UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ]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 0-11487
LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1559596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
202 East Center Street
P.O. Box 1387, Warsaw, Indiana 46581-1387
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219)267-6144
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 last practicable date.
Class Outstanding at November 1, 1999
Common Stock, No Par Value 5,792,182
<PAGE>
LAKELAND FINANCIAL CORPORATION
Form 10-Q Quarterly Report
Table of Contents
PART I.
Page Number
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 13
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 32
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 32
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 32
Item 4. Submission of Matters to a Vote of Security Holders . . . 32
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 32
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 32
Form 10-Q Signature Page . . . . . . . . . . . . . . . . . . . . . 33
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and December 31, 1998
(in thousands)
(Page 1 of 2)
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 45,835 $ 45,933
Short-term investments 283 15,575
------------ -----------
Total cash and cash equivalents 46,118 61,508
Securities available-for-sale:
U. S. Treasury securities 34,908 39,521
Mortgage-backed securities 196,150 227,944
State and municipal securities 33,220 59,112
Other debt securities 11,913 1,081
------------ -----------
Total securities available-for-sale
(carried at fair value) 276,191 327,658
Securities held-to-maturity:
Total securities held-to-maturity
(fair value of $0 at
September 30, 1999, and $0
at December 31, 1998) 0 0
Real estate mortgages held-for-sale 880 3,796
Loans:
Total loans 636,443 538,496
Less: Allowance for loan losses 6,381 5,510
----------- -----------
Net loans 630,062 532,986
Land, premises and equipment, net 27,260 26,370
Accrued income receivable 5,693 5,669
Intangible assets 10,755 11,453
Other assets 12,572 9,469
----------- -----------
Total assets $ 1,009,531 $ 978,909
=========== ===========
(Continued)
</TABLE>
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and December 31, 1998
(in thousands)
(Page 2 of 2)
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 125,232 $ 118,361
Interest bearing deposits 595,762 620,986
------------ -----------
Total deposits 720,994 739,347
Borrowings:
Federal funds purchased 31,025 0
U.S. Treasury demand notes 3,562 1,527
Securities sold under agreements
to repurchase 111,783 110,163
Other borrowings 45,000 24,000
------------ -----------
Total borrowings 191,370 135,690
Accrued expenses payable 5,782 6,503
Other liabilities 1,549 1,589
Other debt 16,472 21,386
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,258 19,238
------------ -----------
Total liabilities 955,425 923,753
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,813,984 shares issued and 5,792,182 outstanding as of
September 30, 1999, and 5,813,984 shares issued and 5,796,918
outstanding at December 31, 1998 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 48,061 43,652
Unrealized net gain (loss) on securities available-for-sale (3,524) 1,848
Treasury stock, at cost (421) (334)
------------ -----------
Total stockholders' equity 54,106 55,156
------------ -----------
Total liabilities and stockholders' equity $ 1,009,531 $ 978,909
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 1999 and 1998
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 13,490 $ 11,292 $ 37,669 $ 32,863
Tax exempt 46 48 135 149
----------- ----------- ----------- -----------
Total loan income 13,536 11,340 37,804 33,012
Short-term investments 40 83 232 418
Securities:
U.S. Treasury and government agency securities 530 622 1,756 2,101
Mortgage-backed securities 2,837 3,598 9,014 9,989
State and municipal securities 575 673 2,007 1,546
Other debt securities 171 50 367 150
----------- ----------- ----------- -----------
Total interest and dividend income 17,689 16,366 51,180 47,216
INTEREST EXPENSE
- ----------------
Interest on deposits 6,787 7,259 20,305 20,999
Interest on short-term borrowings 1,797 1,277 4,934 3,326
Interest on long-term debt 676 818 2,117 2,422
----------- ----------- ----------- -----------
Total interest expense 9,260 9,354 27,356 26,747
----------- ----------- ----------- -----------
NET INTEREST INCOME 8,429 7,012 23,824 20,469
- -------------------
Provision for loan losses 550 120 1,050 360
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,879 6,892 22,774 20,109
- ------------------------- ----------- ----------- ----------- -----------
NONINTEREST INCOME
- ------------------
Trust fees 304 275 841 897
Service charges on deposit accounts 1,105 1,033 3,198 2,908
Other income (net) 1,017 797 2,943 2,325
Net gains on the sale of real estate mortgages held-for-sale 381 440 1,136 1,067
Net securities gains (losses) 481 475 1,340 994
----------- ----------- ----------- -----------
Total noninterest income 3,288 3,020 9,458 8,191
(Continued)
</TABLE>
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 1999 and 1998
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 4,089 3,658 11,790 10,297
Occupancy and equipment expense 1,402 1,088 4,010 2,908
Other expense 2,456 2,313 6,859 6,366
----------- ----------- ----------- -----------
Total noninterest expense 7,947 7,059 22,659 19,571
INCOME BEFORE INCOME TAX EXPENSE 3,220 2,853 9,573 8,729
- --------------------------------
Income tax expense 1,128 981 3,252 2,820
----------- ----------- ----------- -----------
NET INCOME $ 2,092 $ 1,872 $ 6,321 $ 5,909
- ---------- =========== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING (Note 2) 5,813,984 5,813,984 5,813,984 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.36 $ 0.33 $ 1.09 $ 1.02
- ------------------------------- =========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.36 $ 0.33 $ 1.09 $ 1.02
- --------------------------------- =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
(unaudited)
<CAPTION>
For the Nine Months Ended
September 30,
-----------------------------------------------------
1999 1998
------------------------- -------------------------
<S> <C> <C> <C> <C>
Common Stock
Balance at beginning of the period $ 1,453 $ 1,453
----------- -----------
Balance at end of the period 1,453 1,453
Paid-in Capital
Balance at beginning of the period 8,537 8,537
----------- -----------
Balance at end of the period 8,537 8,537
Retained Earnings
Balance at beginning of the period 43,652 37,766
Net Income 6,321 $ 6,321 5,909 $ 5,909
Cash dividends declared ($.33 and $.255
per share) (1,912) (1,451)
----------- -----------
Balance at end of the period 48,061 42,224
Accumulated Other Comprehensive Income
Balance at beginning of the period 1,848 685
Unrealized gain (loss) on available-for-
sale securities arising during the period (4,563) 69
Reclassification adjustments for
accumulated (gains) losses included
in net income (809) (600)
----------- -----------
Other comprehensive income
(net of taxes $[3,524] and $348) (5,372) (5,372) (531) (531)
----------- ----------- ----------- -----------
Total comprehensive income $ 949 $ 5,378
Balance at end of the period (3,524) =========== 154 ===========
Treasury Stock
Balance at beginning of the period (334) (185)
Acquisition of treasury stock (87) (146)
----------- -----------
Balance at end of the period (421) (331)
----------- -----------
Total Stockholders' Equity $ 54,106 $ 52,037
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
(Unaudited)
(Page 1 of 2)
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,321 $ 5,909
----------- -----------
Adjustments to reconcile net income to net cash
from operating activites:
Depreciation 1,781 1,266
Provision for loan losses 1,050 360
Amortization of intangible assets 718 698
Loans originated for sale (55,962) (47,891)
Net (gain) loss on sale of loans (1,136) (1,067)
Proceeds from sale of loans 60,014 47,362
Net (gain) loss on sale of premises and equipment 11 (36)
Net (gain) loss on sale of securities available-for-sale (1,340) (994)
Net (gain) loss on calls of securities held-to-maturity 0 0
Net securities amortization (accretion) 1,594 810
Increase (decrease) in taxes payable 310 373
(Increase) decrease in income receivable (24) (733)
Increase (decrease) in accrued expenses payable 146 (343)
(Increase) decrease in other assets (942) (2,267)
Increase (decrease) in other liabilities (40) (470)
----------- -----------
Total adjustments 6,365 (2,932)
----------- -----------
Net cash from operating activities 12,686 2,977
----------- -----------
Cash flows from investing activities:
Proceeds from maturities and calls of securities held-to-maturity 0 45,784
Proceeds from maturities and calls of securities available-for-sale 53,539 13,819
Purchases of securities available-for-sale (55,649) (52,482)
Purchases of securities held-to-maturity 0 (131,919)
Proceeds from sales of securities available-for-sale 44,428 48,084
Net (increase) decrease in total loans (97,941) (37,168)
Proceeds from sale of premises and equipment 83 0
Purchases of land, premises and equipment (2,765) (2,898)
Net proceeds (payments) from acquisitions 0 30,020
----------- -----------
Net cash from investing activities (58,490) (86,760)
----------- -----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
(Unaudited)
(Page 2 of 2)
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in total deposits $ (18,353) $ 61,480
Proceeds from short-term borrowings 15,351,351 1,159,071
Payments on short-term borrowings (15,295,671) (1,138,023)
Proceeds from long-term borrowings 111 50
Payments on long-term borrowings (5,025) (25)
Dividends declared (1,912) (1,451)
Purchase of treasury stock (87) (146)
----------- -----------
Net cash from financing activities 30,414 80,956
----------- -----------
Net increase (decrease) in cash and cash equivalents (15,390) (2,827)
Cash and cash equivalents at beginning of the period 61,508 49,762
----------- -----------
Cash and cash equivalents at end of the period $ 46,118 $ 46,935
=========== ===========
Cash paid during the period for:
Interest $ 27,781 $ 26,047
=========== ===========
Income taxes $ 2,891 $ 2,796
=========== ===========
Loans transferred to other real estate $ 185 $ 52
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This report is filed for Lakeland Financial Corporation (the Company) and
its wholly owned subsidiaries, Lake City Bank (the Bank) and Lakeland Capital
Trust (Lakeland Trust). All significant intercompany,LCB Investments Limited
balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate and do not make the information presented misleading.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's latest annual report to stockholders and Form 10-K. In preparing
financial statements in conformity with generally accepted accounting
principles, management must make estimates and assumptions. These estimates
and assumptions affect the amounts reported and the disclosures provided.
Results for the periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair statement of the results
for interim periods are reflected in the quarterly statements.
The Company formed Lakeland Trust on July 24, 1997. Lakeland Trust issued
$20 million of 9% Cumulative Trust Preferred Securities (Preferred
Securities). The Preferred Securities issued by Lakeland Trust are presented
as a separate line item as long-term debt in the consolidated balance sheets
of the Company under the caption "Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures" and the Company records distributions
payable on the Preferred Securities as an expense in its consolidated
statements of income.
LCB Investments Limited was formed on September 30, 1999. This is a
single purpose, wholly-owned subsidiary of the Bank. It's principal office is
in Bermuda, and it was formed to manage a portion of the investment securities
portfolio of the Bank. It is expected that this subsidiary will become fully
operational during the fourth quarter of 1999.
<PAGE>
NOTE 2. EARNINGS PER SHARE
Basic earnings per common share is based upon weighted-average common
shares outstanding. Diluted earnings per common share shows the dilutive
effect of additional common shares issueable.
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet reflect the acquisition of 21,802 shares of Company
common stock to offset a liability for a directors' deferred compensation
plan. These shares are treated as outstanding when computing the
weighted-average common shares outstanding for the calculation of both basic
and diluted earnings per share.
A reconciliation of the numerators and denominators of the basic earnings
per common share and the diluted earnings per common share for the periods
ended September 30, 1999 and 1998 follows. All dollar amounts other than
earnings per share are in thousands.
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Basic earnings per common share
Net income available to common stockholders $ 2,092 $ 1,872 $ 6,321 $ 5,909
Weighted-average common shares outstanding 5,813,984 5,813,984 5,813,984 5,813,984
Basic earnings per common share $ .36 $ .33 $ 1.09 $ 1.02
Earnings per common share assuming dilution
Net income available to common stockholders $ 2,092 $ 1,872 $ 6,321 $ 5,909
Weighted-average common shares outstanding 5,813,984 5,813,984 5,813,984 5,813,984
Add: dilutive effects of exercises of stock options 14 0 14 187
Weighted-average common and diluted potential
common shares outstanding 5,813,998 5,813,984 5,813,998 5,814,171
Diluted earnings per common share $ .36 $ .33 $ 1.09 $ 1.02
</TABLE>
NOTE 3. STOCK OPTIONS
The Lakeland Financial Corporation 1997 Share Incentive Plan reserves
600,000 shares of common stock for which Incentive Share Options (ISO) and
Non-Qualified Share Options (NQSO) may be granted to employees of the Company
and its subsidiaries, and NQSOs which may be granted to directors of the
Company. Most options granted under this plan were issued for 10-year periods
with full vesting five years from the date the option was granted. Information
about options granted, exercised and forfeited during 1999 follows:
<PAGE>
Number Risk- Stock Fair
of Exercise Free Price Value of
Options Price Rate Volatility Grants
--------- --------- --------- ---------- ---------
Outstanding 1/1/99 188,935
Granted 2/9/99 107,310 $ 19.44 4.79% 44.00% $ 7.50
Granted 3/10/99 600 18.75 5.12% 44.00% 7.28
Granted 3/31/99 5,000 18.00 5.10% 44.00% 6.94
Granted 5/11/99 1,000 17.50 5.40% 44.00% 6.52
Exercised 0
Forfeited 3,550
Outstanding 9/30/99 299,295
The fair values of the options were estimated using an expected life of 5
years and expected dividends of $.11 per quarter. There were 925 options
exercisable as of September 30, 1999.
The Company accounts for the stock options under APB 25. Statement of
Financial Accounting Standards (SFAS) No. 123 requires pro forma disclosures
for companies that do not adopt its fair value accounting method for
stock-based compensation. The following pro forma information presents net
income, basic earnings per common share and diluted earnings per common share
had the fair value method been used to measure compensation cost for stock
option plans. No compensation cost was actually recognized for stock options
in 1999 or 1998.
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income as reported $ 2,092 $ 1,872 $ 6,321 $ 5,909
Pro forma net income $ 1,972 $ 1,833 $ 5,962 $ 5,834
Basic earnings per common share as reported $ .36 $ .33 $ 1.09 $ 1.02
Diluted earnings per common share as reported $ .36 $ .33 $ 1.09 $ 1.02
Pro forma basic earnings per common share $ .34 $ .32 $ 1.03 $ 1.00
Pro forma diluted earnings per common share $ .34 $ .32 $ 1.03 $ 1.00
</TABLE>
<PAGE>
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
September 30, 1999
OVERVIEW
Lakeland Financial Corporation (the "Company") is the holding company for
Lake City Bank. The Company is headquartered in Warsaw, Indiana and, with the
June opening of its newest office in Fort Wayne, now operates 44 offices in 15
counties in northern Indiana.
The Company earned $6,321,000 for the first nine months of 1999, an
increase of 7.0 percent over the same period last year. Earnings for the third
quarter were $2,092,000, up 11.8 percent over the third quarter of 1998.
During the third quarter of 1999, the Company reached the milestone of $1
billion in total assets. Over the past five years, total Company assets have
more than doubled, from $481,958,000 at September 30, 1994, to $1,009,531,000
at September 30, 1999. This is an increase of $527,573,000 or 109.5, percent
which equates to a 15.9 percent rate of growth per year. Stockholders' equity
has increased from $29,767,000 to $54,106,000 for the same time period. That
is an increase of $24,339,000 or 81.8, percent which equates to a 12.7 percent
rate of growth per year. Net income for the nine months ended September 30,
1994, compared to the net income for the same period of 1999, increased
$2,319,000 or 57.9 percent from $4,002,000 to $6,321,000. From September 30,
1994, to September 30, 1999, the number of Lake City Bank offices increased
from 23 to 44. This growth has been funded through results of operation,
issuance of trust preferred securities and existing capital. It should be
noted that past rates of growth may not be indicative of growth in future
periods.
FINANCIAL CONDITION
Assets
Total assets of the Company were $1,009,531,000 as of September 30, 1999.
This was an increase of $30,622,000 or 3.1 percent from $978,909,000 reported
at December 31, 1998. Total loans were $636,443,000 at September 30, 1999.
This was an increase of $97,947,000 or 18.2 percent from the December 31, 1998
balance. Total securities decreased $51,467,000 or 15.7 percent to
$276,191,000 as of September 30, 1999, from $327,658,000 at December 31, 1998.
During the third quarter of 1999, management continued to shift its asset mix
from securities to higher yielding loans. Earning assets increased to
$907,416,000 at September 30, 1999. This was an increase of $27,401,000 or 3.1
percent from the December 31, 1998, total of $880,015,000.
<PAGE>
Funding
Total deposits and securities sold under agreements to repurchase
(repurchase agreements) consist mostly of funds generated within the Company's
primary market area. At September 30, 1999, these funds totaled $832,777,000.
This represented a $16,733,000 or 2.0 percent decrease from December 31, 1998.
The decrease was primarily in savings accounts plus interest-bearing demand
accounts which decreased a combined total of $13,103,000 or 10.8 percent from
the balance at December 31, 1998, and time deposits which decreased
$12,121,000 or 2.4 percent. Noninterest-bearing demand accounts increased
$6,871,000 or 5.8 percent from the balance at December 31, 1998, and
repurchase agreements increased $1,620,000 or 1.5 percent. The repurchase
agreements are a combination of fixed rate contracts and cash management
accounts, a variable rate repurchase agreement product.
In addition to these local funding sources, the Company borrows through
the Treasury, Tax and Loan program, through federal fund lines with
correspondent banks and through advances from the Federal Home Loan Bank of
Indianapolis (FHLB). Including these non-local sources, funding totaled
$928,836,000 at September 30, 1999. This was a $32,413,000 or 3.6 percent
increase from $896,423,000 reported at December 31, 1998.
Earning Assets
On an average daily basis, total earning assets increased 11.2 percent
and 14.5 percent for the three-month period and the nine-month period ended
September 30, 1999, as compared to the same periods of 1998. On an average
daily basis, total deposits and purchased funds increased 10.9 percent and
13.8 percent for the three-month period and nine-month period ended September
30, 1999, as compared to the same periods of 1998.
Investment Portfolio
The Company's investment portfolio consists of U.S. Treasuries, Agencies,
mortgage-backed securities, municipal bonds, trust preferred securities and
corporates. During 1999, new investments have been primarily Agencies,
corporates and trust preferred stocks. At September 30, 1999, and December 31,
1998, the Company's investment in mortgage-backed securities comprised
approximately 71.0 and 69.6 percent of total securities and consisted mainly
of CMOs and mortgage pools issued by GNMA, FNMA and FHLMC. As such, these
securities are backed directly or indirectly by the federal government. The
Company uses Bloomberg analytics to evaluate and monitor all purchases. At
September 30, 1999, the securities in the available-for-sale portfolio had a
<PAGE>
four year average life and a potential for approximately 10 percent price
depreciation should rates move up 300 basis points and approximately 7 percent
price appreciation should rates move down 300 basis points. As of September
30, 1999, all mortgage-backed securities were performing in a manner
consistent with management's original expectations.
The Company's available-for-sale portfolio is managed with consideration
given to factors such as the Company's capital levels, growth prospects,
asset/liability structure and liquidity needs. At September 30, 1999, the
available-for-sale portfolio constituted 100.0 percent of the total security
portfolio. During the first nine months of 1999, purchases for the
available-for-sale portfolio were $55,649,000 and sales totaled $44,428,000.
The securities sold from the available-for-sale portfolio were primarily
municipal bonds and mortgage-backed securities and the sales were due to the
ongoing shift from securities to higher yielding loans. At September 30, 1999,
the net after-tax unrealized loss in the available-for-sale portfolio included
in stockholders' equity was $3,524,000, a decrease of $5,372,000 from the
unrealized gain included in stockholders' equity at December 31, 1998. This
decrease was due to the lower rate environment for securities. Future
investment activity is difficult to predict, as it is dependent upon loan and
deposit trends and other factors.
Loans
Total loans increased $97,947,000 or 18.2 percent to $636,443,000 as of
September 30, 1999, from $538,496,000 at December 31, 1998. Loan growth is net
of loans reclassified to other real estate and loans sold. The Company
continues to experience good loan demand. Commercial loans at September 30,
1999, increased $60,533,000 or 17.5 percent from the level at December 31,
1998. Retail loans at September 30, 1999, increased $51,489,000 or 39.2
percent from December 31, 1998. This increase was largely in indirect consumer
loans with an increase of $36,658,000 or 75.9 percent from December 31, 1998.
Real estate loans (excluding mortgages held-for-sale) decreased $14,074,000 or
23.2 percent from December 31, 1998. The balances in the real estate loan
portfolio are impacted by the sale of real estate mortgages in the secondary
market and the level of refinance and new mortgage activity in the existing
rate environment. During 1999, mortgages totaling $55,878,000 were sold on the
secondary market compared to $44,419,000 sold during the same period of 1998.
During these two periods, loans totaling $52,962,000 and $46,016,000 were
originated for sale. This program of mortgage sales continues to produce the
liquidity needed to meet the mortgage needs of the markets served by the
Company, and to generate a long-term servicing portfolio. As a part of the
Community Reinvestment Act commitment to making real estate financing
available to a variety of customers, the Company continues to originate
non-conforming loans that are held to maturity or prepayment.
The Company had 64.0 percent of its loans concentrated in commercial
loans at September 30, 1999, and 64.4 percent at December 31, 1998.
Traditionally, this type of lending may have more credit risk than other types
<PAGE>
of lending because of the size and diversity of the credits. The Company
manages this risk by adjusting its pricing to the perceived risk of each
individual credit, and by diversifying the portfolio by customer, product,
industry and geography. Customer diversification is accomplished through an
administrative loan limit of $8,500,000. Based upon state banking regulations,
the Company's legal loan limit at September 30, 1999, was approximately
$9,545,000. Product diversification is accomplished by offering a wide variety
of financing options. Management reviews the loan portfolio to ensure loans
are diversified by industry. The loans in the portfolios are distributed
throughout the Compan's principal trade area, which encompasses fifteen
counties in Indiana.
Loans renegotiated as troubled debt restructurings are those loans for
which either the contractual interest rate has been reduced and/or other
concessions are granted to the borrower because of a deterioration in the
financial condition of the borrower which results in the inability of the
borrower to meet the original terms of the loan. Loans renegotiated as
troubled debt restructurings totaled $1,205,000 at September 30, 1999, as
compared to $1,281,000 at December 31, 1998. The loans classified as troubled
debt restructurings at September 30, 1999 were performing in accordance with
the modified terms.
Over the past year, one of management's goals has been to increase the
loan to deposit ratio. The desired effect of this strategy has been to create
a positive impact on the interest margin, which had declined as a result of
increases in deposits due to acquisitions and growth of existing offices.
Acquisitions by the Company in the fourth quarter of 1997 and the first
quarter of 1998 primarily consisted of assumptions of deposits with only small
amounts of loans acquired. As a result, the loan to deposit ratio was reduced.
For the first nine months of 1999, loans increased faster than deposits, even
though almost $56,000,000 of mortgage loans were sold in the secondary market.
During this nine-month period, loans increased $97,947,000 or 18.2 percent.
Demand accounts, which are noninterest-bearing, increased $6,871,000 during
the first nine months of 1999, and other transaction accounts decreased
$13,103,000 during the same period. During the quarter, time deposits
decreased by $12,121,000 or 2.4 percent. As a result of these loan and deposit
trends, the Company's loan to deposit ratio amounted to 88.3 percent at
September 30, 1999, which is an increase from 72.8 percent at year-end 1998.
Market Risk
The Company's primary market risk exposure is interest rate risk. The
Company does not have a material exposure to foreign currency exchange risk,
does not own any derivative financial instruments and does not maintain a
trading portfolio. The Company, through its Asset/Liability Committee (ALCO),
manages interest rate risk by monitoring the computer simulated earnings
impact of various rate scenarios. The Company then modifies its long-term risk
<PAGE>
parameters by attempting to generate the type of loans, investments, and
deposits that currently fit ALCO needs. This computer simulation analysis
measures the net interest income impact of a 300 basis point change in
interest rates during the next 12 months. If the change in net interest income
is less than 3 percent of primary capital, the balance sheet structure is
considered to be within acceptable risk levels. At September 30, 1999, the
Company's potential pretax exposure was within the Company's policy limit.
This policy was last reviewed and approved by the Board of Directors in May,
1999.
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For loans, securities, and liabilities with contractual
maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest-rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits (demand deposits, interest-bearing checking,
savings and money market deposits) that have no contractual maturity, the
table presents principal cash flows and, as applicable, related
weighted-average interest rates based upon the Company's historical
experience, management's judgment and statistical analysis, as applicable,
concerning their most likely withdrawal behaviors. Weighted-average variable
rates are based upon rates existing at the reporting date.
<PAGE>
<TABLE>
QUANTITATIVE MARKET RISK DISCLOSURE
<CAPTION>
Principal/Notional Amount Maturing in:
(Dollars in thousands) Fair
---------------------------------------------------------------------------- Value
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total 9/30/99
--------- --------- --------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $ 88,136 $ 50,407 $ 52,547 $ 42,417 $ 85,899 $ 27,156 $ 346,562 $ 354,515
Average interest rate 8.53% 8.79% 8.53% 8.43% 7.93% 7.95% 8.36%
Variable interest rate loans $ 254,095 $ 2,175 $ 1,477 $ 1,425 $ 1,199 $ 30,390 $ 290,761 $ 291,287
Average interest rate 8.80% 9.51% 10.20% 10.07% 10.21% 8.29% 8.77%
Fixed interest rate securities $ 18,559 $ 22,459 $ 44,942 $ 21,511 $ 26,347 $ 143,957 $ 277,775 $ 271,973
Average interest rate 6.27% 6.48% 5.54% 6.33% 6.13% 6.09% 6.07%
Variable interest rate securities $ 192 $ 204 $ 216 $ 230 $ 244 $ 3,165 $ 4,251 $ 4,217
Average interest rate 5.75% 6.09% 6.09% 6.09% 6.10% 6.43% 6.33%
Other interest-bearing assets $ 283 $ 0 $ 0 $ 0 $ 0 $ 0 $ 283 $ 283
Average interest rate 1.53% 1.53%
Rate sensitive liabilities:
Non-interest bearing checking $ 6,512 $ 5,811 $ 1,052 $ 1,002 $ 1,465 $ 109,390 $ 125,232 $ 125,232
Average interest rate
Savings & interest bearing checking $ 8,209 $ 7,412 $ 6,582 $ 5,979 $ 4,794 $ 74,751 $ 107,727 $ 107,727
Average interest rate 1.63% 1.63% 1.63% 1.63% 1.63% 1.69% 1.67%
Time deposits $ 420,551 $ 40,402 $ 16,777 $ 5,285 $ 3,436 $ 1,584 $ 488,035 $ 489,186
Average interest rate 4.92% 5.29% 5.80% 5.48% 5.17% 5.73% 4.99%
Fixed interest rate borrowings $ 142,870 $ 8,500 $ 10,000 $ 1,472 $ 0 $ 19,258 $ 182,100 $ 241,750
Average interest rate 4.85% 5.56% 5.25% 6.15% 0.00% 9.00% 5.35%
Variable interest rate borrowings $ 45,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 45,000 $ 45,000
Average interest rate 5.50% 5.50%
</TABLE>
<PAGE>
Borrowings
The Company is a member of the FHLB of Indianapolis. Membership has
enabled the Company to participate in the housing programs sponsored by the
FHLB, thereby enhancing the Company's ability to offer additional programs
throughout its trade area. The Company is authorized to borrow up to $100
million under the FHLB program. As of September 30, 1999, the borrowings from
the FHLB totaled $71,349,000, with $20,000,000 due December 27, 1999,
$15,000,000 due February 17, 2000, $10,000,000 due February 28, 2000,
$10,000,000 due March 27, 2000, $5,000,000 due April 28, 2000, $10,000,000 due
December 28, 2001, $1,300,000 due June 24, 2003, and $49,000 with annual
payments maturing on January 15, 2018. All borrowings are collateralized by
residential real estate mortgages. Membership in the FHLB requires an equity
investment in FHLB stock. The amount required is computed annually, and is
based upon a formula which considers the Company's total investment in
residential real estate loans, mortgage-backed securities and any FHLB
advances outstanding at year-end. The Company's investment in FHLB stock at
September 30, 1999, was $3,255,000.
Capital and Stockholders' Equity
The Federal Deposit Insurance Corporation's (FDIC) risk based capital
regulations require that all banks maintain an 8.0 percent total risk based
capital ratio. The FDIC has also established definitions of "well capitalized"
as a 5.0 percent Tier I leverage capital ratio, a 6.0 percent Tier I risk
based capital ratio and a 10.0 percent total risk based capital ratio. As of
September 30, 1999, the Bank's ratios were 6.5 percent, 9.2 percent and 10.2
percent, excluding the SFAS No. 115 adjustment. The ratios reported at
December 31, 1998 were 6.4 percent, 9.6 percent and 10.8 percent and ratios
reported at September 30, 1998 were 6.2 percent, 10.0 percent and 11.5
percent. The ratios include the maximum amount of the trust preferred
securities allowed by regulations. Current regulations limit the amount of
trust preferred securities included in Tier I capital to the greater of the
amount of the trust preferred securities or 25 percent of the total Tier I
capital. All ratios continue to be above "well capitalized" levels.
Total stockholders' equity decreased $1,050,000 or 1.9 percent from
December 31, 1998, to $54,106,000 at September 30, 1999. Net income of
$6,321,000, less dividends of $1,912,000, less the decrease in the accumulated
other comprehensive income of $5,372,000, less $87,000 for the cost of
treasury stock acquired comprised this decrease.
<PAGE>
RESULTS OF OPERATIONS
Net Income
Net income increased to $6,321,000 for the first nine months of 1999, an
increase of $412,000 from the $5,909,000 recorded over the same period in
1998. For the three months ended September 30, 1999, net income was $2,092,000
as compared to $1,872,000 for the three months ended September 30, 1998. Basic
earnings per share for the first nine months of 1999 were $1.09 per share,
which was an increase over the $1.02 per share for the first nine months of
1998, and $.36 per share for the three-month period ended September 30, 1999
as compared to the $.33 per share for the same period of 1998. Diluted
earnings per share reflect the potential dilutive impact of stock options
granted under an employee stock option plan approved by the stockholders in
April, 1998. The stock options did not have a significant impact on earnings
per share as diluted earnings per share were the same as basic earnings per
share for both the nine-month and three-month periods ended September 30,
1999.
Net Interest Income
The net effect of all factors affecting total interest and dividend
income and total interest expense was to increase net interest income. For the
nine-month period ended September 30, 1999, net interest income totaled
$23,824,000, an increase of 16.4 percent or $3,355,000 over the first nine
months of 1998. For the three-month period ended September 30, 1999, net
interest income totaled $8,429,000, an increase of 20.2 percent or $1,417,000
over the first three months of 1998. This increase occurred in part because of
the efforts to improve the loan to deposit ratio. Management plans to continue
its efforts in growing the loan portfolio, as well as implementing a more
aggressive short-term funding strategy to continue this positive trend.
For the nine-month period ended September 30, 1999, total interest and
dividend income increased $3,964,000 or 8.4 percent to $51,180,000, from
$47,216,000 during the same nine months of 1998. Interest and dividend income
increased $1,323,000 or 8.1 percent for the three-month period ended September
30, 1999, as compared to the three-month period ended September 30, 1998.
Daily average earning assets for the first three quarters of 1999 increased to
$896,404,000, a 14.5 percent increase over the same period in 1998. For the
third quarter alone, the daily average earning assets increased to
$905,848,000, an 11.2 percent increase over the daily average earning assets
of the third quarter of 1998. The tax equivalent yields on average earning
assets decreased by 41 basis points for the nine-month period ended September
30, 1999, when compared to the same period of 1998. For the three-month period
ended September 30, 1999, this yield decreased 25 basis points from the yield
for the three-month period ended September 30, 1998.
<PAGE>
The decrease in the yield of 41 basis points on average earning assets
reflected reductions in the yields on both loans and securities caused by the
current low-rate environment along with the level of competition in the
markets served. The yield on securities is historically lower than the yield
on loans, and decreasing the ratio of securities to total earning assets will
normally raise the yield on earning assets. The decrease in the ratio of
average daily securities to average earning assets partially offset the
reductions in the yields on both loans and securities. The ratio of average
daily securities to average earning assets for the first three quarters of
1999 was 33.2 percent compared to 37.4 percent for the same period of 1998. In
addition, the overall tax equivalent yield on loans decreased 64 and 62 basis
points when comparing both the nine and three-month periods ended September
30, 1999 and 1998. The yield on securities decreased 31 and 18 basis points
for the same respective periods.
The decrease in loan yields was offset by an increase in loan balances.
The average daily loan balances for the first nine months of 1999 increased
23.4 percent over the average daily loan balances for the same period of 1998.
The average daily loan balances for the three-months ended September 30, 1999
increased 28.6 percent over the average daily loan balances for the
three-months ended September 30, 1998. The loan growth was funded primarily by
securities sales/maturities and partially by increases in deposits and
borrowings. The increase in loan income of $4,792,000 or 14.5 percent for the
first nine months of 1999 as compared to the first nine months of 1998 and the
increase in loan income of $2,196,000 or 19.4 percent for the three-month
period ended September 30, 1999 as compared to the same period of 1998,
resulted from this loan growth.
Income from securities totaled $13,144,000 for the first nine months of
1999, a decrease of $642,000 or 4.7 percent over the amount for the same
period of 1998. The income from securities for the three-month period ended
September 30, 1999 was $4,113,000 as compared to $4,943,000, a decrease of
$830,000 or 16.8 percent for the three-month period ended September 30, 1998.
This decrease was the result of the decrease in the average daily balances of
securities during the third quarter, as well as the decrease in the yields on
securities. The average daily balances of securities for the nine and
three-month periods ended September 30, 1999 increased $4,995,000 and
decreased $45,674,000 when compared to the same periods of the prior year.
Although the average daily balance for the nine months of 1999 increased, the
ratio of average daily securities to average earning assets decreased due to
the loan growth for the nine months ended September 30, 1999.
Income from short-term investments amounted to $232,000 for the
nine-month period and $40,000 for the three-month period ended September 30,
1999. This compares to $418,000 and $83,000 for the same periods in 1998. The
decrease of $186,000 when comparing the nine-month periods resulted from a
decrease of $3,605,000 or 35.2 percent in the average balance of short-term
<PAGE>
investments, combined with a 73 basis point reduction in the yield. The
decrease of $43,000 when comparing the three-month periods resulted from a
decrease of $2,936,000 or 46.9 percent in the average balance of short-term
investments, combined with a 31 basis point reduction in the rate.
Total interest expense increased $609,000 or 2.3 percent to $27,356,000
for the nine-month period ended September 30, 1999, from $26,747,000 for the
nine-month period ended September 30, 1998 and it decreased $94,000 or 1.0
percent for the three-month period ended September 30, 1999, from the
$9,354,000 for the three-month period ended September 30, 1998. This was a
result of the overall growth of deposits in existing offices and changes in
the deposit mix offset by a 45 basis point reduction in the Company's daily
cost of funds. On an average daily basis, total deposits (including demand
deposits) increased 9.5 and 7.3 percent for the nine and three-month periods
ended September 30, 1999, as compared to the similar periods in 1998. When
comparing these same periods, the average daily balances of the demand deposit
accounts rose $22,004,000 and $27,638,000 while the average daily balances of
savings and transaction accounts combined declined $11,258,000 and
$13,954,000. The average daily balance of time deposits, which pay a higher
rate of interest as compared to demand deposit and transaction accounts,
increased $53,846,000 and $38,519,000 for the nine and three months ended
September 30, 1999, compared to the nine and three months ended September 30,
1998. However, the largest increases, $42,643,000 and $44,729,000 for the same
nine and three month periods, were seen in the Investors Weekly accounts
offered by the Company. These accounts usually pay a lower rate of interest
than other accounts offered by the Company. Average daily balances of
borrowings increased $4,355,000 and $14,287,000 for the nine and three-month
periods ended September 30, 1999 compared to the same period of 1998, while
the rate on borrowings decreased 21 and 33 basis points comparing the same two
periods. On an average daily basis, total deposits (including demand deposits)
and purchased funds increased 13.8 percent and 10.9 percent for the nine and
three-month periods ended September 30, 1999, as compared to the nine and
three-month periods ended September 30, 1998.
Provision for Loan Losses
The Company maintains the allowance for loan losses at a level that is
deemed appropriate based upon loan loss experience, the nature of the
portfolio, the growth of the portfolio and the evaluation of the economic
outlook. Special consideration is given to nonperforming and nonaccrual loans
as well as factors that management feels deserve recognition. The Company
maintains a quarterly loan review program designed to provide reasonable
assurance that the allowance is maintained at an appropriate level and that
changes in the status of loans are reflected in the financial statements in a
timely manner. The adherence to this policy may result in fluctuations in the
provision for loan losses. Consequently, the increase in net interest income
before provision for loan losses, discussed above, may not necessarily flow
through to the net interest income after provision for loan losses.
<PAGE>
The provision amounted to $1,050,000 and $360,000 for the nine-month
periods ended September 30, 1999 and 1998. For the three-month periods ended
September 1999 and 1998, the provision amounted to $550,000 and $120,000.
These provisions in large part reflected the growth of the loan portfolio as
management continued to shift its asset mix from securities to higher yielding
loans. They also reflected consideration of the higher levels of past due
accruing loans (90 days or more) and nonaccrual loans over the same periods.
These levels of non-performing loans reflect both the general economic
conditions that have promoted growth and expansion in the Company's trade area
during the last several years, and a credit risk management strategy that
promotes diversification.
As of September 30, 1999, loans delinquent 90 days or more that were
included in the accompanying financial statements as accrual loans totaled
approximately $406,000. At September 30, 1999, there were loans totaling
$211,000 on nonaccrual. At December 31, 1998, there were $227,000 in loans
delinquent 90 days or more included as accruing loans in the financial
statements and there were no nonaccrual loans.
Although the provision for loan losses has increased for both the first
nine months and the third quarter of 1999 as compared to the same periods of
1998, the ratio of the allowance for loan losses to total loans has declined
somewhat from that at December 31, 1998 and September 30, 1998. At September
30, 1999, the ratio was 1.00 percent as compared to 1.02 percent at December
31, 1998 and 1.10 percent at September 30, 1998. These declines reflect the
growth in the loan portfolio, along with management's analysis of the adequacy
of the allowance.
As part of the loan review process, management reviews all loans
classified as 'special mention' or below, as well as other loans that might
warrant application of SFAS No. 114 as amended by SFAS No. 118, 'Accounting by
Creditors for Impairment of a Loan'. As of September 30, 1999 and December 31,
1998, no loans were classified as impaired.
Following is a summary of the loan loss experience for the nine months
ended September 30, 1999, and the year ended December 31, 1998.
<PAGE>
September 30, December 31,
1999 1998
------------- -------------
(in thousands)
Amount of loans outstanding $ 636,443 $ 538,496
------------- -------------
Average daily loans outstanding for
the period $ 629,505 $ 489,336
------------- -------------
Allowance for loan losses at the
beginning of the period $ 5,510 $ 5,308
Charge-offs
Commercial 82 9
Real estate 6 0
Installment 165 329
Credit card and personal credit lines 17 78
------------- ------------
Total charge-offs 270 416
Recoveries
Commercial 9 44
Real estate 0 0
Installment 71 86
Credit card and personal credit lines 11 8
------------- ------------
Total recoveries 91 138
------------- ------------
Net charge-offs 179 278
Provision charged to expense 1,050 480
------------- ------------
Allowance for loan losses at the end of
the period $ 6,381 $ 5,510
============= ============
Ratio of annualized net charge-offs during
the period to average daily loans during
the period:
Commercial 0.02% (0.01)%
Real estate 0.00% 0.00%
Installment 0.02% 0.05%
Credit card and personal credit lines 0.00% 0.02%
------------- ------------
Total 0.04% 0.06%
============= ============
<PAGE>
Net interest income after provision for loan losses totaled $22,774,000
and $7,879,000 for the nine and three-month periods ended September 30, 1999.
This represented an increase of 13.3 percent and 14.3 percent over the same
periods ended September 30, 1998.
Noninterest Income
Total noninterest income increased $1,267,000 or 15.5 percent to
$9,458,000 for the nine-month period ended September 30, 1999, from $8,191,000
recorded for the nine-month period ended September 30, 1998. Total noninterest
income for the three-month period ended September 30, 1999, was $3,288,000
which was $268,000 or 8.9 percent higher than the noninterest income for the
three months ended September 30, 1998.
Trust fees, which represent basic recurring service fee income, decreased
$56,000 or 6.2 percent to $841,000 for the nine-month period ended September
30, 1999, as compared to $897,000 for the first nine months of 1998. For the
three-month period ended September 30, 1999, trust fees were $304,000, an
increase of $29,000 over the fees for the same period in 1998.
Service charges on deposit accounts increased 10.0 percent or $290,000
during the nine-month period ended September 30, 1999, totaling $3,198,000, as
compared to the same period in 1998. These service charges increased $72,000
for the three-month period ended September 30, 1999, over the amount recorded
for the three-month period ended September 30, 1998. Fees related to
individual checking accounts were the primary sources for the increase.
Other income (net) consists of normal recurring fee income, as well as
other income that management classifies as nonrecurring. Other income (net)
increased $618,000 or 26.6 percent to $2,943,000 for the nine-month period
ended September 30, 1999, as compared to the same period in 1998. The primary
increases were in commercial and other fees, miscellaneous income and
insurance income.
The profits from the sale of mortgages during the nine-month period ended
September 30, 1999, totaled $1,136,000, as compared to $1,067,000 during the
same period in 1998. This increase reflected an increase in the volume of
mortgages sold during the first nine months of 1999, as compared to the sales
during the first nine months of 1998. For the third quarter of 1999 only,
these profits were $381,000 as compared to $440,000 for the same period in
1998. While the volume of mortgages sold during the third quarter of 1999
increased over the third quarter of 1998, some 1999 sales were at a lower rate
than 1998 sales, causing the decrease in profits for this period.
<PAGE>
Net investment securities gains (losses) amounted to $1,340,000 and
$481,000 for the nine and three-month periods ended September 30, 1999, as
compared to $994,000 and $475,000 for the nine and three-month periods ended
September 30, 1998. In the first nine months of 1999 and 1998, the securities
gains resulted from the sales of securities from the available-for-sale
portfolio. The increase year to year was the result of management utilizing
the securities portfolio to fund the increases in the loan portfolio.
Noninterest Expense
Noninterest expense increased $3,088,000 or 15.8 percent to $22,659,000
for the nine-month period ended September 30, 1999, as compared to the first
nine months of 1998. Noninterest expense increased $888,000 or 12.6 percent
when comparing the three-months ended September 30, 1999, to the three months
ended September 30, 1998.
For the nine months ended September 30, 1999, salaries and employee
benefits increased to $11,790,000, a $1,493,000 increase or 14.5 percent as
compared to the first nine months of 1998. When comparing the three months
ended September 30, 1999, to the same period in 1998, the increase was
$431,000 or 11.8 percent. These increases reflected normal salary increases,
additions to staff and increased health care costs. Total employees increased
to 485 at September 30, 1999, from 465 at September 30, 1998. The increase in
total employees included increases in branch personnel, along with increases
in clerical and administrative staff relating to the growth of the Company.
The increase in health care costs was the result of the growth in employees,
as well as the rising cost of health care.
For the nine and three-month periods ended September 30, 1999, occupancy
and equipment expenses were $4,010,000 and $1,402,000, a $1,102,000 increase
or 37.9 percent and $314,000 or 28.9 percent increase from the same periods
one year ago. This performance reflected the ordinary timing differences
incurred with these types of expenses, as well as additional expense related
to the new locations added during 1998 and 1999, along with investments in
equipment and technology necessary to remain competitive. These expenses are
expected to continue to increase as the Company continues to grow.
For the nine-month period ended September 30, 1999, other expenses
totaled $6,859,000 as compared to $6,366,000 during the same period in 1998.
This was an increase of 7.7 percent or $493,000. For the third quarter of 1999
compared to the third quarter of 1998, the increase was $143,000 or 6.2
percent. When comparing the nine and three-month periods ended September 30,
1999 to the same periods of 1998, a significant increase was noted in data
processing fees (up $310,000 or 26.4 percent and $87,000 or 19.0 percent).
<PAGE>
Income Before Income Tax Expense
Income before income tax expense increased $844,000 or 9.7 percent to
$9,573,000 for the first nine months of 1999, as compared to $8,729,000 for
the same period in 1998. For the three months ended September 30, 1999, income
before income taxes was $3,220,000 as compared to $2,853,000 for the three
months ended September 30, 1998. This was due primarily to the loan growth and
the increase in noninterest income offset by the added overhead expenses
resulting from growth and acquisitions.
Income Tax Expense
Income tax expense increased to $3,252,000 for the first nine months of
1999, as compared to $2,820,000 for the same period in 1998. This was a
$432,000 or 15.3 percent increase. Income tax expense for the third quarter of
1999 increased $147,000 or 15.0 percent as compared to the third quarter of
1998. These increases were a result of higher income before taxes and
adjustments in deferred tax assets.
The combined state franchise tax expense and the federal income tax
expense as a percentage of income before income tax expense increased to 34.0
percent during the first nine months of 1999, as compared to 32.3 percent
during the same period in 1998. It increased to 35.0 percent for the three
months ended September 30, 1999, as compared to 34.4 percent for the same
three months in 1998. Currently the state franchise tax rate is 8.5 percent
and is a deductible expense for computing federal income tax.
YEAR 2000
The Company relies heavily on computer technology to provide its products
and services. Competitive pressures also require the Company to invest in and
utilize current technology. Due to the reliance on this technology, the Year
2000 issue will have a pervasive effect on the Company's products, especially
those with interest calculations, and the services it provides. It will also
have an impact on the items necessary to remain competitive, including
customer information and customer conveniences such as ATM's, telephone
banking and debit cards. In discussing the Year 2000 issue, management uses
various estimates and projections relating to costs, percentages or stages of
completion, possible scenarios and contingency plans. These are only estimates
and projections. Actual costs, percentage or stage of completion and outcomes
may be different from management's estimates and projections. Although
management believes it is taking all the steps necessary to prepare for Year
2000, there are many factors beyond management's control and ability to
foresee that may have a significant impact on future events.
The Company is taking a proactive approach to the Year 2000 issue. A Year
2000 Committee was formed and is comprised of representatives from all major
departments and includes involvement of an executive officer to provide senior
<PAGE>
management support and to report periodically to the Board of Directors on the
Year 2000 effort. The committee developed a plan of action that is being
followed to ensure the Company addresses the critical Year 2000 issues. A
master inventory of all software and hardware in use by the Company was
compiled. All software vendors were requested to provide a written statement
regarding their Year 2000 efforts and compliance. FiServ's Pittsburgh, PA
processing center is the primary data processing vendor the Company uses.
FiServ processes all of the major applications for the Company including
deposits, loans, and general ledger. FiServ is one of the leading data
processing vendors for the banking industry. As a result, FiServ is
periodically examined by bank regulatory agencies regarding its Year 2000
efforts to help ensure its systems will be Year 2000 compliant. FiServ
maintains a website on the Internet and specifically addresses its Year 2000
efforts. FiServ's systems are being reviewed for Year 2000 compliance by the
accounting firm McGladrey and Pullen LLC. Periodic reports are received from
McGladrey and Pullen regarding their reviews. In addition, a Company
representative is a member of the FiServ Client Advisory Board. No material
Year 2000 concerns have been brought to the attention of the Company.
The support and network software the Company uses is purchased from
outside vendors. Any software where the vendor was unable to confirm the
software as being Year 2000 compliant, or did not provide a statement on Year
2000 compliance, was evaluated to determine the potential impact of
noncompliance and availability of alternative compliant software. The Company
has developed a software-testing plan which was submitted to bank regulators
in October, 1998. This plan substantially meets all FFIEC guidelines and the
Company is on schedule to meet all plan deadlines. All software has been
tested by Company personnel for Year 2000 compliance, and Year 2000 compliant
software is being installed to replace software determined to be non-compliant
or for which no certification of compliance was provided.
The hardware the Company uses primarily consists of personal computers,
ATMs and communications equipment. The hardware-testing plan the Company is
following was submitted to bank regulators in October 1998. This plan
substantially meets all FFIEC guidelines and the Company is on schedule to
meet all plan deadlines. All personal computers have been tested by Company
personnel for Year 2000 compliance. The vendors of the ATMs and backroom
processing equipment used by the Company have been contacted regarding the
compliance of the models used by the Company. All hardware failing the tests
or known to be noncompliant was evaluated as to the possible effect of
noncompliance and the need for replacement. Several hardware purchases were
accelerated due to Year 2000 issues.
All purchases of software and hardware are processed through the Network
Services Department of the Company. This is intended to ensure all new
software and hardware or upgrades are compatible with existing systems and are
Year 2000 compliant. All non-compliant hardware and software was taken out of
service by June 30, 1999, with the exception of one piece of hardware, which
was replaced during the third quarter.
<PAGE>
Other electrical and mechanical equipment has been evaluated as to
reliance on computer software and the possible effect of the Year 2000. Major
components of this equipment include security and HVAC (heating, ventilation
and air conditioning) equipment. The Company's security officer has determined
that all security equipment has been tested to determine the reliance on
computer systems and the potential impact of the Year 2000 issue. The
Company's facilities manager is responsible for evaluating the other equipment
such as HVAC and elevators to determine reliance on computer systems and to
obtain statements as to Year 2000 compliance from vendors as necessary. The
evaluation of this equipment was completed as of December 31, 1998. No
material items were noted.
For the Company, the potential software, hardware, and other electrical
and mechanical equipment costs are not anticipated to be material. The Company
does not develop its own software, but purchases processing and software from
outside vendors. The hardware the Company uses consists primarily of personal
computers, ATMs, telephone systems, and back room equipment such as document
processing and imaging equipment. In 1997, the Company began updating its wide
and local area networks (WAN/LAN) and its teller platform system as part of
its continuing expansion and commitment to technology. The WAN/LAN and teller
platform system installed are Year 2000 compliant.
Beginning in 1996, the Company began projects to upgrade its technology
and support systems due to the growth the Company was experiencing and
anticipated. The costs incurred for these projects were $4.5 million. The
costs within these projects specifically related to the Year 2000 issue are
difficult to segregate. However, management estimates approximately 20 percent
of these project costs were combined software, hardware and other equipment
costs related to the Year 2000 issue, including costs of accelerated
purchases. This estimate does not include any personnel costs relating to the
Year 2000 issue. These projects are substantially complete.
Other areas of concern being addressed by the committee include vendors
that exchange information with the Company electronically, forms and documents
that are produced externally, and customers. The Year 2000 compliance could
have a major impact on the financial performance of the Company's customers
which could affect both deposit relationships and the customers' ability to
repay loans. All large corporate lending customers have been contacted
regarding their Year 2000 efforts. Large corporate depositors are also being
contacted regarding their Year 2000 efforts. Other customers will be evaluated
on a case-by-case basis. In addition, the Company has conducted several
seminars for corporate customers regarding the Year 2000 issue. These seminars
have been well attended.
Based upon internal evaluations, becoming Year 2000 compliant for the
Company is not anticipated to have a material impact on the financial
<PAGE>
statements. Becoming Year 2000 compliant has had an impact on 1998 and 1999
earnings due to additional payroll costs, training costs and accelerated
purchases. Management believes it is taking the necessary steps to ensure the
Company's systems will be Year 2000 compliant in a timely manner. The Company
continues to meet all published FDIC Year 2000 guidelines.
As a precaution, management has developed both bank-wide and functional
area contingency plans. The largest risks the Company has are that FiServ will
not be able to process or there will be problems with communications or power.
Regulators have agreed there are certain systems that, due to the level of
reliance on these systems, there is little ability to establish traditional
contingency plans. Management considers FiServ, communications and power to be
these types of systems. Through various communications, FiServ has indicated
to the Company that substantial progress has been made with regard to FiServ's
Year 2000 readiness. A more likely scenario is that one or more of the support
applications will not function correctly. That would most likely result in a
one to two day delay in posting of customer transactions since the majority of
the functions of the non-FiServ applications could be performed manually.
Currently the major concerns are power and communications since these are
provided by outside sources and the Company has no means to test them. The
Company does have a back-up power system to provide power to key areas in the
event of a power failure and can transport transaction information physically
in the event of communication problems. Both these concerns have been
addressed in the Company's contingency plan. The Year 2000 problem is
pervasive and complex and can potentially affect any computer process.
Accordingly, no assurance can be given that the Year 2000 compliance can be
achieved without additional unanticipated expenditures and uncertainties that
might affect future financial results. It is not possible at this time to
quantify the estimated future costs due to possible business disruption caused
by vendors, suppliers, customers, or even the possible loss of electric power
or phone service, however, such costs could be substantial.
Recent Regulatory Developments
Pending Legislation. On November 4, 1999, the United States Congress
approved legislation that would allow bank holding companies to engage in a
wider range of nonbanking activities, including greater authority to engage in
securities and insurance activities. Under the Gramm-Leach-Bliley Act (the
"Act"), a bank holding company that elects to become a financial holding
company may engage in any activity that the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), in consultation with the Secretary of
the Treasury, determines by regulation or order is (i) financial in nature,
(ii) incidental to any such financial activity, or (iii) complementary to any
such financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The
Act specifies certain activities that are deemed to be financial in nature,
including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting and selling insurance;
providing financial, investment, or economic advisory services; underwriting,
dealing in or making a market in, securities; and any activity currently
permitted for bank holding companies by the Federal Reserve under section
4(c)(8) of the Bank Holding Company Act. A bank holding company may elect to
be treated as a financial holding company only if all depository institution
subsidiaries of the holding company are well-capitalized, well-managed and
have at least a satisfactory rating under the Community Reinvestment Act.
<PAGE>
National banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of
the Treasury, in consultation with the Federal Reserve, determines is
financial in nature or incidental to any such financial activity, except (i)
insurance underwriting, (ii) real estate development or real estate investment
activities (unless otherwise permitted by law), (iii) insurance company
portfolio investments and (iv) merchant banking. The authority of a national
bank to invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that
apply to national bank investments in financial subsidiaries.
The Act must be signed by the President before it will take effect. At
this time, the Company is unable to predict the impact the Act may have on the
Company and its subsidiaries.
Forward-looking Statements
Statements contained in this Report and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases
and in oral statements made with the approval of an authorized executive
officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). There can be no assurance, in light of certain risks and
uncertainties, that such forward-looking statements will in fact transpire.
The Company disclaims any obligation to subsequently update or revise any
forward-looking statements contained in this report after the date of this
report.
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 1999
Part II - Other Information
Item 1. Legal proceedings
-----------------
There are no material pending legal proceedings to which the
Comapny or its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
27 Financial Data Schedule
b. Reports
None
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
September 30, 1999
Part II - Other Information
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAKELAND FINANCIAL CORPORATION
(Registrant)
Date: November 5, 1999 Michael L. Kubacki
----------------------------------------
Michael L. Kubacki - President and Chief
Executive Officer
Date: November 5, 1999 Terry M. White
----------------------------------------
Terry M. White - Executive Vice President
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
------- ------------------------------------------- -----
27 Financial Data Schedule (EDGAR filing only)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the third quarter
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 45,835
<INT-BEARING-DEPOSITS> 62
<FED-FUNDS-SOLD> 220
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 276,191
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 637,323
<ALLOWANCE> 6,381
<TOTAL-ASSETS> 1,009,531
<DEPOSITS> 720,994
<SHORT-TERM> 191,370
<LIABILITIES-OTHER> 7,331
<LONG-TERM> 35,730
0
0
<COMMON> 1,453
<OTHER-SE> 49,128
<TOTAL-LIABILITIES-AND-EQUITY> 1,009,531
<INTEREST-LOAN> 37,804
<INTEREST-INVEST> 13,144
<INTEREST-OTHER> 232
<INTEREST-TOTAL> 51,180
<INTEREST-DEPOSIT> 20,305
<INTEREST-EXPENSE> 27,356
<INTEREST-INCOME-NET> 23,824
<LOAN-LOSSES> 1,050
<SECURITIES-GAINS> 1,340
<EXPENSE-OTHER> 22,659
<INCOME-PRETAX> 9,573
<INCOME-PRE-EXTRAORDINARY> 6,321
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,321
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 3.55
<LOANS-NON> 211
<LOANS-PAST> 406
<LOANS-TROUBLED> 1,205
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,510
<CHARGE-OFFS> 270
<RECOVERIES> 91
<ALLOWANCE-CLOSE> 6,381
<ALLOWANCE-DOMESTIC> 3,127
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,254
</TABLE>
