UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___.
Commission file number 000-22469
LAFAYETTE BANCORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1605492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
133 North 4th Street, Lafayette, Indiana 47902
(Address of principal executive offices) (Zip Code)
(765) 423-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1994 during
the preceding 12 months (or for such shorter 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at November 2, 1998
Common Stock, without par value 2,380,427 shares
<PAGE>2
LAFAYETTE BANCORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets -- September 30, 1998 and December 31, 1997
Consolidated Statements of Income -- Three Months Ended September 30, 1998
and 1997
Consolidated Statements of Income -- Nine Months Ended September 30, 1998
and 1997
Consolidated Statements of Cash Flows -- Nine Months Ended September 30,
1998 and 1997
Notes to Consolidated Financial Statements -- September 30, 1998
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 5. Other Events
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
SIGNATURES
<PAGE>3
ITEM 1.
LAFAYETTE BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
(Unaudited)
-----------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,353 $ 16,901
Federal funds sold 5,200 14,000
-------------- -------------
Total cash and cash equivalents 22,553 30,901
Securities available-for-sale (at market) 79,160 66,577
Securities held-to-maturity, at cost (market value $6,086
and $5,378) 5,880 5,268
Loans held for sale 7,592 7,640
Loans 336,611 312,227
Less: Allowance for loan losses (3,868) (3,464)
-------------- -------------
Loans, net 332,743 308,763
Federal Home Loan Bank stock (at cost) 1,539 1,242
Premises, furniture and equipment, net 6,372 6,183
Accrued interest receivable and other assets 13,210 12,455
-------------- -------------
Total assets $ 469,049 $ 439,029
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 40,862 $ 42,752
Interest-bearing demand and savings deposits 162,521 144,028
Interest-bearing time deposits 178,558 168,415
-------------- -------------
Total deposits 381,941 355,195
Short-term borrowings 15,259 20,372
Long-term debt 23,946 19,886
Accrued interest payable and other liabilities 5,707 5,107
-------------- -------------
Total liabilities 426,853 400,560
Shareholders' equity
Common stock, no par value: 5,000,000 shares authorized;
2,176,395 and 2,173,570 shares issued; and 2,162,808
and 2,161,370 shares outstanding 2,176 2,174
Common stock to be distributed, 217,640 shares 218 -
Additional paid-in capital 32,620 24,555
Retained earnings 6,977 11,927
Unrealized gain /(loss) on securities available-for-sale,
net of tax ($202 and ($59)) 309 (90)
Less: Treasury stock, at cost (13,587 and 12,200 shares) (104) (97)
-------------- -------------
Total shareholders' equity 42,196 38,469
-------------- -------------
Total liabilities and shareholders' equity $ 469,049 $ 439,029
============== =============
</TABLE>
---------------------------------------------------------
See accompanying notes to consolidated financial statements.
----------------------------------------------------------
<PAGE>4
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended September 30, 1998 and 1997
(Dollar amounts in thousands, except per share data)
(Unaudited)
-----------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income
Loans $ 7,494 $ 6,846
Taxable securities 813 889
Tax exempt securities 261 182
Other 226 169
--------- --------
Total interest income 8,794 8,086
Interest expense
Deposits 3,807 3,505
Short-term borrowings 213 160
Long-term debt 367 278
--------- --------
Total interest expense 4,387 3,943
--------- --------
Net interest income 4,407 4,143
Provision for loan losses 180 120
--------- --------
Net interest income after provision for loan losses 4,227 4,023
Noninterest income
Income from fiduciary activities 225 221
Service charges on deposit accounts 325 321
Net realized gain / (loss) on securities - (4)
Net gain on loan sales 350 226
Other service charges and fees 254 251
Other operating income 200 127
--------- --------
Total noninterest income 1,354 1,142
--------- --------
Noninterest expense
Salaries and employee benefits 2,056 1,866
Occupancy expenses, net 229 228
Equipment expenses 250 265
Other operating expenses 822 778
--------- --------
Total noninterest expense 3,357 3,137
--------- --------
Income before income taxes 2,224 2,028
Income taxes 758 723
--------- --------
Net income 1,466 1,305
--------- --------
Other comprehensive income, net of tax:
Change in unrealized gains/(losses)
on securities 347 145
--------- --------
Comprehensive income $ 1,813 $ 1,450
========= ========
Basic earnings per share $ .62 $ .55
Diluted earnings per share $ .60 $ .54
========= ========
</TABLE>
<PAGE>5
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months ended September 30, 1998 and 1997
(Dollar amounts in thousands, except per share data)
(Unaudited)
---------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income
Loans $ 21,843 $ 19,320
Taxable securities 2,445 2,989
Tax exempt securities 672 612
Other 576 462
---------- --------
Total interest income 25,536 23,383
Interest expense
Deposits 11,066 10,403
Short-term borrow 54 490
Long-term debt 982 562
---------- --------
Total interest expense 12,593 11,455
---------- --------
Net interest income 12,943 11,928
Provision for loan losses 540 270
---------- --------
Net interest income after provision
for loan losses 12,403 11,658
Noninterest income
Income from fiduciary activities 677 631
Service charges on deposit accounts 983 915
Net realized gain on securities - 27
Net gain on loan sales 844 507
Other service charges and fees 723 633
Other operating income 560 376
---------- --------
Total noninterest income 3,787 3,089
---------- --------
Noninterest expense
Salaries and employee benefits 5,970 5,426
Occupancy expenses, net 661 659
Equipment expenses 756 727
Other operating expenses 2,541 2,368
---------- --------
Total noninterest expense 9,928 9,180
---------- --------
Income before income taxes 6,262 5,567
Income taxes 2,130 1,942
---------- --------
Net income 4,132 3,625
---------- --------
Other comprehensive income, net of tax:
Change in unrealized gains / (losses)
on securities 399 74
---------- --------
Comprehensive income $ 4,531 $ 3,699
========== ========
Basic earnings per share $ 1.74 $ 1.52
========== ========
Diluted earnings per share $ 1.70 $ 1.52
========== ========
</TABLE>
<PAGE>6
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(Dollar amounts in thousands)
(Unaudited)
--------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,132 $ 3,625
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 476 474
Premium amortization, net of discount accretion 232 223
Provision for loan losses 540 270
Net realized gain on securities - (27)
Net (gain) loss on:
Other real estate (43) 22
Change in assets and liabilities:
Loans originated for sale (57,273) (36,553)
Loans sold 57,321 35,401
Accrued interest receivable and other assets (1,291) (582)
Accrued interest payable and other liabilities 600 364
----------- ---------
Net cash from operating activities 4,694 3,217
Cash flows from investing activities
Purchase of securities available-for-sale (44,935) (11,902)
Proceeds from sales of securities available-for-sale 3,286 17,453
Proceeds from maturities of securities available-for-sale 29,573 15,390
Purchase of securities held-to-maturity (2,532) (1,153)
Proceeds from maturities of securities held-to-maturity 1,908 2,036
Loans made to customers, net of payments collected (24,520) (33,922)
Purchase of FHLB stock (297) (126)
Property and equipment expenditures (665) (209)
Proceeds from sales of other real estate 251 136
----------- ---------
Net cash from investing activities (37,931) (12,297)
Cash flows from financing activities
Net change in deposit accounts 26,746 6,747
Net change in short-term borrowings (5,113) (5,414)
Proceeds from long-term debt 4,800 11,500
Payments on long-term debt (740) (784)
Common stock issued 69 -
Dividends paid (866) (747)
Purchase of treasury stock (7) (5)
----------- ----------
Net cash from financing activities 24,889 11,297
Net change in cash and cash equivalents (8,348) 2,217
Cash and cash equivalents at beginning of year 30,901 29,380
----------- -----------
Cash and cash equivalents at end of period $ 22,553 $ 31,597
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 12,401 $ 11,556
Income taxes 2,081 1,824
Non-cash investing activity
Loans transferred to other real estate $ - $ -
</TABLE>
<PAGE>7
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The significant accounting policies followed by Lafayette Bancorporation (the
"Corporation") for interim financial reporting are consistent with the
accounting policies followed for annual financial reporting. The consolidated
interim financial statements have been prepared in accordance with Generally
Accepted Accounting Principles and in accordance with instructions to Form 10-Q
and may not include all information and footnotes normally disclosed for full
annual financial statements. All adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
reported have been included in the accompanying unaudited consolidated financial
statements and all such adjustments are of a normal recurring nature.
Under a new accounting standard, comprehensive income is now presented for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized
appreciation/depreciation on securities available for sale, net of tax.
NOTE 2 - PER SHARE DATA
In September 1998, the Corporation declared a 10% stock dividend to shareholders
of record September 30, 1998. A total of 217,640 common shares were issued
November 2, 1998 in connection with this 10% stock dividend. These 217,640
shares are reflected as common stock to be distributed in the September 30, 1998
balance sheet.
The following illustrates the computation of basic and diluted earnings per
share, and includes the weighted average number of shares used in calculating
earnings and dividends per share amounts for the periods presented. The weighted
average number of shares have been retroactively restated for all stock
dividends.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
<S> <C> <C>
Basic earnings per share
Net income $ 4,132 $ 3,625
Weighted average shares outstanding 2,380,334 2,377,639
------------- -------------
Basic earnings per share $ 1.74 $ 1.52
============= =============
Diluted earnings per share
Net income $ 4,132 $ 3,625
Weighted average shares outstanding 2,380,334 2,377,639
Stock Options 119,123 106,756
Assumed shares repurchased upon exercise (68,325) (92,377)
-------------- -------------
Diluted average shares outstanding 2,431,132 2,392,018
-------------- -------------
Diluted earnings per share $ 1.70 $ 1.52
============== =============
</TABLE>
<PAGE>8
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
<S> <C> <C>
Basic earnings per share
Net income $ 1,466 $ 1,305
Weighted average shares outstanding 2,380,448 2,377,639
------------- -------------
Basic earnings per share $ .62 $ .55
============= =============
Diluted earnings per share
Net income $ 1,466 $ 1,305
Weighted average shares outstanding 2,380,448 2,377,639
Stock Options 119,123 106,756
Assumed shares repurchased upon exercise (65,075) (84,326)
-------------- --------------
Diluted average shares outstanding 2,434,496 2,400,069
-------------- --------------
Diluted earnings per share $ .60 $ .54
============== ==============
</TABLE>
NOTE 3 - SECURITIES
The amortized cost and estimated market values of securities are as follows at
September 30, 1998:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
<S> <C> <C>
Securities Available-for-Sale
U.S. Government and its agencies $ 21,544 $ 21,664
Obligations of states and political subdivisions 18,371 18,612
Corporate obligations 1,008 1,011
Mortgage-backed and other asset-backed securities 37,726 37,873
----------- -----------
$ 78,649 $ 79,160
=========== ===========
Securities Held-to-Maturity
Obligations of states and political subdivisions $ 5,880 $ 6,086
=========== ===========
</TABLE>
The amortized cost and estimated market values of securities are as follows at
December 31, 1997:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
<S> <C> <C>
Securities Available-for-Sale
U.S. Government and its agencies $ 21,946 $ 21,906
Obligations of states and political subdivisions 9,892 9,981
Corporate obligations 250 250
Mortgage-backed and other asset-backed securities 34,637 34,440
----------- -----------
$ 66,725 $ 66,577
=========== ===========
Securities Held-to-Maturity
Obligations of states and political subdivisions $ 5,268 $ 5,378
=========== ===========
</TABLE>
<PAGE>9
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Dollar amounts in thousands)
(Unaudited)
--------------------------------------------------------------
NOTE 4 - LOANS
Loans are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Commercial and agricultural loans $ 114,250 $ 112,586
Real estate construction loans 25,178 17,117
Residential real estate loans 147,708 127,574
Installment loans to individuals 49,475 54,950
---------------- ---------------
Total loans $ 336,611 $ 312,227
================ ===============
</TABLE>
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, January 1 $ 3,464 $ 3,198
Provision charged to operations 540 270
Loans charged off (267) (313)
Recoveries on loans previously charged off 131 183
--------- ---------
Balance, September 30 $ 3,868 $ 3,338
========= =========
</TABLE>
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Repurchase agreements $ 14,534 $ 17,340
Treasury tax and loan open-end note 725 3,032
------------ -----------
Total short-term borrowings $ 15,259 $ 20,372
============ ===========
</TABLE>
NOTE 7 - PENDING ACQUISITION
On October 20, 1998, Lafayette Bank and Trust Company, a wholly-owned subsidiary
of Lafayette Bancorporation signed a definitive agreement with Bank One,
Indiana, N.A. to acquire three branches located in DeMotte, Remington, and
Rensselaer, Jasper County, Indiana. Lafayette Bank and Trust Company will
acquire all of the deposits totaling approximately $118 million, selected loans
totaling approximately $24 million, in addition to all physical facilities and
certain other fixed assets. The transaction is subject to the approval of the
Indiana Department of Financial Institutions and the FDIC, and is expected to be
effective in the first quarter of 1999.
<PAGE>10
ITEM 2.
LAFAYETTE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
Lafayette Bancorporation (the "Corporation") is a one-bank holding company
located in Lafayette, Indiana, and conducts business from fourteen offices in
Tippecanoe and White Counties, Indiana. The Corporation provides a wide range of
commercial and personal banking activities, including accepting deposits; making
commercial and consumer loans; originating mortgage loans; providing personal
and corporate trust services; providing investment advisory and brokerage
services; and providing auto, homeowners, and other insurance products.
RESULTS OF OPERATIONS
Net Income
The Corporation earned $1,466, or $.62 per share (basic) for the third quarter
of 1998 compared to $1,305, or $.55 per share (basic) for the third quarter of
1997. Net income increased $507, or 14.0% to $4,132 for the nine month period
ending September 30, 1998 compared to that same 1997 time period. Basic earnings
per share were $1.74 and $1.52 for the nine month period ending September 30,
1998 and 1997, respectively. Net interest income remains the single largest
contributing factor in the net income increase realized by the Corporation.
Other fee-based income, such as gains on mortgages originated and sold in the
secondary market, fees generated by the Corporation's investment brokerage
department, as well as ATM fees all contributed to the noninterest income
growth. Partially offsetting the increases in income were higher loan loss
provisions, increases realized in salary and benefits expense, in addition to
certain other noninterest expenses, primarily advertising.
Return on average assets (ROA) was 1.27% and 1.24% for the third quarter of 1998
and 1997, respectively. Return on average equity (ROE) for that same time period
was 14.15% and 14.07%, respectively. For the nine month period ending September
30, 1998 and 1997, ROA was 1.23% and 1.17%, respectively, while ROE was 13.68%
and 13.43% for those same periods ending September 30, 1998 and 1997,
respectively.
Net Interest Income
Net interest income is the most significant component of the Corporation's
earnings. Net interest income is the difference between interest and fees
realized on earning assets, primarily loans and securities, and interest paid on
deposits and other borrowed funds. The net interest margin is this difference
expressed as a percentage of average earning assets. Net interest income is
determined by several factors, including the volume of earning assets and
liabilities, the mix of earning assets and liabilities, and interest rates. For
the nine months ended September 30, 1998 and 1997, net interest income was
$12,943 and $11,928, respectively. This represents a $1,015, or 8.5% increase
over the prior year. Net interest income for the third quarter of 1998 was $264,
or 6.4% higher than for that same three month period ending September 30, 1997.
Continued loan growth the Corporation has experienced is primarily responsible
for the net interest income increase recorded during the year.
Total interest income for the nine month period ending September 30, 1998 and
1997 was $25,536 and $23,383, respectively. Total interest income for the third
quarter of 1998 was $708, or 8.8% greater than for that same quarter in 1997.
Interest and fees on loans increased $2,523, or 13.1%, to $21,843 for the first
nine months of 1998, compared to $19,320 for the first nine months of 1997. For
the third quarter of 1998, interest and fees on loans increased $648, or 9.5%
compared to the third quarter of 1997. While the Corporation's loan growth has
not been as dramatic as the last two years, average loan balances rose
approximately $25,704, or 8.4%, through September 1998, compared to September
1997, and primarily accounted for the higher interest income totals. Investment
security income also aided in the increase in overall interest income as average
balances increased approximately $9,795, or 13.2%, from September 1997 to
September 1998. Softer loan demand in conjunction with the increasing deposit
growth resulted in additional funds to be invested.
<PAGE>11
Total interest expense for the nine month period ending September 30, 1998 and
1997 was $12,593 and $11,455, respectively. For the third quarter of 1998, total
interest expense increased $444, or 11.3%, compared to the same 1997 time
period. Total interest-bearing liability balances have increased $34,888, or
10.1% from September 1997 to September 1998. Overall interest expense has
increased mainly due to the higher interest-bearing liability volume, as the
average cost of funds between the two periods has not significantly changed.
The following table summarizes the Corporation's net interest income (on a
tax-equivalent basis) for each of the periods presented. A marginal federal
income tax rate of 34% for each period was used.
<TABLE>
<CAPTION>
Nine Months Change from
Ended September 30, Prior Period
1998 1997 Amount Percent
---- ---- ------ -------
<S> <C> <C> <C> <C>
Interest income $25,934 $23,776 $2,158 9.1%
Interest expense 12,593 11,455 1,138 9.9%
------ ------ ------
Net interest income $13,341 $12,321 $1,020 8.3%
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Change from
Ended September 30, Prior Period
1998 1997 Amount Percent
---- ---- ------ -------
<S> <C> <C> <C> <C>
Interest income $8,938 $8,205 $733 8.9%
Interest expense 4,387 3,943 444 11.3%
----- ----- -----
Net interest income $4,551 $4,262 $ 289 6.8%
====== ====== =====
</TABLE>
Net interest income, on a tax equivalent basis, for the first nine months of
1998 was $1,020, or 8.3% higher than for that same nine month period ending
September 30, 1997. For the third quarter of 1998, net interest income, on a tax
equivalent basis, was $289, or 6.8% higher than for the same 1997 time period.
The net interest margin, on a tax equivalent basis for the nine months ending
September 30, 1998 and 1997 was 4.29% and 4.33%, respectively. Although
increases in earning asset balances continue to outpace increases in earning
liabilities, lower earning asset yields are the major contributing factor in the
declining net interest margin.
Provision for Loan Losses and Asset Quality
The provision for loan losses represents charges made to earnings to maintain an
adequate allowance for loan losses. The allowance is maintained at an amount
believed by management to be sufficient to absorb losses inherent in the credit
portfolio. Management conducts, on a quarterly basis, a detailed evaluation of
the adequacy of the allowance.
The consolidated provision for loan losses was $540 and $270 for the first nine
months of 1998 and 1997, respectively. The provision for loan losses increased
$60 for the third quarter of 1998, compared to the same 1997 time period.
Although management believes the allowance is sufficient, an attempt is being
made to increase the allowance as a result of the significant loan growth
experienced over the last two years. The allowance for loan losses at September
30, 1998 was $3,868, or 1.15% of total loans compared to $3,464, or 1.11% of
total loans at December 31, 1997. Net charge-off's were $136 and $130 for the
first nine months of 1998 and 1997, respectively. Although net charge-off's have
increased slightly over the prior year, primarily due to increased charge-off's
in the credit card portfolio, total gross charge-off's are $46, or 14.7% lower
than a year ago.
<PAGE>12
Nonperforming loans include nonaccrual loans, restructured loans, and loans
delinquent 90 days or more. Loans are classified as nonaccrual when management
believes that collection of interest is doubtful, typically when payments are
past due 90 days, unless the loans are well secured and in the process of
collection.
The following table indicates the composition of nonperforming loans:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Loans past due 90 days or more $ 1,245 $ 505
Nonaccrual loans 124 127
Restructured loans 237 350
--------- -------
Total nonperforming loans $ 1,606 $ 982
========= =======
</TABLE>
Nonperforming loan totals at December 31, 1997 were at their lowest level in the
last five years. Although total nonperforming loans increased by $624 at
September 30, 1998, management continues to believe overall asset quality to be
good. The $740 increase in loans past due 90 days or more is attributable to a
$460 net increase in mortgage loans and a $164 net increase in the installment
loan portfolio, of which $116 related to the indirect lending function.
Nonaccrual loans remained at their five year low as of September 30, 1998, while
restructured loan totals declined $113 from the $350 reported at December 31,
1997.
Noninterest Income and Expense
Noninterest income increased $698, or 22.6% to $3,787 for the nine months ending
September 30, 1998, compared to $3,089 for that same period of 1997. Noninterest
income for the third quarter increased $212, or 18.6% to $1,354 compared to the
prior year.
Service charges on deposit accounts, which comprise the largest component of
noninterest income, increased for the first nine months of 1998 while only
showing a slight increase for the third quarter of 1998 when compared to the
same 1997 time period. The Corporation introduced relationship-based pricing on
selected products, which has benefited customers by way of reduced bank service
charges.
Net gain on loans originated and sold in the secondary mortgage market were $844
and $507 for the first nine months of 1998 and 1997 respectively, an increase of
$337, or 66.5%. For the third quarter of 1998, net gain on loan sales were $350,
an increase of $124, or 54.9% from the prior year. The continued strength of the
local economy, along with the declining mortgage loan interest rate environment,
spurred not only an increase in new home sales, but also the volume of loan
refinancings. These factors, in addition to an increase in the departmental
staffing level has led to an increase of $21,920, or 61.9% in loan fundings for
the nine months ended September 30, 1998 compared to September 30, 1997. Loan
fundings for the third quarter of 1998 increased 51.0% to $21,215 compared to
$14,051 recorded for the third quarter of the previous year.
Other service charges and fees were $723 and $633 for the first nine months of
1998 and 1997, respectively, an increase of $90, or 14.2%. The third quarter of
1998 realized only a slight increase compared to the 1997 third quarter results.
ATM surcharge fees account for the majority of the increase over the prior year.
The Corporation began surcharging non-bank customer ATM transactions in May
1997.
Other operating income rose $184, or 48.9%, to $560 for the nine months ending
September 30, 1998, compared to the $376 recorded in the prior year. A gain on
the sale of an other real estate property recorded in the first quarter, in
addition to income recognized in the investment brokerage department accounted
for the majority of the increase. Commissions in the investment brokerage
department increased $111, or 64.5%, to $283 for the first nine months of 1998.
Management believes the increase in the investment brokerage department was
partially due to the perception that the decline in the U.S. stock markets
during the current quarter created many investment opportunities. As a result,
the investment brokerage department's commissions increased $84, or 200% for the
third quarter, compared to the third quarter results posted one year ago.
<PAGE>13
Noninterest expense totaled $9,928 for the first nine months ending September
30, 1998, compared to $9,180 for that same period of 1997, an increase of $748,
or 8.1%. Total noninterest expense for the third quarter of 1998 was $220, or
7.0% higher than the prior year.
Salary and employee benefits expense was $5,970 for the first nine months of
1998, an increase of $544, or 10.0%, from the $5,426 for the first nine months
of 1997. Total salaries and employee benefits for the third quarter of 1998 was
$2,056, a $190, or 10.2% increase from the 1997 amount. The number of full-time
equivalent employees increased to 216 from 209 at September 30, 1998 and 1997,
respectively. These additional staffing needs were a result of a new branch
being opened in March, 1998, in addition to additional staffing needs being met
in the secondary mortgage market department to increase loan origination volume.
The improvement in the income generated by the secondary mortgage market, as
well as the Investment Center, also led to an increase in the commissions paid
to certain employees. Compared to a year ago, health insurance costs increased
32.8% due to the rise in staffing levels, as well as an increase in the number
of claims incurred.
Other operating expenses were $2,541 for the first nine months of 1998, an
increase of $173, or 7.3%, compared to $2,368 for the first nine months of 1997.
For the third quarter of 1998, other operating expenses increased $44, or 5.7%
from the prior year. Accounting for the majority of the overall increase was
higher office supply costs attributed to the opening of the new branch facility,
along with the continued marketing and advertising efforts of the Corporation.
Income Taxes
The effective income tax rate was 34.01% and 34.88% for the first nine months of
1998 and 1997, respectively, and 34.08% and 35.65% for the third quarter of 1998
and 1997, respectively. The lower effective tax rates in 1998 are due to
increased tax-exempt interest income.
FINANCIAL CONDITION
Total assets were $469,049 at September 30, 1998 compared to $439,029 at
December 31, 1997, an increase of $30,020, or 6.8%. Increases of $13,195, and
$23,980 were realized in investment securities, and net loans, respectively, for
the first nine months of 1998, while the cash and cash equivalents balance
decreased $8,348 for the same time period.
Total deposits and long-term debt for the first nine months of 1998 increased
$26,746 and $4,060, respectively, while short-term debt decreased $5,113 during
that same time period. Increases in interest-bearing deposits accounted for all
of the total deposit increase, as noninterest-bearing deposit balances actually
declined by $1,890. The increase in long-term debt is primarily attributable to
an additional $4,800 in borrowings, not including principal repayments, from the
Federal Home Loan Bank in Indianapolis.
Capital
Shareholders' equity totaled $42,196, or 9.0% of total assets at September 30,
1998, and $38,469, or 8.8% of total assets at December 31, 1997.
The Corporation and Bank are subject to various regulatory capital guidelines as
required by federal and state banking agencies. These guidelines define the
various components of core capital and assign risk weights to various categories
of assets.
Tier 1, or core, capital consists of shareholders' equity less goodwill and core
deposit intangibles, as defined by bank regulators. The definition of Tier 2
capital includes the amount of allowance for loan losses which does not exceed
1.25% of gross risk weighted assets. Total capital is the sum of Tier 1 and Tier
2 capital.
<PAGE>14
The minimum requirements under the capital guidelines are generally at least a
4.00% leverage ratio (Tier 1 capital divided by average assets excluding
intangible assets and unrealized gains/losses), a 4.00% Tier 1 risk-based
capital ratio (Tier 1 capital divided by risk-weighted assets), and a 8.00%
total capital ratio (Tier 1 capital plus Tier 2 capital divided by risk-weighted
assets).
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
"well-capitalized" institution must achieve a Tier 1 risk-based capital ratio of
at least 6.00%, and a total capital ratio of at least 10.00%, and a leverage
ratio of at least 5.00% and not be under a capital directive order. Failure to
meet capital requirements can initiate regulatory action that could have a
direct material effect on the Corporation's financial statements. If only
adequately capitalized; regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions, asset growth, and
expansion is limited, in addition to the institution being required to submit a
capital restoration plan.
Management believes the Corporation and the Bank met all the capital
requirements as of September 30, 1998 and December 31, 1997, and were
well-capitalized under the guidelines established by the banking regulators. To
be well-capitalized, the Corporation and Bank must maintain the prompt
corrective action capital guidelines described above.
At September 30, 1998 and December 31, 1997, management was not aware of any
current recommendations by banking regulatory authorities which, if they were to
be implemented, would have, or are reasonably likely to have, a material effect
on the Corporation's consolidated liquidity, capital resources or operations.
The Corporation's actual consolidated capital amounts and ratios are presented
in the following table. The Bank's actual capital amounts and ratios are not
materially different from the consolidated amounts below.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Tier 1 capital
Shareholders' equity $ 42,196 $ 38,469
Less: Intangibles (824) (908)
Add/less: Unrealized loss/(gain) on securities (309) 90
--------- ---------
TOTAL TIER 1 CAPITAL $ 41,063 $ 37,651
========= =========
Total capital
Tier 1 capital $ 41,063 $ 37,651
Allowable allowance for loan losses 3,868 3,464
--------- ---------
TOTAL CAPITAL $ 44,931 $ 41,115
========= =========
RISK WEIGHTED ASSETS $ 336,941 $ 310,170
========= =========
AVERAGE ASSETS $ 457,698 $ 430,555
========= =========
</TABLE>
<PAGE>15
<TABLE>
<CAPTION>
Actual ratios as of
September 30, December 31, Capital Adequacy Well-Capitalized
1998 1997 Requirement Requirement
---- ---- ----------- -----------
<S> <C> <C> <C> <C>
Tier I Capital
(to average assets) 9.0% 8.8% 4.0% 5.0%
Tier I Capital
(to risk
weighted assets) 12.2% 12.1% 4.0% 6.0%
Total Capital
(to risk
weighted assets) 13.3% 13.3% 8.0% 10.0%
</TABLE>
Liquidity
The consolidated statement of cash flows illustrates the elements which gave
rise to the change in the Corporation's cash and cash equivalents for the nine
months ended September 30, 1998 and 1997. Including net income of $4,132, the
net cash from operating activities for the first nine months of 1998 generated
$4,694 of available cash. Net cash from investing activities utilized $37,931 of
available cash, primarily as a result of purchasing $12,700, net of maturity and
sale proceeds, in investment securities and funding $24,520 in net loans. The
$26,746 increase in deposits, along with $4,800 in long-term debt proceeds,
offset by the net decrease in short-term borrowings and long-term debt principal
repayments account for the majority of the $24,889 in cash generated from
financing activities. Total cash outflows for the nine month period in 1998
exceeded cash inflows by $8,348 resulting in a cash and cash equivalent balance
of $22,553 at September 30, 1998.
Year 2000
The Corporation's Board of Directors and management is aware of the possible
consequences the Year 2000 may pose with regard to the computer systems utilized
to conduct business on a daily basis. A "Year 2000 Committee", which reports
monthly to the Board of Directors, has prepared a detailed plan to address this
issue. In addition to developing contingency plans, the Corporation has
conducted internal employee training, as well as customer awareness seminars in
an effort to not only communicate the Year 2000 issue, but also to inform these
individuals of the Corporation's approach to address this issue. Testing of the
Corporation's core processing systems began early in the third quarter and is
scheduled to be completed no later than the end of the first quarter of 1999.
Because the Year 2000 issue could affect the ability of the Corporation's
customers to conduct their business and operations in a timely and effective
manner, the result could adversely impact the Corporation. The Corporation's
ability to process loan and deposit transactions could be affected, which could
limit sources of revenues and funding from customers, as well as impact the
quality of the loan portfolio. In order to assess the potential credit risk in
the Corporation's loan portfolio, a comprehensive review of all commercial loan
customers whose aggregate borrowings were $200,000 or greater was performed.
Although no borrowers were classified as having a high credit risk, the
Corporation took a conservative approach and considered those credits having a
medium credit risk as part of the quarterly loan loss reserve analysis. A
$350,000 specific reserve was allocated to these loans due to the uncertainty of
the actual Year 2000 impact. This specific reserve did not result in an
additional loan loss reserve provision because management's quarterly analysis
of the allowance concluded that the allowance balance was adequate. These
credits will be monitored and reviewed on a quarterly basis until March 31, 2000
in conjunction with the on-going quarterly loan loss reserve analysis.
While management does not believe the necessary steps involved to resolve this
issue will significantly impair the organization's ability to operate and
conduct business in a normal fashion, the Corporation does estimate the total
cost to address this issue to be approximately $1.6 million. The expenditures
related to this issue are comprised primarily of system upgrades, consisting
both of hardware and software, in addition to dedicated personnel costs.
<PAGE>16
The above discussion of Year 2000 issues includes numerous forward-looking
statements reflecting management's current assessment and estimates with respect
to the Corporation's Year 2000 compliance efforts and the impact of Year 2000
issues on the Corporation's business and operations. Various factors could cause
actual results to differ materially from those contemplated by such assessment,
estimates and forward-looking statements, including many factors that are beyond
the control of the Corporation. These factors included, but are not limited to,
representations by vendors and customers, technological advancements, economic
conditions, and competitive considerations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk of the Corporation encompasses exposure to both liquidity risk and
interest rate risk and is reviewed quarterly by the Asset/Liability Committee
and the Board of Directors. There have been no material changes in the
quantitative and qualitative disclosures about market risks as of September 30,
1998 from the analysis and disclosures provided in the Corporation's Form 10-K
for the year ended December 31, 1997.
PART II. OTHER INFORMATION
Item 5. Other Events
On October 20, 1998, Lafayette Bank and Trust Company, a wholly-owned
subsidiary of Lafayette Bancorporation signed a definitive agreement with
Bank One, Indiana, N.A. to acquire three branches located in DeMotte,
Remington, and Rensselaer, Jasper County, Indiana.
Under the terms of the agreement, Lafayette Bank and Trust Company will
acquire all of the deposits, totaling approximately $118 million, selected
loans totaling approximately $24 million, in addition to all physical
facilities and certain other fixed assets. These three branches account for
approximately 30% of Jasper County's deposits.
The transaction is subject to the approval of the Indiana Department of
Financial Institutions and the FDIC, and is expected to be effective in the
first quarter of 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for September 30, 1998
(b) Reports on Form 8-K
No Form 8-K was filed with the SEC during the quarter ended
September 30, 1998.
<PAGE>17
SIGNATURES
Pursuant to the requirements 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.
Date: November 2, 1998 By /s/ Robert J. Weeder
------------------------------
Robert J. Weeder
President
Date: November 2, 1998 By /s/ Marvin S. Veatch
------------------------------
Marvin S. Veatch
Controller
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001035373
<NAME> LAFAYETTE BANCORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,353
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,160
<INVESTMENTS-CARRYING> 5,880
<INVESTMENTS-MARKET> 6,086
<LOANS> 336,611
<ALLOWANCE> 3,868
<TOTAL-ASSETS> 469,049
<DEPOSITS> 381,941
<SHORT-TERM> 15,259
<LIABILITIES-OTHER> 5,707
<LONG-TERM> 23,946
0
0
<COMMON> 2,394
<OTHER-SE> 39,802
<TOTAL-LIABILITIES-AND-EQUITY> 469,049
<INTEREST-LOAN> 21,843
<INTEREST-INVEST> 3,117
<INTEREST-OTHER> 576
<INTEREST-TOTAL> 25,536
<INTEREST-DEPOSIT> 11,066
<INTEREST-EXPENSE> 12,593
<INTEREST-INCOME-NET> 12,943
<LOAN-LOSSES> 540
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,928
<INCOME-PRETAX> 6,262
<INCOME-PRE-EXTRAORDINARY> 6,262
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,132
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 4.29
<LOANS-NON> 124
<LOANS-PAST> 1,245
<LOANS-TROUBLED> 237
<LOANS-PROBLEM> 2,744
<ALLOWANCE-OPEN> 3,464
<CHARGE-OFFS> 267
<RECOVERIES> 131
<ALLOWANCE-CLOSE> 3,868
<ALLOWANCE-DOMESTIC> 2,682
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,186
</TABLE>
