U.S. 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 MARCH 31, 1999.
[ ] 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 May 17, 1999
Common Stock, without par value 2,385,219 shares
<PAGE>2
LAFAYETTE BANCORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets -- March 31, 1999 and December 31, 1998
Consolidated Statements of Income and
Comprehensive Income -- Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows -- Three Months Ended March 31,
1999 and 1998
Notes to Consolidated Financial Statements -- March 31, 1999
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 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, except share data)
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 31,088 $ 17,368
Federal funds sold 6,000 1,400
-------------- -------------
Total cash and cash equivalents 37,088 18,768
Interest-bearing balances with other financial institutions 679 671
Securities available-for-sale (at market) 95,732 76,956
Securities held-to-maturity (market value $7,025
and $5,063) 6,857 4,879
Loans held for sale 8,380 10,086
Loans 426,704 353,828
Less: Allowance for loan losses (4,227) (4,241)
-------------- -------------
Loans, net 422,477 349,587
Federal Home Loan Bank stock (at cost) 1,539 1,539
Premises, furniture and equipment, net 8,494 7,953
Intangible assets 14,271 827
Accrued interest receivable and other assets 13,711 12,703
-------------- -------------
Total assets $ 609,228 $ 483,969
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 52,722 $ 48,657
Interest-bearing demand and savings deposits 233,109 170,308
Interest-bearing time deposits 215,505 176,581
-------------- -------------
Total deposits 501,336 395,546
Short-term borrowings 19,637 16,402
Long-term debt 37,466 23,854
Accrued interest payable and other liabilities 6,950 5,553
-------------- -------------
Total liabilities 565,389 441,355
Shareholders' equity
Common stock, no par value: 5,000,000 shares authorized;
2,398,827 and 2,394,035 shares issued; and 2,385,219
and 2,380,427 shares outstanding 2,399 2,394
Additional paid-in capital 32,737 32,620
Retained earnings 8,932 7,747
Unrealized gain / (loss) on securities available-for-sale,
net of tax (($81) and ($27)) (124) (42)
Less: Treasury stock, at cost (13,608 shares) (105) (105)
-------------- -------------
Total shareholders' equity 43,839 42,614
-------------- -------------
Total liabilities and shareholders' equity $ 609,228 $ 483,969
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>4
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest income
Loans $ 8,130 $ 7,129
Taxable securities 890 820
Tax exempt securities 361 191
Other 102 170
-------------- -------------
Total interest income 9,483 8,310
Interest expense
Deposits 3,901 3,569
Short-term borrowings 275 163
Long-term debt 396 297
-------------- -------------
Total interest expense 4,572 4,029
-------------- -------------
Net interest income 4,911 4,281
Provision for loan losses 180 180
-------------- -------------
Net interest income after provision for loan losses 4,731 4,101
Noninterest income
Income from fiduciary activities 253 226
Service charges on deposit accounts 307 325
Net realized gain on securities - -
Net gain on loan sales 308 225
Other service charges and fees 178 156
Other operating income 150 231
-------------- -------------
Total noninterest income 1,196 1,163
-------------- -------------
Noninterest expense
Salaries and employee benefits 2,166 1,957
Occupancy expenses, net 243 215
Equipment expenses 286 254
Other operating expenses 962 824
-------------- -------------
Total noninterest expense 3,657 3,250
-------------- -------------
Income before income taxes 2,270 2,014
Income taxes 751 689
-------------- -------------
Net income 1,519 1,325
-------------- -------------
Other comprehensive income, net of tax:
Change in unrealized gains / (losses) on securities (82) (26)
--------------- --------------
Comprehensive income $ 1,437 $ 1,299
============== =============
Basic earnings per share $ .64 $ .56
============== =============
Diluted earnings per share $ .62 $ .55
============== =============
Dividend per share $ .14 $ .12
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>5
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1999 and 1998
(Dollar amounts in thousands)
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,519 $ 1,325
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 194 157
Premium amortization, net of discount accretion 104 59
Provision for loan losses 180 180
Net realized gain on securities - -
Net realized (gain) loss on sale of :
Other real estate - (43)
Change in assets and liabilities:
Loans originated for sale (22,085) (14,795)
Loans sold 23,791 16,348
Accrued interest receivable and other assets (1,011) 603
Accrued interest payable and other liabilities 1,397 160
----------- -----------
Net cash from operating activities 4,089 3,994
Cash flows from investing activities
Change in interest-bearing balances with other financial institutions (8) -
Purchase of securities available-for-sale (24,883) (17,650)
Proceeds from sales of securities available-for-sale - 2,982
Proceeds from maturities of securities available-for-sale 5,927 11,778
Purchase of securities held-to-maturity (2,000) (92)
Proceeds from maturities of securities held-to-maturity 19 11
Loans made to customers, net of payments collected (14,765) (7,544)
Property and equipment expenditures (735) (257)
Proceeds from sales of other real estate - 251
----------- ------------
Net cash from investing activities (36,445) (10,521)
Cash flows from financing activities
Net change in deposit accounts (11,225) 6,927
Cash received in branch acquisition for liabilities assumed, net
of assets acquired 45,266 -
Net change in short-term borrowings 3,235 (7,385)
Proceeds from long-term debt 14,000 -
Payments on long-term debt (388) (410)
Common stock issued 122 69
Dividends paid (334) (281)
------------ ------------
Net cash from financing activities 50,676 (1,080)
Net change in cash and cash equivalents 18,320 (7,607)
Cash and cash equivalents at beginning of year 18,768 30,901
----------- -----------
Cash and cash equivalents at end of period $ 37,088 $ 23,294
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 3,841 $ 3,867
Income taxes 150 50
Non-cash investing activity
Loans transferred to other real estate $ 181 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>6
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Dollar amounts in thousands, except share and 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. Certain
prior period information has been reclassified to correspond with the 1999
presentation.
NOTE 2 - PER SHARE DATA
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 has been retroactively restated for stock dividends.
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
<S> <C> <C>
Basic earnings per share
Net income $ 1,519 $ 1,325
Weighted average shares outstanding 2,384,687 2,380,082
------------- --------------
Basic earnings per share $ .64 $ .56
============= ==============
Diluted earnings per share
Net income $ 1,519 $ 1,325
Weighted average shares outstanding 2,384,687 2,380,082
Diluted effect of assumed shares
exercised of Stock Options 62,268 47,276
------------- --------------
Diluted average shares outstanding 2,446,955 2,427,358
-------------- --------------
Diluted earnings per share $ .62 $ .55
============== ==============
</TABLE>
<PAGE>7
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 3 - SECURITIES
The amortized cost and estimated market values of securities are as follows at
March 31, 1999:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
Securities Available-for-Sale
<S> <C> <C>
U.S. Government and its agencies $ 14,027 $ 14,069
Obligations of states and political subdivisions 25,321 25,359
Corporate obligations 3,520 3,507
Mortgage-backed and other asset-backed securities 53,038 52,766
Other securities 31 31
----------- -----------
$ 95,937 $ 95,732
=========== ===========
Securities Held-to-Maturity
Obligations of states and political subdivisions $ 6,857 $ 7,025
=========== ===========
</TABLE>
The amortized cost and estimated market values of securities are as follows at
December 31, 1998:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
Securities Available-for-Sale
<S> <C> <C>
U.S. Government and its agencies $ 14,039 $ 14,110
Obligations of states and political subdivisions 23,526 23,637
Corporate obligations 2,520 2,513
Mortgage-backed and other asset-backed securities 36,940 36,696
----------- -----------
$ 77,025 $ 76,956
=========== ===========
Securities Held-to-Maturity
Obligations of states and political subdivisions $ 4,879 $ 5,063
=========== ===========
</TABLE>
NOTE 4 - LOANS
Loans are comprised of the following:
March 31, December 31,
1999 1998
Commercial and agricultural loans $ 172,830 $ 115,198
Real estate construction loans 33,166 28,043
Residential real estate loans 170,596 160,655
Installment loans to individuals 50,112 49,932
---------------- ---------------
Total loans $ 426,704 $ 353,828
================ ===============
<PAGE>8
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance, January 1 $ 4,241 $ 3,464
Provision charged to operations 180 180
Loans charged-off (211) (86)
Recoveries on loans previously charged-off 17 81
------------- --------------
Balance, March 31 $ 4,227 $ 3,639
============= ==============
</TABLE>
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings are comprised of the following:
March 31, December 31,
1999 1998
Repurchase agreements $ 18,581 $ 15,788
Treasury tax and loan open-end note 1,056 614
---------------- ---------------
Total short-term borrowings $ 19,637 $ 16,402
================ ===============
NOTE 7 - BRANCH ACTIVITY
On March 12, 1999 the Bank completed the acquisition of three Bank One, Indiana
branches located in DeMotte, Remington, and Rensselaer, Indiana. The fair value
of assets acquired was $58,584 (predominately commercial loans and the physical
facilities), the fair value of liabilities assumed was $117,360 (predominately
deposits), and the Bank received $45,266 of cash at settlement. Goodwill and
core deposit intangibles associated with this purchase amounted to $13,510.
The branch acquisition was not considered to be an acquisition of a business
since, among other things, approximately 39% of the assets acquired was in the
form of cash, loans consisted almost entirely of commercial loans, the branches
represented a small portion of the seller's operations in the market area, and
the seller's products differ from the Corporation's products. In addition, the
future earnings from the net assets acquired will be dependent on the effective
use of the cash and the generation of other types of loans, including real
estate, home equity, credit cards, and other consumer loans. Accordingly,
historical operating results of the branches acquired would not be indicative of
future results, and only the above summary information on the net assets
acquired is presented.
In an unrelated event, the Corporation closed the branch located in Chalmers,
Indiana on March 27, 1999.
<PAGE>9
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 8 - SEGMENT INFORMATION
The Corporation's operations include three primary segments: banking, mortgage
banking, and trust. Through its banking subsidiary's fourteen locations in
Tippecanoe, White, and Jasper Counties, the Corporation provides traditional
community banking services, such as accepting deposits and making commercial,
residential and consumer loans. Mortgage banking activities include the
origination of residential mortgage loans for sale on a servicing released basis
to various investors. The Corporation's trust department provides both personal
and corporate trust services.
The Corporation's three reportable segments are determined by the products and
services offered. Loans, investments and deposits comprise the primary revenues
and expenses of the banking operation, net gains on loans sold account for the
revenues in the mortgage banking segment, and trust administration fees provide
the primary revenues in the trust department.
The following segment financial information has been derived from the internal
profitability reporting system utilized by management to monitor and manage the
financial performance of the Corporation. The accounting policies of the three
segments are the same as those described in the summary of significant
accounting policies of the annual report. The Corporation evaluates segment
performance based on profit or loss before income taxes. The evaluation process
for the mortgage banking and trust segments include only direct expenses, while
certain indirect expenses, including goodwill, are absorbed by the banking
operation.
Quarter ended March 31:
<TABLE>
<CAPTION>
1999 Mortgage Total
Banking Banking Trust Segments
<S> <C> <C> <C> <C>
Net interest income $ 4,882 $ 61 $ - $ 4,943
Net gain on loan sales - 308 - 308
Other revenue 613 22 253 888
Noncash items:
Depreciation 181 7 6 194
Provision for loan loss 180 - - 180
Segment profit 2,109 213 87 2,409
Segment assets 599,852 8,514 166 608,532
</TABLE>
<TABLE>
<CAPTION>
1998 Mortgage Total
Banking Banking Trust Segments
<S> <C> <C> <C> <C>
Net interest income $ 4,241 $ 37 $ - $ 4,278
Net gain on loan sales - 225 - 225
Other revenue 700 12 226 938
Noncash items:
Depreciation 144 7 6 157
Provision for loan loss 180 - - 180
Segment profit 2,018 106 46 2,170
Segment assets 432,254 6,236 151 438,641
</TABLE>
<PAGE>10
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 8 - SEGMENT INFORMATION (Continued)
Significant segment totals are reconciled to the financial statements as
follows:
<TABLE>
<CAPTION>
Reportable Consolidated
1999 Segments Other Totals
- ---- -------- ----- ------
<S> <C> <C> <C>
Net interest income (expense) $ 4,943 $ (32) $ 4,911
Provision for loan loss 180 - 180
Net gain on loan sales 308 - 308
Other revenue 888 - 888
Profit 2,409 (890) 1,519
Assets 608,532 696 609,228
</TABLE>
<TABLE>
<CAPTION>
Reportable Consolidated
1998 Segments Other Totals
- ---- -------- ----- ------
<S> <C> <C> <C>
Net interest income $ 4,278 $ 3 $ 4,281
Provision for loan loss 180 - 180
Net gain on loan sales 225 - 225
Other revenue 938 - 938
Profit 2,170 (845) 1,325
Assets 438,641 767 439,408
</TABLE>
Amounts included in the "other" column are as follows.
1999 1998
---- ----
Income:
Holding company net interest
income (expense) $ (32) $ 3
Profit:
Holding company net interest
income (expense) (32) 3
Holding company expenses (107) (159)
Income tax expense (751) (689)
Assets:
Holding company assets 696 767
<PAGE>11
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. The Corporation's wholly-owned subsidiary,
Lafayette Bank and Trust Company ("Bank") conducts business from fourteen
offices in Tippecanoe, White, and Jasper 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
Mergers and Acquisitions
On March 12, 1999 the Corporation completed the acquisition of three Bank One,
Indiana branches located in DeMotte, Remington, and Rensselaer, Indiana. The
Corporation added approximately $117 million in deposits and approximately $58
million in loans as a result of this transaction. Goodwill and core deposit
intangibles associated with this purchase was approximately $13.5 million. This
acquisition is the first for the Corporation in this market and it added
approximately 25% to the Corporation's deposit base.
Net Income
The Corporation earned $1,519, or $.64 per share for the first quarter of 1999
compared to $1,325, or $.56 per share for the first quarter of 1998. The $194,
or 14.6% increase in net income was attributable primarily to higher net
interest income. Realized gains on the sale of mortgage loans in addition to
improved earnings from the Corporation's trust department and ATM fee income
were also contributing factors in enhancing earnings. The increase in 1999
profits were partially offset by increases in salaries and benefits expense, in
addition to expenses incurred in connection with the purchase of the three
branches.
Return on average assets (ROA) was 1.16% and 1.21% for the periods ending March
31, 1999 and 1998, while return on average equity (ROE) was 13.99% and 13.56%
for the periods ending March 31, 1999 and 1998, 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. Net
interest income for the first quarter of 1999 was $630, or 14.7% higher than
that same three month period ending March 31, 1998. The Corporation's philosophy
of increasing margin through loan growth continued during the first quarter of
1999 and contributed significantly to the increase in net interest income.
Total interest income increased $1,173, or 14.1% to $9,483 and $8,310 for the
first quarter of 1999 and 1998, respectively. Although investment security
income increased during 1999 primarily as a result of investing excess funds
from the Bank One branch acquisition, it was the continued loan growth which
accounted for the largest portion of the total interest income increase. From
March 1998 to March 1999, average loan balances increased $83,911, or 26.4%.
<PAGE>12
For the first quarter of 1999, total interest expense increased $543, or 13.5%
compared to the same 1998 time period. While the increase in average deposits
gave rise to an increase in overall interest expense, the overall cost of funds
actually declined, primarily due to the lower interest rate environment that
existed.
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>
Three Months Change from
Ended March 31, Prior Period
1999 1998 Amount Percent
---- ---- ------ -------
<S> <C> <C> <C> <C>
Interest income $9,674 $8,437 $1,237 14.7%
Interest expense 4,572 4,029 543 13.5%
----- ----- ----
Net interest income $5,102 $4,408 $694 15.7%
====== ====== ====
</TABLE>
Net interest income, on a tax equivalent basis, for the first three months of
1999 was $694, or 15.7% higher than for that same three month period ending
March 31, 1998. The net interest margin, on a tax equivalent basis for the three
months ending March 31, 1999 and 1998 was 4.23% and 4.35%, respectively.
The ongoing shift in earning assets to higher yielding loans, along with the
increased length of time those higher yielding loans have been in place,
contributed to the interest income increase.
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.
Loans with a fair value of $56,398 were acquired in the Bank One, Indiana branch
acquisition. The fair value of loans acquired is net of a fair value adjustment
for credit risk of $563. This credit risk valuation account will be used to
absorb future charge-off's recorded on the acquired loans.
The consolidated provision for loan losses was $180 for the first three months
of 1999 and 1998, respectively. The allowance for loan losses was $4,227 and
$4,241 at March 31, 1999 and December 31, 1998, respectively. Adding the newly
established credit valuation account with the allowance for loan losses, the
allowance as a percentage of loans was 1.12% and 1.20% at March 31, 1999 and
December 31, 1998, respectively. This percentage declined during the first
quarter due to the loans acquired in the Bank One acquisition. Based on
management's review of the acquired loans, it appeared the portfolio was above
average quality. During the first quarter of 1999 net charge-off's increased to
$194, compared to $5 during the same time period one year earlier. Increases in
commercial and mortgage charge-off's, along with lower recovery amounts account
for the majority of the increase.
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.
<PAGE>13
The following table indicated the composition of nonperforming loans:
March 31, December 31,
1999 1998
Loans past due 90 days or more $ 1,102 $ 775
Non-accrual loans 1,165 1,468
Restructured loans 188 197
---------------- ---------------
Total nonperforming loans $ 2,455 $ 2,440
================ ===============
Management believes overall asset quality has not declined despite a slight
increase in the nonperforming loan totals. Loans past due 90 days or more
increased as a result of two commercial and one mortgage loan, while nonaccrual
loans declined due to one commercial loan paydown.
During the quarter management began to implement certain changes to improve the
development of the loan watch list, which include not only expanding the number
of loan grades, but also further clarifying the definition of the loan grades.
As a result of these measures, watch list totals as of March 31, 1999 increased
significantly compared to those December 31, 1998 totals.
Noninterest Income and Expense
Noninterest income increased $33, or 2.8% for the first three months of 1999,
compared to the same 1998 time period. Income from fiduciary activities
increased 11.9% to $253 for the quarter ending March 31, 1999. An increase in
the number of large-dollar accounts, along with an increase in the base fee
structure attributed to the higher fees recorded.
Service charges on deposit accounts were 5.5% lower for the first three months
of 1999 compared to the same 1998 time period. A new no-cost checking account
product led to lower service charges recorded.
Net gain on loans originated and sold in the secondary mortgage market increased
36.9% to $308 for the first quarter of 1999 compared to $225 for the first
quarter of 1998. The lower interest rate environment led to an increase of
$7,443, or 45.5% in loan fundings for the first quarter of 1999 compared to the
first quarter of 1998.
Other operating income decreased $81, or 35.1% to $150 for the first three
months of 1999 compared to the $231 recorded for the first three months of 1998.
Two items accounted for the majority of the decrease in other operating income.
First, a $43 gain on the sale of an other real estate owned property was
recorded in the first quarter of 1998. Additionally, investors apparently were
taking a wait-and-see approach with regard to investing in the stock market. The
effect of decreased stock market investing led to lower revenues posted by the
Investment Center, a full service brokerage operation offered through Raymond
James Financial Services, Inc., member NASD/SIPC.
Noninterest expense increased $407, or 12.5% to $3,657 for the first quarter of
1999 compared to that same 1998 time period. Salaries and employee benefits, the
largest noninterest expense component, increased $209, or 10.7% during the first
quarter of 1999 primarily as a result of the forty-six employees assumed in
connection with the acquisition of the three Bank One branches. Staffing
increases from the prior year also gave rise to higher health insurance costs
incurred during the first quarter of 1999. Further, improved fee generation from
the secondary mortgage market department led to increased commissions paid to
loan originators.
Other operating expenses increased $138, or 16.7% to $962 for the first quarter
of 1999 compared to the same 1998 time period. The majority of the increase in
this category was attributable to the three Bank One branches acquired for items
such as office supplies for each location, training of personnel, in addition to
increased goodwill and intangible amortization expense recorded for the first
one-half month.
<PAGE>14
Income Taxes
The Corporation's effective tax rate was 33.1% and 34.2% for the periods ending
March 31, 1999 and 1998, respectively. Increased interest on tax-exempt
securities and loans was a leading factor in the lower effective tax rate
realized.
FINANCIAL CONDITION
Total assets were $609,228 at March 31, 1999 compared to $483,969 at December
31, 1998, an increase of $125,259, or 25.9%. As previously mentioned,
approximately $117 million in deposits and $58 million in loans were
attributable to the three Bank One, Indiana branches acquired in March, 1999.
Cash and cash equivalents, investment securities and net loans increased
$18,320, $20,754, and $72,890, respectively for the first quarter of 1999, while
loans held for sale decreased $1,706.
Total deposits increased $105,790 to $501,336 at March 31, 1999 compared to
$395,546 at December 31, 1998. Short-term borrowings increased $3,235 during the
first quarter of 1999 primarily due to increases in repurchase agreements.
Long-term debt at March 31, 1999 was $37,466, an increase of $13,612. Loan
proceeds from the $14,000 obtained by the Corporation to inject as capital to
its wholly-owned subsidiary bank, net of $388 in Federal Home Loan Bank of
Indianapolis principal repayments accounted for this change.
Capital
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 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.
The minimum requirements under the capital guidelines are a 4.00% leverage ratio
(Tier 1 capital divided by average assets less intangible assets and unrealized
gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1 capital divided
by risk-weighted assets), and an 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%, 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. If an institution is 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.
At March 31, 1999 and December 31, 1998, 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
<PAGE>15
The Corporation's actual consolidated capital amounts are presented in the
following table.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
Tier 1 capital
Shareholders' equity $ 43,839 $ 42,614
Less: Intangibles (14,252) (806)
Add/less: Unrealized loss/(gain) on securities 124 42
---------------- ---------------
TOTAL TIER 1 CAPITAL $ 29,711 $ 41,850
================ ===============
Total capital
Tier 1 capital $ 29,711 $ 41,850
Allowable allowance for loan losses 4,227 4,241
---------------- ---------------
TOTAL CAPITAL $ 33,938 $ 46,091
================ ===============
RISK WEIGHTED ASSETS $ 431,648 $ 353,215
================ ===============
AVERAGE ASSETS $ 509,590 $ 475,438
================ ===============
</TABLE>
The Corporation and Bank's actual capital ratios and minimum required levels are
presented in the following table.
<TABLE>
<CAPTION>
Actual ratios as of Minimum
March 31, December 31, Capital Adequacy Well-Capitalized
1999 1998 Requirement Requirement
---- ---- ----------- -----------
<S> <C> <C> <C> <C>
Tier I Capital
(to average assets)
Consolidated 5.8% 8.8% 4.0% 5.0%
Lafayette Bank and Trust 8.4% 8.7% 4.0% 5.0%
Tier I Capital
(to risk weighted assets)
Consolidated 6.9% 11.9% 4.0% 6.0%
Lafayette Bank and Trust 9.7% 11.8% 4.0% 6.0%
Total Capital
(to risk weighted assets)
Consolidated 7.8% 13.1% 8.0% 10.0%
Lafayette Bank and Trust 10.7% 13.0% 8.0% 10.0%
</TABLE>
<PAGE>16
As discussed earlier, the Corporation's wholly-owned subsidiary bank acquired
three branches on March 12, 1999. Management was aware this transaction would
reduce consolidated and bank-only capital levels. As a result, the Corporation
borrowed $14 million and contributed $13 million of capital to the Bank in order
for the Bank to maintain its well-capitalized status. As of March 31, 1999 the
Bank continued its position as well-capitalized. Management was also aware,
however, that the Corporation's capital level would temporarily drop below the
minimum required level for capital adequacy purposes. As of March 31, 1999 the
Corporation's consolidated capital level was slightly below the required level
for capital adequacy purposes. Management will continue to monitor the
Corporation's consolidated capital level and anticipates that the Corporation
will meet the minimum required level for capital adequacy purposes prior to
December 31, 1999. The Federal Reserve Bank considers the holding company
capital adequacy in connection with any application activity which requires
their approval. Further, since the Corporation's capital levels are below the
well-capitalized category, the use of expedited Federal Reserve Bank procedures
in any application activity which requires their approval will not be available
to the Corporation until it once again becomes well-capitalized. Certain
statements in this paragraph relating to future capital levels of the
Corporation and Bank are forward-looking which may or may not be accurate due to
the impossibility of predicting future economic and business events, including
the ability of the Corporation to raise additional capital, if needed, as well
as other factors that are beyond the control of the Corporation.
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 three
months ended March 31, 1999 and 1998. Including net income of $1,519, the net
cash from operating activities for the first three months of 1999 generated
$4,089 of available cash. Net cash from investing activities utilized $36,445 of
available cash primarily as a result of $20,956 in net investment security
purchases, in addition to $14,765 of net loan fundings by the Corporation.
Proceeds from the three branches acquired in addition to the proceeds from the
long-term debt were offset by a decrease in deposits not associated with the
branch transaction. The net result of this activity generated $50,676 in net
cash from financing activities.
Total cash inflows for the three month period in 1999 exceeded cash outflows by
$18,320 resulting in a cash and cash equivalent balance of $37,088 at March 31,
1999.
YEAR 2000
The Corporation's Board of Directors and management is aware of the possible
consequences the Y2K 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 Y2K 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 of 1998
and was temporarily delayed due to the installation of a new proof system in
conjunction with the time restrictions resulting from the three branch
acquisitions. Testing was completed, however, as of April 30, 1999.
Because the Y2K issue could affect the ability of the Corporation's customers to
conduct their business and operations in a timely and effective manner, any Y2K
disruptions 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. No
borrowers were classified as having a high credit risk.
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. Approximately $1.2
million of the estimated $1.6 million has been incurred through March 31, 1999.
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>17
The above discussion of Y2K issues includes numerous forward-looking statements
reflecting management's current assessment and estimates with respect to the
Corporation's Y2K compliance efforts and the impact of Y2K 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 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 March 31, 1999
from the analysis and disclosures provided in the Corporation's Form 10-K for
the year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for March 31, 1999
(b) Reports on Form 8-K
No Form 8-K was filed with the SEC during the quarter ended March
31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 17, 1999 By /s/ Robert J. Weeder
--------------------------------
Robert J. Weeder
President
Date: May 17, 1999 By /s/ Marvin S. Veatch
--------------------------------
Marvin S. Veatch
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 31,088
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,732
<INVESTMENTS-CARRYING> 6,857
<INVESTMENTS-MARKET> 7,025
<LOANS> 426,704
<ALLOWANCE> 4,227
<TOTAL-ASSETS> 609,228
<DEPOSITS> 501,336
<SHORT-TERM> 19,637
<LIABILITIES-OTHER> 6,950
<LONG-TERM> 37,466
0
0
<COMMON> 2,399
<OTHER-SE> 41,440
<TOTAL-LIABILITIES-AND-EQUITY> 609,228
<INTEREST-LOAN> 8,130
<INTEREST-INVEST> 1,251
<INTEREST-OTHER> 102
<INTEREST-TOTAL> 9,483
<INTEREST-DEPOSIT> 3,901
<INTEREST-EXPENSE> 4,572
<INTEREST-INCOME-NET> 4,911
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,657
<INCOME-PRETAX> 2,270
<INCOME-PRE-EXTRAORDINARY> 2,270
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,519
<EPS-PRIMARY> .64
<EPS-DILUTED> .62
<YIELD-ACTUAL> 4.23
<LOANS-NON> 1,165
<LOANS-PAST> 1,102
<LOANS-TROUBLED> 188
<LOANS-PROBLEM> 4,631
<ALLOWANCE-OPEN> 4,241
<CHARGE-OFFS> 211
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 4,227
<ALLOWANCE-DOMESTIC> 3,794
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 433
</TABLE>
