IBNK » Topics » NON-INTEREST EXPENSE

These excerpts taken from the IBNK 10-K filed Mar 13, 2008.
NON-INTEREST EXPENSE
 
Non-interest expense for 2007 was $87,650 compared to $75,877 in 2006, an increase of 15.5%. Non-interest expense for 2007 was impacted by the addition of the Chicago region resulting from the Prairie acquisition. Expenses charged directly to the new Chicago region totaled $4,493, including personnel expenses of $2,363 and occupancy expenses of $1,007. The Prairie acquisition also increased non-interest expense in other areas that are not charged directly to the Chicago region.
 
Non-interest expense for 2007, compared to 2006, included increases in personnel expense of $5,891, occupancy expense of $1,248, professional fees of $1,657, intangibles expense of $627, travel and meals of $333, postage and courier expenses of $309, and sales and franchise taxes of $306. One-time merger integration related expenses, including travel, courier, programming, supplies, temporary signage, and other expense, were $394.
 
Major contributors to the increase of non-interest expense from 2006 to 2007 are as follows:
 
  •  The increase in personnel expense of $5,891, or 14.7%, was a result of the addition of the Chicago region, higher health insurance, incentive and stock based compensation expenses and investments in personnel in our commercial banking line of business. Incentives and commissions increased $604, in part due to commissions and incentives paid as a result of increases in revenues. Stock based compensation expense increased $716, or 115.5%, due to the adoption of Statement of Financial Accounting Standards No. 123(R), or SFAS 123(R), in 2006. The expense associated with both the 2006 and 2007 grants is now being amortized, while 2006 included only one year’s grant amortization. At December 31, 2007, we had 848 full-time equivalent employees or FTEs compared to 802 in 2006, and 843 in 2005.
 
  •  Occupancy expenses increased $1,248 or 15.3% due to the $1,007 impact of the addition of the five Chicago banking centers and the addition of a new banking center in Union, Kentucky, which added $80 in expense.
 
  •  Professional fees increased $1,657 or 56.1% due primarily to $650 of nonroutine collection expenses and legal fees related to a fourth quarter 2006 charge-off and $585 of investment banking, legal, accounting and other professional fees incurred in connection with the execution of the proposed acquisition of Peoples that was terminated by agreement of both parties in January, 2008. The remainder of the increase was related to the acquisition of Prairie, including systems conversion and merger integration related expenses and higher legal, external audit and examination fees.
 
  •  The increase of intangibles expense of $627 or 67.2% was entirely due to core deposit and customer relationship intangible amortization expense recorded with the Prairie acquisition. Core deposit and customer relationship intangibles totaling $6,380 are being amortized on an accelerated basis over ten and five years, respectively.
 
  •  Travel and meals increased $333 or 43.6%, largely because of expenses associated with travel to Chicago, both before and after the effective date of the Prairie acquisition, as well as because of travel expenses incurred in connection with due diligence and merger integration planning for the since terminated Peoples acquisition.
 
  •  Postage and courier expense increased $309, or 9.1% because of the use of courier services to and from the new Chicago region, coupled with higher postage expense related to mailings for our High Performance Checking program.
 
  •  Sales and franchise taxes increased as a higher level of income was apportioned to states in which we pay franchise tax, particularly Ohio, coupled with receipt in 2006 of a franchise tax refund claim for a prior year.


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Table of Contents

 
Non-interest expense for 2006 was $75,877 compared to $77,557 in 2005, a decrease of 2.2%. Non-interest expense for 2006 included reductions in professional fees of $1,407, salaries expense of $773, incentives of $685, processing expense of $533, and franchise, sales, state and local taxes of $371. Partially offsetting these items were increases in medical expense of $833, postretirement health insurance of $324, stock option expense of $225, occupancy expense of $352 and low income housing partnership losses of $316.
 
Major contributors to the net reduction of non-interest expense from 2005 to 2006 are as follows:
 
  •  Professional fees declined largely as a result of our changing audit firms for 2006. Total audit fees were reduced by $612 or 58.6% from 2005. Legal fees declined $466 or 51.6% largely due to expenses we incurred in 2005 from an IRS audit of our tax returns, by having our in-house counsel we hired in 2004 deal with issues we previously outsourced to outside firms, and a reduced level of litigation. Other professional fees declined due to lower expenses in the area of branch mystery shopping and facilities design.
 
  •  The reduction in salaries expense was a result of a further reduction to our workforce, from 840 average FTEs during 2005 to 804 average FTEs in 2006. Continued ongoing initiatives to find and execute efficiencies were successful, allowing us to reallocate resources to higher yielding businesses, such as the commercial lending team added during the second and third quarters of 2006. At December 31, 2006, we had 802 FTEs compared to 843 in 2005 and 839 in 2004.
 
  •  Incentives declined from 2005 largely due to a reduction in executive incentive compensation expense that resulted because of the fourth quarter 2006 loan charge-off.
 
  •  Processing expense declined from 2005 largely due to successful execution of expense reduction initiatives that resulted in new contracts and lower costs, particularly in the area of ATM and debit card transaction processing.
 
  •  Franchise, sales, state and local tax expense declined because of the filing of a franchise tax refund claim for a prior year, a sales tax liability paid in 2005 that did not reoccur in 2006 and resulted from a 2005 audit, and lower franchise tax liabilities, as well as lower state and local deposit taxes.
 
  •  The increase in medical expense was primarily the result of two items. First, we began to offer and pay for health insurance benefits to part-time employees in 2006. Second, in 2006, we had a higher level of individually significant claims that approached or exceeded the stop loss amounts included in our self-insured health plan. We continue to focus on several initiatives in the area of preventive care in an effort to have a healthier workforce and lower overall health insurance costs.
 
  •  During 2006, we adopted SFAS 123(R), which resulted in the recognition of $245 of stock option expense for options issued during 2006. Prior to 2006, this expense was not recognized in the statement of income, but rather recognized on a pro-forma basis in the footnotes to the financial statements. Total expense recognized for all stock-based compensation for employees and directors, including restricted stock, was $810 in 2006 compared to $385 in 2005.
 
  •  The increase in occupancy expense was caused by the lease of additional space in an existing facility during the fourth quarter of the year, a switch in facilities management companies and related transition expenses, higher real property taxes and higher utilities expense.
 
  •  The increase in low income housing partnership investment expenses was due to higher than expected operating losses from the partnerships we have investments in. The returns we receive on these investments consist of the tax benefits we receive from the tax deductible losses the partnerships generate, plus low income housing tax credits we receive, less the actual losses.
 
NON-INTEREST
EXPENSE



 



Non-interest expense for 2007 was $87,650 compared to $75,877 in
2006, an increase of 15.5%. Non-interest expense for 2007 was
impacted by the addition of the Chicago region resulting from
the Prairie acquisition. Expenses charged directly to the new
Chicago region totaled $4,493, including personnel expenses of
$2,363 and occupancy expenses of $1,007. The Prairie acquisition
also increased non-interest expense in other areas that are not
charged directly to the Chicago region.


 



Non-interest expense for 2007, compared to 2006, included
increases in personnel expense of $5,891, occupancy expense of
$1,248, professional fees of $1,657, intangibles expense of
$627, travel and meals of $333, postage and courier expenses of
$309, and sales and franchise taxes of $306. One-time merger
integration related expenses, including travel, courier,
programming, supplies, temporary signage, and other expense,
were $394.


 



Major contributors to the increase of non-interest expense from
2006 to 2007 are as follows:


 












































































  • 

The increase in personnel expense of $5,891, or 14.7%, was a
result of the addition of the Chicago region, higher health
insurance, incentive and stock based compensation expenses and
investments in personnel in our commercial banking line of
business. Incentives and commissions increased $604, in part due
to commissions and incentives paid as a result of increases in
revenues. Stock based compensation expense increased $716, or
115.5%, due to the adoption of Statement of Financial Accounting
Standards No. 123(R), or SFAS 123(R), in 2006. The
expense associated with both the 2006 and 2007 grants is now
being amortized, while 2006 included only one year’s grant
amortization. At December 31, 2007, we had
848 full-time equivalent employees or FTEs compared to 802
in 2006, and 843 in 2005.
 
  • 

Occupancy expenses increased $1,248 or 15.3% due to the $1,007
impact of the addition of the five Chicago banking centers and
the addition of a new banking center in Union, Kentucky, which
added $80 in expense.
 
  • 

Professional fees increased $1,657 or 56.1% due primarily to
$650 of nonroutine collection expenses and legal fees related to
a fourth quarter 2006 charge-off and $585 of investment banking,
legal, accounting and other professional fees incurred in
connection with the execution of the proposed acquisition of
Peoples that was terminated by agreement of both parties in
January, 2008. The remainder of the increase was related to the
acquisition of Prairie, including systems conversion and merger
integration related expenses and higher legal, external audit
and examination fees.
 
  • 

The increase of intangibles expense of $627 or 67.2% was
entirely due to core deposit and customer relationship
intangible amortization expense recorded with the Prairie
acquisition. Core deposit and customer relationship intangibles
totaling $6,380 are being amortized on an accelerated basis over
ten and five years, respectively.
 
  • 

Travel and meals increased $333 or 43.6%, largely because of
expenses associated with travel to Chicago, both before and
after the effective date of the Prairie acquisition, as well as
because of travel expenses incurred in connection with due
diligence and merger integration planning for the since
terminated Peoples acquisition.
 
  • 

Postage and courier expense increased $309, or 9.1% because of
the use of courier services to and from the new Chicago region,
coupled with higher postage expense related to mailings for our
High Performance Checking program.
 
  • 

Sales and franchise taxes increased as a higher level of income
was apportioned to states in which we pay franchise tax,
particularly Ohio, coupled with receipt in 2006 of a franchise
tax refund claim for a prior year.





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Table of Contents





 



Non-interest expense for 2006 was $75,877 compared to $77,557 in
2005, a decrease of 2.2%. Non-interest expense for 2006 included
reductions in professional fees of $1,407, salaries expense of
$773, incentives of $685, processing expense of $533, and
franchise, sales, state and local taxes of $371. Partially
offsetting these items were increases in medical expense of
$833, postretirement health insurance of $324, stock option
expense of $225, occupancy expense of $352 and low income
housing partnership losses of $316.


 



Major contributors to the net reduction of non-interest expense
from 2005 to 2006 are as follows:


 
































































































  • 

Professional fees declined largely as a result of our changing
audit firms for 2006. Total audit fees were reduced by $612 or
58.6% from 2005. Legal fees declined $466 or 51.6% largely due
to expenses we incurred in 2005 from an IRS audit of our tax
returns, by having our in-house counsel we hired in 2004 deal
with issues we previously outsourced to outside firms, and a
reduced level of litigation. Other professional fees declined
due to lower expenses in the area of branch mystery shopping and
facilities design.
 
  • 

The reduction in salaries expense was a result of a further
reduction to our workforce, from 840 average FTEs during 2005 to
804 average FTEs in 2006. Continued ongoing initiatives to find
and execute efficiencies were successful, allowing us to
reallocate resources to higher yielding businesses, such as the
commercial lending team added during the second and third
quarters of 2006. At December 31, 2006, we had 802 FTEs
compared to 843 in 2005 and 839 in 2004.
 
  • 

Incentives declined from 2005 largely due to a reduction in
executive incentive compensation expense that resulted because
of the fourth quarter 2006 loan charge-off.
 
  • 

Processing expense declined from 2005 largely due to successful
execution of expense reduction initiatives that resulted in new
contracts and lower costs, particularly in the area of ATM and
debit card transaction processing.
 
  • 

Franchise, sales, state and local tax expense declined because
of the filing of a franchise tax refund claim for a prior year,
a sales tax liability paid in 2005 that did not reoccur in 2006
and resulted from a 2005 audit, and lower franchise tax
liabilities, as well as lower state and local deposit taxes.
 
  • 

The increase in medical expense was primarily the result of two
items. First, we began to offer and pay for health insurance
benefits to part-time employees in 2006. Second, in 2006, we had
a higher level of individually significant claims that
approached or exceeded the stop loss amounts included in our
self-insured health plan. We continue to focus on several
initiatives in the area of preventive care in an effort to have
a healthier workforce and lower overall health insurance costs.
 
  • 

During 2006, we adopted SFAS 123(R), which resulted in the
recognition of $245 of stock option expense for options issued
during 2006. Prior to 2006, this expense was not recognized in
the statement of income, but rather recognized on a pro-forma
basis in the footnotes to the financial statements. Total
expense recognized for all stock-based compensation for
employees and directors, including restricted stock, was $810 in
2006 compared to $385 in 2005.
 
  • 

The increase in occupancy expense was caused by the lease of
additional space in an existing facility during the fourth
quarter of the year, a switch in facilities management companies
and related transition expenses, higher real property taxes and
higher utilities expense.
 
  • 

The increase in low income housing partnership investment
expenses was due to higher than expected operating losses from
the partnerships we have investments in. The returns we receive
on these investments consist of the tax benefits we receive from
the tax deductible losses the partnerships generate, plus low
income housing tax credits we receive, less the actual losses.


 




This excerpt taken from the IBNK 10-K filed Mar 27, 2007.
NON-INTEREST EXPENSE
 
Non-interest expense for 2006 was $75,877 compared to $77,557 in 2005, a decrease of 2.2%. Non-interest expense for 2006 included reductions in professional fees of $1,407, salaries expense of $773, incentives of $685, processing expense of $533, and franchise, sales, state and local taxes of $371. Partially offsetting these items were increases in medical expense of $833, postretirement health insurance of $324, stock option expense of $225, occupancy expense of $352 and low income housing partnership losses of $316.
 
Major contributors to the net reduction of non-interest expense from 2005 to 2006 are as follows:
 
  •  Professional fees declined largely as a result of our changing audit firms for 2006. Total audit fees were reduced by $612 or 58.6% from 2005. Legal fees declined $466 or 51.6% largely due to 2005 expenses related to the ongoing audit of our tax returns, by having our in-house counsel we hired in 2004 deal with issues we previously outsourced, and a reduced level of litigation. Other professional fees declined due to lower expenses in the area of branch mystery shopping and facilities design.
 
  •  The reduction in salaries expense was a result of a further reduction to our workforce, from 840 average FTEs during 2005 to 804 average FTEs in 2006. Continued ongoing initiatives to find and execute efficiencies were successful, allowing us to reallocate resources to higher yielding businesses, such as the commercial lending team added during the second and third quarters of 2006. At December 31, 2006, we had 802 full-time equivalent employees compared to 843 in 2005 and 839 in 2004.
 
  •  Incentives declined from 2005 largely due to a reduction in executive incentive compensation expense that resulted because of the fourth quarter 2006 loan charge-off.
 
  •  Processing expense declined from 2005 largely due to successful execution of expense reduction initiatives that resulted in new contracts and lower costs, particularly in the area of ATM and debit card transaction processing.
 
  •  Franchise, sales, state and local tax expense declined because of the filing of a franchise tax refund claim for a prior year, a sales tax liability paid in 2005 that did not reoccur in 2006 and resulted from a 2005 audit, and lower franchise tax liabilities, as well as lower state and local deposit taxes.
 
  •  The increase in medical expense was primarily the result of two items. First, we began to offer and pay for health insurance benefits to part-time employees in 2006. Second, in 2006, we had a higher level of individually significant claims that approached or exceeded the stop loss amounts included in our self-insured health plan. We continue to focus on several initiatives in the area of preventive care in an effort to have a healthier workforce and lower overall health insurance costs.


25


Table of Contents

 
  •  During 2006, we adopted Statement of Financial Accounting Standards No. 123, which resulted in the recognition of $245 of stock option expense for options issued during 2006. Prior to 2006, this expense was not recognized in the statement of income, but rather recognized on a pro-forma basis in the footnotes to the financial statements. Total expense recognized for all stock-based compensation for employees and directors, including restricted stock, was $810 in 2006 compared to $385 in 2005.
 
  •  The increase in occupancy expense was caused by the lease of additional space in an existing facility during the fourth quarter of the year, a switch in facilities management companies and related transition expenses, higher real property taxes and higher utilities expense.
 
  •  The increase in low income housing partnership investment expenses was due to higher than expected operating losses from the partnerships we have investments in. The returns we receive on these investments consist of the tax benefits we receive from the tax deductible losses the partnerships generate, plus low income housing tax credits we receive, less the actual losses.
 
Non-interest expense for 2005 was $77,557 as compared to $138,180 in 2004. The decrease was primarily due to $56,998 of debt prepayment fees incurred during 2004, decreases in several categories including $3,037 in salaries and employee benefits, $880 in processing, $679 in amortization of intangible assets, and $639 in other expenses. These items were partially offset by increases in occupancy expense of $981 and communication and transportation of $1,315.
 
Major contributors to the net reduction of non-interest expense from 2004 to 2005 are as follows:
 
  •  The 2004 balance sheet restructuring resulted in debt prepayment penalties of $56,998; there were no such costs incurred in 2005.
 
  •  The salaries and employee benefits reduction was primarily due to three items. First, we reduced our workforce from 863 average FTEs during 2004 to 840 average FTEs in 2005. A continued emphasis on finding and executing efficiencies, along with changes in our business, such as the sale of the three Illinois banking centers and the sale of the merchant credit card portfolio were largely responsible for these reductions. At December 31, 2005, we had 843 full-time equivalent employees compared to 839 in 2004. Second, medical costs under our self-insured health plan were lower than anticipated. Average claims were positively impacted by a focus on preventive care, as well as a relatively low level of individually significant claims that reached our stop loss insurance policy minimums. Third, we implemented a new retail incentive plan that more closely matched incentive pay with performance.
 
  •  The increase in occupancy expense is due primarily to new banking centers opened in late 2004 and early 2005, partially offset by a reduction resulting from the second quarter 2005 branch sale. Banking centers opened in late 2004 and early 2005 include Evansville, Indiana (July 2004), Henderson, Kentucky (December 2004), and Florence, Kentucky (May 2005).
 
  •  Communication and transportation expenses include an increase in postage of $1,331, as compared to 2004. The postage increase is largely the result of a higher number of mailings to promote deposit products and the High Performance Checking initiative.
 
  •  The decline in processing costs is largely attributable to sale of the merchant credit card portfolio during the first quarter of 2005 and the elimination of related processing costs of $1,066.
 
  •  The decline in amortization of intangible assets occurred because the amortization period for a portion of our core deposit intangibles ended in December 2004. This resulted in elimination of amortization expense of $660 in 2005, as compared to 2004. Goodwill and certain other intangible assets are regularly tested for impairment. We completed this testing in 2005 and found no impairment.
 
  •  The decline in other expense was in large part due to a third quarter 2004 $410 write-down of a property held in other real estate owned.


26


Table of Contents

 
This excerpt taken from the IBNK 10-K filed Mar 12, 2007.
NON-INTEREST EXPENSE
 
Non-interest expense for 2006 was $75,877 compared to $77,557 in 2005, a decrease of 2.2%. Non-interest expense for 2006 included reductions in professional fees of $1,407, salaries expense of $773, incentives of $685, processing expense of $533, and franchise, sales, state and local taxes of $371. Partially offsetting these items were increases in medical expense of $833, postretirement health insurance of $324, stock option expense of $225, occupancy expense of $352 and low income housing partnership losses of $316.
 
Major contributors to the net reduction of non-interest expense from 2005 to 2006 are as follows:
 
  •  Professional fees declined largely as a result of our changing audit firms for 2006. Total audit fees were reduced by $612 or 58.6% from 2005. Legal fees declined $466 or 51.6% largely due to 2005 expenses related to the ongoing audit of our tax returns, by having our in-house counsel we hired in 2004 deal with issues we previously outsourced, and a reduced level of litigation. Other professional fees declined due to lower expenses in the area of branch mystery shopping and facilities design.
 
  •  The reduction in salaries expense was a result of a further reduction to our workforce, from 840 average FTEs during 2005 to 804 average FTEs in 2006. Continued ongoing initiatives to find and execute efficiencies were successful, allowing us to reallocate resources to higher yielding businesses, such as the commercial lending team added during the second and third quarters of 2006. At December 31, 2006, we had 802 full-time equivalent employees compared to 843 in 2005 and 839 in 2004.
 
  •  Incentives declined from 2005 largely due to a reduction in executive incentive compensation expense that resulted because of the fourth quarter 2006 loan charge-off.
 
  •  Processing expense declined from 2005 largely due to successful execution of expense reduction initiatives that resulted in new contracts and lower costs, particularly in the area of ATM and debit card transaction processing.
 
  •  Franchise, sales, state and local tax expense declined because of the filing of a franchise tax refund claim for a prior year, a sales tax liability paid in 2005 that did not reoccur in 2006 and resulted from a 2005 audit, and lower franchise tax liabilities, as well as lower state and local deposit taxes.
 
  •  The increase in medical expense was primarily the result of two items. First, we began to offer and pay for health insurance benefits to part-time employees in 2006. Second, in 2006, we had a higher level of individually significant claims that approached or exceeded the stop loss amounts included in our self-insured health plan. We continue to focus on several initiatives in the area of preventive care in an effort to have a healthier workforce and lower overall health insurance costs.


25


Table of Contents

 
  •  During 2006, we adopted Statement of Financial Accounting Standards No. 123, which resulted in the recognition of $245 of stock option expense for options issued during 2006. Prior to 2006, this expense was not recognized in the statement of income, but rather recognized on a pro-forma basis in the footnotes to the financial statements. Total expense recognized for all stock-based compensation for employees and directors, including restricted stock, was $810 in 2006 compared to $385 in 2005.
 
  •  The increase in occupancy expense was caused by the lease of additional space in an existing facility during the fourth quarter of the year, a switch in facilities management companies and related transition expenses, higher real property taxes and higher utilities expense.
 
  •  The increase in low income housing partnership investment expenses was due to higher than expected operating losses from the partnerships we have investments in. The returns we receive on these investments consist of the tax benefits we receive from the tax deductible losses the partnerships generate, plus low income housing tax credits we receive, less the actual losses.
 
Non-interest expense for 2005 was $77,557 as compared to $138,180 in 2004. The decrease was primarily due to $56,998 of debt prepayment fees incurred during 2004, decreases in several categories including $3,037 in salaries and employee benefits, $880 in processing, $679 in amortization of intangible assets, and $639 in other expenses. These items were partially offset by increases in occupancy expense of $981 and communication and transportation of $1,315.
 
Major contributors to the net reduction of non-interest expense from 2004 to 2005 are as follows:
 
  •  The 2004 balance sheet restructuring resulted in debt prepayment penalties of $56,998; there were no such costs incurred in 2005.
 
  •  The salaries and employee benefits reduction was primarily due to three items. First, we reduced our workforce from 863 average FTEs during 2004 to 840 average FTEs in 2005. A continued emphasis on finding and executing efficiencies, along with changes in our business, such as the sale of the three Illinois banking centers and the sale of the merchant credit card portfolio were largely responsible for these reductions. At December 31, 2005, we had 843 full-time equivalent employees compared to 839 in 2004. Second, medical costs under our self-insured health plan were lower than anticipated. Average claims were positively impacted by a focus on preventive care, as well as a relatively low level of individually significant claims that reached our stop loss insurance policy minimums. Third, we implemented a new retail incentive plan that more closely matched incentive pay with performance.
 
  •  The increase in occupancy expense is due primarily to new banking centers opened in late 2004 and early 2005, partially offset by a reduction resulting from the second quarter 2005 branch sale. Banking centers opened in late 2004 and early 2005 include Evansville, Indiana (July 2004), Henderson, Kentucky (December 2004), and Florence, Kentucky (May 2005).
 
  •  Communication and transportation expenses include an increase in postage of $1,331, as compared to 2004. The postage increase is largely the result of a higher number of mailings to promote deposit products and the High Performance Checking initiative.
 
  •  The decline in processing costs is largely attributable to sale of the merchant credit card portfolio during the first quarter of 2005 and the elimination of related processing costs of $1,066.
 
  •  The decline in amortization of intangible assets occurred because the amortization period for a portion of our core deposit intangibles ended in December 2004. This resulted in elimination of amortization expense of $660 in 2005, as compared to 2004. Goodwill and certain other intangible assets are regularly tested for impairment. We completed this testing in 2005 and found no impairment.
 
  •  The decline in other expense was in large part due to a third quarter 2004 $410 write-down of a property held in other real estate owned.


26


Table of Contents

 
This excerpt taken from the IBNK 10-K filed Mar 13, 2006.
NON-INTEREST EXPENSE
 
Non-interest expense for 2005 was $77,557, as compared to $138,180 in 2004. The decrease was primarily due to $56,998 of debt prepayment fees incurred during 2004, decreases in several categories including $3,037 in salaries and employee benefits, $880 in processing, $679 in amortization of intangible assets, and $639 in other expenses. These items were partially offset by increases in occupancy expense of $981 and communication and transportation of $1,315.
 
Additional information about the major contributors to the net reduction of non-interest expense from 2004 to 2005 is as follows:
 
1. The previously mentioned balance sheet restructuring in 2004 resulted in debt prepayment penalties of $56,998; there were no such costs incurred in 2005.
 
2. The salaries and employee benefits reduction was primarily due to three items. The first was a reduction in the Company’s workforce, from 863 average FTEs during 2004 to 840 average FTEs in 2005. A continued emphasis on finding and executing efficiencies, along with changes in the Company’s business, such as the sale of the three Illinois banking centers and the sale of the merchant credit card portfolio, has allowed the Company to achieve these reductions. At December 31, 2005, the Company had 843 full-time equivalent employees compared to 839 in 2004 and 886 in 2003. The second item relates to lower than anticipated medical costs under the Company’s self-insured health plan. Average claims were positively impacted by a focus on preventive care, as well as a relatively low level of individually significant claims that reach the Company’s stop loss insurance policy minimums. The third resulted in the implementation of a new retail incentive plan that more closely matched incentive pay with performance.
 
3. The increase in occupancy expense is due primarily to new banking centers opened in late 2004 and early 2005, partially offset by a reduction resulting from the sale of three Illinois banking centers during the second quarter of 2005. Banking centers opened in late 2004 and early 2005 include Evansville, Indiana (July 2004), Henderson, Kentucky (December 2004), and Florence, Kentucky (May 2005).


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Table of Contents

4. Communication and transportation expenses include an increase in postage of $1,331, as compared to 2004. The postage increase is largely the result of a higher number of mailings to promote deposit products and the “High Performance Checking” initiative.
 
5. The decline in processing costs is largely attributable to sale of the merchant credit card portfolio during the first quarter of 2005 and the elimination of related processing costs of $1,066.
 
6. The decline in amortization of intangible assets occurred because the amortization period for a portion of the Company’s core deposit intangibles ended in December 2004. This resulted in elimination of amortization expense of $660 in 2005, as compared to 2004. Goodwill and certain other intangible assets are regularly tested for impairment. The Company completed this testing in 2005 and found no impairment.
 
7. The decline in other expense was in large part due to a third quarter 2004 $410 write-down of a property held in other real estate owned.
 
Non-interest expense for 2004 was $138,180, as compared to $82,267 in 2003. The increase was largely due to the previously mentioned $56,998 of debt prepayment fees incurred during 2004, increases in salary and employee benefits of $560, occupancy of $716 and marketing expense of $350. These increases were partially offset by decreases in several categories including $563 in communication and transportation, $377 in low income housing project losses and $868 in other expenses.
 
Additional information about the major contributors to the net increase in non-interest expenses from 2003 to 2004 is as follows:
 
1. The salary and benefits increase in 2004 was 1.3% and was comprised primarily of an increase in salaries, incentives and commissions of $1,227, offset by a $667 decrease in insurance and other benefits. During 2004, the Company reviewed the costs of medical insurance and offered an alternative choice to employees that incents them to manage their health care consumption, which could help control the increase in these expenses in the future. The alternative plan has higher deductibles but provides a savings account for the employee which, if not used in the current year, can be utilized to offset health care deductibles and other expenses in future periods.
 
2. The reduction in occupancy expense in 2004 is attributed to the changes in the number of banking centers in operation. The Company operated 76 banking centers at December 31, 2004, compared to 72 banking centers in 2003 and 74 in 2002. New banking centers were opened in Bowling Green and Georgetown, Kentucky during the first quarter of 2004 and in Evansville, Indiana, and Henderson, Kentucky, in the third and fourth quarters of 2004, respectively. Included in occupancy expense for 2004 is $296 directly related to the new banking centers.
 
3. The increase in marketing expenses in 2004 was due primarily to the initiating the previously mentioned “High Performance Checking” program.
 
4. The 2004 decrease in communication and transportation expenses was largely due to switching to a different telecommunications carrier in the later part of 2003.
 
5. The 2004 decrease in pre-tax operating losses related to the Company’s investment in low-income housing projects (“LIHP”) was primarily attributable to the LIHP entered into in late 2002.
 
6. The reduction in other non-interest expense in 2004 from 2003 did not include any individually material fluctuation in any one category.
 
Professional fees in 2004 were, in total, consistent with 2003 expenses. Legal fees, which are included in professional fees, decreased $541 as the Company started an internal legal department, brought some legal services in-house, and closely monitored other legal and professional fees. This decrease was mainly offset by an increase in audit fees in order to comply with Section 404 of the Sarbanes-Oxley Act, which continued into 2005.


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Table of Contents

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