10-Q 1 bancorp10q.txt 10Q FOR PERIOD ENDING JUNE 30, 2001 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___. Commission file number 000-22469 LAFAYETTE BANCORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1605492 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 133 North 4th Street, Lafayette, Indiana 47902 (Address of principal executive offices) (Zip Code) (765) 423-7100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1994 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes (x) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at August 6, 2001 Common Stock, without par value 3,961,589 shares LAFAYETTE BANCORPORATION INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets -- June 30, 2001 and December 31, 2000 Consolidated Statements of Income and Comprehensive Income -- Three Months Ended June 30, 2001 and 2000 Consolidated Statements of Income and Comprehensive Income -- Six Months Ended June 30, 2001 and 2000 Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2001 and 2000 Notes to Consolidated Financial Statements -- June 30, 2001 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K a) Exhibits b) Reports on Form 8-K SIGNATURES ITEM 1. LAFAYETTE BANCORPORATION CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands) ---------------------------------------------------------------------------- (Unaudited) June 30, December 31, 2001 2000 ---- ---- ASSETS Cash and due from banks $ 28,106 $ 26,452 Interest-bearing balances with other financial institutions 11,859 21,820 Federal funds sold 20,700 25,200 -------------- ------------- Total cash and cash equivalents 60,665 73,472 Securities available-for-sale (at market) 88,343 78,857 Securities held-to-maturity (market value $4,272 and $4,580) 4,134 4,484 Loans held for sale 11,854 5,949 Loans 542,620 537,725 Less: Allowance for loan losses (5,299) (5,071) -------------- ------------- Loans, net 537,321 532,654 Federal Home Loan Bank stock (at cost) 2,344 2,200 Premises, furniture and equipment, net 10,934 11,353 Intangible assets 12,648 13,007 Accrued interest receivable and other assets 17,868 19,171 -------------- ------------- Total assets $ 746,111 $ 741,147 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Noninterest-bearing deposits $ 68,990 $ 70,866 Interest-bearing demand and savings deposits 247,145 230,984 Interest-bearing time deposits 279,068 276,447 -------------- ------------- Total deposits 595,203 578,297 Short-term borrowings 41,398 55,572 FHLB advances 35,206 35,737 Note payable 10,850 11,550 Accrued interest payable and other liabilities 7,092 7,190 -------------- ------------- Total liabilities 689,749 688,346 Shareholders' equity Common stock, no par value: 20,000,000 shares authorized; 3,961,589 and 3,953,616 shares issued and outstanding 3,962 3,954 Additional paid-in capital 38,119 38,024 Retained earnings 13,877 11,086 Accumulated other comprehensive income 404 (263) -------------- -------------- Total shareholders' equity 56,362 52,801 -------------- ------------- Total liabilities and shareholders' equity $ 746,111 $ 741,147 ============== =============

----------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the three months ended June 30, 2001 and 2000 (Dollar amounts in thousands, except per share data) (Unaudited) ----------------------------------------------------------------------------- 2001 2000 ---- ---- Interest income Loans $ 11,992 $ 11,496 Taxable securities 859 822 Tax exempt securities 429 414 Other 465 146 -------------- ------------- Total interest income 13,745 12,878 Interest expense Deposits 6,015 5,513 Short-term borrowings 428 486 Other borrowings 701 582 -------------- ------------- Total interest expense 7,144 6,581 -------------- ------------- Net interest income 6,601 6,297 Provision for loan losses 300 300 -------------- ------------- Net interest income after provision for loan losses 6,301 5,997 Noninterest income Income from fiduciary activities 297 317 Service charges on deposit accounts 522 461 Net realized gain on securities - - Net gain on loan sales 504 159 Other service charges and fees 267 272 Investment product commissions 98 349 Other operating income 128 76 -------------- ------------- Total noninterest income 1,816 1,634 -------------- ------------- Noninterest expense Salaries and employee benefits 3,112 2,712 Occupancy expenses, net 319 301 Equipment expenses 460 444 Intangible amortization 179 185 Other operating expenses 1,258 1,203 -------------- ------------- Total noninterest expense 5,328 4,845 -------------- ------------- Income before income taxes 2,789 2,786 Income taxes 883 979 -------------- ------------- Net income 1,906 1,807 -------------- ------------- Other comprehensive income, net of tax: Change in unrealized gains / (losses) on securities 102 100 -------------- ------------- Comprehensive income $ 2,008 $ 1,907 ============== ============= Basic earnings per share $ .48 $ .46 =============== ============= Diluted earnings per share $ .48 $ .46 =============== ============= Dividend per share $ .10 $ .09 =============== =============

----------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the six months ended June 30, 2001 and 2000 (Dollar amounts in thousands, except per share data) (Unaudited) ----------------------------------------------------------------------------- 2001 2000 ---- ---- Interest income Loans $ 23,834 $ 22,240 Taxable securities 1,635 1,682 Tax exempt securities 852 826 Other 1,210 253 -------------- ------------- Total interest income 27,531 25,001 Interest expense Deposits 12,408 10,627 Short-term borrowings 898 825 Other borrowings 1,437 1,168 -------------- ------------- Total interest expense 14,743 12,620 -------------- ------------- Net interest income 12,788 12,381 Provision for loan losses 600 600 -------------- ------------- Net interest income after provision for loan losses 12,188 11,781 Noninterest income Income from fiduciary activities 594 633 Service charges on deposit accounts 1,010 866 Net realized gain on securities - - Net gain on loan sales 870 271 Other service charges and fees 526 525 Investment product commissions 215 438 Other operating income 250 153 -------------- ------------- Total noninterest income 3,465 2,886 -------------- ------------- Noninterest expense Salaries and employee benefits 6,070 5,030 Occupancy expenses, net 645 582 Equipment expenses 929 833 Intangible amortization 358 370 Other operating expenses 2,453 2,333 -------------- ------------- Total noninterest expense 10,455 9,148 -------------- ------------- Income before income taxes 5,198 5,519 Income taxes 1,614 1,914 -------------- ------------- Net income 3,584 3,605 -------------- ------------- Other comprehensive income, net of tax: Change in unrealized gains / (losses) on securities 667 81 -------------- ------------- Comprehensive income $ 4,251 $ 3,686 ============== ============= Basic earnings per share $ .91 $ .91 ============== ============= Diluted earnings per share $ .90 $ .90 ============== ============= Dividend per share $ .20 $ .18 ============== =============

----------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 2001 and 2000 (Dollar amounts in thousands) (Unaudited) ----------------------------------------------------------------------------- 2001 2000 ---- ---- Cash flows from operating activities Net income $ 3,584 $ 3,605 Adjustments to reconcile net income to net cash from operating activities Depreciation 719 634 Net amortization 373 366 Provision for loan losses 600 600 Net realized (gain) loss on sale of : Other real estate - (11) Change in assets and liabilities: Loans originated for sale (62,040) (25,171) Loans sold 56,135 22,930 Accrued interest receivable and other assets 943 412 Accrued interest payable and other liabilities (98) (218) ------------ ------------ Net cash from operating activities 216 3,147 Cash flows from investing activities Purchase of securities available-for-sale (76,877) (46,790) Proceeds from sales of securities available-for-sale - - Proceeds from maturities of securities available-for-sale 68,483 47,486 Purchase of securities held-to-maturity - - Proceeds from maturities of securities held-to-maturity 350 228 Loans made to customers, net of payments collected (5,387) (32,835) Purchase of Federal Home Loan Bank stock (144) (303) Property and equipment expenditures (300) (1,224) Proceeds from sales of other real estate 41 115 ----------- ----------- Net cash from investing activities (13,834) (33,323) Cash flows from financing activities Net change in deposit accounts 16,906 34,111 Net change in short-term borrowings (14,174) 8,446 Proceeds from FHLB advances - 10,000 Payments on FHLB advances (531) (9,556) Payments on note payable (700) (700) Common stock issued 102 90 Dividends paid (792) (717) ------------ ----------- Net cash from financing activities 811 41,674 ------------ ----------- Net change in cash and cash equivalents (12,807) 11,498 Cash and cash equivalents at beginning of period 73,472 30,570 ----------- ----------- Cash and cash equivalents at end of period $ 60,665 $ 42,068 =========== =========== Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 14,795 $ 12,378 Income taxes 1,690 1,525 Non-cash investing activity Loans transferred to other real estate $ 143 $ -

----------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ----------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION The significant accounting policies followed by Lafayette Bancorporation (the "Corporation") for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The consolidated interim financial statements have been prepared in accordance with Generally Accepted Accounting Principles and in accordance with instructions to Form 10-Q and may not include all information and footnotes normally disclosed for full annual financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements and all such adjustments are of a normal recurring nature. Certain prior period information has been reclassified to correspond with the 2001 presentation. NOTE 2 - PER SHARE DATA The following illustrates the computation of basic and diluted earnings per share, and includes the weighted average number of shares used in calculating earnings and dividends per share amounts for the periods presented. The weighted average number of shares has been retroactively restated for stock dividends and splits. Six Months Ended ---------------- June 30, June 30, 2001 2000 ---- ---- Basic earnings per share Net income $ 3,584 $ 3,605 Weighted average shares outstanding 3,957,542 3,947,757 ------------- -------------- Basic earnings per share $ .91 $ .91 ============= ============== Diluted earnings per share Net income $ 3,584 $ 3,605 Weighted average shares outstanding 3,957,542 3,947,757 Dilutive effect of assumed exercise of Stock Options 34,081 48,253 ------------- -------------- Diluted average shares outstanding 3,991,623 3,996,010 ------------- -------------- Diluted earnings per share $ .90 $ .90 ============= ==============

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------ Three Months Ended ------------------ June 30, June 30, 2001 2000 ---- ---- Basic earnings per share Net income $ 1,906 $ 1,807 Weighted average shares outstanding 3,958,892 3,950,213 ------------- -------------- Basic earnings per share $ .48 $ .46 ============= ============== Diluted earnings per share Net income $ 1,906 $ 1,807 Weighted average shares outstanding 3,958,892 3,950,213 Dilutive effect of assumed exercise of Stock Options 33,212 25,252 ------------- -------------- Diluted average shares outstanding 3,992,104 3,975,465 -------------- -------------- Diluted earnings per share $ .48 $ .46 ============== ==============

NOTE 3 - SECURITIES The amortized cost and estimated fair values of securities are as follows at June 30, 2001: Amortized Estimated Cost Fair Value Securities Available-for-Sale U.S. Government and its agencies $ 3,000 $ 3,010 Obligations of states and political subdivisions 31,379 31,769 Corporate obligations 10,117 10,330 Mortgage-backed and other asset-backed securities 40,623 40,688 Other securities 2,556 2,546 ----------- ----------- $ 87,675 $ 88,343 =========== =========== Securities Held-to-Maturity Obligations of states and political subdivisions $ 4,134 $ 4,272 =========== ===========

The amortized cost and estimated fair values of securities are as follows at December 31, 2000: Amortized Estimated Cost Fair Value Securities Available-for-Sale U.S. Government and its agencies $ 4,201 $ 4,193 Obligations of states and political subdivisions 30,880 31,012 Corporate obligations 3,953 4,001 Mortgage-backed and other asset-backed securities 37,699 37,105 Other securities 2,560 2,546 ----------- ----------- $ 79,293 $ 78,857 =========== =========== Securities Held-to-Maturity Obligations of states and political subdivisions $ 4,484 $ 4,580 =========== ===========

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------ NOTE 4 - LOANS Loans are comprised of the following: June 30, December 31, 2001 2000 ---- ---- Commercial and agricultural loans $ 223,990 $ 215,087 Real estate construction loans 61,865 54,768 Residential real estate loans 208,439 212,190 Installment loans to individuals 48,326 50,696 Commercial paper - 4,984 ---------------- --------------- Total loans $ 542,620 $ 537,725 ================ ===============

NOTE 5 - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is as follows: 2001 2000 ---- ---- Balance, January 1 $ 5,071 $ 4,618 Provision charged to operations 600 600 Loans charged-off (428) (219) Recoveries on loans previously charged-off 56 46 ------------- -------------- Balance, June 30 $ 5,299 $ 5,045 ============= ==============

NOTE 6 - SHORT-TERM BORROWINGS Short-term borrowings are comprised of the following: June 30, December 31, 2001 2000 ---- ---- Repurchase agreements $ 38,630 $ 54,275 Treasury tax and loan open-end note 2,768 1,297 ---------------- --------------- Total short-term borrowings $ 41,398 $ 55,572 ================ ===============

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------ NOTE 7 - SEGMENT INFORMATION The Corporation's operations include three primary segments: banking, mortgage banking, and trust. Through its banking subsidiary's locations in Tippecanoe, White, and Jasper Counties, the Corporation provides traditional community banking services, such as accepting deposits and making commercial, residential and consumer loans. Mortgage banking activities include the origination of residential mortgage loans for sale on a servicing released basis to various investors. The Corporation's trust department provides both personal and corporate trust services. The Corporation's three reportable segments are determined by the products and services offered. Interest on loans, investments and deposits comprise the primary revenues and expenses of the banking operation, net gains on loans sold account for the revenues in the mortgage banking segment, and trust administration fees provide the primary revenues in the trust department. The following segment financial information has been derived from the internal profitability reporting system utilized by management to monitor and manage the financial performance of the Corporation. The accounting policies of the three segments are the same as those described in the summary of significant accounting policies of the annual report. The Corporation evaluates segment performance based on profit or loss before income taxes. The evaluation process for the mortgage banking and trust segments include only direct expenses, while certain indirect expenses, including goodwill, are absorbed by the banking operation. The difference between segment totals and consolidated totals are holding company amounts and income tax expense. Quarter ended June 30: 2001 Mortgage Total Banking Banking Trust Segments Net interest income $ 6,672 $ 89 $ - $ 6,761 Net gain on loan sales - 504 - 504 Other revenue 1,014 1 297 1,312 Noncash items: Depreciation 334 15 12 361 Provision for loan loss 300 - - 300 Segment profit 2,714 241 47 3,002 Segment assets 733,662 12,008 157 745,827

2000 Mortgage Total Banking Banking Trust Segments Net interest income $ 6,496 $ 37 $ - $ 6,533 Net gain on loan sales - 159 - 159 Other revenue 1,158 - 317 1,475 Noncash items: Depreciation 307 10 12 329 Provision for loan loss 300 - - 300 Segment profit 2,400 66 113 2,579 Segment assets 684,125 5,546 202 689,873

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ----------------------------------------------------------------------------- Six months ended June 30: 2001 Mortgage Total Banking Banking Trust Segments Net interest income $ 13,018 $ 126 $ - $ 13,144 Net gain on loan sales - 870 - 870 Other revenue 2,000 1 594 2,595 Noncash items: Depreciation 666 29 24 719 Provision for loan loss 600 - - 600 Segment profit 5,154 405 138 5,697 Segment assets 733,662 12,008 157 745,827

2000 Mortgage Total Banking Banking Trust Segments Net interest income $ 12,767 $ 70 $ - $ 12,837 Net gain on loan sales - 271 - 271 Other revenue 1,976 6 633 2,615 Noncash items: Depreciation 588 22 24 634 Provision for loan loss 600 - - 600 Segment profit 5,347 106 250 5,703 Segment assets 684,125 5,546 202 689,873

NOTE 8 - NEW ACCOUNTING PRONOUNCEMENT Beginning January 1, 2001, a new accounting standard requires all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard on January 1, 2001 had no effect on the financial statements, as no applicable derivatives were held. ITEM 2. LAFAYETTE BANCORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, except per share data) Lafayette Bancorporation (the "Corporation") is a one-bank holding company located in Lafayette, Indiana. The Corporation's wholly-owned subsidiary, Lafayette Bank and Trust Company ("Bank") conducts business from its main office and seventeen offices in Tippecanoe, White, and Jasper Counties, Indiana. The Corporation provides a wide range of commercial and personal banking activities, including accepting deposits; making commercial and consumer loans; originating mortgage loans; providing personal and corporate trust services; providing investment advisory and brokerage services; and providing auto, homeowners, and other insurance products. On March 14, 2001, the Corporation established a loan production office in Flora, Indiana. This Carroll County Loan Center, which provides a full-range of lending products, is currently staffed by four individuals. In order to meet all the banking needs of Carroll County residents, the Corporation plans to open a full-service branch in Flora later this year. On March 15, 2000, the Corporation opened a full-service branch located in the Super Wal-Mart in Monticello, Indiana. Also, on July 19, 2000, a similar full-service branch was opened in the Super Wal-Mart in Lafayette, Indiana. Both of these locations are open seven days a week to serve the Corporation's customers. The Corporation established a new mortgage line of business during the second quarter of 2000, which will assist customers in securing financing who do not meet the qualifications of conventional or traditional mortgage loan programs. The newly created Mortgage Alternative Department only offers mortgage products, such as first and second mortgages and lines of credit, that are secured by real estate. Loans originated in this department are pre-approved for sale and are sold in the secondary mortgage market with no servicing retained. RESULTS OF OPERATIONS Net Income The Corporation earned $1,906, or $.48 per share for the second quarter of 2001 compared to $1,807, or $.46 per share for the second quarter of 2000. Net income decreased $21, or .6% to $3,584 for the six month period ending June 30, 2001 compared to the same 2000 time period. Basic earnings per share were $.91 for the six month periods ending June 30, 2001 and 2000. In general, the Corporation experienced a decline in the net interest margin, primarily due to the Federal Reserve's interest rate cuts. In all, the Federal Reserve cut interest rates six times during the first six months of 2001, resulting in a total interest rate reduction of 275 basis points. Contributing to 2001 earnings were increases in service charges, net gain on loan sales, and other operating income. The increase in 2001 noninterest income was partially offset by lower investment product commissions and higher noninterest expenses. Salaries and employee benefits and occupancy and equipment expenses increased, predominately due to the full-year effect in 2001 of the two Wal-Mart branches and Mortgage Alternative Department, in addition to the newly established Carroll County Loan Center in Flora, Indiana. Return on average assets (ROA) and return on average equity (ROE) are summarized below. Three Months Ending Six Months Ending June 30, June 30, 2001 2000 2001 2000 ---- ---- ---- ---- ROA 1.03% 1.08% .97% 1.10% ROE 13.75% 15.08% 13.12% 15.28% The decrease in ROA and ROE for the three and six months ending June 30, 2001 was due to the combination of the lower net interest margin and the increased costs of operating the new branches, mortgage department, and loan production office. Net Interest Income Net interest income is the most significant component of the Corporation's earnings. Net interest income is the difference between interest and fees realized on earning assets, primarily loans and securities, and interest paid on deposits and other borrowed funds. The net interest margin is this difference expressed as a percentage of average earning assets. Net interest income is determined by several factors, including the volume of earning assets and liabilities, the mix of earning assets and liabilities, and interest rates. For the six months ended June 30, 2001 and 2000, net interest income was $12,788 and $12,381, respectively. The 2001 amount was a $407, or 3.3% increase over the prior year and was primarily the result of the volume of earning assets increasing at a faster pace than the interest-bearing liabilities. Net interest income for the second quarter of 2001 was $304, or 4.8% higher than that same three month period ending June 30, 2000. From June 2000 to June 2001, average loan balances increased $33,449, or 6.4%, which contributed to the aforementioned increases. Total interest income for the six month periods ending June 30, 2001 and 2000 was $27,531 and $25,001, respectively, an increase in 2001 of $2,530, or 10.1%. Total interest income for the second quarter of 2001 was $867, or 6.7% greater than that same 2000 quarter. Interest and fees on loans increased $1,594, or 7.2% to $23,834 for the first six months of 2001 compared to $22,240 for the first six months of 2000. For the second quarter of 2001, interest and fees on loans increased $496, or 4.3% compared to the second quarter of 2000. As previously mentioned, the Corporation's average loan balances increased $33,449, or 6.4% from June 2000 to June 2001. Approximately 86.7% of that loan growth occurred in the highest yielding loan sector, which is the commercial loan portfolio. Other interest income increased $319 and $957, respectively, for the three and six month periods ending June 30, 2001. The Corporation's excess liquidity position appeared to be a result of customers exiting the stock market in the fall of 2000 due to its declining performance. Management believes these funds have been placed in high interest-bearing money market accounts and short-term certificates of deposit until the stock market rebounds and customers once again gain the confidence to re-enter the markets. Because management believes these funds are short-term in nature, the Corporation's strategy has been not to fund longer-term loans or investment securities with these particular deposits. Total interest expense for the six month period ending June 30, 2001 and 2000 was $14,743 and $12,620, respectively. For the second quarter of 2001, total interest expense increased $563, or 8.6%, compared to the second quarter of 2000. From June 2000 to June 2001, total average interest-bearing liabilities, including short-term and long-term borrowings, increased $60,252, or 10.6%. In general, the increased volume of interest-bearing liabilities coupled with the higher rates paid one year ago on certificates of deposit, which are still on the books, led to the higher interest expense recorded during the year. The following table summarizes the Corporation's net interest income (on a tax-equivalent basis) for each of the periods presented. A marginal federal income tax rate of 34% for each period was used. Six Months Change from Ended June 30, Prior Period 2001 2000 Amount Percent ---- ---- ------ ------- Interest income $28,013 $25,433 $2,580 10.1% Interest expense 14,743 12,620 2,123 16.8% ------ ------ ------ Net interest income $13,270 $12,813 $ 457 3.6% ======= ======= ========

Three Months Change from Ended June 30, Prior Period 2001 2000 Amount Percent ---- ---- ------ ------- Interest income $13,986 $13,096 $ 890 6.8% Interest expense 7,144 6,581 563 8.6% ----- ----- ----- Net interest income $6,842 $6,515 $ 327 5.0% ====== ====== ======

The net interest margin, on a tax equivalent basis for the six months ending June 30, 2001 and 2000 was 3.86% and 4.32%, respectively. Provision for Loan Losses and Asset Quality The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses. The allowance is maintained at an amount believed by management to be sufficient to absorb losses inherent in the credit portfolio. Management conducts, on a quarterly basis, a detailed evaluation of the adequacy of the allowance. The consolidated provision for loan losses was $600 for the six months ending June 30, 2001 and 2000. The allowance for loan losses was $5,299 and $5,071 at June 30, 2001 and December 31, 2000, respectively. The allowance as a percentage of loans was .98% and .94% at June 30, 2001 and December 31, 2000, respectively. Although net charge-offs increased $199, or 115.0% in 2001, the provision for loan losses remained unchanged from that of the prior year primarily due to only a slight .91% increase in the outstanding loan balances during the current year. Nonperforming loans include nonaccrual loans, restructured loans, and loans delinquent 90 days or more. Loans are classified as nonaccrual when management believes that collection of interest is doubtful, typically when payments are past due 90 days, unless the loans are well secured and in the process of collection. The following table indicated the composition of nonperforming loans: June 30, December 31, 2001 2000 ---- ---- Loans past due 90 days or more $ 786 $ 1,052 Nonaccrual loans 1,803 2,718 Restructured loans 30 55 ---------------- --------------- Total nonperforming loans $ 2,619 $ 3,825 ================ ===============

Management believes overall asset quality remains satisfactory, as nonperforming loan totals have declined $1,206 since year-end. Loans past due 90 days or more have declined $266 since December 31, 2000, with approximately 89% of that balance change related to two mortgage loans being place on nonaccrual status. Likewise, nonaccrual loan balances have declined $915 since year-end, with the majority of the decrease related to one large commercial loan being removed from nonaccrual status and a portion charged-off to the allowance for loan losses. Total nonperforming loans as a percentage of assets declined to .35% at June 30, 2001, compared to .52% at December 31, 2000. Noninterest Income and Expense Noninterest income totaled $3,465 for the first six months of 2001 compared to $2,886 for the same period in 2000, an increase of $579, or 20.1%. Noninterest income for the second quarter of 2001 increased $182, or 11.1%, to $1,816 compared to the prior year. Income from fiduciary activities decreased for the first six months and also for the second quarter of 2001 when compared to the same 2000 time periods. The lower fees recorded were a direct result of the decline in the performance of the stock market, in that the market value of assets are used in determining the amount of fee income derived by the Corporation. Service charges on deposit accounts comprise the largest component of noninterest income. The $144, or 16.6% increase in revenue for the first six months of 2001 was attributed to the combination of a larger deposit base being assessed fees, along with the full period effect of an increase in the fee structure made in June 2000. For the second quarter of 2001, service charges on deposit accounts increased $61, or 13.2%, compared to the prior year. Net gain on loans originated and sold in the secondary mortgage market were $870 and $271 for the six months ending June 30, 2001 and 2000, respectively, an increase of $599, or 221.0%. For the second quarter of 2001, net gain on loans sold in the secondary mortgage market was $345, or 217.0%, higher than the 2000 time period. The continued lower interest rate environment led to additional new home purchases and refinancing activities of existing homeowners, and the increase in market activity has also increased profit margins on loan sales. Loan fundings for the six months ended June 30, 2001 increased $33,205, or 144.8% compared to the prior year, while fundings for the three months ended June 30, 2001 rose $20,782, or 159.5% when compared to that same time period one year earlier. For customers of the Investment Center, a full service brokerage operation offered exclusively through Raymond James Financial Services, Inc., member NASD/SIPC, the lackluster performance of the stock market resulted in a decline in investor activity; which, in turn led to a 50.9% and 71.9% decrease in investment product commissions recorded for the six and three month periods ending June 30, 2001. Other operating income increased $97, or 63.4%, to $250 for the first six months of 2001, while also increasing $52, or 68.4% for the second quarter of 2001 when compared to the corresponding prior year time periods. These increases are attributed to the income earned on the additional $2,995 director's life insurance coverage purchased in November 2000. Noninterest expense totaled $10,455 for the first six months of 2001, compared to $9,148 for that same 2000 period, an increase of $1,307, or 14.3%. Total noninterest expense for the second quarter of 2001 was $483, or 10.0% higher than the prior year. Salaries and employee benefits expense was $6,070 for the six months ending June 30, 2001, an increase of $1,040, or 20.7% from the $5,030 recorded in the first six months of 2000. Total salaries and benefits expense for the second quarter of 2001 increased $400, or 14.8%, to $3,112 compared to $2,712 recorded for the three months ending June 30, 2000. The valuation of the stock appreciation rights granted to certain senior executives accounted for a large portion of the increases reported in each of these periods, as an increase of $419 and $150 was recorded for the six months and three months ending June 30, 2001, respectively. The remaining increases were predominately associated with staff additions in the new Wal-Mart branches, the Mortgage Alternative Department, and the Carroll County Loan Center. Occupancy and equipment expenses increased $63, or 10.8% and $96, or 11.5%, respectively for the six months ending June 30, 2001. For the three months ending June 30, 2001, occupancy and equipment expenses increased $18, or 6.0% and $16, or 3.6%, respectively. Expenses associated with the Wal-Mart branches, the Mortgage Alternative Department, and the Carroll County Loan Center, such as rent, depreciation, and utilities, accounted for the majority of the recorded increases. Other operating expenses increased $120, or 5.1% to $2,453 for the first six months of 2001 compared to the same 2000 time period. For the second quarter, other operating expenses increased $55, or 4.6%, to $1,258 compared to $1,203 for the three months ending June 30, 2000. Accounting for the majority of the increases in both periods were higher advertising, marketing, and legal expenses, along with increased operational costs of the new Carroll County Loan Center, such as telephone and postage. Mortality costs associated with the additional $2,995 of director's life insurance coverage purchased and increased fees associated with higher ATM volumes also led to higher costs incurred. Income Taxes The Corporation's effective tax rate for the six months ended June 30, 2001 and 2000 was 31.1% and 34.7%, respectively. For the three months ended June 30, 2001 and 2000, the effective tax rate for the Corporation was 31.7% and 35.1% respectively. The current year lower effective tax rate was primarily attributable to a change in state tax law, which now allows a portion of the Corporation's revenues to be apportioned outside the state of Indiana. FINANCIAL CONDITION Total assets were $746,111 at June 30, 2001 compared to $741,147 at December 31, 2000, an increase of $4,964. Investment securities, loans held for sale, and net loans increased $9,136, $5,905, and $4,667, respectively, while cash and cash equivalents and accrued interest receivable and other assets decreased $12,807 and $1,303, respectively. Total deposits increased $16,906 to $595,203 at June 30, 2001 compared to $578,297 at December 31, 2000. Short-term borrowings, consisting primarily of repurchase agreements, and FHLB advances decreased $14,174 and $531, respectively, while quarterly principal repayments on the note payable totaled $700, and accrued interest payable and other liabilities also declined $98. Capital The Corporation and Bank are subject to various regulatory capital guidelines as required by federal and state banking agencies. These guidelines define the various components of core capital and assign risk weights to various categories of assets. Tier 1 capital consists of shareholders' equity less goodwill and core deposit intangibles, as defined by bank regulators. The definition of Tier 2 capital includes the amount of allowance for loan losses which does not exceed 1.25% of gross risk weighted assets. Total capital is the sum of Tier 1 and Tier 2 capital. The minimum requirements under the capital guidelines are a 4.00% leverage ratio (Tier 1 capital divided by average assets less intangible assets and unrealized gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1 capital divided by risk-weighted assets), and an 8.00% total capital ratio (Tier 1 capital plus Tier 2 capital divided by risk-weighted assets). The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These are: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under these regulations, a "well-capitalized" institution must achieve a Tier 1 risk-based capital ratio of at least 6.00%, a total capital ratio of at least 10.00%, and a leverage ratio of at least 5.00% and not be under a capital directive order. Failure to meet capital requirements can initiate regulatory action. If an institution is only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions, asset growth, and expansion may be limited, and the institution may be required to submit a capital restoration plan. At June 30, 2001, management was not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material effect on the Corporation's consolidated liquidity, capital resources or operations. The Corporation's actual consolidated capital amounts are presented in the following table. June 30, December 31, 2001 2000 ---- ---- Tier 1 capital Shareholders' equity $ 56,362 $ 52,801 Less: Intangibles (12,648) (13,007) Net unrealized losses on available-for-sale equity securities (11) (14) Add/less: Unrealized loss/(gain) on securities (404) 263 ----------------- --------------- TOTAL TIER 1 CAPITAL $ 43,299 $ 40,043 ================ =============== Total capital Tier 1 capital $ 43,299 $ 40,043 Allowable allowance for loan losses 5,299 5,071 ---------------- --------------- TOTAL CAPITAL $ 48,598 $ 45,114 ================ =============== RISK WEIGHTED ASSETS $ 548,207 $ 541,362 ================ =============== AVERAGE ASSETS $ 730,655 $ 692,178 ================ ===============

The Corporation and Bank's actual capital ratios and minimum required levels are presented in the following table. Actual ratios as of Minimum June 30, December 31, Capital Adequacy Well-Capitalized 2001 2000 Requirement Requirement ---- ---- ----------- ----------- Tier I Capital (to average assets) Consolidated 5.93% 5.79% 4.00% 5.00% Lafayette Bank and Trust 7.29% 7.29% 4.00% 5.00% Tier I Capital (to risk weighted assets) Consolidated 7.90% 7.40% 4.00% 6.00% Lafayette Bank and Trust 9.71% 9.26% 4.00% 6.00% Total Capital (to risk weighted assets) Consolidated 8.86% 8.33% 8.00% 10.00% Lafayette Bank and Trust 10.67% 10.19% 8.00% 10.00%

Management believes the Bank met all the capital requirements as of June 30, 2000 and December 31, 1999, and was well-capitalized under the regulatory framework for prompt corrective action. The Corporation was adequately capitalized as of June 30, 2001 and December 31, 2000. While the Corporation's total capital status is below the well-capitalized category as a result of the Jasper County branch acquisitions in 1999, capital ratios have improved each quarter since the transaction occurred, and management anticipates maintaining its adequately capitalized status for the foreseeable future. The Federal Reserve Bank considers the holding company capital adequacy in connection with any application activity which requires their approval. Further, since the Corporation's capital levels are below the well-capitalized category, the use of expedited Federal Reserve Bank procedures in any application activity which requires their approval will not be available to the Corporation until it once again becomes well-capitalized. Certain statements in this paragraph relating to future capital levels of the Corporation and Bank are forward-looking which may or may not be accurate due to the impossibility of predicting future economic and business events, including the ability of the Corporation to raise additional capital, if needed, as well as other factors that are beyond the control of the Corporation. Liquidity The consolidated statement of cash flows illustrates the elements which gave rise to the change in the Corporation's cash and cash equivalents for the six months ended June 30, 2001 and 2000. Including net income of $3,584, the net cash from operating activities for the first six months of 2001 generated $216 of available cash. Net cash from investing activities utilized $13,834 of available cash primarily as a result of $8,394 of net purchases of investment securities and $5,387 of net loan fundings by the Corporation. Net cash from financing activities generated $811 of available cash as a result of an $16,906 increase in deposits, offset by a $14,174 decrease in short-term borrowings, $700 of note payable principal repayments, and $792 in dividends paid. Total cash outflows for the six-month period in 2001 exceeded cash inflows by $12,807 resulting in a cash and cash equivalent balance of $60,665 at June 30, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk of the Corporation encompasses exposure to both liquidity and interest rate risk and is reviewed quarterly by the Funds Management Committee and the Board of Directors. There have been no material changes in the quantitative and qualitative disclosures about market risks as of June 30, 2001 from the analysis and disclosures provided in the Corporation's Form 10-K for the year ended December 31, 2000. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Corporation's Annual Meeting of Shareholders was held Monday, April 9, 2001. (b) The following member was elected to the Corporation's Board of Directors to hold office as indicated by the term expiration, or until their successors are duly chosen and qualified. Term Against or Broker Expiration Nominee For Withheld Abstain Non-Votes ---------- ------- --- -------- ------- --------- 2004 Joseph A. Bonner 3,182,213 60 18,830 0 2004 Richard A. Boehning 3,167,568 14,704 18,830 0

Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No exhibits were filed with the submission of Form 10-Q for the quarter ended June 30, 2001 (b) Reports on Form 8-K No Form 8-K was filed with the SEC during the quarter ended June 30, 2001. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 6, 2001 By /s/ Robert J. Weeder --------------------------------------- Robert J. Weeder President and CEO Date: August 6, 2001 By /s/ Marvin S. Veatch --------------------------------------- Marvin S. Veatch Vice President and Controller

LAFAYETTE BANCORPORATION 10-Q