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 June 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 August 2, 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 . . . . . . . . . 12
PART II.
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 30
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 30
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 30
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 31
Form 10-Q Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . 32
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and December 31, 1998
(in thousands)
(Page 1 of 2)
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 44,185 $ 45,933
Short-term investments 10,288 15,575
----------- -----------
Total cash and cash equivalents 54,473 61,508
Securities available-for-sale:
U. S. Treasury securities 35,120 39,521
Mortgage-backed securities 169,577 227,944
State and municipal securities 47,178 59,112
Other debt securities 18,097 1,081
----------- -----------
Total securities available-for-sale
(carried at fair value) 269,972 327,658
Securities held-to-maturity:
Total securities held-to-maturity
(fair value of $0 at
June 30, 1999, and $0
at December 31, 1998) 0 0
Real estate mortgages held-for-sale 2,496 3,796
Loans:
Total loans 619,057 538,496
Less: Allowance for loan losses 5,906 5,510
----------- -----------
Net loans 613,151 532,986
Land, premises and equipment, net 27,402 26,370
Accrued income receivable 5,759 5,669
Intangible assets 10,987 11,453
Other assets 10,754 9,469
----------- -----------
Total assets $ 994,994 $ 978,909
=========== ===========
(Continued)
</TABLE>
-1-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and December 31, 1998
(in thousands)
(Page 2 of 2)
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 129,128 $ 118,361
Interest bearing deposits 594,997 620,986
----------- -----------
Total deposits 724,125 739,347
Borrowings:
Federal funds purchased 30,215 0
U.S. Treasury demand notes 4,000 1,527
Securities sold under agreements
to repurchase 119,540 110,163
Other borrowings 20,000 24,000
----------- -----------
Total borrowings 173,755 135,690
Accrued expenses payable 6,110 6,503
Other liabilities 1,027 1,589
Other debt 16,481 21,386
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,251 19,238
----------- -----------
Total liabilities 940,749 923,753
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized, 5,813,984 shares
issued and 5,794,615 outstanding as of June 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 46,606 43,652
Unrealized net gain (loss) on securities available-for-sale (1,972) 1,848
Treasury stock, at cost (379) (334)
----------- -----------
Total stockholders' equity 54,245 55,156
----------- -----------
Total liabilities and stockholders' equity $ 994,994 $ 978,909
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-2-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended
June 30, 1999, and 1998
(in thousands except for share data)
(Unaudited)
(Page 1 of 2)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------- -- ---------- ---------- -- ----------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and fees on loans: Taxable $ 12,614 $ 11,047 $ 24,179 $ 21,571
Tax exempt 45 50 89 101
---------- ---------- ---------- ----------
Total loan income 12,659 11,097 24,268 21,672
Short-term investments 55 221 192 335
Securities:
U.S. Treasury and government agency securities 622 707 1,226 1,479
Mortgage-backed securities 2,935 3,307 6,177 6,391
State and municipal securities 679 523 1,432 873
Other debt securities 125 49 196 100
---------- ---------- ---------- ----------
Total interest and dividend income 17,075 15,904 33,491 30,850
INTEREST EXPENSE
- ----------------
Interest on deposits 6,789 7,146 13,518 13,740
Interest on short-term borrowings 1,627 1,099 3,137 2,049
Interest on long-term debt 710 792 1,441 1,604
---------- ---------- ---------- ----------
Total interest expense 9,126 9,037 18,096 17,393
---------- ---------- ---------- ----------
NET INTEREST INCOME 7,949 6,867 15,395 13,457
- -------------------
Provision for loan losses 275 120 500 240
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,674 6,747 14,895 13,217
- ------------------------- ---------- ---------- ---------- ----------
NONINTEREST INCOME
- ------------------
Trust fees 248 307 537 622
Service charges on deposit accounts 1,080 988 2,093 1,875
Other income (net) 1,115 718 1,926 1,528
Net gains on the sale of real estate mortgages held-for-sale 295 452 755 627
Net securities gains (losses) 408 266 859 519
---------- ---------- ---------- ----------
Total noninterest income 3,146 2,731 6,170 5,171
(Continued)
</TABLE>
-3-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended
June 30, 1999, and 1998
(in thousands except for share data)
(Unaudited)
(Page 2 of 2)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------- -- ---------- ---------- -- ----------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 3,900 3,340 7,701 6,639
Occupancy and equipment expense 1,336 942 2,608 1,820
Other expense 2,335 2,196 4,403 4,053
---------- ---------- ---------- ----------
Total noninterest expense 7,571 6,478 14,712 12,512
INCOME BEFORE INCOME TAX EXPENSE 3,249 3,000 6,353 5,876
- --------------------------------
Income tax expense 1,090 965 2,124 1,839
---------- ---------- ---------- ----------
NET INCOME $ 2,159 $ 2,035 $ 4,229 $ 4,037
- ---------- ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING (Note 2) 5,813,984 5,813,984 5,813,984 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.37 $ 0.35 $ 0.73 $ 0.69
- ------------------------------- ========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 0.37 $ 0.35 $ 0.73 $ 0.69
- --------------------------------- ========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1999 and 1998
(in thousands)
(unaudited)
<CAPTION>
For the Six Months Ended
June 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 4,229 $ 4,229 4,037 $ 4,037
Cash dividends declared ($.22 and $.165
per share) (1,275) (958)
---------- ----------
Balance at end of the period 46,606 40,845
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 (3,307) (128)
Reclassification adjustments for
accumulated (gains) losses included
in net income (513) (314)
---------- ----------
Other comprehensive income
(net of taxes $[2,506] and $[290]) (3,820) (3,820) (442) (442)
---------- ---------- ---------- ----------
Total comprehensive income $ 409 $ 3,595
Balance at end of the period (1,972) ========== 243 ==========
Treasury Stock
Balance at beginning of the period (334) (185)
Acquisition of treasury stock (45) (104)
---------- ----------
Balance at end of the period (379) (289)
---------- ----------
Total Stockholders' Equity $ 54,245 $ 50,789
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
(in thousands)
(Unaudited)
(Page 1 of 2)
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,229 $ 4,037
---------- ----------
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 1,172 806
Provision for loan losses 500 240
Amortization of intangible assets 479 468
Loans originated for sale (30,414) (33,829)
Net (gain) loss on sale of loans (755) (627)
Proceeds from sale of loans 32,469 31,588
Net (gain) loss on sale of premises and equipment 11 22
Net (gain) loss on sale of securities available-for-sale (859) (520)
Net (gain) loss on calls of securities held-to-maturity 0 1
Net securities amortization (accretion) 1,169 428
Increase (decrease) in taxes payable 248 417
(Increase) decrease in income receivable (90) (396)
Increase (decrease) in accrued expenses payable 571 (329)
(Increase) decrease in other assets 9 (1,609)
Increase (decrease) in other liabilities (562) (287)
---------- ----------
Total adjustments 3,948 (3,627)
---------- ----------
Net cash from operating activities 8,177 410
---------- ----------
Cash flows from investing activities:
Proceeds from maturities and calls of securities held-to-maturity 0 30,267
Proceeds from maturities and calls of securities available-for-sale 38,950 10,773
Purchases of securities available-for-sale (15,592) (28,426)
Purchases of securities held-to-maturity 0 (94,657)
Proceeds from sales of securities available-for-sale 27,692 19,434
Net (increase) decrease in total loans (80,665) (28,840)
Proceeds from sale of premises and equipment 82 0
Purchases of land, premises and equipment (2,297) (1,370)
Net proceeds (payments) from acquisitions 0 30,020
---------- ----------
Net cash from investing activities (31,830) (62,799)
---------- ----------
(Continued)
</TABLE>
-6-
<PAGE>
<TABLE>
Part I
Item 1 - Financial Statements
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
(in thousands)
(Unaudited)
(Page 2 of 2)
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in total deposits $ (15,222) $ 48,978
Proceeds from short-term borrowings 10,057,137 393,311
Payments on short-term borrowings (10,019,072) (381,187)
Proceeds from long-term borrowings 111 50
Payments on long-term borrowings (5,016) (16)
Dividends declared (1,275) (958)
Purchase of treasury stock (45) (104)
---------- ----------
Net cash from financing activities 16,618 60,074
---------- ----------
Net increase (decrease) in cash and cash equivalents (7,035) (2,315)
Cash and cash equivalents at beginning of the period 61,508 49,762
---------- ----------
Cash and cash equivalents at end of the period $ 54,473 $ 47,447
========== ==========
Cash paid during the period for:
Interest $ 18,584 $ 17,001
========== ==========
Income taxes $ 1,858 $ 1,711
========== ==========
Loans transferred to other real estate $ 0 $ 52
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-7-
<PAGE>
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 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 June 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending 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.
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.
-8-
<PAGE>
The common shares outstanding for the stockholders' equity section of the
consolidated balance sheet reflect the acquisition of 19,369 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 June 30, 1999 and 1998 is presented below. All dollar amounts other than
earnings per share are in thousands.
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic earnings per common share
Net income available to common stockholders $ 2,159 $ 2,035 $ 4,229 $ 4,037
Weighted-average common shares outstanding 5,813,984 5,813,984 5,813,984 5,813,984
Basic earnings per common share $ .37 $ .35 $ .73 $ .69
Earnings per common share assuming dilution
Net income available to common stockholders $ 2,159 $ 2,035 $ 4,229 $ 4,037
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 43 1,513 43 1,513
Weighted-average common and diluted potential
common shares outstanding 5,814,027 5,815,497 5,814,027 5,815,497
Diluted earnings per common share $ .37 $ .35 $ .73 $ .69
</TABLE>
-9-
<PAGE>
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:
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 1,600
Outstanding 6/30/99 301,245
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
exerciseable as of June 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.
-10-
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income as reported $ 2,159 $ 2,035 $ 4,229 $ 4,037
Pro forma net income $ 2,057 $ 1,999 $ 4,025 $ 4,001
Basic earnings per common share as reported $ .37 $ .35 $ .73 $ .69
Diluted earnings per common share as reported $ .37 $ .35 $ .73 $ .69
Pro forma basic earnings per common share $ .35 $ .34 $ .69 $ .69
Pro forma diluted earnings per common share $ .35 $ .34 $ .69 $ .69
</TABLE>
-11-
<PAGE>
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
June 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 43 offices in 15
counties in northern Indiana.
The Company earned $4,229,000 for the first six months of 1999, an
increase of 4.8 percent over the same period last year. Earnings for the
second quarter were up 6.1 percent to $2,159,000 over the second quarter of
1998.
Over the past five years, total Company assets have more than doubled,
from $465,819,000 at June 30, 1994, to $994,994,000 at June 30, 1999. This is
an increase of $529,175,000 or 113.6, percent which equates to a 16.4 percent
rate of growth per year. Stockholders' equity has increased from $28,917,000
to $54,245,000 for the same time period. That is an increase of $25,328,000 or
87.6 percent which equates to a 13.4 percent rate of growth per year. Net
income for the six months ended June 30, 1994, compared to the net income for
the same period of 1999, increased $1,479,000 or 53.8 percent from $2,750,000
to $4,229,000. From June 30, 1994, to June 30, 1999, the number of Lake City
Bank offices increased from 23 to 43. 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 $994,994,000 as of June 30, 1999. This
was an increase of $16,085,000 or 1.6 percent from $978,909,000 reported at
December 31, 1998. Total loans were $619,057,000 at June 30, 1999. This was an
increase of $80,561,000 or 15.0 percent from the December 31, 1998 balance.
Total securities decreased $57,686,000 or 17.6 percent to $269,972,000 as of
June 30, 1999, from $327,658,000 at December 31, 1998. During the second
quarter of 1999, management has continued to shift its asset mix from
securities to higher yielding loans. Earning assets increased to $895,907,000
at June 30, 1999. This was an increase of $15,892,000 or 1.8 percent from the
December 31, 1998, total of $880,015,000.
-12-
<PAGE>
Funding
Total deposits and securities sold under agreements to repurchase
(repurchase agreements) consist primarily of funds generated within the
Company's primary market area. At June 30, 1999, these funds totaled
$843,665,000. This represented a $5,845,000 or 0.7 percent decrease from
December 31, 1998. The decrease was primarily in time deposits which decreased
$16,755,000 or 3.4 percent from the balance at December 31, 1998, and savings
accounts plus interest-bearing demand accounts which decreased $9,234,000 or
7.6 percent. Noninterest-bearing demand accounts increased $10,766,000 or 9.1
percent from the balance at December 31, 1998, and repurchase agreements
increased $9,377,000 or 8.5 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
$914,361,000 at June 30, 1999. This was a $17,938,000 or 2.0 percent increase
from $896,423,000 reported at December 31, 1998.
Earning Assets
On an average daily basis, total earning assets increased 13.6 percent
and 16.3 percent for the three-month period and the six-month period ended
June 30, 1999, as compared to the same periods of 1998. On an average daily
basis, total deposits and purchased funds increased 12.9 percent and 15.4
percent for the three-month period and six-month period ended June 30, 1999,
as compared to the three-month period and six-month period ended June 30,
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 June 30, 1999, and December 31,
1998, the Company's investment in mortgage-backed securities comprised
approximately 62.8 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
June 30, 1999, the securities in the available-for-sale portfolio had a three
year average life and a potential for approximately 11 percent price
depreciation should rates move up 300 basis points and approximately 6 percent
price appreciation should rates move down 300 basis points. As of June 30,
1999, all mortgage-backed securities were performing in a manner consistent
with management's original expectations.
-13-
<PAGE>
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 June 30, 1999, the
available-for-sale portfolio constituted 100.0 percent of the total security
portfolio. During the first six months of 1999, purchases for the
available-for-sale portfolio were $15,592,000 and sales totaled $26,833,000.
The securities sold from the available-for-sale portfolio were primarily
municipal bonds and mortgage-backed securities and were due to the ongoing
shift from securities to higher yielding loans. At June 30, 1999, the net
after-tax unrealized loss in the available-for-sale portfolio included in
stockholders' equity was $1,972,000, a decrease of $3,820,000 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 $80,561,000 to $619,057,000 as of June 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 June 30, 1999, increased
$45,485,000 or 13.1 percent from the level at December 31, 1998. Retail loans
at June 30, 1999, increased $37,488,000 or 28.6 percent from December 31,
1998. This increase was largely in indirect consumer loans with an increase of
$26,051,000 or 53.9 percent from December 31, 1998. Real estate loans
(excluding mortgages held-for-sale) increased $84,000 or 0.1 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 $31,714,000 were sold on the secondary market
compared to $30,939,000 sold during the same period of 1998. During these two
periods, loans totaling $30,414,000 and $33,807,000 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 63.1 percent of its loans concentrated in commercial
loans at June 30, 1999, and 64.4 percent at December 31, 1998. Traditionally,
this type of lending may have more credit risk than other types of lending
because of the size and diversity of the credits. The Company manages this
risk by adjusting its pricing to the perceived risk of each individual credit,
and by diversifying the portfolio by customer, product, industry and
geography. Customer diversification is accomplished through an administrative
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<PAGE>
loan limit of $8,500,000. Based upon state banking regulations, the Company's
legal loan limit at June 30, 1999, was approximately $10,331,000. 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 loan portfolios are distributed throughout the Company'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 $1,230,000 at June 30, 1999, as compared
to $1,281,000 at December 31, 1998. The loans classified as troubled debt
restructurings at June 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 six months of 1999, loans increased faster than deposits, even
though almost $32,000,000 of mortgage loans were sold in the secondary market.
During this six-month period, loans increased $80,561,000 or 15.0 percent.
Demand accounts, which are noninterest-bearing, increased $10,766,000 during
the first six months of 1999, and other transaction accounts decreased
$9,234,000 during the same period. During the quarter, time deposits decreased
by $16,755,000 or 3.4 percent. As a result of these loan and deposit trends,
the Company's loan to deposit ratio amounted to 85.5 percent at June 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
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
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considered to be within acceptable risk levels. At June 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.
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<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 6/30/99
--------- --------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $ 74,234 $ 45,810 $ 47,991 $ 32,173 $ 76,704 $ 31,826 $ 308,737 $ 305,170
Average interest rate 8.28% 8.51% 8.26% 8.27% 7.87% 7.90% 8.17%
Variable interest rate loans $ 265,177 $ 2,617 $ 1,941 $ 1,848 $ 1,594 $ 39,639 $ 312,816 $ 312,672
Average interest rate 8.34% 9.36% 9.92% 9.92% 10.05% 8.12% 8.34%
Fixed interest rate securities $ 19,197 $ 19,747 $ 44,370 $ 18,714 $ 26,341 $ 140,536 $ 268,905 $ 265,661
Average interest rate 6.38% 6.57% 5.50% 6.20% 6.00% 5.98% 5.99%
Variable interest rate securities $ 187 $ 198 $ 210 $ 223 $ 236 $ 3,280 $ 4,333 $ 4,311
Average interest rate 5.16% 4.96% 4.96% 4.96% 4.96% 4.91% 4.93%
Other interest-bearing assets $ 10,288 $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,288 $ 10,288
Average interest rate 5.00% 5.00%
Rate sensitive liabilities:
Non-interest bearing checking $ 6,715 $ 5,992 $ 1,085 $ 1,033 $ 1,511 $ 112,793 $ 129,128 $ 129,128
Average interest rate
Savings & interest bearing checking $ 8,504 $ 7,678 $ 6,819 $ 6,194 $ 4,966 $ 77,437 $ 111,596 $ 111,596
Average interest rate 1.55% 1.55% 1.55% 1.55% 1.55% 1.69% 1.61%
Time deposits $ 422,442 $ 36,374 $ 13,620 $ 5,790 $ 3,662 $ 1,512 $ 483,401 $ 484,598
Average interest rate 4.78% 5.28% 5.65% 5.64% 5.17% 5.81% 4.86%
Fixed interest rate borrowings $ 143,505 $ 10,250 $ 0 $ 10,076 $ 1,405 $ 19,251 $ 184,487 $ 187,502
Average interest rate 4.51% 5.62% 0.00% 5.25% 6.15% 9.00% 5.10%
Variable interest rate borrowings $ 25,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 25,000 $ 25,000
Average interest rate 5.35% 5.35%
</TABLE>
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<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 June 30, 1999, the borrowings from the
FHLB totaled $36,349,000, with $20,000,000 due December 27, 1999, $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 June 30, 1999, was $2,936,000.
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
June 30, 1999, the Company's ratios were 6.4 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 June 30, 1998 were 6.2 percent, 9.9 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 $911,000 or 1.7 percent from
December 31, 1998, to $54,245,000 at June 30, 1999. Net income of $4,229,000,
less dividends of $1,275,000, less the decrease in the accumulated other
comprehensive income of $3,820,000, less $45,000 for the cost of treasury
stock acquired comprised this decrease.
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<PAGE>
RESULTS OF OPERATIONS
Net Income
Net income increased to $4,229,000 for the first six months of 1999, an
increase of $192,000 from the $4,037,000 recorded over the same period in
1998. For the three months ended June 30, 1999, net income was $2,159,000 as
compared to $2,035,000 for the three months ended June 30, 1998. Basic
earnings per share for the first six months of 1999 were $.73 per share, which
was an increase over the $.69 per share for the first six months of 1998, and
$.37 per share for the three-month period ended June 30, 1999 as compared to
the $.35 per share for the same period of 1998. Diluted earnings per share
reflects the potential dilutive impact of stock options granted during the
first quarter of 1999 and during 1998 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 was the
same as basic earnings per share for both the six-month and three-month
periods ended June 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
six-month period ended June 30, 1999, net interest income totaled $15,395,000,
an increase of 14.4 percent or $1,938,000 over the first six months of 1998.
For the three-month period ended June 30, 1999, net interest income totaled
$7,949,000, an increase of 15.8 percent or $1,082,000 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 six-month period ended June 30, 1999, total interest and dividend
income increased $2,641,000 or 8.6 percent to $33,491,000, from $30,850,000
during the same six months of 1998. Interest and dividend income increased
$1,171,000 or 7.4 percent for the three-month period ending June 30, 1999, as
compared to the three-month period ending June 30, 1998. Daily average earning
assets for the first two quarters of 1999 increased to $891,603,000, a 16.3
percent increase over the same period in 1998. For the second quarter alone,
the daily average earning assets increased to $902,727,000, a 13.6 percent
increase over the daily average earning assets of the second quarter of 1998.
The tax equivalent yields on average earning assets decreased by 49 basis
points for the six-month period ending June 30, 1999, when compared to the
same period of 1998. For the three-month period ending June 30, 1999, this
yield decreased 42 basis points from the yield for the three-month period
ending June 30, 1998.
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<PAGE>
The decrease in the yield 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 two quarters of 1999 was 34.8 percent
compared to 36.5 percent for the same period of 1998. In addition, the overall
tax equivalent yield on loans decreased 65 basis points when comparing both
the six-month and three-month periods ending June 30, 1999 and 1998. The yield
on securities decreased 38 and 35 basis points for the same respective
periods.
Loan yields decreased during the first six months of 1999, but were
offset by an increase in loan balances. The average daily loan balances for
the first six months of 1999 increased 20.7 percent over the average daily
loan balances for the same period of 1998. The average daily loan balances for
the three-months ending June 30, 1999 increased 23.0 percent over the average
daily loan balances for the three-months ending June 30, 1998. The loan growth
was funded primarily by securities sales/maturities and partially by increased
deposits/borrowings. The increase in loan income of $2,596,000 or 12.0 percent
for the first six months of 1999 as compared to the first six months of 1998
and the increase in loan income of $1,562,000 or 14.1 percent for the
three-month period ended June 30, 1999 as compared to the same period of 1998,
resulted from this loan growth.
Income from securities totaled $9,031,000 for the first six months of
1999, an increase of $188,000 or 2.1 percent over the amount for the same
period of 1998. This increase was the result of the increase in the average
daily balances of securities offset by the decrease in the yields on
securities. The income from securities for the three-month period ending June
30, 1999 was $4,361,000 as compared to $4,586,000, a decrease of $225,000 or
4.9 percent for the three-month period ending June 30, 1998. This decrease was
the result of the slowed growth in securities during the second quarter
combined with the decrease in the yields on securities. The average daily
balances of securities for the three and six-month periods ending June 30,
1999 increased $30,750,000 and $6,622,000 when compared to the same periods of
the prior year.
Income from short-term investments amounted to $192,000 for the six-month
period and $55,000 for the three-month period ended June 30, 1999. This
compares to $335,000 and $221,000 for the same respective periods in 1998. The
decrease of $143,000 for the six-month period ended June 30, 1999 over the
same period in 1998 resulted from a decrease of $3,945,000 or 32.2 percent in
the average balance of short-term investments, offset by an 82 basis point
reduction in the yield. The decrease of $166,000 for the three-month period
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<PAGE>
ended June 30, 1999 over the same period in 1998 resulted from an increase of
$10,839,000 or 68.4 percent in the average balance of short-term investments,
offset by a 116 basis point reduction in the yield.
Total interest expense increased $703,000 or 4.0 percent to $18,096,000
for the six-month period ended June 30, 1999, from $17,393,000 for the
six-month period ended June 30, 1998 and it increased $89,000 or 1.0 percent
for the three-month period ended June 30, 1999, from the $9,037,000 for the
three-month period ended June 30, 1998. This was a result of the overall
growth of deposits in existing offices and changes in the deposit mix offset
by a 43 basis point reduction in the Company's daily cost of funds. On an
average daily basis, total deposits (including demand deposits) increased 10.7
and 8.3 percent for the six and three-month periods ended June 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 $19,140,000 and
$20,371,000 while the average daily balances of savings and transaction
accounts combined declined $9,888,000 and $13,331,000. The average daily
balance of time deposits, which pay a higher rate of interest as compared to
demand deposit and transaction accounts, increased $61,636,000 and $51,457,000
for the six and three months ended June 30, 1999, compared to the six and
three months ended June 30, 1998. However, the largest increases, $37,895,000
and $41,582,000 for the same six 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. On an
average daily basis, total deposits (including demand deposits) and purchased
funds increased 15.4 percent and 12.9 percent for the six and three-month
period ended June 30, 1999, as compared to the six and three-month period
ended June 30, 1998.
Provision for Loan Losses
It is the policy of the Company to maintain 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.
The provision amounted to $500,000 and $240,000 for the six-month periods
ended June 30, 1999 and 1998. For the three-month periods ended June 1999 and
1998, the provision amounted to $275,000 and $120,000. These provisions
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<PAGE>
reflected the growth of the loan portfolio, as well as consideration of the
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 June 30, 1999, loans delinquent 90 days or more that were included
in the accompanying financial statements as accrual loans totaled
approximately $48,000. At June 30, 1999, there were loans totaling $73,000 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
six months and the second quarter of 1999 as compared to the same periods of
1998, the ratio of the allowance for loan losses to total loans has declined
from that at December 31, 1998 and June 30, 1998. At June 30, 1999, the ratio
was .95 percent as compared to 1.02 percent at December 31, 1998 and 1.10
percent at June 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 June 30, 1999 and December 31,
1998, no loans were classified as impaired.
Following is a summary of the loan loss experience for the six months
ending June 30, 1999, and the year ending December 31, 1998.
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<PAGE>
June 30, December 31,
1999 1998
------------- -------------
(in thousands)
Amount of loans outstanding $ 619,057 $ 538,496
------------- -------------
Average daily loans outstanding for
the period $ 571,842 $ 489,336
------------- -------------
Allowance for loan losses at the
beginning of the period $ 5,510 $ 5,308
Charge-offs
Commercial 37 9
Real estate 6 0
Installment 98 329
Credit card and personal credit lines 13 78
------------- ------------
Total charge-offs 154 416
Recoveries
Commercial 7 44
Real estate 0 0
Installment 35 86
Credit card and personal credit lines 8 8
------------- ------------
Total recoveries 50 138
------------- ------------
Net charge-offs 104 278
Provision charged to expense 500 480
------------- ------------
Allowance for loan losses at the end of
the period $ 5,906 $ 5,510
============= ============
Ratio of annualized net charge-offs during
the period to average daily loans during
the period:
Commercial 0.01% (0.01)%
Real estate 0.00% 0.00%
Installment 0.02% 0.05%
Credit card and personal credit lines 0.00% 0.02%
------------- -----------
Total 0.03% 0.06%
============= ===========
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<PAGE>
Net interest income after provision for loan losses totaled $14,895,000
and $7,674,000 for the six and three-month periods ended June 30, 1999. This
represents an increase of 12.7 percent and 13.7 percent over the same periods
ended June 30, 1998.
Noninterest Income
Total noninterest income increased $999,000 or 19.3 percent to $6,170,000
for the six-month period ended June 30, 1999, from $5,171,000 recorded for the
six-month period ended June 30, 1998. Total noninterest income for the
three-month period ended June 30, 1999, was $3,146,000 which was $415,000 or
15.2 percent higher than the noninterest income for the three months ended
June 30, 1998.
Trust fees, which represent basic recurring service fee income, decreased
$85,000 or 13.7 percent to $537,000 for the six-month period ended June 30,
1999, as compared to $622,000 for the first six months of 1998. For the
three-month period ended June 30, 1999, trust fees were $248,000, a decrease
of $59,000 over the fees for the same period in 1998.
Service charges on deposit accounts increased 11.6 percent or $218,000
during the six-month period ended June 30, 1999, totaling $2,093,000, as
compared to the same period in 1998. These service charges increased $92,000
for the three-month period ended June 30, 1999, over the amount recorded for
the three-month period ended June 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 $398,000 or 26.0 percent to $1,926,000 for the six-month period
ended June 30, 1999, as compared to the same period in 1998. The primary
increases were in commercial and other fees, miscellaneous income and
insurance income. Miscellaneous income, for the 1998 periods included the gain
on sale of an office in the first quarter of 1998.
The profits from the sale of mortgages during the six-month period ended
June 30, 1999, totaled $755,000, as compared to $627,000 during the same
period in 1998. This increase reflected an increase in the volume of mortgages
sold during the first six months of 1999, as compared to the sales during the
first six months of 1998. For the second quarter of 1999 only, these profits
were $295,000 as compared to $452,000 for the same period in 1998. This
decrease reflected a lower sales volume during the second quarter of 1999.
Net investment securities gains (losses) amounted to $859,000 and
$408,000 for the six and three-month periods ended June 30, 1999, as compared
to $519,000 and $266,000 for the six and three-month periods ended June 30,
1998. In the first six months of 1999 and 1998, the securities gains resulted
from the sales of securities from the available-for-sale portfolio. The
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<PAGE>
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 $2,200,000 or 17.6 percent to $14,712,000
for the six-month period ended June 30, 1999, as compared to the first six
months of 1998. Noninterest expense increased $1,093,000 or 16.9 percent when
comparing the three-months ended June 30, 1999, to the three months ended June
30, 1998.
For the six months ended June 30, 1999, salaries and employee benefits
increased to $7,701,000, a $1,062,000 increase or 16.0 percent as compared to
the first six months of 1998. When comparing the three months ended June 30,
1999, to the same period in 1998, the increase was $560,000 or 16.8 percent.
These increases reflected normal salary increases, additions to staff and
health care costs. Total employees increased to 497 at June 30, 1999, from 471
at June 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 is the result
of the growth in employees, as well as the rising cost of health care.
For the six and three-month periods ended June 30, 1999, occupancy and
equipment expenses were $2,608,000 and $1,336,000, a $788,000 increase or 43.3
percent and $394,000 or 41.8 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 six-month period ended June 30, 1999, other expenses totaled
$4,403,000 as compared to $4,053,000 during the same period in 1998. This is
an increase of 8.6 percent or $350,000. For the second quarter of 1999
compared to the second quarter of 1998, the increase was $139,000 or 6.3
percent. When comparing the six and three-month periods ended June 30, 1999 to
the same periods of 1998, a significant increase was noted in data processing
fees (up $223,000 or 31.1 percent and $130,000 or 35.5 percent).
Income Before Income Tax Expense
As a result of the above factors, income before income tax expense
increased $477,000 or 8.1 percent to $6,353,000 for the first six months of
1999, as compared to $5,876,000 for the same period in 1998. For the three
months ended June 30, 1999, income before income taxes was $3,249,000 as
compared to $3,000,000 for the three months ended June 30, 1998. This was due
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<PAGE>
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 $2,124,000 for the first six months of
1999, as compared to $1,839,000 for the same period in 1998. This is a
$285,000 or 15.5 percent increase. Income tax expense for the second quarter
of 1999 increased $125,000 or 13.0 percent as compared to the second 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 33.4
percent during the first six months of 1999, as compared to 31.3 percent
during the same period in 1998. It increased to 33.5 percent for the three
months ended June 30, 1999, as compared to 32.2 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 will use 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
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
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<PAGE>
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
has been purchased and will be installed by the end of the third quarter.
Other electrical and mechanical equipment is also being 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
-27-
<PAGE>
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
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. In January,
-28-
<PAGE>
1999, the FDIC completed a Phase II examination of the Company's Year 2000
efforts. The Company continues to meet all published FDIC Year 2000
guidelines.
As a precaution, management is in the process of developing 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.
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.
-29-
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 1999
Part II - Other Information
Item 1. Legal proceedings
-----------------
There are no material pending legal proceedings to which the
Company 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
---------------------------------------------------
On April 13, 1999, the Company's annual meeting of stockholders
was held. At the meeting Eddie Creighton, Michael L. Kubacki, M.
Scott Welch and George L. White were elected to serve as directors
with terms expiring in 2002. Continuing as directors until 2000 are
R. Douglas Grant, Jerry L. Helvey and Allan J. Ludwig. Continuing as
directors until 2001 are Anna K. Duffin, L. Craig Fulmer and Charles
Niemier.
There were 5,794,743 issued and outstanding shares of Common
Stock entitled to vote at the annual meeting. The voting on each
item presented at the annual meeting was as follows:
Election of Directors:
For Withheld
Eddie Creighton 4,637,029 1,157,714
Michael L. Kubacki 4,640,809 1,153,934
M. Scott Welch 4,640,397 1,154,346
George L. White 4,637,029 1,157,714
Item 5. Other Information
-----------------
None
-30-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
27 Financial Data Schedule
b. Reports
None
-31-
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 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: August 13, 1999 Michael L. Kubacki
----------------------------------------
Michael L. Kubacki - President and Chief
Executive Officer
Date: August 13, 1999 Terry M. White
----------------------------------------
Terry M. White -Executive Vice President
and Chief Financial Officer
-32-
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ------------------------------------------- -----
27 Financial Data Schedule (EDGAR filing only)
-33-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the second quarter
10-Q and is qualified in its enitrety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 44,185
<INT-BEARING-DEPOSITS> 64
<FED-FUNDS-SOLD> 10,224
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 269,972
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 621,553
<ALLOWANCE> 5,906
<TOTAL-ASSETS> 994,994
<DEPOSITS> 724,125
<SHORT-TERM> 173,755
<LIABILITIES-OTHER> 7,137
<LONG-TERM> 35,732
0
0
<COMMON> 1,453
<OTHER-SE> 52,792
<TOTAL-LIABILITIES-AND-EQUITY> 994,994
<INTEREST-LOAN> 24,268
<INTEREST-INVEST> 9,031
<INTEREST-OTHER> 192
<INTEREST-TOTAL> 33,491
<INTEREST-DEPOSIT> 13,518
<INTEREST-EXPENSE> 18,096
<INTEREST-INCOME-NET> 15,395
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 859
<EXPENSE-OTHER> 14,712
<INCOME-PRETAX> 6,353
<INCOME-PRE-EXTRAORDINARY> 4,229
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,229
<EPS-BASIC> .73
<EPS-DILUTED> .73
<YIELD-ACTUAL> 3.48
<LOANS-NON> 73
<LOANS-PAST> 48
<LOANS-TROUBLED> 1,230
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,510
<CHARGE-OFFS> 154
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 5,906
<ALLOWANCE-DOMESTIC> 3,380
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,526
</TABLE>
