lfc200910k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) of the
Securities
Exchange Act of 1934
For the
fiscal year ended December 31, 2009
Commission
file number 0-11487
LAKELAND
FINANCIAL CORPORATION
Indiana
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35-1559596
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(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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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:
Common
Stock, no par value
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NASDAQ
Global Select Market
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(Title
of class)
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(Name
of Each Exchange on which
Registered)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes __No X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes __No X
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes __ No __
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ]
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Accelerated
filer [X]
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Non-accelerated
filer [ ]
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Smaller
reporting
company [ ]
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act) Yes __ No X
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 Global Select Market on June 30, 2009, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately
$219,686,892.
Number of
shares of common stock outstanding at February 24, 2010: 16,096,861
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
- Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held on April 13, 2010 are incorporated by reference into Part III
hereof.
Annual
Report on Form 10-K
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Page
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PART
I
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Item
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Item
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Item
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37
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Item
2.
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Item
3.
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PART
II
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Item
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Item
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Item
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Item
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Item
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Item
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Item
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PART
III
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Item
10.
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Item
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Item
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Item
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Item
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PART
IV
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Item
15.
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106
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S1
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PART
I
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 (the “Bank”), an Indiana state bank
headquartered in Warsaw, Indiana. Also included in the consolidated financial
statements prior to December 27, 2006 is LCB Investments, Limited, a
wholly-owned subsidiary of Lake City Bank, which was a Bermuda corporation that
managed a portion of the Bank’s investment portfolio. On December 27, 2006, all
securities were transferred to Lake City Bank from LCB Investments, Limited, and
LCB Investments, Limited was dissolved. On December 18, 2006, LCB Investments
II, Inc. was formed as a wholly-owned subsidiary of Lake City Bank incorporated
in Nevada and it began managing a portion of the Bank’s investment portfolio in
January 2007. On December 21, 2006, LCB Funding, Inc., a real estate investment
trust, incorporated in Maryland, was formed as a wholly-owned subsidiary of LCB
Investments II. 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 recognizes a wholly-owned subsidiary, LCB Investments II, 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, real estate and agricultural lending,
direct and indirect consumer lending, commercial and residential real estate
mortgage lending, retail and merchant credit card services, corporate treasury
management services, retirement services, bond administration, safe deposit box
service and trust and brokerage services.
The
Bank’s main banking office is located at 202 East Center Street, Warsaw,
Indiana. As of December 31, 2009, the Bank had 43 offices in twelve counties
throughout Northern Indiana, as well as a loan production office in
Indianapolis.
Bank’s Business. 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 business strategy is simply
focused on maintaining our traditional community banking approach while
concurrently leveraging the strength and size of our balance sheet to
effectively compete with larger regional and national competitors. We are
focused on serving clients in the state of Indiana, with the majority of our
business in Northern Indiana. While our strategy encompasses all phases of
traditional community banking, including consumer lending and wealth advisory
and trust services, we focus on building expansive commercial relationships and
developing retail and commercial deposit gathering strategies. Key components of
our strategy include: relationship-based services and commercial
focused client service. The interest rates for both deposits and loans, as well
as the range of services provided, are consistent with those of most 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 and the Bank’s reputation
throughout the region. The Bank believes that its convenience, quality service
and high-touch, responsive approach to banking enhances its ability to compete
favorably in attracting and retaining individual and business customers. The
Bank actively solicits deposit-related customers and competes for customers by
offering personal attention, professional service and competitive interest
rates.
Market Overview. While the
Company operates in thirteen counties, it currently defines operations by four
primary geographical markets. They are the South Region, which includes
Kosciusko County and portions of contiguous counties; the North Region, which
includes portions of Elkhart and St. Joseph Counties; the Central Region, which
includes portions of Elkhart County and contiguous counties; and the East
Region, which includes Allen and contiguous counties. The South Region includes
the city of Warsaw, which is the location of the Company’s headquarters. The
Company has had a presence in this region since 1872. It has been in the North
and Central Regions, which includes the cities of Elkhart, South Bend and
Goshen, since 1990. The Company opened its first office in the East Region,
which includes the cities of Fort Wayne and Auburn, in 1999. The Company also
operates a loan production office in Indianapolis, which is staffed with
commercial lending officers and was opened in 2006.
The Company believes that these are
well-established and fairly diverse economic regions. The Company has sought to
diversify expansion and industry throughout its markets, which include a mix of
industrial and service companies, with no business or industry concentrations
within individual markets and combined. Furthermore, no single industry or
employer dominates any of the markets. Fort Wayne represents the largest
population center served by the Company’s full-service branch system 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. In addition, the Indianapolis market represents a
substantial future opportunity given its position as the largest metropolitan
market in the state.
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, management 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 commitment to local communities.
When entering 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.
The Company is an Indiana
institution serving Indiana clients. Since 1990, the Company has expanded from
17 offices in four Indiana counties to 43 branches in twelve Indiana counties
and one loan production office. During this period, the Company has grown assets
from $286 million to $2.6 billion today, an increase of 797%. Mergers and
acquisitions have not played a substantive role in this growth as the Company’s
expansion strategy has been driven primarily by organic growth. Since the
decision to expand outside of the four-county home market in 1990, the Company
has targeted growth in larger cities located in the Northern Indiana market. In
1990, the Company began an expansion strategy that the Company believes has
created a well-established presence in the region directly north of the
Company’s home market. This expansion was focused on the cities of Elkhart,
South Bend and Goshen. In 1999, the Company expanded to the east and opened the
first office in the Fort Wayne market. Most recently in 2006, the Company
established a loan production office in Indianapolis.
While this overall expansion
strategy has been guided by a focus on larger communities in Indiana, it has
also been influenced by the competitive landscape in these markets. As the
historically prominent community banks in these markets were acquired, in most
cases by large out-of-state institutions, the Company believes that Lake City
Bank’s traditional community banking strategy became highly relevant and
provides a competitive advantage to the Company.
The Company believes that another
benefit of this geographic expansion strategy into larger population centers is
that the Company now serves a more well-established and diverse economic region.
While the Company operates within a relatively small geographic region of the
state, the Company’s expansion strategy has provided borrower diversification
within a fairly diverse economic region. Further, the geographical
diversification ensures that no single industry or employer dominates the
Company’s markets. In addition, the Indianapolis market represents a substantial
future opportunity given its position as the largest metropolitan market in the
state. Like previous market expansions, the Company believes the Indianapolis
market will provide future business opportunities as the competitive landscape
in the market changes to the Company’s advantage.
The Company also considers
opportunities beyond current markets when the Company’s Board of Directors and
management believes that the opportunity will provide a desirable strategic fit
without posing undue risk. The Company does not currently have any definitive
understandings or agreements for any acquisitions or de novo
expansion.
Products and Services. The
Company is a full-service commercial bank and provides commercial, retail,
wealth advisory and investment management services to its customers. Commercial
products include commercial loans and technology-driven solutions to commercial
customers’ treasury management needs such as internet business banking and
on-line treasury management services in addition to retirement services, bond
administration and health savings account services. Retail banking clients are
provided a wide array of traditional retail banking services, including lending,
deposit and investment services. Retail lending programs are focused on mortgage
loans, home equity lines of credit and traditional retail installment loans,
including indirect automotive financing. The Company provides credit card
services to retail and commercial customers through an outsourced retail card
program and merchant processing activity. The Company also has an Honors Private
Banking program that is positioned to serve the more financially sophisticated
customer with a menu including investment management and trust services,
executive mortgage programs and access to financial planning seminars and
programs. The Company provides wealth advisory clients with traditional personal
and corporate trust and investment services. The Company
also
provides retail brokerage services, including an array of financial and
investment products such as annuities and life insurance.
Competition
The Bank
competes with other local and regional banks in addition to major banks for
large commercial deposit and loan accounts. The Bank is presently subject to an
aggregate maximum loan limit to any single account pursuant to Indiana law of
$42.5 million. The Bank currently enforces an internal limit of $20.0 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, although the Bank typically
does not participate in such arrangements. The Bank is also a member of the
Federal Home Loan Bank of Indianapolis in order to provide additional funding,
as necessary, to support funding requests and to broaden its mortgage lending
and investment activities
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.
Foreign
Operations
The Company has no investments with
any foreign entity other than one nominal demand deposit account, which is
maintained with a Canadian bank in order to facilitate the clearing of checks
drawn on banks located in other countries. There are no foreign
loans.
Employees
At
December 31, 2009, the Company, including its subsidiaries, had 461 full-time
equivalent employees. Benefit programs include a 401(k) plan, group medical
insurance, group life insurance and paid vacations. The Company also maintained
a defined benefit pension plan which, effective April 1, 2000, was frozen and
employees can no longer accrue new benefits under that plan. The Company also
has an equity incentive plan under which stock-based incentives and compensation
may be granted to employees and directors. The Company also has an employee
deferred compensation plan available to certain employees. The Bank is not a
party to any collective bargaining agreement, and employee relations are
considered good.
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. The factors, which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries are detailed in the “Risk Factors” section included under Item 1a.
of Part I of this Form 10-K. In addition to the risk factors described in that
section, there are other factors that may impact any public company, including
ours, which could have a material adverse effect on the operations and future
prospects of the Company and its subsidiaries. These additional factors include,
but are not limited to, the following:
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·
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the
effects of future economic, business and market conditions and changes,
domestic and foreign, including
seasonality;
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·
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governmental
monetary and fiscal policies;
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·
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legislative
and regulatory changes, including changes in banking, securities and tax
laws and regulations and their application by our regulators, and changes
in the scope and cost of Federal Deposit Insurance Corporation, or FDIC,
insurance and other coverages;
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·
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changes
in accounting policies, rules and
practices;
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·
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the
risks of changes in interest rates on the levels, composition and costs of
deposits, loan demand, and the values and liquidity of loan collateral,
securities, and other interest sensitive assets and
liabilities;
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·
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the
failure of assumptions and estimates underlying the establishment of
reserves for possible loan losses and other
estimates;
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·
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changes
in borrowers’ credit risks and payment
behaviors;
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·
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changes
in the availability and cost of credit and capital in the financial
markets;
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·
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changes
in the prices, values and sales volumes of residential and commercial real
estate;
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·
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the
effects of competition from a wide variety of local, regional, national
and other providers of financial, investment and insurance
services;
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·
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the
risks of mergers, acquisitions and divestitures, including, without
limitation, the related time and costs of implementing such transactions,
integrating operations as part of these transactions and possible failures
to achieve expected gains, revenue growth and/or expense savings from such
transactions;
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·
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changes
in technology or products that may be more difficult, costly, or less
effective than anticipated;
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·
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the
effects of war or other conflicts, acts of terrorism or other catastrophic
events, including storms, droughts, tornados and flooding, that may affect
general economic conditions, including agricultural production and demand
and prices for agricultural goods and land used for agricultural purposes,
generally and in our markets;
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·
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the
failure of assumptions and estimates used in our reviews of our loan
portfolio and our analysis of our capital position;
and
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·
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other
factors and risks described under “Risk Factors”
herein.
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These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. For
additional information regarding these and other risks, uncertainties and other
factors, please review the disclosure in this annual report under “Risk
Factors.”
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 Articles of Incorporation, Bylaws, Code of
Conduct and the charters of its various committees of the Board of Directors are
also available on the website.
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. In addition to this generally applicable
regulatory framework, turmoil in the credit markets in recent years has prompted
the enactment of unprecedented legislation that has allowed the U.S. Treasury to
make equity capital available to qualifying financial institutions to help
restore confidence and stability in the U.S. financial markets, which imposes
additional requirements on institutions in which the U.S. Treasury Department
invests.
The
following is a summary of the material elements of the regulatory framework that
currently 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. Additionally, in
response to the global financial crisis that began in 2007, various legislative
and regulatory proposals have been issued addressing, among other things, the
restructuring of the federal bank regulatory system, more stringent regulation
of consumer products such as mortgages and credit cards, and safe and sound
compensation practices. At this time, the Company is unable to determine whether
any of these proposals will be adopted as proposed. As such, the following is
qualified in its entirety by reference to applicable law. Any change in
statutes, regulations or regulatory policies may have a material effect on the
business of the Company and its subsidiaries.
The
Company
General. The
Company, as the sole shareholder of the Bank, is a bank holding company. As a
bank holding company, the Company is registered with, and is subject to
regulation by, the Federal Reserve under the Bank Holding Company Act of 1956,
as amended (the “BHCA”). In accordance with Federal Reserve policy, the Company
is expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances where the Company might not
otherwise do so. Under the BHCA, the Company is subject to periodic examination
by the Federal Reserve. The Company is required to file with the Federal Reserve
periodic reports of the Company’s operations and such additional information
regarding the Company and its subsidiaries as the Federal Reserve may require.
The Company is also subject to regulation by the DFI under Indiana
law.
Acquisitions, Activities and Change
in Control. The primary purpose of a bank holding company is
to control and manage banks. The BHCA generally requires the prior approval of
the Federal Reserve for any merger involving a bank holding company or any
acquisition by a bank holding company of another bank or bank holding company.
Subject to certain conditions (including deposit concentration limits
established by the BHCA), the Federal Reserve may allow a bank holding company
to acquire banks located in any state of the United States. In approving
interstate acquisitions, the Federal Reserve is required to give effect to
applicable state law limitations on the aggregate amount of deposits that may be
held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located
(provided that those limits do not discriminate against out-of-state depository
institutions or their holding companies) and state laws that require that the
target bank have been in existence for a minimum period of time (not to exceed
five years) before being acquired by an out-of-state bank holding
company.
The BHCA
generally prohibits the Company from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than that of
banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be “so closely related to banking ... as to be a proper incident
thereto.” This authority would permit the Company to engage in a
variety of banking-related businesses, including the ownership and operation of
a thrift, or any entity engaged in 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 not applied for 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
between 10% and 24.99% ownership.
Capital Requirements. Bank
holding companies are required to maintain minimum levels of capital in
accordance with Federal Reserve capital adequacy guidelines. If capital levels
fall below the minimum required levels, a bank holding company, among other
things, may be denied approval to acquire or establish additional banks or
non-bank businesses.
The
Federal Reserve’s capital guidelines establish the following minimum regulatory
capital requirements for bank holding companies: (i) a risk-based requirement
expressed as a percentage of total assets weighted according to risk; and (ii) a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets
of 4%. The leverage requirement consists of a minimum ratio of Tier 1 capital to
total assets of 3% for the most highly rated companies, with a minimum
requirement of 4% for all others. For purposes of these capital standards, Tier
1 capital consists primarily of permanent stockholders’ equity less intangible
assets (other than certain loan servicing rights and purchased credit card
relationships). Total capital consists primarily of Tier 1 capital plus Tier 2
capital which consists of other non-permanent capital items such as 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, 2009, the
Company had regulatory capital in excess of the Federal Reserve’s minimum
requirements.
Emergency Economic Stabilization Act
of 2008. Events in the U.S. and global financial markets over
the past several years, including deterioration of the worldwide credit markets,
have created significant challenges for financial institutions throughout the
country. In response to this crisis affecting the U.S. banking system and
financial markets, on October 3, 2008, the U.S. Congress passed, and the
President signed into law, the Emergency Economic Stabilization Act of 2008 (the
“EESA”). The EESA authorized the Secretary of the United States Department of
Treasury (“Treasury”) to implement various temporary emergency programs designed
to strengthen the capital positions of financial institutions and stimulate the
availability of credit within the U.S. financial system. Financial institutions
participating in certain of the programs established under the EESA are required
to adopt Treasury’s standards for executive compensation and corporate
governance.
The TARP Capital Purchase
Program. On October 14, 2008,
Treasury announced that it would provide Tier 1 capital (in the form of
perpetual preferred stock) to eligible financial institutions. This program,
known as the
TARP
Capital Purchase Program (the “CPP”), allocated $250 billion from the $700
billion authorized by the EESA to Treasury for the purchase of senior preferred
shares from qualifying financial institutions (the “CPP Preferred Stock”). Under
the program, eligible institutions were able to sell equity interests to the
Treasury in amounts equal to between 1% and 3% of the institution’s
risk-weighted assets. The CPP Preferred Stock is non-voting and pays dividends
at the rate of 5% per annum for the first five years and thereafter at a rate of
9% per annum. In conjunction with the purchase of the CPP Preferred Stock, the
Treasury received warrants to purchase common stock from the participating
public institutions with an aggregate market price equal to 15% of the preferred
stock investment. Participating financial institutions are required to adopt
Treasury’s standards for executive compensation and corporate governance for the
period during which Treasury holds equity issued under the CPP. These
requirements are discussed in more detail in the Compensation Discussion and
Analysis section in the Company’s proxy statement, which is incorporated by
reference in this Form 10-K.
Pursuant
to the CPP, on February 27, 2009, the Company entered into a Letter Agreement
with Treasury, pursuant to which the Company issued (i) 56,044 shares of the
Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A and (ii) a
warrant to purchase 396,538 shares of the Company’s common stock, no par value,
for an aggregate purchase price of $56,044,000 in cash. Since the Company’s
participation in the CPP, the Company has raised additional capital through a
public offering of common stock and, as a result of that offering, the number of
shares of common stock subject to the warrant have been reduced by 50% to
198,269. The Company’s federal regulators, the Treasury and the Treasury’s
Office of the Inspector General maintains significant oversight over the Company
as a participating institution, to evaluate how it is using the capital provided
and to ensure that it strengthens its efforts to help its borrowers avoid
foreclosure, which is one of the core aspects of the EESA.
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 unless its net income available to common shareholders over
the past year has been sufficient to fully fund the dividends and the
prospective rate of earnings retention appears consistent with its capital
needs, asset quality, and overall financial condition. 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. Further, with respect to the Company’s participation in the
CPP, the terms of the CPP Preferred Stock provide that no dividends on any
common or preferred stock that ranks equal to or junior to the CPP Preferred
Stock may be paid unless and until all accrued and unpaid dividends for all past
dividend periods on the CPP Preferred Stock have been fully paid.
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 Deposit Insurance Fund (“DIF”) to the maximum extent provided under
federal law and FDIC regulations. The Bank is also a member of the Federal
Reserve System (“member bank”). As an Indiana-chartered, FDIC-insured member
bank, the Bank is presently subject to the examination, supervision, reporting
and enforcement requirements of the DFI, the chartering authority for Indiana
banks, the Federal Reserve, as the primary federal regulator of member banks,
and the FDIC, as administrator of the DIF.
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 whereby FDIC-insured depository
institutions pay insurance premiums at rates based on their risk classification.
An institution’s risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators. Under
the regulations of the FDIC, as presently in effect, insurance assessments range
from 0.07% to 0.78% of total deposits, depending on an institution’s risk
classification, its levels of unsecured debt and secured liabilities, and, in
certain cases, its level of brokered deposits.
Furthermore,
as a result of the increased volume of bank failures in 2008 and 2009, on
May 22, 2009, the FDIC approved a final rule imposing a special assessment
on all depository institutions whose deposits are insured by the FDIC. This
one-time special assessment was imposed on institutions in the second quarter,
and was collected on September 30, 2009. Pursuant to the final rule, the
FDIC imposed on the Bank a special assessment in the amount of $1.1 million,
which was due and payable on September 30, 2009.
On
November 12, 2009, the FDIC adopted a final rule that required insured
depository institutions to prepay on December 30, 2009, their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011, and 2012. On December 31, 2009, the Bank paid the FDIC $10.1 million
in prepaid assessments. An institution’s prepaid assessments were calculated
based on the institution’s actual September 30, 2009 assessment base, adjusted
quarterly by an estimated 5 percent annual growth rate through the end of 2012.
The FDIC also used the institution’s total base assessment rate in effect on
September 30, 2009, increasing it by an annualized 3 basis points beginning in
2011. The FDIC will begin to offset prepaid assessments on March 30, 2010,
representing payment of the regular quarterly risk-based deposit insurance
assessment for the fourth quarter of 2009. Any prepaid assessment not exhausted
after collection of the amount due on June 30, 2013, will be returned to the
institution.
FDIC Temporary Liquidity Guarantee
Program. In conjunction with Treasury’s actions to address the
credit and liquidity crisis in financial markets, on October 14, 2008, the
FDIC announced the Temporary Liquidity Guarantee Program. One component of the
Temporary Liquidity Guarantee Program is the Transaction Account Guarantee
Program, which temporarily provides participating institutions with unlimited
deposit insurance coverage for non-interest bearing and certain low-interest
bearing transaction accounts maintained at FDIC insured institutions. All
institutions that did not opt out of the Transaction Account Guarantee Program
were subject to a 10 basis point per annum assessment on amounts in excess
of $250,000 in covered transaction accounts through December 31, 2009. On
August 26, 2009, the FDIC extended the Transaction Account Guarantee Program for
an additional six months through June 30, 2010. Beginning January 1, 2010, the
assessment levels increased to 15 basis points, 20 basis points or 25 basis
points per annum, based on the risk category to which an institution is assigned
for purposes of the risk-based premium system. The Bank did not opt out of the
six-month extension of the Transaction Account Guarantee Program. As a result,
the Bank, like every other FDIC-insured depository institution in the United
States that did not opt out of the Transaction Account Guarantee Program, is
incurring fees on amounts in excess of $250,000 in covered transaction
accounts.
FICO
Assessments. The Financing Corporation (“FICO”) is a
mixed-ownership governmental corporation chartered by the former Federal Home
Loan Bank Board pursuant to the Federal Savings and Loan Insurance Corporation
Recapitalization Act of 1987 to function as a financing vehicle for the
recapitalization of the former Federal Savings and Loan Insurance Corporation.
FICO issued 30-year non-callable bonds of approximately $8.2 billion that mature
by 2019. Since 1996, federal legislation has required that all FDIC-insured
depository institutions pay assessments to cover interest payments on FICO’s
outstanding obligations. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. During the year ended
December 31, 2009, the FICO assessment rate was approximately 0.01% 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, 2009, the Bank paid supervisory assessments to the DFI
totaling $204,000.
Capital Requirements. Banks
are generally required to maintain capital levels in excess of other businesses.
Under federal regulations, the Bank is subject to the following minimum capital
standards: (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%. In general, 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, federal regulations 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 Federal Reserve, 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, 2009: (i) the Bank was not subject to a directive from the Federal
Reserve to increase its capital to an amount in excess of the minimum regulatory
capital requirements; (ii) the Bank exceeded its minimum regulatory capital
requirements under Federal Reserve capital adequacy guidelines; and (iii) the
Bank was “well-capitalized,” as defined by Federal Reserve
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 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 Federal Reserve Act also imposes limitations on the amount
of dividends that may be paid by state member banks, such as the Bank. Without
Federal Reserve approval, a state member bank may not pay dividends in any
calendar year that, in the aggregate, exceed the bank’s calendar year-to-date
net income plus the bank’s retained net income for the two preceding calendar
years.
The
payment of dividends by any financial institution 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, 2009. As of
December 31, 2009, approximately $24.7 million was available to be paid as
dividends by the Bank. Notwithstanding the availability of funds for dividends,
however, the Federal Reserve may prohibit the payment of any dividends by the
Bank if the Federal Reserve 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 branches or the acquisition of
individual branches of a bank in another state (rather than the acquisition of
an out-of-state bank in its entirety) is permitted only in those states the laws
of which expressly 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
reserves against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $55.2 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $55.2 million, the reserve
requirement is $1.335 million plus 10% of the aggregate amount of total
transaction accounts in excess of $55.2 million. The first $10.7 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve. We
will believe the Bank will continue to maintain compliance with the foregoing
requirements.
The
Company’s chief decision-makers monitor and evaluate financial performance on a
Company-wide basis. All of the Company’s financial service operations are
similar and considered by management to be aggregated into one reportable
operating segment. While the Company has assigned certain management
responsibilities by region and business-line, the Company's chief
decision-makers monitor and evaluate financial performance on a Company-wide
basis. The majority of the Company's revenue is from the business of banking and
the Company's assigned regions have similar economic characteristics, products,
services and customers. Accordingly, all of the Company’s operations are
considered by management to be aggregated in one reportable operating
segment.
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.
DISTRIBUTION
OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST
RATES AND INTEREST DIFFERENTIAL
(in
thousands of dollars)
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Balance
|
|
|
Income
|
|
|
Yield
(1)
|
|
|
Balance
|
|
|
Income
|
|
|
Yield
(1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
(2)(3)
|
|
$ |
1,897,544 |
|
|
$ |
96,151 |
|
|
|
5.07
|
% |
|
$ |
1,662,355 |
|
|
$ |
99,538 |
|
|
|
5.99
|
% |
Tax
exempt (1)
|
|
|
4,202 |
|
|
|
199 |
|
|
|
4.74 |
|
|
|
2,669 |
|
|
|
147 |
|
|
|
5.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
399,342 |
|
|
|
21,179 |
|
|
|
5.30 |
|
|
|
368,578 |
|
|
|
19,731 |
|
|
|
5.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
|
22,540 |
|
|
|
35 |
|
|
|
0.16 |
|
|
|
12,136 |
|
|
|
171 |
|
|
|
1.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
1,631 |
|
|
|
26 |
|
|
|
1.59 |
|
|
|
2,045 |
|
|
|
49 |
|
|
|
2.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
earning assets
|
|
|
2,325,259 |
|
|
|
117,590 |
|
|
|
5.06
|
% |
|
|
2,047,783 |
|
|
|
119,636 |
|
|
|
5.84
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
39,616 |
|
|
|
0 |
|
|
|
|
|
|
|
41,302 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
30,208 |
|
|
|
0 |
|
|
|
|
|
|
|
28,200 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
nonearning assets
|
|
|
76,671 |
|
|
|
0 |
|
|
|
|
|
|
|
70,986 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
allowance for loan losses
|
|
|
(24,801 |
) |
|
|
0 |
|
|
|
|
|
|
|
(17,597 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,446,953 |
|
|
$ |
117,590 |
|
|
|
|
|
|
$ |
2,170,674 |
|
|
$ |
119,636 |
|
|
|
|
|
(1)
|
Tax
exempt income was converted to a fully taxable equivalent basis at a 35
percent tax rate for 2009 and 2008. 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, 2009 and 2008, are included as
taxable loan interest income.
|
|
|
(3)
|
Nonaccrual
loans are included in the average balance of taxable
loans.
|
DISTRIBUTION
OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST
RATES AND INTEREST DIFFERENTIAL (Cont.)
(in
thousands of dollars)
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Balance
|
|
|
Income
|
|
|
Yield
(1)
|
|
|
Balance
|
|
|
Income
|
|
|
Yield
(1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
(2)(3)
|
|
$ |
1,662,355 |
|
|
$ |
99,538 |
|
|
|
5.99
|
% |
|
$ |
1,401,480 |
|
|
$ |
102,840 |
|
|
|
7.34
|
% |
Tax
exempt (1)
|
|
|
2,669 |
|
|
|
147 |
|
|
|
5.51 |
|
|
|
2,588 |
|
|
|
166 |
|
|
|
6.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
368,578 |
|
|
|
19,731 |
|
|
|
5.35 |
|
|
|
306,293 |
|
|
|
15,140 |
|
|
|
4.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
|
12,136 |
|
|
|
171 |
|
|
|
1.41 |
|
|
|
17,412 |
|
|
|
863 |
|
|
|
4.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
2,045 |
|
|
|
49 |
|
|
|
2.40 |
|
|
|
1,486 |
|
|
|
68 |
|
|
|
4.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
earning assets
|
|
|
2,047,783 |
|
|
|
119,636 |
|
|
|
5.84
|
% |
|
|
1,729,259 |
|
|
|
119,077 |
|
|
|
6.89
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
41,302 |
|
|
|
0 |
|
|
|
|
|
|
|
44,565 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
28,200 |
|
|
|
0 |
|
|
|
|
|
|
|
26,042 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
nonearning assets
|
|
|
70,986 |
|
|
|
0 |
|
|
|
|
|
|
|
54,220 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
allowance for loan losses
|
|
|
(17,597 |
) |
|
|
0 |
|
|
|
|
|
|
|
(15,045 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,170,674 |
|
|
$ |
119,636 |
|
|
|
|
|
|
$ |
1,839,041 |
|
|
$ |
119,077 |
|
|
|
|
|
(1)
|
Tax
exempt income was converted to a fully taxable equivalent basis at a 35
percent tax rate for 2008 and 2007. 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, 2008 and 2007, are included as
taxable loan interest income.
|
|
|
(3)
|
Nonaccrual
loans are included in the average balance of taxable
loans.
|
DISTRIBUTION
OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST
RATES AND INTEREST DIFFERENTIAL (Cont.)
(in
thousands of dollars)
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
LIABILITIES
AND STOCKHOLDERS'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
70,202 |
|
|
$ |
100 |
|
|
|
0.14
|
% |
|
$ |
64,877 |
|
|
$ |
64 |
|
|
|
0.10
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing checking accounts
|
|
|
572,539 |
|
|
|
5,790 |
|
|
|
1.01 |
|
|
|
495,057 |
|
|
|
9,979 |
|
|
|
2.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
denominations under $100,000
|
|
|
359,526 |
|
|
|
15,356 |
|
|
|
4.27 |
|
|
|
329,783 |
|
|
|
13,924 |
|
|
|
4.22 |
|
In
denominations over $100,000
|
|
|
638,956 |
|
|
|
11,001 |
|
|
|
1.72 |
|
|
|
528,316 |
|
|
|
20,613 |
|
|
|
3.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
short-term borrowings
|
|
|
272,224 |
|
|
|
1,089 |
|
|
|
0.40 |
|
|
|
278,451 |
|
|
|
5,620 |
|
|
|
2.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subordinated
debentures
|
|
|
72,792 |
|
|
|
2,726 |
|
|
|
3.74 |
|
|
|
86,230 |
|
|
|
5,016 |
|
|
|
5.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
|
|
1,986,239 |
|
|
|
36,062 |
|
|
|
1.82
|
% |
|
|
1,782,714 |
|
|
|
55,216 |
|
|
|
3.10
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
229,009 |
|
|
|
0 |
|
|
|
|
|
|
|
219,762 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
19,354 |
|
|
|
0 |
|
|
|
|
|
|
|
17,138 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
212,351 |
|
|
|
0 |
|
|
|
|
|
|
|
151,060 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
|
|
$ |
2,446,953 |
|
|
$ |
36,062 |
|
|
|
|
|
|
$ |
2,170,674 |
|
|
$ |
55,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest differential - yield on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
daily earning assets
|
|
|
|
|
|
$ |
81,528 |
|
|
|
3.51
|
% |
|
|
|
|
|
$ |
64,420 |
|
|
|
3.14
|
% |
DISTRIBUTION
OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST
RATES AND INTEREST DIFFERENTIAL (Cont.)
(in
thousands of dollars)
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
LIABILITIES
AND STOCKHOLDERS'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
64,877 |
|
|
$ |
64 |
|
|
|
0.10
|
% |
|
$ |
67,104 |
|
|
$ |
133 |
|
|
|
0.20
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing checking accounts
|
|
|
495,057 |
|
|
|
9,979 |
|
|
|
2.02 |
|
|
|
425,753 |
|
|
|
14,854 |
|
|
|
3.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
denominations under $100,000
|
|
|
329,783 |
|
|
|
13,924 |
|
|
|
4.22 |
|
|
|
295,328 |
|
|
|
14,289 |
|
|
|
4.84 |
|
In
denominations over $100,000
|
|
|
528,316 |
|
|
|
20,613 |
|
|
|
3.90 |
|
|
|
462,056 |
|
|
|
24,338 |
|
|
|
5.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
short-term borrowings
|
|
|
278,451 |
|
|
|
5,620 |
|
|
|
2.02 |
|
|
|
177,343 |
|
|
|
7,239 |
|
|
|
4.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subordinated
debentures (1)
|
|
|
86,230 |
|
|
|
5,016 |
|
|
|
5.82 |
|
|
|
30,972 |
|
|
|
2,628 |
|
|
|
8.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
|
|
1,782,714 |
|
|
|
55,216 |
|
|
|
3.10
|
% |
|
|
1,458,556 |
|
|
|
63,481 |
|
|
|
4.35
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
219,762 |
|
|
|
0 |
|
|
|
|
|
|
|
226,484 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
17,138 |
|
|
|
0 |
|
|
|
|
|
|
|
16,234 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
151,060 |
|
|
|
0 |
|
|
|
|
|
|
|
137,767 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
|
|
$ |
2,170,674 |
|
|
$ |
55,216 |
|
|
|
|
|
|
$ |
1,839,041 |
|
|
$ |
63,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest differential - yield on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
daily earning assets
|
|
|
|
|
|
$ |
64,420 |
|
|
|
3.14
|
% |
|
|
|
|
|
$ |
55,596 |
|
|
|
3.22
|
% |
(1)
|
Long-term
borrowings and subordinated debentures interest expense was reduced by
interest capitalized on construction in process for
2007.
|
ANALYSIS
OF CHANGES IN INTEREST DIFFERENTIALS
(fully
taxable equivalent basis)
(in
thousands of dollars)
YEAR
ENDED DECEMBER 31,
|
|
2009
Over (Under) 2008 (1)
|
|
|
2008
Over (Under) 2007 (1)
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
INTEREST
AND LOAN FEE INCOME (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
13,045 |
|
|
$ |
(16,432 |
) |
|
$ |
(3,387 |
) |
|
$ |
17,372 |
|
|
$ |
(20,674 |
) |
|
$ |
(3,302 |
) |
Tax
exempt
|
|
|
75 |
|
|
|
(23 |
) |
|
|
52 |
|
|
|
5 |
|
|
|
(24 |
) |
|
|
(19 |
) |
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
1,633 |
|
|
|
(185 |
) |
|
|
1,448 |
|
|
|
3,260 |
|
|
|
1,331 |
|
|
|
4,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
|
83 |
|
|
|
(219 |
) |
|
|
(136 |
) |
|
|
(206 |
) |
|
|
(486 |
) |
|
|
(692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
(9 |
) |
|
|
(14 |
) |
|
|
(23 |
) |
|
|
20 |
|
|
|
(39 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
|
14,827 |
|
|
|
(16,873 |
) |
|
|
(2,046 |
) |
|
|
20,451 |
|
|
|
(19,892 |
) |
|
|
559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
|
6 |
|
|
|
30 |
|
|
|
36 |
|
|
|
(4 |
) |
|
|
(65 |
) |
|
|
(69 |
) |
Interest
bearing checking accounts
|
|
|
1,376 |
|
|
|
(5,565 |
) |
|
|
(4,189 |
) |
|
|
2,134 |
|
|
|
(7,009 |
) |
|
|
(4,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
denominations under $100,000
|
|
|
1,269 |
|
|
|
163 |
|
|
|
1,432 |
|
|
|
1,566 |
|
|
|
(1,931 |
) |
|
|
(365 |
) |
In
denominations over $100,000
|
|
|
3,659 |
|
|
|
(13,271 |
) |
|
|
(9,612 |
) |
|
|
3,168 |
|
|
|
(6,893 |
) |
|
|
(3,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
short-term borrowings
|
|
|
(123 |
) |
|
|
(4,408 |
) |
|
|
(4,531 |
) |
|
|
3,021 |
|
|
|
(4,640 |
) |
|
|
(1,619 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subordinated
debentures
|
|
|
(697 |
) |
|
|
(1,593 |
) |
|
|
(2,290 |
) |
|
|
3,435 |
|
|
|
(1,047 |
) |
|
|
2,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
5,490 |
|
|
|
(24,644 |
) |
|
|
(19,154 |
) |
|
|
13,320 |
|
|
|
(21,585 |
) |
|
|
(8,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
DIFFERENTIALS
|
|
$ |
9,337 |
|
|
$ |
7,771 |
|
|
$ |
17,108 |
|
|
$ |
7,131 |
|
|
$ |
1,693 |
|
|
$ |
8,824 |
|
(1)
|
The
earning assets and interest bearing liabilities used to calculate interest
differentials are based on average daily balances for 2009, 2008 and 2007.
The changes in volume represent "changes in volume times the old rate".
The changes in rate represent "changes in rate times old volume". The
changes in rate/volume were also calculated by "change in rate times
change in volume" and allocated consistently based upon the relative
absolute values of the changes in volume and changes in
rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Tax
exempt income was converted to a fully taxable equivalent basis at a 35
percent tax rate for 2009, 2008 and 2007. 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.
|
ANALYSIS
OF SECURITIES
(in
thousands of dollars)
The amortized cost and the fair
value of securities as of December 31, 2009, 2008 and 2007 were as
follows:
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
1,005 |
|
|
$ |
992 |
|
|
$ |
1,001 |
|
|
$ |
1,025 |
|
|
$ |
1,201 |
|
|
$ |
1,206 |
|
U.S.
Government agencies
|
|
|
4,588 |
|
|
|
4,610 |
|
|
|
15,453 |
|
|
|
15,685 |
|
|
|
18,539 |
|
|
|
18,555 |
|
Mortgage-backed
securities
|
|
|
264,276 |
|
|
|
270,796 |
|
|
|
225,892 |
|
|
|
229,571 |
|
|
|
205,335 |
|
|
|
205,202 |
|
Non-agency
residential mortgage-backed securities
|
|
|
88,382 |
|
|
|
72,495 |
|
|
|
106,790 |
|
|
|
85,098 |
|
|
|
45,823 |
|
|
|
45,293 |
|
State
and municipal securities
|
|
|
59,375 |
|
|
|
61,135 |
|
|
|
55,081 |
|
|
|
55,651 |
|
|
|
56,613 |
|
|
|
57,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt securities available for sale
|
|
$ |
417,626 |
|
|
$ |
410,028 |
|
|
$ |
404,217 |
|
|
$ |
387,030 |
|
|
$ |
327,511 |
|
|
$ |
327,757 |
|
At year-end 2009, there were no
holdings of securities of any one issuer, other than the U.S. Government,
government agencies and government sponsored agencies, in an amount greater than
10% of stockholders’ equity. At year-end 2008, there were no holdings of
securities of any one issuer, other than the U.S. Government, government
agencies and government sponsored agencies, in an amount greater than 10% of
stockholders’ equity with the exception of Residential Accredit Loans, Inc.,
which had a book value of $21.3 million and a market value of $15.8 million,
Countrywide Home Loans Alternative Loan Trust, which had a book value of $19.9
million and a market value of $15.1 million and Chase Mortgage Finance Trust,
which had a book value of $17.4 million and a market value of $15.0 million.
These are all Alt A or Whole Loan securities in the Super Senior tranches, which
are the highest rated tranches with very high credit standards. In addition, the
collateral of the Alt A or Whole Loan securities purchased must meet certain
criteria set by the Company’s Asset Liability Management Committee including
maximum loan-to-value and minimum FICO scores, consist of only fixed-rate
mortgages and must be AAA rated at the time of purchase. See Note 2 for more
information on these investments. At year-end 2007, there were no holdings of
securities of any one issuer, other than the U.S. Government, government
agencies and government sponsored agencies, in an amount greater than 10% of
stockholders’ equity with the exception of Residential Accredit Loans, Inc.,
which had a book value of $22.6 million and a market value of $22.3
million.
ANALYSIS
OF SECURITIES (cont.)
(fully
tax equivalent basis)
(in
thousands of dollars)
The weighted average yields and
maturity distribution for debt securities portfolio at December 31, 2009, were
as follows:
|
|
|
|
|
After
One
|
|
|
After
Five
|
|
|
|
|
|
|
Within
|
|
|
Year
|
|
|
Years
|
|
|
Over
|
|
|
|
One
|
|
|
Within
|
|
|
Within
Ten
|
|
|
Ten
|
|
|
|
Year
|
|
|
Five
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Treasury securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
$ |
0 |
|
|
$ |
992 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Yield
|
|
|
0
|
% |
|
|
2.38
|
% |
|
|
0
|
% |
|
|
0
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
4,610 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Yield
|
|
|
3.88
|
% |
|
|
0
|
% |
|
|
0
|
% |
|
|
0
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
0 |
|
|
|
13,977 |
|
|
|
70,382 |
|
|
|
186,437 |
|
Yield
|
|
|
0
|
% |
|
|
5.14
|
% |
|
|
5.00
|
% |
|
|
5.09
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency
residential mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
0 |
|
|
|
0 |
|
|
|
5,648 |
|
|
|
66,847 |
|
Yield
|
|
|
0
|
% |
|
|
0
|
% |
|
|
5.00
|
% |
|
|
5.66
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
216 |
|
|
|
5,341 |
|
|
|
37,107 |
|
|
|
18,471 |
|
Yield
|
|
|
4.90
|
% |
|
|
4.08
|
% |
|
|
4.47
|
% |
|
|
4.28
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
|
|
$ |
4,826 |
|
|
$ |
20,310 |
|
|
$ |
113,137 |
|
|
$ |
271,755 |
|
Yield
|
|
|
3.92
|
% |
|
|
4.73
|
% |
|
|
4.82
|
% |
|
|
5.18
|
% |
ANALYSIS
OF LOAN PORTFOLIO
Analysis
of Loans Outstanding
(in
thousands of dollars)
The Company segregates its loan
portfolio into four basic segments: commercial (including agricultural loans),
residential real estate mortgages, installment and personal line of credit loans
(including credit card loans). The loan portfolio as of December 31, 2009, 2008,
2007, 2006 and 2005 was as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Commercial
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
1,697,449 |
|
|
$ |
1,522,523 |
|
|
$ |
1,238,623 |
|
|
$ |
1,081,420 |
|
|
$ |
960,046 |
|
Tax
exempt
|
|
|
2,085 |
|
|
|
10,493 |
|
|
|
1,971 |
|
|
|
4,991 |
|
|
|
4,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commercial loans
|
|
|
1,699,534 |
|
|
|
1,533,016 |
|
|
|
1,240,594 |
|
|
|
1,086,411 |
|
|
|
964,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate mortgage loans
|
|
|
95,211 |
|
|
|
117,230 |
|
|
|
124,107 |
|
|
|
109,176 |
|
|
|
74,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment
loans
|
|
|
51,878 |
|
|
|
51,174 |
|
|
|
49,185 |
|
|
|
52,548 |
|
|
|
67,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit and credit card loans
|
|
|
167,194 |
|
|
|
132,147 |
|
|
|
109,760 |
|
|
|
105,762 |
|
|
|
91,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
loans
|
|
|
2,013,817 |
|
|
|
1,833,567 |
|
|
|
1,523,646 |
|
|
|
1,353,897 |
|
|
|
1,198,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance
for loan losses
|
|
|
(32,073 |
) |
|
|
(18,860 |
) |
|
|
(15,801 |
) |
|
|
(14,463 |
) |
|
|
(12,774 |
) |
Net
deferred loan (fees)/costs
|
|
|
(1,807 |
) |
|
|
(233 |
) |
|
|
74 |
|
|
|
(60 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
$ |
1,979,937 |
|
|
$ |
1,814,474 |
|
|
$ |
1,507,919 |
|
|
$ |
1,339,374 |
|
|
$ |
1,185,956 |
|
The residential real estate mortgage
loan portfolio included construction loans totaling $5,790, $6,468, $5,252,
$8,636 and $7,987 as of December 31, 2009, 2008, 2007, 2006 and 2005. The Bank
generally sells conforming mortgage loans which it originates. These loans
generally represent mortgage loans that are made to clients with long-term or
substantial relationships with the Bank on terms consistent with secondary
market requirements. 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.
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, 2009.
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate
|
|
|
|
|
|
Line
of
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
Installment
|
|
|
Credit
|
|
|
Total
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
maturity of one day
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
106,637 |
|
|
$ |
106,637 |
|
|
|
5.30
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
within one year
|
|
|
766,059 |
|
|
|
18,418 |
|
|
|
16,489 |
|
|
|
20,199 |
|
|
$ |
821,165 |
|
|
|
40.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
one year, within five years
|
|
|
779,741 |
|
|
|
20,728 |
|
|
|
33,245 |
|
|
|
16,148 |
|
|
$ |
849,862 |
|
|
|
42.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over
five years
|
|
|
124,589 |
|
|
|
54,692 |
|
|
|
2,144 |
|
|
|
24,210 |
|
|
$ |
205,635 |
|
|
|
10.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
|
29,145 |
|
|
|
1,373 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
30,518 |
|
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
$ |
1,699,534 |
|
|
$ |
95,211 |
|
|
$ |
51,878 |
|
|
$ |
167,194 |
|
|
$ |
2,013,817 |
|
|
|
100.0
|
% |
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, 2009 amounted to $680,527 and
$374,970.
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, 2009, 2008, 2007, 2006 and
2005.
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
PART
A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate mortgage loans
|
|
$ |
0 |
|
|
$ |
126 |
|
|
$ |
155 |
|
|
$ |
0 |
|
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial loans
|
|
|
0 |
|
|
|
81 |
|
|
|
65 |
|
|
|
154 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to individuals for household, family and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
personal expenditures
|
|
|
190 |
|
|
|
271 |
|
|
|
189 |
|
|
|
145 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to finance agriculture production and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
loans to farmers
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
past due loans
|
|
|
190 |
|
|
|
478 |
|
|
|
409 |
|
|
|
299 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
B - NONACCRUAL LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate mortgage loans
|
|
|
1,373 |
|
|
|
757 |
|
|
|
18 |
|
|
|
132 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial loans
|
|
|
28,373 |
|
|
|
20,053 |
|
|
|
7,021 |
|
|
|
13,688 |
|
|
|
7,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
772 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonaccrual loans
|
|
|
30,518 |
|
|
|
20,810 |
|
|
|
7,039 |
|
|
|
13,820 |
|
|
|
7,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
C - TROUBLED DEBT RESTRUCTURED LOANS
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans
|
|
$ |
30,708 |
|
|
$ |
21,288 |
|
|
$ |
7,448 |
|
|
$ |
14,119 |
|
|
$ |
7,495 |
|
Nonearning assets of the Company
include nonperforming loans (as indicated above), nonaccrual investments and
other real estate and repossessions, the total of which amounted to $31,582 at
December 31, 2009.
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 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, 2009, there were
$30.5 million of loans on nonaccrual status, some of which were also on impaired
status. There were $31.8 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, 2009 there were
$6.5 million of loans renegotiated as troubled debt restructurings. These loans
were excluded from troubled debt restructured loans in the previous table
because they were included in nonaccrual loans. As of December 31, 2008, 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 not otherwise disclosed, which exceeded ten percent of total
loans except commercial real estate. Commercial real estate was $544.3 million
at December 31, 2009. Nearly all of the Bank’s commercial, industrial,
agricultural real estate mortgage, real estate construction mortgage and
consumer loans are made within its basic service area.
Basis
For Determining Allowance For Loan Losses:
The allowance is an amount that
management believes will be adequate to absorb probable incurred credit losses
relating to specifically identified loans based on an evaluation, as well as
other probable incurred losses inherent in the loan portfolio. The evaluations
take into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower’s ability to repay.
Management also considers trends in adversely classified loans based upon a
monthly review of those credits. An appropriate level of general allowance is
determined after considering the following: application of historical loss
percentages, emerging market risk, emerging concentrations, commercial loan
focus and large credit concentration, new industry lending activity and general
economic conditions. For a more thorough discussion of the allowance for loan
losses methodology see the Critical Accounting Policies section of Item
7.
Based upon these policies and
objectives, $21.2 million, $10.2 million and $4.3 million were charged to the
provision for loan losses and added to the allowance for loan losses in 2009,
2008 and 2007.
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. Although management believes that the allowance for
loan losses is adequate to absorb probable incurred losses on any existing
loans, management cannot predict loan losses with any certainty, and the Company
cannot guarantee that the allowance for loan losses will prove sufficient to
cover actual losses in the future.
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, 2009, 2008, 2007, 2006 and
2005.
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of loans outstanding, December 31,
|
|
$ |
2,012,010 |
|
|
$ |
1,833,335 |
|
|
$ |
1,523,720 |
|
|
$ |
1,353,837 |
|
|
$ |
1,198,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
daily loans outstanding during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
December 31,
|
|
$ |
1,901,746 |
|
|
$ |
1,665,024 |
|
|
$ |
1,404,068 |
|
|
$ |
1,270,484 |
|
|
$ |
1,088,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses, January 1,
|
|
$ |
18,860 |
|
|
$ |
15,801 |
|
|
$ |
14,463 |
|
|
$ |
12,774 |
|
|
$ |
10,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
7,251 |
|
|
|
6,726 |
|
|
|
2,381 |
|
|
|
905 |
|
|
|
317 |
|
Residential
real estate
|
|
|
337 |
|
|
|
72 |
|
|
|
16 |
|
|
|
0 |
|
|
|
8 |
|
Installment
|
|
|
674 |
|
|
|
805 |
|
|
|
537 |
|
|
|
145 |
|
|
|
164 |
|
Credit
cards and personal credit lines
|
|
|
249 |
|
|
|
3 |
|
|
|
458 |
|
|
|
22 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans charged-off
|
|
|
8,511 |
|
|
|
7,606 |
|
|
|
3,392 |
|
|
|
1,072 |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
of loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
337 |
|
|
|
147 |
|
|
|
252 |
|
|
|
53 |
|
|
|
37 |
|
Residential
real estate
|
|
|
0 |
|
|
|
16 |
|
|
|
27 |
|
|
|
0 |
|
|
|
0 |
|
Installment
|
|
|
173 |
|
|
|
200 |
|
|
|
124 |
|
|
|
52 |
|
|
|
89 |
|
Credit
cards and personal credit lines
|
|
|
12 |
|
|
|
95 |
|
|
|
29 |
|
|
|
12 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recoveries
|
|
|
522 |
|
|
|
458 |
|
|
|
432 |
|
|
|
117 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans charged-off
|
|
|
7,989 |
|
|
|
7,148 |
|
|
|
2,960 |
|
|
|
955 |
|
|
|
460 |
|
Provision
for loan loss charged to expense
|
|
|
21,202 |
|
|
|
10,207 |
|
|
|
4,298 |
|
|
|
2,644 |
|
|
|
2,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31,
|
|
$ |
32,073 |
|
|
$ |
18,860 |
|
|
$ |
15,801 |
|
|
$ |
14,463 |
|
|
$ |
12,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge-offs during the period to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
daily loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
0.36
|
% |
|
|
0.40
|
% |
|
|
0.15
|
% |
|
|
0.07
|
% |
|
|
0.02
|
% |
Residential
real estate
|
|
|
0.02 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
Installment
|
|
|
0.03 |
|
|
|
0.04 |
|
|
|
0.03 |
|
|
|
0.01 |
|
|
|
0.01 |
|
Credit
cards and personal credit lines
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
0.03 |
|
|
|
0.00 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
ratio of net charge-offs
|
|
|
0.42
|
% |
|
|
0.43
|
% |
|
|
0.21
|
% |
|
|
0.08
|
% |
|
|
0.04
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of allowance for loan losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonperforming
assets
|
|
|
101.55
|
% |
|
|
84.23
|
% |
|
|
160.27
|
% |
|
|
101.67
|
% |
|
|
169.87
|
% |
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, 2009, 2008, 2007, 2006 and
2005.
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
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
|
|
$ |
28,014 |
|
|
|
84.39
|
% |
|
$ |
15,738 |
|
|
|
83.61
|
% |
|
$ |
13,659 |
|
|
|
81.42
|
% |
Residential
real estate
|
|
|
365 |
|
|
|
4.73 |
|
|
|
292 |
|
|
|
6.39 |
|
|
|
571 |
|
|
|
8.15 |
|
Installment
|
|
|
453 |
|
|
|
2.58 |
|
|
|
384 |
|
|
|
2.79 |
|
|
|
421 |
|
|
|
3.23 |
|
Credit
cards and personal credit lines
|
|
|
538 |
|
|
|
8.30 |
|
|
|
996 |
|
|
|
7.21 |
|
|
|
828 |
|
|
|
7.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
allocated allowance for loan losses
|
|
|
29,370 |
|
|
|
100.00
|
% |
|
|
17,410 |
|
|
|
100.00
|
% |
|
|
15,479 |
|
|
|
100.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
allowance for loan losses
|
|
|
2,703 |
|
|
|
|
|
|
|
1,450 |
|
|
|
|
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
allowance for loan losses
|
|
$ |
32,073 |
|
|
|
|
|
|
$ |
18,860 |
|
|
|
|
|
|
$ |
15,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
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
|
|
$ |
12,185 |
|
|
|
80.24
|
% |
|
$ |
10,870 |
|
|
|
80.46
|
% |
Residential
real estate
|
|
|
389 |
|
|
|
8.07 |
|
|
|
187 |
|
|
|
6.24 |
|
Installment
|
|
|
690 |
|
|
|
6.20 |
|
|
|
509 |
|
|
|
5.67 |
|
Credit
cards and personal credit lines
|
|
|
561 |
|
|
|
5.49 |
|
|
|
688 |
|
|
|
7.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
allocated allowance for loan losses
|
|
|
13,825 |
|
|
|
100.00
|
% |
|
|
12,254 |
|
|
|
100.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
allowance for loan losses
|
|
|
638 |
|
|
|
|
|
|
|
520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
allowance for loan losses
|
|
$ |
14,463 |
|
|
|
|
|
|
$ |
12,774 |
|
|
|
|
|
ANALYSIS
OF DEPOSITS
(in
thousands of dollars)
The average daily deposits for the
years ended December 31, 2009, 2008 and 2007, and the average rates paid on
those deposits are summarized in the following table:
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Daily
|
|
|
Rate
|
|
|
Daily
|
|
|
Rate
|
|
|
Daily
|
|
|
Rate
|
|
|
|
Balance
|
|
|
Paid
|
|
|
Balance
|
|
|
Paid
|
|
|
Balance
|
|
|
Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$ |
229,009 |
|
|
|
0.00
|
% |
|
$ |
219,762 |
|
|
|
0.00
|
% |
|
$ |
226,484 |
|
|
|
0.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and transaction accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular
savings
|
|
|
70,202 |
|
|
|
0.14 |
|
|
|
64,877 |
|
|
|
0.10 |
|
|
|
67,104 |
|
|
|
0.20 |
|
Interest
bearing checking
|
|
|
572,539 |
|
|
|
1.01 |
|
|
|
495,057 |
|
|
|
2.02 |
|
|
|
425,753 |
|
|
|
3.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
of $100,000 or more
|
|
|
638,956 |
|
|
|
1.72 |
|
|
|
528,316 |
|
|
|
3.90 |
|
|
|
462,056 |
|
|
|
5.27 |
|
Other
time deposits
|
|
|
359,526 |
|
|
|
4.27 |
|
|
|
329,783 |
|
|
|
4.22 |
|
|
|
295,328 |
|
|
|
4.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$ |
1,870,232 |
|
|
|
1.72
|
% |
|
$ |
1,637,795 |
|
|
|
2.72
|
% |
|
$ |
1,476,725 |
|
|
|
3.63
|
% |
As of December 31, 2009, time
certificates of deposit will mature as follows:
|
|
$100,000
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
or
more
|
|
|
Total
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
three months
|
|
$ |
147,136 |
|
|
|
27.31
|
% |
|
$ |
61,639 |
|
|
|
18.80
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over
three months, within six months
|
|
|
82,596 |
|
|
|
15.33 |
|
|
|
71,485 |
|
|
|
21.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over
six months, within twelve months
|
|
|
206,038 |
|
|
|
38.24 |
|
|
|
119,928 |
|
|
|
36.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over
twelve months
|
|
|
103,044 |
|
|
|
19.12 |
|
|
|
74,897 |
|
|
|
22.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
time certificates of deposit
|
|
$ |
538,814 |
|
|
|
100.00
|
% |
|
$ |
327,949 |
|
|
|
100.00
|
% |
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, 2009, 2008 and 2007 were as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net income to:
|
|
|
|
|
|
|
|
|
|
Average
daily total assets
|
|
|
0.78
|
% |
|
|
0.91
|
% |
|
|
1.04
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
daily stockholders' equity
|
|
|
8.94
|
% |
|
|
13.04
|
% |
|
|
13.94
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of dividends declared per
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share to basic earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding (12,851,845
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
in 2009, 12,271,927 shares in
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
and 12,188,594 shares in 2007)
|
|
|
48.82
|
% |
|
|
37.58
|
% |
|
|
34.49
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of average daily
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders'
equity to average
|
|
|
|
|
|
|
|
|
|
|
|
|
daily
total assets
|
|
|
8.68
|
% |
|
|
6.96
|
% |
|
|
7.49
|
% |
Cash dividends were declared on
April 14, July 14, October 13, 2009 and January 12, 2010 for each quarter of
2009, April 8, July 8, October 14, 2008 and January 13, 2009 for each quarter of
2008 and April 10, July 10 and October 9, 2007 and January 8, 2008 for each
quarter of 2007.
SHORT-TERM
BORROWINGS
(in
thousands of dollars)
The following is a schedule, at the end
of the year indicated, of statistical information relating to securities sold
under agreement to repurchase maturing within one year and secured by either
U.S. Government agency securities or mortgage-backed securities classified as
other debt securities and other short-term borrowings maturing within one year.
There were no other categories of short-term borrowings for which the average
balance outstanding during the period was 30 percent or more of stockholders'
equity at the end of each period.
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at year end:
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
$ |
9,600 |
|
|
$ |
19,000 |
|
|
$ |
70,010 |
|
Securities
sold under agreements to repurchase
|
|
$ |
127,118 |
|
|
$ |
137,769 |
|
|
$ |
154,913 |
|
Other
short-term borrowings
|
|
$ |
215,000 |
|
|
$ |
45,000 |
|
|
$ |
90,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
average interest rate at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
|
0.50
|
% |
|
|
0.50
|
% |
|
|
4.07
|
% |
Securities
sold under agreements to repurchase
|
|
|
0.42
|
% |
|
|
0.43
|
% |
|
|
3.20
|
% |
Other
short-term borrowings
|
|
|
0.38
|
% |
|
|
0.65
|
% |
|
|
4.31
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Highest
amount outstanding as of any month end
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
$ |
94,300 |
|
|
$ |
126,700 |
|
|
$ |
96,850 |
|
Securities
sold under agreements to repurchase
|
|
$ |
133,072 |
|
|
$ |
175,427 |
|
|
$ |
154,913 |
|
Other
short-term borrowings
|
|
$ |
220,000 |
|
|
$ |
163,700 |
|
|
$ |
90,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
average outstanding during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
$ |
25,195 |
|
|
$ |
50,171 |
|
|
$ |
22,950 |
|
Securities
sold under agreements to repurchase
|
|
$ |
125,195 |
|
|
$ |
153,363 |
|
|
$ |
121,372 |
|
Other
short-term borrowings
|
|
$ |
119,849 |
|
|
$ |
73,981 |
|
|
$ |
32,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
average interest rate during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
|
0.56
|
% |
|
|
2.53
|
% |
|
|
5.33
|
% |
Securities
sold under agreements to repurchase
|
|
|
0.46
|
% |
|
|
1.85
|
% |
|
|
3.52
|
% |
Other
short-term borrowings
|
|
|
0.39
|
% |
|
|
2.09
|
% |
|
|
5.09
|
% |
Securities sold under agreements to
repurchase include fixed-rate, term transactions initiated by the Bank, as well
as corporate sweep accounts. Other short-term borrowings consist of Federal Home
Loan Bank advances and Federal Reserve TAF borrowings.
In addition to the other information in
this Annual Report on Form 10-K, shareholders or prospective investors should
carefully consider the following risk factors:
A continued downturn in the economy,
particularly in Northern Indiana, where our business is primarily conducted,
could have an adverse effect on our business, results of operations and
financial condition.
We operate branch offices in four
geographical markets concentrated in Northern Indiana and a loan production
office in central Indiana located in Indianapolis. Our most mature market, the
South Region, includes Kosciusko County and portions of contiguous counties. The
Bank was founded in this market in 1872. Warsaw is this region’s primary city.
The Bank entered the North Region in 1990, which includes portions of Elkhart
and St. Joseph counties. This region includes the cities of Elkhart and South
Bend. The Central Region includes portions of Elkhart County and contiguous
counties and is anchored by the city of Goshen. The North and Central regions
represent relatively mature markets with nearly 20 years of business activity.
We entered the East Region in 1999, which includes Allen and DeKalb counties.
Fort Wayne represents the primary city in this market. We have experienced rapid
commercial loan growth in this market over the past 10 years. We entered the
Indianapolis market in 2006 with the opening of a loan production office in
Marion County.
Our success depends upon the business
activity, population, income levels, deposits and real estate activity in these
markets. Although our customers’ business and financial interests may extend
well beyond these market areas, adverse economic conditions that affect these
market areas could reduce our growth rate, affect the ability of our customers
to repay their loans to us and generally affect our financial condition and
results of operations.
In late 2007 and all of 2008 and 2009,
the United States economy experienced a severe downturn. Certain areas of our
geographical markets have seen notably worse economic conditions than those
suffered by the country at-large. As reported for November 2009, the 13 counties
in which we operate had unemployment rates between 9.5% and 14.5%. In
particular, Elkhart County has suffered from adverse business and economic
conditions that have resulted in a county-wide level of unemployment of
approximately 14.5%, which is well above the national average of 9.6%. A
continued downturn in economic conditions, particularly within our primary
market areas in Northern Indiana, could result in a decrease in demand for our
products and services, an increase in loan delinquencies and defaults and high
or increased levels of problem assets and foreclosures. Moreover, because of our
geographic concentration, we are less able than other regional or national
financial institutions to diversify our credit risks across multiple
markets.
Difficult economic and market
conditions have adversely affected our industry.
Dramatic
declines in the housing market, with decreasing home prices and increasing
delinquencies and foreclosures, have negatively impacted the credit performance
of mortgage and commercial real estate loans and resulted in significant
write-downs of assets by many financial institutions across the United States.
General downward economic trends, reduced availability of commercial credit and
increasing unemployment have negatively impacted the credit performance of
commercial and consumer credit, resulting in additional write-downs. Concerns
over the stability of the financial markets and the economy have resulted in
decreased lending by many financial institutions to their customers and to each
other. This market turmoil and tightening of credit has led to increased
commercial and consumer deficiencies, lack of customer confidence, increased
market volatility and widespread reductions in general business activity.
Financial institutions have also generally experienced decreased access to
deposits and borrowings. The resulting economic pressure on consumers and
businesses and the lack of confidence in the financial markets may adversely
affect our business, results of operations and financial condition. A worsening
of these conditions would likely exacerbate the adverse effects of these
difficult market conditions on us and others in the financial institutions
industry. In particular, we may face the following risks in connection with
these events:
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we
potentially face increased regulation of our industry and compliance with
such regulation may increase our costs and limit our ability to pursue
business opportunities;
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customer
demand for loans secured by real estate could be reduced due to weaker
economic conditions, an increase in unemployment, a decrease in real
estate values or an increase in interest
rates;
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the
process we use to estimate losses inherent in our credit exposure requires
difficult, subjective and complex judgments, including forecasts of
economic conditions and how these
economic
|
conditions
might impair the ability of our borrowers to repay their loans. The level of
uncertainty concerning economic conditions may adversely affect the accuracy of
our estimates which may, in turn, impact the reliability of the
process;
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the
value of the portfolio of investment securities that we hold may be
adversely affected; and
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we
may be required to pay significantly higher FDIC premiums because market
developments have significantly depleted the insurance fund of the FDIC
and reduced the ratio of reserves to insured
deposits.
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We must effectively manage our credit
risk.
There are risks inherent in making any
loan, including risks inherent in dealing with individual borrowers, risks of
nonpayment, risks resulting from uncertainties as to the future value of
collateral and risks resulting from changes in economic and industry conditions.
We attempt to minimize our credit risk through prudent loan application approval
procedures, careful monitoring of the concentration of our loans within specific
industries, a centralized credit administration department and periodic
independent reviews of outstanding loans by our loan review department. However,
we cannot make assurances that such approval and monitoring procedures will
reduce these credit risks.
The majority of the Bank’s loan
portfolio is invested in commercial and commercial real estate loans. The Bank
focuses on traditional commercial and industrial lending but is also involved in
commercial real estate activity in its markets. In general, commercial loans
represent higher dollar volumes to fewer customers. As a result, we may assume
greater lending risks than other community banking-type financial institutions
that have a lesser concentration of such loans and are more retail
oriented.
Commercial and industrial and
agri-business loans make up a significant portion of our loan
portfolio.
Commercial and industrial and
agri-business loans were $899.8 million, or approximately 44.7% of our total
loan portfolio, as of December 31, 2009. Our commercial loans are primarily made
based on the identified cash flow of the borrower and secondarily on the
underlying collateral provided by the borrower. Most often, this collateral is
accounts receivable, inventory, machinery or real estate. Credit support
provided by the borrower for most of these loans and the probability of
repayment is based on the liquidation of the pledged collateral and enforcement
of a personal guarantee, if any exists. Whenever possible, we require a personal
guarantee on commercial loans. As a result, in the case of loans secured by
accounts receivable, the availability of funds for the repayment of these loans
may be substantially dependent on the ability of the borrower to collect amounts
due from its customers. The collateral securing other loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Our loan portfolio includes commercial
real estate loans, which involve risks specific to real estate
value.
Commercial real estate loans were
$799.7 million, or approximately 39.7% of our total loan portfolio, as of
December 31, 2009. The market value of real estate can fluctuate significantly
in a short period of time as a result of market conditions in the geographic
area in which the real estate is located. Although a significant portion of such
loans are secured by real estate as a secondary form of collateral, continued
adverse developments affecting real estate values in one or more of our markets
could increase the credit risk associated with our loan portfolio. Additionally,
real estate lending typically involves higher loan principal amounts and the
repayment of the loans generally is dependent, in large part, on sufficient
income from the properties securing the loans to cover operating expenses and
debt service. Economic events or governmental regulations outside of the control
of the borrower or lender could negatively impact the future cash flow and
market values of the affected properties.
If the loans that are collateralized by
real estate become troubled and the value of the real estate has been
significantly impaired, then we may not be able to recover the full contractual
amount of principal and interest that we anticipated at the time of originating
the loan, which could cause us to increase our provision for loan losses and
adversely affect our operating results and financial condition.
Our
consumer loans generally have a higher degree of risk of default than our other
loans.
At December 31, 2009, consumer loans
totaled $57.5 million, or 2.9% of our total loan and lease portfolio. Consumer
loans typically have shorter terms and lower balances with higher yields as
compared to one-to-four
family
residential loans, but generally carry higher risks of default. Consumer loan
collections are dependent on the borrower’s continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
these loans.
Our continued pace of growth may
require us to raise additional capital in the future, but that capital may not
be available when it is needed.
We are required by federal and state
regulatory authorities to maintain adequate levels of capital to support our
operations. In February 2009, we accepted a capital investment of $56.0 million
under the U.S. Treasury’s Capital Purchase Program, and in November 2009 we
raised $57.9 million in a public offering of common stock to further strengthen
our capital position. However, we may at some point need to raise additional
capital to support our continued growth. Our ability to raise additional
capital, if needed, will depend on conditions in the capital markets at that
time, which are outside our control, and on our financial performance.
Accordingly, we cannot make assurances of our ability to raise additional
capital, if needed, on terms acceptable to us. If we cannot raise additional
capital when needed, our ability to further expand our operations through
internal growth or acquisitions could be materially impaired.
Interest rates and other conditions
impact our results of operations.
Our profitability is significantly
driven by the spread between the interest rates earned on investments and loans
and the interest rates paid on deposits and other interest-bearing liabilities.
Like most banking institutions, our net interest spread and margin will be
affected by general economic conditions and other factors, including fiscal and
monetary policies of the federal government, that influence market interest
rates and our ability to respond to changes in such rates. At any given time,
our assets and liabilities will be such that they are affected differently by a
given change in interest rates. As a result, an increase or decrease in rates,
the length of loan terms or the mix of adjustable and fixed rate loans in our
portfolio could have a positive or negative effect on our net income, capital
and liquidity. We measure interest rate risk under various rate scenarios and
using specific criteria and assumptions. Although we believe our current level
of interest rate sensitivity is reasonable and effectively managed, significant
fluctuations in interest rates may have an adverse effect on our business,
results of operations and financial condition.
Our allowance for loan losses may prove
to be insufficient to absorb potential losses in our loan
portfolio.
We determined our allowance for loan
losses pursuant to our established guidelines and practices and maintained a
level considered adequate by management to absorb loan losses that are inherent
in the portfolio. The amount of future loan losses is susceptible to changes in
economic, operating and other conditions (in our markets as well as the United
States), including changes in interest rates, which may be beyond our control,
and such losses may exceed current estimates. At December 31, 2009, our
allowance for loan losses as a percentage of total loans was 1.59% and as a
percentage of total nonperforming loans was 105%. Because of the nature of our
loan portfolio and our concentration in commercial and industrial loans, which
tend to be larger loans, the movement of a small number of loans to
nonperforming status can have a significant impact on these ratios. Although
management believes that the allowance for loan losses is adequate to absorb
probable incurred losses on any existing loans, we cannot predict loan losses
with certainty, and we cannot assure you that our allowance for loan losses will
prove sufficient to cover actual loan losses in the future. Loan losses in
excess of our reserves may adversely affect our business, results of operations
and financial condition.
Liquidity risks could affect operations
and jeopardize our business, results of operations and financial
condition.
Liquidity is essential to our business.
An inability to raise funds through deposits, borrowings, the sale of loans and
other sources could have a substantial negative effect on our liquidity. Our
primary sources of funds consist of cash from operations, investment maturities
and sales and deposits. Additional liquidity is provided by brokered deposits,
CDARS deposits, repurchase agreements and our participation in the Federal
Reserve Bank’s Term Auction Facility, as well as the ability to borrow from the
Federal Reserve Bank and the Federal Home Loan Bank. However, the Federal
Reserve Bank’s Term Auction Facility will no longer be available after March 8,
2010. Our access to funding sources in amounts adequate to finance or capitalize
our activities or on terms that are acceptable to us could be impaired by
factors that affect us directly or the financial services industry or economy in
general, such as further disruptions in the financial markets or negative views
and expectations about the prospects for the financial services
industry.
Since late 2007, and particularly
during the second half of 2008 and much of 2009, the financial services industry
and the credit markets generally have been materially and adversely affected by
significant declines in asset values and by a lack of liquidity. The liquidity
issues have been particularly acute for regional and community banks, as many of
the larger financial institutions have significantly curtailed their lending to
regional and community banks to reduce their exposure to the risks of other
banks. In addition, many of the larger correspondent lenders have reduced or
even eliminated federal funds lines for their correspondent customers.
Furthermore, regional and community banks generally have less access to the
capital markets than do the national and super-regional banks because of their
smaller size and limited analyst coverage. Any decline in available funding
could adversely impact our ability to originate loans, invest in securities,
meet our expenses, pay dividends to our shareholders, or fulfill obligations
such as repaying our borrowings or meeting deposit withdrawal demands, any of
which could have a material adverse impact on our liquidity, business, results
of operations and financial condition.
In addition, approximately 20% of our
deposits are concentrated in public funds from a small number of municipalities
and government agencies. Public deposits can be cyclical in nature and are often
reduced in June and December of each year. If these government entities withdraw
their deposits at inopportune times, or if we lose one or more of these deposit
customers, the Bank would need to find a replacement source of liquidity for the
funds withdrawn. If the Bank is unable to find a replacement source of
liquidity, the Bank’s liquidity could be adversely affected.
Declines in asset values may result
in impairment charges and adversely affect the value of our investments,
financial performance and capital.
We maintain an investment portfolio
that includes, but is not limited to, mortgage-backed securities. The market
value of investments in our portfolio has become increasingly volatile over the
past year. The market value of investments may be affected by factors other than
the underlying performance of the servicer of the securities or the mortgages
underlying the securities, such as ratings downgrades, adverse changes in the
business climate and a lack of liquidity in the secondary market for certain
investment securities. On a monthly basis, we evaluate investments and other
assets for impairment indicators. We may be required to record additional
impairment charges if our investments suffer a decline in value that is
considered other-than-temporary. If we determine that a significant impairment
has occurred, we would be required to charge against earnings the credit-related
portion of the other-than-temporary impairment, which could have a material
adverse effect on our results of operations in the periods in which the
write-offs occur.
We may experience difficulties in
managing our growth, and our growth strategy involves risks that may negatively
impact our net income.
Although we do not have any current
plans to do so, we may expand into additional communities or attempt to
strengthen our position in our current markets through opportunistic
acquisitions of all or part of other financial institutions, including
FDIC-assisted transactions, or by opening new branches. To the extent that we
undertake acquisitions or new branch openings, we are likely to experience the
effects of higher operating expenses relative to operating income from the new
operations, which may have an adverse effect on our levels of reported net
income, return on average equity and return on average assets. Other effects of
engaging in such growth strategies may include potential diversion of our
management’s time and attention and general disruption to our
business.
To the extent that we grow through
acquisitions and branch openings, we cannot assure you that we will be able to
adequately and profitably manage this growth. Acquiring other banks and
businesses will involve similar risks to those commonly associated with
branching, but may also involve additional risks, including:
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potential
exposure to unknown or contingent liabilities of banks and businesses we
acquire;
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exposure
to potential asset quality issues of the acquired bank or related
business;
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difficulty
and expense of integrating the operations and personnel of banks and
businesses we acquire; and
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the
possible loss of key employees and customers of the banks and businesses
we acquire.
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Attractive
acquisition opportunities may not be available to us in the future.
We expect that other banking and
financial service companies, many of which have significantly greater resources
than us, will compete with us in acquiring other financial institutions if we
pursue such acquisitions. This competition could increase prices for potential
acquisitions that we believe are attractive. Also, acquisitions are subject to
various regulatory approvals. If we fail to receive the appropriate regulatory
approvals, we will not be able to consummate an acquisition that we believe is
in our best interests. Among other things, our regulators consider our capital,
liquidity, profitability, regulatory compliance and levels of goodwill and
intangibles when considering acquisition and expansion proposals. Any
acquisition could be dilutive to our earnings and shareholders’ equity per share
of our common stock.
Higher FDIC deposit insurance premiums
and assessments could adversely affect our financial condition.
FDIC insurance premiums increased
substantially in 2009, and we expect to pay higher FDIC premiums in the future.
Bank failures have significantly depleted the FDIC’s Deposit Insurance Fund and
reduced the Deposit Insurance Fund’s ratio of reserves to insured deposits. The
FDIC adopted a revised risk-based deposit insurance assessment schedule on
February 27, 2009, which raised deposit insurance premiums. On May 22, 2009, the
FDIC also implemented a special assessment equal to five basis points of each
insured depository institution’s assets minus Tier 1 capital as of June 30,
2009, but no more than 10 basis points times the institution’s assessment base
for the second quarter of 2009, to be collected on September 30, 2009.
Additional special assessments may be imposed by the FDIC for future periods. On
November 12, 2009, the FDIC adopted a uniform three basis-point increase in
assessment rates, which is effective on January 1, 2011. Also, on November 12,
2009, the FDIC adopted a rule that required the Bank to prepay its quarterly
risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011
and 2012, along with their risk-based assessment for the third quarter of
2009.
We participate in the FDIC’s Temporary
Liquidity Guarantee Program, or TLG, for noninterest-bearing transaction deposit
accounts. Banks that participate in the TLG’s noninterest-bearing transaction
account guarantee will pay the FDIC an annual assessment of 10 basis points on
the amounts in such accounts above the amounts covered by FDIC deposit
insurance. To the extent that these TLG assessments are insufficient to cover
any loss or expenses arising from the TLG program, the FDIC is authorized to
impose an emergency special assessment on all FDIC-insured depository
institutions. The FDIC has authority to impose charges for the TLG program upon
depository institution holding companies, as well. The TLG was scheduled to end
December 31, 2009, but the FDIC has extended it to June 30, 2010 at an increased
charge of 15 to 25 basis points beginning January 1, 2010, depending on the
depository institution’s risk assessment category rating assigned with respect
to regular FDIC assessments if the institution elects to remain in the TLG.
These changes have caused the premiums and TLG assessments charged by the FDIC
to increase. These actions have significantly increased our noninterest expense
in 2009 and are expected to increase our costs for the foreseeable
future.
We face intense competition in all
phases of our business from other banks and financial institutions.
The banking and financial services
business in our market is highly competitive. Our competitors include large
regional banks, local community banks, savings and loan associations, securities
and brokerage companies, mortgage companies, insurance companies, finance
companies, money market mutual funds, credit unions, farm credit services and
other nonbank financial service providers. Many of these competitors are not
subject to the same regulatory restrictions as we are and are able to provide
customers with a feasible alternative to traditional banking
services.
Increased competition in our market may
also result in a decrease in the amounts of our loans and deposits, reduced
spreads between loan rates and deposit rates or loan terms that are more
favorable to the borrower. Any of these results could have a material adverse
effect on our ability to grow and remain profitable. If increased competition
causes us to significantly discount the interest rates we offer on loans or
increase the amount we pay on deposits, our net interest income could be
adversely impacted. If increased competition causes us to relax our underwriting
standards, we could be exposed to higher losses from lending activities.
Additionally, many of our competitors are much larger in total assets and
capitalization, have greater access to capital markets, possess larger lending
limits and offer a broader range of financial services than we can
offer.
Government regulation can result in
limitations on our operations.
We operate in a highly regulated
environment and are subject to supervision and regulation by a number of
governmental regulatory agencies, including the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, and the
Indiana Department of Financial Institutions. Regulations adopted by
these
agencies,
which are generally intended to provide protection for depositors and customers
rather than for the benefit of shareholders, govern a comprehensive range of
matters relating to ownership and control of our shares, our acquisition of
other companies and businesses, permissible activities for us to engage in,
maintenance of adequate capital levels and other aspects of our operations.
These bank regulators possess broad authority to prevent or remedy unsafe or
unsound practices or violations of law. The laws and regulations applicable to
the banking industry could change at any time and we cannot predict the effects
of these changes on our business and profitability. Increased regulation could
increase our cost of compliance and adversely affect profitability. For example,
new legislation or regulation may limit the manner in which we may conduct our
business, including our ability to offer new products, obtain financing, attract
deposits, make loans and achieve satisfactory interest spreads.
We cannot predict the effect on our
operations of recent legislative and regulatory initiatives that were enacted in
response to the ongoing financial crisis.
United States federal, state and
foreign governments have taken or are considering extraordinary actions in an
attempt to deal with the worldwide financial crisis. To the extent adopted, many
of these actions have been in effect for only a limited time, and have produced
limited or no relief to the capital, credit and real estate markets. There is no
assurance that these actions or other actions under consideration will
ultimately be successful.
In the United States, the federal
government has adopted the Emergency Economic Stabilization Act of 2008 and the
American Recovery and Reinvestment Act of 2009. With authority granted under
these laws, the U.S. Treasury has proposed a financial stability plan that is
intended to:
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invest
in financial institutions and purchase troubled assets and mortgages from
financial institutions for the purpose of stabilizing and providing
liquidity to the United States financial
markets;
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temporarily
increase the limit on FDIC deposit insurance coverage to $250,000 per
depositor through December 31, 2009 (which was extended to December 31,
2013 under the Helping Families Save Their Homes Act of 2009);
and
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provide
for various forms of economic stimulus, including to assist homeowners
restructure and lower mortgage payments on qualifying
loans.
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Numerous other actions have been taken
by the United States Congress, the Federal Reserve, the U.S. Treasury, the FDIC,
the SEC and others to address the liquidity and credit crisis that has followed
the sub-prime mortgage crisis that commenced in 2007, including the financial
stability plan adopted by the U.S. Treasury. In addition, President Obama
recently announced a financial regulatory reform proposal, and the House and
Senate are expected to consider competing proposals over the coming
years.
There can be no assurance that the
financial stability plan proposed by the U.S. Treasury, the other proposals
under consideration or any other legislative or regulatory initiatives will be
effective at dealing with the ongoing economic crisis and improving economic
conditions globally, nationally or in our markets, or that the measures adopted
will not have adverse consequences. The terms and costs of these activities, or
the failure of these actions to help stabilize the financial markets, asset
prices, and market liquidity, and a continuation or worsening of current
financial market and economic conditions, could materially and adversely affect
our business, results of operations, financial condition and the trading prices
of our securities.
Negative developments in the financial
industry and the credit markets may subject us to additional
regulation.
As a result of ongoing challenges
facing the United States economy, the potential exists for new laws and
regulations regarding lending and funding practices and liquidity standards to
be promulgated, and bank regulatory agencies are expected to be active in
responding to concerns and trends identified in examinations, including the
expected issuance of many formal enforcement orders. Negative developments in
the financial industry and credit markets, and the impact of new legislation in
response to those developments, may negatively impact our operations by
restricting our business operations, including our ability to originate or sell
loans, and may adversely impact our financial performance.
Changes in future rules applicable to
TARP recipients could adversely affect our business, results of operations and
financial condition.
On February 27, 2009, we issued $56.0
million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, or the
Series A Preferred Stock, to the U.S. Treasury pursuant to the TARP Capital
Purchase Program. The rules and policies applicable to recipients of capital
under the TARP Capital Purchase Program continue to evolve and their scope,
timing and effect cannot be predicted. Any redemption of the securities sold to
the U.S. Treasury to avoid these restrictions would require prior Federal
Reserve and U.S. Treasury approval. Based on guidelines recently issued by the
Federal Reserve, institutions seeking to redeem TARP Capital Purchase Program
preferred stock must demonstrate an ability to access the long-term debt markets
without reliance on the FDIC’s TLG, successfully demonstrate access to public
equity markets and meet a number of additional requirements and considerations
before such institutions can redeem any securities sold to the U.S.
Treasury.
Our ability to attract and retain
management and key personnel may affect future growth and earnings, and the
recent economic stimulus legislation imposes new compensation restrictions that
could adversely affect our ability to do so.
Much of our success and growth has been
influenced strongly by our ability to attract and retain management experienced
in banking and financial services and familiar with the communities in our
market areas. Our ability to retain the executive officers, management teams,
branch managers and loan officers of our bank subsidiary will continue to be
important to the successful implementation of our strategy. It is also critical,
as we grow, to be able to attract and retain qualified additional management and
loan officers with the appropriate level of experience and knowledge about our
market areas to implement our community-based operating strategy. The unexpected
loss of services of any key management personnel, or the inability to recruit
and retain qualified personnel in the future, could have an adverse effect on
our business, results of operations and financial condition.
The American Recovery and Reinvestment
Act of 2009 that was signed into law in February 2009 includes extensive new
restrictions on our ability to pay retention awards, bonuses and other incentive
compensation during the period in which we have any outstanding securities held
by the U.S. Treasury that were issued under the TARP Capital Purchase Program.
Many of the restrictions may not be limited to our senior executives and could
cover other employees whose contributions to revenue and performance can be
significant. The limitations may adversely affect our ability to recruit and
retain these key employees in addition to our senior executive officers,
especially if we are competing for talent against institutions that are not
subject to the same restrictions. The Federal Reserve, and perhaps the FDIC, are
contemplating proposed rules governing the compensation practices of financial
institutions and these rules, if adopted, may make it more difficult to attract
and retain the people we need to operate our businesses and limit our ability to
promote our objectives through our compensation and incentive
programs.
We have a continuing need for
technological change and we may not have the resources to effectively implement
new technology.
The financial services industry is
constantly undergoing rapid technological changes with frequent introductions of
new technology-driven products and services. In addition to better serving
customers, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. Our future success will depend in part
upon our ability to address the needs of our customers by using technology to
provide products and services that will satisfy customer demands for convenience
as well as to create additional efficiencies in our operations as we continue to
grow and expand our market areas. Many of our larger competitors have
substantially greater resources to invest in technological improvements. As a
result, they may be able to offer additional or superior products to those that
we will be able to offer, which would put us at a competitive disadvantage.
Accordingly, we cannot provide assurances that we will be able to effectively
implement new technology-driven products and services or be successful in
marketing such products and services to our customers.
System failure or breaches of our
network security could subject us to increased operating costs as well as
litigation and other liabilities.
The computer systems and network
infrastructure we use could be vulnerable to unforeseen problems. Our operations
are dependent upon our ability to protect our computer equipment against damage
from physical theft, fire, power loss, telecommunications failure or a similar
catastrophic event, as well as from security breaches, denial of service
attacks, viruses, worms and other disruptive problems caused by hackers. Any
damage or failure that causes an interruption in our operations could have a
material adverse effect on our financial condition and results of operations.
Computer break-ins, phishing and other disruptions could also jeopardize the
security of information stored in and transmitted through our computer systems
and network infrastructure, which may result in significant liability to us and
may cause existing and potential customers to refrain from doing business with
us. Although we,
with the
help of third-party service providers, intend to continue to implement security
technology and establish operational procedures to prevent such damage, there
can be no assurance that these security measures will be successful. In
addition, advances in computer capabilities, new discoveries in the field of
cryptography or other developments could result in a compromise or breach of the
algorithms we and our third-party service providers use to encrypt and protect
customer transaction data. A failure of such security measures could have a
material adverse effect on our financial condition and results of
operations.
We are subject to certain operational
risks, including, but not limited to, customer or employee fraud and data
processing system failures and errors.
Employee errors and misconduct could
subject us to financial losses or regulatory sanctions and seriously harm our
reputation. Misconduct by our employees could include hiding unauthorized
activities from us, improper or unauthorized activities on behalf of our
customers or improper use of confidential information. It is not always possible
to prevent employee errors and misconduct, and the precautions we take to
prevent and detect this activity may not be effective in all cases. Employee
errors could also subject us to financial claims for negligence.
We maintain a system of internal
controls and insurance coverage to mitigate operational risks, including data
processing system failures and errors and customer or employee fraud. Should our
internal controls fail to prevent or detect an occurrence, or if any resulting
loss is not insured or exceeds applicable insurance limits, it could have a
material adverse effect on our business, results of operations and financial
condition.
We may be subject to a higher
consolidated effective tax rate if there is a change in tax laws or if LCB
Funding, Inc. fails to qualify as a real estate investment trust.
The Bank holds certain investment
securities in its wholly-owned subsidiary LCB Investments II, Inc., which is
incorporated in Nevada. Pursuant to the State of Indiana’s current tax laws and
regulations, we are not subject to Indiana income tax for income earned through
that subsidiary. If there are changes in tax laws or interpretations thereof
requiring us to pay state taxes for income generated by LCB Investments II,
Inc., the resulting tax consequences could increase our effective tax rate or
cause us to have a tax liability for prior years.
The Bank also holds certain commercial
real estate loans, residential real estate loans and other loans in a real
estate investment trust through LCB Investments II, Inc. Qualification as a real
estate investment trust involves application of specific provisions of the
Internal Revenue Code relating to various asset tests. If LCB Funding, Inc.
fails to meet any of the required provisions for real estate investment trusts,
or there are changes in tax laws or interpretations thereof, it could no longer
qualify as a real estate investment trust and the resulting tax consequences
would increase our effective tax rate or cause us to have a tax liability for
prior years.
We have no unresolved SEC staff
comments.
The Company conducts its operations
from the following branch locations:
Location
Main/Headquarters
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202
East Center St.
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Warsaw
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IN
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Warsaw
Drive-up
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East
Center St.
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Warsaw
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IN
|
Akron
|
102
East Rochester
|
Akron
|
IN
|
Argos
|
100
North Michigan
|
Argos
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IN
|
Auburn
|
1220
East 7th St.
|
Auburn
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IN
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Bremen
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1600
State Road 331
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Bremen
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IN
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Columbia
City
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601
Countryside Dr.
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Columbia
City
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IN
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Concord
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4202
Elkhart Rd.
|
Goshen
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IN
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Cromwell
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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 Jefferson Blvd
|
6851
West Jefferson Blvd.
|
Fort
Wayne
|
IN
|
Goshen
Downtown
|
102
North Main St.
|
Goshen
|
IN
|
Goshen
South
|
2513
South Main St.
|
Goshen
|
IN
|
Granger
|
12830
State Road 23
|
Granger
|
IN
|
Huntington
|
1501
North Jefferson St.
|
Huntington
|
IN
|
Kendallville
East
|
631
Professional Way
|
Kendallville
|
IN
|
LaGrange
|
901
South Detroit
|
LaGrange
|
IN
|
Ligonier
Downtown
|
222
South Cavin St.
|
Ligonier
|
IN
|
Ligonier
South
|
1470
U.S. Highway 33 South
|
Ligonier
|
IN
|
Medaryville
|
Main
St.
|
Medaryville
|
IN
|
Mentone
|
202
East Main St.
|
Mentone
|
IN
|
Middlebury
|
712
Wayne Ave.
|
Middlebury
|
IN
|
Milford
|
State
Road 15 North
|
Milford
|
IN
|
Mishawaka
|
5015
North Main St.
|
Mishawaka
|
IN
|
Nappanee
|
202
West Market St.
|
Nappanee
|
IN
|
North
Webster
|
644
North Main St.
|
North
Webster
|
IN
|
Pierceton
|
202
South First St.
|
Pierceton
|
IN
|
Plymouth
|
862
East Jefferson St.
|
Plymouth
|
IN
|
Rochester
|
507
East 9th St.
|
Rochester
|
IN
|
Shipshewana
|
895
North Van Buren St.
|
Shipshewana
|
IN
|
Silver
Lake
|
102
Main St.
|
Silver
Lake
|
IN
|
South
Bend Northwest
|
21113
Cleveland Rd.
|
South
Bend
|
IN
|
Syracuse
|
502
South Huntington
|
Syracuse
|
IN
|
Warsaw
East
|
3601
Commerce Dr.
|
Warsaw
|
IN
|
Warsaw
North
|
420
Chevy Way
|
Warsaw
|
IN
|
Warsaw
West
|
1221
West Lake St.
|
Warsaw
|
IN
|
Winona
Lake
|
99
Chestnut St.
|
Winona
Lake
|
IN
|
Winona
Lake East
|
1324
Wooster Rd.
|
Winona
Lake
|
IN
|
The Company leases from third
parties the real estate and buildings for its Milford and Winona Lake East
offices. In addition, the Company leases the real estate for its four
freestanding ATMs. The Company also leases from a third party office space
in Indianapolis, Indiana, for a loan production office. 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.
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.
None of the Company’s assets are the
subject of any material encumbrances.
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.
PART
II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
4th
|
|
3rd
|
|
2nd
|
|
1st
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
prices (per share)*
|
|
|
|
|
|
|
|
Low
|
$16.35
|
|
$17.80
|
|
$17.10
|
|
$14.14
|
High
|
$22.24
|
|
$22.49
|
|
$21.04
|
|
$23.87
|
|
|
|
|
|
|
|
|
Dividends
declared (per share)
|
$0.155
|
|
$0.155
|
|
$0.155
|
|
$0.155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
prices (per share)*
|
|
|
|
|
|
|
|
Low
|
$14.93
|
|
$18.52
|
|
$19.00
|
|
$16.87
|
High
|
$24.10
|
|
$30.09
|
|
$25.00
|
|
$23.97
|
|
|
|
|
|
|
|
|
Dividends
declared (per share)
|
$0.155
|
|
$0.155
|
|
$0.155
|
|
$0.140
|
* The
trading ranges are the high and low prices as obtained from The Nasdaq Stock
Market.
The
common stock of the Company began being quoted on The Nasdaq Stock Market under
the symbol LKFN in August, 1997. Currently, the Company’s common stock is listed
for trading on the Nasdaq Global Select market. On December 31, 2009, the
Company had approximately 436 shareholders of record and estimates that it has
approximately 2,300 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. In
addition, as a result of the Company's participation in the TARP Capital
Purchase Program, the Company may not increase the quarterly dividends it pays
on the Company's common stock above $0.155 per share for three years, without
the consent of Treasury, unless Treasury no longer holds shares of the Series A
Preferred Stock. 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.
The following table provides
information about purchases by the Company and its affiliates during the quarter
ended December 31, 2009 of equity securities that are registered by the Company
pursuant to Section 12 of the Exchange Act:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
Maximum
Number (or
|
|
|
|
|
|
|
Total
Number of
|
|
Appropriate
Dollar
|
|
|
|
|
|
|
Shares
Purchased as
|
|
Value)
of Shares that
|
|
|
|
|
|
|
Part
of Publicly
|
|
May
Yet Be Purchased
|
|
|
Total
Number of
|
|
Average
Price
|
|
Announced
Plans or
|
|
Under
the Plans or
|
Period
|
|
Shares
Purchased
|
|
Paid
per Share
|
|
Programs
|
|
Programs
|
|
|
|
|
|
|
|
|
|
10/01/09-10/31/09
|
|
0
|
|
$0.00
|
|
0
|
|
$0.00
|
11/01/09-11/30/09
|
|
772
|
|
20.12
|
|
0
|
|
0.00
|
12/01/09-12/31/09
|
|
0
|
|
0.00
|
|
0
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Total
|
|
772
|
|
$20.12
|
|
0
|
|
$0.00
|
The shares purchased during the periods
were credited to the deferred share accounts of seven nonemployee directors
under the Company’s directors’ deferred compensation plan.
STOCK
PRICE PERFORMANCE GRAPH
The graph below compares the cumulative
total return of the Company, the Nasdaq Market Index and a peer group
index.
INDEX
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
Lakeland
Financial Corporation
|
$100.00
|
$104.08
|
$134.46
|
$112.75
|
$132.28
|
$98.80
|
NASDAQ
Market Index
|
100.00
|
101.37
|
111.03
|
121.92
|
72.49
|
104.31
|
Peer
Group Index
|
100.00
|
100.58
|
114.89
|
83.98
|
64.15
|
45.63
|
* Assumes
$100 invested on December 31, 2004 and dividends were
reinvested.
The peer
group index is
comprised of all financial institution holding companies in the United States
with total assets as of December 31, 2009 between $1.0 billion and $3.0 billion
dollars whose equity securities were traded on an exchange or national quotation
service.
Lakeland
Financial Peer Group
|
|
|
|
|
9/30/2009
|
|
|
|
|
|
|
|
|
|
Company
|
Institution
Key
|
Ticker
|
State
|
Assets
|
Alliance
Financial Corporation
|
100700
|
ALNC
|
NY
|
1,456,276
|
AmericanWest
Bancorporation
|
100865
|
AWBC
|
WA
|
1,763,431
|
Ameris
Bancorp
|
100594
|
ABCB
|
GA
|
2,207,475
|
Arrow
Financial Corporation
|
100134
|
AROW
|
NY
|
1,836,283
|
Atlantic
Southern Financial Group, Inc.
|
4093166
|
ASFN
|
GA
|
1,083,677
|
Bancorp
Rhode Island, Inc.
|
4054977
|
BARI
|
RI
|
1,569,880
|
Bancorp,
Inc.
|
4054569
|
TBBK
|
DE
|
2,041,034
|
BancTrust
Financial Group, Inc.
|
100351
|
BTFG
|
AL
|
2,036,069
|
Bank
of Florida Corporation
|
4047172
|
BOFL
|
FL
|
1,488,008
|
Bank
of Granite Corporation
|
100304
|
GRAN
|
NC
|
1,009,669
|
Bank
of Kentucky Financial Corporation
|
1024571
|
BKYF
|
KY
|
1,391,669
|
Bank
of Marin Bancorp
|
4164467
|
BMRC
|
CA
|
1,126,529
|
Bank
of the Ozarks, Inc.
|
1018441
|
OZRK
|
AR
|
2,889,686
|
Bar
Harbor Bankshares
|
100824
|
BHB
|
ME
|
1,060,707
|
BNC
Bancorp
|
4086131
|
BNCN
|
NC
|
1,704,645
|
Bryn
Mawr Bank Corporation
|
100154
|
BMTC
|
PA
|
1,195,525
|
Cadence
Financial Corporation
|
1018635
|
CADE
|
MS
|
1,767,699
|
Camden
National Corporation
|
101149
|
CAC
|
ME
|
2,272,746
|
Capital
Bank Corporation
|
4042314
|
CBKN
|
NC
|
1,734,950
|
Capital
City Bank Group, Inc.
|
100774
|
CCBG
|
FL
|
2,491,937
|
Cardinal
Financial Corporation
|
4019138
|
CFNL
|
VA
|
1,893,403
|
Cascade
Bancorp
|
100589
|
CACB
|
OR
|
2,272,047
|
Cascade
Financial Corporation
|
102173
|
CASB
|
WA
|
1,646,987
|
Cass
Information Systems, Inc.
|
100886
|
CASS
|
MO
|
1,033,395
|
Center
Bancorp, Inc.
|
100687
|
CNBC
|
NJ
|
1,349,516
|
Center
Financial Corporation
|
4084856
|
CLFC
|
CA
|
2,201,842
|
CenterState
Banks, Inc.
|
4053925
|
CSFL
|
FL
|
1,783,823
|
Centrue
Financial Corporation
|
1021347
|
TRUE
|
MO
|
1,338,474
|
Century
Bancorp, Inc.
|
100209
|
CNBKA
|
MA
|
2,051,247
|
Citizens
& Northern Corporation
|
100693
|
CZNC
|
PA
|
1,283,378
|
City
Bank
|
1009626
|
CTBK
|
WA
|
1,219,356
|
City
Holding Company
|
100199
|
CHCO
|
WV
|
2,596,236
|
CNB
Financial Corporation
|
100790
|
CCNE
|
PA
|
1,090,300
|
CoBiz
Financial Inc.
|
1017371
|
COBZ
|
CO
|
2,537,665
|
Colony
Bankcorp, Inc.
|
100882
|
CBAN
|
GA
|
1,290,891
|
Columbia
Bancorp
|
1025077
|
CBBO
|
OR
|
1,057,717
|
Commonwealth
Bankshares, Inc.
|
100912
|
CWBS
|
VA
|
1,145,184
|
Community
Bankers Trust Corporation
|
4100717
|
BTC
|
VA
|
1,239,138
|
Crescent
Banking Company
|
100005
|
CSNT
|
GA
|
1,030,472
|
Crescent
Financial Corporation
|
4066238
|
CRFN
|
NC
|
1,063,703
|
Dearborn
Bancorp, Inc.
|
1024255
|
DEAR
|
MI
|
1,042,337
|
Eagle
Bancorp, Inc.
|
4002078
|
EGBN
|
MD
|
1,682,773
|
Eastern
Virginia Bankshares, Inc.
|
1974273
|
EVBS
|
VA
|
1,105,727
|
Encore
Bancshares, Inc.
|
4057668
|
EBTX
|
TX
|
1,600,720
|
Enterprise
Bancorp, Inc.
|
1025202
|
EBTC
|
MA
|
1,287,427
|
Enterprise
Financial Services Corp
|
1024631
|
EFSC
|
MO
|
2,518,625
|
EuroBancshares,
Inc.
|
4086027
|
EUBK
|
PR
|
2,806,909
|
Farmers
Capital Bank Corporation
|
100257
|
FFKT
|
KY
|
2,273,259
|
Fidelity
Southern Corporation
|
100845
|
LION
|
GA
|
1,912,394
|
Financial
Institutions, Inc.
|
1016825
|
FISI
|
NY
|
2,138,205
|
First
Bancorp, Inc.
|
1019988
|
FNLC
|
ME
|
1,331,842
|
First
Business Financial Services, Inc.
|
1021886
|
FBIZ
|
WI
|
1,073,653
|
First
California Financial Group, Inc.
|
100349
|
FCAL
|
CA
|
1,469,628
|
First
Chester County Corporation
|
100793
|
FCEC
|
PA
|
1,306,681
|
First
Citizens Banc Corp
|
100876
|
FCZA
|
OH
|
1,103,720
|
First
Community Bancshares, Inc.
|
100792
|
FCBC
|
VA
|
2,298,341
|
First
Financial Corporation
|
100502
|
THFF
|
IN
|
2,500,913
|
First
Financial Service Corporation
|
101772
|
FFKY
|
KY
|
1,107,566
|
First
M&F Corporation
|
1018386
|
FMFC
|
MS
|
1,676,469
|
First
Mariner Bancorp
|
1024706
|
FMAR
|
MD
|
1,410,427
|
First
of Long Island Corporation
|
100265
|
FLIC
|
NY
|
1,507,614
|
First
Regional Bancorp
|
100282
|
FRGB
|
CA
|
2,175,019
|
First
Security Group, Inc.
|
4050826
|
FSGI
|
TN
|
1,202,908
|
First
State Bancorporation
|
100565
|
FSNM
|
NM
|
2,886,347
|
First
United Corporation
|
100525
|
FUNC
|
MD
|
1,681,749
|
Firstbank
Corporation
|
100768
|
FBMI
|
MI
|
1,429,810
|
FNB
United Corp.
|
100805
|
FNBN
|
NC
|
2,193,906
|
German
American Bancorp, Inc.
|
100551
|
GABC
|
IN
|
1,233,815
|
Great
Florida Bank
|
4091674
|
GFLB
|
FL
|
1,716,557
|
Green
Bankshares, Inc.
|
1019938
|
GRNB
|
TN
|
2,794,217
|
Guaranty
Bancorp
|
4093621
|
GBNK
|
CO
|
2,057,378
|
Hampton
Roads Bankshares, Inc.
|
4066242
|
HMPR
|
VA
|
2,938,994
|
Hawthorn
Bancshares, Inc.
|
1023919
|
HWBK
|
MO
|
1,240,228
|
Heritage
Commerce Corp
|
4019167
|
HTBK
|
CA
|
1,367,610
|
Heritage
Financial Corporation
|
1024198
|
HFWA
|
WA
|
1,017,956
|
Home
BancShares, Inc.
|
1022914
|
HOMB
|
AR
|
2,631,736
|
Horizon
Bancorp
|
100750
|
HBNC
|
IN
|
1,321,224
|
Horizon
Financial Corp.
|
1024822
|
HRZB
|
WA
|
1,300,100
|
Hudson
Valley Holding Corp.
|
1016867
|
HUVL
|
NY
|
2,578,790
|
Independent
Bank Corporation
|
100319
|
IBCP
|
MI
|
2,962,028
|
Indiana
Community Bancorp
|
101857
|
INCB
|
IN
|
1,052,998
|
Intervest
Bancshares Corporation
|
1023951
|
IBCA
|
NY
|
2,382,170
|
Lakeland
Bancorp, Inc.
|
1022451
|
LBAI
|
NJ
|
2,769,463
|
Lakeland
Financial Corporation
|
100608
|
LKFN
|
IN
|
2,469,882
|
LNB
Bancorp, Inc.
|
100612
|
LNBB
|
OH
|
1,181,179
|
Macatawa
Bank Corporation
|
4004314
|
MCBC
|
MI
|
1,981,772
|
MainSource
Financial Group, Inc.
|
100513
|
MSFG
|
IN
|
2,934,326
|
MBT
Financial Corp.
|
4056273
|
MBTF
|
MI
|
1,442,512
|
Mercantile
Bancorp, Inc.
|
1018583
|
MBR
|
IL
|
1,685,805
|
Mercantile
Bank Corporation
|
113567
|
MBWM
|
MI
|
2,017,350
|
Merchants
Bancshares, Inc.
|
100353
|
MBVT
|
VT
|
1,405,994
|
Metro
Bancorp, Inc.
|
4048256
|
METR
|
PA
|
2,086,495
|
MetroCorp
Bancshares, Inc.
|
4039909
|
MCBI
|
TX
|
1,629,732
|
MidWestOne
Financial Group, Inc.
|
1021746
|
MOFG
|
IA
|
1,529,676
|
NewBridge
Bancorp
|
100346
|
NBBC
|
NC
|
2,009,544
|
Old
Second Bancorp, Inc.
|
100625
|
OSBC
|
IL
|
2,699,094
|
Orrstown
Financial Services, Inc.
|
100631
|
ORRF
|
PA
|
1,159,996
|
PAB
Bankshares, Inc.
|
106981
|
PABK
|
GA
|
1,251,219
|
Pacific
Continental Corporation
|
4049245
|
PCBK
|
OR
|
1,150,508
|
Pacific
Mercantile Bancorp
|
4055039
|
PMBC
|
CA
|
1,110,533
|
Peapack-Gladstone
Financial Corporation
|
1137117
|
PGC
|
NJ
|
1,487,679
|
Peoples
Bancorp Inc.
|
100532
|
PEBO
|
OH
|
2,004,754
|
Peoples
Bancorp of North Carolina, Inc.
|
4050385
|
PEBK
|
NC
|
1,041,231
|
Porter
Bancorp, Inc.
|
1022071
|
PBIB
|
KY
|
1,728,762
|
Preferred
Bank
|
1023519
|
PFBC
|
CA
|
1,411,817
|
PremierWest
Bancorp
|
4054224
|
PRWT
|
OR
|
1,715,550
|
Princeton
National Bancorp, Inc.
|
100504
|
PNBC
|
IL
|
1,287,059
|
QCR
Holdings, Inc.
|
1024092
|
QCRH
|
IL
|
1,749,304
|
Royal
Bancshares of Pennsylvania, Inc.
|
100416
|
RBPAA
|
PA
|
1,361,810
|
S.Y.
Bancorp, Inc.
|
100548
|
SYBT
|
KY
|
1,763,533
|
Savannah
Bancorp, Inc.
|
100844
|
SAVB
|
GA
|
1,041,358
|
SCBT
Financial Corporation
|
1019950
|
SCBT
|
SC
|
2,776,684
|
Seacoast
Banking Corporation of Florida
|
100425
|
SBCF
|
FL
|
2,139,915
|
Shore
Bancshares, Inc.
|
1027751
|
SHBI
|
MD
|
1,157,685
|
Sierra
Bancorp
|
4064269
|
BSRR
|
CA
|
1,307,049
|
Simmons
First National Corporation
|
100431
|
SFNC
|
AR
|
2,915,437
|
Smithtown
Bancorp, Inc.
|
100654
|
SMTB
|
NY
|
2,670,257
|
Southern
Community Financial Corporation
|
4072468
|
SCMF
|
NC
|
1,725,341
|
Southside
Bancshares, Inc.
|
1021743
|
SBSI
|
TX
|
2,941,563
|
State
Bancorp, Inc.
|
100446
|
STBC
|
NY
|
1,596,464
|
StellarOne
Corporation
|
1032007
|
STEL
|
VA
|
2,982,264
|
Sterling
Bancorp
|
100450
|
STL
|
NY
|
2,136,805
|
Suffolk
Bancorp
|
100453
|
SUBK
|
NY
|
1,671,816
|
Summit
Financial Group, Inc.
|
1021909
|
SMMF
|
WV
|
1,577,793
|
Tennessee
Commerce Bancorp, Inc.
|
4056797
|
TNCC
|
TN
|
1,335,751
|
TIB
Financial Corp.
|
108287
|
TIBB
|
FL
|
1,717,622
|
Tower
Bancorp, Inc.
|
100663
|
TOBC
|
PA
|
1,378,936
|
TriCo
Bancshares
|
100546
|
TCBK
|
CA
|
2,095,666
|
Union
Bankshares Corporation
|
100575
|
UBSH
|
VA
|
2,583,284
|
Univest
Corporation of Pennsylvania
|
100671
|
UVSP
|
PA
|
2,117,849
|
Virginia
Commerce Bancorp, Inc.
|
4053565
|
VCBI
|
VA
|
2,734,112
|
VIST
Financial Corp.
|
100598
|
VIST
|
PA
|
1,276,395
|
Wainwright
Bank & Trust Company
|
100490
|
WAIN
|
MA
|
1,009,883
|
Washington
Trust Bancorp, Inc.
|
100491
|
WASH
|
RI
|
2,888,065
|
West
Bancorporation, Inc.
|
1021570
|
WTBA
|
IA
|
1,499,611
|
West
Coast Bancorp
|
100183
|
WCBO
|
OR
|
2,653,357
|
Yadkin
Valley Financial Corporation
|
4140013
|
YAVY
|
NC
|
2,051,672
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in
thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
116,343 |
|
|
$ |
118,484 |
|
|
$ |
117,973 |
|
|
$ |
105,551 |
|
|
$ |
80,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
36,062 |
|
|
|
55,216 |
|
|
|
63,417 |
|
|
|
53,224 |
|
|
|
30,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
80,281 |
|
|
|
63,268 |
|
|
|
54,556 |
|
|
|
52,327 |
|
|
|
50,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
21,202 |
|
|
|
10,207 |
|
|
|
4,298 |
|
|
|
2,644 |
|
|
|
2,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
59,079 |
|
|
|
53,061 |
|
|
|
50,258 |
|
|
|
49,683 |
|
|
|
47,783 |
|
Other
noninterest income
|
|
|
20,547 |
|
|
|
22,236 |
|
|
|
19,844 |
|
|
|
18,668 |
|
|
|
16,771 |
|
Gain
on sale of credit card portfolio
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
863 |
|
Gain
on redemption of Visa shares
|
|
|
0 |
|
|
|
642 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Mortgage
banking income
|
|
|
1,695 |
|
|
|
411 |
|
|
|
309 |
|
|
|
194 |
|
|
|
521 |
|
Net
securities gains (losses)
|
|
|
2 |
|
|
|
39 |
|
|
|
89 |
|
|
|
(68 |
) |
|
|
(69 |
) |
Noninterest
expense
|
|
|
(53,475 |
) |
|
|
(47,481 |
) |
|
|
(42,923 |
) |
|
|
(40,242 |
) |
|
|
(38,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
27,848 |
|
|
|
28,908 |
|
|
|
27,577 |
|
|
|
28,235 |
|
|
|
27,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
8,869 |
|
|
|
9,207 |
|
|
|
8,366 |
|
|
|
9,514 |
|
|
|
9,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
18,979 |
|
|
|
19,701 |
|
|
|
19,211 |
|
|
|
18,721 |
|
|
|
17,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
and accretion of discount on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
2,694 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$ |
16,285 |
|
|
$ |
19,701 |
|
|
$ |
19,211 |
|
|
$ |
18,721 |
|
|
$ |
17,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding*
|
|
|
12,851,845 |
|
|
|
12,271,927 |
|
|
|
12,188,594 |
|
|
|
12,069,300 |
|
|
|
11,927,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share*
|
|
$ |
1.27 |
|
|
$ |
1.61 |
|
|
$ |
1.58 |
|
|
$ |
1.55 |
|
|
$ |
1.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding*
|
|
|
12,952,444 |
|
|
|
12,459,802 |
|
|
|
12,424,137 |
|
|
|
12,375,467 |
|
|
|
12,289,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share*
|
|
$ |
1.26 |
|
|
$ |
1.58 |
|
|
$ |
1.55 |
|
|
$ |
1.51 |
|
|
$ |
1.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared*
|
|
$ |
0.62 |
|
|
$ |
0.61 |
|
|
$ |
0.55 |
|
|
$ |
0.38 |
|
|
$ |
0.46 |
|
* Share and per share data have been
adjusted for a 2-for-1 stock split on April 28, 2006.
ITEM
6. SELECTED FINANCIAL DATA (continued)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in
thousands) |
|
Balances
at December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,571,505 |
|
|
$ |
2,377,445 |
|
|
$ |
1,989,133 |
|
|
$ |
1,836,706 |
|
|
$ |
1,634,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
$ |
2,012,010 |
|
|
$ |
1,833,334 |
|
|
$ |
1,523,720 |
|
|
$ |
1,353,837 |
|
|
$ |
1,198,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$ |
1,851,125 |
|
|
$ |
1,885,299 |
|
|
$ |
1,478,918 |
|
|
$ |
1,475,765 |
|
|
$ |
1,266,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
short-term borrowings
|
|
$ |
354,051 |
|
|
$ |
202,609 |
|
|
$ |
316,165 |
|
|
$ |
187,484 |
|
|
$ |
211,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
$ |
40,042 |
|
|
$ |
90,043 |
|
|
$ |
44 |
|
|
$ |
45 |
|
|
$ |
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
debentures
|
|
$ |
30,928 |
|
|
$ |
30,928 |
|
|
$ |
30,928 |
|
|
$ |
30,928 |
|
|
$ |
30,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
$ |
279,994 |
|
|
$ |
149,880 |
|
|
$ |
146,270 |
|
|
$ |
130,187 |
|
|
$ |
113,334 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 and a
loan production office in Indianapolis, Indiana. The Company earned $19.0
million for the year 2009 versus $19.7 million for 2008, a decrease of 3.7%. The
decrease was driven primarily by an $11.0 million increase in the provision for
loan losses, a $6.0 million increase in noninterest expense and a $1.1 million
decrease in noninterest income. Offsetting these negative impacts was a $17.0
million increase in net interest income. The Company earned $19.7 million for
the year 2008 versus $19.2 million for 2007, an increase of 2.6%. The increase
was driven primarily by an $8.7 million increase in net interest income and a
$3.1 million increase in noninterest income. Offsetting these positive impacts
was a $5.9 million increase in the provision for loan losses and a $4.6 million
increase in noninterest expense.
Basic earnings per share for the year
2009 was $1.27 per share versus $1.61 per share for 2008 and $1.58 for 2007.
Diluted earnings per share for the year ended 2009 was $1.26 per share versus
$1.58 per share for the year ended 2008 and $1.55 for the year ended 2007.
Diluted earnings per share reflect the potential dilutive impact of warrants and
stock awards granted under employee equity incentive plans. Basic and diluted
earnings per share for 2009 were also impacted by the Company’s issuance of 3.6
million common shares during the year and the Company’s participation in the
TARP Capital Purchase Program.
The Company’s total assets were $2.572
billion as of December 31, 2009 versus $2.377 billion as of December 31, 2008,
an increase of $194.1 million or 8.2%. This increase was primarily due to a
$166.5 million increase in commercial loans from $1.533 billion at December 31,
2008 to $1.700 billion at December 31, 2009.
2009
versus 2008
The Company reported net income of
$19.0 million in 2009, a decrease of $722,000, or 3.7%, versus net income of
$19.7 million in 2008. Net interest income increased $17.0 million, or 26.9%, to
$80.3 million versus $63.3 million in 2008. Net interest income increased
primarily due to the expansion of the net interest margin from 3.14% in 2008 to
3.51% in 2009 resulting from a large decrease in interest expense that offset an
increase in interest income. In addition, increases in average earning assets
contributed to the increase in net interest income. Particularly a 10.9%
increase in commercial loans reflecting our continued strategic focus on
commercial lending as a key driver of the business, contributed to the
increase.
Interest income decreased $2.1 million, or 1.8%, from $118.5 million in 2008 to
$116.3 million in 2009. The decrease was driven primarily by decreases in the
yield on average earning assets. Interest expense decreased $19.2 million, or
34.7%, from $55.2 million in 2008 to $36.1 million in 2009. The decrease was
primarily the result of a 113 basis point decrease in the Company’s daily cost
of funds over the year due to a decrease in market rates over the
same time period. The Company’s net interest margin increased to 3.51% in 2009
versus 3.14% in 2008, primarily due to declines in the Company’s daily cost of
funds. Average earning assets increased by $277.5 million from $2.0 billion in
2008 to $2.3 billion in 2009. As previously stated, an increase in commercial
loans accounted for most of the increase. Additionally, most of the loan growth
was attributed to significant growth in five counties: St. Joseph, Kosciusko,
Allen, Hamilton and Elkhart and with balanced growth in the Bank’s other
regions. The capital from the common stock offering and particularly the capital
received from the TARP Capital Purchase Program were used to fund the loan
growth during 2009. In addition, deposits increased to fund the loan growth,
driven primarily by increases of $110.6 million in average certificates of
deposit of $100,000 or more, $77.5 million in interest bearing transaction
accounts and $29.7 million in other certificates of deposit. The increase in
interest bearing transaction accounts was driven primarily by the addition of a
new product, which pays a higher interest rate on balances up to a maximum
balance amount when certain conditions are met during each interest cycle.
Management believes that the growth in the loan portfolio will likely continue
in a measured, but prudent, fashion as a result of our strategic focus on
commercial lending and in conjunction with the general expansion and penetration
of the geographical markets the Company serves, as well as our expansion in the
Indianapolis market and the continued progress that we are making in that
relatively new market.
Interest income was also affected by
an increase in nonaccrual loans. Nonaccrual loans were $30.5 million, or 1.52%
of total loans, at year end versus $20.8 million, or 1.14% of total loans, at
the end of 2008. There were 31 relationships totaling $31.8 million classified
as impaired as of December 31, 2009 versus 22 relationships totaling $20.3
million at the end of 2008. The increase in nonaccrual loans resulted primarily
from the addition of three commercial relationships totaling $10.6 million. The
increase in impaired loans resulted from the three commercial relationships
mentioned previously, as well as one other commercial relationship of $2.1
million. Net charge-offs were $8.0 million in 2009 versus $7.1 million in 2008,
representing 0.42% and 0.43% of average daily loans in 2009 and 2008. Total
nonperforming loans were $30.7 million, or 1.53% of total loans, at year end
2009 versus $21.3 million, or 1.16% of total loans, at the end of
2008.
The provision for loan loss expense
was $21.2 million in 2009, resulting in an allowance for loan losses at December
31, 2009 of $32.1 million, which represented 1.59% of the loan portfolio, versus
a provision for loan loss expense of $10.2 million in 2008 and an allowance for
loan losses of $18.9 million at the end of 2008, or 1.03% of the loan portfolio.
The higher provision in 2009 versus 2008 was attributable to a number of
factors, but was primarily a result of an increase in net charge-offs, general
growth in the loan portfolio, as well as higher allocations on specific watch
list credits. The level of loan loss provision was also influenced by other
factors related to the growth in the loan portfolio, such as the continued
emerging market risk, the continued emerging concentration risk, commercial loan
focus and large credit concentration, new industry lending activity, general
economic conditions and historical loss percentages. In addition, management
gave consideration to changes in the allocation for specific watch list credits
in determining the appropriate level of the loan loss provision. Management’s
overall view on current credit quality was also a factor in the determination of
the provision for loan losses. The Company’s management continues to monitor the
adequacy of the provision based on loan levels, asset quality, economic
conditions and other factors that may influence the assessment of the
collectability of loans.
Noninterest income was $22.2 million
in 2009 versus $23.3 million in 2008, a decrease of $1.1 million, or 4.7%. The
2009 decrease was driven in a large part, by a change related to the
processing of merchant credit card activities. Prior to the third quarter of
2009, transaction driven revenue and expenses related to this category were
reported on a gross basis in merchant card fee income in noninterest income and
credit card interchange fees in noninterest expense. Beginning in the second
quarter of 2009, the Company began converting clients to a new third party
processor for this activity. As a result, only net revenues with the new
processor are being recognized in merchant card fee income in noninterest
income. This change was driven by the structure of the agreement with the third
party processor, and not due to any change in the Company’s accounting policies.
Service charges on deposit accounts decreased $358,000, or 4.2%, also
affecting noninterest income. The decrease was due primarily to decreases in
retail NSF and overdraft fees as we believe retail customers have been spending
less because of the general economic environment. Mortgage banking income
increased by $1.3 million, or 312.4%, offsetting some of the decreases in
noninterest income. The increase was driven by lower mortgage interest rates,
which has led to increased loan refinance volumes as well as a larger pipeline
of mortgage loan applications. Loan, insurance and service fees also increased
$354,000, or 11.1%, driven by higher fee income on increased debit card activity
generated by requirements under a rewards checking program. Additionally,
noninterest income in 2008 was positively impacted due to a nonrecurring gain of
$642,000 related to the VISA initial public offering and the redemption of some
of the shares we owned in connection with the offering.
Noninterest expense increased $6.0 million, or 12.6%, from $47.5 million in 2008
to $53.5 million in 2009. Other expense increased by $4.0 million, or 35.9%,
driven by higher FDIC insurance premiums. FDIC premiums increased by $2.8
million in 2009 versus 2008. We expect our premiums to continue to increase as
we increase our deposit base and as the FDIC continues to charge all insured
institutions higher assessments due to the current troubled
economy. Salaries and employee benefits increased by $2.3 million, or 9.0%. The
increase was driven by staff additions primarily in revenue producing areas as
well as normal salary increases, increased health insurance and
performance-based incentive expense. Credit card interchange fees decreased due
to the agreement with the third party processor which resulted in reporting
revenues and expenses on a net basis.
As a result of these factors, income
before income tax expense decreased $1.1 million, or 3.7%, from $28.9 million in
2008 to $27.8 million in 2009. Income tax expense was $8.9 million in 2009
versus $9.2 million in 2008. Income tax as a percentage of income before tax was
31.8% in both 2009 and 2008. Net income decreased $722,000, or 3.7%, to $19.0
million in 2009 versus $19.7 million in 2008. Basic earnings per share in 2009
was $1.27, a decrease of 21.1%, versus $1.61 in 2008. Earnings per share in 2009
were impacted by the Company’s issuance of an additional 3.6 million shares of
common stock, as well as $2.7 million in dividends and accretion of discount on
preferred stock related to the Company’s participation in the TARP Capital
Purchase Program. The Company’s net income performance represented a 12.7%
return on January 1, 2009, stockholders’ equity versus 13.5% in 2008. The net
income performance resulted in a 0.78% return on average daily assets in 2009
versus 0.91% in 2008.
RESULTS
OF OPERATIONS
2008
versus 2007
The Company reported record net
income of $19.7 million in 2008, an increase of $490,000, or 2.6%, versus net
income of $19.2 million in 2007. Net interest income increased $8.7 million, or
16.0%, to $63.3 million versus $54.6 million in 2007. Net interest income
increased primarily due to increases in average earning assets, particularly a
22.4% increase in commercial loans as a result of our continued strategic focus
on commercial lending as a key driver of the business. Interest income increased
$511,000, or 0.4%, from $118.0 million in 2007 to $118.5 million in 2008. The
increase was driven primarily by increases in average earning assets. Interest
expense decreased $8.2 million, or 12.9%, from $63.4 million in 2007 to $55.2
million in 2008. The decrease was primarily the result of a 101 basis point
decrease in the Company’s daily cost of funds over the year due to a decrease in
market rates over the same time period. The Company had a net interest margin of
3.14% in 2008 versus 3.22% in 2007, primarily due to a decline in the prime rate
from 7.25% to 3.25% during 2008, which was led by changes in the Fed Fund rate
by the Federal Open Market Committee. Average earning assets increased by $318.5
million from $1.7 billion in 2007 to $2.0 billion in 2008. This increase was due
primarily to loan growth led by significant growth in five counties: St. Joseph,
Kosciusko, Allen, Hamilton and Elkhart and with balanced growth in the Bank’s
other regions. Deposits increased to fund the loan growth during 2008, driven
primarily by increases of $69.3 million in interest bearing transaction
accounts, $37.3 million in average brokered deposit balances and $36.9 million
in average other time deposit account balances. The increase in interest bearing
transaction accounts was driven primarily by the addition of a new product,
which paid a higher interest rate on balances up to a maximum balance amount
when certain conditions were met during each interest cycle. In addition, loan
growth was funded by a $97.0 million increase in the average balance in Federal
Home Loan Bank advances.
Nonaccrual loans were $20.8 million,
or 1.14% of total loans, at year end versus $7.0 million, or 0.46% of total
loans, at the end of 2007. There were 22 relationships totaling $20.3 million
classified as impaired as of December 31, 2008 versus five relationships
totaling $6.7 million at the end of 2007. The increase in impaired and
nonperforming loans resulted primarily from the addition of four commercial
relationships totaling $14.4 million. Net charge-offs were $7.1 million in 2008
versus $3.0 million in 2007, representing 0.43% and 0.21% of average daily loans
in 2008 and 2007. Total nonperforming loans were $21.3 million, or 1.16% of
total loans, at year end 2008 versus $7.4 million, or 0.49% of total loans, at
the end of 2007. The provision for loan loss expense was $10.2 million in 2008,
resulting in an allowance for loan losses at December 31, 2008 of $18.9 million,
which represented 1.03% of the loan portfolio, versus a provision for loan loss
expense of $4.3 million in 2007 and an allowance for loan losses of $15.8
million at the end of 2007, or 1.04% of the loan portfolio. The higher provision
in 2008 versus 2007 was attributable to a number of factors, but was primarily a
result of an increase in net charge-offs, general growth in the loan portfolio,
as well as higher allocations on specific watch list credits. The level of loan
loss provision was also influenced by other factors related to the growth in the
loan portfolio, such as the continued emerging market risk, the continued
emerging concentration risk, commercial loan focus and large credit
concentration, new industry lending activity, general economic conditions and
historical loss percentages. In addition, management gave consideration to
changes in the allocation for specific watch list credits in determining the
appropriate level of the loan loss provision. Management’s overall view on
current credit quality was also a factor in the determination of the provision
for loan losses.
Noninterest
income was $23.3 million in 2008 versus $20.2 million in 2007, an increase of
$3.1 million, or 15.3%. The 2008 increase was driven by a $1.4 million, or
18.9%, increase in service charges on deposit accounts. The increase was due
primarily to increases in retail NSF fees and account analysis service charges
on commercial checking accounts, which are generally higher when the earnings
allowance credit rate is lower. Additionally, noninterest
income increased due to a nonrecurring gain of $642,000 related to the VISA
initial public offering and the redemption of some of the shares we owned in
connection with the offering. Investment brokerage fees increased $381,000, or
25.6%, due to increased trade volume. Loan, insurance and service fees increased
$328,000, or 13.2%, driven by higher fee income on debit card
activity.
Noninterest expense increased $4.6
million, or 10.6%, from $42.9 million in 2007 to $47.5 million in 2008. Other
expense increased by $1.8 million, or 20.1%, driven by regulatory expenses which
increased by $1.5 million due to the Company’s resumption of regular FDIC
insurance premiums, as prior credits expired early in 2008. Salaries and
employee benefits increased by $1.7 million, or 7.0%, driven by normal salary
increases, increased health insurance and performance-based incentive expense,
the addition of revenue producing staff and enhanced staff in administrative
positions. Data processing fees and supplies increased $549,000, or 17.7%,
driven by the implementation of a new corporate treasury management platform and
contractual increases in existing operating services. Net occupancy expense
increased by $348,000, or 12.7%, primarily as a result of higher maintenance and
repair costs and higher property tax expense that resulted from the Indiana
property tax reapportionment process.
As a result of these factors, income
before income tax expense increased $1.3 million, or 4.8%, from $27.6 million in
2007 to $28.9 million in 2008. Income tax expense was $9.2 million in 2008
versus $8.4 million in 2007. Income tax as a percentage of income before tax was
31.8% in 2008 versus 30.3% in 2007. The increase in the tax rate was driven by a
lower percentage of revenue being derived from tax-advantaged sources in 2008
versus 2007. Net income increased $490,000, or 2.6%, to $19.7 million in 2008
versus $19.2 million in 2007. Basic earnings per share in 2008 was $1.61, an
increase of 1.9%, versus $1.58 in 2007. The Company’s net income performance
represented a 13.5% return on January 1, 2008, stockholders’ equity versus 14.8%
in 2007. The net income performance resulted in a 0.91% return on average daily
assets in 2008 versus 1.04% in 2007.
As of December 31, 2009, the Company
had 43 branches serving twelve counties in northern Indiana and one loan
production office in Indianapolis. Since 1996, the Company has added seventeen
new offices through acquisition and internal growth. The Company will consider
future acquisition and expansion opportunities, including FDIC assisted
transactions, with an emphasis on markets that it believes would be receptive to
its business philosophy of client-focused, independent banking, as well as
increased penetration in existing markets where opportunities for market share
growth exist.
Total assets of the Company were $2.572
billion as of December 31, 2009, an increase of $194.1 million, or 8.2%, when
compared to $2.377 billion as of December 31, 2008. Total cash and cash
equivalents decreased by $8.0 million, or 12.5%, to $56.0 million at December
31, 2009 from $64.0 million at December 31, 2008.
Total securities available for sale
increased by $23.0 million, or 5.9%, to $410.0 million at December 31, 2009 from
$387.0 million at December 31, 2008. The portfolio contained mostly
collateralized mortgage obligations and other securities which were either
directly or indirectly backed by the federal government or a local municipal
government and collateralized mortgage obligations rated AAA by S&P or Aaa
by Moody’s at the time of purchase. As of December 31, 2009, the Company had
$72.5 million of collateralized mortgage obligations which were not issued by
the federal government or government sponsored agencies, but were rated AAA by
S&P and/or Aaa by Moody’s at the time of purchase. The investment portfolio
did not contain any corporate debt instruments or trust preferred instruments as
of December 31, 2009. The increase in securities available for sale was a result
of a number of activities in the securities portfolio. Paydowns from prepayments
of $98.1 million were received, and the amortization of premiums, net of the
accretion of discounts, was $546,000. Maturities and calls of securities totaled
$16.9 million. These portfolio decreases were offset by securities purchases
totaling $129.2 million. The fair value of the securities increased $9.6 million
due to higher market values for securities which were backed directly or
indirectly by the federal government. The investment portfolio is managed to
provide for an appropriate balance between credit risk and investment return and
to limit the Company’s exposure to risk to an acceptable level.
Six of the 24 private label
collateralized mortgage obligations in the investment portfolio were still rated
AAA/Aaa as of December 31, 2009, but eighteen had been downgraded by S&P,
Fitch and/or Moody’s, including sixteen which were ranked below investment grade
by one or more rating agencies. The Company independently, analyzed valuations
for these securities that include projections of future performance in the
underlying collateral using various scenarios and prepayment assumptions. The
Company used Bloomberg analytics and other third party assistance in preparing
this analysis. Based on the analyses as of December 31, 2009, the Company
realized
$225,000
in other than temporary impairment, equal to expected credit losses, on three of
the 24 private label collateralized mortgage obligations.
Real estate mortgages held for sale
increased by $1.1 million, or 279.3%, to $1.5 million at December 31, 2009 from
$401,000 at December 31, 2008. 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. The Company
generally sells to third parties almost all of the mortgage loans it originates.
During 2009, $121.9 million in real estate mortgages were originated for sale
and $119.9 million in mortgages were sold, compared to $41.0 million and $40.8
million in 2008.
Total loans, excluding real estate
mortgages held for sale, increased by $178.7 million, or 9.8%, to $2.012 billion
at December 31, 2009 from $1.833 billion at December 31, 2008. The mix of loan
types within the Company’s portfolio continued a trend toward a higher
percentage of the total loan portfolio being in commercial loans. This general
increase in commercial loans was a result of the Company’s long standing
strategic focus toward emphasizing origination of commercial loans. The
portfolio breakdown at year end 2009 and 2008 reflected 84% commercial and
industrial and agri-business, 13% residential real estate and home equity and 3%
consumer loans.
At December 31, 2009, the allowance
for loan losses was $32.1 million, or 1.59% of total loans outstanding, versus
$18.9 million, or 1.03% of total loans outstanding at December 31, 2008. 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.
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 from a wide variety of industries.
Commercial loans represent higher dollar loans to fewer customers and therefore
higher credit risk than other types of loans. 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, if economic conditions do not stabilize or improve, certain borrowers
may experience difficulty and the level of nonperforming loans, charge-offs and
delinquencies could rise and require further increases in the provision for loan
losses.
Loans are charged against the allowance
for loan losses when management believes that the principal is uncollectible.
Subsequent recoveries, if any, are credited to the allowance. The allowance is
an amount that management believes will be adequate to absorb probable incurred
credit losses relating to specifically identified loans based on an evaluation,
as well as other probable incurred losses inherent in the loan portfolio. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrower’s
ability to repay. Management also considers trends in adversely classified loans
based upon a monthly review of those credits. An appropriate level of general
allowance is determined after considering the following
factors: application of historical loss percentages, emerging market
risk, commercial loan focus and large credit concentrations, new industry
lending activity and current economic conditions. Federal regulations require
insured institutions to classify their own assets on a regular basis. The
regulations provide for three categories of classified loans – substandard,
doubtful and loss. The regulations also contain a special mention category.
Special mention is defined as loans that do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss, but do possess credit deficiencies or potential
weaknesses deserving management’s close attention. Assets classified as
substandard or doubtful require the institution to establish specific allowances
for loan losses. If an asset or portion thereof is classified as loss, the
insured institution must either establish specified allowances for loan losses
in the amount of 100% of the portion of the asset classified loss, or charge off
such amount. At December 31, 2009, on the basis of management’s review of the
loan portfolio, the Company had loans totaling $178.0 million on the classified
loan list versus $98.8 million on December 31, 2008. As of December 31, 2009,
the Company had $75.0 million of assets classified special mention, $100.6
million classified as substandard, $369,000 classified as doubtful and $0
classified as loss as compared to $47.2 million, $46.2 million, $5.4 million and
$0 at December 31, 2008. In addition, at December 31, 2009 the Company had two
relationships accounted for as troubled debt restructurings – a $176,000
mortgage loan with an allocation of $35,000 and a $6.3 million commercial credit
with an allocation of $2.5 million. The Company has no commitments to lend
additional funds to either of the borrowers. There were no troubled debt
restructurings at December 31, 2008.
Allowance estimates are developed by
management taking into account actual loss experience, adjusted for current
economic conditions. The Company discusses this methodology with regulatory
authorities to ensure
compliance.
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 current accounting guidance, 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. For a more thorough discussion of the allowance
for loan losses methodology see the Critical Accounting Policies section of this
Item 6.
The allowance for loan losses increased
70.1% or $13.2 million, from $18.9 million December 31, 2008 to $32.1 million at
December 31, 2009. Pooled loan allocations increased $3.2 million from $7.0
million at December 31, 2008 to $10.2 million at December 31, 2009, which was a
result of an increase in pooled loan balances of $101.3 million year over year
and an increase in loan allocations due to increased historical charge-offs and
the current economic environment. Specific loan allocations increased $8.8
million from $10.4 million at December 31, 2008 to $19.2 million at December 31,
2009. This increase was primarily due to the higher classified loan balance. The
unallocated component of the allowance for loan losses increased from $1.4
million at December 31, 2008 to $2.7 million at December 31, 2009 primarily due
to the uncertainty in the current economic conditions.
The Company has experienced growth in
total loans over the last three years of $658.2 million, or 48.6%. The
concentration of this loan growth was in the commercial loan portfolio while the
percentage of commercial loans to all loans has remained relatively constant at
84%, 84% and 82% of the total loan portfolio at December 31, 2009, 2008 and
2007. 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 has historically considered growth and
portfolio composition when determining loan loss allocations. Management
believes that it is prudent to continue to provide for loan losses in a manner
consistent with its historical approach due to the 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 $21.2 million in 2009 versus $10.2 million in 2008. At December
31, 2009, total nonperforming loans increased by $9.4 million to $30.7 million
from $21.3 million at December 31, 2008. Loans delinquent 90 days or more that
were included in the accompanying financial statements as accruing totaled
$190,000 versus $478,000 at December 31, 2008. For December 31, 2009 and 2008,
$29.7 million and $20.3 million of impaired loans were also included in the
total for nonaccrual loans. Total impaired loans increased by $11.5 million to
$31.8 million at December 31, 2009 from $20.3 million at December 31, 2008. The
increase in nonaccrual loans resulted primarily from the addition of three
commercial relationships totaling $10.6 million. As discussed earlier. The
increase in impaired loans resulted primarily from the three commercial
relationships mentioned previously, as well as one other commercial relationship
of $2.1 million. The
Company allocated $6.7 million and $3.2 million of the allowance for loan losses
to the impaired loans in 2009 and 2008. 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
allowance for loan loss to total loans percentage was 1.59% in 2009 and 1.03% in
2008. The Company’s total nonperforming loans
were 1.53% of total loans at year end 2009 versus 1.16% of total loans at the
end of 2008. However, the Company’s overall asset quality position can be
influenced by a small number of credits due to the focus on commercial lending
activity.
Management does not foresee a rapid
recovery from the current distressed economic conditions in the Company’s
markets as certain industries, including residential and commercial real estate
development, recreational vehicle and mobile home manufacturing and other
regional industries continue to experience general slow-downs and shrinkage from
their levels a few years ago. The Company’s continued growth strategy promotes
diversification among industries as well as continued focus on enforcement of a
strong credit environment and an aggressive position in loan work-out
situations. While the Company believes that the impact of these
industry-specific issues will be somewhat mitigated by its overall expansion
strategy, the economic recession impacting its entire geographic footprint will
continue to present challenges.
Total deposits decreased by $34.2
million, or 1.8%, to $1.851 billion at December 31, 2009 from $1.885 billion at
December 31, 2008. The decrease resulted from decreases of $185.1 million in
brokered deposits, $75.3 million in public fund certificates of deposit, $19.9
million in other certificates of deposit and $7.2 million in interest bearing
transaction accounts. These decreases were offset by increases of $104.5 million
in certificates of deposit of $100,000 and over, $45.2 million in money market
accounts, $44.3 million in CDARS certificates of deposit, $30.6
million
in savings deposits and $28.7 million in demand deposits. Growth in savings and
retail transaction accounts was driven by an existing rewards checking product
and the introduction of a rewards savings product. Management intends to
continue to promote these as premier banking products and expects growth to
continue in these products.
Total short-term borrowings increased
by $151.4 million, or 74.8%, to $354.1 million at December 31, 2009 from $202.6
million at December 31, 2008. The increase resulted primarily from $85.0 million
in borrowings under the Federal Reserve Bank’s Term Auction Facility and an $85
million increase in short-term borrowings from the Federal Home Loan Bank of
Indianapolis. The increases were offset by decreases in securities sold under
agreements to repurchase of $10.7 million and $9.4 million in federal funds
purchased.
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 current accounting guidance (AFS adjustment) from capital adequacy
calculations. Excluding this adjustment from the calculation, the Company had a
total risk-based capital ratio of 15.4% and a Tier I risk-based capital ratio of
14.1% as of December 31, 2009. These ratios met or exceeded the Federal
Reserve’s “well-capitalized” minimums of 10.0% and 6.0%, respectively. To
further strengthen the Company's capital position, the Company issued 3.6
million additional common shares resulting in net proceeds to the Company of
$57.9 million in November 2009. In addition, on February 27, 2009, the Company
participated in Treasury's TARP Capital Purchase Program. Pursuant to the
program, the Company issued to Treasury 56,044 shares of the Series A Preferred
Stock. The $56.0 million received by the Company in connection with this
investment qualifies as Tier 1 regulatory capital for the Company. In
conjunction with this issuance of preferred stock, the Company issued a warrant
to purchase 396,538 shares of the Company's common stock. The warrant has
subsequently been adjusted to 198,267 shares as a result of the successful
common equity offering.
The ability to maintain these ratios
is a function of the balance between net income and a prudent dividend policy.
Total stockholders’ equity increased by 86.8% to $280.0 million as of December
31, 2009 from $149.9 million as of December 31, 2008. The increase in 2009
resulted from net income of $19.0 million, as well as the following
factors:
|
·
|
cash
dividends of $10.1 million,
|
|
·
|
a
favorable change in the AFS adjustment for the market valuation on
securities held for sale of $5.8 million, net of
tax,
|
|
·
|
positive
pension liability adjustment of $242,000, net of
tax,
|
|
·
|
$12,000
for net treasury stock sold,
|
|
·
|
$796,000
related to stock option exercises,
|
|
·
|
$322,000
in stock compensation expense,
|
|
·
|
$89,000
in stock award exercise expense,
|
|
·
|
$53.8
million from the issuance of preferred stock, net of accretion,
and
|
|
·
|
$57.9
million from the issuance of common
stock.
|
Total stockholders’ equity increased
by 2.5% to $150.0 million as of December 31, 2008 from $146.3 million as of
December 31, 2007. The increase in 2008 resulted from net income of $19.7
million, as well as the following factors:
|
·
|
cash
dividends of $7.4 million,
|
|
·
|
an
unfavorable change in the AFS adjustment for the market valuation on
securities held for sale of $10.4 million, net of
tax,
|
|
·
|
negative
pension liability adjustment of $629,000, net of
tax,
|
|
·
|
$211,000
for the acquisition of treasury stock,
and
|
|
·
|
$2.1
million related to stock option
exercises.
|
The 2009 AFS adjustment was
primarily related to a 222 basis point increase in the two to five year U.S.
Treasury rates during 2009. Management has factored this into the determination
of the size of the AFS portfolio to help ensure that stockholders’ equity will
be adequate under various scenarios.
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 and the valuation of mortgage
servicing rights.
Allowance
for Loan Losses
The Company maintains an allowance for
loan losses to provide for probable incurred credit losses. Loan losses are
charged against the allowance when management believes that the principle is
uncollectable. Subsequent recoveries, if any, are credited to the allowance.
Allocations of the allowance are made for specific loans and for pools of
similar types of loans, although the entire allowance is available for any loan
that, in management’s judgment, should be charged against the allowance. A
provision for loan losses is taken based on management’s ongoing evaluation of
the appropriate allowance balance. A formal evaluation of the adequacy of the
loan loss allowance is conducted at least monthly and more often if deemed
necessary. The ultimate recovery of all loans is susceptible to future market
factors beyond the Company’s control.
The level of loan loss provision is
influenced by growth in the overall loan portfolio, emerging market risk,
emerging concentration risk, commercial loan focus and large credit
concentration, new industry lending activity, general economic conditions and
historical loss analysis. In addition, management gives consideration to changes
in the allocation for specific watch list credits in determining the appropriate
level of the loan loss provision. Furthermore, management’s overall view on
credit quality is a factor in the determination of the provision.
The determination of the appropriate
allowance is inherently subjective, as it requires significant estimates. The
Company has an established process to determine the adequacy of the allowance
for loan losses that generally includes consideration of the following factors:
changes in the nature and volume of the loan portfolio, overall portfolio
quality and current economic conditions that may affect the borrowers’ ability
to repay. Consideration is not limited to these factors, although they represent
the most commonly cited factors. With respect to specific allocation levels for
individual credits, management generally considers the amounts and timing of
expected future cash flows and the valuation of collateral as the primary
measures. Management also considers trends in adversely classified loans based
upon an ongoing review of those credits. With respect to pools of similar loans,
we generally use percentage allocations based upon historical analysis. We may
also adjust these allocations for other factors cited above. An appropriate
level of general allowance for pooled loans is determined after considering the
following: application of historical loss percentages, emerging market risk,
commercial loan focus and large credit concentration, new industry lending
activity and general economic conditions. It is also possible that the following
could affect the overall process: social, political, economic and terrorist
events or activities. All of these factors are susceptible to significant
change. As a result of this detailed process, the allowance results in two forms
of allocations, specific and general. These two components represent the total
allowance for loan losses deemed adequate to cover probable losses inherent in
the loan portfolio.
Commercial loans are subject to a dual
standardized grading process administered by the credit administration and
internal loan review functions. A credit grade is assigned to each commercial
loan by both the commercial loan officer and the loan review department. These
grade assignments are performed independent of each other and a loan may or may
not be graded the same. The grade given by the loan review department is
assigned in the Company’s loan system for individual credits. The need for
specific allocation of the loan loss reserve is considered for individual
credits when graded special mention, substandard, doubtful or loss. Other
considerations with respect to specific allocations for individual credits
include, but are not limited to, the following: (a) does the customer’s cash
flow or net worth appear insufficient to repay the loan; (b) is there adequate
collateral to repay the loan; (c) has the loan been criticized in a regulatory
examination; (d) is the loan on non-accrual; (e) are there other reasons where
the ultimate collectability of the loan is in question; or (f) are there unique
loan characteristics require special monitoring. Specific allowances are
established in cases where management has identified significant conditions or
circumstances related to an individual credit that we believe indicate the loan
is impaired.
Allocations are also applied to
categories of loans not considered individually impaired but for which the rate
of loss is expected to be consistent with or greater than historical averages.
Such allocations are based on past loss experience and information about
specific borrower situations and estimated collateral values. In addition,
general allocations are made for other pools of loans, including non-classified
loans. These general pooled loan
allocations
are performed for similar portfolios of consumer and residential real estate
loans, and loans within certain industry categories believed to present unique
risk of loss. General allocations of the allowance are primarily made based on a
five-year historical average for loan losses for these portfolios, judgmentally
adjusted for economic factors and portfolio trends.
Due
to the imprecise nature of estimating the allowance for loan losses, the
Company’s allowance for loan losses includes an unallocated component. The
unallocated component of the allowance for loan losses incorporates the
Company’s judgmental determination of inherent losses that may not be fully
reflected in other allocations, including factors such as the level of
classified credits, economic uncertainties, industry trends impacting specific
portfolio
segments, broad portfolio quality trends and trends in the composition of the
Company’s large commercial loan portfolio and related large dollar exposures to
individual borrowers.
Mortgage
Servicing Rights Valuation
The Company adopted the current
accounting guidance on January 1, 2007, and for sales of mortgage loans
beginning in 2007, mortgage servicing rights (MSRs) are initially recognized as
assets for the full fair value of retained servicing rights on loans sold.
Subsequent measurement uses the amortization method where all 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 type and interest rate. Fair value is
determined based upon discounted cash flows using market-based
assumptions.
To determine the fair value of MSRs,
the Company uses a valuation model that calculates the present value of
estimated future net servicing income. In using this valuation method, the
Company incorporates assumptions that market participants would use in
estimating future net servicing income, which include estimates of prepayment
speeds, discount rate, cost to service, escrow account earnings, contractual
servicing fee income, ancillary income, late fees, and float income. The Company
compares the valuation model inputs and results to published industry data in
order to validate the model results and assumptions.
The most significant assumption used to
value MSRs is prepayment rate. In general, during periods of declining interest
rates, the value of MSRs decline due to increasing prepayment speeds
attributable to increased mortgage refinancing activity. Prepayment rates are
estimated based on published industry consensus prepayment rates. Prepayments
will increase or decrease in correlation with market interest rates and actual
prepayments generally differ from initial estimates. If actual prepayment rates
are different than originally estimated, the Company may receive less mortgage
servicing income, which could reduce the value of the MSRs. Other assumptions
used in estimating the fair value of MSRs do not generally fluctuate to the same
degree as prepayment rates, and therefore the fair value of MSRs is less
sensitive to changes in these other assumptions.
The servicing assets had a fair value
of $2.1 million at both December 31, 2009 and 2008. At December 31, 2009, key
economic assumptions and the sensitivity of the current fair value of mortgage
servicing rights to an immediate 10% and 20% adverse changes in those
assumptions are as follows:
|
|
(dollars
in thousands)
|
|
Fair
value of mortgage servicing assets
|
|
$ |
2,136 |
|
Constant
prepayment speed (PSA)
|
|
|
299 |
|
Impact
on fair value of 10% adverse change
|
|
$ |
(112 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(216 |
) |
Discount
rate
|
|
|
9.5 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(53 |
) |
These
sensitivities are hypothetical and should not be relied upon. As the figures
indicate, changes in value based on a 10% and 20% variation in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in value may not be linear. Also, in this table, the
effect of a variation in a particular assumption on the value of the servicing
asset is calculated without changing any other assumption; in reality, changes
in one factor may result in changes in another (for example, increases in market
interest rates may result in lower prepayments), which might magnify or
counteract the sensitivities.
On a monthly basis, the Company
evaluates the possible impairment of MSRs based on the difference between the
carrying amount and the current fair value of MSRs. For purposes of evaluating
and measuring impairment, the Company stratifies its portfolios on the basis of
certain risk characteristics, including loan type and interest rate. If
impairment exists, a valuation allowance is established for any excess of
amortized cost over the current fair value, by risk stratification, through a
charge to income. If the Company later determines that all or
a
portion of the impairment no longer exists for a particular strata, a
reduction of the valuation allowance may be recorded as an increase to
income.
Valuation
and Other Than Temporary Impairment of Investment Securities
The fair values of securities available
for sale are determined on a recurring basis by obtaining quoted prices on
nationally recognized securities exchanges or pricing models utilizing
significant observable inputs such as matrix pricing, which is a mathematical
technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying
on the securities’ relationship to other benchmark quoted securities. Different
judgments and assumptions used in pricing could result in different estimates of
value.
At the end of each reporting period
securities held in the investment portfolio are evaluated on an individual
security level for other than temporary impairment in accordance with current
accounting guidance. An impairment is other than temporary if the decline in the
fair value of the security is below its amortized cost and it is probable that
all amounts due according to the contractual terms of a debt security will not
be received.
Significant judgments are required in
determining impairment, which include making assumptions regarding the estimated
prepayments, loss assumptions and the change in interest rates.
We consider the following factors when
determining an other-than-temporary impairment for a security or
investment:
|
·
|
The
length of time and the extent to which the market value has been less than
amortized cost;
|
|
·
|
The
financial condition and near-term prospects of the
issuer;
|
|
·
|
The
underlying fundamentals of the relevant market and the outlook for such
market for the near future; and
|
|
·
|
Our
intent and ability to hold the security for a period of time sufficient to
allow for any anticipated recovery in market
value.
|
For the private label mortgage-backed
securities, additional independent analysis is performed to determine if
other-than-temporary impairment needs to be recorded for these securities. The
independent analysis utilizes third party reports which include projections of
the cash flows of the individual securities under several different scenarios
based upon assumptions as to collateral defaults, prepayment speeds, expected
losses and the severity of potential losses. Based upon the initial review using
the third party reports, securities may be identified for further analysis. If
any are identified, management makes assumptions as to prepayment speeds,
default rates, severity of losses and lag time until losses are actually
recorded for each security based upon historical data for each security and
other factors. Cash flows for each security using these assumptions are
generated and the net present value is computed using an appropriate discount
rate (the current accounting yield) for the individual security. The net present
value is then compared to the book value of the security to determine if there
is any other-than-temporary impairment that must be recorded.
If, in management’s judgment, an
other-than-temporary impairment exists, the cost basis of the security will be
written down to the then-current fair value, and the unrealized loss will be
transferred from accumulated other comprehensive loss as an immediate reduction
of current earnings (as if the loss had been realized in the period of other
than temporary impairment). In addition, discount accretion will be discontinued
on any bond that meets one or both of the following: (1) the rating by S&P,
Moody’s or Fitch decreases to below “A” and/or (2) the cash flow analysis on a
security indicates under any scenario modeled by the third party there is a
potential to not receive the full amount invested in the security.
Newly Issued But Not Yet Effective Accounting
Standards
In June 2009, the FASB amended previous
guidance relating to transfers of financial assets and eliminates the concept of
a qualifying special purpose entity. This guidance must be applied as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. This guidance
must be applied to transfers occurring on or after the effective date.
Additionally, on and after the effective date, the concept of a qualifying
special-purpose entity is no longer relevant for accounting purposes. Therefore,
formerly qualifying special-purpose entities should be evaluated for
consolidation by reporting entities on and after the effective date in
accordance with the applicable consolidation guidance. The disclosure provisions
were also amended and apply to
transfers that occurred both before and after the effective date of
this guidance. The Company does not anticipate the adoption of this standard
will have any material effect on the Company’s operating results or financial
condition.
In June 2009, the FASB amended guidance
for consolidation of variable interest entity guidance
by replacing the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which
enterprise
has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. Additional disclosures about an enterprise’s involvement in variable
interest entities are also required. This guidance is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter. Early
adoption is prohibited. The Company does not anticipate the adoption of this
standard will have any material effect on the Company’s operating results or
financial condition.
In September 2009, the FASB issued
guidance with respect to how entities calculate net asset value per share or
“NAV” of investments considered “alternative investments”, such as hedge funds,
private equity funds, or funds of funds. This guidance provides a practical
expedient for measuring the fair value of investments in a limited number of
entities that calculate NAV. This guidance provides enhanced disclosure
requirements and is effective for a reporting entity’s first annual reporting
period beginning after December 15, 2009. Early application is permitted in
financial statements that have not yet been issued. The Company did not early
adopt this guidance. The Company does not anticipate the adoption of this
standard will have any material effect on the Company’s operating results or
financial condition.
In January 2010, the FASB amended
existing guidance for fair value measurements and disclosures which requires
disclosures for transfers in and out of Levels 1 and 2 fair value measurements
and activity in Level 3 fair value measurements. The amendments in the guidance
also clarify existing disclosures for level of disaggregation and disclosures
about inputs and valuation techniques. The amendments in the guidance also
include conforming amendments to the guidance on employers’ disclosures about
postretirement benefit plan assets. The guidance was effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company does not anticipate the
adoption of this standard will have any material effect on the Company’s
operating results or financial condition.
No other new accounting standards have
been issued that are not yet effective that are expected to have a significant
impact on the Company’s financial condition or results of
operations.
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 as of the filing date of this Form 10-K, the cash flow
from the securities portfolio is expected to provide approximately $57.0 million
of funding in 2010.
In addition to these primary sources of
funds, management has several secondary sources available to meet potential
funding requirements. As of December 31, 2009, the Company had $180.0 million in
Federal Funds lines with correspondent banks and may borrow up to $300.0 million
at the Federal Home Loan Bank of Indianapolis. The Company had all of its
securities in the available for sale (AFS) portfolio at December 31, 2009.
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 67% 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
the majority of its originated mortgage loans on the secondary market to reduce
interest rate risk and to create an additional source of funding.
As a result of the unprecedented
activity in the financial markets during the third and fourth quarters of 2008
which continued throughout 2009, the Company has reviewed its liquidity plan and
has taken several actions designed to provide for an appropriate funding
strategy in this unsettled environment. These actions include: actively
communicating with correspondent banks who provide federal fund lines to ensure
availability of these funds; expanded use of brokered certificate of deposits,
which have been readily available to the Company at competitive rates;
allocation of collateral at the Federal Reserve Bank for borrowings under their
programs; increased usage of FHLB advances at advantageous rates and an
increased focus on attractive core deposit programs
offered by the Company. The Company had available capacity at the
Federal Reserve Bank of $279 million given current collateral structure and the
terms of these facilities at December 31, 2009.
During 2009, cash and cash equivalents
decreased $8.0 million from $64.0 million as of December 31, 2008 to $56.0
million as of December 31, 2009. The primary driver of this decrease was an
increase in loan balances of $187.1 million, which is net of approximately
$121.9 million of loans originated and sold in 2009. Other uses of funds
included the purchase of securities of $129.2 million and a $50.0 million
paydown of long-term borrowings. Sources of funds were proceeds from short-term
borrowings of $151.4 million, proceeds from the sale of preferred stock of $56.0
million, proceeds from the sale of common stock of $57.9 million, proceeds from
maturities, calls and principal paydowns of securities of $115.0 million and
proceeds from loan sales of $122.0 million.
During 2008, cash and cash equivalents
decreased $3.7 million from $67.7 million as of December 31, 2007 to $64.0
million as of December 31, 2008. The primary driver of this decrease was an
increase in loan balances of $317.5 million, which is net of approximately $41.0
million of loans originated and sold in 2008. Other uses of funds included the
purchase of securities of $143.2 million and a $113.6 million paydown of
short-term borrowings. Sources of funds were proceeds from deposit increases of
$406.4 million, proceeds from long-term borrowings of $90.0 million, proceeds
from maturities, calls and principal paydowns of securities of $66.5 million and
proceeds from loan sales of $41.5 million.
During 2007, cash and cash equivalents
decreased $52.0 million from $119.7 million as of December 31, 2006 to $67.7
million as of December 31, 2007. The primary driver of this decrease was an
increase in loan balances of $178.5 million, which is net of approximately $37.5
million of loans originated and sold in 2007. Another use of funds was purchases
of securities of $104.0 million. Sources of funds were proceeds from short-term
borrowings of $128.7 million, proceeds from maturities, calls and principal
paydowns of securities of $43.6 million, proceeds from loan sales of $39.5
million and proceeds from the sale of securities of $31.6 million.
The
following tables disclose information on the maturity of the Company’s
contractual long-term obligations and commitments. Certificates of deposit
listed are those with original maturities of 1 year or more.
|
|
Payments
Due by Period
|
|
|
|
|
|
|
One
year
|
|
|
|
|
|
|
|
|
After
5
|
|
|
|
Total
|
|
|
or
less
|
|
|
1-3
years
|
|
|
4-5
years
|
|
|
years
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
288,768 |
|
|
$ |
231,567 |
|
|
$ |
52,039 |
|
|
$ |
5,125 |
|
|
$ |
37 |
|
Long-term
debt
|
|
|
40,042 |
|
|
|
0 |
|
|
|
25,000 |
|
|
|
15,000 |
|
|
|
42 |
|
Operating
leases
|
|
|
69 |
|
|
|
42 |
|
|
|
7 |
|
|
|
6 |
|
|
|
14 |
|
Subordinated
debentures
|
|
|
30,928 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
30,928 |
|
Total
contractual long-term cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations
|
|
$ |
359,807 |
|
|
$ |
231,609 |
|
|
$ |
77,046 |
|
|
$ |
20,131 |
|
|
$ |
31,021 |
|
|
|
Amount
of Commitment Expiration Per Period
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
One
year
|
|
|
Over
one
|
|
|
|
Committed
|
|
|
or
less
|
|
|
year
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Unused
loan commitments
|
|
$ |
864,634 |
|
|
$ |
590,615 |
|
|
$ |
274,019 |
|
Commercial
letters of credit
|
|
|
1,200 |
|
|
|
1,200 |
|
|
|
0 |
|
Standby
letters of credit
|
|
|
39,445 |
|
|
|
34,276 |
|
|
|
5,169 |
|
Total
commitments and letters of credit
|
|
$ |
905,279 |
|
|
$ |
626,091 |
|
|
$ |
279,188 |
|
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. 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. Off-Balance Sheet transactions are more fully
discussed in Note 19.
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 significant
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, 2009, the net interest
margin could be expected to decline in both a falling interest rate environment
and in a rising rate environment. During 2009 the FOMC kept the target federal
funds rate at a range of 0% to .25% and indicated they expect to keep the rate
at that level for an extended period of time. Due to the low rate environment
there was a reduction in the Company’s yield on earning assets of .78%. This
decrease in the yield on earning assets was offset by a decrease in the rates
paid on deposit accounts and purchased funds. The rate paid on deposit accounts
and purchased funds decreased 1.28% for 2009. The combined result of the
decreases in the yield on earning assets and in the rates paid on deposits and
purchased funds was an increase in the net margin from 3.14% for 2008 to 3.51%
for 2009. Future changes in the net interest margin will be dependent upon
multiple factors including further actions by the FOMC during 2010 in response
to economic conditions, competitive pressures in the various markets served, and
changes in the structure of the balance sheet as a result of changes in customer
demands for products and services.
The Company utilizes a computer
modeling software to stress test the balance sheet under a wide variety of
interest rate scenarios. The model quantifies the income impact of changes in
customer preference for products, basis risk between the assets and the
liabilities that support them and the risk inherent in different yield curves,
as well as other factors. The ALCO committee reviews these possible outcomes and
makes loan, investment and deposit decisions that maintain reasonable balance
sheet structure in light of potential interest rate movements. Although
management does not consider GAP ratios in this planning, the information can be
used in a general fashion to look at asset and liability mismatches. The
Company’s cumulative repricing GAP ratio as of December 31, 2009 for the next 12
months using a rates unchanged scenario was a negative 16.62% of earning
assets.
The Company’s investment portfolio
consists of U.S. Treasury securities, agencies, mortgage-backed securities and
municipal bonds. During 2009, purchases in the securities portfolio consisted of
primarily mortgage-backed securities and municipal bonds. As of December 31,
2009, the Company’s investment in mortgage-backed securities represented
approximately 84% of total securities, with 66% of the securities consisting of
CMOs and mortgage pools issued by Ginnie Mae, Fannie Mae and Freddie Mac. Ginnie
Mae, Fannie Mae and Freddie Mac securities are each guaranteed by their
respective agencies as to principal and interest. The private label
mortgage-backed securities (CMOs not issued by the government or government
sponsored agencies) comprised approximately 18% of the total securities
portfolio. These private label mortgage-backed securities are all super senior
tranche securities, were rated AAA or better at the time of purchase and met
specific criteria established by the Asset Liability Management Committee of the
Company. 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,
2009, the securities in the AFS portfolio had approximately a 3.8 year average
life with approximately 13% price depreciation in the event of a 300 basis
points upward movement. The portfolio had approximately 7% price appreciation in
the event of a 300 basis point downward movement in rates. As of December 31,
2009, all mortgage-backed securities were performing in a manner consistent with
management’s original ALCO modeled expectations.
The following table provides
information regarding the Company’s financial instruments used for purposes
other than trading that are sensitive to changes in interest rates. For loans,
securities and liabilities with contractual maturities, the tables present
principal cash flows and related weighted-average interest rates by contractual
maturities, as well as the Company’s historical experience of the impact of
interest-rate fluctuations on the prepayment of residential and home equity
loans and mortgage-backed securities. Core deposits such as deposits,
interest-bearing checking, savings and money market deposits that have no
contractual maturity, are shown under Year 1, however historical experience
indicates that some portion of the balances are retained over time.
Weighted-average variable rates are based upon rates existing at the reporting
date.
|
|
2009
|
|
|
|
Principal/Notional
Amount Maturing in:
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
Year
1
|
|
|
Year
2
|
|
|
Year
3
|
|
|
Year
4
|
|
|
Year
5
|
|
|
Thereafter
|
|
|
Total
|
|
|
12/31/2009
|
|
Rate
sensitive assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
interest rate loans
|
|
$ |
209,742 |
|
|
$ |
165,359 |
|
|
$ |
155,828 |
|
|
$ |
195,205 |
|
|
$ |
78,716 |
|
|
$ |
85,199 |
|
|
$ |
890,049 |
|
|
$ |
901,670 |
|
Average
interest rate
|
|
|
6.26 |
% |
|
|
6.40 |
% |
|
|
6.29 |
% |
|
|
5.93 |
% |
|
|
6.12 |
% |
|
|
6.09 |
% |
|
|
|
|
|
|
|
|
Variable
interest rate loans
|
|
$ |
745,623 |
|
|
$ |
109,501 |
|
|
$ |
68,996 |
|
|
$ |
36,013 |
|
|
$ |
40,245 |
|
|
$ |
121,583 |
|
|
$ |
1,121,961 |
|
|
$ |
1,116,860 |
|
Average
interest rate
|
|
|
3.98 |
% |
|
|
3.89 |
% |
|
|
3.63 |
% |
|
|
3.29 |
% |
|
|
3.40 |
% |
|
|
3.43 |
% |
|
|
|
|
|
|
|
|
Fixed
interest rate securities
|
|
$ |
72,265 |
|
|
$ |
48,019 |
|
|
$ |
41,500 |
|
|
$ |
41,071 |
|
|
$ |
43,193 |
|
|
$ |
171,433 |
|
|
$ |
417,481 |
|
|
$ |
409,880 |
|
Average
interest rate
|
|
|
4.97 |
% |
|
|
5.08 |
% |
|
|
5.43 |
% |
|
|
5.20 |
% |
|
|
4.45 |
% |
|
|
2.64 |
% |
|
|
|
|
|
|
|
|
Variable
interest rate securities
|
|
$ |
145 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
145 |
|
|
$ |
148 |
|
Average
interest rate
|
|
|
6.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
Other
interest-bearing assets
|
|
$ |
7,019 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
7,019 |
|
|
$ |
7,019 |
|
Average
interest rate
|
|
|
0.21 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
Rate
sensitive liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing checking
|
|
$ |
259,415 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
259,415 |
|
|
$ |
259,415 |
|
Average
interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
& interest bearing checking
|
|
$ |
724,947 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
724,947 |
|
|
$ |
724,947 |
|
Average
interest rate
|
|
|
0.98 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
Time
deposits
|
|
$ |
688,822 |
|
|
$ |
126,693 |
|
|
$ |
40,312 |
|
|
$ |
7,231 |
|
|
$ |
3,264 |
|
|
$ |
441 |
|
|
$ |
866,763 |
|
|
$ |
870,727 |
|
Average
interest rate
|
|
|
2.20 |
% |
|
|
2.82 |
% |
|
|
3.20 |
% |
|
|
4.12 |
% |
|
|
2.89 |
% |
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
Fixed
interest rate borrowings
|
|
$ |
97,074 |
|
|
$ |
0 |
|
|
$ |
25,000 |
|
|
$ |
0 |
|
|
$ |
15,000 |
|
|
$ |
42 |
|
|
$ |
137,116 |
|
|
$ |
138,436 |
|
Average
interest rate
|
|
|
0.28 |
% |
|
|
0.00 |
% |
|
|
2.53 |
% |
|
|
0.00 |
% |
|
|
3.21 |
% |
|
|
6.15 |
% |
|
|
|
|
|
|
|
|
Variable
interest rate borrowings
|
|
$ |
256,977 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
30,928 |
|
|
$ |
287,905 |
|
|
$ |
287,813 |
|
Average
interest rate
|
|
|
0.47 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
CONSOLIDATED BALANCE SHEETS (in thousands except share
data)
|
|
|
|
|
|
|
December
31
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
48,964 |
|
|
$ |
57,149 |
|
Short-term
investments
|
|
|
7,019 |
|
|
|
6,858 |
|
Total
cash and cash equivalents
|
|
|
55,983 |
|
|
|
64,007 |
|
|
|
|
|
|
|
|
|
|
Securities
available for sale (carried at fair value)
|
|
|
410,028 |
|
|
|
387,030 |
|
Real
estate mortgage loans held for sale
|
|
|
1,521 |
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
Loans,
net of allowance for loan losses of $32,073 and $18,860
|
|
|
1,979,937 |
|
|
|
1,814,474 |
|
|
|
|
|
|
|
|
|
|
Land,
premises and equipment, net
|
|
|
29,576 |
|
|
|
30,519 |
|
Bank
owned life insurance
|
|
|
36,639 |
|
|
|
33,966 |
|
Accrued
income receivable
|
|
|
8,600 |
|
|
|
8,599 |
|
Goodwill
|
|
|
4,970 |
|
|
|
4,970 |
|
Other
intangible assets
|
|
|
207 |
|
|
|
413 |
|
Other
assets
|
|
|
44,044 |
|
|
|
33,066 |
|
Total
assets
|
|
$ |
2,571,505 |
|
|
$ |
2,377,445 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Noninterest
bearing deposits
|
|
$ |
259,415 |
|
|
$ |
230,716 |
|
Interest
bearing deposits
|
|
|
1,591,710 |
|
|
|
1,654,583 |
|
Total
deposits
|
|
|
1,851,125 |
|
|
|
1,885,299 |
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
|
9,600 |
|
|
|
19,000 |
|
Securities
sold under agreements to repurchase
|
|
|
127,118 |
|
|
|
137,769 |
|
U.S.
Treasury demand notes
|
|
|
2,333 |
|
|
|
840 |
|
Other
short-term borrowings
|
|
|
215,000 |
|
|
|
45,000 |
|
Total
short-term borrowings
|
|
|
354,051 |
|
|
|
202,609 |
|
|
|
|
|
|
|
|
|
|
Accrued
expenses payable
|
|
|
14,040 |
|
|
|
17,163 |
|
Other
liabilities
|
|
|
1,236 |
|
|
|
1,434 |
|
Long-term
borrowings
|
|
|
40,042 |
|
|
|
90,043 |
|
Subordinated
debentures
|
|
|
30,928 |
|
|
|
30,928 |
|
Total
liabilities
|
|
|
2,291,422 |
|
|
|
2,227,476 |
|
|
|
|
|
|
|
|
|
|
Commitments,
off-balance sheet risks and contingencies (Notes 1 and 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Cumulative
perpetual preferred stock: 1,000,000 shares authorized, no par
value,
|
|
|
|
|
|
|
|
|
$56,044
liquidation value, 56,044 shares issued and outstanding as of December 31,
2009
|
|
|
54,095 |
|
|
|
0 |
|
Common
stock: 90,000,000 shares authorized, no par
value
|
|
|
|
|
|
|
|
|
16,078,461
shares issued and 15,977,352 outstanding as of December 31,
2009
|
|
|
|
|
|
|
|
|
12,373,080
shares issued and 12,266,849 outstanding as of December 31,
2008
|
|
|
83,487 |
|
|
|
22,085 |
|
Retained
earnings
|
|
|
149,945 |
|
|
|
141,371 |
|
Accumulated
other comprehensive loss
|
|
|
(5,993 |
) |
|
|
(12,024 |
) |
Treasury
stock, at cost (2009 - 101,109 shares, 2008 - 106,231
shares)
|
|
|
(1,540 |
) |
|
|
(1,552 |
) |
Total
stockholders' equity
|
|
|
279,994 |
|
|
|
149,880 |
|
Noncontrolling
interest
|
|
|
89 |
|
|
|
89 |
|
Total
equity
|
|
|
280,083 |
|
|
|
149,969 |
|
Total
liabilities and stockholders' equity
|
|
$ |
2,571,505 |
|
|
$ |
2,377,445 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF INCOME (in thousands except share and per share
data)
|
|
|
|
|
Years
Ended December 31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
NET
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$ |
96,151 |
|
|
$ |
99,538 |
|
|
$ |
102,840 |
|
Tax
exempt
|
|
|
148 |
|
|
|
113 |
|
|
|
137 |
|
Interest
and dividends on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
17,562 |
|
|
|
16,202 |
|
|
|
11,591 |
|
Tax
exempt
|
|
|
2,421 |
|
|
|
2,411 |
|
|
|
2,474 |
|
Interest
on short-term investments
|
|
|
61 |
|
|
|
220 |
|
|
|
931 |
|
Total
interest income
|
|
|
116,343 |
|
|
|
118,484 |
|
|
|
117,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
32,247 |
|
|
|
44,580 |
|
|
|
53,614 |
|
Interest
on borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
1,089 |
|
|
|
5,620 |
|
|
|
7,239 |
|
Long-term
|
|
|
2,726 |
|
|
|
5,016 |
|
|
|
2,564 |
|
Total
interest expense
|
|
|
36,062 |
|
|
|
55,216 |
|
|
|
63,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME
|
|
|
80,281 |
|
|
|
63,268 |
|
|
|
54,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
21,202 |
|
|
|
10,207 |
|
|
|
4,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME AFTER PROVISION FOR
|
|
|
|
|
|
|
|
|
|
|
|
|
LOAN
LOSSES
|
|
|
59,079 |
|
|
|
53,061 |
|
|
|
50,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth
advisory fees
|
|
|
2,980 |
|
|
|
3,278 |
|
|
|
3,142 |
|
Investment
brokerage fees
|
|
|
1,676 |
|
|
|
1,872 |
|
|
|
1,491 |
|
Service
charges on deposit accounts
|
|
|
8,245 |
|
|
|
8,603 |
|
|
|
7,238 |
|
Loan,
insurance and service fees
|
|
|
3,540 |
|
|
|
3,186 |
|
|
|
2,850 |
|
Merchant
card fee income
|
|
|
2,464 |
|
|
|
3,471 |
|
|
|
3,286 |
|
Other
income
|
|
|
1,867 |
|
|
|
1,826 |
|
|
|
1,837 |
|
Mortgage
banking income
|
|
|
1,695 |
|
|
|
411 |
|
|
|
309 |
|
Net
securities gains
|
|
|
2 |
|
|
|
39 |
|
|
|
89 |
|
Gain
on redemption of Visa shares
|
|
|
0 |
|
|
|
642 |
|
|
|
0 |
|
Impairment
on available for sale securities (includes total losses of
$2,925,
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of $2,700 recognized in other comprehensive income,
pretax)
|
|
|
(225 |
) |
|
|
0 |
|
|
|
0 |
|
Total
noninterest income
|
|
|
22,244 |
|
|
|
23,328 |
|
|
|
20,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
27,765 |
|
|
|
25,482 |
|
|
|
23,817 |
|
Net
occupancy expense
|
|
|
3,206 |
|
|
|
3,082 |
|
|
|
2,734 |
|
Equipment
costs
|
|
|
2,147 |
|
|
|
1,941 |
|
|
|
1,906 |
|
Data
processing fees and supplies
|
|
|
3,944 |
|
|
|
3,645 |
|
|
|
3,096 |
|
Credit
card interchange
|
|
|
1,448 |
|
|
|
2,321 |
|
|
|
2,204 |
|
Other
expense
|
|
|
14,965 |
|
|
|
11,010 |
|
|
|
9,166 |
|
Total
noninterest expense
|
|
|
53,475 |
|
|
|
47,481 |
|
|
|
42,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX EXPENSE
|
|
|
27,848 |
|
|
|
28,908 |
|
|
|
27,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
8,869 |
|
|
|
9,207 |
|
|
|
8,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
18,979 |
|
|
$ |
19,701 |
|
|
$ |
19,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
and accretion of discount on preferred stock
|
|
|
2,694 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
|
$ |
16,285 |
|
|
$ |
19,701 |
|
|
$ |
19,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
WEIGHTED AVERAGE COMMON SHARES
|
|
|
12,851,845 |
|
|
|
12,271,927 |
|
|
|
12,188,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER COMMON SHARE
|
|
$ |
1.27 |
|
|
$ |
1.61 |
|
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
WEIGHTED AVERAGE COMMON SHARES
|
|
|
12,952,444 |
|
|
|
12,459,802 |
|
|
|
12,424,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER COMMON SHARE
|
|
$ |
1.26 |
|
|
$ |
1.58 |
|
|
$ |
1.55 |
|
The accompanying notes are an integral
part of these consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands except share
and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders'
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
$ |
0 |
|
|
$ |
17,978 |
|
|
$ |
116,516 |
|
|
$ |
(3,178 |
) |
|
$ |
(1,129 |
) |
|
$ |
130,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
19,211 |
|
|
|
|
|
|
|
|
|
|
|
19,211 |
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,168 |
|
|
|
|
|
|
|
2,168 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,379 |
|
Cash
dividends declared, $.545 per share
|
|
|
|
|
|
|
|
|
|
|
(6,637 |
) |
|
|
|
|
|
|
|
|
|
|
(6,637 |
) |
Treasury
shares purchased under deferred directors' plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,557
shares)
|
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
(243 |
) |
|
|
0 |
|
Treasury
stock sold and distributed under deferred directors'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plan
(1,322 shares)
|
|
|
|
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
0 |
|
Stock
issued for stock option exercises (98,117 shares, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,202
shares redeemed)
|
|
|
|
|
|
|
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
771 |
|
Tax
benefit of stock option exercises
|
|
|
|
|
|
|
396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396 |
|
Stock
option expense
|
|
|
|
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174 |
|
Balance
at December 31, 2007
|
|
|
0 |
|
|
|
19,531 |
|
|
|
129,090 |
|
|
|
(1,010 |
) |
|
|
(1,341 |
) |
|
|
146,270 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
19,701 |
|
|
|
|
|
|
|
|
|
|
|
19,701 |
|
Other
comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,029 |
) |
|
|
|
|
|
|
(11,029 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,672 |
|
Cash
dividends declared, $.605 per share
|
|
|
|
|
|
|
|
|
|
|
(7,417 |
) |
|
|
|
|
|
|
|
|
|
|
(7,417 |
) |
Treasury
shares purchased under deferred directors' plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,211
shares)
|
|
|
|
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
(211 |
) |
|
|
0 |
|
Stock
issued for stock option exercises (165,357 shares)
|
|
|
|
|
|
|
1,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,354 |
|
Tax
benefit of stock option exercises
|
|
|
|
|
|
|
756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756 |
|
Stock
option expense
|
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233 |
|
Adjustment
to initially apply measurement date provision of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 158, net of tax of $8 (Note 13)
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
15 |
|
|
|
|
|
|
|
12 |
|
Balance
at December 31, 2008
|
|
|
0 |
|
|
|
22,085 |
|
|
|
141,371 |
|
|
|
(12,024 |
) |
|
|
(1,552 |
) |
|
|
149,880 |
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands except share
and per share data) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders'
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
0 |
|
|
|
22,085 |
|
|
|
141,371 |
|
|
|
(12,024 |
) |
|
|
(1,552 |
) |
|
|
149,880 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
18,979 |
|
|
|
|
|
|
|
|
|
|
|
18,979 |
|
Other
comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,031 |
|
|
|
|
|
|
|
6,031 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,010 |
|
Common
stock cash dividends declared, $.62 per share
|
|
|
|
|
|
|
|
|
|
|
(7,698 |
) |
|
|
|
|
|
|
|
|
|
|
(7,698 |
) |
Treasury
shares purchased under deferred directors' plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,425
shares)
|
|
|
|
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
(231 |
) |
|
|
0 |
|
Treasury
stock sold and distributed under deferred directors'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plan
(16,547 shares)
|
|
|
|
|
|
|
(243 |
) |
|
|
|
|
|
|
|
|
|
|
243 |
|
|
|
0 |
|
Stock
activity under stock compensation plans (79,950 shares)
|
|
|
|
|
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
796 |
|
Stock
compensation expense
|
|
|
|
|
|
|
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411 |
|
Issuance
of 3,625,431 shares of common stock
|
|
|
|
|
|
|
57,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,922 |
|
Issuance
of 56,044 shares of preferred stock at discount
|
|
|
53,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,759 |
|
Issuance
of warrant to purchase 396,538 shares of common stock (1)
|
|
|
|
|
|
|
2,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,285 |
|
Accretion
of preferred stock discount
|
|
|
336 |
|
|
|
|
|
|
|
(336 |
) |
|
|
|
|
|
|
|
|
|
|
0 |
|
Preferred
stock dividend paid and/or accrued
|
|
|
|
|
|
|
|
|
|
|
(2,371 |
) |
|
|
|
|
|
|
|
|
|
|
(2,371 |
) |
Balance
at December 31, 2009
|
|
$ |
54,095 |
|
|
$ |
83,487 |
|
|
$ |
149,945 |
|
|
$ |
(5,993 |
) |
|
$ |
(1,540 |
) |
|
$ |
279,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Subsequent
to issue, the share count was adjusted to 198,269 shares due to a
Qualified Equity Offering (Note 24).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (in thousands)
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,979 |
|
|
$ |
19,701 |
|
|
$ |
19,211 |
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,252 |
|
|
|
1,940 |
|
|
|
1,721 |
|
Provision
for loan losses
|
|
|
21,202 |
|
|
|
10,207 |
|
|
|
4,298 |
|
Loss
on sale and write down of other real estate owned
|
|
|
154 |
|
|
|
285 |
|
|
|
127 |
|
Amortization
of intangible assets
|
|
|
206 |
|
|
|
206 |
|
|
|
206 |
|
Amortization
of loan servicing rights
|
|
|
587 |
|
|
|
399 |
|
|
|
416 |
|
Net
change in loan servicing rights valuation allowance
|
|
|
0 |
|
|
|
(23 |
) |
|
|
(49 |
) |
Loans
originated for sale
|
|
|
(121,900 |
) |
|
|
(41,000 |
) |
|
|
(37,539 |
) |
Net
gain on sales of loans
|
|
|
(2,085 |
) |
|
|
(786 |
) |
|
|
(676 |
) |
Proceeds
from sale of loans
|
|
|
121,969 |
|
|
|
41,544 |
|
|
|
39,526 |
|
Net
gain on sale of Visa redemption shares
|
|
|
0 |
|
|
|
(642 |
) |
|
|
0 |
|
Net
(gain) loss on sale of premises and equipment
|
|
|
(7 |
) |
|
|
(10 |
) |
|
|
1 |
|
Net
gain on securities available for sale
|
|
|
(2 |
) |
|
|
(39 |
) |
|
|
(89 |
) |
Impairment
on available for sale securities
|
|
|
225 |
|
|
|
0 |
|
|
|
0 |
|
Net
securities amortization (accretion)
|
|
|
546 |
|
|
|
(41 |
) |
|
|
473 |
|
Stock
compensation expense
|
|
|
411 |
|
|
|
233 |
|
|
|
174 |
|
Earnings
on life insurance
|
|
|
(207 |
) |
|
|
(965 |
) |
|
|
(810 |
) |
Death
benefit received on life insurance
|
|
|
(319 |
) |
|
|
0 |
|
|
|
0 |
|
Tax
benefit of stock option exercises
|
|
|
(191 |
) |
|
|
(756 |
) |
|
|
(396 |
) |
Net
change:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
income receivable
|
|
|
(1 |
) |
|
|
527 |
|
|
|
(406 |
) |
Accrued
expenses payable
|
|
|
(2,882 |
) |
|
|
564 |
|
|
|
3,770 |
|
Other
assets
|
|
|
(14,358 |
) |
|
|
(2,326 |
) |
|
|
1,858 |
|
Other
liabilities
|
|
|
(317 |
) |
|
|
334 |
|
|
|
1,216 |
|
Total
adjustments
|
|
|
5,283 |
|
|
|
9,651 |
|
|
|
13,821 |
|
Net
cash from operating activities
|
|
|
24,262 |
|
|
|
29,352 |
|
|
|
33,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of securities available for sale
|
|
|
0 |
|
|
|
0 |
|
|
|
31,612 |
|
Proceeds
from maturities, calls and principal paydowns of
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
available for sale
|
|
|
114,976 |
|
|
|
66,527 |
|
|
|
43,628 |
|
Purchases
of securities available for sale
|
|
|
(129,154 |
) |
|
|
(143,153 |
) |
|
|
(104,007 |
) |
Purchase
of life insurance
|
|
|
(2,147 |
) |
|
|
(11,458 |
) |
|
|
(163 |
) |
Net
increase in total loans
|
|
|
(187,129 |
) |
|
|
(317,454 |
) |
|
|
(178,171 |
) |
Proceeds
from sales of land, premises and equipment
|
|
|
16 |
|
|
|
114 |
|
|
|
85 |
|
Purchases
of land, premises and equipment
|
|
|
(1,318 |
) |
|
|
(5,038 |
) |
|
|
(4,155 |
) |
Proceeds
from sales of other real estate owned
|
|
|
391 |
|
|
|
120 |
|
|
|
11 |
|
Net
cash from investing activities
|
|
|
(204,365 |
) |
|
|
(410,342 |
) |
|
|
(211,160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in total deposits
|
|
|
(34,174 |
) |
|
|
406,381 |
|
|
|
3,153 |
|
Net
increase (decrease) in short-term borrowings
|
|
|
151,442 |
|
|
|
(113,556 |
) |
|
|
128,681 |
|
Proceeds
from long-term borrowings
|
|
|
40,000 |
|
|
|
90,000 |
|
|
|
0 |
|
Payments
on long-term borrowings
|
|
|
(90,001 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Common
dividends paid
|
|
|
(7,698 |
) |
|
|
(7,417 |
) |
|
|
(6,637 |
) |
Preferred
dividends paid
|
|
|
(2,021 |
) |
|
|
0 |
|
|
|
0 |
|
Proceeds
from issuance of preferred stock and warrant
|
|
|
56,044 |
|
|
|
0 |
|
|
|
0 |
|
Proceeds
from issuance of common stock
|
|
|
57,922 |
|
|
|
0 |
|
|
|
0 |
|
Proceeds
from stock option exercise
|
|
|
796 |
|
|
|
2,110 |
|
|
|
1,167 |
|
Purchase
of treasury stock
|
|
|
(231 |
) |
|
|
(211 |
) |
|
|
(243 |
) |
Net
cash from financing activities
|
|
|
172,079 |
|
|
|
377,306 |
|
|
|
126,120 |
|
Net
change in cash and cash equivalents
|
|
|
(8,024 |
) |
|
|
(3,684 |
) |
|
|
(52,008 |
) |
Cash
and cash equivalents at beginning of the year
|
|
|
64,007 |
|
|
|
67,691 |
|
|
|
119,699 |
|
Cash
and cash equivalents at end of the year
|
|
$ |
55,983 |
|
|
$ |
64,007 |
|
|
$ |
67,691 |
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
39,274 |
|
|
$ |
56,508 |
|
|
$ |
59,822 |
|
Income
taxes
|
|
|
11,700 |
|
|
|
8,445 |
|
|
|
8,427 |
|
Supplemental
non-cash disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
transferred to other real estate
|
|
|
464 |
|
|
|
692 |
|
|
|
5,328 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Operations and Principles of Consolidation:
The consolidated financial statements
include Lakeland Financial Corporation and its wholly-owned subsidiary, Lake
City Bank (the “Bank”), together referred to as (the “Company”). Also included
in the consolidated financial statements prior to December 27, 2006 is LCB
Investments, Limited, a wholly owned subsidiary of Lake City Bank, which was a
Bermuda corporation that managed a portion of the Bank’s investment portfolio.
On December 27, 2006, all securities were transferred to Lake City Bank from LCB
Investments, Limited. On December 18, 2006, LCB Investments II, Inc. was formed
as a wholly owned subsidiary of Lake City Bank incorporated in Nevada to manage
a portion of the Bank’s investment portfolio beginning in 2007. On December 21,
2006 LCB Funding, Inc., a real estate investment trust incorporated in Maryland,
was formed as a wholly owned subsidiary of LCB Investments II, Inc. All
intercompany transactions and balances are eliminated in
consolidation.
The Company provides financial services
through its subsidiary, Lake City Bank, a full-service commercial bank with 43
branch offices in twelve counties in northern Indiana. The Company also operates
a loan production office in Indianapolis, which was opened in 2006. The Company
provides commercial, retail, trust and investment services to its customers.
Commercial products include commercial loans and technology-driven solutions to
meet commercial customers’ treasury management needs such as internet business
banking and on-line treasury management services. Retail banking clients are
provided a wide array of traditional retail banking services, including lending,
deposit and investment services. Retail lending programs are focused on mortgage
loans, home equity lines of credit and traditional retail installment loans. The
Company provides credit card services to retail and commercial customers through
its retail card program and merchant processing activity. The Company also has
an Honors Private Banking program that is positioned to serve the more
financially sophisticated customer with a menu including brokerage and trust
services, executive mortgage programs and access to financial planning seminars
and programs. The Company 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.
Subsequent
Events:
The Company has evaluated subsequent
events for recognition or disclosure through March 8, 2010, which is the date
that the Company’s financial statements were issued.
Use of
Estimates:
To prepare financial statements in
conformity with accounting principles generally accepted in the United State 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,
other than temporary impairment of securities and the fair value of loan
servicing rights are particularly subject to change.
Cash
Flows:
Cash and cash equivalents include cash,
demand deposits in other financial institutions and short-term investments with
maturities of 90 days or less. Cash flows are reported net for customer loan and
deposit transactions.
Securities:
Securities are classified as available
for sale when they might be sold before maturity. Securities available for sale
are carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income (loss), net of tax. 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. Securities are classified as held
to maturity and carried at amortized cost when management has the positive
intent and ability to hold them to maturity.
Purchase premiums or discounts are
recognized in interest income using the interest method over the terms of the
securities or over estimated lives for mortgage-backed securities. Gains and
losses on sales are based on the amortized cost of the security sold and
recorded on the trade date. Securities are written down to fair value when a
decline in fair value is deemed to be other-than-temporary, as more fully
discussed in Note 2.
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Real
Estate Mortgage Loans Held for Sale:
Loans held for sale are reported at the
lower of cost or market on an aggregate basis. Net unrealized losses, if any,
are recorded as a valuation allowance and charged to earnings.
Loan sales occur on the delivery date
agreed to in the commitment agreement. The Company retains servicing on the
majority of loans sold. The carrying value of loans sold is reduced by the
amount allocated to the servicing right. The gain or loss on the sale of loans
is the difference between the carrying value of the loans sold and the funds
received from the sale.
Loans:
Loans that management has the intent
and ability to hold for the foreseeable future or until maturity or payoff are
reported at the principal balance outstanding, net of unearned interest,
deferred loan fees and costs, and an allowance for loan losses.
Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term. All mortgage and commercial
loans for which collateral is insufficient to cover all principal and accrued
interest are reclassified as nonaccrual loans, on or before the date when the
loan becomes 90 days delinquent. When a loan is classified as a nonaccrual loan,
interest on the loan is no longer accrued, all unpaid accrued interest is
reversed and interest income is subsequently recorded only to the extent cash
payments are received. Accrual status is resumed when all contractually due
payments are brought current and future payments are reasonably assured.
Consumer installment loans, except those loans that are secured by real estate,
are not placed on a nonaccrual status since these loans are charged-off when
they have been delinquent from 90 to 180 days, and when the related collateral,
if any, is not sufficient to offset the indebtedness. Advances under consumer
line of credit programs, are charged-off when collection appears doubtful.
Nonaccrual loans and loans past due 90 days still on accrual include both
smaller balance homogeneous loans that are collectively evaluated for impairment
and individually classified impaired loans.
Allowance
for Loan Losses:
The allowance for loan losses is a
valuation allowance for probable incurred credit losses. Loan losses are charged
against the allowance when management believes the uncollectability of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. The Company has an established process to determine the adequacy of
the allowance for loan losses that generally includes consideration of the
following factors: changes in the nature and volume of the loan portfolio,
overall portfolio quality and current economic conditions that may affect the
borrowers’ ability to repay. Consideration is not limited to these factors,
although they represent the most commonly cited factors. This evaluation is
inherently subjective, as it requires estimates that are susceptible to
significant revision as more information becomes available or as future events
change. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management’s judgment,
should be charged-off.
The allowance consists of specific and
general components. The specific component relates to loans that are
individually classified as impaired or loans otherwise classified as special
mention, substandard, doubtful or loss on the Company’s watch list. The general
component covers non-classified loans and is based on historical loss experience
adjusted for current factors.
A loan is
impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Loans, for which the terms have been modified, and
for which the borrower is experiencing financial difficulties, are considered
troubled debt restructurings and classified as impaired. Troubled debt
restructurings are measured at the present value of estimated future cash flows
using the loan’s effective rate at inception. Impairment is evaluated in total
for smaller-balance loans of similar nature such as residential mortgage and
consumer loans, and on an individual loan basis for other loans. Factors
considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
and
interest owed. If a loan is impaired, a portion of the allowance may be
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Mortgage and
commercial loans, when they have been delinquent from 90 to 180 days, are
reviewed to determine if a charge-off is necessary, if the related collateral,
if any, is not sufficient to offset the indebtedness.
Investments
in Limited Partnerships:
Investments in limited partnerships
represent the Company’s investments in affordable housing projects for the
primary purpose of available tax benefits. The Company is a limited partner in
these investments and as such, the Company is not involved in the management or
operation of such investments. These investments are accounted for using the
equity method of accounting. Under the equity method of accounting, the Company
records its share of the partnership’s earnings or losses in its income
statement and adjusts the carrying amount of the investments on the balance
sheet. These investments are evaluated for impairment when events indicate the
carrying amount may not be recoverable. The investment recorded at December 31,
2009 and 2008 was $1.2 million and $606,000 and is included with other assets in
the balance sheet.
Foreclosed
Assets:
Assets acquired through or instead of
loan foreclosure are initially recorded at fair value less costs to sell 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, 2009 and 2008, the balance of real estate owned was $872,000
and $953,000 and are included with other assets on the balance
sheet.
Land,
Premises and Equipment:
Land is carried at cost. Premises and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the useful lives of the assets.
Premises assets have useful lives between 7 and 40 years. Equipment assets have
useful lives between 3 and 7 years.
Loan
Servicing Rights:
Servicing rights are recognized
separately when they are acquired through sales of loans. When mortgage loans
are sold, servicing rights are initially recorded at fair value with the income
statement effect recorded in mortgage banking income. Fair value is based on a
valuation model that calculates the present value of estimated future net
servicing income. All classes of servicing assets are subsequently measured
using the amortization method which requires servicing rights to be amortized
into noninterest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying loans.
Servicing rights are evaluated for
impairment based upon the fair value of the rights as compared to carrying
amount. Impairment is determined by stratifying rights into groupings based on
predominant risk characteristics, such as loan type, term and interest rate. Any
impairment of a grouping is reported as a valuation allowance, to the extent
that fair value is less than the carrying amount. If the Company later
determines that all or a portion of the impairment no longer exists for a
particular grouping, a reduction of the allowance may be recorded as an increase
to income. Changes in valuation allowance are reported with mortgage banking
income on the income statement. The fair values of servicing rights are subject
to significant fluctuations as a result of changes in estimated and actual
prepayment speeds and default rates and losses.
Servicing fee income/(loss), which is
included in loan, insurance and service fees in the income statement, is
recorded for fees earned for servicing loans. Fees earned for servicing loans
are based on a contractual percentage of the outstanding principal and are
recorded as income when earned. The amortization of servicing rights is netted
against mortgage banking income. Servicing fees totaled $639,000, $620,000 and
$621,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Late fees and ancillary fees related to loan servicing are not
material.
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Mortgage
Banking Derivatives:
Commitments to fund mortgage loans
(interest rate locks) to be sold into the secondary market and forward
commitments for the future delivery of these mortgage loans are accounted for as
free standing derivatives. Fair values of these mortgage derivatives are
estimated based on changes in mortgage interest rates from the date the interest
on the loan is locked. The Company enters into forward commitments for the
future delivery of mortgage loans when interest rate locks are entered into, in
order to hedge the change in interest rates resulting from its commitments to
fund the loans. Changes in fair values of these derivatives are included in
mortgage banking income.
The Company does not have any other
material derivative instruments, nor does the Company participate in any other
significant hedging activities.
Bank
Owned Life Insurance:
At December 31, 2009 and 2008, the
Company owned $35.8 million and $33.5 million of life insurance policies on
certain officers to provide life insurance for these officers. At December 31,
2009 and 2008 the Company also owned $802,000 and $510,000 of variable life
insurance on certain officers related to a deferred compensation plan. Bank
owned life insurance is recorded at the amount that can be realized under the
insurance contract at the balance sheet date, which is the cash surrender value
adjusted for other changes or other amounts due that are probable at
settlement.
Goodwill
and Other Intangible Assets:
All goodwill on the Company’s
balance sheet resulted from business combinations prior to January 1, 2009 and
represents the excess of the purchase price over the fair value of acquired
tangible assets and liabilities and identifiable intangible assets. Goodwill is
not amortized, but assessed at least annually for impairment and any such
impairment will be recognized in the period identified.
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.
Federal
Home Loan Bank and Federal Reserve Bank Stock:
Federal Home Loan Bank and Federal
Reserve Bank stock is carried at cost in other assets and is periodically
evaluated for impairment based on ultimate recoverability of par value. Both
cash and stock dividends are reported as income.
Repurchase
Agreements:
Substantially all repurchase agreement
liabilities represent amounts advanced by various customers. Securities are
pledged to cover these liabilities, which are not covered by federal deposit
insurance.
Long-term
Assets:
Premises and equipment, core deposit
and other intangible assets and other long-term assets are reviewed for
impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
Benefit
Plans:
The Company maintains a 401(k) profit
sharing plan for all employees meeting age and service requirements. The Company
contributions are based upon the percentage of budgeted net income earned during
the year. The Company has a noncontributory defined benefit pension plan which
covered substantially all employees until the plan was frozen effective April 1,
2000. Funding of the plan equals or exceeds the minimum funding requirement
determined by the actuary. Pension expense is the net of interest cost, return
on plan assets and
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
amortization
of gains and losses not immediately recognized. Benefits are based on years of
service and compensation levels. An employee deferred compensation plan is
available to certain employees with returns based on investments in mutual
funds. The Company maintains a directors’ deferred compensation plan. Effective
January 1, 2003, the directors’ deferred compensation plan was amended to
restrict the deferral to be in stock only and deferred directors’ fees are
included in equity. The Company acquires shares on the open market and records
such shares as treasury stock.
Stock
Compensation:
Compensation cost is recognized for
stock options and restricted stock awards issued to employees, based on the fair
value of these awards at the date of grant. A Black-Scholes model is utilized to
estimate the fair value of stock options, while the market price of the
Company’s common stock at the date of grant adjusted for the present value of
expected dividends is used for restricted stock awards. Compensation cost is
recognized over the required service period, generally defined as the vesting
period.
Income
Taxes:
Annual consolidated federal and state
income tax returns are filed by the Company. Deferred income tax assets and
liabilities are determined using the liability (or balance sheet) method. Income
tax expense is recorded based on the amount of taxes due on its tax return plus
net deferred taxes computed based upon the expected
future
tax consequences of temporary differences between carrying amounts and tax basis
of assets and liabilities,
using
enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.
The Company adopted guidance issued by
the FASB with respect to accounting for uncertainty in income taxes as of
January 1, 2007. A tax position is recognized as a benefit only if it is “more
likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the
largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the “more likely than not” test,
no tax benefit is recorded. The adoption had no affect on the Company’s
financial statements.
The Company recognizes interest and/or
penalties related to income tax matters in income tax expense.
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 current accounting
guidance.
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, stock
awards and warrants. 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 included in Treasury Stock for 2009 and 2008 reflect the
acquisition of 101,109 and 106,231 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 defined benefit pension plans, which are also recognized as a
separate component of equity.
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The
components of other comprehensive income and related tax effects are as
follows:
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Unrealized
holding gain/(loss) on securities available for sale
|
|
|
|
|
|
|
|
|
|
arising
during the period
|
|
$ |
9,366 |
|
|
$ |
(17,394 |
) |
|
$ |
3,272 |
|
Reclassification
adjustment for gains included in net income
|
|
|
(2 |
) |
|
|
(39 |
) |
|
|
(89 |
) |
Reclassification
adjustment for other than temporary impairment
|
|
|
225 |
|
|
|
0 |
|
|
|
0 |
|
Net
securities gain /(loss) activity during the period
|
|
|
9,589 |
|
|
|
(17,433 |
) |
|
|
3,183 |
|
Tax
effect
|
|
|
(3,799 |
) |
|
|
7,048 |
|
|
|
(1,247 |
) |
Net
of tax amount
|
|
|
5,790 |
|
|
|
(10,385 |
) |
|
|
1,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain (loss) on defined benefit pension plans
|
|
|
248 |
|
|
|
(1,179 |
) |
|
|
277 |
|
Amortization
of net actuarial loss
|
|
|
158 |
|
|
|
113 |
|
|
|
114 |
|
Net
gain/(loss) activity during the period
|
|
|
406 |
|
|
|
(1,066 |
) |
|
|
391 |
|
Tax
effect
|
|
|
(165 |
) |
|
|
422 |
|
|
|
(159 |
) |
Net
of tax amount
|
|
|
241 |
|
|
|
(644 |
) |
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income/(loss), net of tax
|
|
$ |
6,031 |
|
|
$ |
(11,029 |
) |
|
$ |
2,168 |
|
The following is a summary of the
accumulated other comprehensive income balances, net of tax:
|
|
|
|
|
Current
|
|
|
|
|
|
|
Balance
|
|
|
Period
|
|
|
Balance
|
|
|
|
at
12/31/08
|
|
|
Change
|
|
|
at
12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities
|
|
|
|
|
|
|
|
|
|
available
for sale
|
|
$ |
(10,210 |
) |
|
$ |
5,790 |
|
|
$ |
(4,420 |
) |
Unrealized
loss on defined benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
pension
plans
|
|
|
(1,814 |
) |
|
|
241 |
|
|
|
(1,573 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(12,024 |
) |
|
$ |
6,031 |
|
|
$ |
(5,993 |
) |
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 $7.7
million and $7.2 million of cash on hand or on deposit with the Federal Reserve
Bank to meet regulatory reserve and clearing requirements at year-end 2009 and
2008.
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. In addition, as a result of the Company's participation in
the TARP Capital Purchase Program, the Company may not increase the quarterly
dividends it pays on the Company's common stock above $0.155 per share for three
years, without the consent of Treasury, unless Treasury no longer holds shares
of the Series A Preferred Stock.
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair
Value of Financial Instruments:
Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed in Note 5. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Industry
Segments:
The Company’s chief decision-makers
monitor and evaluate financial performance on a Company-wide basis. All of the
Company’s financial service operations are similar and considered by management
to be aggregated into one reportable operating segment. While the Company has
assigned certain management responsibilities by region and business-line, the
Company's chief decision-makers monitor and evaluate financial performance on a
Company-wide basis. The majority of the Company's revenue is from the business
of banking and the Company's assigned regions have similar economic
characteristics, products, services and customers. Accordingly, all of the
Company’s operations are considered by management to be aggregated in one
reportable operating segment.
Adoption
of New Accounting Standards:
In September 2006, the FASB issued
guidance that defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This guidance also
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The guidance was effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued guidance
that delayed the effective date of this fair value guidance for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal year.
The effect of adopting this new guidance did not have a material effect on the
Company’s operating results or financial condition.
In December 2007, the FASB issued
guidance that establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in an
acquire, including the recognition and measurement of goodwill acquired in a
business combination. The guidance is effective for fiscal years beginning on or
after December 15, 2008. The effect of adopting this new guidance did not have a
material effect on the Company’s operating results or financial
condition.
In December 2007, the FASB issued
guidance that changes the accounting and reporting for minority interests, which
is recharacterized as noncontrolling interests and classified as a component of
equity within the consolidated balance sheets. The guidance was effective as of
the beginning of the first fiscal year beginning on or after December 15, 2008.
The effect of adopting this new guidance did not have a material effect on the
Company’s operating results or financial condition.
In March 2008, the FASB issued guidance
that amends and expands the disclosure requirements for derivative instruments
and hedging activities. The guidance requires qualitative disclosure about
objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. The guidance was effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The effect of adopting this new
guidance did not have a material effect on the Company’s operating results or
financial condition.
In May 2009, the FASB issued guidance
which requires the effects of events that occur subsequent to the balance sheet
date be evaluated through the date the financial statements are either issued or
available to be issued. Companies should disclose the date through which
subsequent events have been evaluated and whether that date is the date the
financial statements were issued or the date the financial statements were
available to be issued. Companies are required to reflect in their financial
statements the effects of subsequent events that provide additional evidence
about conditions at the balance sheet date (recognized subsequent events).
Companies are also prohibited from reflecting in their financial statements the
effects of subsequent events that provide evidence about conditions that arose
after the balance sheet date (nonrecognized subsequent events), but requires
information about those events to be disclosed if the financial statements would
otherwise be misleading. This guidance was effective
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
for
interim and annual financial periods ending after June 15, 2009 with prospective
application. The effect of adopting this new guidance did not have a material
effect on the Company’s operating results or financial condition.
In June 2009, the FASB replaced The Hierarchy of Generally Accepted
Accounting Principle, with the FASB Accounting Standards
Codification TM (The Codification) as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. Rules and interpretive releases of the Securities and
Exchange Commission under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The Codification was effective for
financial statements issued for periods ending after September 15, 2009. The
effect of adopting this new guidance did not have a material effect on the
Company’s operating results or financial condition.
In June 2008, the FASB issued guidance
which addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting and, therefore, included in the
earnings allocation in computing earnings per share (EPS) under the two-class
method. Unvested share-based payment awards that contain non-forfeitable rights
to dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of EPS pursuant to the
two-class method. This guidance was effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those years. All prior period EPS data presented were to be adjusted
retrospectively (including interim financial statements, summaries of earnings,
and selected financial data) to conform to the provisions of this guidance. The
effect of adopting this new guidance did not have a material effect on the
Company’s operating results or financial condition.
In December 2008, the FASB issued
guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other post-retirement plan. These additional disclosures include
disclosure of investment policies and fair value disclosures of plan assets,
including fair value hierarchy. The guidance also includes a technical amendment
that requires a nonpublic entity to disclose net periodic benefit cost for each
annual period for which a statement of income is presented. This guidance is
effective for fiscal years ending after December 15, 2009. Upon initial
application, provisions of the FSP are not required for earlier periods that are
presented for comparative purposes. The new disclosures have been presented in
the notes to the consolidated financial statements.
In April 2009, the FASB amended
existing guidance for determining whether impairment is other-than-temporary for
debt securities. The guidance requires an entity to assess whether it intends to
sell, or it is more likely than not that it will be required to sell, a security
in an unrealized loss position before recovery of its amortized
cost
basis. If
either of these criteria is met, the entire difference between amortized cost
and fair value is recognized as
impairment
through earnings. For securities that do not meet the aforementioned criteria,
the amount of impairment is split into two components as follow: 1)
other-than-temporary impairment (OTTI) related to other factors, which is
recognized in other comprehensive income and 2) OTTI related to credit loss,
which must be recognized in the income statement. The credit loss is defined as
the difference between the present value of the cash flows expected to be
collected and the amortized cost basis. Additionally, disclosures about
other-than-temporary impairments for debt and equity securities were expanded.
This guidance was effective for interim and annual reporting periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. The effect of adopting this new guidance did not have a material
effect on the Company’s operating results or financial condition.
In April 2009, the FASB issued guidance
that emphasizes that the objective of a fair
value measurement does not change even when market activity for the asset or
liability has decreased significantly. Fair value is the price that would be
received for an asset sold or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions.
When observable transactions or quoted prices are not considered orderly, then
little, if any, weight should be assigned to the indication of the asset or
liability’s fair value. Adjustments to those transactions or prices should be
applied to determine the appropriate fair value. The guidance, which was applied
prospectively, was effective for interim and annual reporting periods ending
after June 15, 2009 early adoption for periods ending after March 15, 2009. The
effect of adopting this new guidance did not have a material effect on the
Company’s operating results or financial condition.
In August 2009, the FASB amended
existing guidance for the fair value measurement of liabilities by clarifying
that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure
fair value using a valuation technique that uses the quoted price of the
identical liability when traded as an asset, quoted prices for similar
liabilities or similar liabilities when traded as assets, or that is consistent
with existing fair value guidance. The amendments in this guidance also clarify
that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
identical
liability when traded as an asset in an active market when no adjustments to the
quoted price of the asset are required for Level 1 fair value measurements. The
guidance was effective for the first reporting period beginning after issuance.
The effect of adopting this new guidance did not have a material effect on the
Company’s operating results or financial condition.
Newly
Issued But Not Yet Effective Accounting Standards:
In
June 2009, the FASB amended previous guidance relating to transfers of financial
assets and eliminates the concept of a qualifying special purpose entity. This
guidance must be applied as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter. This guidance must be applied to transfers occurring on or
after the effective date. Additionally, on and after the effective date, the
concept of a qualifying special-purpose entity is no longer relevant for
accounting purposes. Therefore, formerly qualifying special-purpose entities
should be evaluated for consolidation by reporting entities on and after the
effective date in accordance with the applicable consolidation guidance. The
disclosure provisions were also amended and apply to transfers that occurred
both before and after the effective date of this guidance. The Company does not
anticipate the adoption of this standard will have any material effect on the
Company’s operating results or financial condition.
In June 2009, the FASB amended
guidance for consolidation of variable interest entity guidance
by replacing the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which
enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive
benefits from the entity. Additional disclosures about an enterprise’s
involvement in variable interest entities are also required. This guidance is
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Early adoption is prohibited. The Company does not anticipate the
adoption of this standard will have any material effect on the Company’s
operating results or financial condition.
In September 2009, the FASB issued
guidance with respect to how entities calculate net asset value per share or
“NAV” of investments considered “alternative investments”, such as hedge funds,
private equity funds, or funds of funds. This guidance provides a practical
expedient for measuring the fair value of investments in a limited number of
entities that calculate NAV. This guidance provides enhanced disclosure
requirements and is effective for a reporting entity’s first annual reporting
period beginning after December 15, 2009. Early application is permitted in
financial statements that have not yet been issued. The Company did not early
adopt this guidance. The Company does not anticipate the adoption of this
standard will have any material effect on the Company’s operating results or
financial condition.
In January 2010, the FASB amended
existing guidance for fair value measurements and disclosures which requires
disclosures for transfers in and out of Levels 1 and 2 fair value measurements
and activity in Level 3 fair value measurements. The amendments in the guidance
also clarify existing disclosures for level of disaggregation and disclosures
about inputs and valuation techniques. The amendments in the guidance also
include conforming amendments to the guidance on employers’ disclosures about
postretirement benefit plan assets. The guidance was effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company does not anticipate the
adoption of this standard will have any material effect on the Company’s
operating results or financial condition.
No other new accounting standards have
been issued that are not yet effective that are expected to have a significant
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.
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 tables below.
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Gain
|
|
|
Losses
|
|
|
Cost
|
|
2009
|
|
(in
thousands)
|
|
U.S.
Treasury securities
|
|
$ |
992 |
|
|
$ |
0 |
|
|
$ |
(13 |
) |
|
$ |
1,005 |
|
U.S.
Government agencies
|
|
|
4,610 |
|
|
|
22 |
|
|
|
0 |
|
|
|
4,588 |
|
Residential
mortgage-backed securities
|
|
|
270,796 |
|
|
|
7,598 |
|
|
|
(1,078 |
) |
|
|
264,276 |
|
Non-agency
residential mortgage-backed securities
|
|
|
72,495 |
|
|
|
46 |
|
|
|
(15,933 |
) |
|
|
88,382 |
|
State
and municipal securities
|
|
|
61,135 |
|
|
|
1,898 |
|
|
|
(138 |
) |
|
|
59,375 |
|
Total
|
|
$ |
410,028 |
|
|
$ |
9,564 |
|
|
$ |
(17,162 |
) |
|
$ |
417,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
1,025 |
|
|
$ |
24 |
|
|
$ |
0 |
|
|
$ |
1,001 |
|
U.S.
Government agencies
|
|
|
15,685 |
|
|
|
232 |
|
|
|
0 |
|
|
|
15,453 |
|
Residential
mortgage-backed securities
|
|
|
229,571 |
|
|
|
3,907 |
|
|
|
(228 |
) |
|
|
225,892 |
|
Non-agency
residential mortgage-backed securities
|
|
|
85,098 |
|
|
|
0 |
|
|
|
(21,692 |
) |
|
|
106,790 |
|
State
and municipal securities
|
|
|
55,651 |
|
|
|
970 |
|
|
|
(400 |
) |
|
|
55,081 |
|
Total
|
|
$ |
387,030 |
|
|
$ |
5,133 |
|
|
$ |
(22,320 |
) |
|
$ |
404,217 |
|
Information regarding the fair value
of available for sale debt securities by maturity as of December 31, 2009 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.
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(in
thousands)
|
|
Due
in one year or less
|
|
$ |
4,804 |
|
|
$ |
4,826 |
|
Due
after one year through five years
|
|
|
6,122 |
|
|
|
6,333 |
|
Due
after five years through ten years
|
|
|
35,959 |
|
|
|
37,107 |
|
Due
after ten years
|
|
|
18,083 |
|
|
|
18,471 |
|
|
|
|
64,968 |
|
|
|
66,737 |
|
Mortgage-backed
securities
|
|
|
352,658 |
|
|
|
343,291 |
|
Total
debt securities
|
|
$ |
417,626 |
|
|
$ |
410,028 |
|
Security proceeds, gross gains and
gross losses for 2009, 2008 and 2007 were as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Sales
of securities available for sale
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
31,612 |
|
Gross
gains
|
|
|
0 |
|
|
|
0 |
|
|
|
219 |
|
Gross
losses
|
|
|
0 |
|
|
|
0 |
|
|
|
130 |
|
There were no security sales in 2009
and 2008. All of the gains and losses were from calls or
maturities.
NOTE
2 – SECURITIES (continued)
Securities with carrying values of
$263.1 million and $289.7 million were pledged as of December 31, 2009 and 2008,
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.
Information regarding securities
with unrealized losses as of December 31, 2009 and 2008 is presented below. The
tables distribute the securities between those with unrealized losses for less
than twelve months and those with unrealized losses for twelve months or
more.
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
2009
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
992 |
|
|
$ |
13 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
992 |
|
|
$ |
13 |
|
U.S.
Government agencies
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Residential
mortgage-backed securities
|
|
|
58,792 |
|
|
|
1,075 |
|
|
|
851 |
|
|
|
3 |
|
|
|
59,643 |
|
|
|
1,078 |
|
Non-agency
residential mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
0 |
|
|
|
0 |
|
|
|
69,022 |
|
|
|
15,933 |
|
|
|
69,022 |
|
|
|
15,933 |
|
State
and municipal securities
|
|
|
7,257 |
|
|
|
102 |
|
|
|
445 |
|
|
|
36 |
|
|
|
7,702 |
|
|
|
138 |
|
Total
temporarily impaired
|
|
$ |
67,041 |
|
|
$ |
1,190 |
|
|
$ |
70,318 |
|
|
$ |
15,972 |
|
|
$ |
137,359 |
|
|
$ |
17,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
U.S.
Government agencies
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Residential
mortgage-backed securities
|
|
|
28,428 |
|
|
|
91 |
|
|
|
9,667 |
|
|
|
137 |
|
|
|
38,095 |
|
|
|
228 |
|
Non-agency
residential mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
68,685 |
|
|
|
15,271 |
|
|
|
16,413 |
|
|
|
6,421 |
|
|
|
85,098 |
|
|
|
21,692 |
|
State
and municipal securities
|
|
|
14,663 |
|
|
|
373 |
|
|
|
877 |
|
|
|
27 |
|
|
|
15,540 |
|
|
|
400 |
|
Total
temporarily impaired
|
|
$ |
111,776 |
|
|
$ |
15,735 |
|
|
$ |
26,957 |
|
|
$ |
6,585 |
|
|
$ |
138,733 |
|
|
$ |
22,320 |
|
The number of securities with
unrealized losses as of December 31, 2009 and 2008 is presented
below.
|
|
Less
than
|
|
|
12
months
|
|
|
|
|
|
|
12
months
|
|
|
or
more
|
|
|
Total
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
1 |
|
|
|
0 |
|
|
|
1 |
|
U.S.
Government agencies
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Residential
mortgage-backed securities
|
|
|
18 |
|
|
|
4 |
|
|
|
22 |
|
Non-agency
residential mortgage-backed securities
|
|
|
0 |
|
|
|
23 |
|
|
|
23 |
|
State
and municipal securities
|
|
|
15 |
|
|
|
1 |
|
|
|
16 |
|
Total
temporarily impaired
|
|
|
34 |
|
|
|
28 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
U.S.
Government agencies
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Residential
mortgage-backed securities
|
|
|
12 |
|
|
|
12 |
|
|
|
24 |
|
Non-agency
residential mortgage-backed securities
|
|
|
19 |
|
|
|
5 |
|
|
|
24 |
|
State
and municipal securities
|
|
|
37 |
|
|
|
2 |
|
|
|
39 |
|
Total
temporarily impaired
|
|
|
68 |
|
|
|
19 |
|
|
|
87 |
|
NOTE
2 – SECURITIES (continued)
All of the following are considered to
determine whether or not the impairment of these securities is
other-than-temporary. Eighty percent of the securities are backed by the U.S.
Government, government agencies, government sponsored agencies or are A rated or
better, except for certain non-local municipal securities. Mortgage-backed
securities which are not issued by the U.S. Government or government sponsored
agencies (private label mortgage-backed securities) met specific criteria set by
the Asset Liability Management Committee at their time of purchase, including
having the highest rating available by either Moody’s or S&P. None of the
securities have call provisions (with the exception of the municipal securities)
and payments as originally agreed are being received. For the government,
government-sponsored agency and municipal securities there are no concerns of
credit losses and there is nothing to indicate that full
principal will not be received. Management considered the unrealized losses on
these securities to be primarily interest rate driven and did not expect
material losses given current market conditions
unless
the securities are sold, which at this time management does not have the intent
to sell nor will it more likely than not be required to sell these securities
before the recovery of their amortized cost basis.
As of December 31, 2009, the Company
had $72.5 million of collateralized mortgage obligations which were not issued
by the federal government or government sponsored agencies, but were rated AAA
by S&P and/or Aaa by Moody’s at the time of purchase. Five of the 24 private
label mortgage backed securities were still rated AAA/Aaa as of December 31,
2009, but nineteen had been downgraded by S&P, Fitch and/or Moody’s,
including sixteen which were ranked below investment grade by one or more rating
agencies. For these private label mortgage-backed securities, additional
independent analysis is performed by the Company to determine if the impairment
is temporary or other-than-temporary in which case impairment would need to be
recorded for these securities. The independent analysis utilizes third party
reports which include projections of the cash flows of the individual securities
under several different scenarios based upon assumptions as to collateral
defaults, prepayment speeds, expected losses and the severity of potential
losses. Based upon the initial review using the third party reports, securities
may be identified for further analysis. If any are identified, management makes
assumptions as to prepayment speeds, default rates, severity of losses and lag
time until losses are actually recorded for each security based upon historical
data for each security and other factors. Cash flows for each security using
these assumptions are generated and the net present value is computed using an
appropriate discount rate (the current accounting yield) for the individual
security. The net present value is then compared to the book value of the
security to determine if there is any other-than-temporary impairment that must
be recorded. Based on this analysis of the private label mortgage-backed
securities the Company recorded an other-than-temporary impairment of $225,000
relating to three separate securities in the third quarter of 2009, which is
equal to the credit loss, establishing a new, lower amortized cost basis.
Because management did not have the intent to sell nor did management believe
that it would more likely than not be required to sell these securities before
the recovery of their new, lower amortized cost basis, management did not
consider the remainder of the investment securities to be other-than-temporarily
impaired at December 31, 2009.
The following table provides
information about debt securities for which only a credit loss was recognized in
income and other losses are recorded in other comprehensive income.
|
|
Accumulated
|
|
|
|
Credit
Losses
|
|
|
|
in
2009
|
|
|
|
(in
thousands)
|
|
Balance
January 1, 2009
|
|
$ |
0 |
|
Additions
related to other-than-temporary impairment losses not previously
recognized
|
|
|
225 |
|
Balance
December 31, 2009
|
|
$ |
225 |
|
NOTE
2 – SECURITIES (continued)
Information on securities with at
least one rating below investment grade as of December 31, 2009 is presented
below.
|
|
|
|
|
|
|
|
12/31/2009
|
1-Month
|
3-Month
|
6-Month
|
|
|
|
Other
Than
|
|
|
December
31, 2009
|
|
|
Lowest
|
Constant
|
Constant
|
Constant
|
|
|
|
Temporary
|
Purchase
Par
|
Book
|
|
Market
|
Unrealized
|
Credit
|
Default
|
Default
|
Default
|
Credit
|
Description
|
CUSIP
|
Impairment
|
Value
|
Value
|
|
Value
|
Gain/(Loss)
|
Rating
|
Rate
|
Rate
|
Rate
|
Support
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
CWALT
2006-32CB A16
|
02147XAR8
|
No
|
2,177,596
|
2,075,438
|
1,238,050
|
1,238,050
|
(837,388)
|
CCC
|
1.88
|
3.10
|
3.30
|
10.72
|
CWHL
2006-18 2A7
|
12543WAJ7
|
No
|
4,820,096
|
4,726,609
|
3,922,931
|
3,922,931
|
(803,678)
|
CCC
|
5.29
|
7.76
|
4.41
|
4.44
|
CWALT
2005-J10 1A7
|
12667G4N0
|
No
|
5,011,000
|
4,961,209
|
4,046,533
|
4,046,533
|
(914,676)
|
B-
|
5.75
|
2.21
|
2.35
|
7.80
|
CWALT
2005-46CB A1
|
12667G6U2
|
No
|
4,683,948
|
4,464,695
|
3,190,330
|
3,190,330
|
(1,274,365)
|
CCC
|
2.23
|
2.01
|
1.67
|
5.01
|
CWALT
2005-J8 1A3
|
12667GJ20
|
No
|
6,517,771
|
6,249,113
|
5,264,143
|
5,264,143
|
(984,970)
|
B-
|
0.00
|
0.00
|
0.46
|
6.67
|
CHASE
2006-S3 1A5
|
16162XAE7
|
No
|
3,730,933
|
3,723,937
|
2,940,460
|
2,940,460
|
(783,477)
|
CCC
|
2.55
|
3.83
|
2.82
|
5.21
|
CHASE
2006-S2 2A5
|
16163BBA1
|
No
|
4,231,708
|
4,213,214
|
4,113,813
|
4,113,813
|
(99,401)
|
CCC
|
1.83
|
1.25
|
2.86
|
5.79
|
FHAMS
2006-FA1 1A3
|
32051GS63
|
No
|
3,955,078
|
3,848,419
|
3,283,783
|
3,283,783
|
(564,636)
|
CCC
|
N/A
|
N/A
|
N/A
|
4.32
|
GSR
2006-10F 1A1
|
36266WAC6
|
No
|
6,426,094
|
5,977,823
|
4,223,293
|
4,223,293
|
(1,754,530)
|
CCC
|
0.00
|
0.00
|
0.00
|
4.64
|
MANA
2007-F1 1A1
|
59023YAA2
|
No
|
3,551,494
|
3,482,302
|
2,874,899
|
2,874,899
|
(607,403)
|
CCC
|
0.00
|
0.00
|
2.22
|
4.59
|
RALI
2006-QS4 A2
|
749228AB8
|
Yes
|
2,977,555
|
2,827,555
|
1,540,170
|
1,540,170
|
(1,287,385)
|
CC
|
12.94
|
9.91
|
11.94
|
2.34
|
RFMSI
2006-S5 A14
|
74957EAP2
|
No
|
4,567,970
|
4,490,983
|
3,650,448
|
3,650,448
|
(840,535)
|
CCC
|
3.78
|
6.67
|
5.84
|
3.94
|
RALI
2005-QS7 A5
|
761118AE8
|
No
|
5,327,000
|
5,063,804
|
3,800,388
|
3,800,388
|
(1,263,416)
|
CCC
|
1.94
|
3.67
|
4.97
|
11.51
|
RALI
2006-QS3 1A14
|
761118XS2
|
Yes
|
3,238,860
|
3,073,681
|
2,122,231
|
2,122,231
|
(951,450)
|
CC
|
11.32
|
9.80
|
10.46
|
6.31
|
RAST
2006-A14C 1A2
|
76114BAB4
|
Yes
|
1,559,881
|
1,475,392
|
1,014,578
|
1,014,578
|
(460,814)
|
C
|
0.00
|
2.03
|
3.01
|
1.43
|
TBW
2006-2 3A1
|
878048AG2
|
No
|
3,130,538
|
3,022,486
|
2,778,352
|
2,778,352
|
(244,134)
|
D
|
0.00
|
0.00
|
0.00
|
5.75
|
|
|
|
$65,907,522
|
$63,676,661
|
$50,004,402
|
$50,004,402
|
$(13,672,258)
|
|
|
|
|
|
All of these securities are super
senior or senior tranche residential non-agency residential mortgage-backed
securities. The credit support is the credit support percentage for a tranche
from other subordinated tranches, which is the amount of principal in the
subordinated tranches expressed as a percentage of the remaining principal in
the super senior/senior tranche. The super senior/senior tranches receive the
prepayments and the subordinate tranches absorb the losses. The super
senior/senior tranches do not absorb losses until the subordinate tranches are
gone.
The Company does not have a history
of actively trading securities, but keeps the securities available for sale
should liquidity or other needs develop that would warrant the sale of
securities. While these securities are held in the available for sale portfolio,
the current intent and ability is to hold them until a recovery in fair value or
maturity.
NOTE
3 - LOANS
Total loans outstanding as of
year-end consisted of the following:
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Commercial
and industrial loans
|
|
$ |
693,579 |
|
|
$ |
652,107 |
|
Commercial
real estate - owner occupied
|
|
|
348,812 |
|
|
|
337,060 |
|
Commercial
real estate - nonowner occupied
|
|
|
257,374 |
|
|
|
212,444 |
|
Commercial
real estate - multifamily loans
|
|
|
26,558 |
|
|
|
25,428 |
|
Commercial
real estate - construction loans
|
|
|
166,959 |
|
|
|
116,970 |
|
Agri-business
and agricultural loans
|
|
|
206,252 |
|
|
|
189,007 |
|
Residential
real estate mortgage loans
|
|
|
95,211 |
|
|
|
117,230 |
|
Home
equity loans
|
|
|
161,594 |
|
|
|
128,219 |
|
Installment
loans and other consumer loans
|
|
|
57,478 |
|
|
|
55,102 |
|
Subtotal
|
|
|
2,013,817 |
|
|
|
1,833,567 |
|
Less: Allowance
for loan losses
|
|
|
(32,073 |
) |
|
|
(18,860 |
) |
Net
deferred loan fees
|
|
|
(1,807 |
) |
|
|
(233 |
) |
Loans,
net
|
|
$ |
1,979,937 |
|
|
$ |
1,814,474 |
|
NOTE
4 - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the
allowance for loan losses for 2009, 2008 and 2007:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Balance
January 1,
|
|
$ |
18,860 |
|
|
$ |
15,801 |
|
|
$ |
14,463 |
|
Provision
for loan losses
|
|
|
21,202 |
|
|
|
10,207 |
|
|
|
4,298 |
|
Loans
charged-off
|
|
|
(8,511 |
) |
|
|
(7,606 |
) |
|
|
(3,392 |
) |
Recoveries
|
|
|
522 |
|
|
|
458 |
|
|
|
432 |
|
Net
loans charged-off
|
|
|
(7,989 |
) |
|
|
(7,148 |
) |
|
|
(2,960 |
) |
Balance
December 31,
|
|
$ |
32,073 |
|
|
$ |
18,860 |
|
|
$ |
15,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
$ |
30,518 |
|
|
$ |
20,810 |
|
|
$ |
7,039 |
|
Interest
not recorded on nonaccrual loans
|
|
|
1,422 |
|
|
|
897 |
|
|
|
1,033 |
|
Loans
past due 90 days and still accruing
|
|
|
190 |
|
|
|
478 |
|
|
|
409 |
|
Troubled
debt restructurings
|
|
|
6,521 |
|
|
|
0 |
|
|
|
0 |
|
Impaired loans were as
follows:
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in
thousands)
|
|
Year-end
loans with no allocated allowance for loan losses
|
|
|
$ |
1,745 |
|
|
$ |
0 |
|
Year-end
loans with allocated allowance for loan losses
|
|
|
|
|
|
30,093 |
|
|
|
20,304 |
|
|
|
|
|
|
$ |
31,838 |
|
|
$ |
20,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of the allowance for loan losses allocated
|
|
|
|
|
$ |
6,658 |
|
|
$ |
3,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
2008 |
|
|
|
2007 |
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Average
of impaired loans during the year
|
|
$ |
23,576 |
|
|
$ |
15,316 |
|
|
$ |
11,773 |
|
Interest
income recognized during impairment
|
|
|
35 |
|
|
|
34 |
|
|
|
14 |
|
Cash-basis
interest income recognized
|
|
|
30 |
|
|
|
11 |
|
|
|
8 |
|
NOTE
4 - ALLOWANCE FOR LOAN LOSSES (continued)
Nonaccrual loans and loans past due
90 days still on accrual include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans. The Company has allocated $2.5 million of specific reserves to customers
whose loan terms have been modified in troubled debt restructurings as of
December 31, 2009. The Company is not committed to lend additional funds to
debtors whose loans have been modified in a troubled debt restructuring. For
December 31, 2009 $29.7 million of impaired loans were also included in the
total for nonaccrual loans. Total impaired loans increased to $31.8 million at
December 31, 2009. The increase in nonaccrual loans resulted from the addition
of three commercial relationships totaling $10.6 million. The increase in
impaired loans resulted from the three commercial relationships mentioned
previously, as well as one other commercial relationship of $2.1 million. As of
December 31, 2009 three of the four relationships totaling $10.2 million were
included in the balance of nonperforming and impaired loans. Total impaired
loans were $20.3 million at December 31, 2008 and were also included in the
total for nonaccrual loans. The majority of the balance of nonperforming loans
at December 31, 2008 is four commercial relationships totaling $14.4 million.
The majority of the balance of nonperforming loans at December 31, 2007 is a
single commercial credit of $4.2 million. As of December 31, 2008, this credit
was not included in the balance of nonperforming and impaired
loans.
NOTE
5 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that
would be received for an asset or paid to transfer a liability (exit price) in
the principle or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. There
are three levels of inputs that may be used to measure fair values:
|
|
|
Level 1
|
|
Quoted
prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.
|
|
|
Level
2
|
|
Significant
other observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
|
|
Level
3
|
|
Significant
unobservable inputs that reflect a company’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.
|
The Company used the following
methods and significant assumptions to estimate the fair value of each type of
financial instrument:
Securities: Securities
available for sale are valued primarily by a third party pricing service. The
fair values of securities available for sale are determined on a recurring basis
by obtaining quoted prices on nationally recognized securities exchanges (Level
1 inputs) or pricing models utilizing significant observable inputs such as
matrix pricing, which is a mathematical technique widely used in the industry to
value debt securities without relying exclusively on quoted prices for the
specific securities but rather by relying on the securities’ relationship to
other benchmark quoted securities (Level 2 inputs). There were no transfers from
or into Level 1, Level 2 or Level 3 during 2009.
Impaired
loans: The fair value of impaired loans with specific allocations of
the allowance for loan losses is generally based on recent real estate
appraisals. These appraisals may utilize a single valuation approach or a
combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the appraisers to
adjust for differences between the comparable sales and income data available.
Such adjustments are usually significant and typically result in a Level 3
classification of the inputs for determining fair value.
Mortgage
servicing rights: Fair value is based on a valuation model that
calculates the present value of estimated future net servicing income based on a
set of assumptions and results in a Level 3 classification.
Other
real estate owned: Nonrecurring adjustments to certain commercial and
residential real estate properties classified as other real estate owned are
measured at the lower of carrying amount or fair value, less costs to sell. Fair
values are generally based on third party appraisals of the property, resulting
in a Level 3 classification. In cases where the carrying amount exceeds the fair
value, less costs to sell, an impairment loss is recognized.
Real
estate mortgage loans held for sale: Real estate mortgage loans held
for sale are carried at the lower of cost or fair value, as determined by
outstanding commitments, from third party investors.
NOTE
5 – FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
The table below presents the balances
of assets measured at fair value on a recurring basis:
|
|
December
31, 2009
|
|
|
|
Fair
Value Measurements Using
|
|
|
Assets
|
|
Assets
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
at
Fair Value
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
992 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
992 |
|
U.S.
Government agencies
|
|
|
0 |
|
|
|
4,610 |
|
|
|
0 |
|
|
|
4,610 |
|
Mortgage-backed
securities
|
|
|
0 |
|
|
|
270,796 |
|
|
|
0 |
|
|
|
270,796 |
|
Non-agency
residential mortgage-backed securities
|
|
|
0 |
|
|
|
72,495 |
|
|
|
0 |
|
|
|
72,495 |
|
State
and municipal securities
|
|
|
0 |
|
|
|
61,135 |
|
|
|
0 |
|
|
|
61,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
992 |
|
|
$ |
409,036 |
|
|
$ |
0 |
|
|
$ |
410,028 |
|
|
|
December
31, 2008
|
|
|
|
Fair
Value Measurements Using
|
|
|
Assets
|
|
Assets
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
at
Fair Value
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
1,025 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
1,025 |
|
U.S.
Government agencies
|
|
|
0 |
|
|
|
15,685 |
|
|
|
0 |
|
|
|
15,685 |
|
Mortgage-backed
securities
|
|
|
0 |
|
|
|
229,571 |
|
|
|
0 |
|
|
|
229,571 |
|
Non-agency
residential mortgage-backed securities
|
|
|
0 |
|
|
|
85,098 |
|
|
|
0 |
|
|
|
85,098 |
|
State
and municipal securities
|
|
|
0 |
|
|
|
55,651 |
|
|
|
0 |
|
|
|
55,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,025 |
|
|
$ |
386,005 |
|
|
$ |
0 |
|
|
$ |
387,030 |
|
The table below presents the balances
of assets measured at fair value on a nonrecurring basis:
|
|
December
31, 2009
|
|
|
|
Fair
Value Measurements Using
|
|
|
Assets
|
|
Assets
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
at
Fair Value
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Impaired
loans
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
23,435 |
|
|
$ |
23,435 |
|
Mortgage
servicing rights
|
|
|
0 |
|
|
|
0 |
|
|
|
73 |
|
|
|
73 |
|
Other
real estate owned
|
|
|
0 |
|
|
|
0 |
|
|
|
102 |
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
23,610 |
|
|
$ |
23,610 |
|
|
|
December
31, 2008
|
|
|
|
Fair
Value Measurements Using
|
|
|
Assets
|
|
Assets
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
at
Fair Value
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Impaired
loans
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
17,076 |
|
|
$ |
17,076 |
|
Mortgage
servicing rights
|
|
|
0 |
|
|
|
0 |
|
|
|
121 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
17,197 |
|
|
$ |
17,197 |
|
NOTE
5 – FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
Impaired loans, which are measured for
impairment using the fair value of the collateral for collateral dependent
loans, had a gross carrying amount of $30.1 million, with a valuation allowance
of $6.7 million at December 31, 2009, resulting in an additional provision for
loan losses of $3.4 million for the year ended December 31, 2009. At December
31, 2008, impaired loans had a carrying amount of $20.3 million, with a
valuation allowance of $3.2 million, resulting in an additional provision for
loans losses of $2.9 million for the year ending December 31, 2008.
Mortgage servicing rights, which are
carried at lower of cost or fair value, included a portion carried at their fair
value of $73,000, which is made up of the outstanding balance of $119,000, net
of a valuation allowance of $46,000 at December 31, 2009, resulting in no change
in impairment for the year ending December 31, 2009. At December 31, 2008,
mortgage servicing rights included a portion carried at their fair value of
$121,000, which is made up of the outstanding balance of $167,000, net of a
valuation allowance of $46,000 at December 31, 2008, resulting in a recovery of
$23,000 for the year ending December 31, 2008.
Other real estate owned which is
measured at the lower of carrying or fair value less costs to sell, had a net
carrying amount of $102,000 carried at fair value, which is made up of the
outstanding balance of $229,000, net of a valuation allowance of $127,000 at
December 31, 2009, resulting in a charge of $77,000 for the year ending December
31, 2009.
The following table contains the
estimated fair values and the related carrying values of the Company’s financial
instruments at December 31, 2009 and 2008. Items which are not financial
instruments are not included.
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair
Value
|
|
|
Value
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
55,983 |
|
|
$ |
55,983 |
|
|
$ |
64,007 |
|
|
$ |
64,007 |
|
Securities
available for sale
|
|
|
410,028 |
|
|
|
410,028 |
|
|
|
387,030 |
|
|
|
387,030 |
|
Real
estate mortgages held for sale
|
|
|
1,521 |
|
|
|
1,540 |
|
|
|
401 |
|
|
|
405 |
|
Loans,
net
|
|
|
1,979,937 |
|
|
|
1,986,457 |
|
|
|
1,814,474 |
|
|
|
1,827,967 |
|
Federal
Home Loan Bank stock
|
|
|
9,849 |
|
|
|
N/A |
|
|
|
9,849 |
|
|
|
N/A |
|
Federal
Reserve Bank stock
|
|
|
3,420 |
|
|
|
N/A |
|
|
|
1,738 |
|
|
|
N/A |
|
Accrued
interest receivable
|
|
|
8,590 |
|
|
|
8,590 |
|
|
|
8,588 |
|
|
|
8,588 |
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
|
(866,763 |
) |
|
|
(870,727 |
) |
|
|
(998,344 |
) |
|
|
(1,013,798 |
) |
All
other deposits
|
|
|
(984,362 |
) |
|
|
(984,362 |
) |
|
|
(886,955 |
) |
|
|
(886,955 |
) |
Securities
sold under agreements to repurchase
|
|
|
(127,118 |
) |
|
|
(127,118 |
) |
|
|
(137,769 |
) |
|
|
(137,769 |
) |
Other
short-term borrowings
|
|
|
(226,933 |
) |
|
|
(226,942 |
) |
|
|
(64,840 |
) |
|
|
(64,840 |
) |
Long-term
borrowings
|
|
|
(40,042 |
) |
|
|
(41,353 |
) |
|
|
(90,043 |
) |
|
|
(94,002 |
) |
Subordinated
debentures
|
|
|
(30,928 |
) |
|
|
(30,836 |
) |
|
|
(30,928 |
) |
|
|
(30,917 |
) |
Standby
letters of credit
|
|
|
(284 |
) |
|
|
(284 |
) |
|
|
(213 |
) |
|
|
(213 |
) |
Accrued
interest payable
|
|
|
(6,600 |
) |
|
|
(6,600 |
) |
|
|
(9,812 |
) |
|
|
(9,812 |
) |
For purposes of the above
disclosures of estimated fair value, the following assumptions were used as of
December 31, 2009 and 2008. The estimated fair value for cash and cash
equivalents, demand and savings deposits, variable rate loans, variable rate
short term borrowings and accrued interest is considered to approximate cost.
The fair value of Federal Home Loan Bank and Federal Reserve Bank stock is not
determinable as there are restrictions on its transferability. The estimated
fair value for fixed rate loans, certificates of deposit and fixed rate
borrowings is based on discounted cash flows using current market rates applied
to the estimated life. 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 fair value of
subordinated debentures is based on the rates currently available to the Company
with similar term and remaining maturity and credit spread. The fair value of
off-balance sheet items is based on the current fees or cost that would be
charged to enter into or terminate such arrangements. The estimated fair value
of other financial instruments approximate cost and are not considered
significant to this presentation.
NOTE
6 - 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 $263.4 million and $248.8 million at
December 31, 2009 and 2008. Custodial escrow balances maintained in connection
with serviced loans were $935,000 and $1.3 million at year end 2009 and 2008.
Information on loan servicing rights and the related valuation allowance, which
are included in other assets, follows:
Loan
servicing rights:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Carrying
amount at beginning of year
|
|
$ |
1,657 |
|
|
$ |
1,677 |
|
|
$ |
1,766 |
|
Originations
|
|
|
896 |
|
|
|
379 |
|
|
|
327 |
|
Amortization
|
|
|
(587 |
) |
|
|
(399 |
) |
|
|
(416 |
) |
Carrying
amount before valuation allowance
|
|
$ |
1,966 |
|
|
$ |
1,657 |
|
|
$ |
1,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance:
|
|
|
2009 |
|
|
|
2008 |
|
|
|
2007 |
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Beginning
of year
|
|
$ |
46 |
|
|
$ |
69 |
|
|
$ |
118 |
|
Provisions/(recoveries)
|
|
|
0 |
|
|
|
(23 |
) |
|
|
(49 |
) |
End
of year
|
|
|
46 |
|
|
|
46 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount at end of year
|
|
$ |
1,920 |
|
|
$ |
1,611 |
|
|
$ |
1,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at beginning of the year
|
|
$ |
2,148 |
|
|
$ |
2,483 |
|
|
$ |
2,397 |
|
Fair
value at the end of the year
|
|
$ |
2,136 |
|
|
$ |
2,148 |
|
|
$ |
2,483 |
|
Fair value at year end 2009 was
determined using weighted average discount rates 9.5%, a weighted average
constant prepayment rate of 17.9% and a weighted average default rate of .32%.
Fair value at year end 2008 was determined using a weighted average discount
rate of 9.4%, a weighted average constant prepayment rate of 17.2% and a
weighted average default rate of .32%.
The weighted average amortization
period is 4.92 years.
NOTE
7 - LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and
related accumulated depreciation were as follows at December 31:
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Land
|
|
$ |
10,082 |
|
|
$ |
9,932 |
|
Premises
|
|
|
25,101 |
|
|
|
24,747 |
|
Equipment
|
|
|
17,529 |
|
|
|
17,186 |
|
Total
cost
|
|
|
52,712 |
|
|
|
51,865 |
|
Less
accumulated depreciation
|
|
|
23,136 |
|
|
|
21,346 |
|
Land,
premises and equipment, net
|
|
$ |
29,576 |
|
|
$ |
30,519 |
|
NOTE
8 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
There have been no changes in the $5.0
million carrying amount of goodwill since 2002.
Impairment exists when a reporting
unit’s carrying value of goodwill exceeds its fair value, which is determined
through a two step impairment test. Step 1 includes the determination of the
carrying value of our single reporting unit, including the existing goodwill and
intangible assets, and estimating the fair value of the reporting unit. We
determined the fair value of our reporting unit and compared it to its carrying
amount. If the carrying amount of a reporting unit exceeds its fair value, we
are required to perform a second step to the impairment test. Our annual
impairment analysis as of June 30, 2009, indicated that the Step 2 analysis was
not necessary. Circumstances did not change such during the second half of the
year that the Company felt it was necessary to do an additional impairment
analysis.
Acquired
Intangible Assets
|
|
As
of December 31, 2009
|
|
|
As
of December 31, 2008
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Amortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
deposit
|
|
$ |
2,032 |
|
|
$ |
2,032 |
|
|
$ |
2,032 |
|
|
$ |
1,883 |
|
Trust
deposit relationships
|
|
|
572 |
|
|
|
365 |
|
|
|
572 |
|
|
|
308 |
|
Total
|
|
$ |
2,604 |
|
|
$ |
2,397 |
|
|
$ |
2,604 |
|
|
$ |
2,191 |
|
Aggregate amortization expense was
$206,000, $206,000 and $206,000 for 2009, 2008 and 2007.
Estimated amortization expense for
each of the next five years:
|
|
Amount
|
|
|
|
(in
thousands)
|
|
2010
|
|
$ |
54 |
|
2011
|
|
|
54 |
|
2012
|
|
|
52 |
|
2013
|
|
|
47 |
|
2014
|
|
|
0 |
|
NOTE
9 – DEPOSITS
The aggregate amount of time
deposits, each with a minimum denomination of $100,000, was approximately $538.8
million and $637.6 million at December 31, 2009 and 2008.
At December 31, 2009, the scheduled
maturities of time deposits were as follows:
|
|
Amount
|
|
|
|
(in
thousands)
|
|
Maturing
in 2010
|
|
$ |
688,822 |
|
Maturing
in 2011
|
|
|
126,693 |
|
Maturing
in 2012
|
|
|
40,312 |
|
Maturing
in 2013
|
|
|
7,231 |
|
Maturing
in 2014
|
|
|
3,264 |
|
Thereafter
|
|
|
441 |
|
Total
time deposits
|
|
$ |
866,763 |
|
NOTE
10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to
repurchase are secured by mortgage-backed securities with a carrying amount of
$146.3 million and $187.9 million at year-end 2009 and 2008.
Securities sold under agreements to
repurchase (“repo accounts”) represent collateralized borrowings with customers
located primarily within the Company’s service area. Substantially all repo
accounts mature on demand, with the remaining maturing in less than one year.
Repo accounts are not covered by federal deposit insurance and are secured by
securities owned. Information on these liabilities and the related collateral
for 2009 and 2008 is as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Average
daily balance during the year
|
|
$ |
125,195 |
|
|
$ |
153,363 |
|
|
$ |
121,372 |
|
Average
interest rate during the year
|
|
|
0.46 |
% |
|
|
1.85 |
% |
|
|
3.52 |
% |
Maximum
month-end balance during the year
|
|
$ |
133,072 |
|
|
$ |
175,427 |
|
|
$ |
154,913 |
|
Weighted
average interest rate at year-end
|
|
|
0.42 |
% |
|
|
0.43 |
% |
|
|
3.20 |
% |
The Company retains the right to
substitute similar type securities, and has the right to withdraw all excess
collateral applicable to repo accounts whenever the collateral values are in
excess of the related repurchase liabilities. At December 31, 2009, there were
no material amounts of securities at risk with any one customer. The Company
maintains control of these securities through the use of third-party safekeeping
arrangements.
NOTE
11 – BORROWINGS
Long-term borrowings at December 31
consisted of:
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Federal
Home Loan Bank of Indianapolis Notes, 3.71%, Due January 12,
2009
|
|
$ |
0 |
|
|
$ |
50,000 |
|
Federal
Home Loan Bank of Indianapolis Notes, 4.61%, Due June 13,
2011
|
|
|
0 |
|
|
|
25,000 |
|
Federal
Home Loan Bank of Indianapolis Notes, 4.49%, Due May 6,
2013
|
|
|
0 |
|
|
|
15,000 |
|
Federal
Home Loan Bank of Indianapolis Notes, 2.53%, Due June 11,
2012
|
|
|
25,000 |
|
|
|
0 |
|
Federal
Home Loan Bank of Indianapolis Notes, 3.21%, Due May 5,
2014
|
|
|
15,000 |
|
|
|
0 |
|
Federal
Home Loan Bank of Indianapolis Notes, 6.15%, Due January 15,
2018
|
|
|
42 |
|
|
|
43 |
|
Total
|
|
$ |
40,042 |
|
|
$ |
90,043 |
|
Long-term borrowings mature over
each of the next five years as follows:
|
|
(in
thousands)
|
|
2010
|
|
$ |
0 |
|
2011
|
|
|
0 |
|
2012
|
|
|
25,000 |
|
2013
|
|
|
0 |
|
2014
|
|
|
15,000 |
|
NOTE
11 – BORROWINGS (continued)
Other short-term borrowings at
December 31 consisted of:
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Federal
Home Loan Bank of Indianapolis Notes, 0.65%, Due March 4,
2009
|
|
$ |
0 |
|
|
$ |
45,000 |
|
Federal
Home Loan Bank of Indianapolis Notes, 0.47%, Due June 29,
2010
|
|
|
130,000 |
|
|
|
0 |
|
Federal
Reserve Term Auction Facility, 0.25%, Due January 14, 2010
|
|
|
85,000 |
|
|
|
0 |
|
Total
|
|
$ |
215,000 |
|
|
$ |
45,000 |
|
All Federal Home Loan Bank (FHLB)
notes require monthly interest payments and were secured by residential real
estate loans and securities with a carrying value of $327.4 million and $291.0
million at December 31, 2009 and 2008. At December 31, 2009, the Company owned
$9.8 million of FHLB stock, which also secures debts to the FHLB. The Company is
authorized to borrow up to $300 million at the FHLB. Federal Reserve Term
Auction Facility borrowings were secured by commercial loans with a carrying
value of $526.3 million as of December 31, 2009.
NOTE
12 – SUBORDINATED DEBENTURES
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 $30.9 million of subordinated debentures to the
Trust in exchange for the proceeds of the Trust. The Company is not considered
the primary beneficiary of this Trust (variable interest entity), therefore the
trust is not consolidated in the Company’s financial statements, but rather the
subordinated debentures are shown as a liability. The Company’s investment in
the common stock of the trust was $928,000 and is included in other
assets.
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 are equal to the
three-month London Interbank Offered Rate (LIBOR) plus 3.05, which was 3.301%,
4.509% and 7.880% at December 31, 2009, 2008 and 2007.
NOTE
13 - EMPLOYEE BENEFIT PLANS
In April 2000, the Lakeland
Financial Corporation Pension Plan was frozen. The Company also maintains a
Supplemental Executive Retirement Plan (SERP) for select officers that was
established as a funded, non-qualified deferred compensation plan. No current
officers of the Company are participants in the SERP plan and there are 7 total
participants. The measurement date for both the pension and SERP plans is
December 31 for 2009 and 2008.
In September 2006, the FASB issued
guidance which requires that defined benefit plan assets and obligations are to
be measured as of the date of the employer’s fiscal year-end, starting in 2008.
Through 2007, the Company utilized the early measurement date, and measured the
funded status of the defined benefit plan assets and obligations as of September
30 each year. In accordance with the adoption provisions, the net periodic
benefit cost for the period between the September 30 measurement date and the
2008 fiscal year end measurement were allocated proportionately between amounts
to be recognized as an adjustment to retained earnings and net periodic benefit
cost for the fiscal year. As a result of this adoption, the Company increased
January 1, 2008 opening retained earnings by $1,000, decreased deferred income
tax assets by $5,000, decreased the pension liability by $13,000 and credited
the accumulated other comprehensive income for $7,000 for the pension
plan and reduced January 1, 2008 opening retained earnings by $4,000,
decreased deferred income tax assets by $4,000, decreased the SERP liability by
$7,000 and credited the accumulated other comprehensive income for $7,000 for
the SERP plan.
NOTE
13 - EMPLOYEE BENEFIT PLANS (continued)
Information as to the Company’s
plans at December 31 is as follows:
|
|
Pension
Benefits
|
|
|
SERP
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
benefit obligation
|
|
$ |
2,342 |
|
|
$ |
2,398 |
|
|
$ |
1,278 |
|
|
$ |
1,299 |
|
Interest
cost
|
|
|
136 |
|
|
|
175 |
|
|
|
67 |
|
|
|
92 |
|
Actuarial
(gain)/loss
|
|
|
(50 |
) |
|
|
146 |
|
|
|
50 |
|
|
|
53 |
|
Benefits
paid
|
|
|
(136 |
) |
|
|
(377 |
) |
|
|
(137 |
) |
|
|
(166 |
) |
Ending
benefit obligation
|
|
|
2,292 |
|
|
|
2,342 |
|
|
|
1,258 |
|
|
|
1,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets (primarily equity and fixed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
investments and money market funds),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
plan assets
|
|
|
1,614 |
|
|
|
2,407 |
|
|
|
910 |
|
|
|
1,282 |
|
Actual
return
|
|
|
320 |
|
|
|
(416 |
) |
|
|
189 |
|
|
|
(219 |
) |
Employer
contribution
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
13 |
|
Benefits
paid
|
|
|
(136 |
) |
|
|
(377 |
) |
|
|
(137 |
) |
|
|
(166 |
) |
Ending
plan assets
|
|
|
1,798 |
|
|
|
1,614 |
|
|
|
962 |
|
|
|
910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
|
$ |
(494 |
) |
|
$ |
(728 |
) |
|
$ |
(296 |
) |
|
$ |
(368 |
) |
Amounts recognized in the consolidated
balance sheets consist of:
|
|
Pension
Benefits
|
|
|
SERP
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
Funded
status included in other liabilities
|
|
$ |
(494 |
) |
|
$ |
(728 |
) |
|
$ |
(296 |
) |
|
$ |
(368 |
) |
Amounts recognized in accumulated other
comprehensive income consist of:
|
|
Pension
Benefits
|
|
|
SERP
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
Net
actuarial loss
|
|
$ |
1,801 |
|
|
$ |
2,103 |
|
|
$ |
843 |
|
|
$ |
947 |
|
The accumulated benefit obligation
for the pension plan was $2.3 million for both December 31, 2009 and 2008
respectively. The accumulated benefit obligation for the SERP plan was $1.3
million for both December 31, 2009 and 2008.
NOTE
13 - EMPLOYEE BENEFIT PLANS (continued)
Net pension expense and other
amounts recognized in other comprehensive income includes the
following:
|
|
Pension
Benefits
|
|
|
SERP
Benefits
|
|
Net
pension expense
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
Service
cost
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Interest
cost
|
|
|
136 |
|
|
|
140 |
|
|
|
142 |
|
|
|
67 |
|
|
|
73 |
|
|
|
75 |
|
Expected
return on plan assets
|
|
|
(155 |
) |
|
|
(193 |
) |
|
|
(178 |
) |
|
|
(85 |
) |
|
|
(100 |
) |
|
|
(93 |
) |
Recognized
net actuarial loss
|
|
|
101 |
|
|
|
50 |
|
|
|
57 |
|
|
|
57 |
|
|
|
64 |
|
|
|
57 |
|
Net
pension expense
|
|
$ |
82 |
|
|
$ |
(3 |
) |
|
$ |
21 |
|
|
$ |
39 |
|
|
$ |
37 |
|
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss/(gain)
|
|
$ |
(201 |
) |
|
$ |
794 |
|
|
$ |
(201 |
) |
|
$ |
(47 |
) |
|
$ |
406 |
|
|
$ |
(76 |
) |
Amortization
of net loss
|
|
|
(101 |
) |
|
|
(50 |
) |
|
|
(57 |
) |
|
|
(57 |
) |
|
|
(63 |
) |
|
|
(57 |
) |
Change
in minimum pension liability
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
recognized in other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
$ |
(302 |
) |
|
$ |
744 |
|
|
$ |
(258 |
) |
|
$ |
(104 |
) |
|
$ |
343 |
|
|
$ |
(133 |
) |
FAS
158 Adjustment
|
|
|
0 |
|
|
|
(13 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(16 |
) |
|
|
0 |
|
Total
recognized in net pension expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other comprehensive income
|
|
$ |
(220 |
) |
|
$ |
728 |
|
|
$ |
(237 |
) |
|
$ |
(65 |
) |
|
$ |
364 |
|
|
$ |
(94 |
) |
The estimated net loss (gain) for
the defined benefit pension plan and SERP plan that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the
next fiscal year is $83,000 for the pension plan and $59,000 for the SERP
plan.
Additional
Information:
|
|
Pension
Benefits
|
|
|
SERP
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
The
following assumptions were used in calculating the net benefit
obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average discount rate
|
|
|
6.00 |
% |
|
|
5.50 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
5.50 |
% |
|
|
6.00 |
% |
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
|
|
|
5.50 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
|
|
5.50 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
Rate
of increase in future compensation
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Expected
long-term rate of return
|
|
|
8.25 |
% |
|
|
8.25 |
% |
|
|
8.25 |
% |
|
|
8.25 |
% |
|
|
8.25 |
% |
|
|
8.25 |
% |
Plan
Assets
The
Company's investment strategies are to invest in a prudent manner for the
purpose of providing benefits to participants. The investment strategies are
targeted to maximize the total return of the portfolio net of inflation,
spending and expenses. Risk is controlled through diversification of asset types
and investments in domestic and international equities and fixed income
securities. The target allocations for plan assets are shown in the tables
below. Due to the overall decline in equity values during the fourth quarter of
2008, the actual year-end asset mix fell outside of the target allocations.
Equity securities primarily include investments in common stocks. Debt
securities include government agency and commercial bonds. Other investments
consist of money market mutual funds.
The
weighted average 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 following assumptions were used in determining the total long term
rate of return: equity securities were assumed to have a long-term
rate of return of approximately 10% and debt securities were assumed to have a
long-term rate of return of approximately 6%. These rates of return were
adjusted to reflect an approximate target allocation of 60% equity securities
and 40% debt securities with a small downward adjustment due to investments in
the “Other” category, which consist of low yielding money market mutual
funds.
Certain
asset types and investment strategies are prohibited
including: commodities, options, futures, short sales, margin
transactions and non-marketable securities.
NOTE
13 - EMPLOYEE BENEFIT PLANS (continued)
The
Company's pension plan asset allocation at year-end 2009 and 2008, target
allocation for 2010, and expected long-term rate of return by asset category are
as follows:
|
|
|
Percentage
of Plan
Assets
at
Year End
|
|
Weighted
|
|
Target
|
|
|
Average
Expected
|
|
Allocation
|
|
|
Long-Term
Rate
|
Asset Category
|
2010
|
|
2009
|
|
2008
|
|
of
Return
|
|
|
|
|
|
|
|
|
Equity
securities
|
55-65
|
%
|
58%
|
|
46%
|
|
9.95%
|
Debt
securities
|
35-45
|
|
38%
|
|
36%
|
|
5.97%
|
Other
|
5-10
|
|
4%
|
|
18%
|
|
0.25%
|
Total
|
|
|
100%
|
|
100%
|
|
8.25%
|
The
Company's SERP plan asset allocation at year-end 2009 and 2008, target
allocation for 2010, and expected long-term rate of return by asset category are
as follows:
|
|
|
Percentage
of Plan
Assets
at
Year End
|
|
Weighted
|
|
Target
|
|
|
Average
Expected
|
|
Allocation
|
|
|
Long-Term
Rate
|
Asset Category
|
2010
|
|
2009
|
|
2008
|
|
of
Return
|
|
|
|
|
|
|
|
|
Equity
securities
|
55-65
|
%
|
61%
|
|
40%
|
|
9.95%
|
Debt
securities
|
35-45
|
%
|
36%
|
|
42%
|
|
5.93%
|
Other
|
5-10
|
%
|
3%
|
|
18%
|
|
0.25%
|
Total
|
|
|
100%
|
|
100%
|
|
8.25%
|
Fair
Value of Plan Assets
Fair value is the exchange price that
would be received for an asset in the principal or most advantageous market for
the asset in an orderly transaction between market participants on the
measurement date. Also a fair value hierarchy requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.
The
Company used the following methods and significant assumptions to estimate the
fair value of each type of financial instrument:
Equity
and debt securities: The fair values of securities are determined on
a recurring basis by obtaining quoted prices on nationally recognized securities
exchanges (Level 1 inputs) or pricing models utilizing significant observable
inputs such as matrix pricing, which is a mathematical technique widely used in
the industry to value debt securities without relying exclusively on quoted
prices for the specific securities but rather by relying on the securities’
relationship to other benchmark quoted securities (Level 2 inputs).
NOTE
13 - EMPLOYEE BENEFIT PLANS (continued)
The fair values of the Company's
pension plan assets at December 31, 2009, by asset category are as
follows:
|
|
|
|
|
Quoted
Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
Total
|
|
|
(Level
1)
|
|
|
(Level
2 )
|
|
|
(Level
3)
|
|
|
|
(in
thousands)
|
|
Equity
securities - US large cap common stocks
|
|
$ |
767 |
|
|
$ |
767 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Equity
securities - US mid cap common stocks
|
|
|
104 |
|
|
|
104 |
|
|
|
0 |
|
|
|
0 |
|
Equity
securities - US small cap common stocks
|
|
|
52 |
|
|
|
52 |
|
|
|
0 |
|
|
|
0 |
|
Equity
securities - international
|
|
|
92 |
|
|
|
92 |
|
|
|
0 |
|
|
|
0 |
|
Equity
securities - emerging markets
|
|
|
24 |
|
|
|
24 |
|
|
|
0 |
|
|
|
0 |
|
Debt
securities - US Government Agencies
|
|
|
25 |
|
|
|
0 |
|
|
|
25 |
|
|
|
0 |
|
Debt
securities - commercial
|
|
|
662 |
|
|
|
0 |
|
|
|
662 |
|
|
|
0 |
|
Cash
- money market account
|
|
|
61 |
|
|
|
61 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
$ |
1,787 |
|
|
$ |
1,100 |
|
|
$ |
687 |
|
|
$ |
0 |
|
Total pension plan assets available for
benefits also include $11,000 in accrued interest and dividend
income.
The fair values of the Company's SERP
plan assets at December 31, 2009, by asset category are as follows:
|
|
|
|
|
Quoted
Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
Total
|
|
|
(Level
1)
|
|
|
(Level
2 )
|
|
|
(Level
3)
|
|
|
|
(in
thousands)
|
|
Equity
securities - US large cap common stocks
|
|
$ |
415 |
|
|
$ |
415 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Equity
securities - US mid cap common stocks
|
|
|
65 |
|
|
|
65 |
|
|
|
0 |
|
|
|
0 |
|
Equity
securities - US small cap common stocks
|
|
|
33 |
|
|
|
33 |
|
|
|
0 |
|
|
|
0 |
|
Equity
securities - international
|
|
|
45 |
|
|
|
45 |
|
|
|
0 |
|
|
|
0 |
|
Equity
securities - emerging markets
|
|
|
24 |
|
|
|
24 |
|
|
|
0 |
|
|
|
0 |
|
Debt
securities - US Government Agencies
|
|
|
71 |
|
|
|
0 |
|
|
|
71 |
|
|
|
0 |
|
Debt
securities - commercial
|
|
|
278 |
|
|
|
0 |
|
|
|
278 |
|
|
|
0 |
|
Cash
- money market account
|
|
|
25 |
|
|
|
25 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
$ |
956 |
|
|
$ |
607 |
|
|
$ |
349 |
|
|
$ |
0 |
|
Total SERP plan assets available for
benefits also include $6,000 in accrued interest and dividend
income.
Contributions
The Company does not expect to
contribute to its pension or SERP plan in 2010.
Estimated Future Benefit
Payments
The following benefit payments are
expected to be paid:
|
|
Pension
|
|
|
SERP
|
|
Plan Year
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(in
thousands)
|
|
2010
|
|
$ |
118 |
|
|
$ |
137 |
|
2011
|
|
|
119 |
|
|
|
134 |
|
2012
|
|
|
120 |
|
|
|
131 |
|
2013
|
|
|
125 |
|
|
|
128 |
|
2014
|
|
|
126 |
|
|
|
124 |
|
2015-2019
|
|
|
783 |
|
|
|
541 |
|
NOTE
13 - EMPLOYEE BENEFIT PLANS (continued)
Other Employee Benefit
Plans
The Company maintains a 401(k) profit
sharing plan for all employees meeting age and service requirements. The plan
allows employees to contribute up to the maximum amount allowable under the
Internal Revenue code, which are matched based upon the percentage of
budgeted net income earned during the year of the first 6% of the compensation
contributed. The expense recognized was $981,000, $1.0 million and $858,000 in
2009, 2008 and 2007.
Effective January 1, 2004, the Company
adopted the Lake City Bank Deferred Compensation Plan. The purpose of the
deferred compensation plan is to extend full 401(k) type retirement benefits to
certain individuals without regard to statutory limitations under tax qualified
plans. A liability is accrued for the obligation under this plan. The expense
recognized for each of the last three years was $232,000, ($394,000) and $83,000
resulting in a deferred compensation liability of $896,000 and $548,000 as of
year-end 2009 and 2008. The benefit recognized in 2008 relates to the
significant decline in the indices utilized to calculate the returns on the
participant contributions. The plan is funded solely by participant
contributions and does not receive a company match.
Under employment agreements with
certain executives, certain events leading to separation from the Company could
result in cash payments totaling $4.0 million as of December 31, 2009. On
December 31, 2009, no amounts were accrued on these contingent
obligations.
NOTE
14 - OTHER EXPENSE
Other expense for the years ended
December 31, was as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Corporate
and business development
|
|
$ |
1,356 |
|
|
$ |
1,298 |
|
|
$ |
1,508 |
|
Advertising
|
|
|
416 |
|
|
|
442 |
|
|
|
304 |
|
Office
supplies
|
|
|
611 |
|
|
|
630 |
|
|
|
496 |
|
Telephone
and postage
|
|
|
1,625 |
|
|
|
1,457 |
|
|
|
1,219 |
|
Regulatory
fees and FDIC insurance
|
|
|
4,212 |
|
|
|
1,434 |
|
|
|
336 |
|
Professional
fees
|
|
|
2,462 |
|
|
|
2,123 |
|
|
|
1,548 |
|
Amortization
of other intangible assets
|
|
|
206 |
|
|
|
206 |
|
|
|
206 |
|
Courier
and delivery
|
|
|
202 |
|
|
|
227 |
|
|
|
299 |
|
Miscellaneous
|
|
|
3,875 |
|
|
|
3,193 |
|
|
|
3,250 |
|
Total
other expense
|
|
$ |
14,965 |
|
|
$ |
11,010 |
|
|
$ |
9,166 |
|
NOTE
15 - INCOME TAXES
Income tax expense for the years
ended December 31, consisted of the following:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Current
federal
|
|
$ |
12,648 |
|
|
$ |
7,545 |
|
|
$ |
8,456 |
|
Deferred
federal
|
|
|
(4,225 |
) |
|
|
981 |
|
|
|
(69 |
) |
Current
state
|
|
|
953 |
|
|
|
0 |
|
|
|
0 |
|
Deferred
state
|
|
|
(698 |
) |
|
|
(75 |
) |
|
|
(417 |
) |
Tax
benefit of stock options
|
|
|
191 |
|
|
|
756 |
|
|
|
396 |
|
Total
income tax expense
|
|
$ |
8,869 |
|
|
$ |
9,207 |
|
|
$ |
8,366 |
|
Income tax expense included
($1,000), ($15,000) and ($36,000) applicable to security transactions for 2009,
2008 and 2007. The differences between financial statement tax expense and
amounts computed by applying the statutory federal income tax rate of 35% for
2009, 2008 and 2007 to income before income taxes were as follows:
NOTE
15 - INCOME TAXES (continued)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Income
taxes at statutory federal rate of 35%
|
|
$ |
9,747 |
|
|
$ |
10,118 |
|
|
$ |
9,652 |
|
Increase
(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
exempt income
|
|
|
(884 |
) |
|
|
(867 |
) |
|
|
(898 |
) |
Nondeductible
expense
|
|
|
244 |
|
|
|
202 |
|
|
|
273 |
|
State
income tax, net of federal tax effect
|
|
|
183 |
|
|
|
124 |
|
|
|
(224 |
) |
Net
operating loss
|
|
|
(30 |
) |
|
|
(30 |
) |
|
|
(30 |
) |
Tax
credits
|
|
|
(57 |
) |
|
|
(71 |
) |
|
|
(82 |
) |
Bank
owned life insurance
|
|
|
(411 |
) |
|
|
(368 |
) |
|
|
(340 |
) |
Reserve
for unrecognized tax benefits
|
|
|
30 |
|
|
|
60 |
|
|
|
0 |
|
Other
|
|
|
47 |
|
|
|
39 |
|
|
|
15 |
|
Total
income tax expense
|
|
$ |
8,869 |
|
|
$ |
9,207 |
|
|
$ |
8,366 |
|
The net deferred tax asset recorded
in the consolidated balance sheets at December 31, consisted of the
following:
|
|
2009 |
|
|
2008 |
|
|
|
Federal
|
|
|
State
|
|
|
Federal
|
|
|
State
|
|
|
|
(in
thousands)
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad
debts
|
|
$ |
11,225 |
|
|
$ |
2,535 |
|
|
$ |
6,601 |
|
|
$ |
1,491 |
|
Pension
and deferred compensation liability
|
|
|
630 |
|
|
|
142 |
|
|
|
325 |
|
|
|
73 |
|
Net
operating loss carryforward
|
|
|
30 |
|
|
|
0 |
|
|
|
59 |
|
|
|
249 |
|
Non-qualified
stock options
|
|
|
204 |
|
|
|
46 |
|
|
|
82 |
|
|
|
19 |
|
Impairment
of investment securities
|
|
|
79 |
|
|
|
18 |
|
|
|
0 |
|
|
|
0 |
|
Nonaccrual
loan interest
|
|
|
0 |
|
|
|
0 |
|
|
|
321 |
|
|
|
73 |
|
Other
|
|
|
155 |
|
|
|
15 |
|
|
|
211 |
|
|
|
26 |
|
|
|
|
12,323 |
|
|
|
2,756 |
|
|
|
7,599 |
|
|
|
1,931 |
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
|
|
|
131 |
|
|
|
22 |
|
|
|
129 |
|
|
|
21 |
|
Depreciation
|
|
|
1,876 |
|
|
|
199 |
|
|
|
1,741 |
|
|
|
143 |
|
Loan
servicing rights
|
|
|
741 |
|
|
|
167 |
|
|
|
564 |
|
|
|
127 |
|
State
taxes
|
|
|
716 |
|
|
|
0 |
|
|
|
471 |
|
|
|
0 |
|
Leases
|
|
|
46 |
|
|
|
10 |
|
|
|
49 |
|
|
|
11 |
|
Deferred
loan fees
|
|
|
69 |
|
|
|
16 |
|
|
|
64 |
|
|
|
15 |
|
Intangible
assets
|
|
|
1,061 |
|
|
|
240 |
|
|
|
913 |
|
|
|
206 |
|
FHLB
stock dividends
|
|
|
118 |
|
|
|
27 |
|
|
|
118 |
|
|
|
27 |
|
REIT
spillover dividend
|
|
|
892 |
|
|
|
0 |
|
|
|
1,086 |
|
|
|
0 |
|
Prepaid
expenses
|
|
|
137 |
|
|
|
30 |
|
|
|
153 |
|
|
|
34 |
|
|
|
|
5,787 |
|
|
|
711 |
|
|
|
5,288 |
|
|
|
584 |
|
Valuation
allowance
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Net
deferred tax asset
|
|
$ |
6,536 |
|
|
$ |
2,045 |
|
|
$ |
2,311 |
|
|
$ |
1,347 |
|
In addition to the net deferred tax
assets included above, the deferred income tax asset/liability allocated to the
unrealized net gain/loss on securities available for sale included in equity was
$3.2 million and $7.0 million for 2009 and 2008. The deferred income tax asset
allocated to the pension liability included in equity was $1.1 million and $1.2
million for 2009 and 2008.
NOTE
15 - INCOME TAXES (continued)
Unrecognized Tax
Benefits
A reconciliation of the beginning
and ending amount of unrecognized tax benefits for the year ended December 31,
2009 when reserves began is as follows:
|
|
2009
|
|
|
(in
thousands) |
Balance
January 1,
|
|
$ |
60 |
|
Additions
based on tax positions related to the current year
|
|
|
30 |
|
Additions
for tax positions of prior years
|
|
|
0 |
|
Reductions
for tax positions of prior years
|
|
|
0 |
|
Reductions
due to the statute of limitations
|
|
|
0 |
|
Settlements
|
|
|
0 |
|
Balance
at December 31,
|
|
$ |
90 |
|
The balance of $90,000 at December
31, 2009 represents the amount of unrecognized tax benefits that, if recognized,
would favorably affect the effective income tax rate in future periods. The
Company does not expect the total amount of unrecognized tax benefits to
significantly increase or decrease in the next twelve months.
No interest or penalties were
recorded in the income statement and no amount was accrued for interest and
penalties for the period ending December 31, 2009 and 2008. Should the accrual
of any interest or penalties relative to unrecognized tax benefits be necessary,
it is the Company’s policy to record such accruals in its income taxes
accounts.
The Company and its subsidiaries
file a consolidated U.S. federal tax return and a combined unitary return in the
States of Indiana and Michigan. These returns are subject to examinations by
authorities for all years after 2005.
NOTE
16 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors,
and their affiliates as of December 31, 2009 and 2008 were as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Beginning
balance
|
|
$ |
31,927 |
|
|
$ |
48,794 |
|
New
loans and advances
|
|
|
74,422 |
|
|
|
84,435 |
|
Effect
of changes in related parties
|
|
|
134 |
|
|
|
(13,930 |
) |
Repayments
|
|
|
(66,208 |
) |
|
|
(87,372 |
) |
Ending
balance
|
|
$ |
40,275 |
|
|
$ |
31,927 |
|
Deposits from principal officers,
directors, and their affiliates at year-end 2009 and 2008 were $3.3 million and
$2.9 million. In addition, the amount owed directors for fees under the deferred
directors’ plan as of December 31, 2009 and 2008 was $1.6 million and $1.6
million. The related expense for the deferred directors’ plan as of December 31,
2009, 2008 and 2007 was $305,000, $305,000 and $267,000.
NOTE
17 – STOCK BASED COMPENSATION
Effective December 9, 1997, the
Company adopted the Lakeland Financial Corporation 1997 Share Incentive Plan,
which was shareholder approved. At its inception there were 1,200,000 shares of
common stock reserved for grants of stock options to employees of Lakeland
Financial Corporation, its subsidiaries and Board of Directors. The plan expired
on December 8, 2007 and therefore there were no options available for future
grants as of December 31, 2007. Effective April 8, 2008, the Company adopted the
Lakeland Financial Corporation 2008 Equity Incentive Plan, which is shareholder
approved. At its inception there were 750,000 shares of common stock reserved
for grants of stock options, stock appreciation rights, stock awards and cash
incentive awards to employees of Lakeland Financial Corporation, its
subsidiaries and Board of Directors. As of December 31, 2009, 642,800 were
available for future grants. Certain stock awards provide for accelerated
vesting if there is a change in control. The Company has a policy of issuing new
shares to satisfy exercises of stock awards.
Included
in net income for the years ended December 31, 2009, 2008 and 2007 was employee
stock compensation expense of $411,000, $233,000 and $174,000, and a related tax
benefit of $167,000, $94,000 and $70,000 respectively.
Stock
Options
The equity incentive plan requires
that the exercise price for options be the market price on the date the options
are granted. The maximum option term is ten years and the awards usually vest
over 3 years. The fair value of each stock option is estimated with the Black
Scholes pricing model, using the following weighted-average assumptions as of
the grant date for stock awards granted during the years presented. Expected
volatilities are based on historical volatility of the Company’s stock over the
immediately preceding expected life period, as well as other factors known on
the grant date that would have a significant effect on the stock price during
the expected life period. The expected stock award life used was the historical
option life of the similar employee base or Board of Directors. The turnover
rate is based on historical data of the similar employee base as a group and the
Board of Directors as a group. The risk-free interest rate is the U.S. Treasury
rate on the date of grant corresponding to the expected life period of the stock
award.
The fair value of options granted
was determined using the following weighted average assumptions as of grant
date. There were no stock option grants in 2009.
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Risk-free
interest rate
|
|
|
N/A |
|
|
|
3.42 |
% |
|
|
4.46 |
% |
Expected
option life
|
|
|
N/A |
|
|
6.71
years
|
|
|
5.50
years
|
|
Expected
price volatility
|
|
|
N/A |
|
|
|
34.23 |
% |
|
|
35.49 |
% |
Dividend
yield
|
|
|
N/A |
|
|
|
3.35 |
% |
|
|
3.40 |
% |
A summary
of the activity in the stock option plan as of December 31, 2009 and changes
during the period then ended follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
(years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of the year
|
|
|
399,756 |
|
|
$ |
14.25 |
|
|
|
|
|
|
|
Granted
|
|
|
0 |
|
|
|
0.00 |
|
|
|
|
|
|
|
Exercised
|
|
|
(74,950 |
) |
|
|
8.10 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,000 |
) |
|
|
21.60 |
|
|
|
|
|
|
|
Outstanding
at end of the year
|
|
|
321,806 |
|
|
$ |
15.62 |
|
|
|
4.0 |
|
|
$ |
1,141,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at end of the year
|
|
|
211,806 |
|
|
$ |
11.86 |
|
|
|
2.3 |
|
|
$ |
1,141,495 |
|
NOTE
17 - STOCK BASED COMPENSATION (continued)
The weighted-average grant-date fair
value of stock options granted during the periods ended December
31, 2008 and 2007 was $6.45 and $7.05. The total intrinsic value of
stock options exercised during the periods ended December 31, 2009, 2008 and
2007 was $886,000, $2.4 million and $1.4 million, respectively.
There were no modifications of
awards during the periods ended December 31, 2009, 2008 and 2007.
Cash received from stock option
exercise for the periods ending December 31, 2009, 2008 and 2007 was $605,000,
$1.4 million and $771,000, respectively. The actual tax benefit realized for the
tax deductions from stock award exercise totaled $191,000, $756,000 and
$396,000, respectively for the periods ended December 31, 2009, 2008 and
2007.
As of December 31, 2009, there was
$330,000 of total unrecognized compensation cost related to nonvested stock
options granted under the plan. That cost is expected to be recognized over a
weighted-average period of 2.88 years.
Stock
Awards
The fair value of stock awards is
the closing price of the Company’s common stock on the date of grant adjusted
for the present value of expected dividends. The stock awards fully vest on the
third anniversary of the grant date, with the exception of the shares vested
below, which vested on grant. The 2009 Long-Term Incentive Plan must be paid in
stock and has performance conditions which include revenue growth, diluted EPS
growth and average return on equity growth. Shares granted below include the
number of shares assumed granted based on meeting the performance criteria of
the 2009 Long-Term Incentive Plan at December 31, 2009. The Company also has two
other long-term incentive plans that may be paid in either cash or stock. These
plans have 3 year vesting and the same performance conditions as the 2009 plan.
The 2008 Long-Term Incentive Plan had an accrued liability of $309,000 at
December 31, 2009. The 2007 Long-Term Incentive Plan had an accrued liability of
$267,000 at December 31, 2009 and on February 5, 2010 paid $95,000 in cash and
the rest in 7,871 shares of restricted stock.
A summary of the changes in the
Company’s nonvested shares for the year follows:
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant-Date
|
|
Nonvested
Shares
|
|
Shares
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2009
|
|
|
0 |
|
|
$ |
0.00 |
|
Granted
|
|
|
15,000 |
|
|
|
17.61 |
|
Vested
|
|
|
(5,000 |
) |
|
|
17.73 |
|
Forfeited
|
|
|
0 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2009
|
|
|
10,000 |
|
|
$ |
17.55 |
|
As of December 31, 2009, there was
$564,000 of total unrecognized compensation cost related to nonvested shares
granted under the Plan. The cost is expected to be recognized over a weighted
period of 2.07 years. The total fair value of shares vested during the year
ended December 31, 2009 was $89,000. No shares vested during the years ended
December 31, 2008 and 2007.
NOTE
18 - 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.
NOTE
18 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
(continued)
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, 2009 and 2008, that the Company and Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 2009, 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.
|
|
|
|
|
|
|
|
|
|
|
Minimum
Required to
|
|
|
|
|
|
|
|
|
|
Minimum
Required
|
|
|
Be
Well Capitalized
|
|
|
|
|
|
|
|
|
|
For
Capital
|
|
|
Under
Prompt Corrective
|
|
|
|
Actual
|
|
|
Adequacy
Purposes
|
|
|
Action
Regulations
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(dollars
in thousands)
|
|
As
of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
338,152 |
|
|
|
15.38 |
% |
|
$ |
175,888 |
|
|
|
8.00 |
% |
|
$ |
219,860 |
|
|
|
10.00 |
% |
Bank
|
|
$ |
278,453 |
|
|
|
12.67 |
% |
|
$ |
175,768 |
|
|
|
8.00 |
% |
|
$ |
219,710 |
|
|
|
10.00 |
% |
Tier
I Capital (to Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
310,613 |
|
|
|
14.13 |
% |
|
$ |
87,944 |
|
|
|
4.00 |
% |
|
$ |
131,916 |
|
|
|
6.00 |
% |
Bank
|
|
$ |
250,932 |
|
|
|
11.42 |
% |
|
$ |
87,884 |
|
|
|
4.00 |
% |
|
$ |
131,826 |
|
|
|
6.00 |
% |
Tier
I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
310,613 |
|
|
|
12.28 |
% |
|
$ |
101,169 |
|
|
|
4.00 |
% |
|
$ |
126,461 |
|
|
|
5.00 |
% |
Bank
|
|
$ |
250,932 |
|
|
|
9.90 |
% |
|
$ |
101,377 |
|
|
|
4.00 |
% |
|
$ |
126,722 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
205,210 |
|
|
|
10.20 |
% |
|
$ |
160,938 |
|
|
|
8.00 |
% |
|
$ |
201,173 |
|
|
|
10.00 |
% |
Bank
|
|
$ |
203,133 |
|
|
|
10.10 |
% |
|
$ |
160,874 |
|
|
|
8.00 |
% |
|
$ |
201,092 |
|
|
|
10.00 |
% |
Tier
I Capital (to Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
186,350 |
|
|
|
9.26 |
% |
|
$ |
80,469 |
|
|
|
4.00 |
% |
|
$ |
120,704 |
|
|
|
6.00 |
% |
Bank
|
|
$ |
184,273 |
|
|
|
9.16 |
% |
|
$ |
80,437 |
|
|
|
4.00 |
% |
|
$ |
120,655 |
|
|
|
6.00 |
% |
Tier
I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
186,350 |
|
|
|
8.10 |
% |
|
$ |
92,010 |
|
|
|
4.00 |
% |
|
$ |
115,012 |
|
|
|
5.00 |
% |
Bank
|
|
$ |
184,273 |
|
|
|
7.97 |
% |
|
$ |
92,469 |
|
|
|
4.00 |
% |
|
$ |
115,587 |
|
|
|
5.00 |
% |
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, 2009, approximately $24.7 million was
available to be paid as dividends to the Company by the Bank.
NOTE
18 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
(continued)
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, 2009.
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
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, 2009 and 2008, were as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
|
(in
thousands)
|
|
Commercial
loan lines of credit
|
|
$ |
86,855 |
|
|
$ |
647,066 |
|
|
$ |
77,047 |
|
|
$ |
573,723 |
|
Commercial
letters of credit
|
|
|
0 |
|
|
|
1,200 |
|
|
|
0 |
|
|
|
1,165 |
|
Standby
letters of credit
|
|
|
19,817 |
|
|
|
19,628 |
|
|
|
10,179 |
|
|
|
15,646 |
|
Real
estate mortgage loans
|
|
|
10,472 |
|
|
|
2,197 |
|
|
|
9,506 |
|
|
|
87 |
|
Real
estate construction mortgage loans
|
|
|
13 |
|
|
|
1,193 |
|
|
|
619 |
|
|
|
1,470 |
|
Home
equity mortgage open-ended revolving lines
|
|
|
0 |
|
|
|
111,980 |
|
|
|
0 |
|
|
|
102,923 |
|
Consumer
loan open-ended revolving lines
|
|
|
0 |
|
|
|
4,858 |
|
|
|
0 |
|
|
|
5,371 |
|
Total
|
|
$ |
117,157 |
|
|
$ |
788,122 |
|
|
$ |
97,351 |
|
|
$ |
700,385 |
|
The index on variable rate
commercial loan commitments is principally the Company’s base rate, which is the
national prime rate. Interest rate ranges on commitments and open-ended
revolving lines of credit for December 31, 2009 and 2008, were as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
|
|
|
Commercial
loan
|
|
|
2.25-11.00
|
% |
|
|
1.24-8.85
|
% |
|
|
2.80-11.00
|
% |
|
|
1.16-8.85
|
% |
Real
estate mortgage loan
|
|
|
4.38-5.38
|
% |
|
|
3.50-6.25
|
% |
|
|
4.75-7.13
|
% |
|
|
5.50-7.50
|
% |
Consumer
loan open-ended revolving line
|
|
|
N/A |
|
|
|
2.09-15.00
|
% |
|
|
N/A |
|
|
|
2.09-15.00
|
% |
Commitments, excluding open-ended
revolving lines, generally have fixed expiration dates of one year or less.
Open-ended revolving lines are monitored for proper performance and compliance
on a monthly basis. Since many commitments expire without being drawn upon, the
total commitment amount does not necessarily represent future cash requirements.
The Company follows the same credit policy (including requiring collateral, if
deemed appropriate) to make such commitments as is followed for those loans that
are recorded in its financial statements.
The Company’s exposure to credit
losses in the event of nonperformance is represented by the contractual amount
of the commitments. Management does not expect any significant losses as a
result of these commitments.
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
Deposits
with Lake City Bank
|
|
$ |
58,817 |
|
|
$ |
1,446 |
|
Investments
in banking subsidiary
|
|
|
250,313 |
|
|
|
177,802 |
|
Investments
in Lakeland Statutory Trust II
|
|
|
928 |
|
|
|
928 |
|
Other
assets
|
|
|
1,482 |
|
|
|
803 |
|
Total
assets
|
|
$ |
311,540 |
|
|
$ |
180,979 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Dividends
payable and other liabilities
|
|
$ |
618 |
|
|
$ |
171 |
|
Subordinated
debt
|
|
|
30,928 |
|
|
|
30,928 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
279,994 |
|
|
|
149,880 |
|
Total
liabilities and stockholders' equity
|
|
$ |
311,540 |
|
|
$ |
180,979 |
|
CONDENSED
STATEMENTS OF INCOME
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Dividends
from Lake City Bank, Lakeland Statutory Trust II
|
|
$ |
9,857 |
|
|
$ |
7,154 |
|
|
$ |
7,717 |
|
Equity
in undistributed income of subsidiaries
|
|
|
10,448 |
|
|
|
14,293 |
|
|
|
13,506 |
|
Interest
expense on subordinated debt
|
|
|
(1,250 |
) |
|
|
(2,081 |
) |
|
|
(2,643 |
) |
Miscellaneous
expense
|
|
|
(892 |
) |
|
|
(684 |
) |
|
|
(590 |
) |
INCOME
BEFORE INCOME TAXES
|
|
|
18,163 |
|
|
|
18,682 |
|
|
|
17,990 |
|
Income
tax benefit
|
|
|
816 |
|
|
|
1,019 |
|
|
|
1,221 |
|
NET
INCOME
|
|
$ |
18,979 |
|
|
$ |
19,701 |
|
|
$ |
19,211 |
|
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,979 |
|
|
$ |
19,701 |
|
|
$ |
19,211 |
|
Adjustments
to net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed income of subsidiaries
|
|
|
(10,448 |
) |
|
|
(14,293 |
) |
|
|
(13,506 |
) |
Other
changes
|
|
|
410 |
|
|
|
186 |
|
|
|
849 |
|
Net
cash from operating activities
|
|
|
8,941 |
|
|
|
5,594 |
|
|
|
6,554 |
|
Cash
flows from investing activities
|
|
|
(56,044 |
) |
|
|
0 |
|
|
|
0 |
|
Cash
flows from financing activities
|
|
|
104,474 |
|
|
|
(5,518 |
) |
|
|
(5,713 |
) |
Net
increase in cash and cash equivalents
|
|
|
57,371 |
|
|
|
76 |
|
|
|
841 |
|
Cash
and cash equivalents at beginning of the year
|
|
|
1,446 |
|
|
|
1,370 |
|
|
|
529 |
|
Cash
and cash equivalents at end of the year
|
|
$ |
58,817 |
|
|
$ |
1,446 |
|
|
$ |
1,370 |
|
NOTE
21 - EARNINGS PER SHARE
Following are the factors used in
the earnings per share computations:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,979,000 |
|
|
$ |
19,701,000 |
|
|
$ |
19,211,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Dividends
and accretion of discount on preferred stock
|
|
|
2,694,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$ |
16,285,000 |
|
|
$ |
19,701,000 |
|
|
$ |
19,211,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
12,851,845 |
|
|
|
12,271,927 |
|
|
|
12,188,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
1.27 |
|
|
$ |
1.61 |
|
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,979,000 |
|
|
$ |
19,701,000 |
|
|
$ |
19,211,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Dividends
and accretion of discount on preferred stock
|
|
|
2,694,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$ |
16,285,000 |
|
|
$ |
19,701,000 |
|
|
$ |
19,211,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
earnings per common share
|
|
|
12,851,845 |
|
|
|
12,271,927 |
|
|
|
12,188,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Dilutive effect of assumed exercises of stock options
|
|
|
100,599 |
|
|
|
187,875 |
|
|
|
235,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares and dilutive potential common shares
|
|
|
12,952,444 |
|
|
|
12,459,802 |
|
|
|
12,424,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
1.26 |
|
|
$ |
1.58 |
|
|
$ |
1.55 |
|
Stock options for 110,000 and
106,000 shares of common stock were not considered in computing diluted earnings
per common share for 2009 and 2008 and because they were antidilutive. In
addition, warrants for 198,269 shares of common stock were not considered in
computing diluted earnings per common share for 2009 because they were
antidilutive.
NOTE
22 – SELECTED QUARTERLY DATA (UNAUDITED) (in thousands except per share
data)
2009
|
|
4th
|
|
|
3rd
|
|
|
2nd
|
|
|
1st
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Interest
income
|
|
$ |
30,042 |
|
|
$ |
29,530 |
|
|
$ |
28,830 |
|
|
$ |
27,941 |
|
Interest
expense
|
|
|
7,576 |
|
|
|
8,268 |
|
|
|
9,292 |
|
|
|
10,926 |
|
Net
interest income
|
|
$ |
22,466 |
|
|
$ |
21,262 |
|
|
$ |
19,538 |
|
|
$ |
17,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
6,250 |
|
|
|
5,500 |
|
|
|
4,936 |
|
|
|
4,516 |
|
Net
interest income after provision
|
|
$ |
16,216 |
|
|
$ |
15,762 |
|
|
$ |
14,602 |
|
|
$ |
12,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
5,373 |
|
|
|
5,279 |
|
|
|
6,022 |
|
|
|
5,570 |
|
Noninterest
expense
|
|
|
13,538 |
|
|
|
13,097 |
|
|
|
14,153 |
|
|
|
12,687 |
|
Income
tax expense
|
|
|
2,669 |
|
|
|
2,677 |
|
|
|
2,011 |
|
|
|
1,512 |
|
Net
income
|
|
$ |
5,382 |
|
|
$ |
5,267 |
|
|
$ |
4,460 |
|
|
$ |
3,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.33 |
|
|
$ |
0.36 |
|
|
$ |
0.29 |
|
|
$ |
0.29 |
|
Diluted
earnings per common share
|
|
$ |
0.32 |
|
|
$ |
0.36 |
|
|
$ |
0.29 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
4th
|
|
|
3rd
|
|
|
2nd
|
|
|
1st
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Interest
income
|
|
$ |
28,914 |
|
|
$ |
30,966 |
|
|
$ |
29,012 |
|
|
$ |
29,592 |
|
Interest
expense
|
|
|
12,922 |
|
|
|
13,694 |
|
|
|
13,514 |
|
|
|
15,086 |
|
Net
interest income
|
|
$ |
15,992 |
|
|
$ |
17,272 |
|
|
$ |
15,498 |
|
|
$ |
14,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
2,323 |
|
|
|
3,710 |
|
|
|
3,021 |
|
|
|
1,153 |
|
Net
interest income after provision
|
|
$ |
13,669 |
|
|
$ |
13,562 |
|
|
$ |
12,477 |
|
|
$ |
13,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
5,385 |
|
|
|
6,202 |
|
|
|
5,972 |
|
|
|
5,769 |
|
Noninterest
expense
|
|
|
12,550 |
|
|
|
11,942 |
|
|
|
11,607 |
|
|
|
11,382 |
|
Income
tax expense
|
|
|
2,071 |
|
|
|
2,597 |
|
|
|
2,040 |
|
|
|
2,499 |
|
Net
income
|
|
$ |
4,433 |
|
|
$ |
5,225 |
|
|
$ |
4,802 |
|
|
$ |
5,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.39 |
|
|
$ |
0.43 |
|
Diluted
earnings per common share
|
|
$ |
0.35 |
|
|
$ |
0.42 |
|
|
$ |
0.39 |
|
|
$ |
0.42 |
|
NOTE
23 –PREFERRED STOCK
On February 27, 2009, the Company
entered into a Letter Agreement with the United States Department of the
Treasury (“Treasury”), pursuant to which the Company issued (i) 56,044 shares of
the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the
“Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase
396,538 shares of the Company’s common stock, no par value (the “Common Stock”),
for an aggregate purchase price of $56,044,000 in cash. This transaction was
conducted in accordance with Treasury’s Capital Purchase Program implemented
under the Troubled Assets Relief Program (“TARP”).
The Series A Preferred Stock qualifies
as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for
the first five years, and will pay 9% per annum thereafter. The Series A
Preferred Stock is non-voting except with respect to certain matters affecting
the rights of the holders thereof. The Series A Preferred Stock was valued using
a discounting of cash flows at a 12% discount rate based on an average implied
cost of equity over 5 years.
The Warrant has a 10-year term and is
immediately exercisable upon its issuance, with an exercise price, subject to
anti-dilution adjustments, equal to $21.20 per share of the Common Stock
(trailing 20-day Lakeland average closing price as of December 17, 2008, which
was the last trading day prior to date of receipt of Treasury’s preliminary
approval for our participation in the Capital Purchase Program). The Warrant was
valued using the Black Scholes model with the following
assumptions: Market Price of $17.45; Exercise Price of $21.20;
Risk-free interest rate of 3.02%; Expected Life of 10 years; Expected Dividend
rate on common stock of 4.5759% and volatility of common stock price of
41.8046%. This resulted in a value of $4.4433 per share.
The total amount of funds received were
allocated to the Series A Preferred Stock and Warrant based on their respective
fair values to determine the amounts recorded for each component. The method
used to amortize the resulting discount on the Series A Preferred Stock is
accretion over the assumed life of five years using the effective
yield.
During the first quarter of 2009, the
Company invested $56.0 million of the Capital Purchase Program funds received in
the Bank. This additional capital positively impacted the Bank’s capital ratios
and liquidity.
Subsequent to issue, the share count of
the Warrant was adjusted to 198,269 due to a Qualified Equity Offering as more
fully described in Note 24.
Pursuant to the terms of the Purchase
Agreement, the ability of the Company to declare or pay dividends or
distributions on, or purchase, redeem or otherwise acquire for consideration,
shares of its Common Stock will be subject to restrictions, including a
restriction against increasing dividends from the last quarterly cash dividend
per share ($0.155) declared on the Common Stock prior to February 27, 2012. The
redemption, purchase or other acquisition of trust preferred securities of the
Company or its affiliates also will be restricted. These restrictions will
terminate on the earlier of (a) the third anniversary of the date of issuance of
the Preferred Stock and (b) the date on which the Series A Preferred Stock has
been redeemed in whole or the U.S. Treasury has transferred all of the Series A
Preferred Stock to third parties, except that, after the third anniversary of
the date of issuance of the Series A Preferred Stock, if the Series A Preferred
Stock remains outstanding at such time, the company may not increase its common
dividends per share without obtaining consent of the U.S. Treasury.
The Purchase Agreement also subjects
the Company to certain of the executive compensation limitations included in the
Emergency Economic Stabilization Act of 2008 (the EESA). In this connection, as
a condition to the closing of the transaction, the Company’s Senior Executive
Officers (as defined in the Purchase Agreement) (the “Senior Executive
Officers”), (i) voluntarily waived any claim against the U.S. Treasury or the
Company for any changes to such officer’s compensation or benefits that are
required to comply with the regulation issued by the U.S. Treasury under the
TARP Capital Purchase Program and acknowledged that the regulation may require
modification of the compensation, bonus, incentive and other benefit plans,
arrangements and policies and agreements as they relate to the period the U.S.
Treasury owns the Preferred Stock of the Company; and ii) entered into a letter
with the Company amending the Benefit Plans with respect to such Senior
Executive Officers as may be necessary, during the period that the Treasury owns
the Preferred Stock of the Company, as necessary to comply with Section 111(b)
of the EESA.
NOTE
24 –COMMON STOCK
On November 18, 2009, the Company
completed an underwritten public stock offering by issuing 3,500,000 shares of
the Company’s common stock at a public offering price of $17.00 per share, for
aggregate gross proceeds of $59.5 million. The net proceeds to the Company after
deducting underwriting discounts and commissions and estimated offering expenses
were approximately $55.9 million.
On December 3, 2009, the Company was
notified by the Treasury that, as a result of the Company's completion of our
November 18, 2009 Qualified Equity Offering, the amount of the warrant was
reduced by 50% to 198,269 shares.
On December 15, 2009, the Company sold
125,431 shares of common stock pursuant to the underwriters’ exercise of the
over-allotment option, which the Company granted in connection with underwritten
public stock offering. The Company sold the additional shares to the
underwriters at the same public offering price of $17.00 per share agreed to for
the initial closing on November 18, 2009. The aggregate net proceeds to the
Company from the public offering, after deducting underwriting discounts and
commissions and offering expenses, including the net proceeds of approximately
$2.0 million from the sale of shares pursuant to the over-allotment option, were
approximately $57.9 million.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Stockholders
and Board of Directors
Lakeland
Financial Corporation
Warsaw,
Indiana
We have
audited the accompanying consolidated balance sheets of Lakeland Financial
Corporation as of December 31, 2009 and 2008, 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, 2009. We also have audited
Lakeland Financial Corporation’s internal control over financial reporting as
of December 31, 2009, based on Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Lakeland Financial Corporation’s management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and an
opinion on the effectiveness of the company’s internal control over financial
reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Lakeland Financial
Corporation as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2009 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, Lakeland Financial Corporation
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on Internal Control—Integrated
Framework issued by COSO.
Crowe
Horwath LLP
South
Bend, Indiana
March 8,
2010
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
a) An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rules 13a -15(e) and 15d-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
December 31, 2009. Based on that evaluation, the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company’s disclosure controls and procedures were effective.
b) MANAGEMENT’S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities and Exchange Act of 1934. The Company’s
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.
The
Company’s internal control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the
Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Management assessed the effectiveness of the
Company’s internal control over financial reporting as of December 31,
2009. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on our assessment and those
criteria, management concluded that the Company maintained effective internal
control over financial reporting as of December 31, 2009.
The
Company’s independent registered public accounting firm has issued their report
on the Company’s internal control over financial reporting. That report appears
under the heading, Report of Independent Registered Public Accounting
Firm.
c) There
have been no changes in the Company’s internal controls during the previous
fiscal quarter, ended December 31, 2009, that have materially affected, or are
reasonably likely to materially affect the Company’s internal control over
financial reporting.
Not applicable.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
information appearing in the definitive Proxy Statement, for the Annual Meeting
of Shareholders to be held on April 13, 2010, is incorporated herein by
reference in response to this item.
The
information appearing in the definitive Proxy Statement, for the Annual Meeting
of Shareholders to be held on April 13, 2010, is incorporated herein by
reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHARELHOLDER MATTERS
The
information appearing in the definitive Proxy Statement, for the Annual Meeting
of Shareholders to be held on April 13, 2010, 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, 2009 for (i) all compensation plans
previously approved by the Company’s shareholders and (ii) all compensation
plans not previously approved by the Company’s shareholders:
|
(a)
|
|
the
number of securities to be issued upon the exercise of outstanding
options, warrants and rights;
|
|
(b)
|
|
the
weighted-average exercise price of such outstanding options, warrants and
rights;
|
|
|
|
|
|
(c)
|
|
other
than securities to be issued upon the exercise of such outstanding
options, warrants and rights, the
|
|
|
|
number
of securities remaining available for future issuance under the
plans.
|
EQUITY
COMPENSATION PLAN INFORMATION
|
|
|
|
|
|
|
|
Number
of securities
|
|
|
|
|
|
|
|
|
|
remaining
available
|
|
|
|
Number
of securities to be
|
|
|
Weighted-average
|
|
|
for
future issuance
|
|
Plan
category
|
|
issued
upon exercise of
|
|
|
exercise
price of
|
|
|
under
equity
|
|
|
|
outstanding options
|
|
|
outstanding
options
|
|
|
compensation
plans
|
|
Equity
compensation plans
|
|
|
|
|
|
|
|
|
|
approved
by security
|
|
|
|
|
|
|
|
|
|
holders(1)(2)
|
|
|
321,806 |
|
|
$ |
15.62 |
|
|
|
642,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
not
approved by security
|
|
|
|
|
|
|
|
|
|
|
|
|
holders
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
321,806 |
|
|
$ |
15.62 |
|
|
|
642,800 |
|
(1) Lakeland
Financial Corporation 1997 Share Incentive Plan adopted on April 14, 1998 by the
Board of Directors.
(2) Lakeland
Financial Corporation 2008 Equity Incentive Plan adopted on May 14, 2008 by the
Board of Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The
information appearing in the definitive Proxy Statement, for the Annual Meeting
of Shareholders to be held on April 13, 2010, is incorporated herein by
reference in response to this item.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information appearing in the
definitive Proxy Statement, for the Annual Meeting of Shareholders to be held on
April 13, 2010, is incorporated herein by reference in response to this
item.
PART
IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
The documents listed below are filed
as a part of this report:
(a) Exhibits
Exhibit
No.
|
Document
|
Incorporated
by reference to
|
|
|
|
3.1
|
Amended
and Restated Articles
|
Exhibit
3.1 in the Company’s Form 8-K
|
|
of
Incorporation of Lakeland
|
Filed
with the Commission on
|
|
Financial
Corporation
|
February
27, 2009
|
|
|
|
3.2
|
Bylaws
of Lakeland
|
Exhibit
3(ii) to the Company’s
|
|
Financial
Corporation
|
Form
10-Q for the quarter
|
|
|
ended
June 30, 1996
|
|
|
|
4.1
|
Form
of Common Stock Certificate
|
Exhibit
4.1 to the Company’s
|
|
|
Form
10-K for the fiscal year ended
|
|
|
December
31, 2003
|
|
|
|
4.2
|
Form
of Stock Certificate for Series A
|
Incorporated
by reference to Exhibit
|
|
Fixed
Rate Cumulative Perpetual
|
4.1
to the Company’s form 8-K
|
|
Preferred
Stock
|
filed
on March 2, 2009
|
|
|
|
4.3
|
Warrant
to Purchase Shares of Common
|
Incorporated
by reference to Exhibit
|
|
Stock,
dated February 27, 2009
|
4.2
to the Company’s Form 8-K
|
|
|
filed
on March 2, 2009
|
|
|
|
10.1
|
Lakeland
Financial
|
Exhibit
4.3 to the Company’s
|
|
Corporation
2008 Equity
|
Form
S-8 filed with the
|
|
Incentive
Plan
|
Commission
on April 8, 2008
|
|
|
|
10.2
|
Form
of Indenture for Trust Preferred
|
Exhibit
4.1 to the Company’s
|
|
Issuance
|
Form
10-K for the fiscal year ended
|
|
|
December
31, 2003
|
|
|
|
10.3
|
Lakeland
Financial Corporation 401(k)
|
Exhibit
10.1 to the Company’s Form
|
|
Plan
|
S-8
filed with the Commission on
|
|
|
October
23, 2000
|
|
|
|
10.4
|
Amended
and Restated Lakeland
|
Exhibit
10.4 to the Company’s
|
|
Financial
Corporation Director’s Fee
|
Form
10-K for the fiscal year ended
|
|
Deferral
Plan
|
December
31, 2008
|
|
|
|
10.6
|
Form
of Change of Control Agreement
|
Exhibit
10.5 to the Company’s
|
|
entered
into with Michael L. Kubacki,
|
Form
10-K for the fiscal year ended
|
|
David
M. Findlay, Charles D. Smith and
|
December
31, 2008
|
|
Kevin
L. Deardorff
|
|
|
|
|
10.6
|
Employee
Deferred Compensation Plan
|
Exhibit
10.7 to the Company’s
|
|
and
Form of Agreement
|
Form
10-K for the fiscal year ended
|
|
|
December
31, 2008
|
|
|
|
10.7
|
Schedule
of Board Fees
|
|
|
|
|
10.8
|
Form
of Option Grant Agreement
|
Exhibit
10.10 to the Company’s Form
|
|
|
10-K
for the fiscal year ended
|
|
|
December
31, 2004
|
|
|
|
10.9
|
Executive
Incentive Bonus Plan
|
Exhibit
10.11 to the Company’s Form
|
|
|
10-K
for the fiscal year ended
|
|
|
December
31, 2004
|
|
|
|
10.10
|
Amended
and Restated Long Term
|
Exhibit
10.1 to the Company’s Form
|
|
Incentive
Plan
|
10-Q
for the quarter ended
|
|
|
September
30, 2009
|
|
|
|
10.11
|
Letter
Agreement, dated February 27,
|
Incorporated
by reference to Exhibit
|
|
2009,
by and between the Company, and
|
10.1
tot the Company’s Form 8-K
|
|
the
United States Department of the
|
filed
on March 2, 2009
|
|
Treasury,
which includes the Securities
|
|
|
Purchase
Agreement – Standard Terms
|
|
|
attached
as Exhibit A thereto, with
|
|
|
respect
to the issuance and sale of the
|
|
|
Series
A Preferred Stock and Warrant
|
|
|
|
|
10.12
|
Side
Letter, dated February 27, 2009,
|
Incorporated
by reference to Exhibit
|
|
by
and between the Company and the
|
10.2
to the Company’s Form 8-K
|
|
United
States Department of the Treasury
|
filed
on March 2, 2009
|
|
|
|
10.13
|
Form
of Waiver, executed by each of the
|
Incorporated
by reference to Exhibit
|
|
Company’s
senior executive officers
|
10.3
to the Company’s Form 8-K
|
|
|
filed
on March 2, 2009
|
|
|
|
10.14
|
Form
of Omnibus amendment, executed
|
Incorporated
by reference to Exhibit
|
|
by
each of the Company’s senior
|
10.4
to the Company’s Form 8-K
|
|
executive
officers
|
filed
March 2, 2009
|
|
|
|
21.0
|
Subsidiaries
|
|
|
|
|
23.1
|
Consent
of Independent Registered
|
|
|
Public
Accounting Firm
|
|
|
|
|
31.1
|
Certification
of Chief Executive Officer
|
|
|
Pursuant
to Rule 13a-15(e)/15d-15(e) and
|
|
|
13(a)-15(f)/15d-15(f)
|
|
|
|
|
31.2
|
Certification
of Chief Financial Officer
|
|
|
Pursuant
to Rule 13a-15(e)/15d-15(e) and
|
|
|
13(a)-15(f)/15d-15(f)
|
|
|
|
|
32.1
|
Certification
of Chief Executive Officer
|
|
|
Pursuant
to 18 U.S.C. Section 1350, as
|
|
|
adopted
Pursuant to Section 906 of the
|
|
|
Sarbanes-Oxley
Act of 2002
|
|
|
|
|
32.2
|
Certification
of Chief Financial Officer
|
|
|
Pursuant
to 18 U.S.C. Section 1350, as
|
|
|
adopted
Pursuant to Section 906 of the
|
|
|
Sarbanes-Oxley
Act of 2002
|
|
|
|
|
99.1
|
Certification
of Chief Executive
|
|
|
Officer
Pursuant to Section 111(b) of
|
|
|
EESA
|
|
|
|
|
99.2
|
Certification
of Chief Financial
|
|
|
Officer
Pursuant to Section 111(b) of
|
|
|
EESA
|
|
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:
March 8, 2010
|
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 and Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
David M. Findlay
|
|
|
David
M. Findlay
|
Principal
Financial Officer
|
March
8, 2010
|
|
|
|
|
|
|
/s/
Teresa A. Bartman
|
|
|
Teresa
A. Bartman
|
Principal
Accounting Officer
|
March
8, 2010
|
|
|
|
|
|
|
/s/
Robert E. Bartels, Jr.
|
|
|
Robert
E. Bartels, Jr.
|
Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
L. Craig Fulmer
|
|
|
L.
Craig Fulmer
|
Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
Thomas A. Hiatt
|
|
|
Thomas
A. Hiatt
|
Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
Charles E. Niemier
|
|
|
Charles
E. Niemier
|
Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
Emily E. Pichon
|
|
|
Emily
E. Pichon
|
Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
Richard L. Pletcher
|
|
|
Richard
L. Pletcher
|
Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
Steven D. Ross
|
|
|
Steven
D. Ross
|
Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
Donald B. Steininger
|
|
|
Donald
B. Steininger
|
Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
Terry L. Tucker
|
|
|
Terry
L. Tucker
|
Director
|
March
8, 2010
|
|
|
|
|
|
|
/s/
M. Scott Welch
|
|
|
M.
Scott Welch
|
Director
|
March
8, 2010
|
Exhibit
21
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 II, Inc., a subsidiary of Lake City Bank incorporated in
Nevada to manage a portion of the Bank’s investment
portfolio.
|
4.
|
LCB
Funding, Inc., a subsidiary of LCB Investments II, Inc. incorporated under
the laws of Maryland to operate as a real estate investment
trust.
|