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, 2000
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 July 31, 2000
Common Stock, No Par Value 5,787,992
<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 . . . . . . . . . . . . . . . . . . . . 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>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 and December 31, 1999
(in thousands)
(Page 1 of 2)
<CAPTION>
June 30, December 31,
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS Cash and cash equivalents:
Cash and due from banks $ 71,546 $ 59,321
Short-term investments 244 3,783
---------- ----------
Total cash and cash equivalents 71,790 63,104
Securities available-for-sale:
U. S. Treasury and government agency securities 37,743 34,614
Mortgage-backed securities 197,838 192,569
State and municipal securities 33,309 32,714
Other debt securities 11,922 11,524
---------- ----------
Total securities available-for-sale
(carried at fair value) 280,812 271,421
Real estate mortgages held-for-sale 775 862
Loans:
Total loans 678,857 653,898
Less: Allowance for loan losses 6,964 6,522
---------- ----------
Net loans 671,893 647,376
Land, premises and equipment, net 26,755 27,808
Accrued income receivable 6,141 5,420
Intangible assets 10,074 10,522
Other assets 15,080 13,330
---------- ----------
Total assets $1,083,320 $1,039,843
========== ==========
(Continued)
</TABLE>
1
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 and December 31, 1999
(in thousands)
(Page 2 of 2)
<CAPTION>
June 30, December 31,
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing deposits $ 153,951 $ 136,595
Interest bearing deposits 614,146 611,648
---------- ----------
Total deposits 768,097 748,243
Short-term borrowings:
Federal funds purchased 41,800 15,000
U.S. Treasury demand notes 2,390 4,000
Securities sold under agreements
to repurchase 125,759 121,374
Other borrowings 50,000 55,000
---------- ----------
Total short-term borrowings 219,949 195,374
Accrued expenses payable 6,123 4,760
Other liabilities 1,704 1,535
Long-term borrowings 11,453 16,473
Guaranteed preferred beneficial interests in
Company's subordinated debentures 19,278 19,264
---------- ----------
Total liabilities 1,026,604 985,649
STOCKHOLDERS' EQUITY
Common stock: No par value, 90,000,000 shares authorized,
5,813,984 shares issued and 5,788,992 outstanding as of
June 30, 2000, and 5,813,984 shares issued and 5,792,182
outstanding at December 31, 1999 1,453 1,453
Additional paid-in capital 8,537 8,537
Retained earnings 52,618 49,422
Accumulated other comprehensive income/(loss) (5,414) (4,797)
Treasury stock, at cost (478) (421)
---------- ----------
Total stockholders' equity 56,716 54,194
---------- ----------
Total liabilities and stockholders' equity $1,083,320 $1,039,843
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 2000, and 1999
(Unaudited)
(Page 1 of 2)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
----------------------------
Interest and fees on loans: Taxable $ 15,162 $ 12,614 $ 29,539 $ 24,179
Tax exempt 29 45 74 89
---------- ---------- ---------- ----------
Total loan income 15,191 12,659 29,613 24,268
Short-term investments 85 55 143 192
Securities:
U.S. Treasury and government agency securities 734 622 1,463 1,226
Mortgage-backed securities 3,184 2,935 6,263 6,177
State and municipal securities 445 679 891 1,432
Other debt securities 104 125 205 196
---------- ---------- ---------- ----------
Total interest and dividend income 19,743 17,075 38,578 33,491
INTEREST EXPENSE
----------------
Interest on deposits 7,655 6,789 15,094 13,518
Interest on short-term borrowings 2,535 1,627 4,811 3,137
Interest on long-term debt 628 710 1,309 1,441
---------- ---------- ---------- ----------
Total interest expense 10,818 9,126 21,214 18,096
---------- ---------- ---------- ----------
NET INTEREST INCOME 8,925 7,949 17,364 15,395
-------------------
Provision for loan losses 400 275 615 500
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,525 7,674 16,749 14,895
------------------------- ---------- ---------- ---------- ----------
NONINTEREST INCOME
------------------
Trust fees 505 412 1,056 830
Service charges on deposit accounts 1,117 1,080 2,195 2,093
Other income (net) 804 951 1,607 1,633
Net gains on the sale of real estate mortgages held-for-sale 108 295 238 755
Net securities gains (losses) 0 408 0 859
---------- ---------- ---------- ----------
Total noninterest income 2,534 3,146 5,096 6,170
NONINTEREST EXPENSE
-------------------
Salaries and employee benefits 3,595 3,900 7,624 7,701
Occupancy and equipment expense 1,300 1,336 2,589 2,608
Other expense 2,498 2,335 4,801 4,403
---------- ---------- ---------- ----------
Total noninterest expense 7,393 7,571 15,014 14,712
(Continued)
</TABLE>
3
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 2000, and 1999
(Unaudited)
(Page 2 of 2)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAX EXPENSE 3,666 3,249 6,831 6,353
--------------------------------
Income tax expense 1,165 1,090 2,128 2,124
---------- ---------- ---------- ----------
NET INCOME $ 2,501 $ 2,159 $ 4,703 $ 4,229
---------- ========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING (Note 2) 5,813,984 5,813,984 5,813,984 5,813,984
BASIC EARNINGS PER COMMON SHARE $ 0.43 $ 0.37 $ 0.81 $ 0.73
------------------------------- ========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.43 $ 0.37 $ 0.81 $ 0.73
------------------------------ ========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months and Six Months Ended June 30, 2000 and 1999
(in thousands)
(unaudited)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30 June 30
---------------------------------- ----------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
Balance at beginning of the period $ 1,453 $ 1,453 $ 1,453 $ 1,453
------- ------- ------- -------
Balance at end of the period 1,453 1,453 1,453 1,453
Paid-in Capital
Balance at beginning of the period 8,537 8,537 8,537 8,537
------- ------- ------- -------
Balance at end of the period 8,537 8,537 8,537 8,537
Retained Earnings
Balance at beginning of the period 50,870 45,124 49,422 43,652
Net Income 2,501 $ 2,501 2,159 $ 2,159 4,703 $ 4,703 4,229 $ 4,229
Cash dividends declared ($.13 and $.11
per share for 2000 and 1999) (753) (677) (1,507) (1,275)
------- ------- ------- -------
Balance at end of the period 52,618 46,606 52,618 46,606
Accumulated Other Comprehensive Income/(Loss)
Balance at beginning of the period (5,111) 674 (4,797) 1,848
Unrealized gain (loss) on available-for-
sale securities arising during the period (303) (2,400) (617) (3,307)
Reclassification adjustments for
accumulated (gains) losses included
in net income 0 (246) 0 (513)
------- ------- ------- -------
Other comprehensive income/(loss)(net of taxes
of $[199], $[1,736], $[405] and $[2,506]) (303) (303) (2,646) (2,646) (617) (617) (3,820) (3,820)
------- ------- ------- ------- ------- ------- ------- -------
Total comprehensive income $ 2,198 $ (487) $ 4,086 $ 409
Balance at end of the period (5,414) ======= (1,972) ======= (5,414) ======= (1,972) =======
Treasury Stock
Balance at beginning of the period (478) (379) (421) (334)
Acquisition of treasury stock 0 0 (57) (45)
------- ------- ------- -------
Balance at end of the period (478) (379) (478) (379)
------- ------- ------- -------
Total Stockholders' Equity $56,716 $54,245 $56,716 $54,245
======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(in thousands)
(Unaudited)
(Page 1 of 2)
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,703 $ 4,229
---------- ----------
Adjustments to reconcile net income to net cash from operating activites:
Depreciation 1,209 1,172
Provision for loan losses 615 500
Amortization of intangible assets 462 479
Amortization of mortgage servicing rights 122 145
Loans originated for sale (10,538) (30,414)
Net gain on sale of loans (238) (755)
Proceeds from sale of loans 10,761 32,469
Net (gain) loss on sale of premises and equipment (31) 11
Net gain on sale of securities available-for-sale 0 (859)
Net securities amortization 520 1,169
Increase (decrease) in taxes payable (1,476) 248
Increase in income receivable (721) (90)
Increase in accrued expenses payable 3,306 571
Increase in other assets (1,833) (136)
Increase (decrease) in other liabilities 169 (562)
---------- ----------
Total adjustments 2,327 3,948
---------- ----------
Net cash from operating activities 7,030 8,177
---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 0 27,692
Proceeds from maturities and calls of securities available-for-sale 20,290 38,950
Purchases of securities available-for-sale (31,223) (15,592)
Net increase in total loans (25,131) (80,665)
Proceeds from sales of land, premises and equipment 400 82
Purchases of land, premises and equipment (525) (2,297)
---------- ----------
Net cash from investing activities (36,189) (31,830)
---------- ----------
(Continued)
</TABLE>
6
<PAGE>
<TABLE>
LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(in thousands)
(Unaudited)
(Page 2 of 2)
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in total deposits $ 19,854 $ (15,222)
Proceeds from short-term borrowings 11,345,065 10,057,137
Payments on short-term borrowings (11,320,490) (10,019,072)
Proceeds from long-term borrowings 0 111
Payments on long-term borrowings (5,020) (5,016)
Dividends declared (1,507) (1,275)
Purchase of treasury stock (57) (45)
---------- ----------
Net cash from financing activities 37,845 16,618
---------- ----------
Net increase (decrease) in cash and cash equivalents 8,686 (7,035)
Cash and cash equivalents at beginning of the period 63,104 61,508
---------- ----------
Cash and cash equivalents at end of the period $ 71,790 $ 54,473
========== ==========
Cash paid during the period for:
Interest $ 19,940 $ 18,584
========== ==========
Income taxes $ 2,222 $ 1,858
========== ==========
Loans transferred to other real estate $ 0 $ 0
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
7
<PAGE>
LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(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 inter-company balances and
transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared by
the Company, without audit and 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 period ended June 30, 2000 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2000. 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. The securities are captioned "Guaranteed Preferred Beneficial
Interests in Company's Subordinated Debentures". The Company records
distributions payable on the Preferred Securities as interest expense in its
consolidated statements of income.
LCB Investments Limited was formed on September 30, 1999 and began
operation on November 1, 1999. This is a single purpose, wholly-owned
subsidiary of the Bank. Its principal office is in Bermuda, and it was formed
to manage a portion of the securities portfolio of the Bank.
8
<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 at June 30, 2000 reflects the acquisition of
24,992 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, 2000 and 1999 follows. All amounts are in thousands
except share data.
9
<PAGE>
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
---------------------------------------- ---------------------------------------
2000 1999 2000 1999
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Basic earnings per common share
Net income $ 2,501 $ 2,159 $ 4,703 $ 4,229
Weighted-average common
shares outstanding 5,813,984 5,813,984 5,813,984 5,813,984
Basic earnings per
common share $ .43 $ .37 $ .81 $ .73
Diluted earnings per common share
Net income $ 2,501 $ 2,159 $ 4,703 $ 4,229
Weighted-average common
shares outstanding for
basic earnings per
common share 5,813,984 5,813,984 5,813,984 5,813,984
Add: dilutive effect
of assumed exercises
of stock options 0 43 226 43
Average common shares
and dilutive potential
common shares 5,813,984 5,814,027 5,814,210 5,814,027
Diluted earnings per
common share $ .43 $ .37 $ .81 $ .73
<FN>
Stock options for 447,270 and 301,245 shares of common stock were not considered in computing diluted earnings per
common share for June 30, 2000 and 1999 because they were antidilutive.
</FN>
</TABLE>
10
<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 2000 follows:
Number Risk- Stock Fair
of Exercise Free Price Value of
Options Price Rate Volatility Grants
--------- ---------- ---------- ---------- ----------
Outstanding 1/1/00 290,270
Granted 2/8/00 98,150 $ 15.13 6.73% 44.00% $ 5.46
Granted 5/9/00 14,000 $ 14.13 6.79% 65.55% $ 7.52
Granted 6/13/00 89,500 $ 13.50 6.31% 66.77% $ 6.37
Exercised 0
Forfeited 44,650
Outstanding 6/30/00 447,270
The fair values of the options were estimated using an expected life
of 5 years and expected dividends of $.13 per quarter. There were 16,500
options exercisable as of June 30, 2000.
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 2000 or 1999.
11
<PAGE>
For the three months For the six months
ended June 30, ended June 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income as reported $ 2,501 $ 2,159 $ 4,703 $ 4,229
Pro forma net income $ 2,341 $ 2,057 $ 4,441 $ 4,025
Basic earnings per common
share as reported $ .43 $ .37 $ .81 $ .73
Diluted earnings per
common share as reported $ .43 $ .37 $ .81 $ .73
Pro forma basic earnings
per common share $ .40 $ .35 $ .76 $ .69
Pro forma diluted earnings
per common share $ .40 $ .35 $ .76 $ .69
NOTE 4. PENSION PLAN CURTAILMENT
On April 1, 2000 the Lake City Bank Pension Plan was frozen. As a
result of this curtailment, a $500,000 gain was recognized in the income
statement for the second quarter of 2000. The gain is included in the salaries
and employee benefits line of the income statement.
12
<PAGE>
Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATION
June 30, 2000
OVERVIEW
Lakeland Financial Corporation (the "Company") is the holding
company for Lake City Bank. The Company is headquartered in Warsaw, Indiana
and operates 42 offices in 15 counties in northern Indiana. The Company
earned $4.7 million for the first six months of 2000, an increase of 11.2%
over the same period last year. During the second quarter of this year,
earnings were $2.5 million, a 15.8% increase over the $2.2 million earned in
the second quarter of 1999. The most substantial impact on earnings came from
net interest income, which increased substantially during the first half of
the year, as compared to the first six months of 1999. This increase occurred
in part because of the efforts to improve the loan to deposit ratio, as well
as by the gradual rise in interest rates, beginning in July 1999 and
continuing during the first half of 2000.
Over the past five years, total Company assets have more than
doubled, from $533.3 million at June 30, 1995, to $1.083 billion at June 30,
2000. This increase of 103.1%, which equates to a 15.2% annual compounded
growth rate, was accomplished through continued growth in existing markets
with de-novo branch activity, growth in the existing network of offices and
acquisitions. Stockholders' equity has increased from $33.8 million to $56.7
million over the same time period. This is a 67.9% increase, which equates to
a 10.9% annual compounded growth rate. Net income for the six months ended
June 30, 1995, compared to the net income for the same period of 2000,
increased 77.3% from $2.7 million to $4.7 million. From June 30, 1995, to June
30, 2000, the number of Lake City Bank offices increased from 26 to 42. The
capital necessary to support this growth has been provided through results of
operation, issuance of trust preferred securities and existing capital. It
should be noted that historical rates of growth may not be indicative of
growth in future periods.
FINANCIAL CONDITION
Assets
Total assets of the Company were $1.083 billion as of June 30, 2000.
This was an increase of $43.5 million or 4.2% from $1.040 billion reported at
December 31, 1999. Total loans were $678.9 million at June 30, 2000. This was
an increase of $25.0 million or 3.8% from the December 31, 1999 balance. Total
securities increased $9.4 million or 3.5% to $280.8 million as of June 30,
2000, from $271.4 million at December 31, 1999. Earning assets increased to
$953.7 million at June 30, 2000. This was an increase of $30.3 million or 3.3%
from the December 31, 1999, total of $923.4 million.
13
<PAGE>
Funding
Total deposits and securities sold under agreements to repurchase
(repurchase agreements) consist of funds generated within the Company's
primary market area. At June 30, 2000, this funding totaled $893.9 million.
This represented a $24.2 million or 2.8% increase from December 31, 1999. The
increase was primarily in noninterest-bearing demand accounts, which increased
$17.4 million or 12.7% from the balance at December 31, 1999, and
interest-bearing demand accounts, which increased $12.7 million or 11.2%.
Repurchase agreements also increased $4.4 million or 3.6% from the balance at
December 31, 1999, and time deposits decreased $10.2 million or 2.0%. The
repurchase agreements are a combination of fixed rate contracts and variable
rate corporate cash management accounts.
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 $999.5
million at June 30, 2000. This was a $39.4 million or 4.1% increase from
$960.1 million reported at December 31, 1999. The primary increase in
non-local funding sources was federal fund lines, which are used for
short-term funding needs.
Earning Assets
On an average daily basis, total earning assets increased 6.2% and
6.0% for the six-month and three-month periods ended June 30, 2000, as
compared to the same periods in 1999. On an average daily basis, total
deposits and purchased funds increased 7.2% and 6.8% for the six-month and
three-month periods ended June 30, 2000, as compared to the same periods in
1999.
Investment Portfolio
The Company's investment portfolio consists of U.S. Treasuries, U.S.
Government Agencies, mortgage-backed securities, municipal bonds, trust
preferred securities and corporate debt. During 2000, new investments
continued to be in U.S. Treasuries, mortgage-backed securities and trust
preferred securities. At June 30, 2000, and December 31, 1999, the Company's
investment in mortgage-backed securities comprised approximately 70.5% and
70.9% of total securities. The composition of this portfolio is primarily CMOs
and mortgage pools issued by GNMA, FNMA and FHLMC, which are directly or
indirectly guaranteed by the federal government. At June 30, 2000, the
securities in the available-for-sale portfolio had a four year average life
and a potential for approximately 10% price depreciation should rates move up
300 basis points. If rates were to move down 300 basis points, the average
life would be three years with approximately 7% price appreciation possible.
As of June 30, 2000, all mortgage-backed securities were performing in a
manner consistent with management's original expectations.
14
<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, 2000,
the available-for-sale portfolio constituted 100.0% of the total security
portfolio. During the first six months of 2000, purchases for the
available-for-sale portfolio were $31.2 million and there were no sales. At
June 30, 2000, the net after-tax unrealized loss in the available-for-sale
portfolio included in stockholders' equity was $5.4 million, an increase of
$617,000 from the unrealized loss of $4.8 million included in stockholders'
equity at December 31, 1999. Future investment activity is difficult to
predict, as it is dependent upon loan and deposit trends and other factors.
Loans
Total loans increased $25.0 million or 3.8% to $678.9 million as of
June 30, 2000, from $653.9 million at December 31, 1999. 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, 2000, increased
$26.9 million or 6.4% from the level at December 31, 1999. Retail loans at
June 30, 2000, decreased $4.1 million or 2.2% from December 31, 1999. This
decrease was largely in indirect consumer loans with a decrease of $7.4
million or 8.6% from December 31, 1999. Real estate loans (excluding mortgages
held-for-sale) increased $2.1 million or 4.6% from December 31, 1999. The real
estate loan portfolio is impacted by secondary market activity, which is a
function of current interest rates and economic conditions. As interest rates
have gradually risen since the middle of last year, the level of refinancings
have declined. Through June 30, 2000, the Company sold mortgages totaling
$10.6 million into the secondary market as compared to $31.7 million during
the same period in 1999. During these same two periods, loans originated for
sale totaled $10.5 million and $30.4 million. 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 66.1% of its loans concentrated in commercial loans
at June 30, 2000, and 64.6% at December 31, 1999. 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
15
<PAGE>
diversifying the portfolio by customer, product, industry and geography.
Customer diversification is accomplished through an administrative loan limit
of $8.5 million. Based upon state banking regulations, the Bank's legal loan
limit at June 30, 2000, was approximately $11.7 million. 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
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 were 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 $1.1 million at June 30, 2000, as
compared to $1.2 million at December 31, 1999. The loans classified as
troubled debt restructurings at June 30, 2000 were performing in accordance
with the modified terms.
For the first six months of 2000, loans increased more than deposits.
During this six-month period, loans increased $25.0 million or 3.8%.
Commercial loan demand continues to be good, while consumer loan demand has
weakened. Demand accounts, which are noninterest-bearing, increased $17.4
million or 12.7% during the first six months of 2000, and other transaction
accounts increased $12.7 million during the same period. During the first half
of this year, time deposits decreased by $10.2 million or 2.0%. The Company's
loan to deposit ratio was 88.4% at June 30, 2000, a slight increase from 87.4%
at year-end 1999.
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% of primary capital, the balance sheet structure is considered
to be within acceptable risk levels. At June 30, 2000, 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, 2000.
16
<PAGE>
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. Additionally the
Company's historical prepayment experience is included in cash flows for
residential and home equity loans and for mortgage-backed securities. For core
deposits such as demand deposits, interest-bearing checking, savings and money
market deposits that have no contractual maturity, the table presents
principal cash flows based upon management's judgment and statistical
analysis. Weighted-average variable rates are the rates in effect at the
reporting date.
17
<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 6/30/00
--------- --------- --------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $ 74,951 $ 52,887 $ 52,816 $ 79,504 $ 49,797 $ 24,725 $ 334,680 $ 334,626
Average interest rate 8.91% 8.85% 8.86% 8.14% 8.27% 7.92% 8.54%
Variable interest rate loans $ 302,404 $ 1,628 $ 1,484 $ 1,375 $ 1,190 $ 36,871 $ 344,952 $ 345,491
Average interest rate 9.82% 10.71% 10.52% 10.49% 10.75% 8.95% 9.74%
Fixed interest rate securities $ 20,434 $ 47,769 $ 24,332 $ 25,962 $ 19,485 $ 147,995 $ 285,977 $ 277,107
Average interest rate 6.59% 5.70% 6.49% 6.27% 6.66% 6.46% 6.34%
Variable interest rate securities $ 351 $ 357 $ 364 $ 372 $ 380 $ 1,976 $ 3,800 $ 3,706
Average interest rate 6.69% 7.11% 7.09% 7.07% 7.05% 7.02% 7.01%
Other interest-bearing assets $ 244 $ 0 $ 0 $ 0 $ 0 $ 0 $ 244 $ 244
Average interest rate 6.50% 0.00% 0.00% 0.00% 0.00% 0.00% 6.50%
Rate sensitive liabilities:
Non-interest bearing checking $ 8,005 $ 7,144 $ 1,293 $ 1,232 $ 1,801 $ 134,476 $ 153,951 $ 153,951
Average interest rate
Savings & interest bearing checking $ 9,585 $ 8,655 $ 7,686 $ 6,981 $ 5,598 $ 87,288 $ 125,793 $ 125,793
Average interest rate 1.97% 1.97% 1.97% 1.97% 1.97% 1.80% 1.85%
Time deposits $ 251,656 $ 68,367 $ 60,862 $ 54,588 $ 51,936 $ 944 $ 488,353 $ 487,765
Average interest rate 5.86% 6.07% 5.10% 4.95% 4.97% 5.45% 5.60%
Fixed interest rate borrowings $ 161,926 $ 18,023 $ 0 $ 1,453 $ 0 $ 19,278 $ 200,680 $ 207,565
Average interest rate 5.55% 5.73% 0.00% 6.15% 0.00% 9.50% 5.95%
Variable interest rate borrowings $ 50,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 50,000 $ 50,000
Average interest rate 5.87% 0.00% 0.00% 0.00% 0.00% 0.00% 5.87%
</TABLE>
18
<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, which enhances the Company's ability to offer additional
programs throughout its trade area. The Company's Board of Directors has
authorized borrowings of up to $100 million under the FHLB program. As of June
30, 2000, the borrowings from the FHLB totaled $61.3 million. The maturities
of these borrowings are: $5.0 million due October 11, 2000, $5.0 million due
October 16, 2000, $5.0 million due October 23, 2000, $5.0 million due
October 24, 2000, $5.0 million due October 25, 2000, $10.0 million due
December 18, 2000, $15.0 million due December 26, 2000, $10.0 million due
December 28, 2001, $1.3 million due June 24, 2003, and $49,000 with annual
payments maturing on January 15, 2018. All borrowings are collateralized by
residential real estate mortgages and mortgage-backed securities. Membership
in the FHLB requires an equity investment in FHLB stock. The amount required
is computed annually, and is based upon a formula that 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, 2000, was $3.6 million.
Capital and Stockholders' Equity
The Federal Deposit Insurance Corporation's (FDIC) risk based capital
regulations require that all banks maintain an 8.0% total risk based capital
ratio. The FDIC has also established definitions of "well capitalized" as a
5.0% Tier I leverage capital ratio, a 6.0% Tier I risk based capital ratio and
a 10.0% total risk based capital ratio. As of June 30, 2000, the Bank's ratios
were 6.7%, 9.2% and 10.2%, excluding the SFAS No. 115 adjustment. The ratios
reported at December 31, 1999 were 6.7%, 9.1% and 10.0% and ratios reported at
June 30, 1999 were 6.4%, 9.2% and 10.1%. All ratios continue to be above "well
capitalized" levels.
Total stockholders' equity increased $2.5 million or 4.7% from
December 31, 1999, to $56.7 million at June 30, 2000. Net income of $4.7
million, less dividends of $1.5 million, less the decrease in the accumulated
other comprehensive income of $617,000, less $57,000 for the cost of treasury
stock acquired, comprised this increase. The Company has adopted a dividend
reinvestment and stock purchase plan, which became available to the Company's
shareholders in July, 2000. The purpose of the dividend reinvestment plan is
to provide participating shareholders with a simple and convenient method of
investing cash dividends paid by the Company on its shares of common stock
into additional shares of common stock. All of the Company's shareholders of
record are eligible to participate in the plan.
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<PAGE>
RESULTS OF OPERATIONS
Net Income
Net income increased to $4.7 million for the first six months of
2000, an increase of $474,000 from the $4.2 million recorded over the same
period in 1999. For the three months ended June 30, 2000, net income was $2.5
million as compared to $2.2 million for the three months ended June 30, 1999.
Basic earnings per share for the first six months of 2000 was $.81 per share,
which was an increase over the $.73 per share for the first six months of
1999, and $.43 per share for the second quarter of 2000 as compared to $.37
per share for the same period of 1999. Diluted earnings per share reflect the
potential dilutive impact of stock options granted under an employee stock
option plan. The stock options did not have an impact on earnings per share as
diluted earnings per share were the same as basic earnings per share for both
the six-month and three-month periods ended June 30, 2000.
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, 2000, net interest income totaled $17.4
million, an increase of 12.8% or $2.0 million over the first six months of
1999. For the three-month period ended June 30, 2000, net interest income
totaled $8.9 million, an increase of 12.3% or $976,000 over the same period of
1999. This increase occurred in part because of the efforts to improve the
loan to deposit ratio beginning in 1999, and continuing in 2000. This increase
also was influenced by the gradual rise in interest rates, which began during
the last half of 1999 and continued during the first half of 2000.
During the first six months of 2000, total interest and dividend
income increased $5.1 million or 15.2% to $38.6 million, from $33.5 million
during the same six months of 1999. Interest and dividend income increased
$2.7 million or 15.6% for the second quarter of 2000, as compared to the 1999
quarter. Daily average earning assets for the first two quarters of 2000
increased to $946.9 million, a 6.2% increase over the same period in 1999. For
the second quarter alone, the daily average earning assets increased to $956.8
million, a 6.0% increase over the daily average earning assets of the second
quarter of 1999. The tax equivalent yield on average earning assets increased
by 57 basis points for the six-month period ended June 30, 2000, when compared
to the same period of 1999. For the three-month period ended June 30, 2000,
this yield increased 69 basis points from the yield for the three-month period
ended June 30, 1999.
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<PAGE>
The increase in the yield on average earning assets reflected
increases in the yields on both loans and securities caused by the rising
interest rate environment. 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 ratio of average
daily securities to average earning assets for the six-month and three-month
periods ended June 30, 2000 were 29.0% and 28.9% compared to 34.8% and 33.2%
for the same periods of 1999. In addition, the overall tax equivalent yield on
loans increased 41 and 61 basis points when comparing the six-month and
three-month periods. The yield on securities increased 47 and 54 basis points
when comparing the same periods.
The average daily loan balances for the first six months of 2000
increased 16.3% over the average daily loan balances for the same period of
1999. The average daily loan balances for the three-months ended June 30, 2000
increased 12.7% over the average daily loan balances for the three-months
ended June 30, 1999. The loan growth since the first quarter of 1999 was
primarily funded by securities sales and maturities and partially by increases
in deposits and borrowings. The increase in loan interest income of $5.3
million or 22.0% and $2.5 million or 20.0% for the six and three-month periods
in 2000 as compared to the same periods in 1999, primarily resulted from this
loan growth, as well as an increase in the yields.
Income from securities totaled $8.8 million for the first six months
of 2000, a decrease of $209,000 or 2.3% over the amount for the same period of
1999. This decrease was the result of the decrease in the average daily
balances of securities year to year offset by the increase in the yields on
securities. The income from securities for the three-month period ended June
30, 2000 was $4.5 million as compared to $4.4 million, an increase of $106,000
or 2.4% over the three-month period ended June 30, 1999. This increase was a
result of the increase in the yields on securities offset by the decrease in
average daily balances of securities. The average daily balances of securities
for the six and three-month periods ended June 30, 2000 decreased $35.3
million and $22.6 million when compared to the same periods of the prior year.
Income from short-term investments amounted to $143,000 for the
six-month period and $85,000 for the three-month period ended June 30, 2000.
This compares to $192,000 and $55,000 for the same periods in 1999. The
decrease of $49,000 when comparing the six-month periods resulted from a
decrease of $3.1 million or 36.7% in the average balance of short-term
investments, offset by a 114 basis point increase in the yield. The increase
of $30,000 for the second quarter of 2000 over the same period in 1999
resulted from a 174 basis point increase in the yields.
Total interest expense increased $3.1 million or 17.2% to $21.2
million for the six-month period ended June 30, 2000, from $18.1 million for
the six-month period ended June 30, 1999 and increased $1.7 million or 18.5%
for the three-month period ended June 30, 2000, from the $9.1 million for the
three-month period ended June 30, 1999. This was a result of the overall
21
<PAGE>
growth of deposits in existing offices, changes in the deposit mix and a 36
basis point increase in the Company's daily cost of funds. On an average daily
basis, total deposits (including demand deposits) increased 4.0% and 3.9% for
the six and three-month periods ended June 30, 2000, as compared to the
similar periods in 1999. When comparing the same periods, the average daily
balances of the demand deposit accounts rose $19.8 million and $22.1 million,
while the average daily balances of savings and transaction accounts combined
increased $11.6 million and $15.4 million. The average daily balance of time
deposits, which pay a higher rate of interest compared to demand deposit and
transaction accounts, increased $49,000 for the six months ended June 30,
2000, compared to the six months ended June 30, 1999. For the three-month
period ended June 30, 2000, the average daily balance of time deposits
decreased $7.9 million, as compared to the three-months ended June 30, 1999.
These deposit trends are the result of management's efforts to grow
relationship type accounts such as demand deposit and Investors' Weekly
accounts, which pay a lower rate of interest compared to time deposit accounts
and better match the characteristics of the assets being generated. Management
plans to continue these efforts during the remainder of 2000. Average daily
balances of borrowings increased $37.0 million and $37.2 million for the six
and three-month periods ended June 30, 2000 compared to the same periods of
1999, and the rate on borrowings increased 65 and 43 basis points when
comparing the same periods. On an average daily basis, total deposits
(including demand deposits) and purchased funds increased 7.2% and 6.8% for
the six and three-month periods ended June 30, 2000, as compared to the six
and three-month periods ended June 30, 1999.
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 current economic
conditions. Special consideration is given to watch list loans, non-performing
loans and non-accrual loans, as well as other 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 $615,000 and $500,000 for the six-month
periods ended June 30, 2000 and 1999. For the three-month periods ended June
30, 2000 and 1999, the provision amounted to $400,000 and $275,000. These
22
<PAGE>
provisions reflect a number of factors, including the size of the loan
portfolio and consideration of the levels of past due accruing loans (90 days
or more) and non-accrual loans over the same periods. After reviewing these
factors, management decided to increase the provision due to increased
commercial loan growth, as well as an increase in the Bank's internal watch
list loans.
As of June 30, 2000, loans delinquent 90 days or more and were
included in the accompanying financial statements as accrual loans totaled
approximately $229,000. At June 30, 2000, there were loans totaling $151,000
on non-accrual. At December 31, 1999, there were $171,000 in loans delinquent
90 days or more included as accruing loans in the financial statements and
there were $329,000 on non-accrual. 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 a result of management's analysis of the adequacy of the
allowance, the ratio of the allowance for loan losses to total loans was 1.03%
for June 30, 2000, 1.00% for December 31, 1999 and .95% for June 30, 1999.
As part of the loan review process, management reviews all loans
classified as `special mention' or below, as well as other loans that might
require classification as impaired. As of June 30, 2000, loan balances
totaling $887,000 were classified as impaired and as of December 31, 1999,
$246,000 were classified as impaired.
Following is a summary of the loan loss experience for the six months
ended June 30, 2000, and the year ended December 31, 1999.
23
<PAGE>
June 30, December 31,
2000 1999
------------- -------------
(in thousands)
Amount of loans outstanding $ 678,857 $ 653,898
------------- -------------
Average daily loans outstanding for
the period $ 666,666 $ 642,307
------------- -------------
Allowance for loan losses at the
beginning of the period $ 6,522 $ 5,510
Charge-offs
Commercial 0 147
Real estate 0 6
Installment 231 252
Credit card and personal credit lines 13 30
------------- ------------
Total charge-offs 244 435
Recoveries
Commercial 26 10
Real estate 0 0
Installment 43 114
Credit card and personal credit lines 2 13
------------- ------------
Total recoveries 71 137
------------- ------------
Net charge-offs 173 298
Provision charged to expense 615 1,310
------------- ------------
Allowance for loan losses at the end of
the period $ 6,964 $ 6,522
============= ============
Ratio of annualized net charge-offs during
the period to average daily loans during
the period:
Commercial (0.01)% 0.02%
Real estate 0.00% 0.00%
Installment 0.06% 0.03%
Credit card and personal credit lines 0.00% 0.00%
------------- ------------
Total 0.05% 0.05%
============= ============
24
<PAGE>
Net interest income after provision for loan losses totaled $16.7
million and $8.5 million for the six and three-month periods ended June 30,
2000. This represented an increase of 12.5% and 11.1% over the same periods
ended June 30, 1999.
Noninterest Income
Total noninterest income decreased $1.1 million or 17.4% to $5.1
million for the six-month period ended June 30, 2000, from $6.2 million
recorded for the six-month period ended June 30, 1999. Total noninterest
income for the three-month period ended June 30, 2000, was $2.5 million which
was $612,000 lower than the noninterest income for the three months ended June
30, 1999. While fee income increased during the first two quarters of 2000,
noninterest income for the first two quarters declined principally because of
the decline in mortgage loan sale activity due to rising rates and securities
gains realized during the first two quarters of 1999.
Trust and brokerage fees, which represent basic recurring service fee
income, increased $226,000 or 27.2% to $1.1 million for the six-month period
ended June 30, 2000, as compared to $830,000 for the first six months of 1999.
For the three-month period ended June 30, 2000, trust and brokerage fees were
$505,000, an increase of $93,000 over the fees for the same period in 1999.
Trust and brokerage both had strong increases over last year. Trust fees
increased 32.1% when comparing the first two quarters of 2000 to the same
period of 1999. This increase was primarily in employee benefit plans, agency
and testamentary trusts. Brokerage fees increased 18.4% when comparing the
first two quarters of 2000 to the same period of 1999. This increase was the
result of increased volume from customer acceptance of the product.
Service charges on deposit accounts increased 4.9% or $102,000 during
the six-month period ended June 30, 2000, totaling $2.2 million, as compared
to the same period in 1999. The service charges increased $37,000 for the
three-month period ended June 30, 2000, over the amount recorded for the
three-month period ended June 30, 1999. Fees related to business checking
accounts were the primary sources for the increase.
Other income consists of normal recurring fee income, as well as
other income that management classifies as non-recurring. Other income
decreased $26,000 or 1.6% to $1.6 million for the six-month period ended June
30, 2000, as compared to the same period in 1999. The primary decreases were
in ORE(other real estate) income and mortgage fee income.
The profits from the sale of mortgages during the six-month period
ended June 30, 2000, totaled $238,000, as compared to $755,000 during the same
period in 1999. For the second quarter of 2000 only, these profits were
$108,000 as compared to $295,000 for the same period in 1999. This decrease
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<PAGE>
reflected a decrease in the volume of mortgages sold during the first six
months of 2000, as compared to the sales during the first six months of 1999.
This decrease in volume was a result of the rising interest rate environment,
which began in the last half of 1999. Management expects this trend to
continue.
There were no investment securities gains (losses) for the six and
three-month periods ended June 30, 2000, compared to $859,000 and $408,000 for
the six and three-month periods ended June 30, 1999.
Noninterest Expense
Noninterest expense increased $302,000 or 2.1% to $15.0 million for
the six-month period ended June 30, 2000, as compared to the first six months
of 1999. Noninterest expense decreased $178,000 or 2.4% when comparing the
three months ended June 30, 2000, to the three months ended June 30, 1999.
For the six months ended June 30, 2000, salaries and employee
benefits decreased to $7.6 million, a $77,000 decrease or 1.0% as compared to
the first six months of 1999. When comparing the three months ended June 30,
2000, to the same period in 1999, the decrease was $305,000 or 7.8%. This
decrease reflected the pension plan curtailment gain recognized in the second
quarter of 2000, offset by normal salary increases and higher employee
insurance premiums. Total employees decreased to 487 at June 30, 2000, from
497 at June 30, 1999. This decrease primarily resulted from the closing of
two offices during the second quarter of 2000.
For the six and three-month periods ended June 30, 2000, occupancy
and equipment expenses were $2.6 million and $1.3 million, a $19,000 or .7%
decrease and $36,000 or 2.7% decrease from the same periods one year ago. The
slight decrease in expense is the result of closing two offices in the second
quarter of 2000. Also, the growth in these expenses has lessened with the
completion of the Year 2000 project and the completion of a major technology
upgrade.
For the six-month period ended June 30, 2000, other expenses totaled
$4.8 million as compared to $4.4 million during the same period in 1999. This
was an increase of 9.0% or $398,000. For the second quarter of 2000 compared
to the second quarter of 1999, the increase was $163,000 or 7.0%. When
comparing the six and three-month periods ended June 30, 2000 to the same
periods of 1999, a significant increase was noted in professional fees (up
$249,000 or 83.3% and $146,000 or 95.3%). This increase was primarily due to
non-recurring expenses related to employee benefit plans.
26
<PAGE>
Income Before Income Tax Expense
Income before income tax expense increased $478,000 or 7.5% to $6.8
million for the first six months of 2000, as compared to $6.4 million for the
same period in 1999. For the three months ended June 30, 2000, income before
income taxes was $3.7 million as compared to $3.2 million for the three months
ended June 30, 1999. This was due primarily to the increase in net interest
income.
Income Tax Expense
Income tax expense increased $4,000 or .2% for the first six months
of 2000, as compared to the same period in 1999. Income tax expense for the
second quarter of 2000 increased $75,000 or 6.9%, as compared to the second
quarter of 1999.
The combined state franchise tax expense and the federal income tax
expense as a percentage of income before income tax expense decreased to 31.2%
during the first six months of 2000, as compared to 33.4% during the same
period in 1999. It decreased to 31.8% for the three months ended June 30,
2000, as compared to 33.6% for the same three months in 1999. This decrease is
primarily a result of lower state franchise tax expense.
YEAR 2000
The Company had a successful Year 2000 and leap year rollover. At
this point, the Company has not experienced any Year 2000 issues as a result
of the rollover, and is not aware of any customers that have experienced any
material Year 2000 issues. This success can be attributed to the two years of
planning and preparation for the Year 2000. Part of the preparation was
evaluating, upgrading and/or replacing all hardware, software, and electrical
and mechanical equipment that was not year 2000 compliant. Through this
evaluation process, systems that were identified as not Year 2000 ready were
either upgraded or retired. The Company upgraded 19 systems and retired 23
systems based on the results of the evaluation process. As part of this
preparation, the Company contacted all vendors, corporate depositors, and all
large corporate lending customers to assess their Year 2000 efforts. While the
rollover went smoothly, Year 2000 monitoring will continue for much of the
year to assure that all potential Year 2000 issues are addressed.
Recent Regulatory Developments
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in
November, 1999, allows eligible bank holding companies to engage in a wider
range of nonbanking activities, including greater authority to engage in
securities and insurance activities. Under the Act, an eligible bank holding
company that elects to become a financial holding company may engage in any
27
<PAGE>
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 financial in nature, incidental to any
such financial activity, or 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. National banks are also
authorized by the Act to engage, through "financial subsidiaries," in certain
activity that is permissible for financial holding companies (as described
above) and certain 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.
Various bank regulatory agencies have begun issuing regulations as
mandated by the Act. During June, 2000, all of the federal bank regulatory
agencies jointly issued regulations implementing the privacy provisions of the
Act. In addition, the Federal Reserve issued interim regulations establishing
procedures for bank holding companies to elect to become financial holding
companies and listing the financial activities permissible for financial
holding companies, as well as describing the extent to which financial holding
companies may engage in securities and merchant banking activities. The
Federal Reserve has issued an interim regulation regarding the parameters
under which state member banks may establish and maintain financial
subsidiaries. At this time, it is not possible to predict the impact the Act
and its implementing regulations may have on the Company or the Bank. As of
the date of this filing, the Company has not applied for or received approval
to operate as a financial holding company. In addition, the Bank has not
applied for or received approval to establish any financial subsidiaries.
Forward-looking Statements
When used in this report and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral statements made with
the approval of an authorized executive officer, the words or phrases "would
be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to risks and uncertainties, including but not limited
to, changes in economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area, implementation of new technologies, the
Company's ability to develop and maintain secure and reliable electronic
systems and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
28
<PAGE>
The Company wishes to caution readers not to place undo reliance on
any such forward-looking statements, which speak only as of the date made,
and advise readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities and competitive
and regulatory factors, could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ
materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
29
<PAGE>
LAKELAND FINANCIAL CORPORATION
FORM 10-Q
June 30, 2000
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 11, 2000, the Company's annual meeting of stockholders was
held. At the meeting R. Douglas Grant, Jerry L. Helvey, Allan J. Ludwig
and Richard L. Pletcher were elected to serve as directors with terms
expiring in 2003. Continuing as directors until 2001 are Anna K. Duffin,
L. Craig Fulmer, Charles E. Niemier and Terry L. Tucker. Continuing as
directors until 2002 are Eddie Creighton, Michael L. Kubacki, M. Scott
Welch and George L. White.
Election of Directors:
For Withheld
--------- ---------
R. Douglas Grant 4,648,146 1,140,846
Jerry L. Helvey 4,270,663 1,518,329
Allan J. Ludwig 4,311,772 1,477,220
Richard L. Pletcher 4,491,078 1,297,914
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, 2000
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 11, 2000 /s/Michael L. Kubacki
Michael L. Kubacki - President and Chief
Executive Officer
Date: August 11, 2000 /s/Teresa A. Bartman
Teresa A. Bartman - Chief Accounting Officer
32
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EXHIBIT INDEX
Exhibit
No. Description Page
------- ------------------------------------------- -----
27 Financial Data Schedule (EDGAR filing only)
33
