30,000
Securities sold under agreements to repurchase 102,601 124,968
U.S. Treasury demand notes 3,160 4,000
Other short-term borrowings 55,000 26,000
------------ ------------
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,761 184,968
Accrued expenses payable 7,804 12,503
Other liabilities 1,461 2,417
Long-term borrowings 30,047 31,348
Subordinated debentures 30,928 20,619
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,181,392 1,165,180
Commitments, off-balance sheet risks and contingencies
STOCKHOLDERS' EQUITY
Common stock: 90,000,000 shares authorized, no par value
5,834,744 shares issued and 5,788,263 outstanding as of December 31, 2003;
5,813,984 shares issued and 5,767,010 outstanding as of December 31, 2002 1,453 1,453
Additional paid-in capital 10,509 8,537
Retained earnings 80,260 70,819
Accumulated other comprehensive income (loss) (1,282) 3,937
Treasury stock, at cost (2003 - 46,481 shares, 2002 - 46,974 shares) (918) (866)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,022 83,880
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,271,414 $ 1,249,060
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF INCOME (in thousands except share and per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2003 2002 2001
------------ ------------ ------------
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 46,861 $ 49,083 $ 58,348
Tax exempt 280 181 138
Interest and dividends on securities
Taxable 10,946 13,205 15,874
Tax exempt 2,061 1,607 1,770
Interest on short-term investments 188 259 485
------------ ------------ ------------
Total interest income 60,336 64,335 76,615
Interest on deposits 14,079 17,091 29,850
Interest on borrowings
Short-term 1,110 2,552 6,904
Long-term 2,948 2,915 2,476
------------ ------------ ------------
Total interest expense 18,137 22,558 39,230
------------ ------------ ------------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,199 41,777 37,385
Provision for loan losses 2,254 3,056 2,225
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,945 38,721 35,160
NONINTEREST INCOME
Trust and brokerage income 2,370 2,451 2,648
Service charges on deposit accounts 6,860 6,717 5,326
Other income 5,679 3,726 3,475
Net gain on sale of branches 0 0 753
Net gains on sale of real estate mortgages held for sale 3,018 1,914 1,232
Net securities gains 500 55 120
------------ ------------ ------------
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,427 14,863 13,554
NONINTEREST EXPENSE
Salaries and employee benefits 19,829 18,501 17,324
Net occupancy expense 2,444 2,174 2,080
Equipment costs 2,538 2,483 2,801
Loss on extinguishment of debt 804 0 0
Other expense 12,064 11,540 11,652
------------ ------------ ------------
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,679 34,698 33,857
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 20,693 18,886 14,857
Income tax expense 6,828 6,520 4,744
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 13,865 $ 12,366 $ 10,113
============ ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES 5,819,916 5,813,984 5,813,984
============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 2.38 $ 2.13 $ 1.74
============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES 6,001,449 5,958,386 5,841,196
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $ 2.31 $ 2.08 $ 1.73
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
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, 2001 $ 1,453 $ 8,537 $ 55,734 $ (207) $ (544) $ 64,973
Comprehensive income:
Net income 10,113 10,113
Unrealized gain/(loss) on
available for sale securities
arising during the period 2,556 2,556
Reclassification adjustments
for accumulated (gains)
losses included in net income,
net of taxes (73) (73)
Net securities gain/(loss) ------------- -------------
activity during the period
(net of taxes of $1,411) 2,483 2,483
Minimum pension liability adjustment
(net of taxes of $(290)) (441) (441)
-------------
Comprehensive income 12,155
Cash dividends declared, $.60
per share (3,469) (3,469)
Acquisition of treasury stock (125) (125)
----------- ----------- ----------- ------------- ----------- -------------
Balance at December 31, 2001 1,453 8,537 62,378 1,835 (669) 73,534
Comprehensive income:
Net income 12,366 12,366
Unrealized gain/(loss) on
available for sale securities
arising during the period 2,478 2,478
Reclassification adjustments
for accumulated (gains)
losses included in net income,
net of taxes (33) (33)
Net securities gain/(loss) ------------- -------------
activity during the period
(net of taxes of $1,442) 2,445 2,445
Minimum pension liability adjustment
(net of taxes of $(245)) (343) (343)
-------------
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
Unrealized gain/(loss) on
available for sale securities
arising during the period (4,591) (4,591)
Reclassification adjustments
for accumulated (gains)
losses included in net income,
net of taxes (297) (297)
Net securities gain/(loss) ------------- -------------
activity during the period
(net of taxes of $(2,626)) (4,888) (4,888)
Minimum pension liability adjustment
(net of taxes of $(226)) (331) (331)
-------------
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
=========== =========== =========== ============= =========== =============
The accompanying notes are an integral part of these consolidated financial statements.
48
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 13,865 $ 12,366 $ 10,113
------------ ------------ ------------
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation 2,210 2,291 2,338
Provision for loan losses 2,254 3,056 2,225
Amortization of intangible assets 154 176 825
Amortization of loan servicing rights 671 452 307
Net impairment of loan servicing rights (224) 334 388
Loans originated for sale (143,230) (93,751) (68,306)
Net gain on sales of loans (3,018) (1,914) (1,232)
Proceeds from sale of loans 152,118 93,142 60,833
Net (gain) loss on sale of premises and equipment (101) 25 (14)
Gain on sale of branches 0 0 (753)
Net gain on sales of securities available for sale (500) (55) (120)
Net securities amortization 1,549 1,753 1,131
Stock compensation expense 254 0 0
Earnings on life insurance (692) (68) 0
Net change:
Income receivable (11) 442 1,303
Accrued expenses payable (1,404) 1,666 (2,291)
Other assets 2,603 2,417 192
Other liabilities (958) (680) (127)
------------ ------------ ------------
Total adjustments 11,675 9,286 (3,301)
------------ ------------ ------------
Net cash from operating activites . . . . . . . . . . . . . . . . . . . . . . . . 25,540 21,652 6,812
Cash flows from investing activites:
Proceeds from sale of securities available for sale 14,338 5,771 18,450
Proceeds from maturities, calls and principal paydowns of
securities available for sale 132,377 83,371 78,067
Purchases of securities available for sale (162,540) (89,419) (71,665)
Purchase of life insurance (1,393) (13,300) 0
Net increase in total loans (51,681) (85,966) (46,643)
Proceeds from sales of land, premises and equipment 159 11 0
Purchases of land, premises and equipment (3,627) (2,843) (1,476)
Increase in investment in unconsolidated subsidiary (309) 0 0
Net payments in acquisition (600) 0 0
Net payments from branch divestitures 0 0 (40,233)
------------ ------------ ------------
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . (73,276) (102,375) (63,500)
Cash flows from financing activities:
Net increase in total deposits 13,066 119,945 18,300
Proceeds from short-term borrowings 24,459,723 28,841,949 32,481,163
Payments on short-term borrowings (24,459,930) (28,889,098) (32,449,124)
Proceeds from long-term borrowings 40,928 20,000 0
Payments on long-term borrowings (31,920) (41) (44)
Dividends paid (4,306) (3,809) (3,352)
Proceeds from the sale of common stock 152 0 0
Proceeds from stock option exercise 484 0 0
Purchase of treasury stock (169) (197) (125)
------------ ------------ ------------
Net cash from financing activites . . . . . . . . . . . . . . . . . . . . . . . . 18,028 88,749 46,818
------------ ------------ ------------
Net change in cash and cash equivalents (29,708) 8,026 (9,870)
Cash and cash equivalents at beginning of the year 87,149 79,123 88,993
------------ ------------ ------------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . .$ 57,441 $ 87,149 $ 79,123
============ ============ ============
Cash paid during the year for:
Interest $ 18,935 $ 22,610 $ 40,963
Income taxes 6,955 7,249 5,345
Supplemental non-cash disclosures:
Loans transferred to other real estate 1,922 44 1,435
Directors' deferred liability transferred from other liabilities to equity 949 0 0
The accompanying notes are an integral part of these consolidated financial statements.
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, 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 (the "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 CommerciaLink 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 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 accounting
principles generally accepted in the United States of America, 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 includes 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.
Interest income includes amortization of purchase premium or
discount. Gains and losses on sales are based on the amortized cost of the
security sold. Securities are written down to fair value when a decline in
fair value is not temporary.
The Company does not have any material derivative instruments for
presentation nor does the Company participate in any 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.
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. Interest
income is not reported when full loan repayment is in doubt and the loan is
placed on nonaccrual. 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, increased by the provision for loan losses and
decreased by charge-offs less recoveries. 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. Loan losses are charged against the allowance
when management believes the uncollectability of a loan balance is confirmed.
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. 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. 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.
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 measured for impairment through the lower of cost or market
approach. The investment recorded at December 31, 2003 and 2002 was $500,000
and $495,000.
51
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2003 and 2002, the balance of
repossessed assets and real estate owned was $584,000 and $138,000 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 50 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 interest rates and secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance. Fair value is determined using prices for
similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions.
Bank Owned Life Insurance:
At December 31, 2003 and 2002, the Company owned $15.5 million and
$13.4 million of life insurance policies on certain officers to replace group
term life insurance for these individuals. 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.
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.
52
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Benefit Plans:
A noncontributory defined benefit pension plan covered substantially
all employees until the plan was frozen. 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. Effective April 1, 2000, the defined
benefit pension plan was frozen. The Company maintains a directors' deferred
compensation plan. A participant can elect to receives a return based on the
performance of the Company's stock for their contribution. The Company
acquires shares on the open market and records such shares as treasury stock.
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.
Stock Compensation:
At the inception of the Lakeland Financial Corporation Stock Option
Plan, 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, 2003, 521,475 options had been granted
and 57,765 were available for future grants. These are accounted for under APB
No. 25. Employee compensation expense under the stock option plan is reported
if options are granted below market price at grant date. The Company has not
made any such grants. Pro forma disclosures of net income and earnings per
share are shown using the fair value method to measure expense for options
granted using an option pricing model to estimate fair value.
Employee compensation expense under stock options is reported using
the intrinsic value method. No stock-based compensation cost is reflected in
net income, as all options granted had an exercise price equal to or greater
than the market price of the underlying common stock at date of grant. Had
compensation cost for stock options been recorded in the financial statements,
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.
2003 2002 2001
---------- ---------- ----------
Net income (in thousands) as reported $ 13,865 $ 12,366 $ 10,113
Deduct: stock-based compensation expense determined
under fair value based method (in thousands) 543 669 748
---------- ---------- ----------
Pro forma net income (in thousands) $ 13,322 $ 11,697 $ 9,365
========== ========== ==========
Basic earnings per common share as reported $ 2.38 $ 2.13 $ 1.74
Pro forma basic earnings per common share $ 2.29 $ 2.01 $ 1.61
Diluted earnings per common share as reported $ 2.31 $ 2.08 $ 1.73
Pro forma diluted earnings per common share $ 2.22 $ 1.96 $ 1.60
The pro forma effects are computed with option pricing models, using the following weighted-average assumptions as of the
grant date for all options granted to date:
Risk-free interest rate 5.26% 5.53% 5.54%
Expected option life 5.00 years 5.00 years 5.00 years
Expected price volatility 73.13% 76.37% 76.23%
Dividend yield 2.85% 2.87% 2.86%
Income Taxes:
Annual consolidated federal and state income tax returns are filed by
the Company. Income tax expense is recorded based on the amount of taxes due
on its tax return plus 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.
53
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 2003 and 2002 reflect the acquisition
of 46,481 and 46,974 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 separate components of equity.
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 $6.9 million and $3.3 million of
cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at year-end 2003 and 2002. 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 a
separate note. 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.
54
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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:
During 2003, the Company adopted FASB Statement 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, FASB Statement
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities, FASB Statement 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits, FASB
Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, and FASB Interpretation 46, Consolidation of Variable Interest
Entities. Adoption of Statements No. 149 and 150 did not materially affect the
Company's operating results or financial condition.
Statement 132 (revised 2003) requires additional disclosures about
the assets, obligations, cash flows of defined benefit pension and
postretirement plans, as well as the expense recorded for such plans.
Interpretation 45 requires recognizing the fair value of guarantees
made and information about maximum potential payments that might be required,
as well as the collateral or other recourse obtainable. Interpretation 45
covers guarantees such as standby letters of credit, performance guarantees,
and direct or indirect guarantees of the indebtedness of others, but not
guarantees of funding.
Interpretation 46, as revised in December 2003, changes the
accounting model for consolidation from one based on consideration of control
through voting interests. Whether to consolidate an entity will now also
consider whether that entity has sufficient equity at risk to enable it to
operate without additional financial support, whether the equity owners in
that entity lack the obligation to absorb expected losses or the right to
receive residual returns of the entity, or whether voting rights in the entity
are not proportional to the equity interest and substantially all the entity's
activities are conducted for an investor with few voting rights. As further
discussed in Note 11, trust entities that had previously been consolidated
with the Company are now reported separately.
Newly Issued But Not Yet Effective Accounting Standards:
No 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.
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.
55
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)
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)
============ ============ ============
2002
- ----
U.S. Treasury securities $ 5,338 $ 195 $ 0
U.S. Government agencies 11,946 575 0
Mortgage-backed securities 222,036 5,600 (183)
State and municipal securities 34,785 1,275 (24)
------------ ------------ ------------
Total . . . . . . . . . . . . . .$ 274,105 $ 7,645 $ (207)
============ ============ ============
Information regarding the fair value of available for sale debt
securities by maturity as of December 31, 2003 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 $ 101
Due after one year through five years 12,664
Due after five years through ten years 9,403
Due after ten years 48,057
------------
70,225
Mortgage-backed securities 211,142
------------
Total debt securities . . . . . . . . . . . . . . . . . . . . .$ 281,367
============
Security proceeds, gross gains and gross losses for 2003, 2002 and
2001 were as follows:
2003 2002 2001
----------- ----------- -----------
(in thousands)
Sales and calls of securities available
for sale
Proceeds $ 30,154 $ 10,467 $ 20,805
Gross gains 508 77 310
Gross losses 8 22 190
56
NOTE 2 - SECURITIES (continued)
Securities with carrying values of $197.8 million and $206.0 million
were pledged as of December 31, 2003 and 2002, 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
2003 and 2002, 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, 2003 is presented below. The table distributes the securities
between those with unrealized losses for less than twelve months and those
with unrealized losses over more than 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)
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
will 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 maturity.
NOTE 3 - LOANS
Total loans outstanding as of year-end consisted of the following:
2003 2002
------------ ------------
(in thousands)
Commercial and industrial loans $ 593,194 $ 556,800
Agri-business and agricultural loans 82,262 68,137
Real estate mortgage loans 40,118 44,644
Real estate construction loans 3,932 2,540
Installment loans and credit cards 151,376 150,555
------------ ------------
Total loans . . . . . . . . . . . . . . . . . . .$ 870,882 $ 822,676
============ ============
57
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for 2003, 2002 and 2001:
2003 2002 2001
------------ ------------ ------------
(in thousands)
Balance, January 1, $ 9,533 $ 7,946 $ 7,124
Provision for loan losses 2,254 3,056 2,225
Loans charged-off (1,774) (1,875) (1,540)
Recoveries 221 406 137
------------ ------------ ------------
Net loans charged-off (1,553) (1,469) (1,403)
------------ ------------ ------------
Balance December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 10,234 $ 9,533 $ 7,946
============ ============ ============
Nonaccrual loans $ 553 $ 4,216 $ 2,234
Interest not recorded on nonaccrual loans 183 208 142
Loans renegotiated as troubled debt restructuring 0 0 0
Interest income recognized on troubled debt restructuring 0 0 70
Loans past due 90 days and still accruing 3,191 3,387 264
Impaired loans were as follows:
2003 2002
------------ ------------
(in thousands)
Year-end loans with no allocated allowance for loan losses $ 0 $ 0
Year-end loans with allocated allowance for loan losses 3,039 7,298
------------ ------------
$ 3,039 7,298
============ ============
Amount of the allowance for loan losses allocated $ 456 $ 1,298
2003 2002 2001
------------ ------------ ------------
(in thousands)
Average of impaired loans during the year $ 6,320 $ 10,476 $ 2,136
Interest income recognized during impairment 226 562 340
Cash-basis interest income recognized 225 555 42
The Company is not committed to lend additional funds to debtors
whose loans have been modified. The 2003 and 2002 impaired loan totals
included $127,000 and $4.1 million which were also included in the total for
nonaccrual loans. Total impaired loans decreased by $4.3 million to $3.0
million at December 31, 2003 from $7.3 million at December 31, 2002. The
decreases in nonperforming loans and impaired loans resulted from payments on
six commercial loans, including one commercial loan of $1.7 million. The loans
delinquent 90 days or more total includes one commercial credit for $2.9
million and $3.2 million in 2003 and 2002. 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.
58
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 $231.8 million and $168.7 million at December 31, 2003 and
2002. Net loan servicing income/(loss) was ($166,000), ($48,000) and $82,000
for 2003, 2002 and 2001. Information on loan servicing rights follows:
Loan servicing rights: 2003 2002 2001
------------ ------------ ------------
(in thousands)
Beginning of year $ 1,677 $ 1,507 $ 1,419
Originations 1,094 622 395
Amortization (671) (452) (307)
------------ ------------ ------------
End of year . . . . . . . . . . . .$ 2,100 $ 1,677 $ 1,507
============ ============ ============
Valuation allowance: 2003 2002 2001
------------ ------------ ------------
(in thousands)
Beginning of year $ 722 $ 388 $ 0
Additions expensed 421 913 705
Reductions credited to expense (645) (579) (317)
------------ ------------ ------------
End of year . . . . . . . . . . . .$ 498 $ 722 $ 388
============ ============ ============
NOTE 6 - LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation
were as follows at December 31:
2003 2002
------------ ------------
(in thousands)
Land $ 8,456 $ 8,053
Premises 21,004 20,357
Equipment 14,830 12,622
------------ ------------
Total cost . . . . . . . . . . . . . . . . . . . . 44,290 41,032
Less accumulated depreciation 18,133 16,264
------------ ------------
Land, premises and equipment, net $ 26,157 $ 24,768
============ ============
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of goodwill during the year was as
follows:
2003 2002
------------ ------------
(in thousands)
Beginning of year $ 4,970 $ 0
Reclassified from unidentifiable intangible assets 0 4,970
------------ ------------
End of year $ 4,970 $ 4,970
============ ============
59
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
Goodwill is no longer amortized starting in 2002. The effect of not amortizing goodwill is summarized as follows:
2003 2002 2001
------------ ------------ ------------
(in thousands)
Reported net income $ 13,865 $ 12,366 $ 10,113
Add back: goodwill amortization, net of tax 0 0 367
------------ ------------ ------------
Adjusted net income $ 13,865 $ 12,366 $ 10,480
============ ============ ============
Basic earnings per share:
Reported net income $ 2.38 $ 2.13 $ 1.74
Goodwill amortization, net of tax .00 .00 .06
------------ ------------ ------------
Adjusted net income $ 2.38 $ 2.13 $ 1.80
============ ============ ============
Diluted earnings per share:
Reported net income $ 2.31 $ 2.08 $ 1.73
Goodwill amortization, net of tax .00 .00 .06
------------ ------------ ------------
Adjusted net income $ 2.31 $ 2.08 $ 1.79
============ ============ ============
Acquired Intangible Assets
As of December 31, 2003 As of December 31, 2002
------------------------------ ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- -------------- -------------- --------------
Amortized intangible assets
Core deposit $ 2,032 $ 1,139 $ 2,032 $ 990
Trust deposit relationships 572 5 0 0
-------------- -------------- -------------- --------------
Total $ 2,604 $ 1,144 $ 2,032 $ 990
============== ============== ============== ==============
Aggregate amortization expense was $154,000, $149,000 and $193,000
for 2003, 2002 and 2001.
Estimated amortization expense for each of the next five years:
Amount
------------
(in thousands)
$ 214
2005 212
2006 209
2007 206
2008 206
60
NOTE 8 - DEPOSITS
The aggregate amount of time deposits, each with a minimum
denomination of $100,000, was approximately $106.4 million and $225.0 million
at December 31, 2003 and 2002.
At December 31, 2003, the scheduled maturities of time deposits were
as follows:
Amount
------------
(in thousands)
Maturing in 2004 $ 175,302
Maturing in 2005 71,067
Maturing in 2006 15,286
Maturing in 2007 28,526
Maturing in 2008 9,372
Thereafter 950
------------
Total time deposits $ 300,503
============
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 2003 and 2002 is as follows:
2003 2002
------------ ------------
(in thousands)
Average daily balance during the year $ 97,808 $ 116,214
Average interest rate during the year 0.83% 1.49%
Maximum month-end balance during the year $ 108,270 $ 139,857
Securities underlying the agreements at year-end
Fair value $ 115,708 $ 161,063
Collateral at Fair Values
Weighted ----------------------------
Average Mortgage-
Repurchase Interest U.S. Treasury backed
Term Liability Rate Securities Securities
- ------------------------- ------------ ------------ ------------- -------------
(in thousands) (in thousands)
On demand $ 102,197 0.79% $ 0 $ 114,235
1 to 30 days 0 0.00% 0 0
31 to 90 days 0 0.00% 0 0
Over 90 days 404 0.75% 0 1,473
------------ ------------ ------------- -------------
Total $ 102,601 0.79% $ 0 $ 115,708
============ ============ ============= =============
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, 2003, 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.
61
NOTE 10 - BORROWINGS
Long-term borrowings at December 31 consisted of:
2003 2002
------------ ------------
(in thousands)
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 $ 0 $ 1,300
Federal Home Loan Bank of Indianapolis Notes, 3.76%, Due December 29, 2003 0 10,000
Federal Home Loan Bank of Indianapolis Notes, 3.96%, Due April 9, 2004 20,000 20,000
Federal Home Loan Bank of Indianapolis Notes, 2.36%, Due December 29, 2005 10,000 0
Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due January 15, 2018 47 48
------------ ------------
Total $ 30,047 $ 31,348
============ ============
All notes require monthly interest payments and were secured by
residential real estate loans and securities with a carrying value of $86.6
million at December 31, 2003. At December 31, 2003, the Company owned $4.3
million of Federal Home Loan Bank (FHLB) stock, which also secures debts to
the FHLB.
In addition to the long-term borrowings, the Company had $55 million
and $26 million in fixed rate notes with the FHLB at December 31, 2003 and
2002. For the year-end 2003, these notes mature at various times between
January 30, 2004 and July 20, 2004. These notes are classified as short-term
borrowings in the financial statements. The Company is authorized to borrow up
to $100 million from the FHLB.
Long-term borrowings mature over each of the next five years as
follows:
(in thousands)
------------
2004 $ 20,000
2005 10,000
2006 0
2007 0
2008 0
62
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 at December 31, 2003 was 4.205%. 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 Statuttory 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.
63
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. The Company also maintains a
Supplemental Executive Retirement Plan (SERP) for select officers that was
established as a funded, non-qualified deferred compensation plan.
Information as to the Company's plans at December 31 is as follows:
Pension Benefits SERP Benefits
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Change in benefit obligation:
Beginning benefit obligation $ 2,279 $ 2,135 $ 1,412 $ 1,354
Interest cost 155 152 90 97
Actuarial loss 306 33 0 12
Change in discount rate 269 213 94 83
Benefits paid (367) (254) (139) (134)
------------ ------------ ------------ ------------
Ending benefit obligation . . . . . . . . . . . . . . . . . . . . . . . .$ 2,642 $ 2,279 $ 1,457 $ 1,412
Change in plan assets (primarily money market funds and equity and fixed
income investments), at fair value:
Beginning plan assets 1,501 1,920 934 1,069
Actual return (loss) 131 (165) 83 (77)
Employer contribution 0 0 130 76
Benefits paid (367) (254) (139) (134)
------------ ------------ ------------ ------------
Ending plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,265 1,501 1,008 934
Funded status (1,377) (778) (449) (478)
Unrecognized net actuarial (gain) loss 1,876 1,319 814 738
------------ ------------ ------------ ------------
Prepaid benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 499 $ 541 $ 365 $ 260
============ ============ ============ ============
Amounts recognized in the consolidated balance
sheets consist of: Pension Benefits SERP Benefits
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Prepaid benefit cost $ 499 $ 541 $ 365 $ 260
Accumulated other comprehensive income (1,876) (1,319) 0 0
------------ ------------ ------------ ------------
Net amount recognized $ (1,377) $ (778) $ 365 $ 260
============ ============ ============ ============
December 31, December 31,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Projected benefit obligation $ 2,642 $ 2,279 $ 1,457 $ 1,412
Accumulated benefit obligation 2,642 2,279 1,457 1,412
Fair value of plan assets 1,265 1,501 1,008 934
64
NOTE 12 - EMPLOYEE BENEFIT PLANS (continued)
Net pension expense includes the following:
Pension Benefits SERP Benefits
---------------------------------------- ----------------------------------------
2003 2002 2001 2003 2002 2001
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands)
Service cost $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest cost 155 152 164 91 97 101
Expected return on plan assets (141) (184) (249) (95) (104) (120)
Recognized net actuarial (gain) loss 28 7 0 29 12 6
------------ ------------ ------------ ------------ ------------ ------------
Net pension expense (benefit) $ 42 $ (25) $ (85) $ 25 $ 5 $ (13)
============ ============ ============ ============ ============ ============
Additional Information: Pension Benefits SERP Benefits
---------------------------------------- ----------------------------------------
2003 2002 2001 2003 2002 2001
------------ ------------ ------------ ------------ ------------ ------------
Increase in minimum liability included in (in thousands) (in thousands)
other comprehensive income $ 557 $ 588 731 $ 0 $ 0 $ 0
The following assumptions were used in
calculating the net benefit obligation:
Weighted average discount rate 6.75% 7.50% 8.00% 6.75% 7.50% 8.00%
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 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
Expected long-term rate of return 8.25% 8.50% 10.00% 8.25% 8.50% 10.00%
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, 2003,
and 2002, by asset category are as follows:
Pension Plan Assets SERP Plan Assets
at September 30, at September 30,
-------------------------- --------------------------
Asset Category 2003 2002 2003 2002
- -------------- ------------ ------------ ------------ ------------
Equity securities 74% 63% 59% 52%
Debt Securities 23% 36% 36% 42%
Other 3% 1% 5% 6%
------------ ------------ ------------ ------------
Total 100% 100% 100% 100%
============ =========== ============ ============
As of the measurement date, the investment objective was to realize a
rate of return on the plan assets matching that of the actuarial assumption.
The allowable asset allocation parameters were as follows: Equities: 50%-75%
and Fixed Income: 25%-50%. The equity component is managed by an outside
portfolio manager and consists of a diversified portfolio of common stocks.
The fixed income component is managed internally by the Company's Trust
Department and consists of Treasury securities and corporate bonds. The
Company has an internal Pension Administration Committee consisting of the
Human Resources Director, Chief Financial Officer, Manager of Retirement Plan
Services, Senior Personal Trust Officer and Senior Trust Investment Officer.
During 2004, the Committee will meet to review investment performance and to
prepare a formal investment policy.
65
NOTE 12 - EMPLOYEE BENEFIT PLANS (continued)
Contributions
The Company expects to contribute $299,000 to its pension plan and
$119,000 to its SERP plan in 2004.
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 rate of return on stockholders' equity as of January 1st of each year. The
expense recognized was $732,000, $620,000 and $551,000 in 2003, 2002 and 2001.
Under employment agreements with certain executives, certain events
leading to separation from the Company could result in cash payments totaling
$2.2 million as of December 31, 2003. On December 31, 2003, no amounts were
accrued on these contingent obligations.
NOTE 13 - OTHER INCOME AND EXPENSE
Other income for the years ended December 31, was as follows:
2003 2002 2001
------------ ------------ ------------
(in thousands)
Loan, insurance and service fees $ 2,296 $ 1,704 $ 1,692
Merchant card fee income 1,747 1,594 1,305
Miscellaneous 1,636 428 478
------------ ------------ ------------
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 5,679 $ 3,726 $ 3,475
============ ============ ============
Other expense for the years ended December 31, was as follows:
2003 2002 2001
------------ ------------ ------------
(in thousands)
Data processing fees and supplies $ 2,433 $ 2,226 $ 2,212
Corporate and business development 1,003 985 894
Advertising 706 681 669
Office supplies 591 513 557
Telephone and postage 1,137 1,312 1,265
Regulatory fees and FDIC insurance 242 236 237
Professional fees 1,275 995 994
Credit card interchange 955 900 757
Amortization of goodwill 0 0 608
Amortization of other intangible assets 154 149 190
Miscellaneous 3,568 3,543 3,269
------------ ------------ ------------
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 12,064 $ 11,540 $ 11,652
============ ============ ============
66
NOTE 14 - INCOME TAXES
Income tax expense for the years ended December 31, consisted of the following:
2003 2002 2001
------------ ------------ ------------
(in thousands)
Current federal $ 5,121 $ 6,936 $ 5,105
Deferred federal 816 (1,134) (630)
Current state 773 909 445
Deferred state 118 (191) (176)
------------ ------------ ------------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 6,828 $ 6,520 $ 4,744
============ ============ ============
Income tax expense included $203,000, $20,000 and $41,000 applicable
to security transactions for 2003, 2002 and 2001. The differences between
financial statement tax expense and amounts computed by applying the statutory
federal income tax rate of 35%, 35% and 34% for 2003, 2002, and 2001 to income
before income taxes were as follows:
2003 2002 2001
------------ ------------ ------------
(in thousands)
Income taxes at statutory federal rate $ 7,243 $ 6,610 $ 5,051
Increase (decrease) in taxes resulting from:
Tax exempt income (813) (621) (643)
Nondeductible expense 176 136 155
State income tax, net of federal tax effect 579 467 178
Net operating loss, Gateway (30) (30) (29)
Tax credits (73) (48) (48)
Bank owned life insurance (242) (24) 0
Other (12) 30 80
------------ ------------ ------------
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 6,828 $ 6,520 $ 4,744
============ ============ ============
67
NOTE 14 - INCOME TAXES (continued)
The net deferred tax asset recorded in the consolidated balance sheets at December 31, consisted of the following:
2003 2002
-------------------------- --------------------------
Federal State Federal State
------------ ------------ ------------ ------------
(in thousands)
Deferred tax assets
Bad debts $ 3,582 $ 801 $ 3,406 $ 768
Pension and deferred compensation liability 373 88 489 110
Intangible assets 0 0 28 6
Net operating loss carryforward 208 0 237 0
Other 107 21 166 45
------------ ------------ ------------ ------------
4,270 910 4,326 929
Deferred tax liabilities
Accretion 28 6 21 5
Depreciation 660 77 173 47
Loan servicing rights 561 125 334 75
State taxes 215 0 257 0
Leases 186 42 242 55
Deferred loan fees 12 3 56 13
Intangible assets 181 41 0 0
------------ ------------ ------------ ------------
1,843 294 1,083 195
Valuation allowance 0 0 0 0
------------ ------------ ------------ ------------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 2,427 $ 616 $ 3,243 $ 734
============ ============ ============ ============
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 $91,000 and $(2.7)
million for 2003 and 2002. The deferred income tax asset allocated to the
minimum pension liability included in equity was $761,000 and $535,000 for
2003 and 2002.
NOTE 15 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates as of
December 31, 2003 and 2002 were as follows:
2003 2002
------------ ------------
(in thousands)
Beginning balance $ 39,931 $ 39,075
New loans and advances 68,044 58,186
Effect of changes in related parties 5,135 32
Repayments (68,705 (57,362)
------------ ------------
Ending balance . . . . . . . . . . . . . . . . . . .$ 44,405 $ 39,931
============ ============
Deposits from principal officers, directors, and their affiliates at
year-end 2003 and 2002 were $2.0 million and $5.0 million. In addition, the
amount owed directors for fees under the deferred directors' plan as of
December 31, 2003 and 2002 was $994,000 and $1.3 million. The related expense
for the deferred directors' plan as of December 31, 2003, 2002 and 2001 was
$235,000, $487,000 and $399,000.
68
NOTE 16 - STOCK OPTIONS
The stock option plan requires that the exercise price for the options is the market price at 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:
2003 2002 2001
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at beginning of the year 495,545 $ 17.26 550,345 $ 17.27 454,770 $ 18.79
Granted 64,790 34.21 2,000 23.88 147,375 13.81
Exercised 20,760 23.33 0 0.00 0 0.00
Forfeited 18,100 17.51 56,800 17.53 51,800 20.80
------------ ------------ ------------
Outstanding at end of the year . . . . . . . . 521,475 $ 19.12 495,545 $ 17.26 550,345 $ 17.27
============ ============ ============
Options exercisable at end of the year 107,575 $ 23.15 3,600 $ 18.35 42,000 $ 17.55
Weighted-average fair value of options
granted during the year $ 11.06 $ 10.99 $ 6.01
Options outstanding at year-end 2003 were as follows:
Exercisable
Outstanding --------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Number Life Price Number Price
------------ ------------ ------------ ------------ ------------
Range of exercise prices
$11.20-$14.00 198,225 6.6 $ 13.57 7,000 $ 13.55
$14.01-$16.80 92,800 6.2 15.10 2,800 15.53
$16.81-$19.60 73,535 4.7 19.31 7,150 19.44
$19.61-$22.40 1,000 8.3 20.76 0 0.00
$22.41-$25.20 83,700 4.1 24.04 82,700 24.04
$25.21-$28.00 8,425 4.0 27.82 7,425 27.94
$28.01-$35.00 63,790 9.9 34.37 500 34.37
------------ ------------
Outstanding at year-end . . . . . . . . . . . . . . . . . . . 521,475 6.2 $ 19.12 107,575 $ 23.15
============ ============
69
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, 2003 and 2002, that the Company and Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2003, 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
------------ ------------ ------------ ------------ ------------ ------------
(in thousands)
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%
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated $ 103,368 11.08% $ 74,647 8.00% $ 93,309 10.00%
Bank $ 101,510 10.91% $ 74,433 8.00% $ 93,041 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 93,836 10.06% $ 37,323 4.00% $ 55,985 6.00%
Bank $ 91,977 9.89% $ 37,216 4.00% $ 55,825 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 93,836 7.89% $ 47,562 4.00% $ 59,453 5.00%
Bank $ 91,977 7.75% $ 47,463 4.00% $ 59,329 5.00%
70
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, 2003, approximately $19.8 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, 2003. 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,
2003 and 2002. Items, which are not financial instruments, are not included.
2003 2002
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
(in thousands)
Financial Assets:
Cash and cash equivalents $ 57,441 $ 57,441 $ 87,149 $ 87,149
Real estate mortgages held for sale 3,431 3,431 10,395 10,395
Securities available for sale 281,367 281,367 274,105 274,105
Loans, net 860,648 864,493 813,143 817,082
Federal Home Loan Bank stock 4,252 4,252 3,568 3,568
Accrued interest receivable 4,997 4,997 4,985 4,985
Financial Liabilities:
Certificates of deposit (300,503) (305,003) (436,455) (442,948)
All other deposits (625,888) (625,888) (476,870) (476,870)
Securities sold under agreements to repurchase (102,601) (102,601) (124,968) (124,968)
Other short-term borrowings (82,160) (82,184) (60,000) (60,000)
Long-term borrowings (30,047) (30,304) (31,348) (32,248)
Subordinated debentures (30,928) (30,974) (20,619) (21,774)
Accrued interest payable (2,376) (2,376) (3,197) (3,197)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 2003 and 2002. The
estimated fair value for cash, 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, 2003 and 2002,
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, 2003 and 2002, 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.
71
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, 2003 and 2002, 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, 2003 and 2002 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, 2003 and 2002, were as follows:
2003 2002
-------------------------- --------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------------ ------------ ------------ ------------
(in thousands)
Commercial loan lines of credit $ 4,308 $ 222,755 $ 12,643 $ 208,383
Commercial loan letters of credit 0 11,424 0 8,365
Real estate mortgage loans 5,405 1,392 18,631 479
Real estate construction mortgage loans 535 2,605 0 2,117
Credit card open-ended revolving lines 8,560 1,582 7,477 388
Home equity mortgage open-ended revolving lines 0 68,030 0 54,069
Consumer loan open-ended revolving lines 0 3,901 0 3,649
------------ ------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 18,808 $ 311,689 $ 38,751 $ 277,450
============ ============ ============ ============
At December 31, 2003 and 2002, the range of interest rates for
commercial loan commitments with a fixed rate was 2.00% to 10.75% and 2.00% to
11.00%. The range of interest rates for commercial loan commitments with
variable rates was 2.67% to 9.00% and 3.00% to 10.25% at December 31, 2003 and
2002. The index on variable rate commercial loan commitments is principally
the Company's base rate, which is the national prime rate. The range of
interest rates for mortgage loan commitments with a fixed rate was 4.88% to
7.25% at December 31, 2003 and 2002. The range of interest rates for mortgage
loan commitments with a variable rate was 5.00% to 7.00% and 6.00% to 6.50% at
December 31, 2003 and 2002. At December 31, 2003 and 2002, the range of
interest rates for fixed rate credit card commitments was 14.95% to 17.95%. At
December 31, 2003 and 2002 the rate on variable credit card commitments was
7.00% and 7.25%. The range of interest rates for open-ended revolving line
commitments with a variable rate was 2.99% to 15.00% and 3.99% to 15.00% at
December 31, 2003 and 2002.
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.
72
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,
--------------------------
2003 2002
------------ ------------
(in thousands)
ASSETS
Deposits with Lake City Bank $ 861 $ 1,443
Investments in banking subsidiary 117,990 102,091
Investments in Lakeland Statutory Trust II 928 619
Other assets 2,394 2,677
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 122,173 $ 106,830
============ ============
LIABILITIES
Dividends payable and other liabilities $ 1,223 $ 2,331
Subordinated debt 30,928 20,619
STOCKHOLDERS' EQUITY 90,022 83,880
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 122,173 $ 106,830
============ ============
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
Dividends from Lake City Bank, Lakeland Statutory Trust II
and Lakeland Capital Trust $ 3,980 $ 5,730 $ 5,184
Interest on deposits and repurchase agreements, Lake City Bank 1 4 7
Equity in undistributed income of subsidiaries 11,648 8,129 6,364
Interest expense on subordinated debt 1,725 1,856 1,856
Miscellaneous expense 1,264 620 490
------------ ------------ ------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,640 11,387 9,209
Income tax benefit 1,225 979 904
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 13,865 $ 12,366 $ 10,113
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
Cash flows from operating activities:
Net income $ 13,865 $ 12,366 $ 10,113
Adjustments to net cash from operating activities
Equity in undistributed income of subsidiaries (11,648) (8,129) (6,364)
Other changes 510 (101) 56
------------ ------------ ------------
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . 2,727 4,136 3,805
Cash flows from investing activities (9,779) 0 0
Cash flows from financing activities 6,470 (4,006) (3,594)
------------ ------------ ------------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . (582) 130 211
Cash and cash equivalents at beginning of the year 1,443 1,313 1,102
------------ ------------ ------------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . .$ 861 $ 1,443 $ 1,313
============ ============ ============
73
NOTE 21 - EARNINGS PER SHARE
Following are the factors used in the earnings per share computations:
2003 2002 2001
------------ ------------ ------------
Basic earnings per common share
Net income $ 13,865,000 $ 12,366,000 $ 10,113,000
Weighted-average common shares outstanding 5,819,916 5,813,984 5,813,984
Basic earnings per common share $ 2.38 $ 2.13 $ 1.74
Diluted earnings per common share
Net income $ 13,865,000 $ 12,366,000 $ 10,113,000
Weighted-average common shares outstanding for
basic earnings per common share 5,819,916 5,813,984 5,813,984
Add: Dilutive effect of assumed exercises of stock options 181,533 144,402 27,212
Average shares and dilutive potential common shares 6,001,449 5,958,386 5,841,196
Diluted earnings per common share $ 2.31 $ 2.08 $ 1.73
Stock options for 63,790 and 93,460 shares of common stock were not considered in computing diluted earnings per common
share for 2003 and 2002 because they were antidilutive.
74
NOTE 22 - SELECTED QUARTERLY DATA (UNAUDITED)
(in thousands except per share data)
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
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
============ ============ ============ ============
2002 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Interest income 15,773 $ 16,216 $ 16,281 $ 16,065
Interest expense 5,486 5,598 5,623 5,851
------------ ------------ ------------ ------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 10,295 $ 10,625 $ 10,665 $ 10,221
Provision for loan losses 766 1,041 747 502
Noninterest income 4,281 3,649 3,574 3,359
Noninterest expense 8,716 8,600 8,806 8,576
Income tax expense 1,754 1,605 1,619 1,542
------------ ------------ ------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,332 $ 3,021 $ 3,060 $ 2,953
============ ============ ============ ============
Basic earnings per common share $ 0.57 $ 0.52 $ 0.53 $ 0.51
============ ============ ============ ============
Diluted earnings per common share $ 0.57 $ 0.50 $ 0.51 $ 0.50
============ ============ ============ ============
Data for the first 3 quarters may not necessarily agree with that issued in the Company's quarterly filings for those
quarters. On October 1,2002, the Company adopted new accounting guidance, which resulted in the reversal of 2002 goodwill
amortization. Prior quarters have been restated to reflect this reversal. Below is a reconciliation of the previously reported Net
Income and EPS to the restated amounts above.
75
NOTE 22 - SELECTED QUARTERLY DATA (UNAUDITED)
(in thousands except per share data) (continued)
2002 3rd 2nd 1st
Quarter Quarter Quarter
------------ ------------ ------------
Reported net income $ 2,953 $ 2,993 $ 2,885
Net goodwill amortization reversed, net of tax 68 67 68
------------ ------------ ------------
Adjusted net income $ 3,021 $ 3,060 $ 2,953
============ ============ ============
Reported basic earnings per common share $ .51 $ .51 $ .50
Net goodwill amortization .01 .02 .01
------------ ------------ ------------
Adjusted basic earnings per common share $ .52 $ .53 $ .51
============ ============ ============
Reported diluted earnings per common share $ .49 $ .50 $ .49
Net goodwill amortization .01 .01 .01
------------ ------------ ------------
Adjusted diluted earnings per common share $ .50 $ .51 $ .50
============ ============ ============
NOTE 23 - BRANCH DIVESTITURES
On September 21, 2001, the Company sold its Greentown, Logansport,
Peru, Roann and Wabash, Indiana offices. The Company paid $39.8 million to
settle the net liabilities assumed by the buyer and recorded a gain of
$753,000.
NOTE 24 - 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. 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
76
REPORT OF INDEPENDENT AUDITORS
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,
2003 and 2002, 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, 2003. 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 auditing standards
generally accepted in the United States of America. 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, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
Crowe Chizek and Company LLC
South Bend, Indiana
January 9, 2004
77
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's
consolidated financial statements and related information. Management believes
that the consolidated financial statements fairly reflect the form and
substance of transactions and that the financial statements reasonably present
the Company's financial position and results of operations and were prepared
in conformity with accounting principles generally accepted in the United
States of America. Management also has included in the Company's financial
statements amounts that are based on estimates and judgments, which it
believes, are reasonable under the circumstances.
The Company maintains a system of internal controls designed to
provide reasonable assurance that all assets are safeguarded, financial
records are reliable for preparing consolidated financial statements and the
Company complies with laws and regulations relating to safety and soundness
which are designated by the FDIC and other appropriate federal banking
agencies. The selection and training of qualified personnel and the
establishment and communication of accounting and administrative policies and
procedures are elements of this control system. The effectiveness of the
internal control system is monitored by a program of internal audit and by
independent certified public accountants (independent auditors). Management
recognizes that the cost of a system of internal controls should not exceed
the benefits derived and that there are inherent limitations to be considered
in the potential effectiveness of any system. Management believes the
Company's system provides the appropriate balance between costs of controls
and the related benefits.
The independent auditors have audited the Company's consolidated
financial statements in accordance with auditing standards generally accepted
in the United States of America and provide an objective, independent review
of the fairness of the reported operating results and financial position. The
board of directors of the Company has an audit review committee composed of
six non-management directors. The committee meets periodically with the
internal auditors and the independent auditors.
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
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, 2003. 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. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in the definitive Proxy Statement, dated as
of March 5, 2004, 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 5, 2004, is incorporated herein by reference in response to this
item. The sections in the Proxy Statement marked "Report of the Compensation
Committee on Executive Compensation", "Stock Price Performance" and "Audit
Committee Report" are furnished for the information of the Commission and are
not deemed to be "filed" as part of the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the definitive Proxy Statement, dated as
of March 5, 2004, is incorporated herein by reference in response to this
item.
Equity Compensation Plan Information
The table below sets forth the following information as of December
31, 2003 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.
79
==================================================================================================================================
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............... 521,475 19.12 57,765
- ----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders...... 0 0.00 0
- ----------------------------------------------------------------------------------------------------------------------------------
Total............................. 521,475 19.12 57,765
==================================================================================================================================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the definitive Proxy Statement, dated as
of March 5, 2004, is incorporated herein by reference in response to this
item.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information appearing in the definitive proxy statement, dated as
of March 5, 2004, is incorporated herein by reference in response to this
item.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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 Attached hereto
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 Attached hereto
Issuance
10.4 Lakeland Financial Corporation 401(k) Exhibit 10.1 to the Company's Form S-8
Plan filed with the Commission on October
23, 2000
10.5 Amended and Restated Lakeland Financial Exhibit 10.5 to the Company's Form
Corporation Director's Fee Deferral Plan 10-K for the fiscal year ended December
31, 2002
21.0 Subsidiaries Attached hereto
23.1 Report of Independent Auditors Item 8 herein
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 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
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(b) Reports on Form 8-K
A report on Form 8-K was filed on October 15, 2003 under
Item 12 which reported the Company's third quarter financial information
in the form of a press release.
A report on Form 8-K was filed on January 15, 2004 under
Item 12 which reported the Company's fourth quarter and fiscal year
financial information in the form of a press release.
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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 25, 2004 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 25, 2004
and Director
/s/ David M. Findlay
David M. Findlay Principal Financial Officer February 25, 2004
/s/ Teresa A. Bartman
Teresa A. Bartman Principal Accounting Officer February 25, 2004
Robert E. Bartels, Jr Director February 25, 2004
/s/ L. Craig Fulmer
L. Craig Fulmer Director February 25, 2004
/s/ Allan J. Ludwig
Allan J. Ludwig Director February 25, 2004
/s/ Charles E. Niemier
Charles E. Niemier Director February 25, 2004
/s/ Emily E. Pichon
Emily E. Pichon Director February 25, 2004
/s/ Richard L. Pletcher
Richard L. Pletcher Director February 25, 2004
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Steven D. Ross Director February 25, 2004
Donald B. Steininger Director February 25, 2004
Terry L. Tucker Director February 25, 2004
M. Scott Welch Director February 25, 2004
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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.
85